UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the fiscal year ended December 31, 20192022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
Commission file number 001-36103
TECOGEN INC.
(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 | Registrant's telephone number, including area code | |||||
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:Common Stock, $.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 oNon –accelerated filer x
Non–Accelerated Filer ☒Smaller reporting company x☒
Emerging growth company o☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ¨☐ No ý
As of June 30, 2019,2022, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates was: $75,401,948.$17,403,980. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.
As of March 2, 2020,23, 2023, 24,850,261 shares of common stock, $.001 par value per share, of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“Securities Exchange Act”), the Private Securities Litigation Reform Act of 1995 and other federal securities lawsthat involve a number of risks and uncertainties.Forward-looking statements generally can be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “contemplates,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “predicts,” “pro forma,” “potential” “seeks,” “should,” “target,” or other variations thereof (including their use in the negative), or by discussions of strategies, plans or intentions.All statements, other than statements of historical fact, included in this report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are incorporatedforward-looking statements.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause us, our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by reference into Part IIIthese forward-looking statements to differ. See "Item 1A. Risk Factors," "Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Item 1. Business," as well as other sections in this report that discuss some of the factors that could contribute to these differences.
In addition, such forward-looking statements are necessarily dependent upon assumptions and estimates that may prove to be incorrect.Although we believe that the assumptions and estimates reflected in such forward-looking statements are reasonable, we cannot guarantee that our plans, intentions, or expectations will be achieved.The information contained in this report, including the section discussing risk factors, identify important factors that could cause such differences.
The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they appear in this report.The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the extent described therein.date on which the statements are made. Except as required by law, we undertake no obligation to update or release any forward-looking statements as a result of new information, future events, or otherwise, and assume no obligation to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
This report also contains or may contain market data related to our business and industry and any such market data may include projections that are based on certain assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by this data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition, and the market price of our common stock.
TECOGEN INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20192022
TABLE OF CONTENTS
| PART I | ||||||||||
| Item 1. | Business. | |||||||||
| Item 1A. | Risk Factors. | |||||||||
| Item 1B. | Unresolved Staff Comments. | |||||||||
| Item 2. | Properties. | |||||||||
| Item 3. | Legal Proceedings. | |||||||||
| Item 4. | Mine Safety Disclosures. | |||||||||
| II | ||||||||||
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | |||||||||
| Item 6. | ||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |||||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. | |||||||||
| Item 8. | Financial Statements and Supplementary Data. | |||||||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | |||||||||
| Item 9A. | Controls and Procedures. | |||||||||
| Item 9B. | Other Information. | |||||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. | |||||||||
| PART III | ||||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance. | |||||||||
| Item 11. | Executive Compensation. | |||||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | |||||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. | |||||||||
| Item 14. | Principal Accounting Fees and Services. | |||||||||
| PART IV | ||||||||||
| Item 15. | Exhibits and Financial Statement Schedules. | |||||||||
| Item 16. | Form 10-K Summary. | |||||||||
| SIGNATURES | ||||||||||
TECOGEN INC.
PART 1
Item 1. Business
The Company
Tecogen Inc. (“Tecogen,” “Company,”(together with its subsidiaries, “we,” “our,” or “us”“us,” or “Tecogen”) designs, manufactures, markets, and maintains high efficiency, ultra-clean cogeneration products includingproducts. These include natural gas engine-drivenengine driven combined heat and power air conditioning(CHP) systems, chillers and water heatersheat pumps for multi-family residential, commercial, recreational and industrial use.We are known for cost efficient, environmentally friendlyproducts that provide customers with substantial energy savings, resiliency from utility power outages and reliable products for distributed power generation that, through patented technology, nearly eliminate criteria pollutants and significantly reducereducing 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. See "Our Products - Ultera Low-Emissions Technology" for a more in-depth discussion of our Ultera emissions technology. We were incorporated in the State of Delaware on September 15, 2000.
We have two wholly-owned subsidiaries American DG Energy, Inc. ("ADGE") and Tecogen CHP Solutions, Inc., and TTcogen LLC. In addition, 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. TTcogen markets, distributes and sells combined heat and power equipment manufactured by Tedom a.s., in the U.S. northeast. We are also developing ultra-low emissions technologies using our patented Ultera® technology for the automotive market. See "Our Products - Ultera Low-Emissions Technology" below for a more in-depth discussion of our Ultera emissions technology.
Our operations are comprised of twothree business segments:
•our Products and Services segment, which designs, manufactures and sells industrial and commercial cogeneration systems at systems;
•our customers’ facilities;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 we enter into with customers.agreements.
Recent Developments
On May 18, 2017, holdersMarch 15, 2023, we entered into an Agreement with Aegis Energy Services, LLC (“Aegis”) regarding the assignment and assumption of approximately 71%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 (the anticipated closing date) under Maintenance Agreements for 202 cogeneration systems, and acquire certain vehicles and inventory used in connection with the performance of maintenance services. The Agreement also provides that we will hire certain Aegis employees who will continue to provide maintenance services relating to the cogeneration systems, and that Aegis will provide transitional services relating to the assumed Maintenance Agreements. At the closing, we will acquire certain Aegis vehicles for $170,000, and 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 ADGE's outstanding common stock approvedrevenue collected for maintenance services provided pursuant to the proposed acquisitionassumed 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 ADGE (the "Merger") and holderssuch agreements.
Tecochill Hybrid-Drive Air-Cooled Chiller Development
During the third quarter of approximately 55%2021 we began development of the outstanding stockTecochill 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 Tecogen approvedoperational cost savings and greenhouse gas benefits while providing added resiliency from two power sources. We introduced the issuance of Tecogen sharesTecochill Hybrid-Drive Air-Cooled Chiller at the AHR Expo in February 2023 and expect to see incremental revenue in the Merger. Consequently,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 the establishment of NetZero Greens, a new business unit focused on low carbon Controlled Environment Agriculture ("CEA"). We believe that day Tecogen completed its acquisition,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
1
TECOGEN INC.
propose to address this challenge by meansdeveloping 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 stock-for-stock merger,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
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 100%2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the outstanding common sharesERC.
We elected to use an alternative quarter, which qualified us for the ERC in the first, second and third quarters of ADGE.2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result ADGE became a wholly-owned subsidiary of Tecogen. See Note 4 - Acquisitionaveraging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of American DG Energy, Inc.2021 were eligible for the ERC. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the Notes toERC.
During the Consolidated Financial Statementsthree months ended June 30, 2021, we recorded an ERC benefit for further information.
COVID-19 Update
During the first quarter of fiscal 2020, a linenovel strain of creditcoronavirus (“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 up to $10 millionbusinesses, 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 a revolving and secured basis, with availability based on certain accounts receivable, raw materials, and finished goods.
Impact of the excessRussian Invasion of collections over agreed minimum thresholds.Ukraine
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 of Our Business
Our products offer customers energy savings, resiliency and maintain high efficiency, ultra-cleana cleaner environmental footprint. Our cogeneration, products including naturalchiller and heat pump systems use an engine to generate electricity or shaft work and recover the waste heat from the engine.
2
TECOGEN INC.
Our systems are greater than 88% efficient compared to typical electrical grid efficiencies of 40% to 50%. As a result, our greenhouse gas engine-driven combined heat(GHG) emissions are typically half that of the electrical grid. Our systems generate electricity and power, air conditioning systems, refrigeration compressors,hot water or in the case of our Tecochill product, both chilled water and water heaters for residential, commercial, recreational and industrial use. We provide cost efficient, environmentally friendly and reliable products for distributed power generation that, through patented technology, nearly eliminate criteria pollutants and significantly reduce a customer’s carbon footprint. Tecogenhot water. Our products are expected to run on Renewable Natural Gas (RNG) as it is introduced into the US gas pipeline infrastructure.
•Cogeneration units thatthe InVerde e+® and TecoPower® cogeneration units; these systems supply electricity and hot water;
•ChillersTecochill® air-conditioning and refrigeration chillers; these systems produce chilled water and hot water;
•Tecochill® hybrid-drive air-cooled chiller; gas engine-driven chillers that provide air-conditioning and hot water marketed under the TECOCHILL® brand name;
•Ilios® high-efficiency water heaters; These provide hot water at a cost set bysignificantly higher efficiency than a negotiated formula in customer contracts. We call this our "On-Site Utility" business, or our Energy Production segment.conventional boiler (250% vs 75%); and,
•Ultera® emissions control technology.
Traditional customers for our cogenerationInVerde and chiller systemsTecopower products have a simultaneous need for electrical power and hot water. These include hospitals, and nursing homes, schools, and universities, health clubs, and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries,buildings. Conversely our Tecochill product benefits customers who have a simultaneous need for cooling and hot water which is typical in sites such as hospitals, ice rinks, swimming pools, factories, municipal buildings, indoor agriculture and military installations; however, the economic feasibility of using our systems is not limited to these customer types.food processing. Our Tecofrost refrigeration compressors are applied primarily to industrial applications that include cold storage, wineries, dairies, ice rinks and food processing. Market drivers include the price of natural gas, local electricity rates, environmental regulations, and governmental energy policies, as well as customers’ desire to become more environmentally responsible.
Our cooling and refrigeration products provide both cooling and high grade waste heat. This is of particular advantage in facilities that control both temperature and humidity. In such facilities, climate control is achieved by cooling the facility to remove humidity and then reheating to the required temperature. Using engine waste heat to perform the reheat while utilizing natural gas to generate the cooling provides significant economic and environmental benefits. As a result our product has significant competitive advantages in applications that operate year round such as controlled environment agriculture, indoor ice rinks, and hospitals.
Through our factory service centers in California, Connecticut, Florida, Massachusetts, Michigan, New Jersey, and New York, and Toronto, Canada, our specialized technical staff maintains our products via long-term service contracts. To date the Company haswe have shipped over 3,0003,150 units, some of which have been operating for almost 35 years. The Company is in the process of setting upWe established a service center in Toronto, Canada in August 2020 to support itsour existing population of chillers and cogeneration units andincluding 26 cogeneration units recently sold in the areathis territory during 2020 to serve public housing facilities.
3
TECOGEN INC.
settings and redundancy to mitigate service outages.Redundancy is particularly relevant in regions where the electric utility has formulated tariff structures that include high “peak demand” charges.Such tariffs are common in many areas of the country, and are applied by such utilities as Southern California Edison, Pacific Gas and Electric, Consolidated Edison of New York, and National Grid of Massachusetts.Because these tariffs are assessed based on customers’ peak monthly demand charge over a very short interval, typically only 15 minutes, a brief service outage for a system comprised of a single unit can create a high demand charge, and therefore be highly detrimental to the monthly savings of the system.For multiple unit sites, the likelihood of a full system outage that would result in a high demand charge is dramatically reduced, so consequently, these customers have a greater probability of capturing peak demand savings.
Our CHP products are sold directly to customers by our in-house marketing team, and by established independent sales agents and representatives.
Ultera Low-Emissions Technology
All of our CHP products are available with the patented Ultera® low-emissions technology as an equipment option.This breakthrough technology was developed in 2009 and 2010 as part of a research effort partially funded by the California Energy Commission and Southern California Gas Company. The objective was to bring our natural-gas engines into compliance with California’s stringent air quality standards.
The chart below compares emission levels of the Company'sour Ultera® technology to other technologies. As of December 31, 20192022, our Ultera® CHP and fuel cell technologies are the only technologies that we know of which comply with California's air quality standards for CO and NOx, represented in the chart by the colored horizontal lines, shown as the world's strictest air quality standards on the lower right of the chart. We believe that as environmental regulation becomes more stringent in the United States, our emissions technology may be used in markets including generators, fork trucks and biogas engines.
(5)(2)(4)(4)(3)(1)
4
TECOGEN INC.
(1) California has the strictest air quality standards for engines in the world
(2) Conventional Energy Source is U.S. powerplantpower plant and gas boiler.Average U.S. powerplantpower plant NOx emission rate of 0.9461 lb/MWh from (USEPA eGrid 2012),
CO data not available. Gas boiler efficiency of 78% (www.eia.gov) with emissions of 20 ppm NOx @ 3% O2 (California Regulation SCAQMD Rule 1146.2
and <50 ppmv CO @ 3% O2 (California Regulation SCAQMD BACT).
(3) Tecogen emissions based upon actual third party source test data.
(4) Microturbine and Fuel Cell emissions from EPA CHP Partnership - Catalog of CHP Technologies- March 2015.
(5) Stationary Engine BACT as defined by SCAQMD.
After successfully developing the Ultera technology for our own equipment, the Company'sour research &and development team began exploring other possible emissions control applications in an effort to expand the market for the ultra-clean emissions system.Retrofit kits were developed in 2014 for other stationary engines and in 2015 the Ultera Retrofit Kit was applied successfully to natural gas stand-by generators from other manufacturers, including Generac and Caterpillar.
Historically, standby generators have not been subjected to the strict air quality emissions standards of traditional power generation.However, generators which run for more than 200 hours per year or run for non-emergency purposes (other than routine scheduled maintenance) in some territories are subject to compliance with the same stringent regulations applied to a typical electric utility. As demand response programs become more economically attractive and air quality regulations continue to become more stringent, there could be strongincreased demand for retrofitting standby generators with our Ultera® emissions control technology, thus providing a cost-effective solution to keeping the installed base of standby generators operational and in compliance.compliance with regulatory requirements.
In 2017, a group of generators owned by a single customer in Southern California were supplied Ultera kits because of their particular requirement to exceed the 200-hour annual limit. These units are now operational and have been tested by the customer and shown to be compliant with the local pollution limits which we believe to be the strictest anywhere in the United States, and potentially the world. Our CHP products have been permitted to this same standard. However, CHP products are given a heat credit which effectively increases the allowable limit. In 2018, permitting was completed making these certification levels the lowest we have achieved. We believe no other engines have been certified to these levels since the latestcurrent regulations in the Los Angeles region became effective ten years ago.effective.
It is noteworthy that these engine-generators were appliedhave been used in California to poweringpower dispersed loads in a fire-prone area where frequent deenergizingde-energizing of the electric overhead power lines is required for safety. The company believesWe believe this application to be a new and significant application for the Ultera technology in California in light of the widely publicized widespread outages in California in 2019 for precisely this same reason.which have occurred over the recent years.
We provide long-term maintenance contracts, parts sales, and turnkey installation for our products through a network of teneleven well-established field service centers in California, the Midwest, the Northeast, the Southeast and the Southeast. in Ontario, Canada.These centers are staffed by our full-time Company technicians, working from local leased facilities.The facilities provide officesoffice and warehouse space for inventory. We encourage our customers to provide internet connections to our units so that we may maintain remote monitoring and communications with the installed equipment.For connected installations, the machines are contacted daily to download their status and provide regular operational reports (daily, monthly, and quarterly) to our service managers.This communicationcommunications link is used to support the diagnostic efforts of our service staff, and to send messages to pre-programmed phones if a unit has experienced an unscheduled shutdown.In many cases, communications received by service technicians from connected devices allow for proactive maintenance, minimizing equipment downtime and improving operating efficiency for the customer.
The work of our service managers, supervisors, and technicians focuses on our products.Because we manufacture our own equipment, our service technicians bring hands-on experience and competence to their jobs.They are trained at our corporate headquarters and primary manufacturing facility in Waltham, Massachusetts.
Most of our service revenue is in the form of annual service contracts, which are typically of an all-inclusive “bumper-to-bumper” type, with billing amounts proportional to the equipment's achieved operating hours for the period.Customers are thus invoiced in level, predictable amounts without unforeseen add-ons for such items as unscheduled repairs or engine replacements.We strive to maintain these contracts for many years, and work to maintain the integrity and performance of our equipment.
Our products have a long history of reliable operation.Since 1995, we have had a remote monitoring system in place that connects to hundreds of units daily and reports their “availability,” which is the amount of time a unit is running or is ready to run.More than 80% of the units operate above 90% availability, with the average being 93.8%.Our factory service
5
TECOGEN INC.
agreements have directly impacted these positive results and represent an important long-term annuity-like stream of revenue for the Company.us.
New equipment sold beginning in 2016 and select upgrades to the existing installed equipment fleet includes aninclude industrial internet solution which enables Tecogenus to collect, analyze, and manage valuable asset data continuously and in real-time. This provides the service team with improved insight into the functionality of our installed CHP fleet. Specifically, it enables the service department to perform remote monitoring and diagnostics and to view system results in real time via a computer, smart phone or tablet. Consequently, we can better utilize monitoring data ensuring customers are capturing maximum possible savings and efficiencies from their installation. Through constant monitoring and analysis of equipment data, Tecogen expects to enhance the performance of installed equipment by ensuring machinery consistently operates at peak performance and is available to deliver maximum potential value for customers. In 2018 we migrated our cloud based system from the General Electric's Company's Equipment Insight product to our system developed in-house which we have trade named CHP Insight®. CHP insight stores operating data on the cloud like the GE system but we have added improved user interface features specific to CHP operation as well as sophisticated data analysis tools. Management believes that similar monitoring solutions are available from other alternative sources.
cogeneration equipment.
Energy Production
Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements which represented 9.4%7.1% and 17.8% of7.1% our consolidated revenues for the years ended December 31, 20192022 and 2018,2021, respectively. See Note 18.17 "Segments" of the Notes to the Consolidated Financial Statements. Our on-site utility business is described below.
Sales & Distribution
Our products are sold directly to end-users by our sales team and by established independent sales agents and representatives. VariousWe have agreements are in place with distributorsmanufacturers' representatives and outside sales representatives who are compensated by commissions for certaindesignated territories and product lines. Sales through our in-house team or sales that are not covered by a representative’s territory carry no or nominal commissions. ForDuring the fiscal yearsyear ended 2019 and 2018,December 31, 2022 one and no customer relationship accounted for more than 10% of total combined company revenue, respectively.
Markets and Customers
Worldwide, stationary power generation applications vary from huge central stationary generating facilities (traditional electric utility providers) to back-up generators as small as 2 kW.Historically, power generation in most developed countries such as the United States has been part of a regulated central utility system utilizing high-temperature steam turbines powered by fossil-fuels.This turbine technology, though steadily refined over the years, reached a maximum efficiency (where efficiency means electrical energy output per unit of fuel energy input) of approximately 40% to 50%.
A number of developments related primarily to the deregulation of the utility industry as well as significant technological advances have now broadened the range of power supply choices available to all types of customers. CHP,Cogeneration, which
harnesses waste energy from power generation processes and puts it to work for other uses on-site, can boost the energy conversion efficiency to nearly 90%, a better than two-fold improvement over the average efficiency of a fossil fuel plant. This distributed generation, or power generated on-site at the point of consumption rather than power generated centrally, eliminates the cost, complexity, and inefficiency associated with electric transmission and distribution. The implications of the CHP distributed generation approach are significant. Management believesWe believe that if CHPcogeneration were applied on a large scale, global fuel usage might be dramatically curtailed and the utility grid made far more resilient.
Increasingly favorable economic conditions couldmay improve our business prospects domestically and abroad. Specifically, we believe that natural gas prices mightare expected to increase from their historically depressedcurrent values, but only modestly, whileand that electric rates wouldare expected to continue to rise more significantly over the long-term as utilities pay for grid expansion, better emission controls, efficiency improvements, and the integration of renewable power sources.
6
TECOGEN INC.
Governmental agencies in some of these regions may also provide generous rebates that can improve the economic viability of our systems.
