UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 20172021
or

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


Commission file number 001-36103
logo201509a06.jpgtgen-20210930_g1.jpg
TECOGEN INC. (OTCQX:TGEN)
(Exact name of Registrant as specified in its charter)
Delaware04-3536131
(State or Other Jurisdiction of Incorporation or Organization)(IRS Employer Identification No.)
45 First Avenue
Waltham, Massachusetts02451
(Address of Principal Executive Offices)(Offices and Zip Code)
Registrant’s Telephone Number, Including Area Code: (781) 622-1120
(781) 466-6402
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No ¨
Indicate by check mark whether the registrant has submitted electronically 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:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer
Non –accelerated filer oEmerging Growth company
Smaller reporting company x
Emerging Growth company x
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
As of November 3, 2021, 24,850,261 shares of common stock, $.001 par value per share, of the registrant were issued and outstanding.



TECOGEN INC.




QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Title of each classOutstanding, October 31, 2017
Common Stock, $0.001 par value24,724,392
1



TECOGEN INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION


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



TECOGEN INC.





PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements


CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 September 30, 2021December 31, 2020
ASSETS
Current assets:  
Cash and cash equivalents$3,351,231 $1,490,219 
Accounts receivable, net7,728,737 8,671,163 
Unbilled revenue3,842,282 4,267,249 
Employee retention credit1,276,021 — 
Inventories, net7,922,044 7,168,596 
Prepaid and other current assets572,783 597,144 
Total current assets24,693,098 22,194,371 
Long-term assets:
Property, plant and equipment, net1,917,483 2,283,846 
Right of use assets2,019,166 1,632,574 
Intangible assets, net1,234,047 1,360,319 
Goodwill2,406,156 2,406,156 
Other assets210,800 196,387 
TOTAL ASSETS$32,480,750 $30,073,653 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Note payable$— $837,861 
Accounts payable3,546,950 4,183,105 
Accrued expenses2,216,673 1,993,471 
Deferred revenue1,850,371 1,294,157 
Lease obligations, current628,950 506,514 
Total current liabilities8,242,944 8,815,108 
Long-term liabilities:  
Note payable, net of current portion— 1,036,339 
Deferred revenue, net of current portion250,981 115,329 
Lease obligations, net of current portion1,479,495 1,222,492 
Deferred payroll tax liability, net of current portion131,224 — 
Unfavorable contract liability1,348,892 1,617,051 
Total liabilities11,453,536 12,806,319 
Commitments and contingencies (Note 12)00
Stockholders’ equity:  
Tecogen Inc. stockholders’ equity:  
Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261and 24,850,261 issued and outstanding at September 30, 2021 and December 31, 2020, respectively24,850 24,850 
Additional paid-in capital56,965,083 56,814,428 
Accumulated deficit(35,896,586)(39,529,621)
Total Tecogen Inc. stockholders’ equity21,093,347 17,309,657 
Non-controlling interest(66,133)(42,323)
Total stockholders’ equity21,027,214 17,267,334 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$32,480,750 $30,073,653 
 September 30, 2017
 December 31, 2016
ASSETS   
Current assets: 
  
Cash and cash equivalents$2,077,047
 $3,721,765
Accounts receivable, net11,094,287
 8,630,418
Unbilled revenue3,063,089
 2,269,645
Inventory, net6,118,835
 4,774,264
Due from related party496,655
 260,988
Prepaid and other current assets742,701
 401,876
Total current assets23,592,614
 20,058,956
Property, plant and equipment, net15,502,974
 517,143
Intangible assets, net2,430,178
 1,065,967
Excess of cost over fair value of net assets acquired12,602,409
 
Goodwill40,870
 40,870
Other assets2,462,870
 2,058,425
TOTAL ASSETS$56,631,915
 $23,741,361
    
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
Current liabilities: 
  
Accounts payable$5,356,449
 $3,367,481
Accrued expenses1,676,307
 1,378,258
Deferred revenue1,477,124
 876,765
Loan due to related party850,000
 
Interest payable, related party39,403
 
Total current liabilities9,399,283
 5,622,504
Long-term liabilities: 
  
Deferred revenue, net of current portion386,494
 459,275
Senior convertible promissory note, related party3,149,086
 3,148,509
Unfavorable contract liability10,358,283
 
Total liabilities23,293,146
 9,230,288
Commitments and contingencies (Note 9)

 

    
Stockholders’ equity: 
  
Tecogen Inc. stockholders’ equity: 
  
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, respectively24,724
 19,982
Additional paid-in capital56,081,026
 37,334,773
Accumulated other comprehensive loss-investment securities(184,998) 
Accumulated deficit(23,065,226) (22,843,682)
Total Tecogen Inc. stockholders’ equity32,855,526
 14,511,073
Noncontrolling interest483,243
 
Total stockholders’ equity33,338,769
 14,511,073
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$56,631,915
 $23,741,361
The accompanying notes are an integral part of these consolidated financial statements.
1

TECOGEN INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
Three Months EndedThree Months Ended
September 30, 2017 September 30, 2016 September 30, 2021September 30, 2020
Revenues   Revenues
Products$2,425,616
 $2,850,901
Products$1,871,332 $2,705,422 
Services4,519,467
 3,765,554
Services2,829,244 4,125,590 
Energy production1,556,115
 
Energy production315,292 368,695 
Total revenues8,501,198
 6,616,455
Total revenues5,015,868 7,199,707 
Cost of sales   Cost of sales
Products1,538,515
 1,715,462
Products1,036,396 1,617,626 
Services2,981,454
 2,126,175
Services1,467,019 2,597,729 
Energy production723,198
 
Energy production170,518 197,608 
Total cost of sales5,243,167
 3,841,637
Total cost of sales2,673,933 4,412,963 
Gross profit3,258,031
 2,774,818
Gross profit2,341,935 2,786,744 
Operating expenses   Operating expenses
General and administrative2,427,352
 2,003,838
General and administrative2,473,190 2,318,789 
Selling503,415
 367,412
Selling656,885 563,857 
Research and development241,725
 154,075
Research and development122,031 111,253 
Total operating expenses3,172,492
 2,525,325
Total operating expenses3,252,106 2,993,899 
Income from operations85,539
 249,493
Loss from operationsLoss from operations(910,171)(207,155)
Other income (expense)   Other income (expense)
Interest and other income14,849
 3,914
Interest income and other income (expense), netInterest income and other income (expense), net(4,798)(12)
Interest expense(45,242) (45,539)Interest expense(3,855)(4,845)
Total other expense, net(30,393) (41,625)
Consolidated net income55,146
 207,868
Income attributable to the noncontrolling interest(27,935) 
Net income attributable to Tecogen Inc.27,211
 207,868
Other comprehensive income - unrealized gain on securities39,361
 
Comprehensive income$66,572
 $207,868
Gain on extinguishment of debtGain on extinguishment of debt1,885,655 — 
Employee retention creditEmployee retention credit562,253 — 
Unrealized loss on investment securitiesUnrealized loss on investment securities(37,497)— 
Total other income (expense), netTotal other income (expense), net2,401,758 (4,857)
Income (loss) before provision for state income taxesIncome (loss) before provision for state income taxes1,491,587 (212,012)
Provision for state income taxesProvision for state income taxes3,000 9,397 
Consolidated net income (loss)Consolidated net income (loss)1,488,587 (221,409)
Income attributable to the non-controlling interestIncome attributable to the non-controlling interest(21,890)(10,511)
Net income (loss) attributable to Tecogen Inc.Net income (loss) attributable to Tecogen Inc.$1,466,697 $(231,920)
   
Net income per share - basic$0.00
 $0.01
Net income per share - diluted$0.00
 $0.01
Net income (loss) per share - basicNet income (loss) per share - basic$0.06 $(0.01)
Net income (loss) per share - dilutedNet income (loss) per share - diluted$0.06 $(0.01)
Weighted average shares outstanding - basic24,720,613
 19,640,812
Weighted average shares outstanding - basic24,850,261 24,850,261 
Weighted average shares outstanding - diluted24,930,624
 20,229,120
Weighted average shares outstanding - diluted25,154,905 24,850,261 
 
The accompanying notes are an integral part of these consolidated financial statements.


2

TECOGEN INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
Nine Months Ended
 September 30, 2021September 30, 2020
Revenues
Products$6,439,981 $9,543,316 
Services9,438,702 11,658,263 
     Energy production1,339,448 1,395,886 
Total revenues17,218,131 22,597,465 
Cost of sales
Products3,601,408 5,640,965 
Services4,684,008 7,583,710 
     Energy production796,933 887,888 
Total cost of sales9,082,349 14,112,563 
Gross profit8,135,782 8,484,902 
Operating expenses
General and administrative7,365,495 7,645,729 
Selling1,747,959 2,022,027 
Research and development381,064 641,616 
Total operating expenses9,494,518 10,309,372 
Loss from operations(1,358,736)(1,824,470)
Other income (expense)
Interest and other income (expense), net(7,127)11,953 
Interest expense(13,583)(121,084)
Gain on extinguishment of debt3,773,014 — 
Employee retention credit1,276,021 — 
Gain on sale of investment securities6,046 — 
Unrealized gain (loss) on investment securities18,749 (98,403)
Total other income (expense), net5,053,120 (207,534)
Income (loss) before provision for state income taxes3,694,384 (2,032,004)
Provision for state income taxes18,991 27,791 
Consolidated net income (loss)3,675,393 (2,059,795)
Income attributable to non-controlling interest(42,358)(28,400)
Net income (loss) attributable to Tecogen Inc.$3,633,035 $(2,088,195)
Net income (loss) per share - basic$0.15 $(0.08)
Net income (loss) per share - diluted$0.14 $(0.08)
Weighted average shares outstanding - basic24,850,261 24,850,257 
Weighted average shares outstanding - diluted25,131,165 24,850,257 
 Nine Months Ended
 September 30, 2017 September 30, 2016
Revenues   
Products$8,349,159
 $7,525,909
Services12,259,037
 9,853,369
    Energy production2,330,307
 
Total revenues22,938,503
 17,379,278
Cost of sales   
Products5,261,245
 5,035,230
Services7,464,193
 5,746,992
    Energy production1,053,741
 
Total cost of sales13,779,179
 10,782,222
Gross profit9,159,324
 6,597,056
Operating expenses   
General and administrative7,042,500
 5,898,230
Selling1,558,378
 1,217,533
Research and development641,064
 524,696
Total operating expenses9,241,942
 7,640,459
Loss from operations(82,618) (1,043,403)
Other income (expense)   
Interest and other income21,033
 9,575
Interest expense(115,026) (131,973)
Total other expense, net(93,993) (122,398)
Consolidated net loss(176,611) (1,165,801)
(Income) loss attributable to the noncontrolling interest(44,933) 64,962
Net loss attributable to Tecogen Inc.(221,544) (1,100,839)
Other comprehensive loss - unrealized loss on securities(184,998) 
Comprehensive loss$(406,542) $(1,100,839)
    
Net loss per share - basic and diluted$(0.01) $(0.06)
Weighted average shares outstanding - basic and diluted22,643,406
 19,071,497


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














3

TECOGEN INC.








CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three and Nine Months Ended September 30, 2021 and 2020
(unaudited)



Three months ended September 30, 2021Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at June 30, 202124,850,261 $24,850 $56,908,194 $(37,363,283)$(55,667)$19,514,094 
Stock based compensation expense— — 56,889 — — 56,889 
Distributions to non-controlling interest— — — — (32,356)(32,356)
Net income— — — 1,466,697 21,890 1,488,587 
Balance at September 30, 202124,850,261 $24,850 $56,965,083 $(35,896,586)$(66,133)$21,027,214 
 
Nine months ended September 30, 2021Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at December 31, 202024,850,261 $24,850 $56,814,428 $(39,529,621)$(42,323)$17,267,334 
Stock based compensation expense— — 150,655 — — 150,655 
Distributions to non-controlling interest— — — — (66,168)(66,168)
Net income— — — 3,633,035 42,358 3,675,393 
Balance at September 30, 202124,850,261 $24,850 $56,965,083 $(35,896,586)$(66,133)$21,027,214 
Three months ended September 30, 2020Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at June 30, 202024,850,261 $24,850 $56,704,412 $(35,235,389)$80,076 $21,573,949 
Stock issuance costs— — (1,149)— — (1,149)
Stock based compensation expense— — 50,582 — — 50,582 
Distributions to non-controlling interest— — — — (18,670)(18,670)
Net income (loss)— — — (231,920)10,511 (221,409)
Balance at September 30, 202024,850,261 $24,850 $56,753,845 $(35,467,309)$71,917 $21,383,303 
Nine months ended September 30, 2020Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at December 31, 201924,849,261 $24,849 $56,622,285 $(33,379,114)$85,257 $23,353,277 
Stock issuance costs1,000 1,199 — — 1,200 
Stock based compensation expense— — (1,951)— — (1,951)
Stock based compensation expense— — 132,312 — — 132,312 
Distributions to non-controlling interest— — — — (41,740)(41,740)
Net income (loss)— — — (2,088,195)28,400 (2,059,795)
Balance at September 30, 202024,850,261 $24,850 $56,753,845 $(35,467,309)$71,917 $21,383,303 

The accompanying notes are an integral part of these consolidated financial statements.
4

TECOGEN INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
 September 30, 2021September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)$3,675,393 $(2,059,795)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, net357,636 293,941 
Gain on extinguishment of debt(3,773,014)— 
Employee retention credit(1,276,021)— 
Stock-based compensation150,655 132,312 
Provision for doubtful accounts52,000 — 
Gain on disposal of assets(9,787)— 
Gain on sale of investment securities(6,046)— 
Unrealized (gain) loss on investment securities(18,749)98,403 
Abandonment of intangible assets7,400 179,944 
Non-cash interest expense— 51,190 
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in:
Accounts receivable890,374 5,683,941 
Unbilled revenue424,967 51,389 
Inventory(753,447)(737,570)
Prepaid expenses and other current assets24,361 117,109 
Other assets(387,847)532,293 
Increase (decrease) in:
Accounts payable(636,156)(1,455,881)
Accrued expenses and other current liabilities378,970 145,848 
Deferred revenue691,867 (1,619,696)
Other liabilities379,440 — 
Net cash provided by operating activities171,996 1,413,428 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment(84,160)(59,952)
Proceeds from the sale of investment securities11,637 — 
Purchases of intangible assets(56,349)(123,252)
Proceeds from sale of assets9,787 — 
Payment of stock issuance costs— (1,951)
Distributions to non-controlling interest(66,168)(41,740)
Net cash used in investing activities(185,253)(226,895)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable1,874,269 1,874,200 
Payments on revolving line of credit, net— (2,452,329)
Proceeds from the exercise of stock options— 1,200 
Net cash provided by (used in) financing activities1,874,269 (576,929)
Change in cash and cash equivalents1,861,012 609,604 
Cash and cash equivalents, beginning of the period1,490,219 877,676 
Cash and cash equivalents, end of the period$3,351,231 $1,487,280 
Supplemental disclosures of cash flows information:  
Cash paid for interest$— $62,007 
Cash paid for taxes$18,991 $27,791 
 Nine Months Ended
 September 30, 2017 September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:   
Consolidated net loss$(176,611) $(1,165,801)
Adjustments to reconcile net loss to net cash used in operating activities:   
Depreciation and amortization, net402,939
 198,766
Provision (recovery) of inventory reserve43,609
 (90,000)
Stock-based compensation138,329
 117,065
Non-cash interest expense577
 37,923
Loss on sale of assets2,909
 640
Provision (recovery) for losses on accounts receivable8,000
 (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 payable1,641,206
 (279,196)
Accrued expenses and other current liabilities(233,824) 122,809
Deferred revenue407,379
 184,103
Interest payable, related party21,378
 
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 acquisition971,454
 
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 activities223,235
 (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 options128,918
 312,698
Proceeds from exercise of warrants
 2,700,000
Net cash provided by financing activities128,918
 3,132,116
Net decrease in cash and cash equivalents(1,644,718) (1,984,469)
Cash and cash equivalents, beginning of the period3,721,765
 5,486,526
Cash and cash equivalents, end of the period$2,077,047
 $3,502,057
    
TECOGEN INC.

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
 $


The accompanying notes are an integral part of these consolidated financial statements. 
5

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’sOur products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The CompanyWe also installs, owns, operatesinstall, own, operate and maintainsmaintain complete energy systems and other complementary systems at customer sites and sellssell 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’sour customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast. The Company's
Our common stock is listedquoted on NASDAQOTC Markets Group, Inc.'s OTCQX Best Market tier and trades under the ticker symbol TGEN."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 nine months ended September 30, 20172021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2021.
The condensed consolidated balance sheet at December 31, 20162020 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, 2016.2020.
There have been no significant changes in accounting principles, practices or methods for making estimates.
The accompanying unaudited condensed consolidated financial statements include our accounts and the accounts of the Company and entities in which it haswe have a controlling financial interest. Those entities include the Company'sour wholly-owned subsidiaries American DG Energy Inc. and Ilios, Tecogen CHP Solutions, Inc., 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 doeswe do not have a controlling financial interest but where we have significant influence are accounted for under the equity method. Any intercompany transactions have been eliminated in consolidation.
The Company’s    Our operations are comprised of two2 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.
Significant New Accounting Standards or Updates Not Yet Effective
Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update related to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede

6

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements



Employee Retention Credit
nearly all current U.S. GAAP guidance on this topicOn March 27, 2020, the Coronavirus Aid, Relief, and eliminate industry-specific guidance.Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The underlying principleTaxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
Section 2301(c)(2)(B) of the CARES Act permits an employer to use an alternative quarter to calculate gross receipts and the employer may determine if the decline in gross receipt tests is to recognize revenue when promised goods or services are transferred to customersmet for a calendar quarter 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 effective2021 by comparing its gross receipts for the Company beginningimmediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. Accordingly, for the first quarter of fiscal 2018. The new revenue standard2021, we elected to use our gross receipts for the fourth calendar quarter of 2020 compared to our gross receipts for the fourth calendar quarter of 2019. As a result of our election to use an alternative quarter, we qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021 were eligible for the ERC.
Accounting Standards Codification 105, "Generally Accepted Accounting Principles," describes the decision-making framework when no guidance exists in US GAAP for a particular transaction. Specifically, ASC 105-10-05-2 instructs companies to look for guidance for a similar transaction within US GAAP and apply that guidance by analogy. As such, forms of government assistance, such as the ERC, provided to business entities would not be within the scope of ASC 958, but it may be applied retrospectivelyby analogy under ASC 105-10-05-2. We accounted for the Employee Retention Credit as a government grant in accordance with Accounting Standards Update 2013-06, Not-for-Profit Entities (Topic 958) ("ASU 2013-06") by analogy under ASC 105-10-05-2.Under this standard, government grants are recognized when the conditions or conditions on which they depend are substantially met. The conditions for recognition of the ERC include, but are not limited to:
An entity has been adversely affected by the COVID-19 pandemic
We have not used qualifying payroll for both the Paycheck Protection Program and the ERC
We incurred payroll costs to each prior period presented or retrospectivelyretain employees
The process for filing for the credit is an administrative task and not a barrier to receiving the credits
During the three and nine months ended September 30, 2021, we recorded ERC benefits of $562,253 and $1,276,021, respectively in other income (expense), net in our condensed consolidated statements of operations. A current receivable in the amount of $1,276,021 is included in our condensed consolidated balance sheet as of September 30, 2021.

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 cumulative effect recognizedtransfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in retained earningsexchange for transferring goods or providing services or energy to customers.
Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. We have elected to exclude from revenue any value add sales and other taxes which we collect concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which we historically recorded shipping and handling fees and value-added taxes. Incremental costs incurred by us to obtain a contract with a customer are negligible, if any, and are expensed ratably in proportion to the related revenue recognized.
Disaggregated Revenue

In general, our business segmentation is aligned according to the nature and economic characteristics of our products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.
7

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table further disaggregates our revenue by major source by segment for the three and nine months ended September 30, 2021 and 2020.
Three Months Ended September 30, 2021
Products and ServicesEnergy ProductionTotal
Products$1,871,332 $— $1,871,332 
Installation services63,076 — 63,076 
Maintenance services2,766,168 — 2,766,168 
Energy production— 315,292 315,292 
    Total revenue$4,700,576 $315,292 $5,015,868 

Nine Months Ended September 30, 2021
Products and ServicesEnergy ProductionTotal
Products$6,439,981 $— $6,439,981 
Installation services825,325 — 825,325 
Maintenance services8,613,377 — 8,613,377 
Energy production— 1,339,448 1,339,448 
    Total revenue$15,878,683 $1,339,448 $17,218,131 

Three Months Ended September 30, 2020
Products and ServicesEnergy ProductionTotal
Products$2,705,422 $— $2,705,422 
Installation services1,513,686 — 1,513,686 
Maintenance services2,611,904 — 2,611,904 
Energy production— 368,695 368,695 
    Total revenue$6,831,012 $368,695 $7,199,707 


Nine Months Ended September 30, 2020
Products and ServicesEnergy ProductionTotal
Products$9,543,316 $— $9,543,316 
Installation services4,125,191 — 4,125,191 
Maintenance services7,533,072 — 7,533,072 
Energy production— 1,395,886 1,395,886 
    Total revenue$21,201,579 $1,395,886 $22,597,465 

Product and Services Segment

Products. Our Product revenues include cogeneration systems that supply electricity and hot water, chillers that provide air-conditioning and hot water and engineered accessories, which consist of ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. Prior to January 1, 2021, engineered accessories revenue and cost of sales had been reported in our financial statements under Installation Services. Engineered accessories revenue and cost of sales from prior periods have been reclassified to conform with the current year presentation. We refer to the package of engineered accessories and engineering and design services necessary for the customers' installation of a cogeneration unit as light installation services.
We transfer control and generally recognize a sale when we ship a product from our manufacturing facility at which point the customer takes ownership of the dateproduct. Payment terms on product sales are generally 30 days.
8

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill and hold transactions). We recognize revenue related to such transactions once, among other things, the customer has made a written fixed commitment to purchase the product(s) under normal billing and credit terms, the customer has requested the product(s) be held for future delivery as scheduled and designated by them, risk of adoption ("modified retrospective basis")ownership has been assumed by the customer, and the product(s) are tagged as sold and segregated for storage awaiting further direction from the customer. Due to the infrequent nature and duration of bill and hold arrangements, the value associated with custodial storage services is deemed immaterial in the context of the contract and in total, and accordingly, none of the transaction price is allocated to such service.
Depending on the product and terms of the arrangement, we may defer the recognition of a portion of the transaction price received because we have to satisfy a future obligation (e.g., product start-up service). The Company expectsAmounts allocated to adopt this accounting standard updateproduct start-up services are recognized as revenue when the start-up service has been completed. We use an observable selling price to determine standalone selling prices where available and either a combination of an adjusted market assessment approach, an expected cost plus a margin approach, and/or a residual approach to determine the standalone selling prices for separate performance obligations as a basis for allocating contract consideration when an observable selling price is not available. Amounts received but not recognized pending completion of performance are recognized as contract liabilities and are recorded as deferred revenue along with deposits by customers.

