Tecogen 10Q 2023 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☑						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-36103

TECOGEN INC. (OTCQX:TGEN)

(Exact name of Registrant as specified in its charter)


Delaware			04-3536131
(State or Other Jurisdiction of Incorporation or Organization)			(IRS Employer Identification No.)


45 First Avenue
Waltham, Massachusetts 02451
(Address of Principal Executive Offices and Zip Code)


(781) 466-6402
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:


Large accelerated filer o			Accelerated filer o
Non-accelerated filer ☒			Emerging Growth company ☐
Smaller reporting company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of March 31, 2023, 24,850,261 shares of common stock, $.001 par value per share, of the registrant were issued and outstanding.

TECOGEN INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2023

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited)
	March 31, 2023 and December 31, 2022	1

	Condensed Consolidated Statements of Operations (Unaudited)
	Three Months Ended March 31, 2023 and 2022	2

	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
	Three Months Ended March 31, 2023 and 2022	3

	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Three Months Ended March 31, 202 3 and 202 2	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	24

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults in Senior Securities	24

Item 4.	Mine Safety Disclosures	24

Item 5.	Other Information	24

Item 6.	Exhibits	25

Signatures	Signature Page	26

References in this Form 10-Q to "we", "us", "our"', the "Company" and "Tecogen" refers to Tecogen Inc. and its consolidated subsidiaries, unless otherwise noted.

TECOGEN INC.

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	March 31, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	1,629,103	$	1,913,969
Accounts receivable, net	6,758,360		6,714,122
Employee retention credit	46,148		713,269
Unbilled revenue	1,788,902		1,805,330
Inventories, net	11,862,782		10,482,729

Prepaid and other current assets	265,019		401,189
Total current assets	22,350,314		22,030,608
Long-term assets:
Property, plant and equipment, net	1,290,228		1,407,720
Right of use assets	1,084,033		1,245,549
Intangible assets, net	947,885		997,594

Goodwill	2,406,156		2,406,156
Other assets	164,815		165,230
TOTAL ASSETS	$	28,243,431	$	28,252,857

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:



Accounts payable	4,167,461		3,261,952
Accrued expenses	2,240,523		2,384,447
Deferred revenue, current	2,108,082		1,115,627
Lease obligations, current	646,805		687,589

Unfavorable contract liability, current	223,230		236,705
Total current liabilities	9,386,101		7,686,320
Long-term liabilities:

Deferred revenue, net of current portion	231,969		371,823
Lease obligations, net of current portion	496,526		623,452

Unfavorable contract liability, net of current portion	535,706		583,512
Total liabilities	10,650,302		9,265,107

Commitments and contingencies

Stockholders’ equity:
Tecogen Inc. stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261 issued and outstanding at March 31, 2023 and December 31, 2022	24,850		24,850
Additional paid-in capital	57,428,356		57,351,008

Accumulated deficit	(39,771,577)		(38,281,548)
Total Tecogen Inc. stockholders’ equity	17,681,629		19,094,310
Non-controlling interest	(88,500)		(106,560)
Total stockholders’ equity	17,593,129		18,987,750
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	28,243,431	$	28,252,857

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended
	March 31, 2023		March 31, 2022
Revenues
Products	$	1,710,136	$	3,939,481
Services	3,136,173		2,917,280
Energy production	533,509		581,562
Total revenues	5,379,818		7,438,323
Cost of sales
Products	1,212,568		2,644,756
Services	1,737,602		1,366,752
Energy production	337,739		336,027
Total cost of sales	3,287,909		4,347,535
Gross profit	2,091,909		3,090,788
Operating expenses
General and administrative	2,792,483		2,473,903
Selling	520,070		501,091
Research and development	229,102		140,135
Gain on disposition of assets	—		(33,945)
Gain on termination of unfavorable contract liability	—		(71,375)
Total operating expenses	3,541,655		3,009,809
Income (loss) from operations	(1,449,746)		80,979
Other income (expense)
Other income (expense), net	830		(14,150)
Interest expense	(415)		(828)


Unrealized gain on investment securities	—		37,497
Total other income (expense), net	415		22,519
Income (loss) before provision for state income taxes	(1,449,331)		103,498
Provision for state income taxes	22,638		3,930
Consolidated net income (loss)	(1,471,969)		99,568
Income attributable to the non-controlling interest	(18,060)		(10,159)
Net income (loss) attributable to Tecogen Inc.	$	(1,490,029)	$	89,409

Net income (loss) per share - basic	$	(0.06)	—
Net income (loss) per share - diluted	$	(0.06)	—
Weighted average shares outstanding - basic	24,850,261		24,850,261
Weighted average shares outstanding - diluted	24,850,261		25,028,616

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Three Months Ended March 31, 2023 and 2022

(unaudited)


	Tecogen Inc. Stockholders
Three Months ended March 31, 2023	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at December 31, 2022	24,850,261	$	24,850	$	57,351,008	$	(38,281,548)	$	(106,560)	$	18,987,750
Stock based compensation expense	—	—		77,348		—		—		77,348

Net income (loss)	—	—		—		(1,490,029)		18,060		(1,471,969)
Balance at March 31, 2023	24,850,261	$	24,850	$	57,428,356	$	(39,771,577)	$	(88,500)	$	17,593,129

Three Months ended March 31, 2022	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at December 31, 2021	24,850,261	$	24,850	$	57,016,859	$	(35,833,621)	$	(79,939)	$	21,128,149
Stock based compensation expense	—	—		95,707		—		—		95,707
Distributions to non-controlling interest	—	—		—		—		(15,640)		(15,640)
Net income	—	—		—		89,409		10,159		99,568
Balance at March 31, 2022	24,850,261	24,850		57,112,566		$	(35,744,212)	$	(85,420)	$	21,307,784

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Months Ended
	March 31, 2023		March 31, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)	$	(1,471,969)	$	99,568
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization, net	105,920		107,061



Stock-based compensation	77,348		95,707

Gain on disposition of assets	—		(33,945)

Unrealized gain on investment securities	—		(37,497)
Gain on termination of unfavorable contract liability	—		(71,375)


Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable	(44,238)		850,674
Employee retention credit	667,121		—
Unbilled revenue	16,428		351,259
Inventory	(1,380,052)		8,252
Prepaid expenses and other current assets	136,170		2,014
Other assets	161,931		152,888
Increase (decrease) in:
Accounts payable	905,509		894,418
Accrued expenses and other current liabilities	(143,923)		134,795
Deferred revenue	852,600		(504,229)
Other liabilities	(167,711)		(155,119)
Net cash provided by (used in) operating activities	(284,866)		1,894,471
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	—		(80,873)

Purchases of intangible assets	—		(16,220)
Proceeds from disposition of assets	—		64,669

Distributions to non-controlling interest	—		(15,640)
Net cash used in investing activities	—		(48,064)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable	—		—




