UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172019
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-36103
TECOGEN INC. (NASDAQ:TGEN)
(Exact name of Registrant as specified in its charter)
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Delaware | 04-3536131 |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
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45 First Avenue | |
Waltham, Massachusetts | 02451 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (781) 622-1120466-6402
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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:
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Large accelerated filer o | Accelerated filer o | Non –accelerated filer ox | Smaller reporting company x |
| | | Emerging Growth company xo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes. Yes ¨ No ý
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Title of each class | | Outstanding, OctoberJuly 31, 20172019 |
Common Stock, $0.001 par value | | 24,724,39224,843,261 |
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBERJUNE 30, 20172019
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION |
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References in this Form 10-Q to "we", "us", "our"', the "Company" and "Tecogen" refers to Tecogen Inc. and its consolidated subsidiaries, unless otherwise noted.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| | | September 30, 2017 |
| | December 31, 2016 | June 30, 2019 | | December 31, 2018 |
ASSETS | | | | | | |
Current assets: | |
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Cash and cash equivalents | $ | 2,077,047 |
| | $ | 3,721,765 |
| $ | 1,087,970 |
| | $ | 272,552 |
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Accounts receivable, net | 11,094,287 |
| | 8,630,418 |
| 11,628,702 |
| | 14,176,452 |
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Unbilled revenue | 3,063,089 |
| | 2,269,645 |
| 5,829,365 |
| | 4,893,259 |
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Inventory, net | 6,118,835 |
| | 4,774,264 |
| 6,990,697 |
| | 6,294,862 |
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Due from related party | 496,655 |
| | 260,988 |
| — |
| | 9,405 |
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Prepaid and other current assets | 742,701 |
| | 401,876 |
| 640,516 |
| | 722,042 |
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Total current assets | 23,592,614 |
| | 20,058,956 |
| 26,177,250 |
| | 26,368,572 |
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Property, plant and equipment, net | 15,502,974 |
| | 517,143 |
| 3,763,500 |
| | 11,273,115 |
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Right of use assets | | 2,421,581 |
| | — |
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Intangible assets, net | 2,430,178 |
| | 1,065,967 |
| 1,554,634 |
| | 2,893,990 |
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Excess of cost over fair value of net assets acquired | 12,602,409 |
| | — |
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Goodwill | 40,870 |
| | 40,870 |
| 5,281,867 |
| | 8,975,065 |
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Other assets | 2,462,870 |
| | 2,058,425 |
| 557,544 |
| | 393,651 |
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TOTAL ASSETS | $ | 56,631,915 |
| | $ | 23,741,361 |
| $ | 39,756,376 |
| | $ | 49,904,393 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | |
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Current liabilities: | |
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Revolving line of credit, bank | | $ | — |
| | $ | 2,009,435 |
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Accounts payable | $ | 5,356,449 |
| | $ | 3,367,481 |
| 6,234,846 |
| | 7,153,330 |
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Accrued expenses | 1,676,307 |
| | 1,378,258 |
| 2,061,601 |
| | 1,528,014 |
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Deferred revenue | 1,477,124 |
| | 876,765 |
| 1,832,493 |
| | 2,507,541 |
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Loan due to related party | 850,000 |
| | — |
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Interest payable, related party | 39,403 |
| | — |
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Lease obligations, current | | 520,667 |
| | — |
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Total current liabilities | 9,399,283 |
| | 5,622,504 |
| 10,649,607 |
| | 13,198,320 |
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Long-term liabilities: | |
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Deferred revenue, net of current portion | 386,494 |
| | 459,275 |
| 96,937 |
| | 2,375,700 |
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Senior convertible promissory note, related party | 3,149,086 |
| | 3,148,509 |
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Unfavorable contract liability | 10,358,283 |
| | — |
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Lease obligations, long-term | | 1,900,914 |
| | — |
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Unfavorable contract liability, net | | 2,754,497 |
| | 6,292,599 |
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Total liabilities | 23,293,146 |
| | 9,230,288 |
| 15,401,955 |
| | 21,866,619 |
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Commitments and contingencies (Note 9) |
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Commitments and contingencies (Note 11) | |
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Stockholders’ equity: | |
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Tecogen Inc. stockholders’ equity: | |
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Common stock, $0.001 par value; 100,000,000 shares authorized; 24,724,392 and 19,981,912 issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 24,724 |
| | 19,982 |
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Common stock, $0.001 par value; 100,000,000 shares authorized; 24,840,806 and 24,824,746 issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | 24,841 |
| | 24,825 |
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Additional paid-in capital | 56,081,026 |
| | 37,334,773 |
| 56,525,590 |
| | 56,427,928 |
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Accumulated other comprehensive loss-investment securities | (184,998 | ) | | — |
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Accumulated deficit | (23,065,226 | ) | | (22,843,682 | ) | (32,307,301 | ) | | (28,670,095 | ) |
Total Tecogen Inc. stockholders’ equity | 32,855,526 |
| | 14,511,073 |
| 24,243,130 |
| | 27,782,658 |
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Noncontrolling interest | 483,243 |
| | — |
| 111,291 |
| | 255,116 |
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Total stockholders’ equity | 33,338,769 |
| | 14,511,073 |
| 24,354,421 |
| | 28,037,774 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 56,631,915 |
| | $ | 23,741,361 |
| $ | 39,756,376 |
| | $ | 49,904,393 |
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The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
| | | Three Months Ended | Three Months Ended |
| September 30, 2017 | | September 30, 2016 | June 30, 2019 | | June 30, 2018 |
Revenues | | | | | | |
Products | $ | 2,425,616 |
| | $ | 2,850,901 |
| $ | 2,445,448 |
| | $ | 2,483,657 |
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Services | 4,519,467 |
| | 3,765,554 |
| 4,843,649 |
| | 4,461,283 |
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Energy production | 1,556,115 |
| | — |
| 578,299 |
| | 1,508,225 |
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Total revenues | 8,501,198 |
| | 6,616,455 |
| 7,867,396 |
| | 8,453,165 |
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Cost of sales | | | | | | |
Products | 1,538,515 |
| | 1,715,462 |
| 1,546,752 |
| | 1,491,810 |
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Services | 2,981,454 |
| | 2,126,175 |
| 2,530,175 |
| | 2,962,040 |
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Energy production | 723,198 |
| | — |
| 364,554 |
| | 839,721 |
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Total cost of sales | 5,243,167 |
| | 3,841,637 |
| 4,441,481 |
| | 5,293,571 |
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Gross profit | 3,258,031 |
| | 2,774,818 |
| 3,425,915 |
| | 3,159,594 |
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Operating expenses | | | | | | |
General and administrative | 2,427,352 |
| | 2,003,838 |
| 2,683,252 |
| | 2,750,705 |
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Selling | 503,415 |
| | 367,412 |
| 704,700 |
| | 635,396 |
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Research and development | 241,725 |
| | 154,075 |
| 372,545 |
| | 409,779 |
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Total operating expenses | 3,172,492 |
| | 2,525,325 |
| 3,760,497 |
| | 3,795,880 |
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Income from operations | 85,539 |
| | 249,493 |
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Loss from operations | | (334,582 | ) | | (636,286 | ) |
Other income (expense) | | | | | | |
Interest and other income | 14,849 |
| | 3,914 |
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Interest income | | 66 |
| | 4,830 |
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Interest expense | (45,242 | ) | | (45,539 | ) | (17,005 | ) | | (9,802 | ) |
Total other expense, net | (30,393 | ) | | (41,625 | ) | |
Consolidated net income | 55,146 |
| | 207,868 |
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Unrealized gain (loss) on investment securities | | 19,681 |
| | (59,042 | ) |
Total other income (expense), net | | 2,742 |
| | (64,014 | ) |
Loss before provision for state income taxes | | (331,840 | ) | | (700,300 | ) |
Provision for state income taxes | | 15,955 |
| | 38,864 |
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Consolidated net loss | | (347,795 | ) | | (739,164 | ) |
Income attributable to the noncontrolling interest | (27,935 | ) | | — |
| (9,334 | ) | | (15,186 | ) |
Net income attributable to Tecogen Inc. | 27,211 |
| | 207,868 |
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Other comprehensive income - unrealized gain on securities | 39,361 |
| | — |
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Comprehensive income | $ | 66,572 |
| | $ | 207,868 |
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Net loss attributable to Tecogen Inc. | | $ | (357,129 | ) | | $ | (754,350 | ) |
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Net income per share - basic | $ | 0.00 |
| | $ | 0.01 |
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Net income per share - diluted | $ | 0.00 |
| | $ | 0.01 |
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Weighted average shares outstanding - basic | 24,720,613 |
| | 19,640,812 |
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Weighted average shares outstanding - diluted | 24,930,624 |
| | 20,229,120 |
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Net loss per share - basic and diluted | | $ | (0.01 | ) | | $ | (0.03 | ) |
Weighted average shares outstanding - basic and diluted | | 24,826,311 |
| | 24,818,459 |
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The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
| | | Nine Months Ended | Six Months Ended |
| September 30, 2017 | | September 30, 2016 | June 30, 2019 | | June 30, 2018 |
Revenues | | | | | | |
Products | $ | 8,349,159 |
| | $ | 7,525,909 |
| $ | 5,469,974 |
| | $ | 6,157,163 |
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Services | 12,259,037 |
| | 9,853,369 |
| 8,754,945 |
| | 9,180,669 |
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Energy production | 2,330,307 |
| | — |
| 1,819,108 |
| | 3,290,760 |
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Total revenues | 22,938,503 |
| | 17,379,278 |
| 16,044,027 |
| | 18,628,592 |
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Cost of sales | | | | | | |
Products | 5,261,245 |
| | 5,035,230 |
| 3,490,214 |
| | 3,900,925 |
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Services | 7,464,193 |
| | 5,746,992 |
| 5,004,708 |
| | 5,744,894 |
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Energy production | 1,053,741 |
| | — |
| 1,164,431 |
| | 1,985,376 |
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Total cost of sales | 13,779,179 |
| | 10,782,222 |
| 9,659,353 |
| | 11,631,195 |
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Gross profit | 9,159,324 |
| | 6,597,056 |
| 6,384,674 |
| | 6,997,397 |
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Operating expenses | | | | | | |
General and administrative | 7,042,500 |
| | 5,898,230 |
| 5,338,663 |
| | 5,540,255 |
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Selling | 1,558,378 |
| | 1,217,533 |
| 1,397,954 |
| | 1,310,514 |
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Research and development | 641,064 |
| | 524,696 |
| 717,627 |
| | 712,009 |
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Gain on sale of assets | | (1,081,049 | ) | | — |
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Goodwill impairment | | 3,693,198 |
| | — |
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Total operating expenses | 9,241,942 |
| | 7,640,459 |
| 10,066,393 |
| | 7,562,778 |
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Loss from operations | (82,618 | ) | | (1,043,403 | ) | (3,681,719 | ) | | (565,381 | ) |
Other income (expense) | | | | | | |
Interest and other income | 21,033 |
| | 9,575 |
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Interest income | | 598 |
| | 3,758 |
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Interest expense | (115,026 | ) | | (131,973 | ) | (45,031 | ) | | (22,815 | ) |
Unrealized loss on investment securities | | (19,680 | ) | | (78,723 | ) |
Total other expense, net | (93,993 | ) | | (122,398 | ) | (64,113 | ) | | (97,780 | ) |
Loss before provision for state income taxes | | (3,745,832 | ) | | (663,161 | ) |
Provision for state income taxes | | 7,786 |
| | 38,864 |
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Consolidated net loss | (176,611 | ) | | (1,165,801 | ) | (3,753,618 | ) | | (702,025 | ) |
(Income) loss attributable to the noncontrolling interest | (44,933 | ) | | 64,962 |
| 116,412 |
| | (31,567 | ) |
Net loss attributable to Tecogen Inc. | (221,544 | ) | | (1,100,839 | ) | $ | (3,637,206 | ) | | (733,592 | ) |
Other comprehensive loss - unrealized loss on securities | (184,998 | ) | | — |
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Comprehensive loss | $ | (406,542 | ) | | $ | (1,100,839 | ) | |
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Net loss per share - basic and diluted | $ | (0.01 | ) | | $ | (0.06 | ) | $ | (0.15 | ) | | $ | (0.03 | ) |
Weighted average shares outstanding - basic and diluted | 22,643,406 |
| | 19,071,497 |
| 24,822,555 |
| | 24,811,034 |
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The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three and Six Months Ended June 30, 2019 and 2018
(unaudited)
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| Tecogen Inc. Stockholders | | | | |
Three months ended June 30, 2019 | Common Stock Shares | | Common Stock 0.001 Par Value | | Additional Paid-In Capital | | Accumulated Deficit | | Noncontrolling Interest | | Total |
Balance at March 31, 2019 | 24,834,746 |
| | $ | 24,835 |
| | $ | 56,477,342 |
| | $ | (31,950,172 | ) | | $ | 129,370 |
| | $ | 24,681,375 |
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Exercise of stock options | 6,060 |
| | 6 |
| | 8,750 |
| | — |
| | — |
| | 8,756 |
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Stock issuance costs | — |
| | — |
| | (400 | ) | | — |
| | — |
| | (400 | ) |