Installation Services. We provide installation services typically including all necessary engineering and design, labor, subcontract labor and service to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems.
Under complete turnkey installation service contracts revenue is recognized over time using the percentage-of-completion method determined on a modified retrospectivecost 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 performance obligation based on an cost-based input method which we believe appropriately measures and is the most accurate depiction of the transfer of products and services to the customer under these contracts. When the financial metrics of a contract indicate a loss, our policy is to record the entire expected loss as soon as it is known. Contract costs and profit recognized to date under the percentage-of-completion method in excess of billings are recognized as contract assets and are recorded as unbilled revenue. Billings in excess of contract costs and profit are recognized as contract liabilities and are recorded as deferred revenue. Generally billings under complete turnkey installation contracts are made when contractually determined milestones of progress have been achieved, with payment terms generally being 30 days.
Maintenance Services. Maintenance services are provided under either long-term maintenance contracts or time and material maintenance contracts. Revenue under time and material maintenance contracts is recognized when the maintenance service is completed. Revenue under long-term maintenance contracts is recognized either ratably over the term of the contract where the contract price is fixed or when the periodic maintenance activities are completed where the invoiced cost to the customer is based on run hours or kilowatts produced in a given period. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to the amount we have the right to invoice the customer under the contract. Payment terms for maintenance services are generally 30 days.
Energy Production Segment

Energy Production. Revenue from energy contracts is recognized when electricity, heat, hot and/or chilled water is produced by our owned on-site cogeneration systems. Each month we invoice the customer and recognize revenue for the various forms of energy delivered, based on actual meter readings which capture the quantity of the various forms of energy delivered in a given month, under a contractually defined formula which takes into account the current month's cost of energy from the local power utility.
As the various forms of energy delivered by us under energy production contracts are simultaneously delivered and consumed by the customer, our performance obligation under these contracts is considered to be satisfied over time. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to the amount that we have the right to invoice the customer under the contract. Payment terms on invoices under these contracts are generally 30 days.

9

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

Contract Balances

    The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled revenue (contract assets) and deferred revenue, consisting of customer deposits and billings in excess of revenue recognized (contract liabilities) on the condensed consolidated balance sheets.
    Revenue recognized during the nine months ended September 30, 2021 that was included in unbilled revenue at the end of the period was approximately $1.0 million. Approximately $0.7 million was billed in this period that had been recognized as revenue in previous periods.

    Revenue recognized during the nine months ended September 30, 2021 that was included in deferred revenue at the beginning of the period was approximately $1.2 million.

Remaining Performance Obligations

Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term of greater than one year, excluding certain maintenance contracts and all energy production contracts where a direct measurement of the value to the customer is used as a method of measuring progress towards completion of our performance obligation. Exclusion of these remaining performance obligations is due in part to the inability to quantify values based on unknown future levels of delivery and in some cases rates used to invoice customers. Remaining performance obligations therefore consist of unsatisfied or partially satisfied performance obligations related to fixed price maintenance contracts and installation contracts.
As of September 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $2.1 million. We expect to recognize revenue of approximately 92.4% of the remaining performance obligations over the next 24 months, 88.1% recognized in the first quarter of fiscal 2018,12 months and has engaged an outside expert to assist with4.3% recognized over the evaluation ofsubsequent 12 months, and the impact of this accounting standard update on its consolidated financial statements and its implementation.remainder recognized thereafter.
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 2.3. Income (Loss)(loss) Per Common Share
Basic and diluted income (loss) per share for the three and nine months ended September 30, 20172021 and 2016,2020, respectively, were as follows: 
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Numerator:
Net income (loss) available to stockholders$1,466,697 $(231,920)$3,633,035 $(2,088,195)
Denominator:
Weighted average shares outstanding - Basic24,850,261 24,850,261 24,850,261 24,850,257 
Effect of dilutive securities:
Stock options304,644 — 280,904 — 
Weighted average shares outstanding - Diluted25,154,905 24,850,261 25,131,165 24,850,257 
Basic income (loss) per share$0.06 $(0.01)$0.15 $(0.08)
Diluted income (loss) per share$0.06 $(0.01)$0.14 $(0.08)
Anti-dilutive shares underlying stock options outstanding777,296 2,536,664 777,296 2,555,097 


Note 4.Inventories, net
  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

Note 3. Acquisition of American DG Energy Inc.

On May 18, 2017, we completed our acquisition, by means of a stock-for-stock merger, of 100%Inventories at September 30, 2021 and December 31, 2020 consisted 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 our product offerings and benefit directly from the long-term contracted revenue streams generated by these installations. We gained control of ADGE on May 18, 2017 by issuing common stock to the prior stockholders of ADGE.following:


We have included the financial results of ADGE in our condensed consolidated financial statements from the date of acquisition. For the three and nine months ended September 30, 2017, ADGE contributed $1,556,115 and $2,330,307 to our total revenues and $832,917 and $1,276,566 to our gross profit, respectively.
10

Acquisition related costs included in general 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) of the Internal Revenue Code of 1986. Subject to the terms and conditions of the merger agreement, at the

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements



September 30, 2021December 31, 2020
Raw materials$6,587,524 $6,227,591 
Less: reserves(381,000)(381,000)
Raw materials, net$6,206,524 $5,846,591 
Work-in-process716,026 329,702 
Finished goods999,494 992,303 
Total inventories, net$7,922,044 $7,168,596 
closing of the merger, each outstanding share of ADGE common stock was converted into the right to receive approximately 0.092 shares of common stock of Tecogen (the "Exchange Ratio").

Also in connection with the merger, Tecogen, at the effective time of the merger, assumed the (a) outstanding stock options of ADGE and (b) outstanding warrants to purchase common stock of ADGE, each as adjusted pursuant to the Exchange Ratio and subject to the terms of the merger agreement.
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 Information
The unaudited pro forma financial information in the table below summarizes 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 operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016.

  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)

     One-time acquisition-related expenses related to the merger incurred during the three-month and nine-month periods ended September 30, 2017 are not included in the unaudited pro forma financial information as they are not expected to have a continuing impact on 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 prior to the acquisition by Tecogen and was considered to be a discontinued operation by American DG Energy. Additionally, the unaudited pro forma financial information does not include a gain recognized on deconsolidation of that same subsidiary by American DG Energy and an amount of interest cost related to American DG Energy's long-term debt which was extinguished contemporaneously with the disposition of the subsidiary.


Note 4.5. Property, Plant and Equipment, net


Property, plant and equipment at September 30, 20172021 and December 31, 20162020 consisted of the following:
Estimated Useful
Life (in Years)
 September 30, 2017 December 31, 2016Estimated Useful
Life (in Years)
September 30, 2021December 31, 2020
Energy systems1 - 15 years $12,823,745
 $
Energy systems1 - 15 years$3,556,488 $3,526,514 
Machinery and equipment5 - 7 years 1,127,264
 1,009,893
Machinery and equipment5 - 7 years1,484,790 1,448,024 
Furniture and fixtures5 years 103,971
 141,874
Furniture and fixtures5 years193,698 193,698 
Computer software3 - 5 years 196,417
 102,415
Computer software3 - 5 years192,865 192,865 
Leasehold improvements* 440,519
 437,341
Leasehold improvements*450,791 450,792 
  14,691,916
 1,691,523
 5,878,632 5,811,893 
Less - accumulated depreciation and amortization  (2,017,401) (1,174,380)Less - accumulated depreciation and amortization (3,961,149)(3,528,047)
  12,674,515
 517,143
 $1,917,483 $2,283,846 
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 nine months ended September 30, 20172021 and 20162020 was $425,911$144,181 and $751,960,$450,195 and $42,084$175,869 and $125,255,$527,886, respectively.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements



Note 5.6. Intangible Assets and Liabilities Other Than Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired


As of September 30, 20172021 and December 31, 2016 the Company2020 we 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, 2021December 31, 2020
Intangible assetsCostAccumulated AmortizationTotalCostAccumulated AmortizationTotal
Product certifications$765,850 $(519,083)$246,767 $726,159 $(478,357)$247,802 
Patents864,273 (291,664)572,609 855,014 (220,764)634,250 
Developed technology240,000 (136,000)104,000 240,000 (124,000)116,000 
Trademarks26,896 — 26,896 26,896 — 26,896 
In Process R&D263,936 (18,853)245,083 263,936 — 263,936 
Favorable contract asset384,465 (345,773)38,692 384,465 (313,030)71,435 
$2,545,420 $(1,311,373)$1,234,047 $2,496,470 $(1,136,151)$1,360,319 
Intangible liability
Unfavorable contract liability$2,534,818 $(1,185,926)$1,348,892 $2,534,818 $(917,767)$1,617,051 
  September 30, 2017 December 31, 2016
Intangible assets Cost Accumulated Amortization Total Cost Accumulated Amortization Total
Product certifications $602,202
 $(272,503) $329,699
 $544,651
 $(233,992) $310,659
Patents 656,105
 (146,983) 509,122
 681,155
 (123,012) 558,143
Developed technology 240,000
 (72,000) 168,000
 240,000
 (60,000) 180,000
Trademarks 19,215
 
 19,215
 17,165
 
 17,165
Favorable contract asset 1,456,166
 (52,024) 1,404,142
 
 
 
  $2,973,688
 $(543,510) $2,430,178
 $1,482,971
 $(417,004) $1,065,967
             
Intangible liability            
Unfavorable contract liability $10,838,571
 $(480,288) $10,358,283
 $
 $
 $

The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the three and nine months ended September 30, 20172021 and 20162020 was $74,482$51,229 and $73,511,$145,306 and $21,564 and $64,692 respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the nine months ended September 30, 20172021 and 20162020 was $428,264$79,570 and $-0-,$238,192 and $98,053 and $301,414, respectively. During

11

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

the nine months ended September 30, 2021 and 2020, we abandoned certain patent applications amounting to $7,400 and $179,944, respectively, and recorded an abandonment charge in general and administrative expenses in each respective period.

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 onus in 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 and thereafter as of September 30, 2021 is estimated to be as follows:
Non-contract Related IntangiblesContract Related IntangiblesTotal
Year 1$204,679 $(323,761)$(119,082)
Year 2199,576 (269,825)(70,249)
Year 3182,373 (217,757)(35,384)
Year 4173,803 (151,920)21,883 
Year 5169,787 (90,035)79,752 
Thereafter254,896 (273,557)(18,661)
Total$1,185,114 (1,326,855)$(141,741)

Note 7.Sale of Energy Producing Assets and Goodwill Impairment
Year 1 $(993,749)
Year 2 (911,514)
Year 3 (847,307)
Year 4 (858,084)
Year 5 (840,273)
    During the first quarter of 2019 we recognized 2 individual sales of energy producing assets, for a total of 8 power purchase agreements, including the associated energy production contracts for total consideration of $7 million.