Net cash provided by financing activities	—		—
Change in cash and cash equivalents	(284,866)		1,846,407
Cash and cash equivalents, beginning of the period	1,913,969		3,614,463
Cash and cash equivalents, end of the period	$	1,629,103	$	5,460,870

Supplemental disclosures of cash flows information:
Cash paid for interest	$	—	$	413
Cash paid for taxes	$	22,638	$	3,930

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation

Description of Business

Tecogen Inc. (together with its subsidiaries, “we,” “our,” or “us,” or “Tecogen”) designs, manufactures, markets, and maintains high efficiency, ultra-clean cogeneration products. These include natural gas engine driven combined heat and power (CHP) systems, chillers and heat pumps for multi-family residential, commercial, recreational and industrial use. We are known for products that provide customers with substantial energy savings, resiliency from utility power outages and for significantly reducing a customer’s carbon footprint. Our products are sold with our patented Ultera® emissions technology which nearly eliminates all criteria pollutants such as nitrogen oxide ("NOx") and carbon monoxide ("CO"). We developed Ultera® for other applications including stationary engines and forklifts. We were incorporated in the State of Delaware on September 15, 2000.

We have wholly-owned subsidiaries American DG Energy, Inc. ("ADGE") and Tecogen CHP Solutions, Inc., and we own a 51% interest in American DG New York, LLC ("ADGNY"), a joint venture. ADGE and ADGNY distribute, own, and operate clean, on-site energy systems that produce electricity, hot water, heat and cooling. ADGE owns the equipment that it installs at a customer’s facility and sells the energy produced by its systems to the customer on a long-term contractual basis.

Our operations are comprised of three business segments:

•our Products segment, which designs, manufactures and sells industrial and commercial cogeneration systems;

•our Services segment, which provides operations and maintenance ("O&M") services and turn-key installation for our products under long term service contracts, and

•our Energy Production segment, which sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term energy sales agreements.

The majority of our customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast.

On July 20, 2022, we announced our intention to increase focus on opportunities relating to Controlled Environment Agriculture (CEA). Tecogen believes that CEA offers an exciting opportunity to apply the company’s expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security.

Our common stock is quoted on OTC Markets Group, Inc.'s OTCQX Best Market tier and trades under the symbol "TGEN."

On May 18, 2017, the Company acquired 100% of the outstanding common stock of American DG Energy Inc., formerly a related entity, in a stock-for-stock merger.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The condensed consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in Tecogen's Annual Report on Form 10-K for the year ended December 31, 2022.

The accompanying unaudited condensed consolidated financial statements include our accounts and the accounts of entities in which we have a controlling financial interest. Those entities include our wholly-owned subsidiaries American DG Energy Inc., Tecogen CHP Solutions, Inc., and a joint venture, American DG New York, LLC, in which American DG Energy Inc. holds a 51% interest. Investments in partnerships and companies in which we do not have a controlling financial interest but where we have significant influence are accounted for under the equity method. Any intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

The provisions for income taxes in the accompanying unaudited consolidated statements of operations differ from that which would be expected by applying the federal statutory tax rate primarily due to losses for which no benefit is recognized.

Employee Retention Credit

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.

As a result of our election to use an alternative quarter, we qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021, excluding the wages applied to the Paycheck Protection Program Second Draw Loan, were eligible for the ERC.

During the three months ended June 30, 2021, we recorded an ERC benefit for the first and second quarters of 2021 of $713,269 and, in the three months ended September 30, 2021 we recorded an ERC benefit for the third quarter of 2021 of $562,752, respectively, in other income (expense), net in the our condensed consolidated statements of operations. On April 14, 2022, we received $564,027 from the Internal Revenue Service representing the ERC claim for the third quarter of 2021 and $1,275 of accrued interest. We received $667,121 from the Internal Revenue Service on January 12, 2023 in payment of the ERC claimed from the first and second quarters of 2021 and $15,775 of accrued interest, which is reported in other income (expense) in our condensed consolidated statements of operations for the three months ended March 31, 2023. A current receivable in the amount of $46,148 is included in our condensed consolidated balance sheet as of March 31, 2023. We expect to receive the remaining balance in 2023.

Note 2. Revenue

Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services or energy to customers.

Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. We have elected to exclude from revenue any value-added sales and other taxes which we collect concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which we historically recorded shipping and handling fees and value-added taxes. Incremental costs incurred by us to obtain a contract with a customer are negligible, if any, and are expensed ratably in proportion to the related revenue recognized.

Disaggregated Revenue

In general, our business segmentation is aligned according to the nature and economic characteristics of our products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.

The following table further disaggregates our revenue by major source by segment for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31, 2023
	Products		Services		Energy Production		Total
Products	$	1,710,136	$	—	$	—	$	1,710,136

Maintenance services	—		3,136,173		—		3,136,173
Energy production	—		—		533,509		533,509
Total revenue	$	1,710,136	$	3,136,173	$	533,509	$	5,379,818

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements


	Three Months Ended March 31, 2022
	Products		Services		Energy Production		Total
Products	$	3,939,481	$	—	$	—	$	3,939,481
Installation services	—		20,109		—		20,109
Maintenance services	—		2,897,171		—		2,897,171
Energy production	—		—		581,562		581,562
Total revenue	$	3,939,481	$	2,917,280	$	581,562	$	7,438,323

Products Segment

Products. Our Product revenues include cogeneration systems that supply electricity and hot water, chillers that provide air-conditioning and hot water and engineered accessories, which consist of ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. We refer to the package of engineered accessories and engineering and design services necessary for the customers' installation of a cogeneration unit as light installation services.

We transfer control and generally recognize a sale when we ship a product from our manufacturing facility at which point the customer takes ownership of the product. Payment terms on product sales are generally 30 days.

We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill and hold transactions). We recognize revenue related to such transactions once, among other things, the customer has made a written fixed commitment to purchase the product(s) under normal billing and credit terms, the customer has requested the product(s) be held for future delivery as scheduled and designated by them, risk of ownership has been assumed by the customer, and the product(s) are tagged as sold and segregated for storage awaiting further direction from the customer. Due to the infrequent nature and duration of bill and hold arrangements, the value associated with custodial storage services is deemed immaterial in the context of the contract and in total, and accordingly, none of the transaction price is allocated to such service.

Depending on the product and terms of the arrangement, we may defer the recognition of a portion of the transaction price received because we have to satisfy a future obligation (e.g., product start-up service). Amounts allocated to product start-up services are recognized as revenue when the start-up service has been completed. We use an observable selling price to determine standalone selling prices where available and either a combination of an adjusted market assessment approach, an expected cost plus a margin approach, and/or a residual approach to determine the standalone selling prices for separate performance obligations as a basis for allocating contract consideration when an observable selling price is not available. Amounts received but not recognized pending completion of performance are recognized as contract liabilities and are recorded as deferred revenue along with deposits by customers.