Stock based compensation expense | — |
| | — |
| | 39,898 |
| | — |
| | — |
| | 39,898 |
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Distributions to non-controlling interest | — |
| | — |
| | — |
| | — |
| | (27,413 | ) | | (27,413 | ) |
Net income (loss) | — |
| | — |
| | — |
| | (357,129 | ) | | 9,334 |
| | (347,795 | ) |
Balance at June 30, 2019 | 24,840,806 |
| | $ | 24,841 |
| | $ | 56,525,590 |
| | $ | (32,307,301 | ) | | $ | 111,291 |
| | $ | 24,354,421 |
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| Tecogen Inc. Stockholders | | | | |
Six months ended June 30, 2019 | Common Stock Shares | | Common Stock 0.001 Par Value | | Additional Paid-In Capital | | Accumulated Deficit | | Noncontrolling Interest | | Total |
Balance at December 31, 2018 | 24,824,746 |
| | $ | 24,825 |
| | $ | 56,427,928 |
| | $ | (28,670,095 | ) | | $ | 255,116 |
| | $ | 28,037,774 |
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Exercise of stock options | 16,060 |
| | 16 |
| | 20,740 |
| | — |
| | — |
| | 20,756 |
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Stock issuance costs | — |
| | — |
| | (1,011 | ) | | — |
| | — |
| | (1,011 | ) |
Stock based compensation expense | — |
| | — |
| | 77,933 |
| | — |
| | — |
| | 77,933 |
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Distributions to non-controlling interest | — |
| | — |
| | — |
| | — |
| | (27,413 | ) | | (27,413 | ) |
Net loss | — |
| | — |
| | — |
| | (3,637,206 | ) | | (116,412 | ) | | (3,753,618 | ) |
Balance at June 30, 2019 | 24,840,806 |
| | $ | 24,841 |
| | $ | 56,525,590 |
| | $ | (32,307,301 | ) | | $ | 111,291 |
| | $ | 24,354,421 |
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| Tecogen Inc. Stockholders | | | | |
Three months ended June 30, 2018 | Common Stock Shares | | Common Stock 0.001 Par Value | | Additional Paid-In Capital | | Accumulated Deficit | | Noncontrolling Interest | | Total |
Balance at March 31, 2018 | 24,807,096 |
| | $ | 24,807 |
| | $ | 56,264,398 |
| | $ | (22,940,804 | ) | | $ | 448,654 |
| | $ | 33,797,055 |
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Sale of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Exercise of stock options | — |
| | 12 |
| | 15,047 |
| | — |
| | — |
| | 15,059 |
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Stock issuance costs | — |
| | — |
| | (347 | ) | | — |
| | — |
| | (347 | ) |
Distributions to Non-controlling interest | — |
| | — |
| | — |
| | — |
| | (10,962 | ) | | (10,962 | ) |
Stock based compensation expense | — |
| | — |
| | 38,062 |
| | — |
| | — |
| | 38,062 |
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Net income (loss) | — |
| | — |
| | — |
| | (754,350 | ) | | 15,186 |
| | (739,164 | ) |
Balance at June 30, 2018 | 24,807,096 |
| | $ | 24,819 |
| | $ | 56,317,160 |
| | $ | (23,695,154 | ) | | $ | 452,878 |
| | $ | 33,099,703 |
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| Tecogen Inc. Stockholders | | | | |
Six months ended June 30, 2018 | Common Stock Shares | | Common Stock 0.001 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 |
|
Reclassification of Accumulated Other Comprehensive Loss | — |
| | — |
| | — |
| | 165,317 |
| | (165,317 | ) | | — |
| | — |
|
Exercise of stock options | 40,204 |
| | 52 |
| | 63,252 |
| | — |
| | — |
| | — |
| | 63,304 |
|
Stock issuance costs | — |
| | — |
| | (900 | ) | | — |
| | — |
| | — |
| | (900 | ) |
Distributions to Non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (34,299 | ) | | (34,299 | ) |
Stock based compensation expense | — |
| | — |
| | 78,478 |
| | — |
| | — |
| | — |
| | 78,478 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | (733,591 | ) | | 31,566 |
| | (702,025 | ) |
Balance at June 30, 2018 | 24,807,096 |
| | $ | 24,819 |
| | $ | 56,317,160 |
| | $ | — |
| | $ | (23,695,154 | ) | | $ | 452,878 |
| | $ | 33,099,703 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | September 30, 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Consolidated net loss | $ | (176,611 | ) | | $ | (1,165,801 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization, net | 402,939 |
| | 198,766 |
|
Provision (recovery) of inventory reserve | 43,609 |
| | (90,000 | ) |
Stock-based compensation | 138,329 |
| | 117,065 |
|
Non-cash interest expense | 577 |
| | 37,923 |
|
Loss on sale of assets | 2,909 |
| | 640 |
|
Provision (recovery) for losses on accounts receivable | 8,000 |
| | (6,000 | ) |
Changes in operating assets and liabilities, net of effects of acquisitions | | | |
(Increase) decrease in: | | | |
Short term investments | — |
| | 294,802 |
|
Accounts receivable | (1,908,655 | ) | | (2,664,462 | ) |
Unbilled revenue | (776,365 | ) | | (1,024,276 | ) |
Inventory, net | (1,279,847 | ) | | 714,896 |
|
Due from related party | (236,971 | ) | | 744,266 |
|
Prepaid expenses and other current assets | (18,673 | ) | | (100,398 | ) |
Other non-current assets | (32,251 | ) | | — |
|
Increase (decrease) in: | | | |
Accounts payable | 1,641,206 |
| | (279,196 | ) |
Accrued expenses and other current liabilities | (233,824 | ) | | 122,809 |
|
Deferred revenue | 407,379 |
| | 184,103 |
|
Interest payable, related party | 21,378 |
| | — |
|
Net cash used in operating activities | (1,996,871 | ) | | (2,914,863 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property and equipment | (315,205 | ) | | (130,499 | ) |
Purchases of intangible assets | (34,551 | ) | | (71,223 | ) |
Cash acquired in acquisition | 971,454 |
| | — |
|
Cash paid for investment in Ultra Emissions Technologies Ltd | — |
| | (2,000,000 | ) |
Payment of stock issuance costs | (367,101 | ) | | — |
|
Distributions to noncontrolling interest | (31,362 | ) | | — |
|
Net cash provided by (used in) investing activities | 223,235 |
| | (2,201,722 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from demand notes payable, related party | — |
| | 150,000 |
|
Payment of stock issuance costs | — |
| | (28,548 | ) |
Proceeds from debt issuance costs | — |
| | (2,034 | ) |
Proceeds from the exercise of stock options | 128,918 |
| | 312,698 |
|
Proceeds from exercise of warrants | — |
| | 2,700,000 |
|
Net cash provided by financing activities | 128,918 |
| | 3,132,116 |
|
Net decrease in cash and cash equivalents | (1,644,718 | ) | | (1,984,469 | ) |
Cash and cash equivalents, beginning of the period | 3,721,765 |
| | 5,486,526 |
|
Cash and cash equivalents, end of the period | $ | 2,077,047 |
| | $ | 3,502,057 |
|
| | | |
|
| | | | | | | |
Supplemental disclosures of cash flows information: | |
| | |
|
Cash paid for interest | $ | 95,550 |
| | $ | 94,049 |
|
Exchange of stock for non-controlling interest in Ilios | $ | — |
| | $ | 330,852 |
|
Issuance of stock to acquire American DG Energy | $ | 18,745,007 |
| | $ | — |
|
Issuance of Tecogen stock options in exchange for American DG Energy options | $ | 114,896 |
| | $ | — |
|
|
| | | | | | | |
| Six Months Ended |
| June 30, 2019 | | June 30, 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Consolidated net loss | $ | (3,753,618 | ) | | $ | (702,025 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation, accretion and amortization, net | 267,232 |
| | 386,250 |
|
Gain on contract termination | — |
| | (124,732 | ) |
Provision on inventory reserve | — |
| | 1,000 |
|
Stock-based compensation | 77,933 |
| | 78,478 |
|
Goodwill impairment | 3,693,198 |
| | — |
|
(Gain) loss on sale of assets | (1,081,049 | ) | | 13,343 |
|
Provision for losses on accounts receivable | 29,849 |
| | 4,395 |
|
Non-cash interest expense | 12,087 |
| | — |
|
Changes in operating assets and liabilities, net of effects of acquisitions | | | |
(Increase) decrease in: | | | |
Accounts receivable | 2,517,901 |
| | (1,732,029 | ) |
Unbilled revenue | (936,106 | ) | | (345,324 | ) |
Inventory | (695,835 | ) | | (403,785 | ) |
Due from related party | 9,405 |
| | 585,492 |
|
Prepaid expenses and other current assets | (15,282 | ) | | (83,840 | ) |
Other non-current assets | 59,683 |
| | 74,424 |
|
Increase (decrease) in: | | | |
Accounts payable | (918,484 | ) | | (1,017,610 | ) |
Accrued expenses and other current liabilities | (380,351 | ) | | 529,325 |
|
Deferred revenue | (966,776 | ) | | 247,669 |
|
Interest payable, related party | — |
| | (52,265 | ) |
Net cash used in operating activities | (2,080,213 | ) | | (2,541,234 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property and equipment | (52,444 | ) | | (149,453 | ) |
Proceeds from sale of assets | 5,000,000 |
| | 3,606 |
|
Purchases of intangible assets | (22,738 | ) | | (149,264 | ) |
Cash acquired in asset acquisition | — |
| | 442,786 |
|
Expenses associated with asset acquisition | — |
| | (900 | ) |
Payment of stock issuance costs | (1,011 | ) | | — |
|
Distributions to noncontrolling interest | (27,413 | ) | | (34,300 | ) |
Net cash provided by investing activities | 4,896,394 |
| | 112,475 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Payments on revolving line of credit, net | (2,021,519 | ) | | 2,702,828 |
|
Payments for debt issuance costs | — |
| | (145,011 | ) |
Proceeds from the exercise of stock options | 20,756 |
| | 63,305 |
|
Payment on loan due to related party | — |
| | (850,000 | ) |
Net cash provided by (used in) financing activities | (2,000,763 | ) | | 1,771,122 |
|
Change in cash and cash equivalents | 815,418 |
| | (657,637 | ) |
Cash and cash equivalents, beginning of the period | 272,552 |
| | 1,673,072 |
|
Cash and cash equivalents, end of the period | $ | 1,087,970 |
| | $ | 1,015,435 |
|
| | | |
Supplemental disclosures of cash flows information: | |
| | |
|
Cash paid for interest | $ | 23,551 |
| | $ | 79,079 |
|
Cash paid for taxes | $ | 28,524 |
| | $ | 38,864 |
|
The accompanying notes are an integral part of these consolidated financial statements.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1.Description of Business and Basis of Presentation
Description of businessBusiness
Tecogen Inc., or the Company, we, our or us, produces 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. The Company’s products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The Company also installs, owns, operates and maintains complete 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.
The majority of the Company’s customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast. The Company's common stock is listed on NASDAQ under the ticker symbol TGEN.
On May 18, 2017, the Company acquired 100% of the outstanding common stock of American DG Energy Inc., formerly a related entity, in a stock-for-stock merger (see Note 3. "Acquisition of American DG Energy Inc.").merger.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2019.
The condensed consolidated balance sheet at December 31, 20162018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in Tecogen Inc.'s Annual Report on Form 10-K and American DG Energy Inc.'sTecogen's Annual Report on Form 10-K for the year ended December 31, 2016.2018.
There have been no significantcertain changes in accounting principles practices or methods for making estimates.as discussed below in the section entitled "Significant New Accounting Standards Adopted this Period."
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and entities in which it has a controlling financial interest. Those entities include the Company's wholly-owned subsidiaries American DG Energy Inc. and Ilios Inc., TTcogen LLC, and a joint venture, American DG New York, LLC, in which American DG Energy Inc. holds a 51.0%51% interest. Investments in partnerships and companies in which the Company does not have a controlling financial interest but where we have significant influence are accounted for under the equity method. Any intercompany transactions have been eliminated in consolidation.
The Company’s operations are comprised of two business segments. Our Products and Services segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
Reclassification
Certain prior period amounts have been reclassified to conform with current year presentation.
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.
Income Taxes
The provisions for income taxes in the accompanying unaudited consolidated statements of operations differ from that which would be expected by applying the federal statutory tax rate primarily due to losses for which no benefit is recognized.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Significant New Accounting Standards Adopted this Period
Cloud Computing Arrangement.During the third quarter of 2018, the Company early adopted ASU 2018-15 "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract" as it is currently undertaking implementation of a new enterprise resource planning system (ERP). The Company opted to apply the provisions of ASU 2018-15 on a prospective basis. The primary effect of the provisions is to capitalize certain implementation costs amounting to $85,372 during the application development phase in 2018 and to amortize those costs prospectively over the life of the agreement rather than expense them currently as general and administrative costs.
Leases.On January 1, 2019, we adopted the guidance under ASU No. 2016-02, “Leases” (“the new lease standard” or “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 has 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.
The new standard requires lessees to recognize most leases on their balance sheets as a right-of-use ("ROU") asset with a corresponding lease liability. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
As of June 30, 2019, $2.42 million was included in ROU assets $0.52 million in Lease obligations, current, and $1.90 million in Lease obligations, long-term, on the Condensed Consolidated Balance Sheets as a result of the new lease standard. There was no impact on our Condensed Consolidated Statements of Operations and Comprehensive Income or Condensed Consolidated Statements of Cash Flows. See Note 7. Leases for further discussion.
Significant New Accounting Standards or Updates Not Yet Effective
Revenue RecognitionMeasurement of Credit Losses on Financial Instruments. In May 2014,June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Accounting Standards Board ("FASB")Instruments. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about an entity's expected credit losses on financial instruments and other commitments to extend credit at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. Subsequent to issuing ASU 2016-13, the FASB issued anASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 will be effective for the Company's fiscal year beginning January 1, 2020, using a modified retrospective approach. Early adoption is permitted. The Company is currently assessing the impact this ASU will have on its condensed consolidated financial statements.
Note 2. Revenue
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services or energy to customers.
Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. The Company has elected to exclude from revenue any value add sales and other taxes which it collects concurrent with revenue-producing activities. These accounting standard updatepolicy elections are consistent with the manner in which the Company 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's business segmentation is aligned according to revenue from contracts with customers, which, along with amendments issued in 2015the nature and 2016, will supersedeeconomic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This accounting standard update, as amended, will be effective for the Company beginning in the first quarter of fiscal 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective basis"). The Company expects to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2018, and has engaged an outside expert to assist with the evaluation of the impact of this accounting standard update on its consolidated financial statements and its implementation.
