TECOGEN INC. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Comparisons are with fiscal 2015. Tecogen designs, manufactures, sells, installs, and services natural-gas engine-driven combined heat and power equipment, chillers, heat pumps, and emissions-control technology.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $24.49 million | $21.44 million |
| Gross profit / margin | $9.30 million / 38.0% | $7.63 million / 35.6% |
| Operating loss | $997,451 | $2.64 million |
| Net loss attributable to Tecogen | $1.10 million | $2.73 million |
| Basic and diluted loss per share | $0.06 | $0.16 |
| Cash used in operating activities | $2.72 million | $4.73 million |
- Product revenue rose 6.6% to $10.72 million. Service revenue, including installation services, increased 20.9% to $13.77 million. Cogeneration revenue declined modestly, while chiller and heat-pump revenue increased.
- Gross margin improved as management cited better turnkey project margins and manufacturing efficiencies. Operating expenses were nearly unchanged at $10.30 million.
- Year-end cash and cash equivalents were $3.72 million, down from $5.49 million. Working capital was $14.44 million, versus $14.03 million a year earlier. Current assets were $20.06 million and current liabilities $5.62 million.
- Operating cash use declined year over year, but investing activities used $2.26 million, including a $2.00 million investment in Ultra Emissions. Financing provided $3.21 million, mainly from warrant and option exercises.
- Total liabilities were $9.23 million. These included a $3.15 million senior secured convertible note bearing 4% interest, due December 23, 2018, and operating lease commitments of $3.90 million through 2024. The company reported no off-balance-sheet arrangements at year-end.
- Product and installation backlog was $11.1 million, compared with $11.6 million at year-end 2015; it excludes maintenance-contract revenue.
Material changes and business developments
- Revenue increased 14.2%, while the attributable net loss narrowed by 59.8%. The company nevertheless remained loss-making; management noted it had incurred annual operating losses for each of the prior five fiscal years.
- Tecogen completed the consolidation of Ilios into the company in 2016 by exchanging shares with Ilios minority holders. Ilios continues as the company’s heat-pump brand.
- Tecogen formed TTcogen LLC with Tedom to market Tedom CHP products in the United States, expanding the offering from 35 kW modules to systems up to 4 MW.
- Tecogen invested $2 million in Ultra Emissions, a vehicle-emissions technology joint venture. Following outside investment, Tecogen held a 43% interest at year-end.
- In November 2016, Tecogen agreed to acquire American DG Energy (ADGE) in an all-stock merger at an exchange ratio of 0.092 Tecogen shares per ADGE share, subject to approval and other closing conditions. The merger had not closed as of the filing.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management said it believed available resources, including cash and operating cash flows, would fund working-capital requirements for the next 12 months, while also noting that growth may require additional debt or equity financing. Management stated it believed cash resources were adequate to reach full-year profitability.
- Management’s outlook depends on project timing, customer financing and permitting, the spread between natural-gas and electricity prices, utility interconnection rules and incentives, and the company’s ability to compete and control costs. Backlog may change if projects are delayed or modified.
- The proposed ADGE merger carries execution, integration, dilution, expense, approval, and potential litigation risks. Tecogen disclosed two shareholder lawsuits alleging, among other matters, conflicts of interest and omissions or misstatements in merger materials; the company said it believed the claims were without merit and would defend them.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2016, due to material weaknesses involving insufficient accounting expertise for complex reporting and limited IT security and access controls. Management did not consider the cost of additional personnel justified at that time and planned to evaluate remediation as resources became available.
- Revenue recognition includes bill-and-hold transactions of approximately $2.59 million in 2016, up from $928,900 in 2015, and percentage-of-completion accounting for turnkey projects. These practices involve judgments about delivery, contract progress, and estimated costs.
- The company reported no income-tax provision and maintained a full valuation allowance against deferred tax assets, including approximately $19.1 million of federal net operating loss carryforwards. Use of carryforwards may be limited by ownership-change rules.
Important facts for investors to verify
- Review the full financial statements and notes, especially receivables, unbilled revenue, bill-and-hold revenue, turnkey contract estimates, and cash conversion.
- Track cash burn, funding needs, and whether the company reaches sustained operating profitability without additional financing.
- Check progress in remediating the disclosed material weaknesses and assess the reliability of future financial reporting.
- Confirm the status and final terms of the ADGE merger, related shareholder litigation, integration costs, and any resulting share dilution.
- Monitor backlog conversion, project delays, customer concentration in receivables, and the contribution and funding needs of the joint ventures.