TECOGEN INC. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Tecogen designs, manufactures and services natural-gas cogeneration, chiller and heat-pump systems, and sells energy through long-term agreements. Its reportable segments are Products, Services and Energy Production. The company trades on OTCQX as TGEN.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $5.38 million | $7.44 million; down 27.7% |
| Gross profit and margin | $2.09 million; 38.9% | $3.09 million; 41.6% |
| Operating income (loss) | $(1.45) million | $80,979 |
| Net income (loss) attributable to Tecogen | $(1.49) million; $(0.06) per share | $89,409; reported EPS rounded to — |
| Operating cash flow | $(284,866) | $1.89 million provided |
| Cash and cash equivalents | $1.63 million at March 31 | $1.91 million at December 31, 2022 |
| Working capital | $12.96 million | $14.34 million at December 31, 2022 |
- Product revenue fell 56.6% to $1.71 million, led by lower cogeneration and chiller sales. Service revenue rose 7.5% to $3.14 million; Energy Production revenue declined 8.3% to $533,509.
- Gross margin declined 2.7 percentage points. Management cited higher material costs; Services margin also faced higher labor costs, and Energy Production margin reflected lower site runtime.
- Operating expenses increased 17.7% to $3.54 million, including higher general and administrative and R&D expenses. Q1 2022 included asset-disposition and contract-liability gains not repeated in 2023.
- Inventory increased to $11.86 million from $10.48 million at year-end. Operating cash use included inventory purchases, partly offset by receipt of $667,121 in employee retention credit (ERC) funds, higher accounts payable and increased customer deposits.
- The balance sheet lists no conventional borrowings or current-period financing cash flows. Operating lease liabilities totaled $1.14 million; these are distinct from interest-bearing debt.
Material changes, outlook and notable items
- Management said product revenue varies substantially because sales are high-dollar and low-volume. It expects installation activity to remain low as it focuses on higher-margin segments.
- Product and installation backlog, excluding service contracts, was $7.1 million at March 31, 2023, versus $9.4 million a year earlier. Of the current backlog, $5.2 million represented purchase orders and $1.9 million firm verbal commitments subject to execution. The filing cautions backlog is not necessarily indicative of future performance.
- The company introduced its Tecochill Hybrid-Drive Air-Cooled Chiller in February 2023 and expects incremental revenue in Q4 2023; no quantified revenue guidance was provided. It is also pursuing Controlled Environment Agriculture opportunities.
- On April 1, 2023, Tecogen closed an agreement to assume maintenance agreements covering 202 cogeneration systems, bought certain vehicles for $170,000 and hired eight former Aegis employees. It expects to acquire inventory using a $300,000 credit for Aegis equipment purchases and will share a portion of collected maintenance revenue for up to seven years. Accounting impact was still under evaluation.
- Management said existing resources, including cash and operating cash flows, should cover working-capital needs for the next 12 months, but cash generation beyond that period will be necessary; additional debt or equity financing may be needed if operations do not provide sufficient funds.
- New leases for Billerica facilities are scheduled to commence January 1, 2024, with estimated initial improvements of $1.0–$1.25 million. The Waltham headquarters lease expires March 31, 2024.
- A Canadian lawsuit alleges a Tecogen cogenerator fire caused damage and seeks CDN $1 million. Tecogen had reserved $150,000 for anticipated costs potentially not covered by insurance. The company also disclosed contractual energy-project guarantees, while stating it did not expect material payments under them as of March 31, 2023.
- Management concluded disclosure controls were not effective because of a material weakness in IT general controls involving a small number of individuals; remediation is underway as resources permit. No material off-balance-sheet arrangements were reported.
Facts investors should verify
- Whether product orders and backlog convert to revenue, and whether the expected Q4 chiller contribution materializes.
- Whether gross margins and operating cash flow improve, particularly given higher materials, labor and inventory levels.
- Cash needs and financing options after management’s stated 12-month liquidity horizon, including the cost of Billerica improvements and the Aegis agreement.
- The status and potential insurance coverage of the CDN $1 million lawsuit and the company’s energy-contract guarantees.
- Progress remediating the IT general-controls material weakness, and collection of the remaining $46,148 ERC receivable.