    In connection with these assets sales, we entered into agreements with the purchaser to maintain and operate the assets over the remaining periods of the associated energy production contracts (through August 2033 and January 2034, respectively) in exchange for monthly maintenance and operating fees. These agreements contain provisions whereby we have guaranteed to the purchaser a minimum level or threshold of cash flows from the associated energy production contracts. Actual results are compared to the minimum threshold bi-annually and we are contractually obligated to reimburse any shortfall to the purchaser. To the extent actual cash flow results exceed the minimum threshold, we are entitled to fifty percent of such excess under the agreements.

Note 6. Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired

Changes    The foregoing agreements also contain provisions whereby we have agreed to make whole the purchaser in the carrying amountevent the counterparty to the energy production contract(s) defaults on or otherwise terminates before the stated expiration of goodwill andthe energy production contract. Should we be required to make whole the purchaser under such provisions, we would be entitled to seek recovery from the counterparty to the energy production contract(s) under a similar provision contained in those contracts in respect of early termination.
    We are also responsible under the agreements for site decommissioning costs, if any, in excess of cost over faircertain threshold amounts by site. Decommissioning of site assets is performed when, if and as requested by the counterparty to the energy production contract upon termination of the energy production contract.    
Note 8.Leases
    Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing and storage facilities.
    At inception, we determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of our lease agreements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). We account for each component separately based on the estimated standalone price of each component.
    Operating leases are included in Right-of-use assets, Lease obligations, current and Lease obligations, long term on the condensed consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of net assets acquiredremaining lease payments over the lease term and using an incremental borrowing rate consistent with the lease
12

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

terms or implicit rates, when readily determinable. For those leases where it is reasonably certain at the commencement date that we will exercise the option to extend the lease, then the lease term will include the lease extension term. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
    Lease expense for operating leases, which principally consist of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Lease expense for the three and nine months ended September 30, 2021 and 2020 was $197,651 and $591,867 and $179,042 and $565,180, respectively.
    Supplemental information related to leases for the nine months ended September 30, 2021 was as follows:
Cash paid for amounts included in the measurement of operating lease liabilities$534,073 
Weighted-average remaining lease term - operating leases4.1 years
Weighted-average discount rate - operating leases%
    Future minimum lease commitments under non-cancellable operating leases as of September 30, 2021 were as follows:
 Operating Leases
Year 1$181,566 
Year 2733,693 
Year 3744,981 
Year 4298,980 
Year 5108,762 
Thereafter331,128 
Total lease payments2,399,110 
Less: imputed interest290,665 
Total$2,108,445 

  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.

Note 7.9. Stock-Based Compensation


Stock-Based Compensation
The CompanyWe 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.consultants. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Amended Plan to 3,838,750 as of September 30, 2021, and in June 2017 orstockholders approved an amendment to extend the Amended Plan.termination date of the Plan to January 1, 2026 and ratified all of our option grants issued after January 1, 2016 (the "Amended Plan").
Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the 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 September 30, 20172021 was 2,250,536.710,068.
Stock option activity for the nine months ended September 30, 2021 was as follows: 
Common Stock OptionsNumber of
Options
Exercise
Price
Per
Share
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
Aggregate
Intrinsic
Value
Outstanding, December 31, 20202,496,242 $0.71-$10.33$1.94 7.37 years$731,744 
Granted208,000 $1.75$1.75 
Exercised— 
Canceled and forfeited(253,500)$2.60$2.60 
Outstanding, September 30, 20212,450,742  $0.71-$10.33$1.86 7.62 years$1,608,837 
Exercisable, September 30, 2021794,533 $3.48 $163,557 
Vested and expected to vest, September 30, 20212,202,311 $1.95  $1,392,045 
13

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements



Stock option activity for the nine months ended September 30, 2017 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, 20161,117,918
 $0.79-$5.39 $3.10
 5.00 years $1,415,150
Granted45,000
 $3.22-$3.72 3.35
    
Assumed in merger156,124
 $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, 20171,133,387
  $0.79-$25.11 $3.62
 5.25 years $484,535
Exercisable, September 30, 2017883,631
   $3.42
   $201,957
Vested and expected to vest, September 30, 20171,095,925
   $3.59
   $605,063
Consolidated stock-based compensation expense for the three and nine months ended September 30, 20172021 and 20162020 was $138,329$56,889 and $117,065,$150,655 and $50,582 and $132,312, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the periods.period.
At September 30, 2021 the total compensation cost related to unvested stock option awards not yet recognized is $506,958 and this amount will be recognized over a weighted average period of 2.01 years.


Note 8.10. Fair Value Measurements

The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The CompanyWe currently doesdo not have any Level 1 financial assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. We have Level 2 financial assets and liabilities as provided below.
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. We do not currently have any Level 3 financial assets or liabilities.

The following tabletables presents the asset reported in "other assets" in the consolidated balance sheet measured at its fair value on a recurring basis as of September 30, 20172021 and December 31, 2020 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  
Total Level 1 Level 2 Level 3 Total gains (losses)
September 30, 2021September 30, 2021Quoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputs
DescriptionDescriptionTotalLevel 1Level 2Level 3
Recurring fair value measurements         Recurring fair value measurements
Available-for-sale equity securities         
Marketable equity securities Marketable equity securities
EuroSite Power Inc.$334,570
 $
 $
 $334,570
 $(184,998) EuroSite Power Inc.$131,242 $— $131,242 $— 
Total recurring fair value measurements$334,570
 $
 $
 $334,570
 $(184,998)Total recurring fair value measurements$131,242 $— $131,242 $— 
December 31, 2020December 31, 2020Quoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputs
DescriptionDescriptionTotalLevel 1Level 2Level 3
Recurring fair value measurementsRecurring fair value measurements
Marketable equity securitiesMarketable equity securities
EuroSite Power Inc.EuroSite Power Inc.$118,084 $— $118,084 $— 
Total recurring fair value measurementsTotal recurring fair value measurements$118,084 $— $118,084 $— 
      
The Company utilizes    We utilize a Level 32 category fair value measurement to value its investment in EuroSite Power, Inc. 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 we classify it as Level 2.

14

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements



The following table summarizes changes in level 3Level 2 assets which are comprised of available-for-salemarketable equity securities for the period:nine months ended September 30, 2021 and 2020:
Fair value at December 31, 2020$118,084 
Sale of 93,187 shares(5,591)
Unrealized gain18,749 
Fair value at September 30, 2021$131,242 
Fair value at December 31, 2019$216,487 
Unrealized loss(98,403)
Fair value at September 30, 2020$118,084 
During the nine months ended September 30, 2021, we received net proceeds of $11,637 from the sale of 93,187 shares of Eurosite Power, Inc. common stock, and recognized a realized gain of $6,046 which is included in other income (expense), net in the condensed consolidated statements of operations.

Note 11.Revolving Line of Credit and Notes Payable
    On May 4, 2018 we entered into a Credit Agreement with Webster Business Credit Corporation ("Webster") that provided a line of credit of up to $10 million to us on a revolving and secured basis, with availability based on certain accounts receivables, raw materials, and finished goods.
    Borrowings under the Credit Agreement bore interest at a rate equal to, at our option, either (1) One Month LIBOR, plus 3.00%, or (2) Webster’s Base Rate, plus 1.5%. Webster’s Base Rate is defined as the highest of (a) the Federal Funds rate plus 0.5%, (b) Webster’s Prime Rate as adjusted by bank from time to time, and (c) One Month LIBOR, plus 2.75%.
    The Credit Agreement contained certain affirmative and negative covenants applicable to us, which included, among other things, restrictions on our 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 we may not make any financed capital expenditures in excess of $500,000 in the aggregate in any fiscal year.
    The $145,011 of costs incurred in connection with the issuance of the revolving credit facility were capitalized and were being amortized to interest expense on a straight-line basis over three years based on the contractual term of the Agreement.
On May 11, 2020, we terminated our Credit Agreement with Webster, together with several related agreements including, a Revolving Note Security Agreement, Blocked Account Agreement, and Master Letter of Credit Agreement. We paid an early termination fee of $25,000 to terminate the Credit Agreement. As of May 11, 2020, the outstanding balance under the line of credit and accrued and unpaid interest was $0.
Paycheck Protection Program Loan
On April 17, 2020, we obtained an unsecured loan through Webster Bank, N.A. in the amount of $1,874,200 in connection with the Paycheck Protection Program pursuant to the Coronavirus Aid, Relief, and Economic Security Act, as amended ("CARES Act”) administered by the United States Small Business Administration ("SBA"). The loan was guaranteed by the SBA. Interest on the loan balance was at the rate of 1% per year, and as a result of the enactment of the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”), repayment of the loan balance could be deferred until August 2021, at which time the balance would be payable in 18 monthly installments of $106,356 with the final payment due in January 2023 if not forgiven in accordance with the CARES Act and the terms of the Promissory Note executed by us in connection with the loan. The loan could be prepaid at any time without penalty. The loan agreement and promissory note include customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of shares of our common stock while the loan remains outstanding. The loan agreement and promissory note also defines events of default to include, among other things, payment defaults, breaches of provisions of the loan agreement or the promissory note and cross-defaults on other loans, if applicable.
On January 19, 2021, we received a letter dated January 12, 2021 from Webster Bank, NA confirming that the Paycheck Protection Program Loan issued to us pursuant to the CARES Act, as amended, in the original principal amount of $1,874,200 together with accrued interest of $13,659 was forgiven in full as of January 11, 2021. We have accounted for the loan forgiveness of $1,887,859 as debt extinguishment in accordance with Accounting Standards Update 2020-09, Debt (Topic 470) ("ASU 2020-09") and reported as a separate component of other income (expense), net in the condensed consolidated statements of operations for the nine months ended September 30, 2021. The loan forgiveness is expected to be nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
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TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

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
Paycheck Protection Program Second Draw Loan

On February 5, 2021, we obtained a Paycheck Protection Program Second Draw unsecured loan through Webster Bank, N.A. in the amount of $1,874,269 pursuant to the CARES Act. The loan was guaranteed by the SBA. Interest on the loan balance was at the rate of 1% per year, and repayment of the loan balance could be deferred until June 5, 2022. If not forgiven in accordance with the CARES Act, as amended, the loan was repayable in forty-four (44) monthly installments of $43,400 beginning July 5, 2022 with final payment due on February 5, 2026. The loan could be prepaid at any time without penalty. The loan agreement and promissory note included customary provisions for a loan of this type, including prohibitions on our payment of dividends or repurchase of shares of our common stock while the loan remains outstanding. The loan agreement and promissory note defines events of default to include, among other things, payment defaults, breaches of provisions of the loan agreement or the promissory note and cross-defaults on other loans, if applicable.
On September 20, 2021, we received a letter dated September 13, 2021 from Webster Bank, NA confirming that the Paycheck Protection Program Second Draw Loan issued to us pursuant to the CARES Act, as amended, in the original principal amount of $1,874,269 together with accrued interest of $11,386 was forgiven in full as of September 8, 2021. We have accounted for the loan forgiveness of $1,885,655 as debt extinguishment in accordance with Accounting Standards Update 2020-09, Debt (Topic 470) ("ASU 2020-09") and reported as a separate component of other income (expense), net in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021. The loan forgiveness is expected to be nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
Note 9.12. Commitments and Contingencies
The Company guaranteesWe guarantee certain obligations of EuroSite Power Inc, 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 September 30, 20172021 of approximately $301,000 due ratably in equal installments through September 2021,$656 and certain guarantees of performance in respect of certain customer contracts. Based on current conditions, the Company doeswe do not believe there to be any amounts probable of payment by the Companyus under any of the guarantees and hashave 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.condensed consolidated balance sheets.
Legal Proceedings
Tecogen is not currently a party to any material litigation arising from its operations, and it is not aware 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 in the Superior Court of the Commonwealth of Massachusetts and named as a defendant in a case in the United States District Court 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.
Note 10. Related Party Transactions13. Segments
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 Co-Chief Executive Officer and a Company Director. The loan is in the amount of $850,000 and bears interest at 6%, payable quarterly, and matures and becomes due and payable on May 25, 2018.
Ultra Emissions Technologies Ltd.
On December 28, 2015, the Company entered into a joint venture agreement relating to the formation of a joint venture company (the “JV”) organized to develop 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 organized 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.
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 manufacture ("Tedom"), entered into a joint venture, where the Company will hold a 50% participating interest and the remaining 50% interest will be with 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 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 expand the current Tecogen product offerings to the MicroCHP of 35kW to large 4,000kW plants. Tecogen agreed to refer all appropriate sale leads to TTcogen regarding the products agreed to by the parties and Tecogen shall have the first right to repair and maintain the products sold by TTcogen.