LeasesIn February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Note 2. Income (Loss) Per Common Share
Basic and diluted income (loss) per shareThe following table further disaggregates our revenue by major source by segment for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively, were as follows: 2018.
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) attributable to stockholders | | $ | 27,211 |
| | $ | 207,868 |
| | $ | (221,544 | ) | | $ | (1,100,839 | ) |
Weighted average shares outstanding - Basic | | 24,720,613 |
| | 19,640,812 |
| | 22,643,406 |
| | 19,071,497 |
|
Basic income (loss) per share | | $ | 0.00 |
| | $ | 0.01 |
| | $ | (0.01 | ) | | $ | (0.06 | ) |
Weighted average shares outstanding - Diluted | | 24,930,624 |
| | 20,229,120 |
| | 22,643,406 |
| | 19,071,497 |
|
Diluted income (loss) per share | | $0.00 | | $0.01 | | $ | (0.01 | ) | | $ | (0.06 | ) |
Anti-dilutive shares underlying stock options outstanding | |
|
| |
|
| | 235,736 |
| | 1,130,158 |
|
Anti-dilutive convertible debentures | |
|
| |
|
| | 889,830 |
| | 889,830 |
|
Anti-dilutive warrants outstanding | |
| |
| | 250,000 |
| | 250,000 |
|
|
| | | | | | | | | | | |
Three Months Ended | June 30, 2019 |
| Products and Services | | Energy Production | | Total |
Products | $ | 2,445,448 |
| | $ | — |
| | $ | 2,445,448 |
|
Installation services | 2,291,027 |
| | — |
| | 2,291,027 |
|
Maintenance services | 2,552,622 |
| | — |
| | 2,552,622 |
|
Energy production | — |
| | 578,299 |
| | 578,299 |
|
Total revenue | $ | 7,289,097 |
| | $ | 578,299 |
| | $ | 7,867,396 |
|
|
| | | | | | | | | | | |
Six Months Ended | June 30, 2019 |
| Products and Services | | Energy Production | | Total |
Products | $ | 5,469,974 |
| | $ | — |
| | $ | 5,469,974 |
|
Installation services | 3,846,891 |
| | — |
| | 3,846,891 |
|
Maintenance services | 4,908,054 |
| | — |
| | 4,908,054 |
|
Energy production | — |
| | 1,819,108 |
| | 1,819,108 |
|
Total revenue | $ | 14,224,919 |
| | $ | 1,819,108 |
| | $ | 16,044,027 |
|
|
| | | | | | | | | | | |
Three Months Ended | June 30, 2018 |
| Products and Services | | Energy Production | | Total |
Products | $ | 2,483,657 |
| | $ | — |
| | $ | 2,483,657 |
|
Installation services | 2,296,606 |
| | — |
| | 2,296,606 |
|
Maintenance services | 2,164,677 |
| | — |
| | 2,164,677 |
|
Energy production | | | 1,508,225 |
| | 1,508,225 |
|
Total revenue | $ | 6,944,940 |
| | $ | 1,508,225 |
| | $ | 8,453,165 |
|
|
| | | | | | | | | | | |
Six Months Ended | June 30, 2018 |
| | | | | |
Products | $ | 6,157,163 |
| | $ | — |
| | $ | 6,157,163 |
|
Installation services | 4,698,404 |
| | — |
| | 4,698,404 |
|
Maintenance services | 4,482,265 |
| | — |
| | 4,482,265 |
|
Energy production | | | 3,290,760 |
| | 3,290,760 |
|
Total revenue | $ | 15,337,832 |
| | $ | 3,290,760 |
| | $ | 18,628,592 |
|
Note 3. Acquisition of American DG Energy Inc.
Product and Services Segment
On May 18, 2017,Products. We transfer control and generally recognize a sale when we completedship a product from our acquisition, by means ofmanufacturing facility at which point a stock-for-stock merger, of 100%customer takes ownership of the outstanding common shares of American DG Energy Inc. (“American DG Energy" or "ADGE”), a company which installs, owns, operates and maintains 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 ourproduct. Payment terms on 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 common stock to the prior stockholders of ADGE.sales are generally 30 days.
We have includedrecognize revenue in certain circumstances before delivery to the financial resultscustomer 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 ADGE in our condensed consolidated financial statementsownership has been assumed by the customer, and the product(s) are tagged as sold and segregated for storage awaiting further direction from the datecustomer. Due to the infrequent nature and duration of acquisition. Forbill and hold arrangements, the threevalue associated with custodial storage services is deemed immaterial in the context of the contract and nine months ended September 30, 2017, ADGE contributed $1,556,115in total, and $2,330,307accordingly, none of the transaction price is allocated to our total revenues and $832,917 and $1,276,566 to our gross profit, respectively.such service.
Acquisition related costs included in generalDepending on the product and administrative expenses totaled $37,445 and $374,042, respectively for the three and nine months ended September 30, 2017. Stock issuance related costs totaling $367,101 were netted against additional paid in capital during the nine months ended September 30, 2017.
The merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a)terms of the Internal Revenue Codearrangement, we may defer the recognition of 1986. Subject to the terms and conditionsa portion of the merger agreement, attransaction 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
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
closingdetermine 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.
Installation Services. We provide both complete turnkey installation services and what we refer to as light installation services. Complete turnkey installation services 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 light installation contracts, revenue related to ancillary products and parts is recognized when we transfer control of such items to the customer, generally when we ship them from our manufacturing facility, with revenue related to engineering and design services being recognized at the point where the customer can benefit from the service, generally as completed. Generally billings under light installation contracts are made when shipped and/or completed, with payment terms generally being 30 days.
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 is satisfied progressively over time as enhancements are made to customer owned and controlled properties. We measure progress towards satisfaction of the merger, each outstanding shareperformance obligation based on an input method based on cost which we believe is the most faithful depiction of ADGE common stock was converted intothe 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.
Maintenance Services. Maintenance services are provided under either long-term maintenance contracts or one-time maintenance contracts. Revenue under one-time 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 that amount to which we have the right to receive approximately 0.092 shares of common stock of Tecogen (the "Exchange Ratio").invoice the customer under the contract.
Also in connection withEnergy Production Segment
Energy Production. Revenue from energy contracts is recognized when electricity, heat, hot and/or chilled water is produced by the merger, Tecogen, atCompany owned on-site cogeneration systems. Each month we bill the effective timecustomer and recognize revenue for the various forms of energy delivered, based on meter readings which capture the quantity of the merger, assumedvarious forms of energy delivered in a given month, under a contractually defined formula which takes into account the (a) outstanding stock optionscurrent month's cost of ADGEenergy from the local power utility.
As the various forms of energy delivered by us under energy production contracts are simultaneously delivered and (b) outstanding warrantsconsumed by the customer, our performance obligation under these contracts is considered to purchase common stockbe satisfied over time. We use an output method to measure progress towards completion of ADGE, each as adjusted pursuantour performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the Exchange Ratio and subjectcustomer 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 of the merger agreement.on invoices under these contracts are generally 30 days.
The fair value of the 4,662,937 shares of common stock issued as part of the consideration for the acquisition was determined based on the closing market price of Tecogen’s stock on the date of acquisition. Additionally, as there is no required service condition in the assumed equity-based awards, 100% of the estimated fair value of the replacement equity-based awards at the date of the merger is considered attributable to pre-combination service and accordingly is included in the consideration.
The following table summarizes the consideration paid for ADGE and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE.
|
| | | | |
Consideration | |
|
Tecogen common stock - 4,662,937 shares | | $ | 18,745,007 |
|
Assumed fully vested equity awards | | 114,896 |
|
| | $ | 18,859,903 |
|
| |
|
Recognized amounts of identifiable assets acquired and liabilities assumed | |
|
Financial assets | | $ | 1,551,590 |
|
Inventory | | 108,333 |
|
Prepaid and other current assets | | 358,628 |
|
Property, plant and equipment | | 15,430,250 |
|
Investment securities | | 519,568 |
|
Identifiable intangibles assets | | 1,456,166 |
|
Financial liabilities | | (1,857,859 | ) |
Unfavorable contract liability | | (10,838,571 | ) |
Other liabilities | | (939 | ) |
Total identifiable net assets | | 6,727,166 |
|
Noncontrolling interest in American DG New York, LLC | | (469,672 | ) |
Excess of cost over fair value of net assets acquired | | 12,602,409 |
|
| | $ | 18,859,903 |
|
Amounts recognized in respect of inventory, property, plant and equipment, identifiable intangible assets, unfavorable contract liability and noncontrolling interest are provisional, pending completion of the necessary valuations and analysis.
Excess of cost over fair value of net assets acquired of $12.6 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 excess purchase price over net assets acquired recognized is expected to be deductible for income tax purposes.
Identified intangible assets and the unfavorable contract liability, both of which relate to existing customer contracts, and the estimated amortization are more fully described in Note 5, "Intangible Assets and Liabilities Other Than Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired".
The fair value of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE, was estimated using the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within level 3 of the fair value hierarchy described in ASC Section 820-10-35. Key assumptions include a discount rate of 5.61% and the run out of existing contracts at current levels of profitability.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Unaudited Pro Forma Financial InformationContract Balances
The unaudited pro forma financial informationtiming 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 table below summarizesConsolidated Condensed Balance Sheets.
Revenue recognized during the combined results of operations for Tecogen and ADGE as though the companies were combined as of the beginning of fiscal 2016. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition including amortization charges and credits from acquired intangible assets and liabilities (certain of which are preliminary), and depreciation adjustments related to fair value as though the aforementioned companies were combined as of the beginning of fiscal 2016. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operationsquarter ended June 30, 2019 that would have been achieved if the acquisition had taken placewas included in unbilled revenue at the beginning of fiscal 2016.the period was approximately $1.4 million. Approximately $3.7 million was billed in this period that had been recognized as revenue in previous periods.
|
| | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
Total revenues | | $ | 25,030,586 |
| | $ | 21,240,102 |
|
Net income (loss) | | (998,323 | ) | | (2,236,396 | ) |
Basic earnings (loss) per share | | (0.04 | ) | | (0.09 | ) |
Diluted earnings (loss) per share | | (0.04 | ) | | (0.09 | ) |
Revenue recognized during the quarter ended June 30, 2019 that was included in deferred revenue at the beginning of the period was approximately $1.4 million.
One-time acquisition-related expenses related toThe decrease in the merger incurreddeferred revenue balance during the three-month and nine-month periodsquarter ended SeptemberJune 30, 2017 are not2019 is primarily the result of of revenue recognized during the period that was included in the unaudited pro forma financial information as they are not expecteddeferred revenue balance at the beginning of the period, offset by cash payments of $379 thousand received in advance of satisfying performance obligations.
Remaining Performance Obligations
Remaining performance obligations related to haveASC 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 continuing impact ondirect measurement of the consolidated results.
The unaudited pro forma financial information does not include the revenues or results of operations of a subsidiary previously owned and consolidated by American DG Energy as that subsidiary was disposed of in 2016 priorvalue to the acquisition by Tecogencustomer 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 was consideredin some cases rates used to be a discontinued operation by American DG Energy. Additionally,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 June 30, 2019, the unaudited pro forma financial information does not include a gain recognized on deconsolidation of that same subsidiary by American DG Energy and anaggregate amount of interest cost relatedthe transaction price allocated to American DG Energy's long-term debt whichremaining performance obligations was extinguished contemporaneously with the dispositionapproximately $20.4 million. The Company expects to recognize revenue of approximately 93% of the subsidiary.remaining performance obligations over the next 24 months, 29% recognized in the first 12 months and 64% recognized over the subsequent 12 months, and the remainder recognized thereafter.
Note 3. Income (loss) Per Common Share
Basic and diluted income (loss) per share for the three and six months ended June 30, 2019 and 2018, respectively, were as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net loss attributable to stockholders | | $ | (357,129 | ) | | $ | (754,350 | ) | | $ | (3,637,206 | ) | | $ | (733,592 | ) |
Weighted average shares outstanding - Basic and diluted | | 24,826,311 |
| | 24,818,459 |
| | 24,822,555 |
| | 24,811,034 |
|
Basic loss per share | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.15 | ) | | $ | (0.03 | ) |
Anti-dilutive shares underlying stock options outstanding | | 205,036 |
| | 176,812 |
| | 228,537 |
| | 135,517 |
|
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 4. Property, Plant and Equipment
Property, plant and equipment at SeptemberJune 30, 20172019 and December 31, 20162018 consisted of the following:
| | | Estimated Useful Life (in Years) | | September 30, 2017 | | December 31, 2016 | Estimated Useful Life (in Years) | | June 30, 2019 | | December 31, 2018 |
Energy systems | 1 - 15 years | | $ | 12,823,745 |
| | $ | — |
| 1 - 15 years | | $ | 4,372,639 |
| | $ | 12,709,990 |
|
Machinery and equipment | 5 - 7 years | | 1,127,264 |
| | 1,009,893 |
| 5 - 7 years | | 1,419,009 |
| | 1,355,617 |
|
Furniture and fixtures | 5 years | | 103,971 |
| | 141,874 |
| 5 years | | 193,697 |
| | 222,542 |
|
Computer software | 3 - 5 years | | 196,417 |
| | 102,415 |
| 3 - 5 years | | 192,865 |
| | 200,626 |
|
Leasehold improvements | * | | 440,519 |
| | 437,341 |
| * | | 450,792 |
| | 450,792 |
|
| | | 14,691,916 |
| | 1,691,523 |
| | | 6,629,002 |
| | 14,939,567 |
|
Less - accumulated depreciation and amortization | | | (2,017,401 | ) | | (1,174,380 | ) | | | (2,865,502 | ) | | (3,666,452 | ) |
| | | 12,674,515 |
| | 517,143 |
| | | $ | 3,763,500 |
| | $ | 11,273,115 |
|
Construction in progress | | 2,828,459 |
| | — |
| |
| | $ | 15,502,974 |
| | $ | 517,143 |
| |
* Lesser of estimated useful life of asset or lease term
Depreciation and amortization expense on property and equipment for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 was $425,911$164,356 and $751,960,$506,218 and $42,084$402,336 and $125,255,$830,416, respectively.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
In March 2019, the Company sold certain energy systems related assets and related energy production contracts. See Note 6. Sale of Energy Producing Assets and Goodwill Impairment for further discussion.