Services Segment

Maintenance Services. Maintenance services are provided under either long-term maintenance contracts or time and material maintenance contracts. Revenue under time and material maintenance contracts is recognized when the maintenance service is completed. Revenue under long-term maintenance contracts is recognized either ratably over the term of the contract where the contract price is fixed or when the periodic maintenance activities are completed where the invoiced cost to the customer is based on run hours or kilowatts produced in a given period. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to the amount we have the right to invoice the customer under the contract. Payment terms for maintenance services are generally 30 days.

Installation Services. We provide both complete turnkey installation services which typically include all necessary engineering and design, labor, subcontract labor to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. Under complete turnkey installation service contracts revenue is recognized over time using the percentage-of-completion method determined on a cost to cost basis. Our performance obligation under such contracts are satisfied progressively over time as enhancements are made to customer owned and controlled properties. We measure progress towards satisfaction of the performance obligation based on an input method based on cost which we believe is the most faithful depiction of the transfer of products and services to the customer under these contracts. When the financial metrics of a contract indicate a loss, our policy is to record the entire expected loss as soon as it is known. Contract costs and profit recognized to date under the percentage-of-completion method in excess of billings are recognized as contract assets and are recorded as unbilled revenue. Billings in excess of contract costs and profit are recognized as contract liabilities and are recorded as deferred revenue. Generally billings under complete turnkey installation contracts are made when contractually

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

determined milestones of progress have been achieved, with payment terms generally being 30 days. Our installation services revenue decreased significantly in three months March 31, 2023 and is likely to continue to remain low due to our strategy to focus on higher margin segments of our business.

Energy Production Segment

Energy Production. Revenue from energy contracts is recognized when electricity, heat, hot and/or chilled water is produced by our owned on-site cogeneration systems. Each month we bill the customer and recognize revenue for the various forms of energy delivered, based on meter readings which capture the quantity of the various forms of energy delivered in a given month, under a contractually defined formula which takes into account the current month's cost of energy from the local power utility.

As the various forms of energy delivered by us under energy production contracts are simultaneously delivered and consumed by the customer, our performance obligation under these contracts is considered to be satisfied over time. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to that amount to which we have the right to invoice the customer under the contract. Payment terms on invoices under these contracts are generally 30 days.

Contract Balances

The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled revenue (contract assets) and deferred revenue, consisting of customer deposits and billings in excess of revenue recognized (contract liabilities) on the condensed consolidated balance sheets.

We did not recognize any revenue during the three months ended March 31, 2023 that was included in unbilled revenue at the end of the period. Approximately $16,428 was billed in this period that had been recognized as revenue in previous periods.

Revenue recognized during the three ended months March 31, 2023 that was included in deferred revenue at the beginning of the period was approximately $136,640.

Remaining Performance Obligations

Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term of greater than one year, excluding certain maintenance contracts and all energy production contracts where a direct measurement of the value to the customer is used as a method of measuring progress towards completion of our performance obligation. Exclusion of these remaining performance obligations is due in part to the inability to quantify values based on unknown future levels of delivery and in some cases rates used to invoice customers. Remaining performance obligations therefore consist of unsatisfied or partially satisfied performance obligations related to fixed price maintenance contracts and installation contracts.

As of March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $2.3 million. We expect to recognize revenue of approximately 98.5% of the remaining performance obligations over the next 24 months, 90.1% recognized in the first 12 months and 8.4% recognized over the subsequent 12 months, and the remainder recognized thereafter.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

Note 3. Income (Loss) Per Common Share

Basic and diluted income (loss) per share for the three months ended March 31, 2023 and 2022, respectively, were as follows:


	Three Months Ended
	March 31, 2023		March 31, 2022
Numerator:
Net income (loss) available to stockholders	$	(1,490,029)	$	89,409

Denominator:
Weighted average shares outstanding - Basic	24,850,261		24,850,261
Effect of dilutive securities:
Stock options	—		178,355
Weighted average shares outstanding - Diluted	24,850,261		25,028,616

Basic income (loss) per share	$	(0.06)	$	—
Diluted income (loss) per share	$	(0.06)	$	—

Anti-dilutive shares underlying stock options outstanding	1,744,351		928,271


Note 4.			Inventories, net

Inventories at March 31, 2023 and December 31, 2022 consisted of the following:


	March 31, 2023		December 31, 2022


Raw materials, net	$	9,354,413	$	9,001,491
Work-in-process	1,133,323		498,139
Finished goods	1,375,046		983,099
Total inventories, net	$	11,862,782	$	10,482,729

Note 5. Property, Plant and Equipment, net

Property, plant and equipment at March 31, 2023 and December 31, 2022 consisted of the following:


	Estimated Useful Life (in Years)	March 31, 2023		December 31, 2022
Energy systems	1 - 15 years	$	2,810,232	$	2,810,232
Machinery and equipment	5 - 7 years	1,624,885		1,624,885
Furniture and fixtures	5 years	196,007		196,007
Computer software	3 - 5 years	192,865		192,865
Leasehold improvements	*	466,789		466,789
		5,290,778		5,290,778
Less - accumulated depreciation and amortization		(4,000,550)		(3,883,058)
		$	1,290,228	$	1,407,720

* Lesser of estimated useful life of asset or lease term

Depreciation and amortization expense on property and equipment for the three months ended March 31, 2023 and 2022 was $117,492 and $126,792, respectively.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

Note 6. Intangible Assets and Liabilities Other Than Goodwill

As of March 31, 2023 and December 31, 2022 we had the following amounts related to intangible assets and liabilities other than goodwill:


	March 31, 2023						December 31, 2022
Intangible assets	Cost		Accumulated Amortization		Total		Cost		Accumulated Amortization		Total
Product certifications	$	777,465	$	(597,499)	$	179,966	$	777,465	$	(584,863)	$	192,602
Patents	888,910		(427,515)		461,395		888,910		(405,140)		483,770
Developed technology	240,000		(160,000)		80,000		240,000		(156,000)		84,000
Trademarks	26,896		—		26,896		26,896		—		26,896
In Process R&D	263,936		(75,410)		188,526		263,936		(65,984)		197,952
Favorable contract asset	384,465		(373,363)		11,102		384,465		(372,091)		12,374

	$	2,581,672	$	(1,633,787)	$	947,885	$	2,581,672	$	(1,584,078)	$	997,594

Intangible liability
Unfavorable contract liability	$	2,618,168	$	(1,859,232)	$	758,936	$	2,618,168	$	(1,797,951)	$	820,217

The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the three months ended March 31, 2023 and 2022 was $49,361 and $50,795. The net credit to cost of sales related to the amortization of the contract related intangible asset and liability for the three months ended March 31, 2023 and 2022 was $60,933 and $70,526, respectively

Favorable/Unfavorable Contract Assets and Liabilities

The favorable contract asset and unfavorable contract liability in the foregoing table represent the estimated fair value of American DG Energy's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by us in May 2017.