The Inflation Reduction Act of 2022 increased Federal tax credits, including the investment tax credit (ITC), to up to thirty percent (30%) of the project cost for projects incorporating certain low emission technologies, including CHP equipment, that begin construction before January 1, 2025 and provides for an additional ten percent (10%) credit if the taxpayer satisfies additional requirements relating to domestic content. State and local governments and tax-exempt entities may also benefit from certain tax credits through direct payments or transfers of tax credits to unrelated third parties. This particular new direct pay option is especially impactful given the fact that many ideal facilities for CHP systems are not-for-profit, including many healthcare and hospital facilities, schools and universities, as well as recreation centers. These customers historically have not been able to benefit from previous iterations of the ITC. Under the federal definition for CHP systems, all of our products, including our air-conditioning and cooling models (Tecochill and Tecofrost) qualify for the tax credit when heat recovery is incorporated into the system design.
We aggressively market to both potential domestic and international customers where utility pricing aligns with our advantages. These areas include regions that have strict emissions regulations, such as California, or those that reward CHP systems that are especially non-polluting, such as New Jersey. There are currentlyCurrently, more than 23 states that recognize CHP as part of their Renewable Portfolio Standards or Energy Efficiency Resource Standards and several of them, including New York, California, Massachusetts, New Jersey, and North Carolina, have initiated specific incentive programs for CHP.Standards.
The traditional markets for CHP systems are buildings with long hours of operation and with corresponding demand for electricity or cooling and heat. Traditional customers for our cogeneration systems include controlled environment agriculture, 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, and military installations.
Traditional customers for our chillers, refrigeration compressors and heat pumps overlap with those for our cogeneration systems. Engine-driven chillers are often used as replacements for aging electric chillers because they both occupy similar amounts of floor space and require similar maintenance schedules. This is also the case with refrigeration compressors.
The markets for our products are provided in standardized packages of energy, equipment, and services suited to the needs of property owners and operators in healthcare, hospitality, large residential, athletic facilities, and certain industrial sites. This includes national accounts and other customer groups having a common set of energy requirements at multiple locations.
InVerde and Tecopower
Our combined heat and power products are highly competitive. Our cogeneration productsthat produce electricity and hot water compete with the utility grid, existing technologies such as other reciprocating engine and microturbine CHP systems, and other emerging distributed generation technologies including solar power, wind-powered systems, and fuel cells. Our products are highly competitive between 60KW and 1.5MW in electrical generation capacity. In this size range we have other reciprocating engine competitors, although we have strong competitive advantages when it comes to ease of utility interconnection, ease of install in tight spaces and our microgrid capabilities. We believe that Capstone Turbine Corporation is the only microturbine manufacturer with a commercial presence in CHP.
Although operating solar and wind powered systems produce no emissions, the main drawbacks to these renewable powered systems are their dependence on weather conditions, their reliance on backup utility grid-provided power, and high capital costs that can often make these systems uneconomical without government subsidies. Similarly, while the market for fuel cells is still developing, a number of fuel cell companies are focused on markets similar to ours. Fuel cells, like solar and wind powered systems, have received higher levels of incentives for the same type of applications as CHP systems in many territories. We believe that, notwithstanding these higher government incentives, our CHP solutions provide a better value and more robust solution to end users in most applications.
Additionally, our patents relating to the Ultera ultra-low emissions technology give Tecogenour products a strong competitive advantage in markets where severe emissions limits are imposed or where very clean power is favored, such as New Jersey, California, and Massachusetts.
Overall, we compete with end users’ other options for electrical power, heating, and cooling on the basis of our clean technology’s ability to:
•Provide a more efficient solution that provides operational savings for a facility's energy needs including cooling, electricity and hot water;
•Provide power when a utility grid is not available or goes out of service;
7
TECOGEN INC.
•Reduce emissions of criteria pollutants (NOx and CO) to near-zero levels and cut the emission of greenhouse gases such as carbon dioxide;dioxide due to increased efficiencies compared to the electric grid;
•Provide reliable on-site power generation, heating and cooling services; andservices.
We believe that no other company has developed a product that competes withprovides the features and benefits provided by our inverter-based InVerde e+, which offers UL-certified grid connection black-start capability, and patented variable-speed operation.sophisticated off-grid and microgrid capabilities. An inverter-based product with at least some of these features has been introduced by others, but we believe that they face serious challenges in duplicating all the unique features of the InVerde e+. Competitors' product development time and costs could be significant. The Company hasWe have exclusive license rights to Microgrid algorithms developed by the University of Wisconsin researchers. We have exclusive rights for engine-driven systems utilizing natural gas or diesel fuel in the application of power generation where the per-unit output is less than 500kW. The software allows our products to be integrated as a Microgrid, where multiple InVerde e+® units can be seamlessly isolated from the main utility grid in the event of an outage and re-connected to it afterward. We expect that our patents and license for Microgrid software will deter others from offering certain important functions. See "Business-Intellectual Property"."Business-Intellectual Property."
Similarly, in the growing Microgrid segment, neither fuel cells nor microturbines can respond to changing energy loads when the system is disconnected from the utility grid. Engines such as those used in the Company'sour equipment inherently have a fast-dynamic response to step load changes, which is why they are the primary choice for emergency generators. Fuel cells and microturbines require additional energy storage systems to be utilized infor time-limited off-grid operation, giving our engine-driven solutions an advantage for Microgrid and resiliency applications.
IliosHeat Pump
Research & Development
We continue to seek alliances with utilities, government agencies, universities, research facilities, and manufacturers. The Company hasWe have succeeded in developing new technologies and products in collaboration with several entities, including:
•Sacramento Municipal Utility District has provided test sites for the Companyto us since 2010.
•Southern California Gas Company and San Diego Gas & Electric Company, each a Sempra Energy subsidiary, have granted us research and development contracts since 2004.
•Department of Energy’s Lawrence Berkeley National Laboratory, with which the Company haswhom we have had research and development contracts since 2005, including ongoing Microgrid development work related to the InVerde.
•Eastern Municipal Water District in Southern California has co-sponsored demonstration projects to retrofit both a natural-gas powered municipal water pump engine and a biofuel powered pumping station engine with the Ultera low emissions technology since 2012.
•Consortium for Electric Reliability Technology Solutions executed research and development contracts with the Company,us, and has provided a test site to the Companyus since 2005.
8
TECOGEN INC.
•California Energy Commission executedwith whom we had a research and development contracts with the Companycontract from 2004 until March 2013.
•The AVL California Technology Center performed a support role in research and development contracts as well as internal research and development on our Ultera emission control system from August 2009 to November 2011. In addition, the Center supported our research on emissions from gasoline vehicles from January of 2016 through October 2017. AVL researchers collaborated with our engineers on several peer reviewed papers published by technology association SAE International in 2017 and 2018.
Certain components of our InVerde product were developed through a grant from the California Energy Commission.This grant includes a requirement that we pay royalties on all sales of all products related to the grant. grant, which obligation expired in 2022.As of December 31, 2019, such2022, royalties accrued in accordance with this grant agreement were less than $6,000$10,000 on an annual basis.
We also continue to leverage our resources with government and industry funding, which has yielded a number of successful developments, including the Ultera low-emissions technology, sponsored by the California Energy Commission and Southern California Gas Company. Pursuant to the terms of the grants from the California Energy Commission, the California Energy Commission has a royalty-free, perpetual, non-exclusive license to these technologies for government purposes.
Our current internal R&D efforts are focused on the hybrid-drive air-cooled chiller that utilizes the basic inverter design used in the InVerde e+. Management believes that this chiller will address a significant market segment that is currently not addressed by our existing Tecochill product. For the years ended December 31, 20192022 and 2018,2021, we spent $1,460,096$732,873 and $1,297,612,$542,079, respectively, inon research and development activities.
Intellectual Property
•10,774,720: “NOx Reduction Using a Dual-Stage Catalyst System with Intercooling in Vehicle Gasoline Engines under Real Driving Condition.” This patent, granted in September 2020, improves the removal of Non-Methane Organic Gases (NMOG) and Carbon Monoxide (CO) from vehicle emissions. The improved performance, consisting of up to 90% reductions in NMOG and CO results from increased oxidation of NMOG and CO due to a lower temperature environment in the second stage catalyst.
•10,774,724: “Dual Stage Internal Combustion Engine Aftertreatment System Using Exhaust Gas Intercooling and Charger Driven Air Ejector.” This patent, granted in September 2020, relates to the use of turbo compressors and exhaust gas intercoolers in turbocharged engines to reduce the complexity and cost of Ultera emissions reduction systems.
•9,995,195: “Emissions control systems and methods for vehicles.” This patent, granted in June 2018, is a method for vehicle cold start to enhance the removal of CO and hydrocarbons emissions, which are extremely problematic for cold engines. Air is injected in the exhaust between the engine’s close-coupled catalyst and underbody catalyst. Once the engine is warmed (> 500 F exhaust) this air stream is shut off. This method synergizes well with the Ultera system by utilizing the injection air feed for an alternative purpose during engine start.
•9,956,526: “Poison-Resistant Catalyst and Systems Containing Same.” This patent, granted in May 2018, relates to a special catalyst formulation that is resistant to contaminant induced corrosion in conditions like those of the Ultera second stage. These poisons or contaminants are most commonly sulfur compounds.
•9,702,306: “Internal Combustion Engine Controller.” This patent granted in July of 2017 relates to the unique control methodology used in the InVerde e+ CHP unit that maximizes engine fuel economy under variable speed operation.
•9,470,126: "Assembly and method for reducing ammonia in exhaust of internal combustion engines." This patent, granted in October 2016, is related to the Ultera emission control system applicable to all our products.
•9,856,767: “Systems and methods for reducing emissions in exhaust of vehicles and producing electricity." This patent, filed in November 2015 and published in March 2016, relates to the development of the Ultera emission control system for vehicle applications.
9
TECOGEN INC.
•9,121,326: “Assembly and method for reducing nitrogen oxides, carbon monoxide and hydrocarbons in exhausts of internal combustion engines.” This patent, granted in September 2015, is related to the Ultera emission control system applicable to all our products.
•8,578,704: “Assembly and method for reducing nitrogen oxides, carbon monoxide, and hydrocarbons in exhausts of internal combustion engines.” This patent, granted in November 2013, is for the Ultera emission control system applicable to all our products.
•7,243,017: “Method for controlling internal combustion engine emissions.” This patent, granted in July 2007, applies to the specific algorithms used in our engine controller for metering fuel usage to obtain the correct combustion mixture and is technology used by most of our engines.
•7,239,034: “Engine driven power inverter system with cogeneration.” This patent, granted in July 2007, pertains to the utilization of an engine-driven CHP module combined with an inverter and applies to our InVerde product specifically.
In addition, the Companywe have licensed specific rights to Microgrid software algorithms developed by University of Wisconsin researchers for which we pay royalties to the assignee, The Wisconsin Alumni Research Foundation (WARF). The specific patent named in our agreement isPursuant to U.S. Patent 7,116,010, titled “Control of small distributed energy resources” (7,116,010), granted in 2006.2006 and expires on March 27, 2024. Our exclusive rights are for engine-driven systems utilizing natural gas or diesel fuel in the application of power generation where the per-unit output is less than 500 kW. The software allows our products to be integrated as a Microgrid, where multiple InVerde units can be seamlessly isolated from the main utility grid in the event of an outage and re-connected to it afterward. The licensed software allows us to implement such a Microgrid with minimal control devices and associated complexity and cost. Tecogen paysWe consider the Microgrid software algorithm licensed from WARF to be a key feature of our InVerde product, and one that would be difficult to duplicate outside the patent. We pay WARF a royalty for each cogeneration module sold using the licensed technology. Such royalty payments have been in the range of $5,000 to $30,000$15,000 on an annual basis through the year ended December 31, 2019.2022. In addition, WARF reserved the right to grant non-profit research institutions and governmental agencies non-exclusive licenses to practice and use, for non-commercial research purposes, the technology developed by the Companyus that is based on the licensed software.
We consider our patents and licensed intellectual property to be important in the operation of our business. The expiration, termination, or invalidity of one or more of these patents may have a material adverse effect on our business. Our earliest patent, licensed from WARF, was issued in 2006 and expires in 2022. Most of our current patents expire between 2022 and 2027.
In 2013, we purchased rights to designs and technologies,technology, including patents granted or pending for our permanent magnet generators. A key component of our InVerde module uses this acquired technology.
Our patents for the Ultera®Ultera low-emissions control technology applies to all our gas engine-driven products and may have applications to other rich-burn spark-ignited internal combustion engines. We have been granted patents for this technology in Europe, Australia, Brazil, Canada, Japan, Mexico, Korea and Singapore.
Copyrights
Our control software is protected by copyright laws or through an exclusive license agreement.
Trademarks
10
TECOGEN INC.
We rely on treatment of our technology as trade secrets through confidentiality agreements, which our employees and vendors are required to sign. Also, we rely on non-disclosure agreements with others that have or may have access to confidential information to protect our trade secrets and proprietary knowledge.
Sourcing & Manufacturing
We are focused on continuously strengthening our manufacturing processes and increasing operational efficiencies within the Company.efficiencies. Many of the components used in the manufacture of our highly-efficient clean energy equipment are readily fabricated from commonly available raw materials or are standard available parts sourced from multiple suppliers. We believe that adequate supplies exist to meet our near to medium term manufacturing needs. Tecogen hasWe have an on-going focus on developing and implementing new systems to simplify our manufacturing processes, product sourcing methods, and our supply chain.
Although our Waltham lease expires March 31, 2024, we have identified an alternate space and are currently negotiating the lease terms.
Government & Regulation
Several kinds of federal, state and local government regulations affect our products and services, including but not exclusive to:
•product safety certifications and interconnection requirements;
•air pollution regulations which govern the emissions allowed in engine exhaust;
•state and federal incentives for CHP technology;
•various local building and permitting codes and third-party certifications;
•electric utility pricing and related regulations; and
•federal and state laws regarding the legalization of cannabis for medicinal and recreational use.
Our markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We are impacted not only by energy policy, laws, regulations and incentives of governments in the markets in which we sell, but also by rules, regulations and costs imposed by utilities. Utility companies or governmental entities may place barriers on the installation or interconnection of our products with the electric grid. Further, utility companies may charge additional fees to customers who install on-site power generation; thereby reducinggeneration to reduce the electricity they take from the utility or for having theand to preserve electric capacity to use poweravailable from the grid for back-up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our product or increase the cost to our potential customers for using our systems. This could make our systems less desirable, adversely impacting our revenue and profitability. In addition, utility rate reductions can make our products less competitive, causing a material adverse effect on our operations. These costs, incentives and rules are not always the same as those faced by technologies with which we compete.
Similarly, rules, regulations, laws and incentives could also provide an advantage to our distributed generation solutions as compared with competing technologies if we are able to achieve requiredbecause they enable compliance in a lower cost, more efficient manner. Additionally,manner with reduced emissions and higher fuel efficiency could helpwhich helps our customers combat the effects of global warming. Accordingly, weWe may benefit from increased government regulations that impose tighter emission and fuel efficiency standards. We encourage investors and potential investors to carefully consider associatedthe risks described under "Item 1A. Risk Factors detailedFactors" below which highlightregarding various aspects of the regulatory environment and other related risks.
Our products are well-suited to meet the needs of the rapidly emerging indoor agriculture market, including cannabis.cannabis and other high volume leafy greens. To date our focus in the indoor agricultural market has primarily involved cannabis, a product with high revenue generating potential. However, we have sold to other indoor agricultural growers, and we believe that the indoor food production market will provide significant opportunities for the Company.us. The indoor agriculture market in particular has the potential to be a major driver of growth as states move to legalize the use of cannabis for medicinal purposes and recreational use. However, under the Controlled Substances Act (CSA) cannabis continues to be categorized as a Schedule I drug, so that cannabis growers continue to face significant uncertainty regarding their ability to conduct business.
First passed by Congress in 2014, the Rohrabcher-Farr Amendment is an amendment to the annual appropriations bill that, among other things, funds the Department of Justice. It prohibits the US Attorney General from using funds to prosecute the medical use of cannabis. It does not address recreational use. On January 4, 2018, US Attorney General Jeff Sessions rescinded the Cole memo. Written in 2013, the Cole memo had directed US Attorneys not to allocate resources to prosecute "individuals whose actions are in clear and unambiguous compliance with existing state laws" regarding the cannabis market.
11
TECOGEN INC.
As of the date of the filing of this filing,report, we are not aware of any US Attorney who has taken action against participants in the recreational cannabis market operating in accordance with state law. The uncertainty we face regarding the potential for growth from the sales to the cannabis industry is due in part to uncertainty regarding prosecutorial priorities.priorities of the current Presidential administration as well as the ability of cannabis growers to obtain funding in an environment where national bankers are not permitted to fund cannabis growth facilities.
Our Energy Production segment is subject to extensive government regulation. We are required to file for local construction permits (electrical, mechanical and the like) and utility interconnects, and mustare required to make various local and state filings related to environmental emissions.
In the past, many electric utility companies have raised opposition to DG,distributed generation of energy, a critical element of our On-Site Utility business.business model. Such resistance has generally taken the form of stringent standards for interconnection and the use of target rate structures as disincentives to combined generation of on-site power and heating or cooling services. A DG company'sdistributed generation facility's ability to obtain reliable and affordable back-up power through interconnection with the grid is essential to theour business model. Utility policies and regulations in most states often do not accommodate widespread on-site generation. These barriersBarriers erected by electric utility companies and unfavorable regulations, where applicable, make more difficult or uneconomic our ability to connect to the electric grid at customer sites more difficult or uneconomic and areis an impediment to the growth of this segment.our business. The development of this segmentour business could be adversely affected by any slowdown or reversal in the utility deregulation process or by difficulties in negotiating back-up power supply agreements with electric providers in the areas where we intendseek to do business.
Environmental Matters
We are regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and service operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, the necessary research and development and capital expenditures to comply with these emissions standards.
Human Capital Resources
We believe our success in delivering energy efficient, ultra clean cogeneration systems, chillers and energy production services relies on our culture, values, and the creativity and commitment of our people. We strive to maintain healthy, safe, and secure working conditions and a workplace where our employees are treated with respect and dignity. Our vision is to create an inclusive, diverse and authentic community that inspires collaboration, integrity, engagement, and innovation. We are striving to create a world-class employee experience – one that offers opportunity for personal and professional growth, and enables work-life balance that aligns with our core values.
Employee Health and Safety
Employee health and safety continues to be a priority in every aspect of our business. We have taken a common-sense approach to safety that helps us understand and reduce hazards in our business. Training, risk assessment, safety coaching, and employee engagement are all programs that help us consistently manage our facility and employee safety. As resources are available, we expect to continue to expand and evolve our safety programs to better meet our employee needs and workplace conditions as our business grows. Fiscal year 2022 was unique due to the impact that the COVID-19 pandemic had on organizations, including ours. Our response has consistently evolved to meet the turbulent environment. Our efforts included:
• The senior management team implemented regular communication regarding impacts of the
COVID-19 pandemic, including health and safety protocols and procedures.
• Implementing a hierarchy of controls to address hand washing, social distancing, cleaning areas and frequency, personal protective equipment and resources to stay up to date on the changing conditions.
• Deployment of face covers across the company for use in areas where they are required and recommended.
• Limiting domestic and international non-essential travel for all employees.
• Providing additional days of leave for full- and part-time employees to cope with the illness.
• Restricting access to our corporate offices.
• Providing public access by appointment or pickup only in high risk areas.
• Implementing protocols to address actual and suspected COVID-19 cases and potential exposure.
12
TECOGEN INC.
• Working closely with customers to meet their specific COVID-19 requirements and maintain service.