Note 5. Intangible Assets and Liabilities Other Than Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired
As of SeptemberJune 30, 20172019 and December 31, 20162018 the Company had the following amounts related to intangible assets and liabilities other than goodwill and excess of cost over fair value of net assets acquired:goodwill:
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
Intangible assets | | Cost | | Accumulated Amortization | | Total | | Cost | | Accumulated Amortization | | Total | | Cost | | Accumulated Amortization | | Total | | Cost | | Accumulated Amortization | | Total |
Product certifications | | $ | 602,202 |
| | $ | (272,503 | ) | | $ | 329,699 |
| | $ | 544,651 |
| | $ | (233,992 | ) | | $ | 310,659 |
| | $ | 726,159 |
| | $ | (372,782 | ) | | $ | 353,377 |
| | $ | 726,159 |
| | $ | (345,658 | ) | | $ | 380,501 |
|
Patents | | 656,105 |
| | (146,983 | ) | | 509,122 |
| | 681,155 |
| | (123,012 | ) | | 558,143 |
| | 930,509 |
| | (198,362 | ) | | 732,147 |
| | 910,569 |
| | (188,239 | ) | | 722,330 |
|
Developed technology | | 240,000 |
| | (72,000 | ) | | 168,000 |
| | 240,000 |
| | (60,000 | ) | | 180,000 |
| | 240,000 |
| | (100,000 | ) | | 140,000 |
| | 240,000 |
| | (92,000 | ) | | 148,000 |
|
Trademarks | | 19,215 |
| | — |
| | 19,215 |
| | 17,165 |
| | — |
| | 17,165 |
| | 25,552 |
| | — |
| | 25,552 |
| | 22,752 |
| | — |
| | 22,752 |
|
In Process R&D | | | 263,936 |
| | — |
| | 263,936 |
| | 263,936 |
| | — |
| | 263,936 |
|
Favorable contract asset | | 1,456,166 |
| | (52,024 | ) | | 1,404,142 |
| | — |
| | — |
| | — |
| | 274,858 |
| | (260,217 | ) | | 14,641 |
| | 1,561,739 |
| | (232,099 | ) | | 1,329,640 |
|
TTcogen intangible assets | | | 29,607 |
| | (4,626 | ) | | 24,981 |
| | — |
| | — |
| | — |
|
| | $ | 2,973,688 |
| | $ | (543,510 | ) | | $ | 2,430,178 |
| | $ | 1,482,971 |
| | $ | (417,004 | ) | | $ | 1,065,967 |
| | $ | 2,490,621 |
| | $ | (935,987 | ) | | $ | 1,554,634 |
| | $ | 3,754,762 |
| | $ | (860,772 | ) | | $ | 2,893,990 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Intangible liability | | | | | | | | | | | | | | | | | | | | | | | | |
Unfavorable contract liability | | $ | 10,838,571 |
| | $ | (480,288 | ) | | $ | 10,358,283 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,689,025 |
| | $ | (1,934,528 | ) | | $ | 2,754,497 |
| | $ | 7,912,275 |
| | $ | (1,619,676 | ) | | $ | 6,292,599 |
|
The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 was $74,482$23,649 and $73,511,$47,748 and $26,473 and $51,376, respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 was $428,264$113,442 and $-0-,$286,734 and $216,107 and $444,166, respectively.
Favorable/Unfavorable Contract Assets and Liabilities
The favorable contract asset and unfavorable contract liability in the foregoing table represent the estimated fair value of American DG Energy's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Company onin May 18, 2017 (see Note 3. "Acquisition of American DG Energy Inc."). These contracts are long-term and provide customers with an alternative source of electrical power in addition to that provided by the local power utility, at rates that are lower than local utilities. This alternative electrical power is typically produced by ADGE owned, operated and maintained natural gas powered systems installed at the customers' sites, with ADGE bearing all costs of operation and maintenance. In addition to the alternative source of electrical power provided by ADGE’s systems, customers can opt to add and take advantage of the heat generated in the electrical production process in the form of hot water and/or space heating. Pricing to the customer for electrical power produced and supplied by ADGE under the contracts is under a fixed formula which requires the customer to pay for the kilowatts of electrical power provided at a fixed percentage discount to the local utility’s electric rate for that period. As a result, as utility rates for electrical power change, the amount ADGE is able to charge the customer under the contract also changes. There has been a sharp decrease in electric rates over the past several years, subsequent to the vast majority of customer contract dates, causing the billable value of the electrical power generated by ADGE’s systems to decrease, resulting in a deterioration of expected profitability. As of the date of acquisition, utility electric rates were significantly below the level anticipated at the time the fixed percentage discounts contained in the vast majority of ADGE’s customer contracts were contracted for, thus these contract terms, although they produce cash flow, were considered to be off market in the vast majority of ADGE’s customer contracts. Additionally, the demand and volume of kilowatts produced and billed for vary by contract and by period and in certain instances have been significantly below what was originally expected such that had it been known at the time the contract(s) were negotiated, it would have influenced ADGE’s determination of the level of the fixed percentage discount in those contracts.2017.
The determination of fair value requires 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
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
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 ADGE’s customer contracts, the measure of at market, and thus the baseline to measure the amount related to any of the off 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. It is believed that a market participant would have utilized a similar margin in arriving at a buy price for the contract(s).
Amortization of intangibles including contract related amounts is calculated using the straight linestraight-line method over the remaining useful life or contract term. Aggregate future amortization over the next five years is estimated to be as follows:
| | Year 1 | | $ | (993,749 | ) | | $ | (179,760 | ) |
Year 2 | | (911,514 | ) | | (190,417 | ) |
Year 3 | | (847,307 | ) | | (214,440 | ) |
Year 4 | | (858,084 | ) | | (176,316 | ) |
Year 5 | | (840,273 | ) | | (116,609 | ) |
Note 6. Sale of Energy Producing Assets and Goodwill and Excess of Cost Over Fair Value of Net Assets AcquiredImpairment
ChangesDuring the first quarter of 2019, the Company recognized two individual sales of energy producing assets, for a total of eight power purchase agreements, including the associated energy production contracts for total consideration of $7 million, which resulted in a combined gain on sale of assets of $1,081,049 included in the carryingaccompanying statement of operations.
In connection with the sales, the Company 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 has 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, with the Company making up any shortfall. To the extent actual results are in excess of the minimum threshold, the Company is entitled to forty percent of such excess under the agreements.
The foregoing agreements also contain provisions whereby the Company has 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 Company be required to make whole the purchaser under such provisions, the Company 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.
The Company is also responsible under the agreements for site decommissioning costs, if any, in excess of certain threshold amounts by site. Decommissioning of site assets is performed when, if and as requested by the counterparty to the energy production contract upon termination of the energy production contract.
The combined gain on sale of these assets of $1,081,049 was determined after deducting from the gross proceeds the remaining net book value of the assets sold and an estimate of the remaining costs to complete installation of certain of the site assets as well as deducting an estimate of amounts which the Company believes it will be required to pay under the minimum cash flow guarantee described above. In determining the $1,081,049 combined gain on the sale of these assets, no amount of goodwill assigned to the energy production segment and excessreporting unit was included as individual sites and related site energy producing assets are not considered businesses. The aggregate of cost overthe assets sold represents a significant portion of the energy production segment and reporting unit’s assets and cash flows which is the basis for determination of the fair value of netthe energy production reporting unit as used for goodwill impairment determinations. Accordingly, the sale of these assets acquiredcaused the Company to assess the impact of the sales on the valuation of remaining goodwill assigned to the energy production reporting unit. That assessment included a determination of whether the remaining carrying value of the energy production reporting unit including goodwill exceeded its fair value. Following a goodwill impairment charge in 2018 which reduced the carrying value of the energy production reporting unit including goodwill to fair value based on discounted cash flows, exclusion of the discounted cash flows related to the assets sold resulted in impairment of the remaining goodwill assigned to the energy production reporting unit in an amount proportionate to the discounted cash flows related to the assets sold to the total discounted cash flows of the energy production reporting unit before the sales. The goodwill impairment as a result of the sales and recognized in the first quarter of 2019 totaled approximately $3.7 million, reducing the remaining carrying value of the energy production reporting unit, including goodwill to the discounted cash flow of the remaining sites or fair value.
Note 7. Leases
Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing and storage facilities. Our lease terms do not include options to extend or terminate the lease until we are reasonably certain that we will exercise that option.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for each component separately based on the estimated standalone price of each component.
Operating leases are included in Right-of-use assets, Lease obligations, current and Lease obligations, long term on the Condensed Consolidated Balance Sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using an incremental borrowing rate consistent with the lease terms or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease expense for operating leases, which principally consists of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Lease expense for the three and six months ended June 30, 2019 was $192,674 and $372,371,respectively.
Supplemental information related to leases for the six months ended June 30, 2019 was as follows:
|
| | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 319,436 |
|
Right-of-use assets obtained in exchange for operating lease liabilities | | $ | 2,628,299 |
|
Weighted-average remaining lease term - operating leases | | 4.5 years |
|
Weighted-average discount rate - operating leases | | 6 | % |
Future minimum lease commitments under non-cancellable operating leases as of June 30, 2019 were as follows:
|
| | | | | | | | |
| | Goodwill | | Excess of cost over fair value of net assets acquired |
Balance at December 31, 2016 | | $ | 40,870 |
| | $ | — |
|
Acquisitions | | — |
| | 12,602,409 |
|
Balance at September 30, 2017 | | $ | 40,870 |
| | $ | 12,602,409 |
|
Excess of cost over fair value of net assets acquired at September 30, 2017 has not as of yet been allocated to the respective segments pending completion of the necessary analysis. |
| | | | |
| | Operating Leases |
Q3 through Q4 2019 | | $ | 375,423 |
|
2020 | | 649,801 |
|
2021 | | 576,698 |
|
2022 | | 529,115 |
|
2023 | | 536,863 |
|
Thereafter | | 134,700 |
|
Total lease payments | | 2,802,600 |
|
Less: imputed interest | | 381,019 |
|
Total | | $ | 2,421,581 |
|
Note 7.8. Stock-Based Compensation
Stock-Based Compensation
The Company adopted thea 2006 Stock Option and Incentive Plan, or the Plan, under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants of the Company. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Amended Plan to 3,838,750 as of SeptemberJune 30, 2017, or the Amended Plan.2019.
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 SeptemberJune 30, 20172019 was 2,250,536.1,903,180.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Stock option activity for the ninesix months ended SeptemberJune 30, 20172019 was as follows:
|
| | | | | | | | | | | | | | | |
Common Stock Options | Number of Options | | Exercise Price Per Share | | Weighted Average Exercise Price | | Weighted Average Remaining Life | | Aggregate Intrinsic Value |
Outstanding, December 31, 2016 | 1,117,918 |
| | $0.79-$5.39 | | $ | 3.10 |
| | 5.00 years | | $ | 1,415,150 |
|
Granted | 45,000 |
| | $3.22-$3.72 | | 3.35 |
| | | | |
Assumed in merger | 156,124 |
| | $3.15-$30.33 | — |
| 10.35 |
| | | | |
Exercised | (79,543 | ) | | $0.79-$2.00 | | 1.62 |
| | | | |
Canceled and forfeited | (106,112 | ) | | $2.60-$30.33 | | 9.67 |
| | | | |
Outstanding, September 30, 2017 | 1,133,387 |
| | $0.79-$25.11 | | $ | 3.62 |
| | 5.25 years | | $ | 484,535 |
|
Exercisable, September 30, 2017 | 883,631 |
| | | | $ | 3.42 |
| | | | $ | 201,957 |
|
Vested and expected to vest, September 30, 2017 | 1,095,925 |
| | | | $ | 3.59 |
| | | | $ | 605,063 |
|
|
| | | | | | | | | | | | | | |
Common Stock Options | Number of Options | | Exercise Price Per Share | | Weighted Average Exercise Price | | Weighted Average Remaining Life | | Aggregate Intrinsic Value |
Outstanding, December 31, 2018 | 1,292,589 |
| | $0.79-$10.33 | | $ | 3.52 |
| | 5.93 years | | $ | 671,331 |
|
Granted | 88,500 |
| | $3.40-$3.80 | | $ | 3.70 |
| | | | |
Exercised | (16,060 | ) | | $1.20-$2.60 | | $ | 1.29 |
| | | | |
Canceled and forfeited | (700 | ) | | $4.50 | | $ | 4.50 |
| | | | |
Outstanding, June 30, 2019 | 1,364,329 |
| | $0.79-$10.33 | | $ | 3.56 |
| | 5.78 years | | $ | 722,514 |
|
Exercisable, June 30, 2019 | 910,329 |
| | | | $ | 3.50 |
| | | | $ | 655,677 |
|
Vested and expected to vest, June 30, 2019 | 1,296,229 |
| | | | $ | 3.55 |
| | | | $ | 712,488 |
|
Consolidated stock-based compensation expense for the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 was $138,329$39,898 and $117,065,$77,933, and $38,062 and $78,478, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the periods.
Note 8.9. Fair Value Measurements
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company has Level 2 financial assets and liabilities as provided below.
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not currently have any Level 3 financial assets or liabilities.