Amortization of intangibles including contract related amounts is calculated using the straight-line method over the remaining useful life or contract term. Aggregate future amortization over the next five years and thereafter as of March 31, 2023 is estimated to be as follows:


	Non-contract Related Intangibles		Contract Related Intangibles		Total
Year 1	$	198,951	$	(223,230)	$	(24,279)
Year 2	181,065		(146,940)		34,125
Year 3	177,295		(97,376)		79,919
Year 4	172,495		(62,692)		109,803
Year 5	136,158		(55,026)		81,132
Thereafter	55,025		(173,672)		(118,647)
Total	$	920,989	(758,936)		$	162,053


Note 7.			Sale of Energy Producing Assets and Goodwill Impairment

During the first quarter of 2019 we recognized two individual sales of energy producing assets, for a total of eight power purchase agreements, including the associated energy production contracts for total consideration of $7 million.

In connection with these assets sales, we entered into agreements with the purchaser to maintain and operate the assets over the remaining periods of the associated energy production contracts (through August 2033 and January 2034, respectively) in exchange for monthly maintenance and operating fees. These agreements contain provisions whereby we have guaranteed to the purchaser a minimum level or threshold of cash flows from the associated energy production contracts. Actual results are

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

compared to the minimum threshold bi-annually and we are contractually obligated to reimburse any shortfall to the purchaser. To the extent actual cash flow results exceed the minimum threshold, we are entitled to fifty percent of such excess under the agreements. Based upon an analysis of these energy producing assets expected future performance, as of March 31, 2023, we do not expect to make any material payments under the guarantee.

At March 31, 2023, we were due $22,229 under the energy production contracts, representing outstanding accounts receivable balances that were due from the purchaser's customers which were past due at December 31, 2022 and have since been collected. We expect to receive these funds in the third quarter of 2023 when the bi-annnual reconciliation for the period ended June 30, 2023 is prepared.

The foregoing agreements also contain provisions whereby we have agreed to make whole the purchaser in the event the counterparty to the energy production contract(s) defaults on or otherwise terminates before the stated expiration of the energy production contract. Should we be required to make whole the purchaser under such provisions, we would be entitled to seek recovery from the counterparty to the energy production contract(s) under a similar provision contained in those contracts in respect of early termination.

We are also responsible under the agreements for site decommissioning costs, if any, in excess of certain threshold amounts by site. Decommissioning of site assets is performed when, if and as requested by the counterparty to the energy production contract upon termination of the energy production contract.


Note 8.			Leases

Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing and storage facilities.

At inception, we determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of our lease agreements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). We account for each component separately based on the estimated standalone price of each component.

Operating leases are included in Right-of-use assets, Lease obligations, current and Lease obligations, long term on the condensed consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term and using an incremental borrowing rate consistent with the lease terms or implicit rates, when readily determinable. For those leases where it is reasonably certain at the commencement date that we will exercise the option to extend the lease, then the lease term will include the lease extension term. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

Lease expense for operating leases, which principally consist of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Lease expense for the three months ended March 31, 2023 and 2022 was $189,715 and and $196,979, respectively.

Supplemental information related to leases for the three months ended March 31, 2023 was as follows:


	Three Months Ended
	March 31, 2023			March 31, 2022
Cash paid for amounts included in the measurement of operating lease liabilities	$	184,072		$	181,661
Right-of-use assets obtained in exchange for operating lease liabilities	$	—		$	—
Weighted-average remaining lease term - operating leases	3.60 years			3.80 years
Weighted-average discount rate - operating leases	6		%	6		%

Supplemental information related to operating leases as of March 31, 2023 and December 31, 2022 was as follows:

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements


	March 31, 2023		December 31, 2022
Operating leases
Right-of-use assets	$	1,084,033	$	1,245,549

Operating lease liability, current	$	646,805	$	687,589
Operating lease liability, long-term	496,526		623,452
Total operating lease liability	$	1,143,331	$	1,311,041

Future minimum lease commitments under non-cancellable operating leases as of March 31, 2023 were as follows:


	Operating Leases
Year 1	$	691,899
Year 2	146,956
Year 3	120,763
Year 4	94,023
Year 5	53,092
Thereafter	157,648
Total lease payments	1,264,381
Less: imputed interest	121,050
Total	$	1,143,331

The lease on our headquarters located in Waltham, Massachusetts which consists of approximately 43,000 square feet of manufacturing, storage and office space, expires on March 31, 2024. Currently, our monthly base rent is $44,254. On March 31, 2023, we entered into two lease agreements for two adjoining buildings, located in Billerica, Massachusetts, containing approximately 26,412 square feet of manufacturing, storage and offices space to serve as our headquarters and manufacturing facilities. Under the terms of the leases, which have initial lease terms of five (5) years with two successive options to renew for additional terms of five (5) years, both leases commence on January 1, 2024 and require payment of the base rent, plus real estate taxes and common maintenance expenses. Our costs for initial improvements required to the leased premises is estimated to range between $1,000,000 and $1,250,000. The estimated straight-line rent expense for the initial term of the lease is approximately $24,800. In accordance with ASC 842-20-30-1, we will record the lease liability and right-of-use asset using the discount rate for the lease upon the lease commencement date.

Note 9. Stock-Based Compensation

Stock-Based Compensation

We adopted a 2006 Stock Option and Incentive Plan, or the Plan, under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Amended Plan to 3,838,750 as of March 31, 2023, and in June 2017 stockholders approved an amendment to extend the termination date of the Plan to January 1, 2026.

Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the Amended Plan. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of March 31, 2023 was 150,893.

During the three months ended March 31, 2023, we did not grant any options to purchase shares of common stock under the Amended Plan.

We adopted the 2022 Stock Incentive Plan (the "2022 Plan"), under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. We have reserved

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

3,800,000 shares of our common stock for issuance pursuant to awards under the 2022 Plan. The adoption of the 2022 Plan was approved by our shareholders on June 9, 2022.

Under the 2022 Plan, stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the 2022 Plan. The options are not transferable except by will or domestic relations order. The option price per share under the 2022 Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Plan as of March 31, 2023 was 3,600,000.

During the three months ended March 31, 2023, we did not grant any options to purchase shares of common stock under the 2022 Plan.

Stock option activity for the three months ended March 31, 2023 was as follows:


Common Stock Options	Number of Options	Exercise Price Per Share	Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Outstanding, December 31, 2022	3,204,297	$0.71-$10.33	$	1.61	7.30 years	$	882,074
Granted	—

Exercised	—
Canceled and forfeited	(4,500)	$1.10-$1.13	$	1.11

Outstanding, March 31 2023	3,199,797	$0.71-$10.33	$	1.61	7.05 years	$	741,404
Exercisable, March 31, 2023	1,768,222		$	2.08		$	375,744
Vested and expected to vest, March 31, 2023	2,985,061		$	1.65		$	686,555

Consolidated stock-based compensation expense for the three months ended March 31, 2023 and 2022 was $77,348 and $95,707, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the period.

