Tecogen Stock Jumps 20 Percent After Announcing Outstanding 2017 Financials

Tecogen Inc. (NASDAQ: TGEN – $2.88 & Fra: 2T1 – €2.24), that designs, manufactures, sells, installs, and maintains high efficiency, ultra-clean, cogeneration products, had a transformative 2017. The Company generated a positive net income for the full year, it successfully completed the acquisition of American DG Energy (ADGE), and repaid most of its debt. Tecogen is now moving forward into 2018 as a viable, profitable, and scalable business.

In the fourth quarter, ended December 31, 2017, Tecogen reached record breaking revenue of $10.2 million delivering 44.3% in revenue growth when compared to the prior year ‘s fourth quarter revenue of $7.1 million, which was in itself an increase of 66.2% compared to sales of $4.2 million in the fourth quarter of 2015.

Thanks to the strong rise in revenue, profitability also grew in the quarter, delivering a record $268,981 in net income, compared to $4,556 in net income reported in the fourth quarter of 2016.

Product revenue increased 45% in the fourth quarter compared to the fourth quarter of 2016 to a record $4.6 million, bringing product revenues for the full year to $13 million, a 21% increase over 2016. The growth was a result of ongoing strong order flows from both new customers and existing ones.

Service and installation revenue once again rose higher to $4.1 million for the quarter, a 5% increase over the fourth quarter of 2016 and $16.4 million for the year, up 19% versus 2016.

Finally, ADGE’s energy production revenue of $1.5 million was steady and consistent with prior results as the fleet provides a nice baseline of revenues and cash flow for the company.

For the full year, ended December 31, 2017, Tecogen reported record revenue of $33.2 million compared to $24.5 million for the same period in 2016, an increase of 35.6%. The completion of the merger with American DG Energy on May 18, 2017 added over $3.8 million to revenue for the year.

Also net income improved significantly in 2017 to $47,436 from a loss of $1,096,283 in the prior year, an increase in profitability of $1,143,719. This full year profitability is a major accomplishment for the Company and was the result of strong performances across-the-board from product sales, installation and services to the ADGE fleet of on-site utility sites.

Maybe even more important, Tecogen reached an adjusted EBITDA of $533,000 in the fourth quarter, which was not only a record, it also marked the sixth consecutive quarter and the first full calendar year of positive operational results.

Sales backlog of equipment and installations has grown to $15.7 million at year end 2017 compared to $11.1 million at year end 2016, a sizable increase. As of March 19, 2018, backlog stood at $17.4 million, well ahead of the Company’s stated goal of maintaining sales backlog above $10 million. Both the backlog and backlog-related revenue have consistently moved higher since management began providing backlog data in 2014. The growth is broadly attributable to all the components that comprise the backlog, namely all product sales and installation services.

Note that the backlog does not include service contract revenues, nor does it include ADGE’s estimated undiscounted future energy production revenues, which exceed $50 million, stretching over the next 15 years.

Speaking about the results, co-CEO Benjamin Locke noted, “We expect the strong order flow to continue as enthusiasm for our InVerde e+ continues to grow due to its superiority over other CHP systems in our size range, and we expect our chiller sales will continue to improve as the HVAC market increasingly recognizes the tremendous value of so-called mechanical CHP for applications such as indoor growing, ice rinks and traditional applications, such as hospitals and other industrial applications.”

Bigger Things Ahead

As if these strong and improving financials aren’t enough to merit substantial interest from the investment community, Tecogen has some other aces up its sleeve.

Tecogen’s current success is in part based on its exceptional emissions control technology called Ultera. This is a muffler-like kit that dramatically reduces a natural gas powered engine’s harmful emissions such as NOx, CO, and hydrocarbons. Since 2012, the Ultera technology has been installed on hundreds of cogeneration systems and functions impeccably.

Following that achievement, Tecogen has been developing a number of applications for its Ultera technology with tremendous blue sky potential.

In December 2015, following the outbreak of the Volkswagen emissions scandal, Tecogen initiated a program to adapt the Ultera technology to gasoline fueled automotive engines. The prospect of vehicle engines realizing fuel cell like emissions is tremendously compelling from a policy and market standpoint.

Two phases of testing conducted since at the world-renowned AVL California Technical, showed that Ultera was highly successful in reducing emissions of carbon monoxide (CO) and non-methane hydrocarbons (NMOG).

Tecogen has now initiated the next chapter of the program. Subsequent to quarter-end, on January 4, 2018, Tecogen entered into an agreement with a leading not-for-profit research and development organization with globally recognized expertise in vehicle powertrain development, including emissions after-treatment processes. The goal of this first phase, which is expected to take approximately four months, is to optimize the chemistry and design of the second stage of the Ultera two-stage catalyst system.