The Company accounts for its interest in TTcogen's operations using equity method accounting. Any initial operating losses of TTcogen are to be borne and funded by Tedom. To the extent any such losses are borne and funded solely by Tedom, the
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements


Company will not recognize any portion of such losses given the Company does not guarantee the obligations of the joint venture nor is 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 under the Join Venture Agreement dated May 19, 2016 ("JVA") and its corresponding LLC Operating Agreement ("LLC Operating Agreement"), of the immediate termination of the JVA and LLC Operating Agreement. This notice begins the dissolution process under the LLC Operating Agreement. The termination notice was the result of a material and incurable breach of certain provisions thereunder by Tedom and/or Tedom USA. The Company intends to work together with Tedom to come to an amicable decision to create a new path forward for TTcogen and the relationship between the Company and Tedom and/or facilitate an amicable wind up of TTcogen's affairs as provided for in the LLC Operating Agreement and in accordance with the terms therewith.

Note 11. Segments
As of September 30, 2017, the Company was2021, we were organized into two2 operating divisionssegments through which senior management evaluates the Company’sour 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’sour 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 months ended September 30, 2017 and 2016 and the nine months ended September 30, 20172021 and 2016:2020:
16
    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 ServicesEnergy ProductionCorporate, other and elimination (1)Total
Three Months Ended September 30, 2021
Revenue - external customers$4,700,576 $315,292 $— $5,015,868 
Intersegment revenue48,111 — (48,111)— 
Total revenue$4,748,687 $315,292 $(48,111)$5,015,868 
Gross profit$2,197,161 $144,774 $— $2,341,935 
Identifiable assets$28,079,758 $4,400,992 $— $32,480,750 
Three Months Ended September 30, 2020
Revenue - external customers$6,831,012 $368,695 $— $7,199,707 
Intersegment revenue77,514 — (77,514)— 
Total revenue$6,908,526 $368,695 $(77,514)$7,199,707 
Gross profit$2,615,657 $171,087 $— $2,786,744 
Identifiable assets$21,031,221 $2,877,859 $11,338,685 $35,247,765 
Nine Months Ended September 30, 2021
Revenue - external customers$15,878,683 $1,339,448 $— $17,218,131 
Intersegment revenue236,155 — (236,155)— 
Total revenue$16,114,838 $1,339,448 $(236,155)$17,218,131 
Gross profit$7,593,267 $542,515 $— $8,135,782 
Identifiable assets$28,079,758 $4,400,992 $— $32,480,750 
Nine Months Ended September 30, 2020
Revenue - external customers$21,201,579 $1,395,886 $— $22,597,465 
Intersegment revenue309,224 — (309,224)— 
Total revenue$21,510,803 $1,395,886 $(309,224)$22,597,465 
Gross profit$7,976,904 $507,998 $— $8,484,902 
Identifiable assets$21,031,221 $2,877,859 $11,338,685 $35,247,765 
(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    We have 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.



17

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements



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


Forward-looking statements are made throughout thisThis Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limitingForward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the foregoing,potential future impact of the COVID-19 pandemic on our business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words “believes,such as “future,” “anticipates,” “plans,“believes,” “estimates,” “expects,” “seeks,“intends,“estimates”“plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar expressionsterms. Forward-looking statements are intended to identifynot guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Such forward-looking statements include, among other things, statements regarding the impact of the coronavirus pandemic on demand for our currentproducts and future cash requirements,services, the availability of incentives, rebates, and tax benefits relating to our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activitiesproducts, changes in the future.regulatory environment relating to our products, competing technological developments, and the availability of financing to fund our operations and growth. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”), as supplemented, and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors.” The following discussion should be read in conjunction with the 2020 Form 10-K filed with the Securities and Exchange Commission (“SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. Each of the terms “Tecogen,” “we,” “our,” and “us” as used herein refer collectively to Tecogen Inc. and our wholly owned subsidiaries, unless otherwise stated. While the Companywe may elect to update forward-looking statements in the future, itwe specifically disclaimsdisclaim any obligation to do so, even if the Company’sour estimates change, and readersyou should not rely on those forward-looking statements as representing the Company’sours views as of any date subsequent to the date of the filing of this Quarterly Report. There areForm 10-Q.

Recent Developments

Paycheck Protection Program Loan
On April 17, 2020, we obtained an unsecured loan in the principal amount of $1,874,200 from Webster Bank, NA ("Webster") under the Paycheck Protection Program adopted pursuant to the Coronavirus Aid, Relief and Economic Recovery Act, as amended ("CARES Act"). The loan was forgivable if the proceeds were utilized by us for payroll, utilities, and rent expenses. On January 19, 2021 we received confirmation from Webster that the Paycheck Protection Program Loan in the original principal amount of $1,874,200 together with accrued interest of $13,659 was forgiven in full effective as of January 11, 2021. The loan forgiveness of $1,887,859 was accounted for as debt extinguishment and is reported as a separate component of other income (expense), net in the condensed consolidated statements of earnings for the nine months ended September 30, 2021.
Paycheck Protection Program Second Draw Loan
On February 5, 2021, we obtained a Paycheck Protection Program Second Draw unsecured loan through Webster in the amount of $1,874,269 in connection with the Paycheck Protection Program pursuant to the CARES Act. The loan is guaranteed by the United States Small Business Administration. On September 20, 2021, we received a letter dated September 13, 2021 from Webster Bank, NA confirming that the Paycheck Protection Program Second Draw Loan issued to us pursuant to the CARES Act, as amended, in the original principal amount of $1,874,269 together with accrued interest of $11,386 was forgiven in full as of September 8, 2021. The loan forgiveness of $1,885,655 was accounted for as debt extinguishment and is reported as a separate component of other income (expense), net in the condensed consolidated statements of earnings for the three and nine months ended September 30, 2021.










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TECOGEN INC.
Employee Retention Credit

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. The ERC is available through December 31, 2021 and is equal to 70% of qualified wages (which includes employer qualified health plan expenses) paid to employees. In addition, the availability of the ERC was permitted to entities that received a Paycheck Protection Loan subject to certain conditions. During each quarter in 2021, a maximum of $10,000 in qualified wages for each employee is eligible for the ERC. Therefore, the maximum tax credit that can be claimed by an eligible employer in 2021 is $7,000 per employee per calendar quarter. Section 2301(c)(2)(B) of the CARES Act permits an employer to use an alternative quarter to calculate gross receipts and the employer may determine if the decline in gross receipts tests is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. Accordingly, for the first quarter of 2021, we elected to use our gross receipts for the fourth calendar quarter of 2020 compared to our gross receipts for the fourth calendar quarter of 2019. As a result of our election to use an alternative quarter, we
qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021 were eligible for the ERC (rather than just wages paid to employees not providing services). During the three and nine months ended September 30, 2021, we recorded ERC benefits of $562,253 and $1,276,021 and, respectively in other income (expense), net in our condensed consolidated statements of operations.

COVID-19 Update

During the first quarter of fiscal 2020, a novel strain of coronavirus (“COVID-19”) began spreading rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by U.S. Federal, state and local governments in response have materially adversely affected and could in the future materially adversely impact our business, results of operations, financial condition, and stock price. The pandemic has impacted our operations, revenues and cash flows and the future impact of the pandemic remains uncertain. It may be affected by factors including growth in the number of important factors that could causeinfections, any increase in the actual resultsprevalence of highly transmissible COVID-19 variants, the duration of the Companypandemic, steps taken to differ materiallycombat the pandemic, and the availability and acceptance of effective treatments.
We have made every effort to keep our employees who operate our business safe and minimize unnecessary risk of exposure to the virus. Our service centers have continued to operate due to our essential services designation, however from those indicatedtime to time our service personnel have been unable to perform maintenance services for customers that temporarily ceased or reduced operations at facilities served by such forward-looking statements, including those detailed underour equipment, and certain customers closed their operations, reducing the heading “Risk Factors”amount of energy produced and sold to customers during these periods. During the nine-month period ended September 30, 2021, we did see a recovery in this Quarterly Report.our energy production revenues as normal business operations are beginning to resume due to the lifting of government-imposed COVID-19 restrictions. During the pandemic we have also experienced slower payments from certain customers. These business interruptions resulted in reductions in service and installation revenue, energy production revenue, and margins in the affected portions of our business.


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 Companyus 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 portablepotable 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).


19


TECOGEN INC.
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’sOur 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.



20


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).

Results of Operations


Third Quarter of 20172021 Compared to Third Quarter of 20162020


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

Three Months Ended
September 30, 2021September 30, 2020
Revenues100.0%100.0%
Cost of sales53.3%61.3%
Gross profit46.7%38.7%
Operating expenses
General and administrative49.3%32.2%
Selling13.1%7.8%
Research and development2.4%1.5%
Total operating expenses64.8%41.6%
Loss from operations(18.1)%(2.9)%
Total other income (expense), net47.9%(0.1)%
Consolidated net income (loss)29.7%(3.1)%
Income attributable to the non-controlling interest(0.4)%(0.1)%
Net income (loss) attributable to Tecogen, Inc.29.2%(3.2)%

Revenues


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

Three Months Ended September 30,
20212020Increase (Decrease) $Increase (Decrease) %
REVENUES:
Products
Cogeneration$1,446,001 $1,889,941 $(443,940)(23.5)%
Chiller383,100 769,694 (386,594)(50.2)%
Engineered accessories42,231 45,787 (3,556)(7.8)%
Total product revenues1,871,332 2,705,422 (834,090)(30.8)%
Services
Maintenance services2,766,168 2,611,904 154,2645.9 %
Installation services63,076 1,513,686 (1,450,610)(95.8)%
Total service revenues2,829,244 4,125,590 (1,296,346)(31.4)%
Products and services4,700,576 6,831,012 (2,130,436)(31.2)%
Energy production revenues315,292 368,695 (53,403)(14.5)%
Total revenues$5,015,868 $7,199,707 $(2,183,839)(30.3)%

Total revenues infor the third quarter of 2017three months ended September 30, 2021 were $8,501,198$5,015,868 compared to $6,616,455$7,199,707 for the same period in 2016, an increase2020, a decrease of $1,884,743$2,183,839 or 28.5%.30.3% year over year.


