TECOGEN INC. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020, compared with FY2019. Tecogen designs, manufactures and services natural-gas CHP, chiller and water-heating systems, and sells energy under long-term contracts. Its Products and Services segment generated 93.5% of 2020 revenue; Energy Production generated the remainder.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $28.25 million | $33.43 million |
| Gross profit / margin | $10.83 million / 38.3% | $12.48 million / 37.3% |
| Operating loss | $5.96 million | $4.66 million |
| Net loss attributable to Tecogen | $6.15 million; $0.25 per share | $4.71 million; $0.19 per share |
| Cash from (used in) operating activities | $1.41 million | ($4.48 million) |
| Cash and cash equivalents at year-end | $1.49 million | $0.88 million |
| Working capital at year-end | $13.38 million | $14.46 million |
At December 31, 2020, total assets were $30.07 million and total liabilities were $12.81 million. The company had $1.87 million of PPP debt outstanding, no revolving-line balance, and lease obligations of approximately $1.73 million. Management said existing resources, operating cash flows and the subsequent PPP loan were expected to cover working-capital needs for the next 12 months.
Material changes versus FY2019
- Revenue declined 15.5%. Product revenue fell 18.8%: cogeneration sales rose 30.5%, but chiller sales fell 78.0%.
- Service revenue declined 8.2%, chiefly as COVID-19 delayed installations and customer facility closures disrupted work. Energy Production revenue fell 41.5%, reflecting earlier site sales and reduced customer activity during the pandemic.
- Gross margin increased 1.0 percentage point, primarily due to a revenue mix shift toward higher-margin service contracts; gross profit dollars nevertheless decreased.
- Operating loss widened by $1.30 million and net loss by $1.44 million. Lower revenue and a substantially smaller gain on asset sales contributed; lower operating costs and a reduced goodwill impairment partly offset these pressures.
- Goodwill impairment was $2.88 million, versus $3.69 million in 2019. The company also recorded $0.25 million of long-lived asset impairment. Remaining goodwill was $2.41 million.
- Operating cash flow improved to positive $1.41 million, aided in part by decreases in accounts receivable and unbilled revenue. Backlog fell to $8.3 million from $22.4 million; it excludes maintenance and energy-contract revenue.
Outlook, risks and unusual items
- Outlook: No quantitative revenue or earnings guidance was provided. Management cited ongoing uncertainty from COVID-19 and said future growth could require additional capital.
- COVID-19: Customer closures, delayed orders and installations, reduced energy use, slower collections and constrained service access adversely affected results. The duration and future impact remained uncertain.
- PPP loans: The $1.874 million first-draw loan, plus accrued interest, was forgiven in full on January 11, 2021; the $1.887 million forgiveness was to be recognized in Q1 2021. A second-draw loan of $1.874 million was obtained in February 2021; forgiveness was expected but not assured.
- Energy asset-sale obligations: Following sales of eight energy purchase agreements and related systems for $7 million in 2019, Tecogen retained operating and maintenance duties and guarantees, including minimum-collection and certain contract-default obligations.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness involving limited IT security and user-access controls. An ERP system was being implemented to address control weaknesses. The auditor did not provide an internal-controls attestation.
- Other risks: Persistent losses, customer concentration, reduced backlog, supplier dependence, project timing, utility-rate economics and incentives, contract expirations, and potential further goodwill impairment. The common stock moved from Nasdaq to OTCQX in June 2020, which the company said limited liquidity and could impair access to capital.
- The filing reports no material pending legal proceedings. The independent auditor issued an unqualified opinion on the financial statements and identified the goodwill impairment assessment as a critical audit matter.
Investor facts to verify
- Whether the second-draw PPP loan qualifies for forgiveness and how its proceeds and any forgiveness are reflected in 2021 results and cash flows.
- Whether the $8.3 million product and installation backlog converts to revenue, and the timing, margins and cancellation or delay exposure of those projects.
- Whether collections, receivables and doubtful-account provisions stabilize after the 2020 increase in credit-loss expense.
- Progress in remediating the material weakness and implementing the ERP system; note that management reported controls were ineffective at December 31, 2020.
- Assumptions supporting the Energy Production segment’s remaining goodwill and the performance of its contracts, including asset-sale guarantees and potential cash shortfalls.
- Ability to fund operations and growth while sustaining recurring losses, and the effects of OTCQX trading on liquidity and future financing.