The organization is performing the first phase of a three-phase program that will ultimately lead to Tecogen’s goal of creating a working prototype of the Ultera system that is fully integrated into a vehicle.

This will enable potential partners in the automobile industry to have confidence in their evaluation, especially regarding cost, space and reliability. Tecogen is funding this initial phase. For the following phases, which will focus on component development, followed by completion and testing of the refined prototype, Tecogen may seek external financiers.

Additionally, in the first quarter of 2017, Tecogen began a research program, funded by the Propane Education and Research Council (PERC), to demonstrate the effectiveness of the Ultera emissions systems on propane fueled fork trucks.

Late 2016, the PERC provided the Company with a research grant to demonstrate Ultera’s emissions reduction capability in a propane-fueled fork truck.

The project has significant potential for the industry, as these vehicles generally operate indoors, where health concerns are magnified. In recent years, the market share for propane fork trucks has been eroded by battery-operated versions, mainly because of this issue.

Given these regulatory market drivers, the Company secured a commitment from a major fork truck company to support the Tecogen engineering team and to supply a fork truck for testing. The initial results from these tests are superb.

The image below depicts a representative test run for the fork truck under heavy use. In this heavy lift test, the truck is subjected to 20 repeated lifts in a 12-minute period. This is a strenuous duty cycle as the weight, 4,300 pounds, is close to the 5,000 pound rating of the truck.

The chart shows emissions from the fork truck associated with these heavy lifts. On top, are the measured carbon monoxide (CO) emissions, while below, in red, are the emissions for nitrogen oxides (NOx). The solid lines in each chart depict the concentrations before entering the Ultera stage, while the dash lines are post-Ultera emissions.

Beginning with CO, measurements pre-Ultera, show emission peaks of up to 900 parts per million, while the amount of CO leaving the Ultera is very close to 0. In addition, the bottom chart, shows an overall 24% reduction in NOx emissions when using Ultera.

Moreover, the Ultera removed 58% of total hydrocarbons (THC) emissions during these tests. This is important, as regulations treat THC and NOx as a single pollutant. Their emissions are added together and are required to be below a single prescribed limit. As such, the hydrocarbon removal is very significant.

The project to apply Ultera to fork trucks has made substantial progress both in terms of testing and refinement of the prototype’s design. Test results are strongly encouraging and now undergoing review by the fork truck manufacturer, which is planning to visit the Tecogen plant late April.

Finally, earlier this year, the South Coast Air Quality Management District (SCAQMD) reset its Best Available Control Technology (BACT) Guideline for stationary non-emergency electrical generators powered by a spark-ignition internal combustion engine to be consistent with its Rule 1110.2 emissions standard. SCAQMD covers the Los Angeles Basin, extends eastward to within a few miles of the Arizona border, and represents almost half of the state’s population. To date, Ultera is the only known technology that enables rich-burn engines to comply with the rule.

In 2008, SCAQMD expanded the rule to cover such newly installed generators, which was the original basis for the invention of Tecogen’s now patented Ultera emission system. To-date, Ultera is the only known technology that enables rich-burn engines, specifically, to comply with the rule. Several machines that utilize Ultera are now recorded in California’s BACT Clearinghouse as examples of projects able to meet SCAQMD’s high standard. Regulators outside of California also refer to the Clearinghouse for their own BACT-related inquiries.

This is a tremendous achievement by Tecogen’s applied science capabilities. While it does not mark a regulatory change within SCAQMD, it does raise Tecogen’s profile substantially. More importantly, it alerts other regulators both within California and beyond that there is a viable way to achieve fuel-cell-like emissions with an internal combustion engine. Being listed as BACT by one regulatory body greatly eases the adoption of the standard by other regulators, thus enabling BACT, and by extension the utilization of Ultera, to spread rapidly across the country. It’s hard to overstate just how significant a sales driver this could turn out to be.

Fourth Quarter and Full Year Financials

Total product revenue for the full year 2017 grew 21% year-on-year to almost $13 million. Product revenue growth was driven by strong sales of chiller and cogeneration equipment.

Total service revenue in 2017 was $16.3 million, showing 19% growth over 2016. Total full year service revenue benefited from 2% growth in service revenues (revenue from contracted maintenance and replacement part sales) and 47% growth in installations revenue as the Company’s turnkey installation offerings continue to gain traction with customers.

Note that Product Revenue is derived from the sale of the various cogeneration and chiller units. The Company’s Service Revenue, however, is derived from long-term maintenance contracts and turnkey installations.