Segment 1 - Product
21


TECOGEN INC.
    Products and Services


Product revenues in the third quarter of 2017three months ended September 30, 2021 were $2,425,616$1,871,332 compared to $2,850,901$2,705,422 for the same period in 2016,2020, a decrease of $425,285$834,090, or 14.9%30.8%. ThisThe decrease wasin revenue during the aggregate ofthree months ended September 30, 2021 is due primarily to a decrease in cogeneration sales of $797,528 and an increase$443,940 due to decreased unit volume, a decrease in chiller and heat pump sales of $372,243.$386,594 due to decreased unit volume and, to a lesser extent, a decrease in sales of engineered accessories of $3,556. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales in which revenue is recognized upon shipment were impacted as energy and other construction projects were delayed due to the COVID-19 pandemic. Further, in the three months ended September 30, 2021 we experienced supply chain delays which impacted our product sales.
    Service revenues in the third quarter of 2017three months ended September 30, 2021 were $4,519,467$2,829,244, compared to $3,765,554$4,125,590 for the same period in 2016,2020, a decrease of $1,296,346, or 31.4%. The decrease in revenue during the three months ended September 30, 2021 is due primarily to a decrease in installation revenues of $1,450,610, offset partially by an increase of $753,913$154,264, or 20.0%. This increase in the third quarter is due to an increase in installation activity of $757,554 and a decrease of $3,6415.9%, in service contract revenues. While service contract revenue generally remains relatively constant, installation activity can vary widely depending on the status of various projects.


Segment 2 -    Energy Production


Energy production revenues in the third quarter of 2017three months ended September 30, 2021 were $1,556,115, which represents energy revenues earned$315,292, compared to $368,695 for the entire quarter as American DG Energy was acquired during Q2 2017.same period in 2020, a decrease of $53,403, or 14.5%. The decrease in energy production revenue is a consequence of certain energy production sites that are not fully operational or have permanently closed. For sites that have not permanently closed, energy production revenues at these sites decreased 7.6% in the three months ended September 30, 2021 compared to the same period in 2020.


Cost of Sales


Cost of sales in the third quarter of 2017three months ended September 30, 2021 was $5,243,167$2,673,933 compared to $3,841,637$4,412,963 for the same period in 2016, an increase2020, a decrease of $1,401,530,$1,739,030, or 36.5%39.4%.
Segment 1 - Product and Services

Cost The decrease in cost of sales for productis due to the reduction of Products and services inServices revenues and their related cost of sales. During the third quarter of 2017 was $4,519,969three months ended September 30, 2021 our gross margin increased to 46.7% compared to $3,841,63738.7% for the same period in 2016, an2020, a 8.0% percentage point increase. The increase of $678,332 or 17.7%. Duringin the third quarter our overall gross margin percentage is due to higher margin on both our cogeneration and chiller products due to higher sales prices and lower warranty costs, and an overall change in sales mix to increased higher margin service contract revenue.

    Products and Services

    Cost of sales for products and services in the three months ended September 30, 2021 was 34.9%$2,503,415 compared to 41.9%$4,215,355 for the same period in 2016,2020, a decrease of 16.7%$1,711,940, or 40.6%. This decreaseDuring the three months ended September 30, 2021, our products and services gross margin was 46.7% compared to 38.3% for the same period in 2020, an 8.4% percentage point increase. The increase in products and services gross margin is due primarily to a changeshift in product mix.revenue mix to proportionately higher service maintenance revenues and lower installation activities in the three months ended September 30, 2021 compared to the same period in 2020.


Segment 2 -    Energy Production


Cost of sales for energy production in the third quarterthree months ended September 30, 2021 was $170,518 compared to $197,608 for the same period in 2020, a decrease of 2017 was $723,198 which represents$27,090, or 13.7%. During the cost associated withthree months ended September 30, 2021 our energy revenues earned during the quarter. During this period ourproduction gross margin decreased to 46.0% compared to 46.4% for the same period in 2020, a 0.4% percentage point decrease. The decrease in the energy production was 53.5%.gross margin is due to decreased runtime at our energy production sites in the three months ended September 30, 2021 compared to the same period in 2020.


22


TECOGEN INC.

Operating Expenses


Operating expenses increased $258,207, or 8.6%, to $3,252,106 in the three months ended September 30, 2021 compared to $2,993,899 in the same period in 2020.

Three Months Ended
Operating ExpensesSeptember 30, 2021September 30, 2020Increase (Decrease) $Increase (Decrease) %
General and administrative$2,473,190 $2,318,789 $154,401 6.7 %
Selling656,885 563,857 93,028 16.5 %
Research and development122,031 111,253 10,778 9.7 %
Total$3,252,106 $2,993,899 $258,207 8.6 %


General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses infor the quarter endingthree months ended September 30, 20172021 were $2,427,352$2,473,190 compared to $2,003,838$2,318,789 for the same period in 2016,2020, an increase of $423,514$154,401 or 21.1%6.7%. The increase wasGeneral and administrative expenses increased due to increaseda $92,669 increase in payroll and payroll related costs, from the addition of American DG Energy's operations.a $52,000 increase in bad debt expense and a $25,795 increase in depreciation and amortization expense, partially offset by a $20,786 decrease in legal expense.

Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the third quarter of 2017three months ended September 30, 2021 were $503,415$656,885 compared to $367,412$563,857 for the same period in 2016,2020, an increase of $136,003$93,028 or 37.0%16.5%. This differenceThe increase is due to a largerhigher sales forcecommissions which increased $118,934 due to proportionately higher sales agent product sales and increased public relations and trade show costs.decreased royalty expense which decreased $5,165 due to decreased InVerde cogeneration sales.

Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses infor the quarter endingthree months ended September 30, 20172021 were $241,725$122,031 compared to $154,075$111,253 for the same period in 2016,2020, an increase of $87,650$10,778 or 56.9%9.7%. 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.
TECOGEN INC.



IncomeLoss from Operations


Income    Our loss from operations for the third quarter of 2017three months ended September 30, 2021 was $85,539$910,171 compared to $249,493a loss of $207,155 for the same period in 2016,2020, an increase of $703,016. The increase in our loss from operations is due primarily to the lower revenue for our Products and Services Segment and our Energy Production Segment and a decrease of $163,954. The decrease was a result of lower margins due to change$258,207 increase 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.operating expenses.


Other Income (Expense), net


Other expense,income, net for the three months ended September 30, 20172021 was $30,393$2,401,758 compared to $41,625other expense, net of $4,857 for the same period in 2016. Other income (expense) includes interest and2020, an increase of $2,406,615. The increase in other income in the three months ended September 30, 2021 is due primarily to the gain on the extinguishment of $14,849, and interest expense on notes payabledebt of $45,242$1,885,655 as a result of the Paycheck Protection Program Second Draw Loan forgiveness, the recognition of the Employee Retention Credit of $562,253 for the third calendar quarter of 2017. For2021, a $990 decrease in interest expense and partially offset by an increase in the unrealized loss on investment securities of $37,497 compared to the same period in 2016, interest and other income was $3,914 and2020. The reduction in interest expense was $45,539.

Noncontrolling Interest

The income attributableis due to the noncontrolling interest was $27,935May 2020 termination of our Credit Agreement with Webster Business Credit Corporation. See Note 11. "Revolving Line of Credit and Notes Payable" to our unaudited condensed consolidated financial statements for the period ended September 30, 2021.

Provision for State Income Taxes

    The provision for state income taxes for the three months ended September 30, 20172021 and 2020 was $3,000 and $9,397, respectively and represents estimated income tax payments, net of refunds to various states.

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TECOGEN INC.
Non-controlling Interest

    Income attributable to the non-controlling interest was $21,890 for the three months ended September 30, 2021 which represents the noncontrollingnon-controlling interest portion of American DG Energy's 51% owned subsidiary, ADGNY,American DG New York, LLC. For the same period in 2020, income attributable to the non-controlling interest was $10,511.


Net Income (Loss) Attributable to Tecogen Inc.Inc


Net    The net income (loss) attributable to Tecogen for the three months ended September 30, 20172021 was $27,211net income of $1,466,697 compared to $207,868a net loss of $231,920 for the same period in 2016, a decrease2020, an improvement of $180,657, year over year. The decrease was$1,698,617, or 732.4%.The improvement is due primarily to the resultextinguishment of a changedebt associated with the forgiveness of the Paycheck Protection Program Second Draw loan and recognition of the Employee Retention Credit in product mix.the three months ended September 30, 2021.


Other ComprehensiveNet Income (Loss) per Share


The unrealized gain on securities of $39,361net income (loss) per share, basic and diluted, 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 ofthree months ended September 30, 2017.

First Nine Months2021 was net income per share of 2017 Compared to First Nine Months of 2016

Revenues

Total revenues for the first nine months of 2017 were $22,938,503$0.06 compared to $17,379,278net loss per share of $0.01 for the same period in 2016, an increase of $5,559,225 or 32.0%.

Segment 1 - Product2020. Weighted average shares outstanding used to calculate basic and Services

Product revenues indiluted earnings per share for the first ninethree months of 2017ended September 30, 2021 were $8,349,159 compared to $7,525,90924,850,261 and 25,154,905 shares, respectively, and for the same period in 2016, an increase2020 were 24,850,261 and 24,850,261 shares, respectively.


Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020

The following table sets forth for the periods indicated, the percentage of $823,250 or 10.9%. This increase wasnet sales represented by certain items reflected in our condensed consolidated statements of operations:

Nine Months Ended
September 30, 2021September 30, 2020
Revenues100.0%100.0%
Cost of sales52.7%62.5%
Gross profit47.3%37.5%
Operating expenses
General and administrative42.8%33.8%
Selling10.2%8.9%
Research and development2.2%2.8%
Total operating expenses55.1%45.6%
Loss from operations(7.9)%(8.1)%
Total other income (expense), net29.3%(0.9)%
Consolidated net income (loss)21.3%(9.1)%
Income attributable to the non-controlling interest(0.2)%(0.1)%
Net income (loss) attributable to Tecogen, Inc.21.1%(9.2)%

Revenues

The following table presents revenue for the net of an increase in cogeneration sales of $648,863periods indicated, by segment and an increase in chiller and heat pump sales of $174,387. Servicethe change from the prior year:







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TECOGEN INC.
Nine Months Ended September 30,
20212020Increase (Decrease) $Increase (Decrease) %
REVENUES:
Products
Cogeneration$2,542,962 $8,234,423 $(5,691,461)(69.1)%
Chiller2,929,411 518,485 2,410,926465.0 %
Engineered accessories967,608 790,408 177,20022.4 %
Total product revenues6,439,981 9,543,316 (3,103,335)(32.5)%
Services
Maintenance services8,613,377 7,533,072 1,080,30514.3 %
Installation services825,325 4,125,191 (3,299,866)(80.0)%
Total service revenues9,438,702 11,658,263 (2,219,561)(19.0)%
Products and services15,878,683 21,201,579 (5,322,896)(25.1)%
Energy production revenues1,339,448 1,395,886 (56,438)(4.0)%
Total revenues$17,218,131 $22,597,465 $(5,379,334)(23.8)%

    Total revenues for the first nine months of 2017ended September 30, 2021 were $12,259,037$17,218,131 compared to $9,853,369$22,597,465 for the same period in 2016,2020, a decrease of $5,379,334 or 23.8% year over year primarily due to a $5,322,896 decrease in Products and Services revenue due to decreased cogeneration sales and installation revenue.