The following table presents the asset reported in the consolidated balance sheet measured at its fair value on a recurring basis as of SeptemberJune 30, 20172019 by level within the fair value hierarchy.
| | September 30, 2017 | | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | | |
June 30, 2019 | | | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total gains (losses) | Total | | Level 1 | | Level 2 | | Level 3 |
Recurring fair value measurements | | | | | | | | | | | | | | | | |
Available-for-sale equity securities | | | | | | | | | | |
Marketable equity securities | | | | | | | | |
EuroSite Power Inc. | $ | 334,570 |
| | $ | — |
| | $ | — |
| | $ | 334,570 |
| | $ | (184,998 | ) | $ | 216,487 |
| | $ | — |
| | $ | 216,487 |
| | $ | — |
|
Total recurring fair value measurements | $ | 334,570 |
| | $ | — |
| | $ | — |
| | $ | 334,570 |
| | $ | (184,998 | ) | $ | 216,487 |
| | $ | — |
| | $ | 216,487 |
| | $ | — |
|
The Company utilizes a Level 32 category fair value measurement to value its investment in EuroSite Power as an available-for-salea marketable equity security at period end. That measurement is determined by management based onequal to the lowestquoted market closing sales price in a 15 day trading period prior toat period end. Since this security is not actively traded the Company classifies it as Level 2.
The following table summarizes changes in Level 2 assets which are comprised of marketable equity securities for the period:
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes changes in level 3 assets which are comprised of available-for-sale securities for the period:
|
| | | |
Fair value at acquisition on May 18, 2017 | $ | 519,568 |
|
Unrealized loss recognized in other comprehensive loss | (184,998 | ) |
Fair value at September 30, 2017 | $ | 334,570 |
|
|
| | | |
Fair value at December 31, 2018 | $ | 236,167 |
|
Unrealized loss included in net income for the six months ended June 30, 2019 | (19,680 | ) |
Fair value at June 30, 2019 | $ | 216,487 |
|
Note 10.Revolving Line of Credit, Bank
On May 4, 2018 ("Closing Date") the Company, and its wholly owned subsidiaries, American DG Energy Inc. and TTcogen LLC (collectively, the "Borrowers"), entered into a Credit Agreement with Webster Business Credit Corporation (the "Lender") that matures in May 2021 and provides Borrowers a line of credit of up to $10 million on a revolving and secured basis, with availability based on certain accounts receivables, raw materials, and finished goods.
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Borrower's option, either (1) One Month LIBOR, plus 3.00%, or (2) Lender’s Base Rate, plus 1.5%. Lender’s Base Rate is defined as the highest of (a) the Federal Funds rate plus 0.5%, (b) Lender’s Prime Rate as adjusted by Lender from time to time, and (c) One Month LIBOR, plus 2.75%.
The Credit Agreement contains certain affirmative and negative covenants applicable to the Company and its subsidiaries, which include, among other things, restrictions on their ability to (i) incur additional indebtedness, (ii) make certain investments, (iii) acquire other entities, (iv) dispose of assets and (v) make certain payments including those related to dividends or repurchase of equity. The Credit Agreement also contains financial covenants including maintaining a fixed charge coverage ratio of not less than 1.10:1.00 and the Company may not make any financed capital expenditures in excess of $500,000 in the aggregate in any fiscal year. As of June 30, 2019, the Company believes it is in compliance with all of the covenants.
The $145,011 of costs incurred in connection with the issuance of the revolving credit facility were capitalized and are being amortized to interest expense on a straight-line basis over three years based on the contractual term of the Agreement. As of June 30, 2019, the outstanding balance on the line of credit was $0 and the unamortized portion of debt issuance cost related to the Credit Agreement was $97,669 and is included in prepaid and other current assets in the accompanying Condensed Consolidated Balance Sheet.
Note 9.11. Commitments and Contingencies
The Company guarantees certain obligations of a former subsidiary of American DG Energy, EuroSite Power Inc. These guarantees include a payment performance guarantee in respect of collateralized equipment financing loans, with a remaining principal amount outstanding subject to the guarantee at SeptemberJune 30, 20172019 of approximately $301,000$168,000 due ratably in equal installments through September 2021, and certain guarantees of performance in respect of certain customer contracts. Based on current conditions, the Company does not believe there to be any amounts probable of payment by the Company under any of the guarantees and has estimated the value associated with the non-contingent aspect of the guarantees is approximately $10,000$7,000 which is recorded as a liability in the accompanying financial statements.
Legal Proceedings
Tecogen is not currentlyIn connection with the sale of energy producing assets, the Company made certain guarantees to the purchaser as discussed in Note 6. Sale of Energy Producing Assets and Goodwill Impairment. In the first quarter of 2019 the Company recorded a party to any material litigation arising from its operations,reduction on the gain on sale and it is not awarea corresponding liability of any pending or threatened litigation against it relating to its operations that could have a material adverse effect on its business, operating results or financial condition. However, it is or has been a party to a claim$350,000 in the Superior Court of the Commonwealth of Massachusetts and named as a defendant in a case in the United States District Courtfinancial statements to reserve for the District of Massachusetts, described below, related to the Merger.
Massachusetts Superior Court Action
On or about February 6, 2017, ADGE, John Hatsopoulos, George N. Hatsopoulos, Charles T. Maxwell, Deanna M. Petersen, Christine Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen, and Merger Sub were served with a Verified Complaint by William C. May ("May"), individually and on behalf of the other shareholders of ADGE as a class. The action was commenced in the Business Litigation Session of the Superior Court of the Commonwealth of Massachusetts, Civil Action No. 17-0390. The complaint alleged class action claims arising out of the proposed Merger. On May 31, 2017, May voluntarily dismissed the action and consolidated his claims with the pending federal action in the United States District Court for the District of Massachusetts. If the complaint in the federal court is dismissed, it is possible that May or another plaintiff will recommence an action in state court with similar claims to those asserted by May.
United States District Court Action
On or about February 15, 2017, a lawsuit was filed in the United States District Court for the District of Massachusetts by Lee Vardakas (“Vardakas”), individually and on behalf of other stockholders of ADGE, naming ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Benjamin Locke, Charles T. Maxwell, Deanne M. Petersen, Christine M. Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants. The action is captioned Vardakas v. American DG Energy, Inc., Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
On May 18, 2017, ADGE’s and Tecogen’s shareholders approved the Merger.
Following the consummation of the Merger (and the appointment of May, from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint discontinued the claims against Cassel Salpeter & Co., LLC but asserted against the remaining defendants claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 14a-9; claims against certain defendants for control person liability under § 20(a) of the Exchange Act (collectively, the “Federal Securities Law Claims”); and common law claims for breach of fiduciary duty and aiding and abetting (the “State Law Claims”). The Federal Securities Law Claims allege, in substance, that defendants made material nondisclosure in the proxy statement about the process leading to the Merger and about the fairness opinion relied upon by ADGE’s Board of Directors in recommending the Merger to shareholders. The State Law Claims assert, in substance, that defendants breached their fiduciary duties in negotiating and approving the Merger, which, plaintiff claims, deprived ADGE’s nonaffiliated shareholders of fair value for their shares.
On July 19, 2017, defendants moved to dismiss the Amended Complaint. In their motion papers, defendants contend that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim. Defendants also assert that
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
if the Federal Securities Law Claims are dismissed, the district court must also dismiss the State Law Claims because it would lack subject matter jurisdiction. The parties are awaiting a decision from the court.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimed and the likelihood of an unfavorable outcome is not reasonably estimable.such future costs.
Note 10.12. Related Party Transactions
The Company has two affiliated companies, namely Ultra Emissions Technologies Ltd, and TTcogen LLC. These companies are related because either several of the major stockholders of those companies have a significant ownership position in the Company or they are joint ventures between Tecogen and other parties.
In January of 2017, prior to its acquisition of American DG Energy, the Company purchased a large quantity of used equipment from American DG Energy for approximately $985,000. Tecogen plans to sell this equipment to specific customers in the coming quarters.
In connection with the acquisition of American DG Energy, the Company assumed a loan from John N. Hatsopoulos, the Company's former Co-Chief Executive Officer and a Company Director. The loan iswas in the amount of $850,000 and bearsbore interest at 6%, payable quarterly, and matures and becomes due and payable onquarterly. On May 25, 2018.
Ultra Emissions Technologies Ltd.
On December 28, 2015,4, 2018, the Company, entered into a joint venture agreement relating tothrough payment of $919,590, terminated the formation of a joint venture company (the “JV”) organized to developloan and commercialize Tecogen’s patented technology (“Ultera® Technology”) designed to reduce harmful emissions generated by engines using fossil fuels. The joint venture company, called Ultra Emissions Technologies Limited, was organizedall obligations under the laws of the Island of Jersey, Channel Islands.
The Company received a 50% equity interest in the JV in exchange for a fully paid-up worldwide license to use Tecogen’s Ultera emissions control technology in the field of mobile vehicles burning fossil fuels. The other half of the joint venture equity interests were purchased for $3,000,000 by a small group of offshore investors. Warrants to purchase additional equity securities in the JV were granted to all parties pro rata. If the venture is not successful, all licensed intellectual property rights will revert to Tecogen.
On August 2, 2016, Tecogen exercised 2,000,000 warrants (the "Ultratek Warrants"), in the JV, at $1.00 per share, for an aggregate amount of $2 million. The funds used to exercise the Ultratek Warrants were acquired by the Company from the holders of certain Company warrants (the "Tecogen Warrant Holders"), when they partially exercised their Tecogen warrants (the "Tecogen Warrants"), in July of 2016. The Tecogen Warrant Holders exercised a total of 675,000 Tecogen Warrants with a $4.00 exercise price, resulting in cash proceeds of $2,700,000 to the Company, which the Company then used in part to invest in the JV. An additional $8,500,000 was raised from other outside investors for a total equity investment in the JV to date of $13,500,000. Due to this investment, Tecogen's ownership has decreased to 43%.
The JV is expected to have losses as it performs the necessary research and development with the Ultera technology. The Company accounts for its interest in the JV using the equity method. Income and losses will be recorded consistent with an agreement between the JV shareholders as to how income and losses will be allocated. These allocations are consistent with the allocation of cash distributions and liquidating distributions of the JV. The shareholder agreement calls for Tecogen's investment to be returned before any other shareholder if the venture does not achieve commercialization. As a result, as of September 30, 2017, Tecogen has not recorded any of the losses of the JV as the cumulative losses of the JV have not exceeded the other owners' investments to date. As of September 30, 2017, $94,777 is due to Tecogen from Ultratek.loan.
TTcogen LLC
On May 19, 2016, the Company along with Tedom a.s., a corporation incorporated in the Czech Republic and a European combined heat and power product manufacturemanufacturer ("Tedom"), entered into a joint venture, where the Company will holdheld a 50% participating interest and the remaining 50% interest will be withwas held by Tedom. As part of the joint venture, the parties agreed to create a Delaware limited liability company, TTcogen LLC ("TTcogen"), to carry out the business of the venture. Tedom
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
granted TTcogen the sole and exclusive right to market, sell, offer for sale, and distribute certain products as agreed to by the parties throughout the United States. The product offerings of the joint venture expandexpanded the current Tecogen product offerings to the MicroCHP offor 35kW to large 4,000kW plants. Tecogen agreed to refer all appropriate sale leads to TTcogen regarding thecertain products agreed to by the parties and Tecogen shallwould have the first right to repair and maintain the products sold by TTcogen.
TheUntil the Company accountsacquired the assets of TTcogen, the Company accounted for its interest in TTcogen's operations using the equity method of accounting. Any initial operating losses of TTcogen are to bewere borne and funded by Tedom. To the extent any such losses arewere borne and funded solely by Tedom, the
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Company willdid not recognize any portion of such losses given the Company doesdid not guarantee the obligations of the joint venture nor iswas it committed to provide funding to the joint venture. As of period ending September 30, 2017, $391,618 is due to Tecogen from TTcogen.
On September 22, 2017, the Company provided written notice to Tedom and Tedom USA Inc., a Delaware subsidiary of Tedom (“Tedom USA”) in exercise of its rights underthat the JoinCompany terminated the Joint Venture Agreement dated May 19, 2016 ("JVA") and its correspondingthe TTcogen LLC Operating Agreement ("LLC Operating Agreement"), of the immediate termination of the JVA and LLC Operating Agreement.. This notice beginsbegan the dissolution process under the LLC Operating Agreement.
On March 27, 2018, the Company entered into a Membership Interest Purchase and Wind-Down Agreement (the “Purchase Agreement”) among the Company, Tedom, Tedom USA, and TTcogen. The termination notice wasPurchase Agreement followed the resultmutual agreement of a material and incurable breach of certain provisions thereunder by Tedom and/or Tedom USA. The Company intendsthe parties to work together with Tedom to come to an amicable decision to create a new path forward for TTcogen andterminate the relationshipjoint venture between the Company and Tedom and/or facilitate an amicable wind up of TTcogen's affairs as provided forthat resulted in the LLC Operatingcreation of TTcogen, and implemented the acquisition by the Company of Tedom USA’s 50% membership interest in TTcogen for a purchase price of one dollar, plus $72,597, which represents a portion of Tedom USA's initial investment in TTcogen, minus certain adjustments.
The Purchase Agreement also granted TTcogen and the Company the exclusive right to market, sell, and distribute Tedom’s Micro T35 combined heat and power equipment within an agreed territory in accordance with the terms therewith.northeastern United States under certain conditions, and limited the Company’s right to sell certain competing products. The Company will provide services for Tedom equipment sold by TTcogen or the Company.