The new energy production revenue from the ADGE sites added $3.8 million to total revenue in 2017. The ADGE revenue stream adds an important second source of annuity-like revenue thanks to its long-term contracts.

Three Months Ended
December 31
Full Year Ended
December 31
Amounts in $000’s
Product Revenues
Service Revenues
Energy Production
Total Revenues
Cost of Products Sales
Cost of Services Sales
Cost of Energy Production
Total Cost of Sales
Gross Profit
Total Operating Expenses
Income (Loss) from Operations
Net Income (Loss)
Earnings (Loss) Per Share
Shares Out. – Diluted
Selected income statement data for the quarters and full year ended December 31, 2017 and December 31, 2016. Source: Company Filing

Product gross margin was 38.3% for 2017 compared to 33% for 2016. This improvement is due to the implementation of production efficiencies and material labor and factory utilization efforts. Service margin declined to 37.7% for 2017 compared to 41.9% in 2016. Installation projects, which carry a lower margin than service maintenance contracts, were a higher percentage of the product mix as compared to last year, bringing the overall service margin down on a comparative basis.

Energy production activities from the ADGE fleet provided a 46.9% gross margin and $1.8 million in gross profit, bringing the consolidated gross margin to 39% for the year

Amounts in $000’s
December 31, 2017
December 31, 2016
Cash and Cash Equivalents
Accounts Receivable
Total Current Assets
Property and Equipment
Intangible Assets
Total Assets
Accounts Payable
Accrued Expenses
Total Current Liabilities
Promissory Note
Unfavorable Contract Liability
Total Liabilities
Total Stockholder Equity
Selected balance sheet data for the quarters ended December 31, 2017 and December, 2016. Source: Company Filing

Note that due to the American DG acquisition it is hard to compare the current balance sheet with the one a year ago.

Also important to note on the balance sheet is that as a result of the Company’s financial success of the past few quarters, it was able to retire a convertible note to Michaelson Capital Special Fund LP of $3,150,000, plus interest, fully discharging its obligation under this agreement. Consequently, as of year-end 2017 total debt of Tecogen only consisted of a note due to a related party in the amount of $850,000, plus the related accrued interest.

This enables the Company to better utilize its borrowing capacity on its balance sheet, should the need arise. Late February 2018, Tecogen signed a term sheet with a commercial lender regarding a credit facility that would permit the Company to borrow up to $10 million. The goal is to finalize this working capital line of credit in the second quarter.


Tecogen has attained profitability for both the year and quarter ended December 31, 2017, breaking its previous quarterly and year end revenue records.

In addition to achieving profitability, a significant accomplishment in 2017 was the completion of the American DG acquisition in May of 2017. ADGE is now an important source of stable, high-margin revenue that helps balance out the volatility in Tecogen’s other revenue streams.

And there’s lots more ahead…

A broad diversity of market participants is becoming increasingly comfortable with the Company, its products, and its ability to deliver the most value of any Combined Heat and Power system. For example, the Company continues to cultivate and deepen its relationships with energy service companies (ESCOs). They were important contributors to product revenue growth in 2017.

Also indoor agriculture continues to emerge as an important driver of near-term revenue growth. In the fourth quarter, Tecogen announced 3 chillers to be installed at a Massachusetts grow facility and 2 chillers sold to a cucumber grow facility in Ontario. Many more orders in this area are expected in 2018.

The situation on the regulatory front is becoming more favorable to Tecogen as well. The Federal budget bill, passed into law in February 2018, extended the 10% investment tax credit (ITC) for new CHP projects to the end of 2021 and retroactively back to the start of 2017. In management’s view, the ITC extension signals the growing appreciation among lawmakers and regulators for cogeneration. This appreciation extends to the state level via the continuation of state-run incentives such as the New York State Energy Research and Development Authority (NYSERDA) rebate program, New Jersey’s SmartStart program and emerging programs in other states.

Moreover, electric utilities are starting to embrace CHP as a means for supporting areas with constrained electrical capacity, as evidenced by new programs in the Con Ed territories as well as other large utilities.

The outlook for Tecogen has never been more promising. The core business of selling, installing and servicing cogeneration and chiller systems is profitable, scalable and provides a fundamental revenue and profit stream. The Company’s advanced microgrid controls technology are already in place to take advantage of grid stabilization needs and support strategies, and the Ultera emissions technology has been accepted as the best available approach for engine generation.

Finally, its Ultera emissions technology, whether it’s upgrading existing stationary engine systems, retrofitting fork trucks to be Near Zero emission, or improving gasoline vehicle emissions, promises tremendous upside for the Company. Recommendation BUY.

Smallcaps.us Advice: BuyPrice Target: $9.41Latest Company Report (pdf)
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