    Products and Services

    Product revenues in the nine months ended September 30, 2021 were $6,439,981 compared to $9,543,316 for the same period in 2020, a decrease of $3,103,335, or 32.5%.This decrease is due primarily to a decrease in cogeneration sales of $5,691,461 due to decreased unit volume, partially offset by an increase in chiller sales of $2,410,926 due to increased unit volume and increased sales of engineered accessories of $177,200. Chiller sales in the first quarter of 2020 were negatively impacted by the return of chiller products of approximately $655,000. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales in which revenue is recognized upon shipment and were negatively impacted as energy and other construction projects were delayed due to the COVID-19 pandemic. Further, in the nine months ended September 30, 2021 we experienced supply chain delays which impacted our product sales.
    Service revenues in the nine months ended September 30, 2021 were $9,438,702, compared to $11,658,263 for the same period in 2020, a decrease of $2,219,561, or 19.0%. The decrease in the nine months ended September 30, 2021 is due primarily to a decrease in installation revenues of $3,299,866, offset partially by an increase of $2,405,668$1,080,305, 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 $309,91014.3%, in service contract revenues. While service contract revenue generally remains relatively constant, installation activity can vary widely depending on the status of various projects.


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 throughended September 30, 2017.

Cost of Sales

Cost of sales for the first nine months of 2017 was $13,779,1792021 were $1,339,448, compared to $10,782,222$1,395,886 for the same period in 2016, an increase2020, a decrease of $2,996,957,$56,438, or 27.8%4.0%. The decrease in energy production revenue is a consequence of certain energy production sites that are not fully operational or have permanently close, partially offset by the revenue recognized from our share of the bi-annual excess cash flows from energy production contracts we sold in the first quarter of 2019. Energy production revenue at sites permanently closed represented 4.1% of energy production revenue during the nine months ended September 30, 2020. For sites that have not permanently closed, energy production revenues at these sites decreased 1.7% in the nine months ended September 30, 2021 compared to the same period in 2020.

Cost of Sales

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TECOGEN INC.

Segment 1 - Product and Services

Cost of sales for product and services in the first nine months of 2017ended September 30, 2021 was $12,725,438$9,082,349 compared to $10,782,222$14,112,563 for the same period in 2016,2020, a decrease of $5,030,214, or 35.6%. The decrease in cost of sales is due to the reduction of Products and Services revenues and their related cost of sales. During the nine months ended September 30, 2021 our gross margin increased to 47.3% compared to 37.5% for the same period in 2020, a 9.8% percentage point increase. The increase in the gross margin percentage is due to higher margins on both our cogeneration and chiller products due to higher sales prices and lower warranty costs and an increaseoverall change in sales mix to increased higher margin service contract revenue.

    Products and Services

    Cost of $1,943,216sales for products and services in the nine months ended September 30, 2021 was $8,285,416 compared to $13,224,675 for the same period in 2020, a decrease of $4,939,259, or 18.0%37.3%. During the first nine months of 2017,2021, our productproducts and services gross margin was 38.3%47.8% compared to 38.0%37.6% for the same period in 2016,2020, a 0.8% improvement.10.2% percentage point increase. The increase in margin was a result of material cost savings in production and ongoing product development. Productservices gross margin foris due primarily to a shift in revenue mix to proportionately higher service maintenance revenues and lower installation activities in the first nine months of 2017 was 37.0%ended September 30, 2021 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.2020.

    
Segment 2 - Energy Production


Cost of sales for energy production in the nine months ended September 30, 2021 was $796,933 compared to $887,888 for the same period in 2020, a decrease of $90,955, or 10.2%. During the first nine months of 2017 was $1,053,741 which represents2021 our energy production gross margin increased to 40.6% compared to 36.4% for the same period in 2020, a 4.2% percentage point increase. The increase in the energy production gross margin is due to improved site operational efficiency, decreased contract maintenance costs and the reduced cost associated with energy revenues earned from May 19, 2017,of natural gas due to decreased therms used in the date after acquisition of American DG Energy throughnine months ended September 30, 2017; this represents approximately 42%2021 compared to the same period in 2020 and the revenue from our share of the second quarter's revenue plus the entire third quarter's revenue for American DG Energy. During this period our gross margin forbi-annual excess cash flows from energy production was 54.8%; higher than expected, due to seasonality and a retroactive rate change which reduced fuel costs.contracts we sold in the first quarter of 2019.


Operating Expenses


Operating expenses decreased $814,854, or 7.9%, to $9,494,518 in the nine months ended September 30, 2021 compared to $10,309,372 in the same period in 2020.

Nine Months Ended
Operating ExpensesSeptember 30, 2021September 30, 2020Increase (Decrease) $Increase (Decrease) %
General and administrative$7,365,495 $7,645,729 $(280,234)(3.7)%
Selling1,747,959 2,022,027 (274,068)(13.6)%
Research and development381,064 641,616 (260,552)(40.6)%
Total$9,494,518 $10,309,372 $(814,854)(7.9)%


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 months ended September 30, 20172021 were $7,042,500$7,365,495 compared to $5,898,230$7,645,729 for the same period in 2016, an increase2020, a decrease of $1,144,270$280,234 or 19.4%3.7%. The increase was mainlyGeneral and administrative expenses decreased due to management's continued efforts to control overhead costs, resulting in a $268,379 decrease in payroll and payroll related costs, a $182,289 decrease in legal fees due to a combination of costs incurredreduction in connection withabandoned patent application write-downs which decreased to $7,400 in the mergernine months ended September 30, 2021 compared to $179,944 in nine months ended September 30, 2020, and related litigation as well as increased costs from the addition of American DG Energy's operations.a $95,636 decrease in franchise taxes, partially offset by a $67,807 increase in depreciation and amortization expense, a $63,631 increase in business insurance expense, $51,650 increase in bad debt expense, $41,744 increase in audit and consulting fees and a $31,014 increase in occupancy expenses.

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TECOGEN INC.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the nine months ended September 30, 20172021 were $1,558,378$1,747,959 compared to $1,217,533$2,022,027 for the same period in 2016, an increase2020, a decrease of $340,845$274,068 or 28.0%13.6%. This differenceThe decrease is due to the mix of in-houselower sales versus representation commissions which decreased $136,522 due to lower product sales, a $42,448 decrease in royalty expense due to decreased InVerde cogeneration sales, decreased travel and increasedrelated expenses which decreased $42,690 due to COVID-19 travel curtailment and a $19,826 decrease in public relations and trade show costs.expenses.

Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the nine months ended September 30, 20172021 were $641,064$381,064 compared to $524,696$641,616 for the same period in 2016, an increase2020, a decrease of $116,368$260,552 or 22.2%. This increase was due to the Company's cost sharing in connection with40.6%, as certain R&D projects were curtailed or stopped entirely as a research and development grant in process.consequence of COVID-19.


Loss from Operations


Loss    Our loss from operations for the nine months ended September 30, 20172021 was $82,618$1,358,736 compared to a loss of $1,043,403$1,824,470 for the same period in 2016, an improvement2020, a decrease of $960,785.$465,734. The improvement wasdecrease in our loss from operations is due primarily to increased product and services revenues, as well as the addition of our energy production revenue stream. The loss for the nine months ended September 30, 2017 included one-time merger related expenses of $156,298 and depreciation and amortization expense of $402,939.$814,854 decrease in operating expenses.


Other Income (Expense), net


Other expense,income, net for the nine months ended September 30, 20172021 was $93,993$5,053,120 compared to $122,398other expense, net of $207,534 for the same period in 2016. Other income (expense) includes interest and2020, an increase of $5,260,654. The increase in other income in the nine months ended September 30, 2021 is due primarily to the gain on the extinguishment of $21,033,debt of $3,773,014 as a result of the Paycheck Protection Program Loan forgiveness, recognition of the Employee Retention Credit of 1,276,021 for the first, second and third quarters of 2021, and to a lesser extent, a $107,501 decrease in interest expense and an increase in the unrealized gain on notes payableinvestment securities of $115,026$117,152. The reduction in interest expense is due to the May 2020 termination of our Credit Agreement with Webster Business Credit Corporation. See Note 11. "Revolving Line of Credit and Notes Payable" to our unaudited condensed consolidated financial statements for the period ended June 30, 2021.

Provision for State Income Taxes

    The provision for state income taxes for the nine months ended September 30, 2017. For the same period in 2016, interest2021 and other2020 was $18,991 and $27,791, respectively and represents estimated income was $9,575 and interest expense was $131,973.tax payments, net of refunds to various states.


NoncontrollingNon-controlling Interest


The income    Income attributable to the noncontrollingnon-controlling interest was $44,933$42,358 for the nine months ended September 30, 20172021 which represents the noncontrollingnon-controlling interest portion of American DG Energy's 51% owned subsidiary, ADGNY,American DG New York, LLC. For the same period in 2016, the loss2020, income attributable to the noncontrollingnon-controlling interest was $64,962 which was the result of Tecogen's ownership in its former partially owned subsidiary Ilios Inc.$28,400.

TECOGEN INC.


Net LossIncome (Loss) Attributable to Tecogen Inc.Inc


Net loss    The net income (loss) attributable to Tecogen for the nine months ended September 30, 20172021 was $221,544net income of $3,633,035 compared to a net loss of $1,100,839$2,088,195 for the same period in 2016,2020, an improvement of $879,295.$5,721,230, or 274.0%. The improvement wasis due primarily to the resultextinguishment of debt associated with the Paycheck Protection Program and the Paycheck Protection Program Second Draw loans, recognition of the Company's merger with American DG Energy in addition to 10.9% growth in product revenueEmployee Retention Credit and 24.4% growth in services revenue.lower operating expenses.


Other Comprehensive LossNet Income (Loss) per Share


The unrealized loss on securities of $184,998net income (loss) per share, basic and diluted, for the nine months ended September 30, 2017 represents2021 was net income per share of $0.15 and $0.14, respectively, compared to net loss per share of $0.08 and $0.08, respectively, for the market fluctuation impactingsame period in 2020. Weighted average shares outstanding used to calculate basic and diluted earnings per share for the fair value of American DG Energy's remaining common stock ownership in its former partially owned subsidiary, EuroSite Power Inc. as ofnine months ended September 30, 2017.2021 were 24,850,261 and 25,131,165 shares, respectively, and for the same period in 2020 were 24,850,257 and 24,850,257 shares, respectively.

27



TECOGEN INC.

Liquidity and Capital Resources


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

Nine Months Ended
Cash Provided by (Used in)September 30, 2021September 30, 2020Increase (Decrease)
Operating activities$171,996 $1,413,428 $(1,241,432)
Investing activities(185,253)(226,895)41,642 
Financing activities1,874,269 (576,929)2,451,198 
Change in cash and cash equivalents$1,861,012 $609,604 $1,251,408 

Consolidated working capital at September 30, 20172021 was $14,193,331$16,450,154 compared to $14,436,452$13,379,263 at December 31, 2016, a decrease2020, an increase of $243,121.$3,070,891, or 20.4%. Included in working capital were cash and cash equivalents of $2,077,047$3,351,231 at September 30, 2017,2021, compared to $3,721,765 in cash and cash equivalents$1,490,219 at December 31, 2016, a decrease2020, an increase of $1,644,718.$1,861,012, or 124.9%. The decreaseincrease in working capital and cash was the result of longer collection periodsthe receipt in February 2021 of a Second Draw Paycheck Protection Program loan in the amount of $1,874,269 and pre-buying for production.the forgiveness of the initial Paycheck Protection Program loan and the Second Draw Paycheck Protection Program loan during the nine months ended September 30, 2021.


