TECOGEN INC. — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; comparisons are with FY2013. Tecogen designs, manufactures, sells, installs, and services natural-gas engine-driven cogeneration, chiller, and high-efficiency water-heating systems. The company reported one business segment and consolidated its majority-owned subsidiary, Ilios.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $19.34 million | $15.85 million |
| Gross profit / margin | $6.40 million / 33.1% | $5.03 million / 31.7% |
| Operating loss | $3.70 million | $3.67 million |
| Consolidated net loss | $3.87 million | $3.81 million |
| Net loss attributable to Tecogen | $3.75 million; $0.24 per share | $3.45 million; $0.26 per share |
| Cash used in operating activities | $5.13 million | $3.38 million |
| Cash and cash equivalents at year-end | $1.19 million | $7.71 million |
| Working capital at year-end | $7.22 million | $5.57 million |
- Revenue grew 22.0%. Product revenue increased 35.9% to $8.63 million, including chiller sales of $3.26 million versus $1.15 million in 2013. Cogeneration revenue was $5.36 million versus $5.20 million.
- Services and installations generated $10.72 million, up 12.8%; this included $7.44 million of service-contract revenue and $3.28 million of installation revenue.
- Gross margin improved, which management attributed to better turnkey-project margins and production efficiencies. Operating expenses rose 16.1% to $10.10 million, mainly due to higher general and administrative costs, including public-company compliance, stock compensation, added administrative staffing, and CFO turnover. Consequently, operating loss edged higher despite revenue growth.
- Operating cash use increased year over year. Accounts receivable rose to $4.75 million and inventory to $4.09 million. Deferred revenue increased to $1.87 million, primarily associated with more active turnkey projects.
- Year-end liabilities totaled $8.30 million. The company had a $3.00 million senior unsecured convertible note, bearing 4% interest and due December 2016 unless converted. The 2013 related-party demand notes and line of credit were repaid in January 2014. The note is convertible at $5.40 per share; a change of control may trigger repayment or assumption provisions.
- FY2014 financing included $2.34 million of proceeds from stock issuance and $0.16 million from option exercises; debt repayments were $2.95 million. Investing cash use was $0.94 million. Restricted short-term investments of $0.59 million served as collateral for project performance bonds.
Changes, outlook, and notable disclosures
- Management said existing resources, including cash, operating cash flows, and funds raised in subsequent private placements, should meet working-capital needs for the next 12 months. It also warned that growth may require additional debt or equity financing. On January 28, 2015, the company disclosed a $1.00 million private placement.
- No numerical revenue or earnings guidance was provided. Management expects service activity to be busier from May through September and describes product sales as high-value, low-volume, and difficult to predict.
- The company recognized approximately $1.02 million of bill-and-hold revenue in 2014, compared with none in 2013. It also uses percentage-of-completion accounting for turnkey projects; estimates of total contract costs and selling prices affect revenue and margin timing.
- Management reported material weaknesses in disclosure controls and internal control over financial reporting at December 31, 2014, citing insufficient accounting expertise for complex reporting and limited IT general-control staffing. Management said it had not determined that the cost of adding personnel justified the benefit and planned to continue evaluating remediation. The 2014 financial statements received an unqualified audit opinion; the auditor did not express an opinion on internal-control effectiveness.
- Key risks include recurring losses and cash burn, uncertain financing access and potential dilution, volatile project timing, dependence on third-party component suppliers, competition, customer acceptance, energy-price spreads, regulatory and utility charges, and warranty/product-liability exposure. Tecogen has a $3.00 million convertible note and $4.86 million of future operating-lease payments. A $1.055 million credit facility supporting performance bonds was personally supported by a co-CEO and extended to July 2015; a separate $0.584 million restricted-cash-backed letter of credit supported a project bond.
- The company reported no legal proceedings it believed would materially affect its financial position or results. The filing also notes related-party dealings, including sales to affiliate American DG Energy and a net $0.60 million receivable from related parties at year-end.
Most important facts for investors to verify
- Whether revenue growth, particularly the sharp increase in chiller and turnkey activity, converts into sustainable gross profit and lower operating losses.
- Cash runway and financing needs, including the pace of operating cash use, collections of receivables, inventory levels, and completion and billing of turnkey projects.
- The terms, maturity, conversion and change-of-control provisions of the $3.00 million convertible note, and the dilution impact of future financing and outstanding equity awards.
- Whether the company remediates the disclosed material weaknesses and whether future filings report improved financial-reporting controls.
- The support for 2014 bill-and-hold revenue and percentage-of-completion estimates, and the status of performance bonds, letters of credit, and related-party balances.
- Actual Ilios ownership: the filing states 65.0% ownership, potentially declining to 63.7% if restricted shares vest.