We understand the benefits of Contents
employee health and safety and continue to invest in programs, products, and resources. We also understand the environment of trust and fairness that exists when information is openly shared. We also continue to invest in products and services to meet the health and safety needs of our customers and communities.Talent Acquisition and Development
Our values are integral to our employment process and serve as guideposts for leadership. The ultimate goal is straightforward: find great people, ask them to join, and give them a reason to stay. Reasons include fair compensation, a complete array of employee benefits to include: health, dental and life insurance; short-term and long-term disability insurance; HSA account funding; generous time off benefits; and the grant of options or awards to purchase shares of our common stock. Recently we instituted web-based training for all of our employees.
Employees
As of December 31, 2019,2022, we employed 8885 full-time employees and 51 part-time employees, including 86 sales and marketing personnel, 51 service personnel, 19 manufacturing personnel and 42 service10 finance and administrative personnel. SevenNine of our New Jersey service employees are represented by a collective bargaining agreement which expires on December 31, 2025 and thereafter renews annually unless terminated by either party by written notice within sixty days prior to the expiration date.
Available Information
Our internet website address is http://www.tecogen.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and filings with the SEC are available free of charge on our website as soon as reasonably practicable after the reports are filed with, or furnished to, the SEC. Information contained on our website is not incorporated into this Annual Report on Form 10-K or our other securities filings.filings with the SEC. The SEC maintains an internet website at www.sec.gov which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors
Our business operations, financial condition, results of operations and the Company face many risks.stock price may be affected by a number of factors. In additional to the other information in this Form 10-K, the following factors and the information contained under the heading ''Cautionary Note Concerning Forward-Looking Statements'' should be considered in evaluating the Companyour company and itsour business. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks occur, our business, financial condition orand results of operations could suffer and the trading price of our common stock could decline.
Risks Relating to Our Business Strategy and Industry
Our financial condition and results of operations have been and may be materially adversely affected by the 2019 novel Coronavirus (COVID-19) pandemic.
COVID-19 has had and continues to have a significant impact around the world, prompting governments and businesses to take unprecedented measures in response. Such measures have included restrictions on travel and business operations, temporary business closures, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption of financial markets.
COVID-19 has and could continue to have a material and adverse effect on our business, financial condition and results of operations. During the course of the pandemic, certain of our suppliers have experienced disruptions, resulting in supply shortages that affected revenues, and similar disruptions could occur in the future. Public safety measures can also adversely impact demand for our products and services in affected areas.
COVID-19 has negatively impacted our revenue and may continue to do so. We may need to raise additional financing if cash generated from our operations is insufficient.
During the year ended December 31, 2022, our revenues continued to be negatively impacted due to supply chain issues and project deferrals. The extent to which the coronavirus will continue to impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. As part of our pandemic response plan, our sales, engineering, and select administrative functions may be operated remotely when necessary or appropriate while our manufacturing and service teams continues to function normally, subject to customer-initiated disruptions in service.
Due to the impact of the coronavirus pandemic on our customers, including the closure of certain customers' facilities and difficulties that customers may have in maintaining their business and operations during the pandemic, collections from certain existing customers have been and may continue to be deferred or difficult or impossible to collect, that there may be delays in the implementation of current projects and the completion of sales of our products and services.
13
TECOGEN INC.
To the extent cash generated from operations in the future is insufficient to fund our operating requirements, we will be required to seek additional outside financing. Our inability to obtain necessary capital or financing to fund these working capital needs will adversely affect our ability to expand our operations.
If the cash generated by operations istogether with proceeds of loans under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act,") that we have obtained and were forgiven as described below are insufficient to fund our future operating requirements, we will need to raise additional funds through public or private equity or debt financings. Such financing may not be available to us when needed, or if available, may not be available on terms that are favorable to us and could result in significant dilution to the holdings of our stockholders. Furthermore, any such debt financing is likely to include financial and other covenants that may impede our ability to react to changes in the economy or industry. We currently rely upon a $10 million line of credit based on the Company's accounts receivable and inventory in order to fund the Company's operations. If adequate financing is not available when needed, we may be required to implement cost-cutting strategies, delay production, curtail research and development efforts, or ifimplement other measures, which may adversely affect our results of operations and financial conditions and the Company failsprice of our stock.
On April 17, 2020, we were granted a loan of $1,874,200 under the Paycheck Protection Program established pursuant to satisfythe CARES Act to provide relief to certain businesses as a result of the pandemic. The loan was provided to us by Webster Bank, N.A. and was guaranteed by the United States Small Business Administration (“SBA”). We utilized the loan for payroll, rent, and utilities during the applicable covered period. Effective January 11, 2021, the loan together with all accrued interest thereon was forgiven in full by the SBA. The loan forgiveness is considered to be nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial covenants includedstatements.
On February 5, 2021, we obtained a Second Draw Paycheck Protection Program unsecured loan in the lineamount of $1,874,269 through Webster Bank, pursuant to the Paycheck Protection Program under the CARES Act and is guaranteed by the SBA. We utilized the loan for payroll, rent, and utilities during the applicable covered period. Effective September 8, 2021, the loan together with all accrued interest thereon was forgiven in full by the SBA. The loan forgiveness is considered to be nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
The 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 CompanyAmerican Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
We qualified for the ERC in the first, second and third quarters of 2021 and recognized $1,276,021 in Employee Retention Credits in 2021. As of January 12, 2023, we have received $1,229,873 in payment of the ERC's and expect to receive the remaining balance of $46,148 in the second quarter of 2023.
Based upon our operating and cash flow plan, we believe existing resources, including cash and cash flows from operations will be sufficient to meet our working capital needs for the next twelve months. If adequate financing is not available when needed, we may be required to implement cost-cutting strategies, delay production, curtail research and development efforts, or implement other measures, which may adversely affect our overall results of operations and financial condition.condition and the price of our stock.
If we experience a period of significant growth or expansion, it could place a substantial strain on our resources.
If our cogeneration and chiller products penetrate the market rapidly, we may be unable to deliver large volumes of technically complex products or components to our customers on a timely basis and at a reasonable cost to us. We have never ramped up our manufacturing capabilities to meet significant large-scale production requirements. If we were to commit to deliver large volumes of products, we may not be able to satisfy these commitments on a timely and cost-effective basis.
Our operating history is characterized by net losses and there can be no assurance we will be able to increase our sales and sustain profitability in the future.
We have historically incurred annual operating losses, including an operating loss of $2,447,927 in 2022. Although we made a net lossprofit of $4.7 million for 2019$3,696,000 in 2021, as a result of the Paycheck Protection Program Loans and $5.7 million for 2018.Employee Retention Credits in the amount of $5,049,035 in the aggregate, we have historically incurred annual operating losses. Our product and services segment of the business is capital intensive and, because our products generally are built to order with customized configurations, the lead time to build and deliver a unit can be significant. We may be required to purchase key components long before we can deliver a unit.unit and receive payment. Changes in customer orders or lack of demand may also impact our profitability. There can be no assurance we will be able to increase our sales and achieve and sustain profitability in the future.
We are dependent on a limited number of third-party suppliers for the supply of key components for our products.
We use third-party suppliers for components in all of our products. Our engine supplier, generator supplier for cogeneration products (other than the InVerde), and the compressor and vessel sets in our chillers, are all purchased from large
14
TECOGEN INC.
multinational equipment manufacturers. The loss of one or more of our suppliers could materially and adversely affect our business if we are unable to replace them. While alternate suppliers for the manufacture of our engine, generators and compressors have been identified, should the need arise, there can be no assurance that alternate suppliers will be available and able to provide such items on acceptable terms or on a timely basis.
From time to time, shipments of components for our products can be delayed because of industry-wide or other shortages of necessary materials and components from third-party suppliers, as well as shipping delays at points of importation. A supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity, or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to deliver our products in accordance with contractual obligations.
The amount of the Company'sour backlog is subject to fluctuation due to itsour customers’ experiencing unexpected delays in financing, permitting or modifications in specifications of the equipment.
We experience significant fluctuations in revenues from quarter to quarter on our product sales which may make period to period comparisons difficult.
We have low volume, high dollar sales for projects that are generally non-recurring, and therefore our sales have fluctuated significantly from period to period. Fluctuations cannot be predicted because they are affected by the purchasing decisions and timing requirements of our customers, which are unpredictable. Such fluctuations may make quarter to quarter and year to year comparisons difficult.
We expect significant competition for our products and services.
Many of our competitors and potential competitors are well established and have substantially greater financial, research and development, technical, manufacturing and marketing resources than we do. If these larger competitors decide to focus on the development of distributed power or cogeneration, they have the manufacturing, marketing and sales capabilities to complete research, development, and commercialization of these products more quickly and effectively than we can. There can also be no assurance that current and future competitors will not develop new or enhanced technologies or more cost-effective systems, and therefore, there can be no assurance that we will be successful in this competitive environment.
We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.
We believe that we will need to reduce the unit production cost of our products over time to maintain our ability to offer competitively priced products. Our ability to achieve cost reductions will depend on our ability to develop low-cost design enhancements, to obtain necessary tooling and favorable supplier contracts, and to increase sales volumes so we can achieve economies of scale. We can make no assurance that we will be able to achieve any such production cost reductions. Our failure to do so could have a material adverse effect on our business and results of operations.
Our products involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our results of operations.
The sale of our products typically involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we have little or no control. We expect to plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, our financial condition, results of operations and cash flow would suffer. If demand in any period increases well above anticipated levels, we may have difficulties in responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the order, which would negatively impact our operations. In addition, our operating expenses are based on anticipated sales levels, and a high percentage of our expenses are generally fixed in the short term. As a result of these factors, a small fluctuation in timing of sales can cause operating results to vary materially from period to period.
The economic viability of our projects depends on the price spread between natural gas and other fuel and electricity, and the variability of these prices creates a risk that our projects will not be economically viable and that potential customers will avoid such energy price risks.
15
TECOGEN INC.
The economic viability of our CHP products depends on the spread between natural gas fuel and electricity prices. Volatility in one component of the spread, such as the cost of natural gas and other fuels (e.g., propane or distillate oil), can be managed to some extent by means of futures contracts. However, the regional rates charged for both base load and peak electricity may decline periodically due to excess generating capacity or general economic recessions.recessions, and both the cost of natural gas and the cost of electricity for base load and peak load may be adversely affected by geopolitical disruptions such as Russian expansion into the Ukraine and political and other responses to such expansionist activity.
Our products and on-site utility service could become less competitive if electric rates were to fall substantially in the future, although, historically, electric rates have not had any sustained decline in price. Potential customers may perceive the risk of unpredictable swings in natural gas and electricity prices as a risk of investing in on-site CHP, and may decide not to purchase CHP products.
We may make acquisitions or take other corporate strategic actions that could harm our financial performance.
To expedite development of our business, including with regard to equipment installation and service functions, we anticipate investigating and potentially pursuing future acquisitions of complementary businesses. Risks associated with such acquisitions include the diversion of management attention and cash from operations to cover the costs associated with acquisitions, disruption of our existing operations, loss of key personnel in the acquired companies, dilution through the issuance of additional securities, assumptions of existing liabilities, and commitment to further increase operating expenses. If any or all of these problems actually occur, acquisitions could negatively impact our financial performance and future stock value.
Expiring customer contracts may lead to decreases in revenue and increases in expenses.
Each year, a portion of our customer contracts expire and need to be renewed or replaced. We may not be able to renew or extend contracts with existing customers or obtain replacement contracts at attractive rates or for the same term as the expiring contracts. To the extent we are unable to extend customer contracts prior to their expiration dates, energy production revenue will decline due to less energy billing. Expiring customer contracts can also lead to an increase in expenses because we are obligated to remove the equipment from the customer location at our own expense at the end of the customer contract. The Company completedinvestment required to obtain replacement contracts, including the mergermanufacture and installation of the cogeneration or chiller equipment and the costs to incorporate this equipment into a facility are significant. To the extent that we do not have sufficient liquidity, our ability to add new contracts with ADGEenergy production sites may be adversely impacted.
Our revenue from energy billing may be adversely impacted by increases in May 2017. As the Company completesprice of natural gas, reductions in utility rates for electrical power, weather conditions, or by an increase in remote work and study environments, all of which could reduce our revenue.
Over the integrationpast several years electric rates have fluctuated, in some instances the rate have decreased, subsequent to the vast majority of ADGE's assetscustomer contract dates, causing the billable value of the electrical power generated by our systems to decrease which has an adverse effect on our results of operations. In warmer months the customers do not use as much thermal energy because they do not have as much demand for heat at their locations. Due to lower demand in warmer months, we may not be able to bill for thermal energy and business model into its operations,in turn may have a decrease in revenue. In addition, increases in the Company'scost of natural gas may increase the cost of power generation in comparison to the cost of power from the electric grid and may result in decreased revenue and adversely affect our results of operation. Increased remote work and remote study environments during the COVID-19 pandemic has resulted in decreased commercial electricity and revenue generated by our systems, and has adversely affected our results of operations.
Our financial condition cash flows, and results of operations could suffer if there is an impairment of goodwill or intangible assets.
As of December 31, 2022, our goodwill was $2,406,156, and our intangible assets were $997,594. We performed a goodwill impairment test at December 31, 2022 and determined that the estimated fair value of the energy production business assets, based on a discounted cash flow analysis, exceeded the carrying value of the assets and did not recognize goodwill impairment relating to our energy production segment for the year ended December 31, 2022. We are required to test intangible assets with indefinite lives, including goodwill, annually or, in certain instances, more frequently, and may be negatively impacted.required to record impairment charges, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred. Our goodwill impairment analysis is sensitive to changes in key assumptions used in our analysis. If the assumptions used in our analysis are not realized, it is possible that an impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of goodwill or other intangible assets. However, any such impairment would have an adverse effect on our results of operations.
Risks Related to our Technology and Business Operations
If we are unable to maintain our technological expertise in design and manufacturing processes, we will not be able to successfully compete.
16
TECOGEN INC.
We believe that our future success will depend upon our ability to continue to develop and provide innovative products and product enhancements that meet the increasingly sophisticated needs of Contentsour customers. However, this requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. The development of new, technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs, and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
The introduction of products embodying new technologies and the shifting of customer demands or changing industry standards could render our existing products obsolete and unmarketable. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products or product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.
Legal, Regulatory and Compliance Risks
Our business is subject to product liability and warranty claims.
Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may face substantial liability for damages resulting from the faulty design of products, manufacture of products or improper use of products by end users. We currently maintain product liability insurance, but there can be no assurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our ability to market and sell our products.
We sell our products with limited warranties. There can be no assurance that the provision in our financial statements for estimated product warranty expense will be sufficient. There can be no assurance that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant occurrence of warranty expense in excess of estimates could have a material adverse effect on our operating results, financial condition and cash flow. Further, we have at times undertaken programs to enhance the performance of units previously sold. These enhancements have at times been provided at no cost or below our cost. If we choose to offer such programs again in the future, such actions could result in significant costs.
Agreements with our customers may include potential liquidated damages relating to construction delays or performance guaranties.
Turnkey construction contracts to which we are a party may contain liquidated damages provisions resulting from failure to achieve agreed milestones relating to construction activity. Agreements relating to the sale of equipment or energy may include performance and other obligations that may result in payment obligations to customers.
Utilities or governmental entities could hinder our entry into and growth in the marketplace, and we may not be able to effectively sell our products.
Utilities or governmental entities on occasion have placed barriers to the installation of our products or their interconnection with the electric grid, and they may continue to do so. Utilities may charge additional fees to customers who install on-site CHP and rely on the grid for back-up power. These types of restrictions, fees, or charges could make it harder for customers to install our products or use them effectively, as well as increase costs to potential customers. This could make our systems less desirable, thereby adversely affecting our revenue and other operating results.
The reduction, elimination or expiration of government and economic incentives for applications of our equipment could reduce demand for our equipment and harm our business.
The market for cogeneration equipment depends in part on the availability and size of government and economic incentives that vary by geographic market. Because our sales to customers are typically into geographic areas with such incentives, elimination, or expiration of government subsidies and economic incentives for cogeneration equipment may negatively affect the competitiveness of equipment relative to other sources of electricity, heating, and cooling equipment, and could harm or halt the growth of the cogeneration industry and our business. For example, we are eligible for the New Jersey Smart Start Combined Heat and Power Incentive.
We may incorporate price reduction on equipment sold to customers based on the anticipated receipt of governmental economic incentive payments and apply and collect the incentives payments. If such incentives become unavailable to us our financial condition may be adversely affected.
Competing sources of electricity, heating, and cooling equipment may successfully lobby for changes in the relevant legislation in their markets that are harmful to the cogeneration industry. Reductions in, or eliminations or expirations of, governmental incentives in regions where we focus our sales efforts could result in decreased demand for and lower revenue
17
TECOGEN INC.
from cogeneration equipment there, which would adversely affect us. In addition, our ability to successfully penetrate new geographic markets may depend on new geographic areas adopting and maintaining incentives to promote cogeneration, to the extent such incentives are not currently in place. Additionally, electric utility companies may establish pricing structures or interconnection requirements that could adversely affect our sales and be harmful to cogeneration.
We may be exposed to substantial liability claims if we fail to fulfill our obligations to our customers or our on-site equipment malfunctions.
We enter into contracts with large commercial and not-for-profit customers under which we assume responsibility for meeting a portion of the customers' building energy demand and equipment installation. We may be exposed to substantial liability claims if we fail to fulfill our obligations to such customers. If the equipment malfunctions, it may be costly to repair or replace. There can be no assurance that we will not be vulnerable to claims by customers and by third parties that are beyond any contractual protections that we are able to negotiate. As a result, liability claims could cause us significant financial harm.
We may be subject to litigation, which is expensive and could divert management attention.
Our share price may be volatile and in the past companies that have experienced volatility in the market price of their stock have been subject to an increased incidence of securities class action litigation. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
Although we maintain directors’ and officers’ insurance coverage, there can be no assurances that this insurance coverage will be sufficient to cover the substantial fees and expenses of lawyers and other professional advisors relating to any future litigation, our obligations to indemnify our officers and directors who are or may become parties to such pending and future actions, or the amount of any judgments or settlements that we may be obligated to pay in connection with such actions. We may be required to make material payments in connection with the defense of or to settle such litigation or to satisfy any adverse judgment. In addition, actions that arise in the future could be excluded from coverage or, if covered, could exceed our deductibles and/or the coverage provided. In addition, an adverse outcome of litigation could cause our insurance premiums and retention amounts to increase in the future. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations. For more information regarding litigation, see "Item 3. Legal Proceedings" and Note 11 "Commitments and Contingencies" in the Notes to our Consolidated Financial Statements included elsewhere herein.
Credit and Liquidity Risks
We are implementing a new enterprise resource planning system, and if this new system proves ineffective or ifexposed to credit risks with respect to some of our customers.
To the extent our customers do not advance us sufficient funds to finance our costs during the execution phase of our contracts, we experience issues withare exposed to the transition, werisk that they may be unable to timelyaccept delivery or accurately prepare financial reports,that they will be unable to make paymentspayment at the time of delivery or within agreed upon payment terms. Our provision for doubtful accounts receivable was $361,197 as of December 31, 2022, a decrease of $188,009 when compared to the provision for doubtful accounts as of December 31, 2021. We have experienced customer payment delays due to COVID-19, which are attributable to temporary business shutdowns, resulting in declines in revenues and cash flows from our customers and delays in project completion due to delays in government project inspections and a general slowdown in business activity and in some cases, customers ceasing business activities altogether.
Risks Relating to Ownership of our Common Stock
Investment in our Common Stock is subject to price fluctuations and market volatility.