The acquisition of Tedom's 50% membership interest for $72,598 was accounted for as an acquisition of assets, and not a business combination, due to the lack of an assembled workforce. The Company adopted the provisions of ASU 2017-01 "Business Combinations - Clarifying the Definition of a Business" at the beginning of 2018, which require, at a minimum, the presence of an input and substantive process that together significantly contribute to the ability to create an output. The lack of an assembled workforce results in the non presence of a substantive process. The following represents the consideration for and the fair value of assets acquired and liabilities assumed recognized at the acquisition date:
|
| | | |
Cash | $ | 442,786 |
|
Accounts receivable | 176,235 |
|
Unbilled revenue | 232,540 |
|
Fixed assets | 47,508 |
|
Intangible assets | 29,607 |
|
Accounts payable | (811,468 | ) |
Deferred revenue | (44,610 | ) |
Cash payable | $ | 72,598 |
|
The intangible asset represents contract backlog related to acquired contracts. The value assigned to contract backlog was determined based on the result of a discounted cash flow analysis, which resultant value was capped so as to preclude recognition of any amount in excess of cost after considering the fair values assigned to other assets acquired and liabilities assumed.
Note 11.13. Segments
As of SeptemberJune 30, 2017,2019, the Company was organized into two operating divisionssegments through which senior management evaluates the Company’s business. These divisions,segments, as described in more detail in Note 1, are organized around the products and services provided to customers and represent the Company’s reportable segments. Prior to the acquisition of ADGE (see Note 3. “Acquisition of American DG Energy Inc.”), the Company’s operations were comprised of a single segment.TheThe following table presents information by reportable segment for the three and six months ended SeptemberJune 30, 20172019 and 2016 and the nine months ended September 30, 2017 and 2016:2018:
|
| | | | | | | | | | | | | | | | | |
| | | Products and Services | | Energy Production | | Corporate, other and elimination (1) | | Total |
| Three months ended September 30, 2017 | | | | | | | | |
| | | | | | | | | |
| Revenue - external customers | | $ | 6,945,083 |
| | $ | 1,556,115 |
| | $ | — |
| | $ | 8,501,198 |
|
| Intersegment revenue | | 250,525 |
| | — |
| | (250,525 | ) | | — |
|
| Total revenue | | 7,195,608 |
| | 1,556,115 |
| | (250,525 | ) | | 8,501,198 |
|
| Gross profit | | 2,425,114 |
| | 832,917 |
| | — |
| | 3,258,031 |
|
| Identifiable assets | | 19,179,530 |
| | 16,028,115 |
| | 21,424,270 |
| | 56,631,915 |
|
| | | | | | | | | |
| Three months ended September 30, 2016 | | | | | | | | |
| | | | | | | | | |
| Revenue - external customers | | $ | 6,616,455 |
| | $ | — |
| | $ | — |
| | $ | 6,616,455 |
|
| Intersegment revenue | | — |
| | — |
| | — |
| | — |
|
| Total revenue | | 6,616,455 |
| | — |
| | — |
| | 6,616,455 |
|
| Gross profit | | 2,774,818 |
| | — |
| | — |
| | 2,774,818 |
|
| Identifiable assets | | 15,112,139 |
| | — |
| | 8,078,531 |
| | 23,190,670 |
|
| | | | | | | | | |
| Nine months ended September 30, 2017 | | | | | | | | |
| | | | | | | | | |
| Revenue - external customers | | $ | 20,608,196 |
| | $ | 2,330,307 |
| | $ | — |
| | $ | 22,938,503 |
|
| Intersegment revenue | | 442,343 |
| | — |
| | (442,343 | ) | | — |
|
| Total revenue | | 21,050,539 |
| | 2,330,307 |
| | (442,343 | ) | | 22,938,503 |
|
| Gross profit | | 7,882,758 |
| | 1,276,566 |
| | — |
| | 9,159,324 |
|
| Identifiable assets | | 19,179,530 |
| | 16,028,115 |
| | 21,424,270 |
| | 56,631,915 |
|
| | | | | | | | | |
| Nine months ended September 30, 2016 | | | | | | | | |
| | | | | | | | | |
| Revenue - external customers | | $ | 17,379,278 |
| | $ | — |
| | $ | — |
| | $ | 17,379,278 |
|
| Intersegment revenue | | — |
| | — |
| | — |
| | — |
|
| Total revenue | | 17,379,278 |
| | — |
| | — |
| | 17,379,278 |
|
| Gross profit | | 6,597,056 |
| | — |
| | — |
| | 6,597,056 |
|
| Identifiable assets | | 15,112,139 |
| | — |
| | 8,078,531 |
| | 23,190,670 |
|
| | | | | | | | | |
| (1) Corporate, intersegment revenue, other and elimination includes various corporate assets. Excess of cost over fair value of net assets acquired at September 30, 2017 has not as of yet been allocated to the respective segments pending completion of the necessary analysis. |
|
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | |
| | Products and Services | | Energy Production | | Corporate, other and elimination (1) | | Total |
Six months ended June 30, 2019 | | | | | | | | |
| | | | | | | | |
Revenue - external customers | | $ | 14,224,919 |
| | $ | 1,819,108 |
| | $ | — |
| | $ | 16,044,027 |
|
Intersegment revenue | | 357,161 |
| | — |
| | (357,161 | ) | | — |
|
Total revenue | | $ | 14,582,080 |
| | $ | 1,819,108 |
| | $ | (357,161 | ) | | $ | 16,044,027 |
|
Gross profit | | $ | 5,729,997 |
| | $ | 654,677 |
| | $ | — |
| | $ | 6,384,674 |
|
Identifiable assets | | $ | 24,448,764 |
| | $ | 3,551,619 |
| | $ | 11,755,993 |
| | $ | 39,756,376 |
|
| | | | | | | | |
Six months ended June 30, 2018 | | | | | | | | |
| | | | | | | | |
Revenue - external customers | | $ | 15,337,832 |
| | $ | 3,290,760 |
| | $ | — |
| | $ | 18,628,592 |
|
Intersegment revenue | | 646,084 |
| | — |
| | (646,084 | ) | | — |
|
Total revenue | | $ | 15,983,916 |
| | $ | 3,290,760 |
| | $ | (646,084 | ) | | $ | 18,628,592 |
|
Gross profit | | $ | 5,692,013 |
| | $ | 1,305,384 |
| | $ | — |
| | $ | 6,997,397 |
|
Identifiable assets | | $ | 20,619,262 |
| | $ | 12,853,001 |
| | $ | 17,999,924 |
| | $ | 51,472,187 |
|
| | | | | | | | |
Three months ended June 30, 2019 | | | | | | | | |
| | | | | | | | |
Revenue - external customers | | $ | 7,289,097 |
| | $ | 578,299 |
| | $ | — |
| | $ | 7,867,396 |
|
Intersegment revenue | | 83,649 |
| | — |
| | (83,649 | ) | | — |
|
Total revenue | | $ | 7,372,746 |
| | $ | 578,299 |
| | $ | (83,649 | ) | | $ | 7,867,396 |
|
Gross profit | | $ | 3,212,170 |
| | $ | 213,745 |
| | $ | — |
| | $ | 3,425,915 |
|
Identifiable assets | | $ | 24,448,764 |
| | $ | 3,551,619 |
| | $ | 11,755,993 |
| | $ | 39,756,376 |
|
| | | | | | | | |
Three months ended June 30, 2018 | | | | | | | | |
| | | | | | | | |
Revenue - external customers | | $ | 6,944,940 |
| | $ | 1,508,225 |
| | $ | — |
| | $ | 8,453,165 |
|
Intersegment revenue | | 290,915 |
| | — |
| | (290,915 | ) | | — |
|
Total revenue | | $ | 7,235,855 |
| | $ | 1,508,225 |
| | $ | (290,915 | ) | | $ | 8,453,165 |
|
Gross profit | | $ | 2,491,090 |
| | $ | 668,504 |
| | $ | — |
| | $ | 3,159,594 |
|
Identifiable assets | | $ | 20,619,262 |
| | $ | 12,853,001 |
| | $ | 17,999,924 |
| | $ | 51,472,187 |
|
| | | | | | | | |
(1) Corporate, intersegment revenue, other and elimination includes various corporate assets. |
Note 12.14. Subsequent Events
By unanimous written consent on October 24, 2017, the shareholders of Tecogen Inc.'s (the "Company") joint venture, Ultra Emissions Technologies S.ar.L, ("Ultratek"), voted to dissolve Ultratek, thus terminating the joint venture agreement dated December 28, 2015 and the license agreement between the Company and Ultratek, dated December 28, 2015. This joint venture agreement and license agreement is described in its entirety on the Company's Form 8-K that was filed with the Securities and Exchange Commission on December 31, 2015.
Pursuant to the unanimous shareholder consent dissolving Ultratek, the Company will be receiving its full $2,000,000 investment into Ultratek back upon the completion of the liquidation process. Further, upon termination of the license agreement all intellectual property immediately reverts back to the Company. The Company has also agreed to purchase all of the assets of Ultratek upon dissolution, including new intellectual property that Ultratek developed, for a total purchase price of $400,000.
The Company has evaluated subsequent events through the date of this filing and determined that no additionalmaterial subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
TECOGEN INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company’s estimates change, and readers should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in this Quarterly Report.our Annual Report on Form 10-K for our fiscal year ended December 31, 2018.
Overview
Tecogen Inc., or the Company, or Tecogen designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning using automotive engines that have been specially adapted to run on natural gas. In some cases, our customers may choose to have the Company engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because, in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes, such as space and portable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and MCHP (mechanical power plus heat).
Our products are sold directly to end-users by our in-house marketing team and by established sales agents and representatives. We have agreements in place with distributors and sales representatives. Our existing customers include hospitals and nursing homes, colleges and universities, health clubs and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries, ice rinks, swimming pools, factories, municipal buildings, military installations and indoor growing facilities. We have an installed base of more than 3,000 units. Our products have long useful lives with proper maintenance. Some of our units have been operating for over 35 years.
With the acquisition of American DG Energy Inc., or American DG or ADGE, on ("ADGE") in May 18, 2017, we now also sell energy in the formadded an additional source of revenue. Through ADGE, we install, own, operate and maintain complete distributed generation of electricity heat,systems, or DG systems or energy systems, and other complementary systems at customer sites, and sell electricity, hot water, heat and cooling to our customersenergy under long-term energy sales agreements (with a standard term of 10 to 15 years). Our typical sales model is to own and install energy systems in our customers’ buildings and sell the energy produced by those systems backcontracts at prices guaranteed to the customers at a cost set by a negotiated formula in our customer contracts.to be below conventional utility rates. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We use a contractually defined formula to multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from each customer's local energy utility, to derive the value of our monthly energy sale, which includes a negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customers’customer's local energy utility that month. Our revenues commence as new energy systems become operational. As of September 30, 2017, we had 93 energy systems operational.
The Company’s operations are comprised of two business segments. Our Products and Services segment ("Segment 1")
designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Energy Production segment ("Segment 2") sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
TECOGEN INC.
In addition to being a smaller reporting company, Tecogen is an emerging growth company as that term is defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act).TECOGEN INC.
Results of Operations
ThirdSecond Quarter of 20172019 Compared to ThirdSecond Quarter of 20162018
Revenues
Total revenues in the thirdsecond quarter of 20172019 were $8,501,198$7,867,396 compared to $6,616,455$8,453,165 for the same period in 2016, an increase2018, a decrease of $1,884,743$585,769 or 28.5%6.9%. This decrease is due to the sale of certain energy producing assets in the first quarter, therefore reducing the energy production revenue in the second quarter of 2019 compared to the same period in 2018.
Segment 1 - ProductProducts and Services
Product revenues in the thirdsecond quarter of 20172019 were $2,425,616$2,445,448 compared to $2,850,901$2,483,657 for the same period in 2016,2018, a decrease of $425,285$38,209 or 14.9%1.5%. This decrease was the aggregatenet of a decreasean increase in cogeneration sales of $797,528$125,127 and an increasea decrease in chiller and heat pump sales of $372,243.$163,336, year over year. Such variations in product mix are to be expected. Service revenues in the thirdsecond quarter of 20172019 were $4,519,467$4,843,649 compared to $3,765,554$4,461,283 for the same period in 2016,2018, an increase of $753,913$382,366 or 20.0%8.6%. This increase in the thirdsecond quarter is due to an increasea decrease in installation activity of $757,554$5,579 and a decreasean increase of $3,641$387,945 in service contract revenues. Service contract revenue in the second quarter of 2019 included certain engineering service projects accounting for this increase.
Segment 2 - Energy Production
Energy production revenues in the thirdsecond quarter of 20172019 were $1,556,115, which$578,299, compared to $1,508,225 for the same period in 2018, a decrease of $929,926 or 61.7%. Energy production revenue represents energy revenues earned forduring the entire quarter asby our American DG Energy was acquired during Q2 2017.sites. This decrease is representative of the reduction in energy producing assets owned due to the sales of a portion of these assets as discussed in Note 6. Sale of Energy Producing Assets and Goodwill Impairment.
Cost of Sales
Cost of sales in the thirdsecond quarter of 20172019 was $5,243,167$4,441,481 compared to $3,841,637$5,293,571 for the same period in 2016, an increase2018, a decrease of $1,401,530,$852,090, or 36.5%.16.1% due to the decrease in revenue. Overall gross margin for the second quarter of 2019 was 43.5% compared to 37.4% for the same period in 2018.
Segment 1 - ProductProducts and Services
Cost of sales for productproducts and services in the thirdsecond quarter of 20172019 was $4,519,969$4,076,927 compared to $3,841,637$4,453,850 for the same period in 2016, an increase2018, a decrease of $678,332$376,923 or 17.7%8.5%. During the thirdsecond quarter our overall gross margin for our product and services segment was 34.9%44.1% compared to 41.9%35.9% for the same period in 2016, a decrease of 16.7%. This decrease is due to a change in product mix.2018.
