TECOGEN INC. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; comparison is with FY 2014. This filing reports annual results, not standalone fourth-quarter results.
Business context
Tecogen designs, manufactures, sells and services natural-gas engine-driven combined heat and power systems, chillers and high-efficiency water heaters. Its Ultera emissions technology is offered with company products and for eligible engine retrofits. The company also owns 65% of Ilios Dynamics. Revenue includes equipment sales, recurring service and parts, and installation work.
Financial performance and liquidity
- Revenue: $21.44 million, up 10.9% from $19.34 million. Product revenue rose 16.6% to $10.06 million, led by cogeneration sales; chiller and heat-pump sales declined. Service and installation revenue increased 6.2% to $11.39 million.
- Profitability: Gross profit was $7.63 million, or 35.6% of revenue, versus $6.40 million, or 33.1%, in 2014. Operating loss narrowed to $2.64 million from $3.70 million. Net loss attributable to Tecogen was $2.73 million, or $0.16 per share, compared with $3.75 million, or $0.24 per share.
- Costs: Operating expenses were $10.28 million, up 1.7%. R&D fell 43.2% to $0.59 million after completion of Ilios and InVerde e+ development programs; general and administrative expense increased, partly due to public-company costs and higher net rent expense.
- Cash flow: Operating activities used $4.73 million, compared with $5.13 million in 2014. Investing activities used $0.19 million. Financing activities provided $9.22 million, primarily from an $8.86 million stock-and-warrant placement and $0.36 million from option exercises.
- Liquidity: Year-end cash and cash equivalents were $5.49 million, with $0.29 million in restricted short-term investments; working capital was $14.03 million. Management said existing resources, operating cash flows and funds raised in subsequent private placements were expected to cover working-capital needs for the next 12 months, while noting future growth may require additional capital.
- Debt and commitments: A $3.0 million senior convertible note carried 4% interest and was originally due December 31, 2016; the conversion price was $3.37 per share. The company reported $4.67 million of future operating lease payments through 2024. The performance-bond letter-of-credit restriction was released in January 2016.
- Working capital items: Accounts receivable were $5.29 million and inventory $5.68 million, both higher year over year. Product and installation backlog was $11.6 million at year-end, versus $9.9 million a year earlier.
Material changes and developments
- Cogeneration revenue increased to $7.88 million from $5.36 million, while chiller and heat-pump revenue declined to $2.17 million from $3.26 million.
- Gross margin improved, which management attributed to better turnkey-project margins and production efficiencies. The company continued to report annual operating losses, as it had in each of the previous five fiscal years.
- The December 2015 ULTRATEK joint venture gave Tecogen a 50% interest in a venture focused on adapting Ultera for vehicle engines. Tecogen contributed an exclusive mobile-vehicle license; strategic investors contributed $3 million for initial development. The venture’s future commercial potential is uncertain and may take years to realize.
- Tecogen issued 2.35 million shares in its 2015 stock-and-warrant financing, and exercised options added 222,375 shares. Shares outstanding rose to 18.48 million at year-end from 15.91 million.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance was provided. Management cited expected business growth and potential additional capital needs; product sales are high-value, low-volume and timing-sensitive, and quarterly revenue can fluctuate significantly.
- Key business risks include continued losses and cash consumption; reliance on the spread between natural-gas and electricity prices; customer adoption, lengthy sales cycles and backlog execution; competition; supplier availability; regulatory and utility interconnection barriers; and protection of patents and technology.
- Management concluded disclosure controls and internal control over financial reporting were not effective at year-end due to a material weakness: insufficient accounting expertise for complex reporting and limited IT security and user-access controls. Management did not consider the cost of additional personnel justified at that time. The auditor expressed an opinion on the financial statements, not on internal-control effectiveness.
- The company recorded no income-tax benefit on losses and maintained a full valuation allowance against deferred tax assets. Federal net operating loss carryforwards were approximately $17.9 million, but their use may be limited by ownership-change rules.
- Management said ordinary-course legal proceedings were not expected to have a material impact. No dividends had been paid, and none were anticipated in the foreseeable future.
- After year-end, the board authorized an offer to acquire the remaining 35% of Ilios through a stock exchange; no shares had been issued under the offer by the filing date. Management also reported an offer in principle to extend the convertible note maturity to December 18, 2018 and increase its balance by $150,000; verify whether this was finalized.
Important facts for investors to verify
- Whether operating cash burn declines and the company reaches profitability without further dilutive financing.
- Backlog conversion, customer collections and inventory utilization, given rising receivables and inventory.
- Final terms and completion of the convertible-note maturity extension, and the potential dilution from conversion or warrants.
- Progress in remediating the disclosed material weakness and the status of the Ilios share exchange.
- ULTRATEK’s development milestones, funding sufficiency and commercial prospects; the filing cautions that vehicle-market potential is uncertain.