Historically, valuations of many small companies have been highly volatile. The securities of many small companies have experienced significant price and trading volume fluctuations unrelated to the operating performance or the prospects of such companies. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
•results and timing of our product development;
•results of the development of our competitors’ products;
•regulatory actions with respect to our suppliersproducts or our competitors’ products;
•actual or anticipated fluctuations in our financial condition and employees,operating results;
•actual or invoiceanticipated changes in our growth rate relative to our competitors;
•actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
•competition from existing products or new products that may emerge;
18
TECOGEN INC.
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
•issuance of new or updated research or reports by securities analysts;
•fluctuations in the valuation of companies perceived by investors to be comparable to us;
•share price and collect fromvolume fluctuations attributable to inconsistent trading volume levels of our users.shares;
•disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to accuratelyobtain, maintain, books and records and to prepare our financial statements. The transitiondefend or enforce proprietary rights relating to our new ERP systemproducts and technologies;
•announcement or expectation of additional financing efforts;
•sales of our Common Stock by us, our insiders, or our other stockholders; and
•general economic and market conditions.
Furthermore, during the COVID-19 pandemic and at other times, the U.S. stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, or international currency fluctuations, may negatively impact the market price of shares of our common stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could potentially harm our business.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our shares will depend on the research and reports that securities or industry analysts publish about us or our business. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more analysts downgrade our shares or change their opinion of our share price our share price may decline. In addition, if one or more analysts cease coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Because our directors and executive officers are among our largest stockholders, they can exert influence over our business and affairs and have actual or potential interests that may differ from other stockholders or investors.
As of the date of this report, our directors and executive officers collectively beneficially own approximately 11.4% of our issued and outstanding shares. John Hatsopoulos, a director, beneficially owns approximately 9.4% of our issued and outstanding shares. Additionally, the holdings of our directors and executive officers may increase in the future upon vesting or exercise of the options or other stock awards they may hold or in the future may be disruptivegranted or if they otherwise acquire additional shares in the open market or otherwise. The interests of such persons may differ from the interests of our other stockholders. As a result, in addition to their board seats and offices, such persons will have influence over corporate actions requiring shareholder approval. These matters would include the election of directors and the approval of mergers or other business combination transactions.
Such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to acquire us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Current stock holdings may be diluted if we make future equity issuances or if outstanding options are exercised for shares of our common stock.
“Dilution” refers to the reduction in the voting effect and proportionate ownership interest of a given number of shares of common stock as the total number of shares increases. Our issuance of additional stock, convertible preferred stock, or convertible debt may result in dilution to the interests of shareholders and may also result in the reduction of your stock price. The sale of a substantial number of shares into the market, or even the perception that sales could occur, could depress the price of our common stock. Also, the exercise of options may result in additional dilution.
The holders of outstanding options, warrants and convertible securities or derivatives, if any, have the opportunity to profit from a rise in the market price of our shares, if any, without assuming the risk of ownership, with a resulting dilution in the interests of other stockholders. We may find it more difficult to raise additional equity capital if it should be needed for our business ifwhile the ERP system does not workoptions, warrants and convertible securities are outstanding.
Future sales of our shares by our existing stockholders may cause our stock price to fall.
19
TECOGEN INC.
The market price of our shares could decline as planneda result of sales by our existing stockholders of our shares in the market or ifthe perception that these sales could occur. These sales might also make it more difficult for us to conduct an equity or equity-based financing at a time and price that we experience issues relating to the implementation. Such disruptions could impact our ability to timely or accurately make payments to our suppliersdeem appropriate and employees, and could alsothus inhibit our ability to invoice,raise additional capital when it is needed.
Because we have not and collectdo not intend to pay cash dividends, our stockholders receive no current income from holding our customers. Data integrity problemsstock.
We have paid no cash dividends on our capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. We currently expect to retain earnings for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. As a result, capital appreciation, if any, of our Common Stock could be the sole source of gain for our stockholders for the foreseeable future.
We incur substantial costs to operate as a public reporting company.
We incur substantial legal, financial, accounting and other costs and expenses to operate as a public reporting company. We believe that these costs are a disproportionately larger percentage of our revenues than they are for many larger companies. In addition, the rules and regulations of the SEC impose significant requirements on public companies, including ongoing disclosure obligations and mandatory corporate governance practices. Our senior management and other personnel need to devote a substantial amount of time to ensure ongoing compliance with these requirements. Our common stock is currently quoted on the OTC Markets Group Inc.’s OTCQX Best Market tier. Under the OTC Markets Group Inc.’s OTCQX continued qualification requirements, we are required to have a minimum bid price of $0.10 per share as of the close of business for at least one of every 30 consecutive calendar days, a market capitalization of at least $5 million for at least one of every 30 consecutive calendar days, and at least two market makers. Also, we must be current in our SEC reporting obligations. If we seek to list our stock for trading on a national securities exchange or be quoted on the Nasdaq Stock Market, we will be subject to additional disclosure and governance obligations. There can be no assurance that we will continue to meet all of the public company requirements to which we are subject on a timely basis, or at all, or that our compliance costs will not continue to be material.
Because our common stock is not traded on a national securities exchange, our stock has limited liquidity and our ability to raise capital is impaired.
On June 19, 2020, we voluntarily delisted our common stock from Nasdaq and transitioned the quotation of our shares to OTC Markets Group Inc.’s OTCQX Best Market. Our common stock has been quoted on the OTC Markets Group Inc.’s OTCQX Best Market since June 19, 2020 under the symbol “TGEN”. We believe that trading “over the counter” has limited our stock’s liquidity and may impair our ability to raise additional capital. Also, and as a result, relatively small trades in our stock could have a disproportionate effect on our stock price.
Certain provisions of our charter and bylaws may discourage mergers and other transactions.
Certain provisions of our certificate of incorporation and bylaws may make it more difficult for someone to acquire control of the company. These provisions may make it more difficult for stockholders to take certain corporate actions and could delay or prevent someone from acquiring our business. These provisions could limit the price that certain investors might be willing to pay for shares of our common stock. The ability to issue “blank check” preferred stock is a traditional anti-takeover measure. This provision may be beneficial to our management and the board of directors in a hostile tender offer and may have an adverse impact on stockholders who may want to participate in such tender offer, or who may want to replace some or all of the members of the board of directors.
Our board of directors may issue shares of preferred stock without stockholder approval.
Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock. Accordingly, our board of directors may, without shareholder approval, issue one or more new series of preferred stock with rights which could adversely affect the voting power or other issues may be discovered which, if not corrected, could impactrights of the holders of outstanding shares of our business or financial results.common stock. In addition, the issuance of shares of preferred stock may have the effect of rendering more difficult or discouraging, an acquisition or change of control of the company. Although we do not have any current plans to issue any shares of preferred stock, we may experience periodic or prolonged disruption ofdo so in the future.
In order to comply with public reporting requirements, we must continue to strengthen our financial functions arising out of this conversion, general use of such system, other periodic upgrades or updates, or other external factors that are outside of our control. If we encounter unforeseen problems with our ERP system or other related systems and infrastructure, itinternal controls, and failure to do so could adversely affect our ability to provide timely and accurate financial statements.
Refinement of our internal controls and procedures will be required as we manage future growth and operate effectively as a public company. Such refinement of our internal controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, is costly and puts a significant burden on management. We cannot assure you that measures already taken, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are
20
TECOGEN INC.
unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve our disclosure controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price.
Investor confidence in the price of our stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002. As of the end of the period covered by this report, our principal executive officers and our principal financial officer have concluded there is a material weakness in our disclosure controls and procedures and our internal control over financial reporting, systemswhich could harm our operating results or cause us to fail to meet our reporting obligations.
Our Chief Executive Officer and Chief Financial Officer (“certifying officers”) are responsible for establishing and maintaining our abilitydisclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). The certifying officers designed such disclosure controls and procedures, or caused such disclosure controls and procedures to produce financialbe designed under their supervision, to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and is made known to management (including the certifying officers) by others within the company, including its subsidiaries. We regularly evaluate the effectiveness of our disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly in our Forms 10-Q and annually in our Forms 10-K. In completing such reporting, we disclose, as appropriate, any significant change in our internal control over financial reporting that occurred during our most recent fiscal period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As a public company, we are subject to the rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal control over financial reporting (“management’s report”). If we fail to achieve and maintain the adequacy of our disclosure control or internal control over financial reporting, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal control over financial reporting, particularly that relating to revenue recognition, is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss in investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our common stock. Investor confidence and the price of our common stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
As of the end of the period covered by this Annual Report, December 31, 2022, our principal executive officer and principal financial officer performed an evaluation of our disclosure controls and procedures and concluded that our controls were not effective to provide reasonable assurance that information required to be disclosed by us in reports that we file under the Securities Exchange Act, is recorded, processed, summarized and reported when required. Management conducted an evaluation of our internal control over financial reporting and based on this evaluation, management concluded that the company’s internal control over financial reporting was not effective as of December 31, 2022. We have a small number of employees dealing with general controls over information technology security and user access. This constitutes a material weakness in financial reporting. Any failure to implement effective internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock and may require us to incur additional costs to improve our internal control system.
General Business Risks
Our intellectual property may not be adequately protected.
We seek to protect our intellectual property rights through patents, trademarks, copyrights, trade secret laws, confidentiality agreements, and licensing arrangements, but we cannot ensure that we will be able to adequately protect our technology from misappropriation or infringement. We cannot ensure that our existing intellectual property rights will not be invalidated, circumvented, challenged, or rendered unenforceable.
Our competitors may successfully challenge the validity of our patents, design non-infringing products, or deliberately infringe our patents. There can be no assurance that other companies are not investigating or developing other similar technologies. In addition, our intellectual property rights may not provide a competitive advantage to us or ensure that our products and technology will be adequately covered by our patents and other intellectual property. Any of these factors or the expiration, termination, or invalidity of one or more of our patents may have a material adverse effect on our business.
Others may assert that our technology infringes their intellectual property rights.
21
TECOGEN INC.
We may be subject to infringement claims from time to time. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay additional royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results and financial condition could be adversely affected.would suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.
Our business and financial performance may be adversely affected by information systems interruptions, cybersecurity attacks or other disruptions which could have a material adverse effect on our business and results from operations.
We depend upon information technology, infrastructure, including network, hardware and software systems to conduct our business. Despite our implementation of network and other cybersecurity measures, our information technology system and networks could be disrupted or experience a security breach from computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Our security measures may not be adequate to protect against highly targeted sophisticated cyber-attacks, or other improper disclosures of confidential and/or sensitive information. Additionally, we may have access to confidential or other sensitive information of our customers, which despite our efforts to protect, may be vulnerable to security breaches, theft, or improper disclosure any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
Our success is dependent upon attracting and retaining highly qualified personnel and the loss of key personnel could significantly hurt our business.
To achieve success, we must attract and retain highly qualified technical, operational and executive employees. The loss of the services of key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering, operations, and business development personnel, could result in the loss of business or could otherwise negatively impact our ability to operate and grow our business successfully.
Our business may be impacted by political events, war, terrorism, public health issues, natural disasters and other circumstances that are not within our control.
War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on us, our suppliers, and manufacturing vendors. Our business operations are subject to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers, or to receive products from our manufacturers and suppliers, and create delays and inefficiencies in our supply chain. If major public health issues, including pandemics, arise, we could be adversely affected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and suppliers. In the event of a natural disaster, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
There was one customer who represented 12% of operations. In warmer monthsrevenues for the year ended December 31, 2022 and no customer who represented more than 10% of revenues for the year ended December 31, 2021. There was one customer who represented 15% of the accounts receivable balance as of December 31, 2022, and two customers do not usewho represented 14% and 12%, respectively, of the accounts receivable balance as much thermal energy because they do not have as much demand for heat at their locations. Due to lower demand in warmer months we may not be able to bill for thermal energy and in turn may have a decrease in revenue.
Item 1B. Unresolved Staff Comments.
22
TECOGEN INC.
Item 2. Properties.
Our headquarters is located in Waltham, Massachusetts, and consists of approximately 43,000 square feet of manufacturing, storage and office space. OurAlthough our Waltham lease will expireexpires March 31, 2024.2024, we have identified an alternate space and are currently negotiating the lease terms. Currently, our monthly base rent is $44,254. We believe that our facilities are appropriate and adequate for our current needs.
Our teneleven leased service centers can be broken into two different sizes. The larger leased spaces have office space to accommodate administrative, sales and engineering personnel, and warehouse space to stock parts in support of our service contracts.
As of December 31, 2019,2022, the service centers that fit this larger category are based in Piscataway, New Jersey and Valley Stream and Buchanan, New York to service the Metro New York City and the Mid-Atlantic region. The San Francisco Bay area and Northern California is served by such a center in Hayward, California. A portion of the corporate headquarters in Waltham, Massachusetts is used in this manner to service Boston and New England.
The smaller service centers are parts depots or warehouses for the stocking of parts in support of our service contracts. These centers are located in Los Angeles, California; Sterling Heights, Michigan; Newark, New York; andYork, East Windsor, ConnecticutConnecticut; Toronto, Ontario and Wellesley Chapel, Florida.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Our Shares
Our common stock is listedquoted on the NASDAQ CapitalOTC Markets Group’s OTCQX Best Market tier and trades under the symbol TGEN. As of March 2, 2020,23, 2023, there were 57 holdersholders of record of our common stock.stock. Any over-the-market quotations reflect inter-dealers prices, without mark-up, markdown or commission and may not necessarily represent actual transactions.
Dividends
We have never declared or paid a cash dividend on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, contractual restrictions and covenants included under ourany bank or other indebtedness that we may enter into, capital requirements, business prospects and other factors that our board of directors considers relevant.
Equity Compensation Plan Information
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 December 31, 20192022 and 20182021 was 1,906,180146,393 and 1,990,980,764,768, respectively.
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 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.
23
TECOGEN INC.
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 2022 Plan as of December 31, 2022 was 3,600,000.
The following table provides information as of December 31, 2019,2022, regarding Common Stock that may be issued under the Company’s 2006 Stock IncentiveAmended Plan as amended, orand the 2022 Plan.
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) | ||||||||||||||||||
| Equity compensation plans approved by security holders | 3,204,297 | $ | 1.61 | 3,746,393 | ||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||||||||
| Total | 3,204,297 | $ | 1.61 | 3,746,393 | ||||||||||||||||
| Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) | ||||||||
| Equity compensation plans approved by security holders | 1,292,968 | $ | 3.57 | 1,906,180 | ||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||
| Total | 1,292,968 | $ | 3.57 | 1,906,180 | ||||||
Item 6. Selected Financial Data.[Reserved].
Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of
important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Tecogen designs, manufactures, markets, and sells industrial and commercialmaintains high efficiency, ultra-clean cogeneration systems that produce combinations of electricity, hot water, and air conditioning using automotive engines that have been specially adapted to run onproducts. These include natural gas. 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 thesegas 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® technology which nearly eliminates all criteria pollutants such as CHP (electricity plus heat)NOx and MCHP (mechanical power plus heat)CO. Our systems are greater than 88% efficient compared to typical electrical grid efficiencies of 40% to 50%. As a result, our greenhouse gas (GHG) emissions are typically half that of the electrical grid. Our systems generate electricity and hot water or in the case of our Tecochill product, both chilled water and hot water. These result in savings of energy related costs of up to 60% for our customers. Our products are expected to run on Renewable Natural Gas (RNG) as it is introduced into the US gas pipeline infrastructure.
Our products are sold directly to end-users by our in-house marketingsales 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. To date the Company haswe have shipped over 3,0003,150 units, some of which have been operating for almost 35 years.
Although we may, from time to time, have one or a few customers who may represent more than 10% of our product revenue for a given year, we are not dependent on the recurrence of revenue from those customers. Our product revenue is such that customers may make a large purchase once and may not ever make a purchase again. Our equipment is built to last 30 or more years. Therefore, on the one hand, our product revenue model is not dependent on recurring sales transactions from the same customer. Our service revenue on the other hand, does lend itself to recurring revenue from particular customers, although we currently do not have any service revenue customers who make up more than 10% of our total revenues on an annual basis.customers.
For the last two fiscal years, more than half of our revenue was generated from long-term maintenance and energy production contracts, which provideprovides us with a predictable revenue stream, especially during the summer months. We haveexperience a slight surge of activity from May through September as our “chiller season” is in full swing. Our O&M service
24
TECOGEN INC.
revenue which has grown from year to year since 2005, with our New York City/New Jersey and New England systems experiencing the majority of the growth. This growth, was impacted to some extent by the COVID-19 pandemic. Our installation service related revenue has decreased and is consistent with the salelikely to continue to remain low due to our strategy to focus on higher margin segments of new units into those territories.our business. Our service margins are generally predictable as we service hundreds of long-term contracts with relatively low dollar, high volume sales.
During the years ended December 31, 2022 and 2021, our revenues were negatively impacted due to 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 segment revenue due to business closures and increased remote work and learning environments. The extent to which the coronavirus will continue to impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted.
Our product revenue is derived from the sale of the various cogeneration modules, such as the InVerde, InVerde e+, the CM-75, the CM-60,Tecopower, Ilios heat pumps, and the three TECOCHILL chiller models, such as the smaller ST, the larger DT and the RT (roof-top) units.Tecochill products. In 2019, we also reintroduced our TecoFrost line to the mix.refrigeration line. The sales cycle for each module varies widely and can range from as short as a monthbetween 6 months to as long as a year or more. Furthermore, since our products and their installation are costly, they are considered a major capital improvement and customers may be slow in making their buying decisions. Our product sales are high dollar value, low volume transactions. Therefore, our product revenue can be difficult to predict and the expected margin is variable.can vary. In most cases we work with consulting engineers who specify our product in new and retrofit applications. We also work with building owners directly, in some limited cases offering a full turn-key installation.
Our cogeneration, heat pump, and chiller modules are built to order and revenue is recognized upon shipment. The lead time to build and deliver a unit depends on its customized configuration and is approximately 12 to 14 weeks for a chiller and 6 to 8 weeks for a cogeneration system or heat pump, from time of purchase order. As revenue is recognized upon shipment, our work-in-process is an important factor in understanding our financial condition in any given quarter.
•Products and Services segment - designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our systems;
•Services segment - provides maintenance services for Tecogen supplied products at customer sites; and,
•Energy Production segment - sells energy in the form of electricity, heat, hot water, and cooling to our customers under long-term sales agreements.
Recent Developments
Assumption of Aegis Energy Services Maintenance Agreements
On May 18, 2017, holders of approximately 71% of ADGE’s outstanding common stock approved the Merger and approximately 55% of the outstanding stock of Tecogen approved the issuance of Tecogen shares in the Merger. Consequently, on that day Tecogen completed its acquisition, by means of a stock-for-stock merger, of 100% of the outstanding common shares of ADGE. As a result, ADGE became a wholly-owned subsidiary of Tecogen. See Note 4."Acquisition of American DGMarch 15, 2023, we entered into an Agreement with Aegis Energy Inc." of the Notes to Consolidated Financial Statements for further information and Item 3. Legal Proceedings for informationServices, LLC (“Aegis”) regarding the dismissalassignment and assumption of all remaining claims incertain maintenance agreements, the litigationpurchase and sale of certain assets, and related matters (the “Agreement”) pursuant to the Merger.
Tecochill Hybrid-Drive Air-Cooled Chiller Development
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 December 14, 2018,July 20, 2022, we announced the Company enteredestablishment of NetZero Greens, a new business unit focused on low carbon Controlled Environment Agriculture (CEA). We believe that CEA offers an exciting opportunity to apply our expertise in clean
25
TECOGEN INC.