At March 31, 2023 the total compensation cost related to unvested stock option awards not yet recognized is $421,659 and this amount will be recognized over a weighted average period of 1.46 years.

Note 10. Fair Value Measurements

The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. We currently do not have any Level 1 financial assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. We have Level 2 financial assets and liabilities as provided below.

Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. We do not currently have any Level 3 financial assets or liabilities.

The following tables presents the asset reported in "other assets" in the consolidated balance sheet measured at its fair value on a recurring basis as of March 31, 2023 and 2022 by level within the fair value hierarchy.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements


March 31, 2023			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Unrealized
Description	Total		Level 1		Level 2		Level 3		Gains
Recurring fair value measurements
Marketable equity securities
EuroSite Power Inc.	$	93,744	$	—	$	93,744	$	—	$	—
Total recurring fair value measurements	$	93,744	$	—	$	93,744	$	—	$	—

March 31, 2022			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs		Unrealized
Description	Total		Level 1		Level 2		Level 3		Gains
Recurring fair value measurements
Marketable equity securities
EuroSite Power Inc.	$	112,492	$	—	$	112,492	$	—	$	37,497
Total recurring fair value measurements	$	112,492	$	—	$	112,492	$	—	$	37,497

We utilize a Level 2 category fair value measurement to value its investment in EuroSite Power, Inc. as a marketable equity security at period end. That measurement is equal to the quoted market closing price at period end. Since this security is not actively traded we classify it as Level 2.

The following table summarizes changes in Level 2 assets which are comprised of marketable equity securities for the three months ended March 31, 2023 and 2022:


Fair value at December 31, 2022	$	93,744
Unrealized gains	—
Fair value at March 31, 2023	$	93,744

Fair value at December 31, 2021	$	74,995
Unrealized gains	37,497
Fair value at March 31, 2022	$	112,492


Note 11.			Segments

As of March 31, 2023, we were organized into three operating segments through which senior management evaluates our business. These segments, as described in more detail in Note 1, are organized around the products and services provided to customers and represent our reportable segments. The following table presents information by reportable segment for the three months ended March 31, 2023 and 2022:

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements


	Products		Services		Energy Production		Corporate, other and elimination (1)		Total
Three Months Ended March 31, 2023

Revenue - external customers	$	1,710,136	$	3,136,173	$	533,509	$	—	$	5,379,818
Intersegment revenue	—		88,214		—		(88,214)		$	—
Total revenue	$	1,710,136	$	3,224,387	$	533,509	$	(88,214)	$	5,379,818
Gross profit	$	497,567	$	1,398,572	$	195,770	$	—	$	2,091,909
Identifiable assets	$	12,023,164	$	9,750,153	$	3,433,439	$	3,036,675	$	28,243,431

Three Months Ended March 31, 2022

Revenue - external customers	$	3,939,481	$	2,917,280	$	581,562	$	—	$	7,438,323
Intersegment revenue	—		95,253		—		(95,253)		—
Total revenue	$	3,939,481	$	3,012,533	$	581,562	$	(95,253)	$	7,438,323
Gross profit	$	1,294,726	$	1,550,527	$	245,535	$	—	$	3,090,788
Identifiable assets	$	10,204,104	$	9,827,069	$	3,978,145	$	8,754,653	$	32,763,971

(1) Corporate, intersegment revenue, other and elimination includes various corporate assets.


Note 12.			Subsequent Events

We have evaluated events through the date of this filing, and, except as described below, have determined that no material subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.

On March 15, 2023, we entered into an Agreement with Aegis Energy Services, LLC (“Aegis”) regarding the assignment and assumption of certain maintenance agreements, the purchase and sale of certain assets, and related matters (the “Agreement”) pursuant to which we agreed to assume Aegis’ rights and obligations arising on or after April 1, 2023 under Maintenance Agreements for 202 cogeneration systems, and acquire certain vehicles and inventory used in connection with the performance of maintenance services. On April 1, 2023, we closed on the agreement with Aegis and acquired certain Aegis vehicles for $170,000, and hired eight (8) former Aegis employees who will continue to provide maintenance services relating to the cogeneration systems. As agreed, Aegis will provide transitional services relating to the assumed Maintenance Agreements. between the closing and June 30, 2023, we will acquire from Aegis inventory used to provide maintenance services in exchange for a credit of $300,000 to be used for purchases by Aegis of our cogeneration equipment on or before June 30, 2023. Following the closing, for a period of up to seven years, we will pay Aegis a portion of the revenue collected for maintenance services provided pursuant to the assumed Maintenance Agreements. We also have the right to assume Aegis’ remaining Maintenance Agreements for cogeneration systems on the same terms and conditions but effective December 31, 2023 to the extent that Aegis is permitted to assign such agreements to us in accordance with the terms of such agreements. Management is in the process of evaluating the accounting impact of the Aegis agreement.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on our business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Such forward-looking statements include, among other things, statements regarding the impact of the coronavirus pandemic on demand for our products and services, the availability of incentives, rebates, and tax benefits relating to our products, changes in the regulatory environment relating to our products, competing technological developments, and the availability of financing to fund our operations and growth. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (“20221 Form 10-K”), as supplemented, and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors.” The following discussion should be read in conjunction with the 2021 Form 10-K filed with the Securities and Exchange Commission (“SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. Each of the terms “Tecogen,” “we,” “our,” and “us” as used herein refer collectively to Tecogen Inc. and our wholly owned subsidiaries, unless otherwise stated. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on those forward-looking statements as representing ours views as of any date subsequent to the date of the filing of this Form 10-Q.

Recent Developments

Assumption of Aegis Energy Services Maintenance Agreements

On March 15, 2023, we entered into an Agreement with Aegis Energy Services, LLC (“Aegis”) regarding the assignment and assumption of certain maintenance agreements, the purchase and sale of certain assets, and related matters (the “Agreement”) pursuant to which we agreed to assume Aegis’ rights and obligations arising on or after April 1, 2023 under Maintenance Agreements for 202 cogeneration systems, and acquire certain vehicles and inventory used in connection with the performance of maintenance services. On April 1, 2023, we closed on the agreement with Aegis and acquired certain Aegis vehicles for $170,000, and hired eight (8) former Aegis employees who will continue to provide maintenance services relating to the cogeneration systems. As agreed, Aegis will provide transitional services relating to the assumed Maintenance Agreements between the closing and June 30, 2023, and we will acquire from Aegis inventory used to provide maintenance services in exchange for a credit of $300,000 to be used for purchases by Aegis of our cogeneration equipment on or before June 30, 2023. Following the closing, for a period of up to seven years, we will pay Aegis a portion of the revenue collected for maintenance services provided pursuant to the assumed Maintenance Agreements. We also have the right to assume Aegis’ remaining Maintenance Agreements for cogeneration systems on the same terms and conditions but effective December 31, 2023 to the extent that Aegis is permitted to assign such agreements to us in accordance with the terms of such agreements.

