TECOGEN INC. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023; comparisons are with fiscal 2022. The filing was signed March 22, 2024 and audited financial statements received an unqualified opinion. This is an annual report, not a standalone fourth-quarter report.
Business context
Tecogen designs, manufactures and services natural-gas engine-driven cogeneration, chiller and related systems. Its three segments are Products, Services and Energy Production. The company reported 93 full-time and one part-time employee at year-end. Its common stock trades on OTCQX under TGEN.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $25.14 million | $25.00 million |
| Gross profit / margin | $10.20 million / 40.6% | $11.07 million / 44.3% |
| Operating loss | $4.41 million | $2.35 million |
| Net loss attributable to Tecogen | $4.60 million | $2.45 million |
| Net loss per share | $0.19 | $0.10 |
| Cash used in operations | $0.82 million | $1.35 million |
| Cash and cash equivalents at year-end | $1.35 million | $1.91 million |
| Working capital at year-end | $9.82 million | $14.34 million |
Revenue was nearly flat, but mix shifted: Products revenue fell 20.6% to $8.86 million, including a 47.7% decline in cogeneration sales; Services revenue rose 20.4% to $14.52 million, including $1.88 million from the Aegis contracts acquired in April. Energy Production revenue declined 1.6% to $1.76 million. Services represented the largest revenue stream.
Gross margin contracted by 3.7 percentage points. Management cited higher material and labor costs, obsolete inventory provisions, increased warranty costs, engine replacements at certain service sites, and higher fuel and maintenance costs in Energy Production. Operating expenses rose 8.9% to $14.62 million. General and administrative expense included a substantial increase in bad-debt expense: $902,432 in 2023 versus a $70,987 benefit in 2022, following write-downs of install receivables.
Year-end total assets were $27.79 million and total liabilities were $13.14 million. Current liabilities were $10.48 million, including $4.51 million of accounts payable, $2.50 million of accrued expenses, and $0.51 million due under a related-party note. The filing reports working capital of $9.82 million. Cash-flow support included $505,505 of proceeds under the related-party note; operating and investing activities together used cash.
Product and installation backlog was $7.39 million at year-end, up from $6.72 million. Backlog excludes maintenance and energy contract revenue and remains subject to customer financing, permitting, interconnection and timing changes.
Material changes and notable items
- The April 2023 Aegis acquisition added maintenance agreements covering approximately 200 cogeneration systems, along with vehicles, inventory and eight employees. Tecogen reported $1.88 million in acquired-contract revenue after closing. A February 2024 amendment added 18 contracts and Aegis support for a further 36 units.
- The company introduced its Tecochill hybrid-drive air-cooled chiller in 2023 and received an order for three units from a Florida utility on February 8, 2024.
- Research and development spending increased to $840,011 from $732,873, primarily for the hybrid-drive chiller.
- On October 10, 2023, Tecogen borrowed $500,000 from director and principal shareholder John N. Hatsopoulos at 5.12% interest. In March 2024, the maturity was extended to October 10, 2025, and repayment may be made in cash or common stock. Financing agreements also provide potential additional funding from Mr. Hatsopoulos and director Earl R. Lewis, subject to their terms.
- The company entered leases for new Billerica, Massachusetts facilities beginning January 1, 2024. Estimated initial improvements are $500,000 to $750,000; the filing also discloses future lease commitments for the new premises.
- A proposed reverse stock split at one-for-four, one-for-five or one-for-six ratios was to be submitted for shareholder approval in June 2024; implementation and timing would require further board action.
Outlook, risks and contingencies
Management stated that cash, expected operating cash flows and related-party note availability are expected to fund operations for the next 12 months, but gave no assurance. The forecast depends on maintaining margins, securing new and expanded business, using working capital effectively and controlling expenses. The company acknowledged that growth, chiller development and facility relocation could increase cash requirements and that additional debt or equity financing may be needed. Its accumulated deficit was $42.88 million.
Key risks include continuing losses and uncertain product demand; long, variable sales cycles and customer project deferrals; dependence on third-party suppliers; energy-price spreads that affect customer economics; collection risk; competition; utility interconnection rules and incentives; and the possibility of future goodwill or intangible-asset impairment. The company reported $10.55 million of inventory and identified obsolete inventory provisions as a current cost pressure.
Tecogen faces an Ontario lawsuit seeking CDN $1 million plus interest and legal costs over an alleged 2022 cogenerator fire. The company denies liability and maintained a $150,000 reserve at year-end. It also has guarantees relating to previously sold energy-producing assets; management said it did not expect material payments under those guarantees.
A ransomware attack occurred on April 28, 2023; the network returned to full operation May 1. The company reported remediation steps, including password changes and multifactor authentication. Separately, management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end due to a material weakness involving limited staffing for IT security and user-access controls. The independent auditor did not audit or opine on internal-control effectiveness.
Other notable risks include the OTCQX market’s limited liquidity, possible shareholder dilution from future financing or equity awards, and customer concentration in receivables: one customer represented 14% of year-end accounts receivable. No customer exceeded 10% of annual revenue in either 2023 or 2022.
Important facts for investors to verify
- Whether operating performance, margins and cash generation improve sufficiently to sustain liquidity, and whether additional financing is needed.
- Conversion of the $7.39 million backlog into shipments and collections, including the timing and economics of hybrid-chiller orders.
- Retention, service costs and contingent payments associated with the Aegis contracts, including the added 2024 contracts.
- Collection of receivables and further bad-debt or inventory-reserve charges; confirm exposure to the customer representing 14% of receivables.
- Progress in remediating the material weakness in IT general controls and user access, and any future cybersecurity incidents.
- Developments in the Ontario fire lawsuit, the adequacy of the reserve, and any payments under energy-asset guarantees.
- Terms and availability of related-party financing, the extended note maturity and any dilution if repayment is made in stock; also verify the outcome of the proposed reverse split.