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 Amendment No. 1requirements relating to and Waiver No. 1energy-intensive indoor agriculture applications that we expect to be transferable to CEA facilities for food production.
Paycheck Protection Program Loan
On April 17, 2020, we obtained an unsecured loan in the principal amount of $1,874,200 from Webster Bank, NA ("Webster") under Credit Agreement dated May 4, 2018 (the "Credit Agreement") among the Company, American DG Energy Inc., and TTcogen LLC (collectively, the "Borrowers") and Webster Business Credit Corporation ("Lender") (the "Amendment and Waiver")Paycheck Protection Program adopted pursuant to which Lender waived restrictionsthe Coronavirus Aid, Relief and Economic Recovery Act, as amended ("CARES Act"). On January 19, 2021 we received confirmation from Webster that the Paycheck Protection Program Loan in the Credit Agreementoriginal principal amount of $1,874,200 together with accrued interest of $13,659 was forgiven in full effective as of January 11, 2021. The loan forgiveness of $1,887,859 was accounted for as a debt extinguishment and is reported as a separate component of other income (expense), net in our condensed consolidated statement of operations. The loan forgiveness is considered to (1) permit American DG Energy Inc. to formbe nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
Paycheck Protection Program Second Draw Loan
On February 5, 2021, we obtained a wholly owned company to which it contributed its interests in two energy purchase agreements and associated assets, and enter into an agreement pursuant to which all equity interests in such company were sold to an unrelated third party for $2 million, and (2) permit the Company to enter into a Billing and Asset Management Agreement and an Operation and Maintenance Service Agreement pursuant to which the Company will be responsible for the management and operation of the on-site utilities transferred with the energy purchase agreements, guarantee the collection of certain minimum collections from such on-site utilities, and receive one-half of all collection in excess of agreed minimum collections. Proceeds from the sale described above were deposited to American DG Energy Inc.'s account with Lender and applied against the outstanding balance under the Credit Agreement. The Amendment and Waiver also reduced the availability reserve requirement under the Credit Agreement and waived a default relating to a requirement that Borrowers maintain certain Minimum Availability (as definedPaycheck Protection Program Second Draw unsecured loan through Webster in the Credit Agreement) at all times through the dateamount of the Amendment and Waiver. The Company and American DG Energy completed the transactions described above on December 14, 2018, providing funds a substantial portion of which were used to complete certain construction of on-site utilities managed and operated by the Company, and increasing the amount available to Borrowers under the Credit Agreement.
Employee Retention Credit
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into two separate agreementslaw 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 provide operational and maintenance servicesuse an alternative quarter, we qualified for the purchaser. Concurrently,ERC in the Company amendedfirst, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the termsfirst, second and third quarters of an agreement related2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to certain energy systems related assetsemployees in the first, second and related energy production contracts,third quarters of 2021 were eligible for the ownership ofERC, other than wages with with loan forgiveness which were transferred to the same purchaser in December 2018 in consideration of approximately $2 million, in order to conform and finalize the termscannot be used as qualified wages for purposes of the agreementERC.
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. A current receivable in the amount of $713,269 is included in our condensed consolidated balance sheet as of December 31, 2022. 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. We expect to receive the latter agreement. See Note 5."Saleremaining balance of Energy Producing Assets and Goodwill Impairment" for further discussion.
$46,148 in the second quarter of 2023.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make judgments, assumptions and estimates that affect the
26
TECOGEN INC.
reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. These judgments, assumptions and estimates are made or applied within the context of accounting policies related to the nature of the transaction. Note 2. "Summary of Significant Accounting Policies" of the Notes to our Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements.
Certain aspects of certain accounting policies require management to make difficult, subjective or complex judgments that could have a material effect on the Company’sour financial condition and results of operations. These aspects of these accounting policies are considered critical accounting policies. These policies may require management to make assumptions about matters that are highly uncertain at the time of the estimate or employ an estimate where alternative estimates could have also been employed, and may involve estimates that are reasonably likely to change with the passage of time. Estimates and
assumptions about future events and their effects cannot be determined with certainty. The Company bases itsWe base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as the Company’sour operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in Item"Item 1A," “Risk Factors" above.
Management believes that the following are critical accounting policies:
Revenue Recognition
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied. This generally 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.
Determination of contract consideration allocableallocatable to multiple performance obligations within a single contract requires employing stand-alone selling prices which may be based on observable selling prices, estimated selling prices or as a residual. 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.
Under complete turnkey installation service contracts our performance obligation under such contracts is 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 and revenue is recognized over time using the percentage-of-completion method determined on a cost to costcost-to-cost basis. This method requires management to estimate future cost to complete based on conditions and information available at the time the estimate is made. Events or changes in circumstances can cause these estimates to be revised which may result in significant adjustments to revenue amounts previously recognized.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year.
Inventory
Raw materials, work in process, and finished goods inventories are stated at the lower of cost, as determined by the average cost method, or net realizable value. The CompanyWe periodically reviewsreview inventory quantities on hand for excess and/or obsolete inventory based primarily on historical usage, as well as based on estimated forecast of product demand. Any reserves that result from this review are charged to cost of sales.
Property, plant and Depreciation
cost. Depreciation is computedprovided using the straight-line method at rates sufficient to write offover the costestimated useful life of the applicable assetsasset, which range from three to fifteen years. Leasehold improvements are amortized using the straight-line method over theirthe lesser of the estimated useful lives. Repairslives of the assets or the term of the related leases. Expenditures for maintenance and maintenancerepairs are expensed as incurred.currently, while renewals and betterments that materially extend the life of an asset are capitalized.
27
TECOGEN INC.
projected undiscounted cash flows (excluding interest charges) is less than the lessercarrying value of the economic life ofassets, the asset orassets will be written down to the term ofestimated fair value and such loss is recognized in income from continuing operations in the underlying contract withperiod in which the customer, typically 12 to 15 years.determination is made. If impairment is indicated, the asset is written down to its estimated fair value.
Contract Assets and Liabilities
The favorable contract asset and unfavorable contract liability included in the intangible assets and liabilities of the consolidated balance sheets represent the fair value of customer energy production contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Company.
us.
The determination of fair value requiredrequires development of an estimate of the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Contracts are considered to be assets or liabilities by virtue of the rights and obligations inherent in the contract terms. Typically, contracts with terms considered to be at market are considered to have no fair value as, in order to be entitled to the rights under the contract, performance must occur for which a market rate of return is earned due to the at market terms. The fair value of a contract is primarily a measurement of its off-market terms. The obligation to perform under a contract with terms that are unfavorable to market results in a liability to the extent its terms are off market. The resulting liability is an estimate of the price that would need to be paid to a willing market participant to assume the obligations under the contract in order for them to receive a market rate of return for their remaining performance obligation under the contract. The exact opposite holds true in instances where the terms of a contract are considered to be favorable to market. In that case an asset would exist as an estimate of the price that would be received from a willing market participant in order to be entitled to the rights under the contract.
In determining the estimate of fair value of customer energy production contracts, the measure of market, and thus the baseline to measure the amount related to any of the off marketoff-market terms or conditions with respect to the contracts, was considered best determined, given the nature of the services provided under the contracts, by utilizing a benchmark level of margin, in this case 35% of revenue which is consistent with the average return on revenue of US investor owned public utilities.
Goodwill
Goodwill is not amortized,amortized; however, it is reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. ASC 350 “Intangibles—Goodwill and Other” (ASC 350) permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Circumstances that are considered as part of the qualitative assessment and could trigger the two-step impairment test include, but are not limited to: a significant adverse change in the business climate; a significant adverse legal judgment; adverse cash flow trends; an adverse action or assessment by a government agency; unanticipated competition; decline in our stock price; and a significant restructuring charge within a reporting unit. We define reporting units at the business segment level. For purposes of testing goodwill for impairment, goodwill has been allocated to our reporting units to the extent it relates to each reporting unit. Based upon our qualitative assessment in 2019, it was more likely than not that the fair value of our reporting units were greater than their carrying amounts as of December 31, 2019. An impairment charge of $3,693,198 was recorded in the first quarter of 2019 due to the sale of certain underlying assets as discussed in Note 5. "Sale of Energy Producing Assets and Goodwill Impairment".
During 2018, the Companywe early-adopted the provisions of ASU 2017-04 which simplified goodwill impairment testing by eliminating the requirement to determine the implied value of goodwill where a quantitative analysis indicates that the carrying value of the reporting unit exceeds its fair value.
The Company recorded an impairment loss of $4,390,590 for 2018 based on the analysis. The impairmentanalysis recognizes the shortening of remaining contract terms with customers without replacement and without further growth, as well as less than expected cost savings and, increasedoffset by profitability from the Company's initiativeour initiatives to optimize the long-term profitability of itsour various site operations, and a price peak of the Company's stock on the date of the business combination to which the goodwill relates (see also Note 5."Sale of Energy Producing Assets and Goodwill Impairment").
The discount rate, profitability assumptions, and terminal growth rate of this reporting unit were the material assumptions utilized in the discounted cash flow model used to estimate its fair value. The discount rate reflects an estimate of our weighted-average cost of capitalcapital.
28
TECOGEN INC.
The discounted cash flow analysis requires estimates, assumptions and judgments about future events. Our analysis uses our internally generated long-range plan. The long-range plan reflects managementmanagement's judgment and assumptions about future events.
We believe the assumptions used in our goodwill impairment analysis are appropriate and result in a reasonable estimate of the fair value of the reporting unit. However, given the economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions, made for purposes of our goodwill
impairment testing, will prove to be an accurate prediction of the future. If our assumptions regarding future performance are not achieved, we may be required to record additional goodwill impairment charges in future periods.
Results of Operations
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The following table sets forth for the periods indicated, the percentages of the net sales represented by certain items reflected in the Company'sour statements of operations.
| Years ended December 31, | |||||
| 2019 | 2018 | ||||
| Revenues | 100.0 | % | 100.0 | % | |
| Cost of Sales | 62.7 | 62.1 | |||
| Gross Profit | 37.3 | 37.9 | |||
| General and administrative | 31.1 | 30.1 | |||
| Selling | 8.0 | 7.4 | |||
| Research and development | 4.4 | 3.6 | |||
| Loss from operations | (13.9 | ) | (15.4 | ) | |
| Total other expense, net | (0.4 | ) | (0.6 | ) | |
| Consolidated net loss | (14.3 | ) | (16.2 | ) | |
| Income attributable to the noncontrolling interest | 0.3 | 0.3 | |||
| Net loss attributable to Tecogen Inc. | (14.1 | )% | (15.9 | )% | |
| Years ended December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues | 100.0 | % | 100.0 | % | |||||||
| Cost of Sales | 55.7 | 52.5 | |||||||||
| Gross Profit | 44.3 | 47.5 | |||||||||
| General and administrative | 43.6 | 40.1 | |||||||||
| Selling | 7.2 | 10.1 | |||||||||
| Research and development | 2.9 | 2.2 | |||||||||
| Total operating expenses | 53.7 | 52.5 | |||||||||
| Loss from operations | (9.4) | (5.0) | |||||||||
| Total other income (expense), net | (0.1) | 20.4 | |||||||||
| Consolidated net income (loss) | (9.6) | 15.3 | |||||||||
| (Income) loss attributable to the noncontrolling interest | (0.2) | (0.2) | |||||||||
| Net income (loss) attributable to Tecogen Inc. | (9.8) | % | 15.1 | % | |||||||
The following table presents revenue by segment and the change from the prior year for the years ended December 31, 20182022 and 2021:
| Years Ended | ||||||||||||||||||||||||||
| Revenues | December 31, 2022 | December 31, 2021 | Increase (Decrease) $ | Increase (Decrease) % | ||||||||||||||||||||||
| Product: | ||||||||||||||||||||||||||
| Cogeneration | $ | 5,279,569 | $ | 3,264,313 | $ | 2,015,256 | 61.7 | % | ||||||||||||||||||
| Chillers | 5,034,633 | 5,723,157 | (688,524) | (12.0) | % | |||||||||||||||||||||
| Engineered Accessories | 841,897 | 1,145,859 | (303,962) | (26.5) | % | |||||||||||||||||||||
| Total product revenue | 11,156,099 | 10,133,329 | 1,022,770 | 10.1 | % | |||||||||||||||||||||
| Service: | ||||||||||||||||||||||||||
| Service contracts | 12,060,404 | 11,586,763 | 473,641 | 4.1 | % | |||||||||||||||||||||
| Installations | 257 | 938,831 | (938,574) | (100.0) | % | |||||||||||||||||||||
| Total service revenue | 12,060,661 | 12,525,594 | (464,933) | (3.7) | % | |||||||||||||||||||||
| Energy production | 1,785,854 | 1,739,150 | 46,704 | 2.7 | % | |||||||||||||||||||||
| Total Revenue | $ | 25,002,614 | $ | 24,398,073 | $ | 604,541 | 2.5 | % | ||||||||||||||||||
Revenues
Revenues in 20192022 were $33,426,448$25,002,614 compared to $35,883,684$24,398,073 in 2018, a decrease2021, an increase of $2,457,236$604,541 or 6.8%. This decrease is the result of the decrease in energy production revenue2.5% due to the saleincreased Product revenues.
29
Products
Product revenues in 20192022 were $12,977,896$11,156,099 compared to $12,624,867$10,133,329 in 2018,2021, an increase of $353,029$1,022,770 or 2.8%10.1%. ThisThe revenue increase from the year ended December 31, 2018in 2022 compared to 2019 resulted from2021 is due primarily to an increase in cogeneration sales of $1,606,246$2,015,256, due to increased unit volume, which is partially offset by a $303,962 decrease in sales of engineered accessories and a decrease in chiller sales of $1,253,217.$688,524. Our product mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales in which revenue is recognized upon shipment.shipment and to some degree were impacted by COVID-19 as energy and other construction projects were delayed.
Services
Revenues derived from our service centers, including installation activities, in 20192022 were $17,307,718$12,060,661 compared to $16,859,291$12,525,594 for the same period in 2018,2021, a decrease of $464,933 or 3.7%. The decrease in revenue in 2022 is due primarily to a decrease in installation revenues of $938,574, offset partially by an increase of $448,427$473,641, or 2.7%.4.1%, in service contract revenues. Our service operation growsrevenues grow with the sales of installed systems, since the majority of our product sales are accompanied by a service contract or time and materials agreements. As a result our “fleet” of units being serviced by our service department grows with product sales. Our installation activity is likely to continue to remain low due to our strategy to focus on higher margin segments of our business.
Energy Production
Energy production revenues for the year endingended December 31, 20192022 were $3,140,834$1,785,854 compared to $6,399,526$1,739,150 for 2018, a decrease2021, an increase of $3,258,692,$46,704, or 50.9%2.7%. This reductionThe increase in Energy Productionenergy production revenue is the resultprimarily due to our share of the saleexcess revenue recognized in 2022 under the terms of severalthe maintenance and operating agreements entered into in 2019 with the purchaser of certain energy producing assets, offset partially by the impact of COVID-19 resulting in the permanent closure of some hotel properties and a change to remote work and learning environments, resulting in decreased energy usage. During 2022 three of our energy production sites at the the end of 2018 and the beginning of 2019 as discussed in Note 5. "Sale of Energy Producing Assets and Goodwill Impairment".ceased operations.
Cost of Sales
Cost of sales in 20192022 was $20,947,696$13,935,803 compared to $22,291,822$12,810,420 in 2018, a decrease2021, an increase of $1,344,126$1,125,383 or 6.0%8.8%. The increase in cost of sales is due to increased product revenue volume and the impact of inflation on our material costs. Our overall gross margin was 37.3%44.3% in 20192022 compared to 37.9%47.5% in 2018,2021, a decrease of 1.6%3.2%. The decrease
Products
Costs of sales for products in 2022 was $7,413,320 compared to $5,601,046 in 2021, an increase of $1,812,274, or 32.4%, due to increased product revenue volume and higher material costs. Our products gross margin is attributablewas 33.5% in 2022 compared to 44.7% in 2021, a decrease of 11.2%, due primarily to the reductionimpact of Energy Production revenue and its relatedinflation on our material costs.
Services
Cost of sales for services in 2022 was $5,525,493 compared to $6,134,953 in 2021, a decrease of $609,460, or 9.9%, due to decreased installation activities. Our services gross margin was 54.2% in 2022 compared to 51.0% in 2021, an increase of 3.2%, due to lower installation services revenue.
Energy Production
Cost of sales for energy production for the year endingended December 31, 20192022 was $1,753,980$996,990 compared to $3,801,154$1,074,421 in 2018, which represents2021, a decrease of $77,431. Energy production gross margin was 44.2% in 2022 compared to 38.2% in 2021, an increase of 6%, due primarily to the cost associated with energy revenues earned from May 19, 2017,recognition of our share of the day afterexcess revenue in 2022 under the acquisitionterms of ADGE. Includedthe maintenance and operating agreements entered into in Energy Production cost of sales is depreciation expense associated2019 with the purchaser of certain energy producing sites, net of amortization of favorable and unfavorable contract liability of $502,729.
assets.
Operating Expenses
Operating expenses decreasedincreased in 20192022 to $17,137,333$13,415,952 compared to $19,130,171$12,806,745 in 2018, a decrease2021, an increase of $1,992,838$609,207 or 10.4%4.8%. This decrease was mainly due to the reduction
30
TECOGEN INC.
| Years Ended | Increase (Decrease) | |||||||||||||||||||||||||
| December 31, 2022 | December 31, 2021 | $ | % | |||||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||
| General and administrative | 10,909,251 | 9,795,823 | $ | 1,113,428 | 11.4 | % | ||||||||||||||||||||
| Selling | 1,811,085 | 2,471,929 | (660,844) | (26.7) | % | |||||||||||||||||||||
| Research and development | 732,873 | 542,079 | 190,794 | 35.2 | % | |||||||||||||||||||||
| Gain on sale of assets | (41,931) | (10,486) | (31,445) | 299.9 | % | |||||||||||||||||||||
| Long-lived asset impairment | 4,674 | 7,400 | (2,726) | (36.8) | % | |||||||||||||||||||||
| Total | $ | 13,415,952 | $ | 12,806,745 | $ | 609,207 | 4.8 | % | ||||||||||||||||||
General and administrative costs of $410,698 and the reduction of the goodwill impairment charge of $697,392 when comparingexpenses increased $1,113,428 to $10,909,251 in the year ended December 31, 20192022 compared to 2018. See Note 9. "Goodwill"$9,795,823 in 2021 due primarily to a $311,710 increase in freight and other related costs, a $206,006 increase in payroll costs, a $150,000 provision for litigation, a $131,719 increase in stock-based compensation, a $124,403 increase in franchise taxes, a $122,497 increase in professional fees and a $76,370 increase in travel related expenses.
Selling expenses decreased in the accompanying consolidated financial statements for further discussion of the impairment charges. In addition, selling expenses increased in 2019year ended December 31, 2022 to $2,685,200$1,811,085 compared to $2,651,128$2,471,929 in 2018, an increase2021, a decrease of $34,072 or 1.3%. $660,844 due to a $189,691 decrease in payroll and related benefits and a $305,050 decrease in commissions.
Research and development expenses increased in 2019the year ended December 31, 2022 to $1,460,096$732,873 compared to $1,297,612 in 2018,$542,079, an increase of $162,484 or 12.5%. The$190,794 due to costs incurred to develop the hybrid-drive air-cooled chiller, which included a $96,172 increase in researchpayroll cost and a $92,270 increase in outside development expensescosts.