Tecochill Hybrid-Drive Air-Cooled Chiller Development

TECOGEN INC.

During the third quarter of 2021 we began development of the Tecochill Hybrid-Drive Air-Cooled Chiller. We recognized that there were many applications where the customer wanted an easy to install roof top chiller. Using the inverter design from our InVerde e+ cogeneration module, the system can simultaneously take two inputs, one from the grid or a renewable energy source and one from our natural gas engine. This allows a customer to seek the optimum blend of operational cost savings and greenhouse gas benefits while providing added resiliency from two power sources. We introduced the Tecochill Hybrid-Drive Air-Cooled Chiller at the AHR Expo in February 2023 and expect to see incremental revenue in the fourth quarter of 2023. A patent application based on this concept has been filed with the US Patent and Trademark Office.

Controlled Environment Agriculture: NetZero Greens

On July 20, 2022, we announced our intention to increase our focus on opportunities relating to Controlled Environment Agriculture (CEA). Tecogen believes that CEA offers an exciting opportunity to apply the company’s expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security. We believe that CEA offers an exciting opportunity to apply our expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security. We propose to address this challenge by developing a highly efficient energy solution for CEA grown produce using our cogeneration products in conjunction with solar energy generation, energy storage, and other technologies.

CEA facilities enable multiple crop cycles (15 to 20 cycles) in one year compared to one or two crop cycles in conventional farming. In addition, growing produce close to the point of sale reduces food spoilage during transportation. Food crops grown in greenhouses typically have lower yields per square foot than in CEA facilities, and the push to situate facilities close to consumers in cities requires minimizing land area and maximizing yield per square foot. Yields are increased in CEA facilities by supplementing or replacing natural light with grow lights in a climate-controlled environment - which requires significant energy use.

In recent years our cogeneration equipment has been used in numerous cannabis cultivation facilities because our systems significantly reduce operating costs, reduce the facility GHG footprint and offer resiliency to grid outages. Our experience providing clean energy solutions to cannabis cultivation facilities has given us significant insight into requirements relating to energy-intensive indoor agriculture applications that we expect to be transferable to CEA facilities for food production.

Employee Retention Credit

COVID-19 Update

TECOGEN INC.

During the first quarter of fiscal 2020, a novel strain of coronavirus (“COVID-19”) began spreading rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic has significantly impacted supply chains, curtailed global economic activity, and caused significant volatility and disruption in global markets. The COVID-19 pandemic and the measures taken by U.S. Federal, state and local governments in response have materially adversely affected and could in the future materially impact our business, results of operations, financial condition and stock price. The impact of the pandemic remains uncertain and will depend on the growth in the number of infections, fatalities, the duration of the pandemic, steps taken to combat the pandemic, and the development and availability of effective treatments. We have made every effort to keep our employees who operate our business safe and minimize unnecessary risk of exposure to the virus.

Impact of the Russian Invasion of Ukraine

Presently, we have no operations or customers in Russia or the Ukraine. The higher energy prices for natural gas as a result of the war may affect the performance of our Energy Production segment. However, we have also seen higher electricity prices as much of the electricity production in the United States is generated from fossil fuels. If the electricity prices continue to rise, the economic savings generated by our products are likely to increase. In addition to the direct result of changes in natural gas and electricity prices, the war in Ukraine may result in higher cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities.

Overview

Tecogen designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning using automotive engines that have been adapted to run on natural gas. In some cases, our customers may choose to have us engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because, in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes, such as space and potable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and Engine driven chillers (cooling plus heat ).

Our products are sold directly to end-users by our in-house marketing team and by established sales agents and representatives. We have agreements in place with distributors and sales representatives. Our existing customers include hospitals and nursing homes, colleges and universities, health clubs and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries, ice rinks, swimming pools, factories, municipal buildings, military installations and indoor growing facilities. We have an installed base of more than 3,150 units. Our products have long useful lives with proper maintenance. Some of our units have been operating for over 35 years.

With the acquisition of American DG Energy Inc. ("ADGE") in May 2017, we added an additional source of revenue. Through ADGE, we install, own, operate and maintain complete distributed generation of electricity systems, or DG systems or energy systems, and other complementary systems at customer sites, and sell electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We use a contractually defined formula to multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from each customer's local energy utility, to derive the value of our monthly energy sale, which includes a negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customer's local energy utility that month.

Our operations are comprised of three business segments. Our Products segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Services segment provides O&M services for our products under long term service contracts. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.

TECOGEN INC.

Results of Operations

First Quarter of 2023 Compared to First Quarter of 2022

The following table sets forth for the periods indicated, the percentage of net sales represented by certain items reflected in our condensed consolidated statements of operations:


	Three Months Ended
	March 31, 2023		March 31, 2022
Revenues	100.0	%	100.0	%
Cost of sales	61.1	%	58.4	%
Gross profit	38.9	%	41.6	%
Operating expenses
General and administrative	51.9	%	33.3	%
Selling	9.7	%	6.7	%
Research and development	4.3	%	1.9	%


Total operating expenses	65.8	%	40.5	%
Income (loss) from operations	(26.9)	%	1.1	%
Total other income (expense), net	—	%	0.3	%
Income (loss) before income taxes	(26.9)	%	1.4	%
Provision for state income taxes	0.4	%	0.1	%
Consolidated net income (loss)	(27.4)	%	1.3	%
Income attributable to the non-controlling interest	(0.3)	%	(0.1)	%
Net income (loss) attributable to Tecogen, Inc.	(27.7)	%	1.2	%

Revenues

The following table presents revenue for the periods indicated, by segment and the change from the prior year:


	Three Months Ended March 31,
	2023		2022		Increase (Decrease) $		Increase (Decrease) %
REVENUES:
Products
Cogeneration	$	543,693	$	2,174,004	$	(1,630,311)	(75.0)	%
Chiller	1,068,934		1,607,408		(538,474)		(33.5)	%
Engineered accessories	97,509		158,069		(60,560)		(38.3)	%
Total product revenues	1,710,136		3,939,481		(2,229,345)		(56.6)	%
Services
Maintenance services	3,136,173		2,897,171		239,002		8.2	%
Installation services	—		20,109		(20,109)		(100.0)	%
Total service revenues	3,136,173		2,917,280		218,893		7.5	%
Products and services	4,846,309		6,856,761		(2,010,452)		(29.3)	%
Energy production revenues	533,509		581,562		(48,053)		(8.3)	%
Total revenues	$	5,379,818	$	7,438,323	$	(2,058,505)	(27.7)	%

Total revenues for the three months ended March 31, 2023 were $5,379,818 compared to $7,438,323 for the same period in 2022, a decrease of $2,058,505 or 27.7% year over year.