Cash used inFlows from Operating Activities
Cash provided by operating activities for the nine months ended September 30, 20172021 was $1,996,871$171,996 compared to $2,914,863$1,413,428 of cash provided by operating activities for the same period in 2016.2020 a decrease of $1,241,432, or 87.8% Our accounts receivable balance increasedand unbilled revenue balances decreased to $11,094,287$7,728,737 and $3,842,282, respectively, at September 30, 20172021 compared to $8,630,418$8,671,163 and $4,267,249 at December 31, 2016, using $1,908,6552020, providing $890,374 and $424,967 of cash due to timing of billing, shipments, and collections.collections due in part to payment delays from certain of our customers due to COVID-19. In addition, amounts due from related partiesour inventory increased by $236,971 using cash$753,447 in the nine months ended September 30, 2021 due to timing of billing and collections. Our inventory increasedsupply chain issues which delayed product shipments that were anticipated in the nine months ended September 30, 2021.
Accounts payable decreased to $6,118,835$3,546,950 as of September 30, 20172021 from $4,183,105 at December 31, 2020, using $636,156 in cash flow from operations. The decrease in accounts payable was due to reduced operating expenses. Deferred revenue increased as of September 30, 2021 compared to $4,774,264 as of December 31, 2016, an increase2020, providing $691,867 of $1,344,571. This increasecash from operations. We expect accounts payable and deferred revenue to fluctuate with routine changes in operations.

Cash Flows from Investing Activities

During the nine months ended September 30, 2021 our investing activities used $185,253 in cash for the purchases of property, plant and equipment of $84,160, and purchases of intangible assets of $56,349, along with distributions to the 49% non-controlling interest holders of American DG New York LLC of $66,168, partially offset by the receipt of $11,637 in proceeds from the sale of investment securities and the receipt of $9,787 from the sale of assets. For the nine months ended September 30, 2020 cash used in investing activities was $226,895. The decrease in cash used by investing activities in the nine months ended September 30, 2020 is due to increased product sales as well asa $24,208 decrease in purchases of property, plant and equipment, a $66,903 decrease in investment in intangible assets, partially offset by a $24,428 increase in distributions to the purchasenon-controlling interest holders of used equipmentAmerican DG New York LLC.

Cash Flows from American DG. Although lowering inventory is a goal, management expects inventoryFinancing Activities

During the nine months ended September 30, 2021 our financing activities provided $1,874,269 compared to vary significantly basedthe use of cash of $576,929 for the same period in 2020. Our financing activities during the nine months ended September 30, 2021 consisted solely of our receipt of $1,874,269 under the Paycheck Protection Program Second Draw loan. Financing activities for the nine months ended September 30, 2020 included net payments on productionthe line of credit of $2,452,329 and customer delivery requirements.the proceeds of $1,874,200 received under the Paycheck Protection Program.





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TECOGEN INC.
Backlog

As of September 30, 2017, the Company's2021, our backlog of product and installation projects, excluding service contracts, was $14.5$8.1 million, consisting of $11.5$6.0 million of purchase orders received by us and $3.0$2.1 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 increasedPaycheck Protection Program Loan

On April 17, 2020, we obtained an unsecured loan in the principal amount of $1,874,200 from Webster Bank, NA ("Webster") under the Paycheck Protection Program adopted pursuant to $5,356,449the Coronavirus Aid, Relief and Economic Recovery Act, as amended ("CARES Act"). The loan was forgivable if the proceeds were utilized by us for payroll, utilities, and rent expenses. On January 19, 2021 we received confirmation from Webster that the Paycheck Protection Program Loan in the original principal amount of $1,874,200 together with accrued interest of $13,659 was forgiven in full effective as of January 11, 2021. The loan forgiveness of $1,887,859 was accounted for as a debt extinguishment and is reported as a separate component of other income (expense), net in the condensed consolidated statements of earnings for the nine months ended September 30, 2021.
Paycheck Protection Program Second Draw Loan
On February 5, 2021, we obtained a Paycheck Protection Program Second Draw unsecured loan through Webster in the amount of $1,874,269 in connection with the Paycheck Protection Program pursuant to the CARES Act. The loan is guaranteed by the United States Small Business Administration. On September 20, 2021, we received a letter dated September 13, 2021 from Webster Bank, NA confirming that the Paycheck Protection Program Second Draw Loan issued to us pursuant to the CARES Act, as amended, in the original principal amount of $1,874,269 together with accrued interest of $11,386 was forgiven in full as of September 8, 2021. The loan forgiveness of $1,885,655 was accounted for as debt extinguishment and is reported as a separate component of other income (expense), net in the condensed consolidated statements of earnings for the three and nine months ended September 30, 20172021.

Employee Retention Credit

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. The ERC is available through December 31, 2021 and is equal to 70% of qualified wages (which includes employer qualified health plan expenses) paid to employees. In addition, the availability of the ERC was permitted to entities that received a Paycheck Protection Loan subject to certain conditions. During each quarter in 2021, a maximum of $10,000 in qualified wages for each employee is eligible for the ERC. Therefore, the maximum tax credit that can be claimed by an eligible employer in 2021 is $7,000 per employee per calendar quarter. Section 2301(c)(2)(B) of the CARES Act permits an employer to use an alternative quarter to calculate gross receipts and the employer may determine if the decline in gross receipts tests is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. Accordingly, for the first quarter of 2021, we elected to use our gross receipts for the fourth calendar quarter of 2020 compared to our gross receipts for the fourth calendar quarter of 2019. As a result of our election to use an alternative quarter, we
qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20% from $3,367,481the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021 were eligible for the ERC (rather than just wages paid to employees not providing services). During the three and nine months ended September 30, 2021, we recorded ERC benefits of $562,253 and $1,276,021 and, respectively in other income (expense), net in our condensed consolidated statements of operations.

Liquidity

At September 30, 2021, we had cash and cash equivalents of $3,351,231, an increase of $1,861,012 or 124.9% from the cash and cash equivalents balance at December 31, 2016, including $369,913 from2020. During the ADGE acquisition, providing $1,641,206, in cash flow from operations. Accrued expenses increased to $1,676,307 as ofnine months ended September 30, 2017,2021, our revenues continued to be negatively impacted due to COVID-19, resulting in customer order delays or deferrals; service delays due to customer facility closures, in some cases for extended periods, and a reduction in our energy production revenues due to
29


TECOGEN INC.
customer facility closures, in some cases for extended periods, and a reduction in our energy production revenues due to business closures and increased remote work and learning environments. The extent to which the coronavirus will continue to impact our business, our financial results, and our cash flows will depend on future developments which are highly uncertain and cannot be predicted.
Based on our current operating plan, we believe existing resources, including $531,617cash and cash flows from operations, together with the ADGE acquisition,$1,874,269 of proceeds from $1,378,258 as of December 31, 2016, providing $233,824 ofour Paycheck Protection Program Second Draw loan and current and anticipated Employee Retention Credit will be sufficient to meet our working capital requirements for the next twelve months. The funds made available to us through the Paycheck Protection Program have provided liquidity for our business, and there can be no assurance that additional financing on such favorable terms will be available to us in the future. We will need to generate sufficient cash from operations. The Company expects accounts payableoperations to finance the company during the periods beyond twelve months in the future. If sufficient funds from operating activities are not available to finance our business, we may need to raise additional capital through debt financing or an equity offering to meet our operating and accrued expenses to fluctuate with routine changes in operations.capital needs.


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.'sOur significant accounting policies are discussed in the Notes to their respectiveour Consolidated Financial Statements in theirour Annual ReportsReport on Form 10-K.10-K for the year ended December 31, 2020. The accounting policies and estimates that can have a significant impact upon theour 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
The Company's critical accounting policies have remained consistent as discussed in our Annual Report on
Form 10-K for the year ended December 31, 2020, filed with the SEC on March 18, 2021.
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.
TECOGEN INC.

Seasonality


We expect that the majority of our heating systems sales will be in the winter and theThe 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. Ourseasonality. Demand for our service team does experienceis 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 "disclosureAs of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer ("Certifying Officers") conducted evaluations of our disclosure controls and procedures,” as such term isprocedures. As defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or("Securities Exchange Act"), the Exchange Act,term "disclosure controls and procedures" means controls and procedures of an issuer that are designed to provide reasonable assurance thatensure the information required to be disclosed by the Companyissuer in the reports that we fileit files or submitsubmits under the Exchange ActSection 13(a) or 15(d) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionCommission's ("SEC") rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is accumulated and communicated to the Company'sissuer's management, including our principal executive officers and principal financial and accounting officer, as appropriate,the Certifying Officers, to allow timely decisions regarding required disclosure.
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TECOGEN INC.
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 AccountingFinancial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report,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 isweaknesses and we are taking certain steps to remediate the weaknesses as resources become available.
Changes in Internal Control over Financial Reporting:
During the second and third quarters of 2017 andThere were no changes in connection with the acquisition of American DG Energy Inc. the Company augmented its capabilities with respect to application and implementation of generally accepted accounting principles as it relates to complex transactions and the relatedour internal controls over financial reporting requirements through modifications(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial management including a new Chief Accounting Officer. Such modifications also included securing timely access to and involvement of individuals with a high level of training and expertise with respect to complex accounting and financial reporting matters.reporting.

PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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, as described in Note 3. 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.
TECOGEN INC.

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 non-affiliated 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 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.
Except as set forth above, asAs of the date of the filing of this filing the Company is currentlyReport, we are not a party to any material pending legal or administrative proceedings materialand know of no contemplated governmental proceeding involving us. However, from time to the Company's financial statements and is not aware of any pending or threatened legal or administrative proceeding that is materialtime, we may be involved in ordinary routine litigation incidental to the Company's financial statement.our business.

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"Item1A - 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 on2020 ("2020 Form 10-K for our fiscal year ended December 31, 2016.10-K") The risks discussed in our Annual Report on2020 Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on2020 Form 10-K are not the only risks facing us.we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.


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.

Item 2. Unregistered Sales of equity Securities and Use of Proceeds
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
None.

Item 3. Defaults in Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information

None.
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TECOGEN INC.

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
10.1
31.1*
31.2*
32.1**
Exhibit No.101.INS**Description of Exhibit
2.1
2.2
3.1
3.2
4.1
4.2
4.3+
4.5
4.6
10.1
10.8
10.21
10.26
10.27
10.31
10.32
10.33
10.34
10.35
10.36
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

*Filed herewith
**Furnished herewith
+Compensatory plan or arrangement
(a)
*    Filed herewith
**    Furnished herewith
+    Compensatory plan or arrangement





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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, 2017.
undersigned.
TECOGEN INC.
(Registrant)
Dated: November 10, 2021By:/s/ John N. HatsopoulosBenjamin Locke
Co-ChiefBenjamin Locke
Chief Executive Officer
(Principal Executive Officer)
Dated: November 10, 2021By:/s/ Benjamin M. LockeAbinand Rangesh
Co-Chief Executive OfficerAbinand Rangesh
(Principal Executive Officer)Chief Financial Officer
By:/s/ Bonnie J. Brown
Chief Accounting Officer, Treasurer and Secretary
(Principal AccountingFinancial Officer)


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