Segment 2 - Energy Production
Cost of sales for energy production in the thirdsecond quarter of 20172019 was $723,198 which represents the cost associated with energy revenues earned during the quarter. During this period our gross margin for energy production was 53.5%.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses in the quarter ending September 30, 2017 were $2,427,352$364,554 compared to $2,003,838$839,721 for the same period in 2016, an increase2018, a decrease of $423,514$475,167 or 21.1%. The increase was56.6% due to increased costs from the addition of American DG Energy's operations.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expensesdecrease in revenue as discussed above. Gross margin for this segment was 37.0% for the thirdsecond quarter of 2017 were $503,4152019 compared to $367,41244.3% for the same period in 2016, an increase of $136,003 or 37.0%. This difference is due to a larger sales force and increased public relations and trade show costs.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses in the quarter ending September 30, 2017 were $241,725 compared to $154,075 for the same period in 2016, an increase of $87,650 or 56.9%. This increase was due to the Company's cost sharing in connection with a research and development grant, which pertains to the potential commercialization of the Company's Ultera emissions technology for certain non-stationary applications.
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Income from Operations
Income from operations for the third quarter of 2017 was $85,539 compared to $249,493 for the same period in 2016, a decrease of $163,954. The decrease was a result of lower margins due to change in product mix. Income for the third quarter of 2017 included one-time merger related expenses of $37,445 and depreciation and amortization expense on the energy producing sites of $160,061.
Other Income (Expense), net
Other expense, net for the three months ended September 30, 2017 was $30,393 compared to $41,625 for the same period in 2016. Other income (expense) includes interest and other income of $14,849, and interest expense on notes payable of $45,242 for the third quarter of 2017. For the same period in 2016, interest and other income was $3,914 and interest expense was $45,539.
Noncontrolling Interest
The income attributable to the noncontrolling interest was $27,935 for the three months ended September 30, 2017 which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC.
Net Income Attributable to Tecogen Inc.
Net income attributable to Tecogen for the three months ended September 30, 2017 was $27,211 compared to $207,868 for the same period in 2016, a decrease of $180,657, year over year. The decrease was the result of a change in product mix.
Other Comprehensive Income
The unrealized gain on securities of $39,361 for the third quarter of 2017 represents a market fluctuation impacting the fair value of American DG Energy's remaining common stock ownership in its former partially owned subsidiary, EuroSite Power Inc. as of September 30, 2017.
First Nine Months of 2017 Compared to First Nine Months of 2016
Revenues
Total revenues for the first nine months of 2017 were $22,938,503 compared to $17,379,278 for the same period in 2016, an increase of $5,559,225 or 32.0%.
Segment 1 - Product and Services
Product revenues in the first nine months of 2017 were $8,349,159 compared to $7,525,909 for the same period in 2016, an increase of $823,250 or 10.9%. This increase was the net of an increase in cogeneration sales of $648,863 and an increase in chiller and heat pump sales of $174,387. Service revenues for the first nine months of 2017 were $12,259,037 compared to $9,853,369 for the same period in 2016, an increase of $2,405,668 or 24.4%. This increase in the first nine months of 2017 is due to an increase in installation activity of $2,095,758 and an increase of $309,910 in service contract revenues.
Segment 2 - Energy Production
Energy production revenues in the first nine months of 2017 were $2,330,307, which represents energy revenues earned from May 19, 2017, the date after acquisition of American DG Energy through September 30, 2017.
Cost of Sales
Cost of sales for the first nine months of 2017 was $13,779,179 compared to $10,782,222 for the same period in 2016, an increase of $2,996,957, or 27.8%.
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Segment 1 - Product and Services
Cost of sales for product and services in the first nine months of 2017 was $12,725,438 compared to $10,782,222 for the same period in 2016, an increase of $1,943,216 or 18.0%. During the first nine months of 2017, our product and services gross margin was 38.3% compared to 38.0% for the same period in 2016, a 0.8% improvement. The increase in margin was a result of material cost savings in production and ongoing product development. Product gross margin for the first nine months of 2017 was 37.0% compared to 33.1% for the same period in 2016, a 11.8% improvement. Service gross margin for the first nine months of 2017 was 39.1% compared to 41.7%, a decrease of 6.2% due to normal fluctuations in cost.
Segment 2 - Energy Production
Cost of sales for energy production in the first nine months of 2017 was $1,053,741 which represents the cost associated with energy revenues earned from May 19, 2017, the date after acquisition of American DG Energy through September 30, 2017; this represents approximately 42% of the second quarter's revenue plus the entire third quarter's revenue for American DG Energy. During this period our gross margin for energy production was 54.8%; higher than expected, due to seasonality and a retroactive rate change which reduced fuel costs.2018.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the nine monthsquarter ended SeptemberJune 30, 20172019 were $7,042,500$2,683,252 compared to $5,898,230$2,750,705 for the same period in 2016, an increase2018, a decrease of $1,144,270$67,453 or 19.4%2.5%. The increase was mainly due to a combination of costs incurred in connection with the merger and related litigation as well as increased costs from the addition of American DG Energy's operations.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the nine months ended September 30, 2017second quarter of 2019 were $1,558,378$704,700 compared to $1,217,533$635,396 for the same period in 2016,2018, an increase of $340,845$69,304 or 28.0%10.9% which tends to vary quarter to quarter depending on timing of certain activities.
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Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses in the quarter ended June 30, 2019 were $372,545 compared to $409,779 for the same period in 2018, a decrease of $37,234 or 9.1%. R&D expenses were incurred due to the Company's continued efforts in connection with the Tecofrost and projects relating to industrial refrigeration and potential commercialization of the Company's Ultera emissions technology for certain non-stationary applications.
Income (Loss) from Operations
Loss from operations for the second quarter of 2019 was $334,582 compared to a loss of $636,286 for the same period in 2018, a difference of $301,704. The improvement was a result of the increase in gross profit and margin for the second quarter of 2019 compared to the same period in 2018.
Other Income (Expense), net
Other income, net for the three months ended June 30, 2019 was income of $2,742 compared to expense of $64,014 for the same period in 2018. Other income (expense) includes interest and other income and expense of $66, interest expense of $17,005 and an unrealized gain from market value fluctuation of our investment in EuroSite Power Inc.'s common stock of $19,681 for the second quarter of 2019. For the same period in 2018, interest and other income and expense was $4,830, unrealized loss from market fluctuation of $59,042 and interest expense was $9,802.
Provision for state income taxes
The provision for state income taxes in the second quarter of 2019 and 2018 was $15,955 and $38,864, respectively and represents estimated income tax payments net of refunds to various states.
Noncontrolling Interest
The income attributable to the noncontrolling interest was $9,334 and income of $15,186 for the three months ended June 30, 2019 and 2018, which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC.
Net Loss Attributable to Tecogen Inc.
Net loss attributable to Tecogen Inc. for the three months ended June 30, 2019 was $357,129 compared to a loss of $754,350 for the same period in 2018, a difference of $397,221, year over year. The improvement was a result of the increase in gross profit and margin for the second quarter of 2019 compared to the same period in 2018.
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First Six Months of 2019 Compared to First Six Months of 2018
Revenues
Total revenues for the first six months of 2019 were $16,044,027 compared to $18,628,592 for the same period in 2018, a decrease of $2,584,565 or 13.9%.
Segment 1 - Products and Services
Product revenues in the first six months of 2019 were $5,469,974 compared to $6,157,163 for the same period in 2018, a decrease of $687,189 or 11.2%.This decrease was a combination of an decrease in chiller sales of $867,104 and a increase in cogeneration sales of $179,915. Such variations in product mix from period to period are to be expected. Service revenues in the first six months of 2019 were $8,754,945, compared to $9,180,669 for the same period in 2018, a decrease of $425,724 or 4.6%. This differencedecrease in the first six months of 2019 is due to an decrease in installation activity of $851,513 and an increase of $425,789 in service contract revenues. While service contract revenue remains relatively constant, the mixfirst half of in-house2019 included certain engineering service projects accounting for this increase. Installation activity can vary widely depending on the status of various projects.
Segment 2 - Energy Production
Energy production revenues in the first six months of 2019 were $1,819,108, compared to $3,290,760 for the same period in 2018. This decrease is representative of the reduction in energy producing assets owned due to the sales versus representationof a portion of these assets as discussed in Note 6. Sale of Energy Producing Assets and Goodwill Impairment
Cost of Sales
Cost of sales in the first six months of 2019 was $9,659,353 compared to $11,631,195 for the same period in 2018, a decrease of $1,971,842, or 17.0%.
Segment 1 - Products and Services
Cost of sales for products and services in the first six months of 2019 was $8,494,922 compared to $9,645,819 for the same period in 2018, a decrease of $1,150,897 or 11.9%. During the first six months of 2019, our product and service gross margin was 40.3% compared to 37.1% for the same period in 2018, a 3% increase. The increase in margin was a result of an increase in installation margin.
Segment 2 - Energy Production
Cost of sales for energy production in the first six months of 2019 was $1,164,431 compared to $1,985,376 for the same period in 2018. During this period our gross margin for energy production was 36.0% for 2019 compared to 39.7% for the same period in 2018.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the six months ended June 30, 2019 were $5,338,663 compared to $5,540,255 for the same period in 2018, a decrease of $201,592 or 3.6%. The decrease was mainly due to management's focus on cutting costs wherever possible.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the six months ended June 30, 2019 were $1,397,954 compared to $1,310,514 for the same period in 2018, an increase of $87,440 or 6.7%. The increase is due to a larger sales team and increased public relations and trade show costs.and sales activities.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the ninesix months ended SeptemberJune 30, 20172019 were $641,064$717,627 compared to $524,696$712,009 for the same period in 2016,2018, an increase of $116,368$5,618 or 22.2%0.8%. This increase wasR&D expenses were incurred due to the Company's cost sharingcontinued efforts in connection with a researchthe Tecofrost and development grantprojects relating to industrial refrigeration and potential commercialization of the Company's Ultera emissions technology for certain non-stationary applications.
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A gain on the sale of assets of $1,081,049 was recognized during the six months ended June 30, 2019 in process.connection with the sale of certain energy producing assets. See discussion in Note 6.Sale of Energy Producing Assets and Goodwill Impairment in the accompanying consolidated financial statements.
Goodwill impairment relating to the ADG sites of $3,693,198 was recognized during the six months ended June 30, 2019. See Note 6. Sale of Energy Producing Assets and Goodwill Impairment to the accompanying consolidated financial statements for further discussion of this charge.
Loss from Operations
Loss from operations for the ninesix months ended SeptemberJune 30, 20172019 was $82,618$3,681,719 compared to a loss of $1,043,403$565,381 for the same period in 2016, an improvement2018, a difference of $960,785.$3,116,338. The improvement was due to increased product and services revenues, as well as the additiongoodwill impairment of our energy production revenue stream. The loss$3,693,198 accounts for the ninesignificant difference from the six months ended SeptemberJune 30, 2017 included one-time merger related expenses of $156,298 and depreciation and amortization expense of $402,939.2019 compared to the same period in 2018.
Other Income (Expense), net
Other expense, net for the ninesix months ended SeptemberJune 30, 20172019 was $93,993$64,113 compared to $122,398$97,780 for the same period in 2016.2018. Other income (expense) includes interest and other income of $21,033, and$598, interest expense of $45,031, and unrealized loss on notes payableinvestment securities of $115,026 for the nine months ended September 30, 2017.$19,680. For the same period in 2016,2018, interest and other income was $9,575 and$3,758, interest expense was $131,973.$22,815, and unrealized loss on investment securities was $78,723.
Provision for state income taxes
The provision for state income taxes six months ended June 30, 2019 and 2018 was $7,786 and $38,864, respectively and represents estimated income tax payments net of refunds to various states.
Noncontrolling Interest
The incomeloss attributable to the noncontrolling interest was $44,933$116,412 for the ninesix months ended SeptemberJune 30, 20172019 which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC. For the same period in 2016, the loss2018, income attributable to the noncontrolling interest was $64,962 which was the result of Tecogen's ownership in its former partially owned subsidiary Ilios Inc.
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$31,567.
Net Loss Attributable to Tecogen Inc.Inc
Net loss attributable to Tecogen for the ninesix months ended SeptemberJune 30, 20172019 was $221,544$3,637,206 compared to a loss of $1,100,839$733,592 for the same period in 2016,2018, an improvementincrease of $879,295.$2,903,614. The improvement was the resultgoodwill impairment of the Company's merger with American DG Energy in addition to 10.9% growth in product revenue and 24.4% growth in services revenue.
Other Comprehensive Loss
The unrealized loss on securities of $184,998$3,693,198 accounts for the ninesignificant difference from the six months ended SeptemberJune 30, 2017 represents2019 compared to the market fluctuation impacting the fair value of American DG Energy's remaining common stock ownershipsame period in its former partially owned subsidiary, EuroSite Power Inc. as of September 30, 2017.2018.
Liquidity and Capital Resources
Consolidated working capital at SeptemberJune 30, 20172019 was $14,193,331$15,527,643 compared to $14,436,452$13,170,252 at December 31, 2016, a decrease2018, an increase of $243,121.$2,357,391. Included in working capital were cash and cash equivalents of $2,077,047$1,087,970 at SeptemberJune 30, 2017,2019, compared to $3,721,765 in cash and cash equivalents$272,552 at December 31, 2016, a decrease2018, an increase of $1,644,718.$815,418. The decreaseincrease in working capital and cash was the result of longer collection periods and pre-buying for production.the cash received upon the sale of certain energy production assets.
Cash used in operating activities for the ninesix months ended SeptemberJune 30, 20172019 was $1,996,871$2,080,213 compared to $2,914,863$2,541,234 for the same period in 2016.2018. Our accounts receivable balance increaseddecreased to $11,094,287$11,628,702 at SeptemberJune 30, 20172019 compared to $8,630,418$14,176,452 at December 31, 2016, using $1,908,6552018, providing $2,517,901 of cash due to timing of billing, shipments, and collections. In addition, amounts dueinventory and unbilled revenue increased using $695,835 and $936,106, respectively, using $1,631,941 of cash from related parties increased by $236,971 using cash dueoperations.