TECOGEN INC.

Products

Product revenues in the three months ended March 31, 2023 were $1,710,136 compared to $3,939,481 for the same period in 2022, a decrease of $2,229,345, or 56.6%. The decrease in revenue during the three months ended March 31, 2023 is due primarily to a decrease in cogeneration sales of $1,630,311, a decrease in chiller sales of $538,474,and, a decrease in sales of engineered accessories of $60,560. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales.

Services

Service revenues in the three months ended March 31, 2023 were $3,136,173, compared to $2,917,280 for the same period in 2022, an increase of $218,893, or 7.5%. The increase in revenue during the three months ended March 31, 2023 is due primarily to an increase of $239,002, or 8.2%, in service contract revenues, offset partially by a decrease in installation revenues of $20,109. While service contract revenue generally remains relatively constant, installation activity is likely to remain low due to our strategy of focusing on higher margin segments of our business.

Energy Production

Energy production revenues in the three months ended March 31, 2023 were $533,509, compared to $581,562 for the same period in 2022, a decrease of $48,053, or 8.3%. The decrease in energy production revenue is a consequence of certain energy production sites that have permanently closed.

Cost of Sales

Cost of sales in the three months ended March 31, 2023 was $3,287,909 compared to $4,347,535 for the same period in 2022, a decrease of $1,059,626, or 24.4%. The decrease in cost of sales is due to decreased product revenue volume, offset partially by the impact of inflation on material costs. During the three months ended March 31, 2023 our gross margin decreased to 38.9% compared to 41.6% for the same period in 2022, a 2.7% percentage point decrease due to higher material costs.

Products

Cost of sales for products in the three months ended March 31, 2023 was $1,212,568 compared to $2,644,756 for the same period in 2022, a decrease of $1,432,188, or 54.2% due to decreased product revenue volume, offset partially by higher material costs. During the three months ended March 31, 2023, our products gross margin was 29.1% compared to 32.9% for the same period in 2022, a 3.8% percentage point decrease. The decrease in margin is primarily a function of increased material costs.

Services

Cost of sales for services in the three months ended March 31, 2023 was $1,737,602 compared to $1,366,752 for the same period in 2022, an increase of $370,850, or 27.1%. During the three months ended March 31, 2023, our services gross margin decreased to 44.6% compared to 53.1% in the same period in 2022, a 8.5% percentage point decrease. The decrease in margin is primarily due to increased material and labor costs.

Energy Production

Cost of sales for energy production in the three months ended March 31, 2023 was $337,739 compared to $336,027 for the same period in 2022, an increase of $1,712, or 0.5%. During the three months ended March 31, 2023 our energy production gross margin decreased to 36.7% compared to 42.2% for the same period in 2022, a 5.5% percentage point decrease. The decrease in the energy production gross margin is due to decreased runtime at our energy production sites in the three months ended March 31, 2023 compared to the same period in 2022.

Operating Expenses

Operating expenses increased $531,846, or 17.7%, to $3,541,655 in the three months ended March 31, 2023 compared to $3,009,809 in the same period in 2022.

TECOGEN INC.


	Three Months Ended
Operating Expenses	March 31, 2023		March 31, 2022		Increase (Decrease) $		Increase (Decrease) %
General and administrative	$	2,792,483	$	2,473,903	$	318,580	12.9	%
Selling	520,070		501,091		18,979		3.8	%
Research and development	229,102		140,135		88,967		63.5	%
Gain on disposition of assets	—		(33,945)		33,945		(100.0)	%
Gain on termination of unfavorable contract liability	—		(71,375)		71,375		(100.0)	%
Total	$	3,541,655	$	3,009,809	$	531,846	17.7	%

General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the three months ended March 31, 2023 were $2,792,483 compared to $2,473,903 for the same period in 2022, an increase of $318,580 or 12.9%.

Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the three months ended March 31, 2023 were $520,070 compared to $501,091 for the same period in 2022, an increase of $18,979 or 3.8%.

Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the three months ended March 31, 2023 were $229,102 compared to $140,135 for the same period in 2022, an increase of $88,967 or 63.5%.

The gain on asset dispositions for three months ended March 31, 2022 of $33,945 represents the excess of insurance proceeds received over the net book value of assets for auto and property claims filed during the period.

A gain of $71,375 was recognized in three months ended March 31, 2022 due to a reduction in the Unfavorable Contract Liability associated with the closing of certain energy production sites.

Income (loss) from Operations

Our loss from operations for the three months ended March 31, 2023 was $1,449,746 compared to income from operations of $80,979 for the same period in 2022, a decrease of $1,530,725. This decrease is due primarily to the lower revenue for our Products Segment, decreased margins and a $531,846 increase in operating expenses.

Other Income (Expense), net

Other income, net for the three months ended March 31, 2023 was $415 compared to other income, net of $22,519 for the same period in 2022, a decrease of $22,104, due primarily to the unrealized gain on investment securities of $37,497, recognized in the three months ended March 31, 2022.

Provision for State Income Taxes

The provision for state income taxes for the three months ended March 31, 2023 and 2022 was $22,638 and $3,930, respectively and represents estimated income tax payments, net of refunds, to various states.

Non-controlling Interest

Income attributable to the non-controlling interest was $18,060 for the three months ended March 31, 2023 which represents the non-controlling interest portion of American DG Energy's 51% owned subsidiary, American DG New York, LLC. For the same period in 2022, income attributable to the non-controlling interest was $10,159.

Net Income (loss) Attributable to Tecogen Inc.

The net income attributable to Tecogen for the three months ended March 31, 2023 was a net loss of $1,490,029 compared to a net income of $89,409 for the same period in 2022, a decrease of $1,579,438, or 1,766.5%. This decrease is due primarily to the lower revenue for our Products Segment, decreased margins and a $531,846 increase in operating expenses.

TECOGEN INC.

Liquidity and Capital Resources

The following table presents a summary of our net cash flows from operating, investing and financing activities:


	Three Months Ended
Cash Provided by (Used in)	March 31, 2023		March 31, 2022		Increase (Decrease)
Operating activities	$	(284,866)	$	1,894,471	$	(2,179,337)
Investing activities	—		(48,064)		48,064
Financing activities	—		—		—
Cash Provided by (Used in)	$	(284,866)	$	1,846,407	$	(2,131,273)

Consolidated working capital at March 31, 2023 was $12,964,213 compared to $14,344,288 at December 31, 2022, a decrease of $1,380,075. Included in working capital were cash and cash equivalents of $1,629,103 at March 31, 2023, compared to $1,913,969 at December 31, 2022, a decrease of $284,866, or 14.9%.