Gains on the sale of assets was due$41,931 in 2022 compared to the continued development of our fork truck emissions program, bringing the vehicle emissions program in-house, the re-introduction of our Tecofrost product line and other product developments. There has not been a change in focus with regards to research and development activities.
Impairment of long-lived assets decreased $2,726 to $4,674 in the first quarter of 2019year ended December 31, 2022 compared to $7,400 in connection with the sale of certain energy producing assets with no such gain recognized in 2018. See discussion in Note 5."Sale of Energy Producing Assets and Goodwill Impairment".2021.
Loss from Operations
Loss from operations for the year ended December 31, 20192022 was $4,658,581$2,349,141 compared to a loss of $5,538,309$1,219,092 in 2018,2021, an improvementincrease in the loss from operations of $879,728.$1,130,049. The changeincrease in the net loss from operations was mostlyis primarily due to the goodwill impairment of $3,693,198 recognizeda $520,842 decrease in 2019 as comparedgross margin due to the impairment charge of $4,390,590 for the year ended December 31, 2018, as discussedhigher products material costs and a $609,207 increase in Note 9."Goodwill" in the accompanying consolidated financial statements together with the additional costs associated with our continuing investment in research and development activities.operating expenses.
Other Expense,Income (Expense), net
Other expense, net, for the year ended December 31, 20192022 was $120,598$32,219 compared to $230,069income of $4,979,600 for the same period in 2018. Other2021, a decrease of $5,011,819, due primarily to the gain on extinguishment of debt as a result of the Paycheck Protection Program Loan forgiveness and the recognition of the Employee Retention Credit in 2021. For the year ended December 31, 2022, other income (expense) includes interest and other incomeexpense of $933,$34,713 and net of interest expense of $16,255, which is partially offset by unrealized income on debtmarketable securities of $101,851 in 2019.$18,749. For the same period in 2018,2021, other income, net interest and other income was $8,030 andexpense included Paycheck Protection Program Loan forgiveness of $3,773,014, Employee Retention Credits of $1,276,021, partially offset by other expense of $23,746, interest expense was $120,015. For the year ended December 31, 2019, other expense, net also includesof $14,238 and the unrealized loss on securities of $19,680 compared to $118,084 for the same period in 2018,$37,497, which represents the market value fluctuation of marketable equity securities as discussed in Note 15. "Fair value measurements".
Provision for State Income Taxes
The provision for state income taxes for the years ended December 31, 2022 and 2021 was $16,352 and $19,491, respectively, and represents estimated income tax payments, net of refunds, to various states.
Noncontrolling Interest
With the addition of ADGE, the Company hasAmerican DG Energy, we have income and losses attributable to the noncontrolling interest it haswe have in ADGE'sAmerican DG Energy's 51% owned subsidiary, ADGNY.ADGNY, LLC. The noncontrolling interest share of ADGNY profits and losses was a $85,354 lossincome of $50,215 for the year ended December 31, 20192022 and $92,594 for the periodincome of $45,017 in 2018.2021.
Net LossIncome (Loss) Attributable to Tecogen Inc
Net loss for the year ended December 31, 20192022 was $4,709,019$2,447,927 compared to lossa net income of $5,708,532$3,696,000 for the samecomparable period in 2018.2021. The decrease in lossnet income in 2022 was primarily due to the Paycheck Protection Program loan forgiveness and Employee Retention Credit contributing $3,773,014 and $1,276,021, respectively, in 2021 and was further impacted by the reduction in gross margin and the increase in operating expenses in 2022.
31
TECOGEN INC.
Net LossIncome (Loss) Per Share
Net lossincome per share for the year ended December 31, 20192022 was $0.19a loss of $0.10 compared to a $0.23income of $0.15 per share for the same period in 2018. The change in loss per share of $0.04 was mostly due to the decrease in operating expenses, mainly goodwill impairment, as discussed above.2021. The basic and diluted weighted average shares outstanding for the year ended December 31, 2019 was 24,839,957 compared to 24,815,926 for2022 were 24,850,261 and 24,850,261, respectively. For the same period in 2018.year ended December 31, 2021, basic and diluted shares were 24,850,261 and 25,115,518, respectively.
Liquidity and Capital Resources
The following table presents a summary of our net cash flows from operating, investing, and financing activities:
| Years End | ||||||||||||||
| Cash Provided by (Used in) | December 31, 2022 | December 31, 2021 | ||||||||||||
| Operating activities | $ | (1,351,929) | $ | 465,033 | ||||||||||
| Investing activities | (348,565) | (215,058) | ||||||||||||
| Financing activities | — | 1,874,269 | ||||||||||||
| Change in cash and cash equivalents | $ | (1,700,494) | $ | 2,124,244 | ||||||||||
Consolidated working capital at December 31, 20192022 was $14,463,579,$14,344,288, compared to $13,170,252$16,193,881 at December 31, 2018, an increase2021, a decrease of $1,293,327$1,849,593 or 9.8%11.4%. Included in working capital were cash and cash equivalents of $877,676$1,913,969 at December 31, 2019,2022, compared to $272,552$3,614,463 at December 31, 2018. This increase2021, a decrease of $1,700,494 or 47.0%. The decrease in consolidated working capital and cash and cash equivalents is primarily due to the proceeds receivedsecond draw Paycheck Protection Program loan forgiveness and positive cash flow from operations in 2021.
For the sale of ADGE assets as discussed in Note 5."Sale of Energy Producing Assets and Goodwill Impairment".
2021.
Accounts payable decreased by $1,881,574$246,401 from December 31, 20182021 to December 31, 2019. The decrease in accounts payable is related to timing of manufacturing and inventory purchase activities.2022. Accrued expenses from operations increaseddecreased by $380,993$109,282 as of December 31, 20192022 compared to December 31, 2018.2021 due to lower operating expenses. Deferred revenues from operations decreased by $115,223$678,758 as of December 31, 20192022 as compared to December 31, 2018.2021.
During 20192022, our cash flows providedused by investing activities were $4,706,469,$348,565, and included purchases of property and equipment of $95,643, expenditures$314,879, distributions to non-controlling interests of $76,836, and capital outlays related to intangible assets such as patents and product certificationscertification of $110,683, distributions to non-controlling interest holders$29,505.
During 2021, our cash flows from financing activities were $1,874,269, consisting of ADGNYthe receipt of $84,505 and offset by proceeds from the sale of ADG site assets of $5,000,000.Second Draw Paycheck Protection Program loan.
At December 31, 2019,2022 and 2021, we had cash and cash equivalents of $1,913,969 and $3,614,463, a decrease of $1,700,494 or 47.0%. During the year ended December 31, 2022, our commitments included various leasesrevenues were negatively impacted due to customer order delays or deferrals; service delays due to customer facility closures, in some cases for officeextended periods and warehouse facilities of $2,487,177a reduction in our energy production revenues, due to business closures and increased remote work and learning environments. The extent to which the coronavirus pandemic 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 paid over several years through 2024. The source of funds to fulfill these commitments are expected to be provided by operations.predicted.
Based on our current operating plan, we believe existing resources, including cash and cash flows from operations together with our revolving line of credit, will be sufficient to meet our working capital requirements for the next twelve months. As we continueIn order to grow our business and fund the development of our hydrid-drive air-cooled chiller and the relocation of our primary facility, we expect that our cash requirements will increase. As a result,increase and we may need to raise additional capital through a debt financing or an equity offeringfinancing to meet our operatingneed for capital to fund operations and capital needs for future growth.
Contractual Obligations and Commitments
We are obligated under operating leases for our Waltham, Massachusetts headquarters through March 31, 2024, and our eleven leased service centers through January 2031. Future minimum lease commitments under non-cancellable operating leases as of December 31, 2022 were $1,311,041. See Note 13. "Leases.”
32
TECOGEN INC.
Seasonality
We expect that the majority of our heating systems sales will be operational for the winter and the majority of our chilling systems sales will be operational for the summer. Our cogeneration sales are not generally affected by the seasons. Our service team does experience higher demand in the warmer months when cooling is required. These chillerChiller units for space conditioning applications are generally shut down in the winter and started up again in the spring. This chiller “busy season” for the service team generally runs from May through the end of September. Chillers in indoor cultivation and other process cooling applications run year round.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Disclosure in response to this item is not required of a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated from Item 15 and pages F-1 through F-26F-25 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
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 AccountingPrincipal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of December 31, 2019, (the "Evaluation2022 ("Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective due to the material weakness in financial reporting relating to a small number of employees dealing with general controls over information technology. At the present time, ourOur management has decided that the expense associated with acontinued implementation of new systemsystems is justified and is in the process of implementing a system which willcontinues to implement systems to put the proper control procedures in place to remediate this weakness.
For these purposes, the term disclosure controls and procedures of an issuer means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s 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 its principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles;
•provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, the assessment of the effectiveness of internal
33
TECOGEN INC.
control over financial reporting was made as of a specific date. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and Chief AccountingPrincipal Financial Officer, conducted an evaluation of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion regarding this evaluation. Based on this evaluation, management concluded that the Company’sour internal control over financial reporting was not effective as of December 31, 2019.2022.
At December 31, 2019, the Company2022, we employed 8885 active full-time employees and 51 part-time employees. Considerable progress has been made during 2018 with the addition of competent staff, competent consultants and changes in processes, however, dueDue to the small number of employees dealing with general controls over information technology security and user access, management believes this constitutes a material weakness in financial reporting. At this time, management has decided that the expense associated with a new system is justified and is in the process of implementing a system which will put the proper control procedures in place to remediate these weaknesses.
Our management, including our Chief Executive Officer and Chief AccountingPrincipal Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
This annual report does not include an attestation report of the Company’sour registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’sour registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Companyus to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There has been no change to the Company’sour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the fourth quarter of the fiscal year ended December 31, 2019,2022 that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.
Not applicable.
34
TECOGEN INC.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2023 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2019.2022.
Item 11. Executive Compensation.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2023 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2019.2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2023 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2019.2022.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2023 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2019.2022.
Item 14. Principal Accountant Fees and Services.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2023 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2019.2022.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following are filed as part of this Annual Report on Form 10-K.
(a) Index to Financial Statements and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 20192022 and 20182021
Consolidated Statements of Operations for the years ended December 31, 20192022 and 20182021
Consolidated Statements of Stockholders' Equity for the years ended December 31, 20192022 and 20182021
Consolidated Statements of Cash Flows for the years ended December 31, 20192022 and 20182021
Notes to Audited Consolidated Financial Statements
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(b) Exhibits
The exhibits are listed in the Exhibit Index attached hereto and incorporated by reference herein.
Item 16. Form 10-K Summary.
The Company has determined not to include a summary of the information permitted by Item 16 of the Form 10-K.
35
TECOGEN INC.
EXHIBIT INDEX
| Exhibit Number | Description | |||||||
| 2.1 | ||||||||
| 2.2 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8+ | ||||||||
36
TECOGEN INC.
| 10.23 | ||||||||
| 10.24 | ||||||||
| 10.25+ | ||||||||
| 10.26 | ||||||||
| 10.27 | ||||||||
| 10.28+ | ||||||||
| 10.29 | ||||||||
| 10.30 | ||||||||
| 21.1 | ||||||||
| 23.1* | ||||||||
| 24.1* | Power of Attorney (included on Signature pages of this Annual Report on Form 10-K) | |||||||
| 31.1* | ||||||||
| 101.INS* | XBRL Instance Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase | |||||||
| * | Filed herewith. | |||||||
37
TECOGEN INC.
| # | Confidential Treatment has been granted for portions of this document. The confidential portions were omitted and filed separately, on a confidential basis, with the Securities and Exchange Commission. | |||||||
| + | Management contract or compensatory plan or agreement. | |||||||
38
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, thereunto duly authorized.
| TECOGEN INC. | ||||||||
| (Registrant) | ||||||||
| Dated: | By: | /s/ | ||||||
| Chief Executive and Financial Officer | ||||||||
| (Principal Executive | ||||||||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Benjamin Locke and Bonnie J. Brown, or either of them, eachAbinand Rangesh, with the power of substitution and re-substitution, as his or her attorney-in-fact and agents,agent, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for the year ended December 31, 2019,2022, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-factattorney-in-fact and agents,agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-factattorney-in-fact and agents, or any of them or theiragent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Angelina M. Galiteva | Director, Chairperson of the Board | March 23, 2023 | ||||||||||||
| Angelina M. Galiteva | ||||||||||||||
| /s/ John N. Hatsopoulos | Lead Director | March 23, 2023 | ||||||||||||
| John N. Hatsopoulos | ||||||||||||||
| /s/ Abinand Rangesh | Director and Chief Executive and Financial Officer | March 23, 2023 | ||||||||||||
| Abinand Rangesh | (Principal Executive and Financial Officer) | |||||||||||||
| /s/ Ahmed F. Ghoniem | Director | March 23, 2023 | ||||||||||||
| Ahmed F. Ghoniem | ||||||||||||||
| /s/ Earl R. Lewis III | Director | March 23, 2023 | ||||||||||||
| Earl R. Lewis III | ||||||||||||||
| /s/ Fred Holubow | Director | March 23, 2023 | ||||||||||||
| Fred Holubow | ||||||||||||||
| /s/ John | March | |||||||||||||
| John | ||||||||||||||
Contents
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7
Notes to the consolidated financial statements F-9
F- 1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Tecogen Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tecogen Inc. (the “Company”) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, stockholders' equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
We have determined that there are no critical audit matters in the current period.
/s/ WOLF & COMPANY, P.C.
PCAOB ID 392
We have served as the Company's auditor since 2014.
Boston, Massachusetts
March 12, 202023, 2023
F- 2
TECOGEN INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 20192022 and 2018
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 877,676 | $ | 272,552 | |||
| Accounts receivable, net | 14,569,397 | 14,176,452 | |||||
| Unbilled revenue | 5,421,811 | 4,893,259 | |||||
| Inventory, net | 6,405,229 | 6,294,862 | |||||
| Due from related party | — | 9,405 | |||||
| Prepaid and other current assets | 635,034 | 722,042 | |||||
| Total current assets | 27,909,147 | 26,368,572 | |||||
| Property, plant and equipment, net | 3,465,948 | 11,273,115 | |||||
| Right of use assets | 2,173,951 | — | |||||
| Intangible assets, net | 1,593,781 | 2,893,990 | |||||
| Goodwill | 5,281,867 | 8,975,065 | |||||
| Other assets | 691,941 | 393,651 | |||||
| TOTAL ASSETS | $ | 41,116,635 | $ | 49,904,393 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Revolving line of credit, bank | $ | 2,402,384 | $ | 2,009,435 | |||
| Accounts payable | 5,271,756 | 7,153,330 | |||||
| Accrued expenses | 2,599,366 | 1,528,014 | |||||
| Deferred revenue | 2,635,619 | 2,507,541 | |||||
| Lease obligations, current | 536,443 | — | |||||
| Total current liabilities | 13,445,568 | 13,198,320 | |||||
| Long-term liabilities: | |||||||
| Deferred revenue, net of current portion | 145,464 | 2,375,700 | |||||
| Lease obligations, long-term | 1,637,508 | — | |||||
| Unfavorable contract liability, net | 2,534,818 | 6,292,599 | |||||
| Total liabilities | 17,763,358 | 21,866,619 | |||||
| Commitments and contingencies (Note 11) | |||||||
| Stockholders’ equity: | |||||||
| Tecogen Inc. stockholders’ equity: | |||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 24,849,261 and 24,824,746 issued and outstanding at December 31, 2019 and 2018, respectively | 24,849 | 24,825 | |||||
| Additional paid-in capital | 56,622,285 | 56,427,928 | |||||
| Accumulated deficit | (33,379,114 | ) | (28,670,095 | ) | |||
| Total Tecogen Inc. stockholders’ equity | 23,268,020 | 27,782,658 | |||||
| Noncontrolling interest | 85,257 | 255,116 | |||||
| Total stockholders’ equity | 23,353,277 | 28,037,774 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 41,116,635 | $ | 49,904,393 | |||
| 2019 | 2018 | ||||||
| Revenues | |||||||
| Products | $ | 12,977,896 | $ | 12,624,867 | |||
| Services | 17,307,718 | 16,859,291 | |||||
| Energy production | 3,140,834 | 6,399,526 | |||||
| Total revenues | 33,426,448 | 35,883,684 | |||||
| Cost of sales | |||||||
| Products | 8,385,574 | 7,797,591 | |||||
| Services | 10,808,142 | 10,693,077 | |||||
| Energy production | 1,753,980 | 3,801,154 | |||||
| Total cost of sales | 20,947,696 | 22,291,822 | |||||
| Gross profit | 12,478,752 | 13,591,862 | |||||
| Operating expenses | |||||||
| General and administrative | 10,380,143 | 10,790,841 | |||||
| Selling | 2,685,200 | 2,651,128 | |||||
| Research and development | 1,460,096 | 1,297,612 | |||||
| Gain on sale of assets | (1,081,304 | ) | — | ||||
| Goodwill impairment | 3,693,198 | 4,390,590 | |||||
| Total operating expenses | 17,137,333 | 19,130,171 | |||||
| Loss from operations | (4,658,581 | ) | (5,538,309 | ) | |||
| Other income (expense) | |||||||
| Interest and other income | 933 | 8,030 | |||||
| Interest expense | (101,851 | ) | (120,015 | ) | |||
| Unrealized loss on investment securities | (19,680 | ) | (118,084 | ) | |||
| Total other expense, net | (120,598 | ) | (230,069 | ) | |||
| Loss before income taxes | (4,779,179 | ) | (5,768,378 | ) | |||
| State income tax provision | 15,194 | 32,748 | |||||
| Consolidated net loss | (4,794,373 | ) | (5,801,126 | ) | |||
| Loss attributable to the noncontrolling interest | 85,354 | 92,594 | |||||
| Net loss attributable to Tecogen Inc. | $ | (4,709,019 | ) | $ | (5,708,532 | ) | |
| Net loss per share - basic and diluted | $ | (0.19 | ) | $ | (0.23 | ) | |
| Weighted average shares outstanding - basic and diluted | 24,839,957 | 24,815,926 | |||||
| Tecogen Inc. Stockholders | |||||||||||||||||||||||||||
| Common Stock Shares | Common Stock $.001 Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Noncontrolling Interest | Total | |||||||||||||||||||||
| Balance at December 31, 2017 | 24,766,892 | $ | 24,767 | $ | 56,176,330 | $ | (165,317 | ) | $ | (22,796,246 | ) | $ | 455,611 | $ | 33,695,145 | ||||||||||||
| Exercise of stock options | 57,854 | 58 | 72,867 | — | — | — | 72,925 | ||||||||||||||||||||
| Reclassification of Accumulated Other Comprehensive Loss | — | — | — | 165,317 | (165,317 | ) | — | — | |||||||||||||||||||
| Stock issuance costs | — | — | (2,457 | ) | — | — | — | (2,457 | ) | ||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | (107,901 | ) | (107,901 | ) | ||||||||||||||||||
