Risks and uncertainty factors relating to business operations
As part of its strategic change and the streamlining of its business, Tecnotree is in the process of shifting the focus of its operations from services to product-based solutions. This change may involve risks, such as the time to develop new products, the timely market introduction of products, the competitive situation as well as the company’s ability to respond to customer and market demand.
Dependence on key customers
Tecnotree’s largest customers are much bigger businesses than the company itself and the two largest customers accounted for 77% of net sales in 2016 (80%). The relationship between the company and its major customers is one of interdependence, which offers business opportunities but also poses risks.
Carrying out customer projects, profitability, forecasting
Certain commitments are associated with the project and maintenance agreements made by the company, and unforeseen costs may arise in the future from these agreements. The company aims to limit these commitments with limitation of liability clauses in customer contracts. In addition, the company has a current global liability insurance to cover any liabilities that may materialise in connection with customer projects in accordance with the insurance agreement.
Carrying out projects involves risks. They are contained for example in projects that require new product development, where creating new product features may prove more difficult than anticipated. Another problem with project sales arises from variations in net sales and profit during the different quarters of the year. Forecasting these variations is often difficult.
Risks relating to international operations, receivables and developing markets
Project deliveries result in large accounts receivable. Most of Tecnotree’s net sales come from developing countries and some of these contain political and economic challenges. There is the risk of a considerable delay in the payment of invoices in these countries and that Tecnotree will have to record credit losses. Regulation by the authorities of foreign payment transactions and international sanctions hamper operations in certain countries. Various regulations can change frequently and may be ambiguous. In many countries it is common practice to delay payment of invoices. For these reasons forecasting customer payments is often unreliable and delays occur.
Exchange rate risks
Changes in exchange rates create risks especially in sales activities, but also in other income statement and balance sheet items and in cash flow. A significant part of the company’s net sales is in US dollars. The exchange rate fluctuations of Indian Rupies also have a significant impact on the Group's net result because of the costs for the large number of employees in India and other costs denominated in rupees. Intra-group receivables and liabilities result exchange rate differences in the consolidated income statement, since the Group companies usually have different functional currencies. In conjunction with the debt restructuring programme, the parent company’s intra-group liabilities to subsidiaries were written off.
Financing and liquidity risks
The cash position of the company remains critical. Long-term projects generate receivables through revenue recognition, but there may be a long delay in invoicing for these and receiving payment. This delay increases the risk for the payment.
Grounds for observing the going concern principle
The consolidated financial statements of Tecnotree Corporation have been prepared in accordance with the going concern principle.
Because the liquidity of the company continues to be extremely tight, its financial situation and liquidity remain critical. The amount of overdue trade payables has continued to increase and, according to the estimated cash flow, will be negative in Q2 2017.
At the time of publication of the financial statements, there is limited certainty about the 12-month sufficiency of long-term, short-term and working capital financing.
The company’s management and the Board of Directors have assessed the difficult financial situation and the company’s ability to continue operating. Based on their assessment, the management and Board of Directors consider it appropriate to prepare financial statements with regard to the continuity of the company’s operations. The assessment is based on an ongoing debt structuring payment plan and the streamlining of operations. Furthermore, the company is negotiating with financiers on short term additional funding to secure liquidity and is aggressively collecting its receivables. It is also seeking long-term external financing, which could be implemented through company or restructuring arrangements.
The continuation of Tecnotree's operations depends on the success of the above-described measures and the company's ability to continue complying with the payment program established in connection with the debt restructuring process. The continuation of the business thus involves substantial uncertainty.
The company has sales in several countries where the country’s central bank has a shortage of foreign currencies. This may cause extra delays in payments, costs and even risks of not receiving payment at all. The cash flow varies considerably from one quarter to another, and this places strain on the money situation at times.
The company had all its credit facilities in use at the end of 2016. Payments received relating to receivables pledged for working capital credit facilities go into a pledged blocked account. The agreement is based on the financing of individual customer receivables.
The financing agreement signed by Tecnotree in August 2013 included covenants, but they expired after the District Court of Espoo confirmed the restructuring programme on 15 November 2016.
The parent company’s shareholders’ equity was EUR 1.2 million negative on 31 December 2016 (3.0 negative). Further information about significant uncertainty factors related to going concern is given in the Accounting principles for the consolidated financial statements under “Going concern basis”.
The goodwill of EUR 17.6 million resulting from company acquisitions involve risks. The Group’s shareholders’ equity was EUR 10.7 million at the end of 2016. The goodwill impairment tests are based on management's financial expectations and assumptions, which contain uncertainty factors.
Operating in developing markets often involves problems relating to taxation. Local tax legislation can change rapidly and may be subject to conflicting interpretations. It is possible for the tax authorities in different countries to demand taxation of the same revenue. Withholding taxes are often imposed on sales of systems and services, and obtaining credit for this in the country receiving the revenue is not a clear case. In Finland Tecnotree has a large amount of tax-deductible costs from previous fiscal periods, which can be capitalized in taxation.
As a rule, Tecnotree applies the cost-plus method in its transfer pricing. This clarifies the taxable result recorded in different countries. When the Group makes a loss, however, the consequence is that it has to pay tax in countries where it has subsidiaries. In many cases, withholding taxes have to be paid for dividends, too.
Risks and uncertainties in the near future
Tecnotree’s risks and uncertainties in the near future relate to financing, projects, to their timing, to trade receivables and receivables from construction contracts and to changes in foreign exchange rates. Having sufficient cash funds and the development of net sales are the most significant single risks.
The stringent financial situation and uncertainty of sufficient funding create uncertainly about obtaining new customers.