Cash Flows from Operating Activities

Cash used by operating activities for the three months ended March 31, 2023 was $284,866 compared to $1,894,471 of cash provided by operating activities for the same period in 2022, a decrease of $2,179,337, or 115.0% Our accounts receivable and unbilled revenue balances were $6,758,360 and $1,788,902, respectively, at March 31, 2023 compared to $6,714,122 and $1,805,330 at December 31, 2022, using $44,238 of cash and providing $16,428 of cash, respectively. During the three months ended March 31, 2023 we collected the majority of the outstanding Employee Retention Credit receivables, providing $667,121 of cash from operations.

Accounts payable increased to $4,167,461 as of March 31, 2023 from $3,261,952 at December 31, 2022, providing $905,509 in cash flow from operations. The increase in accounts payable was due to increased material purchases. Deferred revenue increased as of March 31, 2023 compared to December 31, 2022, due to increased customer deposits, providing $852,600 of cash from operations. We expect accounts payable and deferred revenue to fluctuate with routine changes in operations.

Cash Flows from Investing Activities

During the three months ended March 31, 2023 there were no cash flows from investing activities. For the three months ended March 31, 2022 cash used in investing activities was $48,064. During the three months ended March 31, 2022 we used $80,873 of cash to purchase property, plant and equipment, $16,220 to acquired intangible assets and, distributed $15,640 to the non-controlling interest holders of American DG New York LLC, partially offset by the receipt of $64,669 in proceeds from the disposition of assets, including insurance proceeds.

Cash Flows from Financing Activities

During the three months ended March 31, 2023 and 2022 there we no cash flows from financing activities.

Backlog

As of March 31, 2023, our backlog of product and installation projects, excluding service contracts, was $7.1 million, consisting of $5.2 million of purchase orders received by us and $1.9 million of projects in which the customer's internal approval process is complete, financial resources have been allocated and the customer has made a firm verbal commitment that the order is in the process of execution. As of March 31, 2022, our backlog of product and installation projects, excluding service contracts, was $9.4 million consisting of $6.4 million of purchase orders received by us and $2.9 million of projects in which the customer's internal approval process is complete. Backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.

Employee Retention Credit

refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.

TECOGEN INC.

A current receivable in the amount of $46,148 is included in our condensed consolidated balance sheet as of March 31, 2023. We expect to receive the remaining balance in 2023.

Liquidity

At March 31, 2023, we had cash and cash equivalents of $1,629,103, a decrease of $284,866 or 14.9% from the cash and cash equivalents balance at December 31, 2021. During the three months ended March 31, 2023, our revenues continued to be negatively impacted due to COVID-19, resulting in customer order delays or deferrals; service delays due to customer facility closures, in some cases for extended periods, and a reduction in our energy production revenues due to customer facility closures, in some cases for extended periods, a reduction in our energy production revenues due to business closures and increased remote work and learning environments. The extent to which the coronavirus will continue to impact our business, our financial results, and our cash flows will depend on future developments which are highly uncertain and cannot be predicted.

Based on our current operating plan, we believe existing resources, including cash and cash flows from operations, will be sufficient to meet our working capital requirements for the next twelve months. The funds made available to us through the Paycheck Protection Program and Employee Retention Credit have provided liquidity for our business, and there can be no assurance that additional financing on such favorable terms will be available to us in the future. We will need to generate sufficient cash from operations to finance the company during the periods beyond twelve months in the future. If sufficient funds from operating activities are not available to finance our business, we may need to raise additional capital through debt financing or an equity offering to meet our operating and capital needs.

Significant Accounting Policies and Critical Estimates

Our significant accounting policies are discussed in the Notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022. The accounting policies and estimates that can have a significant impact upon our operating results, financial position and footnote disclosures are described in the above notes and in the Annual Report.

Significant New Accounting Standards or Updates Not Yet Effective

The Company's critical accounting policies have remained consistent as discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 23, 2023.

See Note 1, Description of Business and Basis of Presentation, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Seasonality

The majority of our chilling systems sold will be operational for the summer. Demand for our service team is higher in the warmer months when cooling is required. Chiller units are generally shut down in the winter and started up again in the spring. The chiller "busy season' for the service team generally runs from May through the end of September. Our cogeneration sales are not generally affected by seasonality.

Off-Balance Sheet Arrangements

Currently, we do not have any material off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

TECOGEN INC.

Item 4. Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures:

As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer ("Certifying Officers") conducted evaluations of our disclosure controls and procedures. As defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), the term "disclosure controls and procedures" means controls and procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under the Section 13(a) or 15(d) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report, have concluded that our disclosure controls and procedures were not effective due to a material weakness with respect to a small number of individuals dealing with general controls over information technology. Management will continue to evaluate the above weaknesses and we are taking steps to remediate the weaknesses as resources become available.

Changes in Internal Control over Financial Reporting:

There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On November 23, 2022, we were served with a suit filed against us on August 24, 2022 in the Ontario Superior Court of Justice for damages in the amount of CDN $1,000,000, alleging that a Tecogen cogenerator installed by us at the plaintiffs facility caught fire, causing damage to the cogenerator and the plaintiff's facility. For the year ended December 31, 2022, we reserved $150,000 for anticipated costs which may not be covered by insurance. We are not a party to any other material pending legal proceeding.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Item1A - Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2022 ("2022 Form 10-K") The risks discussed in our 2021 Form 10-K could materially affect our business, financial condition and future results. The risks described in our 2022 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Item 2. Unregistered Sales of equity Securities and Use of Proceeds

None.

Item 3. Defaults in Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

TECOGEN INC.

Item 6. Exhibits


Exhibit No.			Description of Exhibit
10.1*			Lease, dated March 31, 2023, between Alibrandi Realty Associates, LLC and Tecogen Inc., Building 1
10.2*			Lease, dated March 31, 2023, between Alibrandi Realty Associates, LLC and Tecogen Inc., Building 3
31.1*			Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**			XBRL Instance Document
101.SCH**			XBRL Taxonomy Extension Schema
100.CAL**			XBRL Taxonomy Extension Calculation Linkbase
100.DEF**			XBRL Taxonomy Extension Definition Linkbase
101.LAB**			XBRL Taxonomy Extension Label Linkbase
101.PRE**			XBRL Taxonomy Extension Presentation Linkbase

____________________________________________

* Filed herewith

** Furnished herewith

+ Compensatory plan or arrangement

TECOGEN INC.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.


	TECOGEN INC.
	(Registrant)

Dated: May 10, 2023	By:	/s/ Abinand Rangesh
	Abinand Rangesh
	Chief Executive and Financial Officer
	(Principal Executive and Financial Officer)

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Tecogen (TGEN) 10-Q2023 Q1 Quarterly report

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