| Stock-based compensation | — | — | 181,188 | — | — | — | 181,188 | ||||||||||||||||||||
| Net loss | — | — | — | — | (5,708,532 | ) | (92,594 | ) | (5,801,126 | ) | |||||||||||||||||
| Balance at December 31, 2018 | 24,824,746 | $ | 24,825 | $ | 56,427,928 | $ | — | $ | (28,670,095 | ) | $ | 255,116 | $ | 28,037,774 | |||||||||||||
| Exercise of stock options | 24,515 | 24 | 33,593 | — | — | — | 33,617 | ||||||||||||||||||||
| Stock issuance costs | — | — | (2,700 | ) | — | — | — | (2,700 | ) | ||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | (84,505 | ) | (84,505 | ) | ||||||||||||||||||
| Stock-based compensation | — | — | 163,464 | — | — | — | 163,464 | ||||||||||||||||||||
| Net loss | — | — | — | — | (4,709,019 | ) | (85,354 | ) | (4,794,373 | ) | |||||||||||||||||
| Balance at December 31, 2019 | 24,849,261 | $ | 24,849 | $ | 56,622,285 | $ | — | $ | (33,379,114 | ) | $ | 85,257 | $ | 23,353,277 | |||||||||||||
| ASSETS | 2022 | 2021 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,913,969 | $ | 3,614,463 | |||||||
| Accounts receivable, net | 6,714,122 | 8,482,286 | |||||||||
| Employee retention credit receivable | 713,269 | 1,276,021 | |||||||||
| Unbilled revenue | 1,805,330 | 3,258,189 | |||||||||
| Inventory, net | 10,482,729 | 7,764,989 | |||||||||
| Prepaid and other current assets | 401,189 | 578,801 | |||||||||
| Total current assets | 22,030,608 | 24,974,749 | |||||||||
| Property, plant and equipment, net | 1,407,720 | 1,782,944 | |||||||||
| Right of use assets | 1,245,549 | 1,869,210 | |||||||||
| Intangible assets, net | 997,594 | 1,181,023 | |||||||||
| Goodwill | 2,406,156 | 2,406,156 | |||||||||
| Other assets | 165,230 | 148,140 | |||||||||
| TOTAL ASSETS | $ | 28,252,857 | $ | 32,362,222 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | 3,261,952 | 3,508,354 | |||||||||
| Accrued expenses | 2,384,447 | 2,343,728 | |||||||||
| Deferred revenue | 1,115,627 | 1,957,752 | |||||||||
| Lease obligations | 687,589 | 641,002 | |||||||||
| Unfavorable contract liabilities | 236,705 | 330,032 | |||||||||
| Total current liabilities | 7,686,320 | 8,780,868 | |||||||||
| Long-term liabilities: | |||||||||||
| Deferred revenue, net of current portion | 371,823 | 208,456 | |||||||||
| Lease obligations, net of current portion | 623,452 | 1,315,275 | |||||||||
| Unfavorable contract liability, net of current portion | 583,512 | 929,474 | |||||||||
| Total liabilities | 9,265,107 | 11,234,073 | |||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261 and 24,850,261 issued and outstanding at December 31, 2022 and 2021, respectively | 24,850 | 24,850 | |||||||||
| Additional paid-in capital | 57,351,008 | 57,016,859 | |||||||||
| Accumulated deficit | (38,281,548) | (35,833,621) | |||||||||
| Total Tecogen Inc. stockholders’ equity | 19,094,310 | 21,208,088 | |||||||||
| Noncontrolling interest | (106,560) | (79,939) | |||||||||
| Total stockholders’ equity | 18,987,750 | 21,128,149 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 28,252,857 | $ | 32,362,222 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
TECOGEN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
For the Years Ended December 31, 20192022 and 20182021
| CASH FLOWS FROM OPERATING ACTIVITIES: | 2019 | 2018 | ||||||
| Consolidated net loss | $ | (4,794,373 | ) | $ | (5,801,126 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation, accretion and amortization, net | 437,102 | 789,123 | ||||||
| Gain on contract termination | — | (124,733 | ) | |||||
| (Gain) loss on sale of assets | (1,081,304 | ) | 22,088 | |||||
| Provision for losses on accounts receivable | 48,000 | 4,395 | ||||||
| Stock-based compensation | 163,464 | 181,188 | ||||||
| Goodwill impairment | 3,693,198 | 4,390,590 | ||||||
| Non-cash interest expense | 43,669 | 32,225 | ||||||
| Changes in operating assets and liabilities, net of effects of acquisition: | ||||||||
| (Increase) decrease in: | ||||||||
| Accounts receivable | (440,945 | ) | (4,467,939 | ) | ||||
| Unbilled revenue | (528,452 | ) | (697,586 | ) | ||||
| Inventory, net | (110,367 | ) | (1,164,057 | ) | ||||
| Due from related party | 9,405 | 576,087 | ||||||
| Prepaid expenses and other current assets | (9,545 | ) | 49,484 | |||||
| Other non-current assets | (298,290 | ) | 113,284 | |||||
| Increase (decrease) in: | ||||||||
| Accounts payable | (1,881,574 | ) | 1,173,979 | |||||
| Accrued expenses and other current liabilities | 380,993 | 111,038 | ||||||
| Deferred revenue | (115,223 | ) | 1,006,893 | |||||
| Interest payable, related party | — | (52,265 | ) | |||||
| Net cash used in operating activities | (4,484,242 | ) | (3,857,332 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | (95,643 | ) | (828,086 | ) | ||||
| Proceeds on sale of property and equipment | 5,000,000 | 2,003,606 | ||||||
| Purchases of intangible assets | (110,683 | ) | (226,847 | ) | ||||
| Cash acquired in acquisition | — | 442,746 | ||||||
| Expenses associated with asset acquisition | — | (2,457 | ) | |||||
| Payment of stock issuance costs | (2,700 | ) | — | |||||
| Distributions to non-controlling interest | (84,505 | ) | (107,901 | ) | ||||
| Net cash provided by investing activities | 4,706,469 | 1,281,061 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds on revolving line of credit, net of payments | 349,280 | 2,097,837 | ||||||
| Payments for debt issuance costs | — | (145,011 | ) | |||||
| Payments made on loan due to related party | — | (850,000 | ) | |||||
| Proceeds from exercise of stock options | 33,617 | 72,925 | ||||||
| Net cash provided by financing activities | 382,897 | 1,175,751 | ||||||
| Change in cash and cash equivalents | 605,124 | (1,400,520 | ) | |||||
| Cash and cash equivalents, beginning of the year | 272,552 | 1,673,072 | ||||||
| Cash and cash equivalents, end of the year | $ | 877,676 | $ | 272,552 | ||||
| Cash paid for interest | $ | 51,888 | $ | 140,055 | |||
| Cash paid for taxes | $ | 35,398 | $ | 32,748 | |||
| 2022 | 2021 | ||||||||||
| Revenues | |||||||||||
| Products | $ | 11,156,099 | $ | 10,133,329 | |||||||
| Services | 12,060,661 | 12,525,594 | |||||||||
| Energy production | 1,785,854 | 1,739,150 | |||||||||
| Total revenues | 25,002,614 | 24,398,073 | |||||||||
| Cost of sales | |||||||||||
| Products | 7,413,320 | 5,601,046 | |||||||||
| Services | 5,525,493 | 6,134,953 | |||||||||
| Energy production | 996,990 | 1,074,421 | |||||||||
| Total cost of sales | 13,935,803 | 12,810,420 | |||||||||
| Gross profit | 11,066,811 | 11,587,653 | |||||||||
| Operating expenses | |||||||||||
| General and administrative | 10,909,251 | 9,795,823 | |||||||||
| Selling | 1,811,085 | 2,471,929 | |||||||||
| Research and development | 732,873 | 542,079 | |||||||||
| Gain on sale of assets | (41,931) | (10,486) | |||||||||
| Long-lived asset impairment | 4,674 | 7,400 | |||||||||
| Total operating expenses | 13,415,952 | 12,806,745 | |||||||||
| Loss from operations | (2,349,141) | (1,219,092) | |||||||||
| Other income (expense) | |||||||||||
| Interest and other income (expense) | (34,713) | (23,746) | |||||||||
| Interest expense | (16,255) | (14,238) | |||||||||
| Gain on extinguishment of debt | — | 3,773,014 | |||||||||
| Employee Retention Credit | — | 1,276,021 | |||||||||
| Gain on the sale of investments | — | 6,046 | |||||||||
| Unrealized gain (loss) on investment securities | 18,749 | (37,497) | |||||||||
| Total other income (expense), net | (32,219) | 4,979,600 | |||||||||
| Income (loss) before income taxes | (2,381,360) | 3,760,508 | |||||||||
| State income tax provision | 16,352 | 19,491 | |||||||||
| Consolidated net income (loss) | (2,397,712) | 3,741,017 | |||||||||
| Income attributable to the noncontrolling interest | (50,215) | (45,017) | |||||||||
| Net income (loss) attributable to Tecogen Inc. | $ | (2,447,927) | $ | 3,696,000 | |||||||
| Net income (loss) per share - basic | $ | (0.10) | $ | 0.15 | |||||||
| Weighted average shares outstanding - basic | 24,850,261 | 24,850,261 | |||||||||
| Net income (loss) per share - diluted | $ | (0.10) | $ | 0.15 | |||||||
| Weighted average shares outstanding -diluted | 24,850,261 | 25,115,518 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
TECOGEN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2022 and 2021
| Common Stock Shares | Common Stock $.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 24,850,261 | $ | 24,850 | $ | 56,814,428 | $ | (39,529,621) | $ | (42,323) | $ | 17,267,334 | ||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | (82,633) | (82,633) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 202,431 | — | — | 202,431 | |||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 3,696,000 | 45,017 | 3,741,017 | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 24,850,261 | 24,850 | 57,016,859 | (35,833,621) | (79,939) | 21,128,149 | |||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | (76,836) | (76,836) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 334,149 | — | — | 334,149 | |||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | (2,447,927) | 50,215 | (2,397,712) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 24,850,261 | $ | 24,850 | $ | 57,351,008 | $ | (38,281,548) | $ | (106,560) | $ | 18,987,750 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
TECOGEN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022 and 2021
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Consolidated net income (loss) | $ | (2,397,712) | $ | 3,741,017 | |||||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation, accretion and amortization, net | 428,348 | 469,854 | |||||||||
| Gain on the extinguishment of debt | — | (3,773,014) | |||||||||
| Employee retention credit | — | (1,276,021) | |||||||||
| Long-lived asset impairment | 4,674 | 7,400 | |||||||||
| Gain on sale of assets | (41,931) | (10,486) | |||||||||
| Provision for doubtful accounts receivable | (70,987) | 131,206 | |||||||||
| Gain on the sale of investments | — | (6,046) | |||||||||
| Provision for litigation | 150,000 | — | |||||||||
| Provision for inventory reserve | 107,000 | — | |||||||||
| Unrealized (gain) loss on investment securities | (18,749) | 37,497 | |||||||||
| Stock-based compensation | 334,149 | 202,431 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| (Increase) decrease in: | |||||||||||
| Accounts receivable | 2,401,904 | 57,618 | |||||||||
| Inventory, net | (2,824,740) | (596,393) | |||||||||
| Unbilled revenue | 1,452,860 | 1,009,060 | |||||||||
| Prepaid expenses and other current assets | 177,612 | 18,343 | |||||||||
| Other non-current assets | 625,320 | (231,478) | |||||||||
| Increase (decrease) in: | |||||||||||
| Accounts payable | (246,401) | (674,750) | |||||||||
| Accrued expenses | (109,282) | 374,802 | |||||||||
| Deferred revenue | (678,758) | 756,722 | |||||||||
| Other current liabilities | (645,236) | 227,271 | |||||||||
| Net cash (used in) provided by operating activities | (1,351,929) | 465,033 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | (314,879) | (91,451) | |||||||||
| Proceeds on sale of property and equipment | 72,655 | 10,486 | |||||||||
| Purchases of intangible assets | (29,505) | (63,097) | |||||||||
| Proceeds from sale of investments | — | 11,637 | |||||||||
| Distributions to noncontrolling interest | (76,836) | (82,633) | |||||||||
| Net used in investing activities | (348,565) | (215,058) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from note payable | — | 1,874,269 | |||||||||
| Net cash provided by financing activities | — | 1,874,269 | |||||||||
| Change in cash and cash equivalents | (1,700,494) | 2,124,244 | |||||||||
| Cash and cash equivalents, beginning of the year | 3,614,463 | 1,490,219 | |||||||||
| Cash and cash equivalents, end of the year | $ | 1,913,969 | $ | 3,614,463 | |||||||
Supplemental disclosure of cash flow information:
| Cash paid for interest | $ | 14,597 | $ | 241 | |||||||
| Cash paid for taxes | $ | 16,352 | $ | 19,491 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20192022 and 20182021
Note 1 – Nature of business and operations
Tecogen Inc. ("Tecogen"(together with its subsidiaries "we", "our", "us" or the “Company”"Tecogen"), a Delaware Corporation, was incorporated on NovemberSeptember 15, 2000, and acquired the assets and liabilities of the Tecogen Products division of Thermo Power Corporation. The Company producesWe produce commercial and industrial, natural-gas-fueled engine-driven, combined heat and power (CHP) products that reduce energy costs, decrease greenhouse gas emissions and alleviate congestion on the national power grid. Tecogen’sOur products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The majority of the Company’sour customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast.
Note 2 – Summary of significant accounting policies
Principles of Consolidation and Basis of Presentation
The financial statements have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board, or FASB. The FASB sets generally accepted accounting principles, or GAAP, to ensure financial condition, results of operations, and cash flows are consistently reported. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, or ASC. The CompanyWe adopted the presentation requirements for noncontrolling interests required by ASC 810 Consolidation.Consolidation. Under ASC 810, earnings or losses attributed to the noncontrolling interests are reported as part of the consolidated earnings and not a separate component of income or expense.
The accompanying consolidated financial statements include our accounts and the accounts of the Company and entities in which it haswe have a controlling financial interest. Those entities include the Company'sour wholly-owned subsidiary, ADGEAmerican DG Energy Inc. ("ADGE"), Tecogen CHP Solutions, Inc., and a joint venture, American DG New York, LLC, or ADGNY, in which ADGE holds a 51.0% interest. As the controlling partner, all major decisions in respect of ADGNY are made by ADGE in accordance with the joint venture agreement. The interests in the individual underlying energy system projects in ADGNY vary between ADGE and its joint venture partner. The noncontrolling interest and distributions are determined based on economic ownership. The economic ownership is calculated by the amount invested by the Companyus and the noncontrolling partner in each site. Each quarter, the Company calculateswe calculate a year-to-date profit/loss for each site that is part of ADGNY and the noncontrolling interest percent of economic ownership in each site is applied to determine the noncontrolling interest share in the profit/loss. The same methodology is used to determine quarterly distributions of available cash to the noncontrolling interest partner. On the Company’sour balance sheet, noncontrolling interest represents the joint venture partner’s investment in ADGNY, plus its share of after taxafter-tax profits less any cash distributions. ADGE owned a controlling 51.0% legal and economic interest in ADGNY as of December 31, 2019.2022.
Investments in partnerships and companies in which the Company doeswe do not have a controlling financial interest but where we have significant influence, if any, are accounted for under the equity method.
Noncontrolling interests in the net assets and operations of ADGNY are reflected in the caption “Noncontrolling interest” in the accompanying consolidated financial statements. All intercompany transactions have been eliminated.
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 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.
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.
F- 7
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20192022 and 20182021
Section 2301(c)(2)(B) of the CARES Act permits an employer to use an alternative quarter to calculate gross receipts and the employer may determine if the decline in gross receipt tests is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. Accordingly, for the first quarter of 2021, we elected to use our gross receipts for the fourth calendar quarter of 2020 compared to our gross receipts for the fourth calendar quarter of 2019. 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 that were applied to the Paycheck Protection Loan Second Draw, were eligible for the ERC. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the ERC.
Accounting Standards Codification 105, "Generally Accepted Accounting Principles," describes the decision-making framework when no guidance exists in US GAAP for a particular transaction. Specifically, ASC 105-10-05-2 instructs companies to look for guidance for a similar transaction within US GAAP and apply that guidance by analogy. As such, forms of government assistance, such as the ERC, provided to business entities would not be within the scope of ASC 958, but it may be applied by analogy under ASC 105-10-05-2. We accounted for the Employee Retention Credit as a government grant in accordance with Accounting Standards Update 2013-06, Not-for-Profit Entities (Topic 958) ("ASU 2013-06") by analogy under ASC 105-10-05-2.Under this standard, government grants are recognized when the conditions on which they depend are substantially met. The conditions for recognition of the ERC include, but are not limited to:
•An entity has been adversely affected by the COVID-19 pandemic;
•We have not used qualifying payroll for both the Paycheck Protection Program and the ERC;
•We incurred payroll costs to retain employees; and,
•The process for filing for the credit is an administrative task and not a barrier to receiving the credits.
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. A current receivable in the amount of $713,269 is included in our condensed consolidated balance sheet as of December 31, 2022. 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. We expect to receive the remaining balance of $46,148 in the second quarter of 2023.
Concentration of Credit Risk
There was one customer who represented 12% of revenues for the year ended December 31, 2022 and no customer who represented more than 10% of revenues for the year ended December 31, 2019 and no customers who represented more than 10% of revenues for the year ended December 31, 2018. The Company has approximately five hundred customers who represented 100% of the revenues for the year ended December 31, 2019.2021. There was one customer who represented more than 10%15% of the accounts receivable balance as of December 31, 20192022, and two customers who represented 14% and 12%, and onerespectively, of the accounts receivable balance as of December 31, 2018.
2021.
Cash and Cash Equivalents
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off against the allowance when identified. At December 31, 20192022 and 2018,2021, the allowance for doubtful accounts was $75,000$361,197 and $26,800,$549,206, respectively.
F- 8
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
Inventory
Raw materials, work in process, and finished goods inventories are stated at the lower of cost, as determined by the average cost method, or net realizable value. The CompanyWe periodically reviewsreview inventory quantities on hand for excess and/or obsolete inventory based primarily on historical usage, as well as based on estimated forecast of product demand. Any reserves that result from this review are charged to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful life of the asset, which range from three to fifteen years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the term of the related leases. Expenditures for maintenance and repairs are expensed currently, while renewals and betterments that materially extend the life of an asset are capitalized.
We review our property, plant and equipment for potential impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable or that the useful lives of the assets are no longer appropriate. We evaluate the recoverability of our long-lived assets when impairment is indicated by comparing the net book value of the asset group to the estimated future undiscounted cash flows attributable to such assets. f the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. If impairment is indicated, the asset is written down to its estimated fair value.
Intangible Assets
Intangible assets subject to amortization include costs incurred by the Companyus to acquire product certifications, certain patent costs and developed technologies. These costs are amortized on a straight-line basis over the estimated economic life of the intangible asset. Indefinite life intangible assets such as trademarks are recorded at cost and not amortized. The Company reviews intangible assets for impairment when the circumstances warrant.
The favorable contract asset which relates to existing ADGE customer contracts is more fully described in Note 7. "Intangible assets and liabilities other than goodwill".
Impairment of Long-lived Assets
Long-lived assets, including intangible assets and property, plant and equipment, are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. Management determined that noan impairment of $4,674 and $7,400 of long-lived assets existed as of December 31, 2019.
For the years ended December 31, 2022 and 2018
December 31, 2021, we recorded impairment of long-lived assets as follows:| Years Ended | December 31, 2022 | December 31, 2021 | |||||||||
| Energy production asset impairment (1) | $ | 156,655 | $ | — | |||||||
| Energy production reversal of unfavorable contract liability (2) | (151,981) | — | |||||||||
| Patent applications abandonment | — | 7,400 | |||||||||
| Long-lived asset impairment | $ | 4,674 | $ | 7,400 | |||||||
| (1) - See Note 8."Property, plant and equipment" | |||||||||||
| (2) - See Note 7."Intangible Assets and Liabilities Other Than Goodwill" | |||||||||||
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired.
Impairment testing for goodwill is performed annually, generally in the fourth fiscal quarter, or more frequently if impairment indicators are present.