Accounts payable decreased to timing of billing and collections. Our inventory increased to $6,118,835$6,234,846 as of SeptemberJune 30, 20172019 from $7,153,330 at December 31, 2018, using $918,484, in cash flow from operations. Deferred revenue decreased as of June 30, 2019 compared to $4,774,264 as of December 31, 2016, an increase2018, using $966,776 of $1,344,571. This increase is duecash from operations. The Company expects accounts payable and deferred revenue to increased product salesfluctuate with routine changes in operations.
TECOGEN INC.
During the first six months of 2019 our investing activities provided $4,896,394 of cash from the proceeds of the sale of energy producing assets of $5.0 million, offset by purchases of property and equipment of $52,444, and expenditures related to purchases of intangible assets of $22,738.
During the first six months of 2019 our financing activities used $2,000,763 compared to cash provided by financing activities of $1,771,122 for the same period in 2018. Financing activities for the first six months of 2019 included net payments on the line of credit of $2,021,519 as well as proceeds from the purchaseexercise of used equipment from American DG. Although lowering inventory is a goal, management expects inventory to vary significantly based on production and customer delivery requirements.stock options of $20,756.
As of SeptemberJune 30, 2017,2019, the Company's backlog of product and installation projects, excluding service contracts, was $14.5$25.3 million, consisting of $11.5$19.0 million of purchase orders received by us and $3.0$6.3 million of projects in which the customer's internal approval process is complete, financial resources have been allocated and the customer has made a firm verbal commitment that the order is in the process of execution. Backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.
Accounts payable increased to $5,356,449 as of September 30, 2017 from $3,367,481 at December 31, 2016, including $369,913 from the ADGE acquisition, providing $1,641,206, in cash flow from operations. Accrued expenses increased to $1,676,307 as of September 30, 2017, including $531,617 from the ADGE acquisition, from $1,378,258 as of December 31, 2016, providing $233,824 of cash from operations. The Company expects accounts payable and accrued expenses to fluctuate with routine changes in operations.
During the first nine months of 2017, our investing activities provided $223,235 of cash and included the acquisition of American DG Energy cash through merger of $971,454, offset by purchases of property and equipment of $315,205, expenditures related to intangible assets of $34,551 and cash paid for certain expenses associated with the merger of $367,101.
During the first nine months of 2017, our financing activities included $128,918 in proceeds from the exercise of stock options.
Significant Accounting Policies and Critical Estimates
The Company’s and it's now wholly-owned subsidiary, American DG Energy Inc.'s significant accounting policies are discussed in the Notes to theirits respective Consolidated Financial Statements in theirits Annual ReportsReport on Form 10-K. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in the above notes and in the respective Annual Reports.Report.
Significant New Accounting Standards or Updates Not Yet Effective
Except for the updates to the Company's lease accounting policy for the adoption of ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”), the Company's critical accounting policies have remained consistent as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019.
See Note 1, Description of Business and Basis of Presentation, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
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Seasonality
We expect that the majority of our heating systems salessold will be inoperational for the winter and the majority of our chilling systems salessold will be inoperational for the summer. Unreasonable weather may therefore have an effect on our revenues throughout the year. Our cogeneration and chiller system sales are not generally affected by the seasons, although customer goals will be to have chillers installed and running in the spring.seasons. Our service team does experience higher demand in the warmer months when cooling is required. TheseChiller units are generally shut down in the winter and started up again in the spring. This “busy season”The chiller "busy season' for the service team generally runs from May through the end of September.
Off-Balance Sheet Arrangements
Currently, we do not have any material off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
The Company maintains "disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company's management, including our principal executive officers and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Co-ChiefChief Executive OfficersOfficer and Chief Accounting Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, have concluded that our disclosure controls and procedures were not effective due to a material weaknessesweakness with respect to a small number of individuals dealing with general controls over information technology and inadequate controls over revenue recognition with respect to the Company's recently acquired subsidiary, American DG Energy Inc.technology. Management will continue to evaluate the above weaknesses. The Company is taking certain steps to remediate the weaknesses as resources become available.
Changes in Internal Control over Financial Reporting:
DuringThe Company has been in the second and third quartersprocess of 2017 and in connection with the acquisition of American DG Energy Inc. the Company augmentedimplementing a new computer system to remediate its capabilitiesmaterial weakness with respect to application and implementation of generally accepted accounting principles as it relates to complex transactions and the related financial reporting requirements through modifications to financial management including a new Chief Accounting Officer. Such modifications also included securing timely access to and involvementsmall number of individuals dealing with a high levelgeneral controls over information technology. Management had the system partially implemented as of trainingyear end 2018 and expertise with respectcontinues to complex accounting and financial reporting matters.work on its implementation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was previously a party to an action in the United States District Court for the District of Massachusetts, Superior Court Actiondescribed below, related to the acquisition of American DG Energy Inc. through merging with and into a subsidiary of the Company (the "Merger"). All claims in the litigation relating to the Merger have been dismissed.
On or aboutNovember 16, 2018, the US District Court for the District of Massachusetts dismissed all remaining claims against all defendants in the litigation against Tecogen Inc. and its affiliates, including American DG Energy Inc., and their directors and certain officers, relating to the Merger in a case filed on May 15, 2017 titled Vardakas v. American DG. Energy, Inc., Case No. 17-CV-1024(LTS).
The case was originally filed in February 6, 2017 ADGE, John Hatsopoulos, George N. Hatsopoulos, Charles T. Maxwell, Deanna M. Petersen, Christine Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen, and Merger Sub were served with a Verified Complaintin Massachusetts state court by William C. May ("May"), individually and on behalf of the other shareholders of ADGEAmerican DG Energy Inc. as a class. The action was commencedclass in the Business Litigation Session of the Superior Court of the Commonwealth of Massachusetts, Civil Action No.N. 17-0390. The complaint alleged class action claims arising out of the proposed Merger, as described in Note 3. On May 31, 2017,Plaintiff May voluntarily dismissed the actionstate court case on May 31, 2017 and consolidated his claimsthat case with the pending federal action in the United States District Court for the District of Massachusetts. If the complaint in the federal court is dismissed, it is possible thatcase filed by plaintiff Lee Vardakas on May or another plaintiff will recommence an action in state court with similar claims to those asserted by May.
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United States District Court Action
On or about February 15, 2017 a lawsuit was filed in the United StatesUS District Court for the District of Massachusetts, by Lee Vardakas (“Vardakas”), individuallyalleging violations of federal securities laws and on behalfbreaches of other stockholdersfiduciary duties to minority shareholders of ADGE, naming ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Benjamin Locke, Charles T. Maxwell, Deanne M. Petersen, Christine M. Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants. The action is captioned Vardakas v. American DG Energy Inc., Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
On May 18, 2017, ADGE’s and Tecogen’s shareholders approved the Merger.
Following the consummation of in connection with the Merger (and the appointment of May, from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint discontinuedUS District Court dismissed all federal securities law claims in the claims against Cassel Salpeter & Co., LLC but asserted againstcase on March 2, 2018. On November 16, 2018 the remaining defendants claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 14a-9; claims against certain defendants for control person liability under § 20(a) of the Exchange Act (collectively, the “Federal Securities Law Claims”); and commonstate law claims foralleging breach of fiduciary dutyduties to minority stockholders, and aiding and abetting (the “State Law Claims”). The Federal Securities Law Claims allege, in substance, that defendants made material nondisclosure in the proxy statement about the process leading to the Merger and about the fairness opinion relied upon by ADGE’s Boardbreaches of Directors in recommending the Merger to shareholders. The State Law Claims assert, in substance, that defendants breached their fiduciary duties, in negotiating and approvingwere dismissed on the Merger, which, plaintiff claims, deprived ADGE’s non-affiliated shareholdersbasis of fair valuethe defendants' Motion for their shares.
On July 19, 2017, defendants moved to dismissJudgment on the Amended Complaint. In theirPleadings. Plaintiff's motion papers, defendants contend that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim. Defendantsfor class certification was also assert that if the Federal Securities Law Claims are dismissed the district court must also dismiss the State Law Claims because it would lack subject matter jurisdiction. The parties are awaiting a decision from the court.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimed and the likelihood of an unfavorable outcome is not reasonably estimable.on November 16, 2018.
Except as set forth above, as of the date of this filing the Company is currently not a party to any legal or administrative proceedings material to the Company's financial statements and is not aware of any pending or threatened legal or administrative proceeding that is material to the Company's financial statement.
Item 1A. Risk Factors
Our business, operations and the Company face many risks. In connection with the Company's acquisition of ADGE on May 18, 2017, there were changes to these risk. To reflect this change, the Company is amending its list of risk factors discussed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016 by adding the risk factors listed below. In addition to the risk factors and other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016. The risks described below may not be the only risks we face as a result of acquiring ADGE. 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 or results of operations could suffer and the trading price of our common stock could decline. Investors and prospective investors should consider the following risks and the information contained under the heading ''Cautionary Note Concerning Forward-Looking Statements'' before deciding whether to invest in our securities.
In addition to the risk factors and other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016.2018. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
1. Through ADGE, we may be exposed to substantial liability claims if we fail to fulfill our obligations to our customers or our on-site equipment malfunctions.
Through ADGE, 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
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to substantial liability claims if we fail to fulfill our obligations to customers or if the equipment malfunctions. 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.
2. Expiring ADGE customer contracts may lead to decreases in revenue and increases in expenses.
This decrease in energy revenue will be due to less energy billing. Expiring customer contracts can also lead to an increase in expenses because we will have to remove the equipment at the customer location. We will remove the equipment at our own expense and are obligated to do so at the end of the customer contract. Each year, a portion of our customers 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.
3. ADGE revenue from energy billing is partly dependent on the weather and increased temperatures could reduce our revenue.
In warmer months the customers are not using as much thermal energy as they do not have as much of a demand to heat their locations. Due to the demand being lower in warmer months we may not be able to bill for thermal energy and in turn may have a decrease in revenue.
4. The reduction, elimination or expiration of government subsidies 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 customers’ sales 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. In particular, the Company depends on the New York State Energy Development Authority CHP Program (PON 2568) and the New Jersey Smart Start Combined Heat and Power Incentive.
These government incentives expire, phase out over time, terminate upon the exhaustion of the allocated funding, require renewal by the applicable authority or are being changed by governments due to changing market circumstances or changes to national, state or local energy policy.
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 that we focus our sales efforts could result in decreased demand for and lower revenue from cogeneration equipment there, which would adversely affect the Company. 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.
TECOGEN INC.
Item 6. Exhibits
|
| |
Exhibit No. | Description of Exhibit |
2.1 | |
2.2 | |
3.1 | |
3.2 | |
4.1 | |
4.2 | |
4.3+ | |
4.5 | |
4.610.1+ | |
10.110.7 | |
10.8 | |
10.2110.13 | |
10.41 | |
10.42+ | |
10.43 | |
10.44 | |
10.45 | |
10.46 | |
10.47 |
|
10.48 | |
10.49 | |
10.50 | |
TECOGEN INC.
|
| |
10.51 | |
10.2610.52 | |
10.2710.53 | |
10.3110.54 | |
10.32 | |
10.33 | |
10.34 | |
10.35 | |
10.3610.55 | |
10.37 | |
10.38 | |
10.39 | |
10.40+ | |
31.1* | |
31.2* | |
31.3* | |
32.1* | |
101.INS** | XBRL Instance Document |
101.SCH** | XBRL Taxonomy Extension Schema |
100.CAL** | XBRL Taxonomy Extension Calculation Linkbase |
100.DEF** | XBRL Taxonomy Extension Definition Linkbase |
101.LAB** | XBRL Taxonomy Extension Label Linkbase |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
| |
+ | Compensatory plan or arrangement |
| |
(a)
| incorporated by reference from the Company's Registration Statement on Form S-1/A (Registration No. 333-193791), filed with the SEC on June 27, 2014. |
TECOGEN INC.
| |
(b)
| incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No. 333-178697), originally filed with the SEC on December 22, 2011. |
| |
(c)
| incorporated by reference from the Company's 10-Q Report for the period ending June 30, 2014, originally filed with the SEC on August 14, 2014. |
| |
(d)
| incorporated by reference from the Company's form 8-K Report originally filed with the SEC on August 6, 2015. |
| |
(e)
| incorporated by reference from the Company's 10-Q Report for the period ending June 30, 2015, originally filed with the SEC on August 6, 2015. |
| |
(f)
| incorporated by reference from the Company's form 8-K Report originally filed with the SEC on August 13, 2015. |
| |
(g)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on April 15, 2015. |
| |
(h)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on May 24, 2016. |
| |
(i)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on June 30, 2016. |
| |
(j)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on August 8, 2016. |
| |
(k)
| incorporated by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-215231), |
as amended, originally filed with the SEC on December 21, 2016.
| |
(l)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on December 2, 2016. |
| |
(m)
| Incorporated by reference to the registrant's Annual Report on Form 10-K, as filed with the SEC on March 29, 2016. |
| |
(n)
| Incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on December 31, 2015. |
| |
(o)
| Incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on April 15, 2016. |
| |
(p)
| Incorporated by reference from American DG Energy's form 8-K Reports originally filed with the SEC on December 28, 2016. |
| |
(q)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on November 2, 2016. |
| |
(r)
| incorporated by reference from the Company's form 8-K Reports originally filed with the SEC on March 24, 2017. |
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, on November 9, 2017August 13, 2019.
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| | |
| TECOGEN INC. |
| (Registrant) |
| |
| By: | /s/ John N. Hatsopoulos |
| Co-Chief Executive Officer |
| (Principal Executive Officer) |
| |
| By: | /s/ Benjamin M. Locke |
| Co-ChiefChief Executive Officer |
| (Principal Executive Officer) |
| |
| By: | /s/ Bonnie J. Brown |
| Chief Accounting Officer, Treasurer and Secretary |
| (Principal Accounting Officer) |