TECOGEN INC. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Tecogen designs, manufactures and services cogeneration, chiller and heat-pump systems, and operates on-site energy systems. Revenue is reported in Products, Services and Energy Production. Financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $7.11 million | $6.62 million | $19.24 million | $20.47 million |
| Gross profit / margin | $2.93 million / 41.1% | $2.89 million / 43.7% | $7.85 million / 40.8% | $8.69 million / 42.4% |
| Operating loss | $368,294 | $214,296 | $2.60 million | $950,653 |
| Net loss attributable to Tecogen | $481,573 | $256,712 | $2.75 million | $1.02 million |
| Loss per share, basic and diluted | $0.02 | $0.01 | $0.11 | $0.04 |
- Q3 mix: Products revenue fell 8.4% to $2.94 million, primarily as cogeneration sales declined; Services rose 24.8% to $3.84 million, including Aegis contract revenue; Energy Production was nearly flat at $331,141.
- Nine-month mix: Products revenue declined 30.1% to $7.09 million, while Services increased 20.8% to $10.93 million. Energy Production declined 4.2% to $1.21 million.
- Q3 cost of sales increased 12.4%, outpacing revenue growth, and gross margin declined 2.6 percentage points. Services margin pressure reflected higher labor and material costs, including engine replacements at some sites. For the nine-month period, lower Products revenue and higher operating expenses drove the wider operating loss.
- Other expense was $78,933 in Q3, including a $56,246 unrealized investment-security loss. For the nine months, other expense was $63,940.
Cash, liquidity and obligations
- Cash was $646,161 at September 30, down $1.27 million, or 66.2%, from December 31, 2022. Working capital was $11.47 million, versus $14.34 million at year-end.
- Nine-month operating cash use was $1.02 million, compared with $433,810 in the prior-year period. Investing cash use was $247,558; there were no financing cash flows during the period.
- Total liabilities were $12.78 million, including $797,675 of lease obligations and $2.26 million of current and long-term acquisition liabilities. The balance sheet reports no separate conventional borrowings at September 30.
- After quarter-end, Tecogen borrowed $500,000 from director and principal shareholder John N. Hatsopoulos at 5.12%, due one year after issuance. Agreements provide potential related-party financing of up to $1 million from Mr. Hatsopoulos and $500,000 from director Earl R. Lewis, with a possible additional $500,000 at Mr. Lewis’s discretion.
Material changes, outlook and risks
- The April 1 Aegis acquisition added maintenance agreements covering approximately 200 cogeneration systems and eight employees. Aegis contributed $1.23 million of revenue and $766,804 of gross profit from acquisition through September 30. Further agreement acquisitions were permitted through year-end, but none had occurred as of September 30.
- Management attributed weaker Products revenue to long sales cycles and reduced business-development activity following COVID-19, which it believes caused a temporary decline. It expects existing resources, operating cash flows and related-party loan availability to cover working capital needs for the next 12 months, but notes that further capital may be needed thereafter and that additional financing may not be available on acceptable terms.
- No specific earnings or revenue guidance was provided. Backlog excluding service contracts was $7.52 million, including $6.52 million of purchase orders and $1.00 million of projects with firm verbal commitments; the company cautions backlog is not necessarily indicative of future performance.
- The company introduced its Tecochill Hybrid-Drive Air-Cooled Chiller in February 2023 and expected to begin accepting orders in Q4 2023. It is exploring Controlled Environment Agriculture opportunities but reported no formal plans to develop facilities itself.
- Disclosure controls were deemed ineffective because of a material weakness in IT general controls. Tecogen also disclosed an April 2023 ransomware incident; its network returned to full operation after restoration and security changes, but cyber incidents remain a stated risk.
- A Canadian lawsuit alleges a Tecogen cogenerator fire caused damage and seeks CDN $1 million plus other relief. Tecogen denies liability and maintains a $150,000 reserve. The company stated it did not expect material payments under guarantees tied to previously sold energy-producing assets.
- A new Billerica headquarters and manufacturing-facility lease begins January 2024; estimated initial improvements are $1.0–$1.25 million. The board also authorized seeking shareholder approval for a reverse split at one-for-four, one-for-five or one-for-six ratios; implementation and timing remained subject to further approvals.
Investor verification points
- Track Products orders and revenue recovery against the reported backlog, and assess whether backlog converts to recognized revenue.
- Monitor Services gross margins, Aegis contract economics, deferred maintenance costs and contingent acquisition payments.
- Check cash burn, collections, working capital and whether related-party financing is drawn beyond the $500,000 post-quarter loan.
- Review remediation of the IT-controls material weakness and any further cyber incidents, and follow developments in the Milton litigation and its reserve.
- Verify the status and cost of the Billerica move, proposed reverse split, and Q4 launch and orders for the Hybrid-Drive Chiller.