To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment. However, we may elect to bypass the qualitative assessment and perform an impairment test even if no indications of a potential impairment
F- 9
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
exist. The impairment test for goodwill is performed at the reporting unit level and compares the fair value of the reporting unit (calculated using a discounted cash flow method) to its carrying value, including goodwill. The discount rate represents our estimate of the weighted-average cost of capital, or expected return, that a marketplace participant would have required as of the valuation date. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess carrying value over fair value, limited to the total amount of goodwill of that reporting unit. Our assessment in 20192022 indicated that the carrying value of our energy production reporting unit did not exceed its fair value and therefore resulted in an impairment of goodwill was not impaired. (see Note 9."Goodwill").
Leases
On January 1, 2019, the Companywe adopted the guidance under ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC("ASC 842”) under the cumulative-effect method of transition where comparative information has not been restated and continues to be reported under the standards in effect for those periods. The adoption did not result in any cumulative-effect adjustment to beginning retained earnings. The Company elected certain practical expedients upon adoption and therefore has not reassessed whether any expired or existing contracts contain leases, has not reassessed the lease classification for any expired or existing leases and has not reassessed initial direct costs for any existing leases.
Income (loss) per Common Share
Segment Information
Income Taxes
With few exceptions, the Company iswe are no longer subject to possible income tax examinations by federal, state or local taxing authorities for tax years before 2016,2019, with the exception of loss carryforwards in the event they are utilized in future years. The Company'sOur tax returns are open to adjustment from 2001 forward, as a result of the fact that the Company haswe have loss carryforwards from those years, which may be adjusted in the year those losses are utilized.
Fair Value of Financial Instruments
F- 10
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
Revenue Recognition
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 general and administrative expenses. For the years ended December 31, 20192022 and 2018, $480,9662021, $563,482 and $447,546$385,351 of shipping and handling costs were included in general and administrative expenses in the accompanying consolidated statements of operations, respectively. The Company hasWe elected to exclude from revenue any value addvalue-add sales and other taxes which it collectswe collect concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which the Companywe have historically recorded shipping and handling fees and taxes. Incremental costs incurred by us in obtaining a contract with a customer are negligible, if any, and are expensed ratably in proportion to the related revenue recognized.
Disaggregated Revenue
In general, the Company'sour business segmentation isare aligned according to the nature and economic characteristics of itsour 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 years ended December 31, 20192022 and 2018.2021.
| Year Ended | December 31, 2022 | |||||||||||||||||||||||||
| Products | Services | Energy Production | Total | |||||||||||||||||||||||
| Products | $ | 11,156,099 | $ | — | $ | — | $ | 11,156,099 | ||||||||||||||||||
| Installation services | — | 257 | — | 257 | ||||||||||||||||||||||
| Maintenance services | — | 12,060,404 | — | 12,060,404 | ||||||||||||||||||||||
| Energy production | — | — | 1,785,854 | 1,785,854 | ||||||||||||||||||||||
| Total revenue | $ | 11,156,099 | $ | 12,060,661 | $ | 1,785,854 | $ | 25,002,614 | ||||||||||||||||||
| Year Ended | December 31, 2021 | |||||||||||||||||||||||||
| Products | Services | Energy Production | Total | |||||||||||||||||||||||
| Products | $ | 10,133,329 | $ | — | $ | — | $ | 10,133,329 | ||||||||||||||||||
| Installation services | — | 938,831 | — | 938,831 | ||||||||||||||||||||||
| Maintenance services | — | 11,586,763 | — | 11,586,763 | ||||||||||||||||||||||
| Energy production | — | — | 1,739,150 | 1,739,150 | ||||||||||||||||||||||
| Total revenue | $ | 10,133,329 | $ | 12,525,594 | $ | 1,739,150 | $ | 24,398,073 | ||||||||||||||||||
| Year Ended | December 31, 2019 | ||||||||||
| Products and Services | Energy Production | Total | |||||||||
| Products | $ | 12,977,896 | $ | — | $ | 12,977,896 | |||||
| Installation services | 7,505,964 | — | 7,505,964 | ||||||||
| Maintenance services | 9,801,754 | — | 9,801,754 | ||||||||
| Energy production | — | 3,140,834 | 3,140,834 | ||||||||
| Total revenue | $ | 30,285,614 | $ | 3,140,834 | $ | 33,426,448 | |||||
| Year Ended | December 31, 2018 | ||||||||||
| Products and Services | Energy Production | Total | |||||||||
| Products | 12,624,867 | $ | — | $ | 12,624,867 | ||||||
| Installation services | 8,097,473 | — | 8,097,473 | ||||||||
| Maintenance services | 8,761,818 | — | 8,761,818 | ||||||||
| Energy production | — | 6,399,526 | 6,399,526 | ||||||||
| Total revenue | $ | 29,484,158 | $ | 6,399,526 | $ | 35,883,684 | |||||
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. Prior to January 1, 2021, engineered accessories revenue and cost of sales had been reported in our financial statements under Installation Services. Engineered accessories revenue and cost of sales from prior periods have been reclassified to conform with the current year presentation. 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 athe 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
F- 11
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
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 and what we refer to as light installation services. Complete turnkey installation serviceswhich typically include all necessary engineering and design, labor, subcontract labor and service, and ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. Light installation services typically include some engineering and design as well as certain ancillary products and parts necessary for the customers’ installation of a cogeneration unit.
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 isare 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 determined milestones of progress have been achieved, with payment terms generally being 30 days.
Energy Production Segment
Energy Production. Revenue from energy contracts is recognized when electricity, heat, hot and/or chilled water is produced by the Companyour 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 Consolidated Balance Sheets.consolidated balance sheets.
F- 12
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
Revenue recognized during the year ended December 31, 20192022 that was included in deferred revenue at the beginning of the period was approximately $2,526,206.$1,669,171.
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term 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 bill customers. Remaining performance obligations therefore consist of unsatisfied or partially satisfied performance obligations related to fixed price maintenance contracts and installation contracts.
As of December 31, 2019,2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $2.8 million. The Company expects$1,487,450. We expect to recognize revenue of approximately 98%94% of the remaining performance obligations over the next 24 months, 3%19% recognized in the first 12 months and 95%75% recognized over the subsequent 12 months, and the remainder recognized thereafter.
Advertising Costs
Research and Development Costs
Research and development expenditures are expensed as incurred. The Company’sOur total research and development expenditures ofwere approximately $1,460,000$733,000 and $1,298,000 were recognized$542,000 for each of the years ended December 31, 20192022 and 2018,2021, respectively.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the statements of operations over the requisite service period.
The determination of the fair value of share-based payment awards is affected by the Company’sour stock price. For the awards issued prior to the Companyour being publicly traded, the Companywe considered the sales price of the Common Stock in private placements to unrelated third parties as a measure of the fair value of its Common Stock.
See Note 14."Stockholders' equity" for a summary of the restricted stock and stock option activity under the Company'sour stock-based employee compensation plan for the years ended December 31, 20192022 and 2018.2021.
Significant New Accounting Standards Adopted this Period
Note 3 – LossIncome (loss) per common share:
Basic and diluted lossincome (loss) per common share for the years endedDecember 31, 20192022 and 2018,2021, respectively, was as follows:
F- 13
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
| 2019 | 2018 | ||||||
| Net loss attributable to stockholders | $ | (4,709,019 | ) | $ | (5,708,532 | ) | |
| Weighted average shares outstanding - Basic and diluted | 24,839,957 | 24,815,926 | |||||
| Loss per share - Basic and diluted | $ | (0.19 | ) | $ | (0.23 | ) | |
| Anti-dilutive shares underlying stock options outstanding | 142,756 | 144,077 | |||||
| Years Ended | December 31, 2022 | December 31, 2021 | |||||||||
| Numerator: | |||||||||||
| Net income (loss) attributable to stockholders | $ | (2,447,927) | $ | 3,696,000 | |||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding - Basic | 24,850,261 | 24,850,261 | |||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options | — | 265,257 | |||||||||
| Weighted average shares outstanding - Diluted | 24,850,261 | 25,115,518 | |||||||||
| Basic income (loss) per share | $ | (0.10) | $ | 0.15 | |||||||
| Diluted income (loss) per share | $ | (0.10) | $ | 0.15 | |||||||
| Anti-dilutive shares underlying stock options outstanding | 915,201 | 931,396 | |||||||||
Note 4 – Acquisition of American DG Energy Inc.
On May 18, 2017, we completed our acquisition, by means of a stock-for-stock merger, of 100% of the outstanding common shares of American DG Energy Inc. (“American DG Energy" or "ADGE”), a company which installs, owns, operatesinstalled, owned, operated and maintainsmaintained complete distributed generation of electricity systems, or DG systems or energy systems, and other complementary systems at customer sites and sells electricity, hot water, heat and cooling energy under long-term contracts at
prices guaranteed to the customer to be below conventional utility rates, by means of a merger of one of our wholly owned subsidiaries with and into ADGE such that ADGE became a wholly owned subsidiary of Tecogen. We acquired ADGE to, among other reasons, expand our product offerings and benefit directly from the long-term contracted revenue streams generated by these installations. We gained control of ADGE on May 18, 2017 by issuing Tecogenshares of our Common Stock to the prior stockholders of ADGE.
Goodwill acquired of $13.3 million arising from the acquisition is primarily attributable to the going concern element of ADGE’s business, including its assembled workforce and the long-term contractual nature of its business, as well as expected cost synergies from the merger related primarily to the elimination of administrative overhead and duplicative personnel. None of the goodwill recognized is expected to be deductible for income tax purposes.
The favorable contract asset and the unfavorable contract liability, both of which relate to existing customer contracts, and the estimated amortization are more fully described in Note 7. "Intangible assets and liabilities other than goodwill".
Note 5. Sale of Energy Producing Assets and Goodwill Impairment
During the first quarter of 2019, the Company recognized two individual sales ofwe sold certain energy producing assets, for a total of eight power purchase agreements, including the associated energy production contracts for total consideration of $7 million, which resulted in a combined gain on sale of assets of $1,081,304 included in the accompanying statement of operations.million.
In connection with the asset sales, the Companywe 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 fees for both maintenance and operation. These agreements contain provisions whereby the Company haswe have guaranteed to the purchaser a minimum level or threshold of cash flows from the associated energy production contracts. Actual results are compared to the minimum threshold bi-annually withand we reimburse any shortfall to the Company making up any shortfall.purchaser. To the extent actual results are in excess of the minimum threshold, the Company iswe are entitled to fifty percent of such excess under the agreements. We received excess payments in both the years ended December 31, 2022 and 2021. For the year ended December 31, 2022, we recognized $101,861 of revenue representing our share of the excess cash flows under the energy production contacts, the current receivable which is included in our consolidated balance sheet as of December 31, 2022. On March 6, 2023, we received the excess payment for the year 2022 from the purchaser. For the year ended December 31, 2021, we recognized $23,803 of revenue representing our share of the excess cash flows under the energy production contracts.
The foregoing agreements also contain provisions whereby the Company haswe 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 the Companywe be required to make whole the purchaser under such provisions, the Companywe 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 did not recognize any counterparty contract default costs in the years ended December 31, 2022 and 2021.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20192022 and 20182021
production contract upon termination of the energy production contract. We did not recognize any site decommissioning costs in the years ended December 31, 2022 and 2021 .
Note 6 – Inventory
Inventories at December 31, 20192022 and 20182021 consisted of the following.
| 2022 | 2021 | ||||||||||
| Raw materials, net | $ | 9,001,491 | $ | 6,691,991 | |||||||
| Work-in-process | 498,139 | 549,802 | |||||||||
| Finished goods | 983,099 | 523,196 | |||||||||
| $ | 10,482,729 | $ | 7,764,989 | ||||||||
| 2019 | 2018 | ||||||
| Raw materials, net | $ | 5,966,162 | $ | 5,881,099 | |||
| Work-in-process | 439,067 | 413,763 | |||||
| Finished goods | — | — | |||||
| $ | 6,405,229 | $ | 6,294,862 | ||||
Note 7 – Intangible Assets and Liabilities Other Than Goodwill
Intangible assets and liabilities at December 31, 20192022 and 20182021 consist of the following:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Intangible assets | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
| Product certifications | $ | 777,465 | $ | (584,863) | $ | 192,602 | $ | 765,850 | $ | (532,676) | $ | 233,174 | ||||||||||||||||||||||||||
| Patents | 888,910 | (405,140) | 483,770 | 871,021 | (314,997) | 556,024 | ||||||||||||||||||||||||||||||||
| Developed technology | 240,000 | (156,000) | 84,000 | 240,000 | (140,000) | 100,000 | ||||||||||||||||||||||||||||||||
| Trademarks | 26,896 | — | 26,896 | 26,896 | — | 26,896 | ||||||||||||||||||||||||||||||||
| In process R&D | 263,936 | (65,984) | 197,952 | 263,936 | (28,279) | 235,657 | ||||||||||||||||||||||||||||||||
| Favorable contract assets | 384,465 | (372,091) | 12,374 | 384,465 | (355,193) | 29,272 | ||||||||||||||||||||||||||||||||
| $ | 2,581,672 | $ | (1,584,078) | $ | 997,594 | $ | 2,552,168 | $ | (1,371,145) | $ | 1,181,023 | |||||||||||||||||||||||||||
| Intangible liability | ||||||||||||||||||||||||||||||||||||||
| Unfavorable contract liability | $ | 2,618,168 | $ | (1,797,951) | $ | 820,217 | $ | 3,056,655 | $ | (1,797,149) | $ | 1,259,506 | ||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Intangible assets | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||
| Product certifications | $ | 726,159 | $ | (399,906 | ) | $ | 326,253 | $ | 726,159 | $ | (345,658 | ) | $ | 380,501 | ||||||||||
| Patents | 1,017,108 | (206,499 | ) | 810,609 | 910,569 | (188,239 | ) | 722,330 | ||||||||||||||||
| Developed technology | 240,000 | (108,000 | ) | 132,000 | 240,000 | (92,000 | ) | 148,000 | ||||||||||||||||
| Trademarks | 26,896 | — | 26,896 | 22,752 | — | 22,752 | ||||||||||||||||||
| In process R&D | 263,936 | — | 263,936 | 263,936 | — | 263,936 | ||||||||||||||||||
| TTcogen intangible assets | 29,607 | (6,477 | ) | 23,130 | 29,607 | (2,776 | ) | 26,831 | ||||||||||||||||
| Favorable contract assets | 274,858 | (263,901 | ) | 10,957 | 1,561,739 | (232,099 | ) | 1,329,640 | ||||||||||||||||
| $ | 2,578,564 | $ | (984,783 | ) | $ | 1,593,781 | $ | 3,754,762 | $ | (860,772 | ) | $ | 2,893,990 | |||||||||||
| Intangible liability | ||||||||||||||||||||||||
| Unfavorable contract liability | $ | 4,689,025 | $ | (2,154,207 | ) | $ | 2,534,818 | $ | 7,912,275 | $ | (1,619,676 | ) | $ | 6,292,599 | ||||||||||
The aggregate amortization expense related to intangible assets exclusive of contract related intangibles was $92,209$201,043 and $112,359$197,788 during the years ended December 31, 20192022 and 2018,2021, respectively. The net credit to cost of sales related to the amortization of the contract related intangible asset and liability for the years ended December 31, 20192022 and 20182021 was $502,729$274,112 and $860,858,$319,084, respectively. We abandoned certain patent applications and recorded non-cash charges of $0 and $7,400 as long-lived asset impairment in the consolidated statement of operations for the years ended December 31, 2022 and 2021, respectively.
Contract Asset and Liability
The favorable contract asset and unfavorable contract liability in the foregoing table represent the fair value of ADGE's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Companyus on May 18, 2017 (see Note 4. "Acquisition of American DG Energy Inc."), reduced by those sold during Q1 2019 (see2019. See Note 5."Sale of Energy Producing Assets and Goodwill Impairment").
During the year ended December 31, 2022, we determined that certain of the ADGE customer contracts terminated due to the customers failure to perform their obligations pursuant to the contractual agreements and accordingly reversed $151,981
F- 15
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2022 and 2021
of unfavorable contract liability related to these contacts. The adjustments are included in the consolidated statement of operations for the year ended December 31, 2022, as non-cash benefits within long-lived asset impairment.
Amortization of intangibles including contract related amounts is calculated using the straight line method over the remaining useful life or contract term, which range from approximately 1-11 years, and is charged against cost of sales in the accompanying consolidated statement of operations. Aggregate future amortization over the next five years is estimated to be as follows:
| Non-contract related intangibles | Contract related intangibles | Total | ||||||||||||||||||
| 2023 | $ | 203,295 | $ | (236,705) | $ | (33,410) | ||||||||||||||
| 2024 | 182,413 | (160,325) | 22,088 | |||||||||||||||||
| 2025 | 177,841 | (113,449) | 64,392 | |||||||||||||||||
| 2026 | 173,702 | (65,232) | 108,470 | |||||||||||||||||
| 2027 | 172,468 | (57,591) | 114,877 | |||||||||||||||||
| Thereafter | 60,979 | (186,915) | (125,936) | |||||||||||||||||
| $ | 970,698 | $ | (820,217) | $ | 150,481 | |||||||||||||||
| Non-contract related intangibles | Contract related intangibles | Total | ||||||||||
| 2020 | $ | 246,967 | $ | (431,990 | ) | (185,023 | ) | |||||
| 2021 | 232,266 | (437,477 | ) | (205,211 | ) | |||||||
| 2022 | 225,556 | (411,844 | ) | (186,288 | ) | |||||||
| 2023 | 218,368 | (335,183 | ) | (116,815 | ) | |||||||
| 2024 | 195,961 | (290,260 | ) | (94,299 | ) | |||||||
| Thereafter | 436,810 | (617,107 | ) | (180,297 | ) | |||||||
| $ | 1,555,928 | $ | (2,523,861 | ) | $ | (967,933 | ) | |||||
Note 8 – Property, plant and equipment
Property, plant and equipment at December 31, 20192022 and 20182021 consisted of the following:
Estimated Useful Life (in Years) | 2019 | 2018 | Estimated Useful Life (in Years) | 2022 | 2021 | |||||||||||||||||||||
| Energy systems | 10 - 15 years | $ | 4,372,638 | $ | 12,709,990 | Energy systems | 10 - 15 years | $ | 2,810,232 | $ | 3,556,488 | |||||||||||||||
| Machinery and equipment | 5 - 7 years | 1,462,208 | 1,355,617 | Machinery and equipment | 5 - 7 years | 1,624,885 | 1,463,153 | |||||||||||||||||||
| Furniture and fixtures | 5 years | 193,698 | 222,542 | Furniture and fixtures | 5 years | 196,007 | 193,698 | |||||||||||||||||||
| Computer software | 3 - 5 years | 192,865 | 200,626 | Computer software | 3 - 5 years | 192,865 | 192,865 | |||||||||||||||||||
| Leasehold improvements | * | 450,792 | 450,792 | Leasehold improvements | * | 466,789 | 466,789 | |||||||||||||||||||
| 6,672,201 | 14,939,567 | 5,290,778 | 5,872,993 | |||||||||||||||||||||||
| Less - accumulated depreciation and amortization | (3,206,253 | ) | (3,666,452 | ) | Less - accumulated depreciation and amortization | (3,883,058) | (4,090,049) | |||||||||||||||||||
| Net property, plant and equipment | $ | 3,465,948 | $ | 11,273,115 | Net property, plant and equipment | $ | 1,407,720 | $ | 1,782,944 | |||||||||||||||||