UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended September 30, 2022
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
Commission file number 001-36103
(Exact name of Registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | ||||
| (Address of Principal Executive Offices and Zip Code) | ||
( | ||
| (Registrant's telephone number, including area code) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer o | Accelerated filer o | ||||
Emerging Growth company | |||||
Smaller reporting company | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 30, 2022, 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, 2022
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)
| December 31, 2021 | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Unbilled revenue | |||||||||||
| Employee retention credit receivable | |||||||||||
| Inventories, net | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Right of use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Deferred revenue | |||||||||||
| Lease obligations, current | |||||||||||
| Unfavorable contract liability, current | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Lease obligations, net of current portion | |||||||||||
| Unfavorable contract liability, net of current portion | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Stockholders’ equity: | |||||||||||
| Tecogen Inc. stockholders’ equity: | |||||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261 issued and outstanding at September 30, 2022 and December 31, 2021 | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total Tecogen Inc. stockholders’ equity | |||||||||||
| Non-controlling interest | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | |||||||||||
| September 30, 2021 | |||||||||||
| Revenues | |||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Energy production | |||||||||||
| Total revenues | |||||||||||
| Cost of sales | |||||||||||
| Products | |||||||||||
| Services | |||||||||||
| Energy production | |||||||||||
| Total cost of sales | |||||||||||
| Gross profit | |||||||||||
| Operating expenses | |||||||||||
| General and administrative | |||||||||||
| Selling | |||||||||||
| Research and development | |||||||||||
| Gain on disposition of assets | ( | ||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense) | |||||||||||
| Other income (expense), net | ( | ( | |||||||||
| Interest expense | ( | ( | |||||||||
| Gain on extinguishment of debt | |||||||||||
| Employee retention credit | |||||||||||
| Unrealized loss on investment securities | ( | ||||||||||
| Total other income (expense), net | ( | ||||||||||
| Income (loss) before provision for state income taxes | ( | ||||||||||
| Provision for state income taxes | |||||||||||
| Consolidated net income (loss) | ( | ||||||||||
| Income attributable to the non-controlling interest | ( | ( | |||||||||
| Net income (loss) attributable to Tecogen Inc. | $ | ( | $ | ||||||||
| Net income (loss) per share - basic | $ | ( | $ | ||||||||
| Net income (loss) per share - diluted | $ | ( | $ | ||||||||
| Weighted average shares outstanding - basic | |||||||||||
| Weighted average shares outstanding - diluted | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Nine Months Ended | |||||||||||
| September 30, 2021 | |||||||||||
| Revenues | |||||||||||
| Products | $ | $ | |||||||||
| Services | |||||||||||
| Energy production | |||||||||||
| Total revenues | |||||||||||
| Cost of sales | |||||||||||
| Products | |||||||||||
| Services | |||||||||||
| Energy production | |||||||||||
| Total cost of sales | |||||||||||
| Gross profit | |||||||||||
| Operating expenses | |||||||||||
| General and administrative | |||||||||||
| Selling | |||||||||||
| Research and development | |||||||||||
| Gain on disposition of assets | ( | ||||||||||
| Gain on termination of unfavorable contract liability | ( | ||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense) | |||||||||||
| Interest and other income (expense), net | ( | ( | |||||||||
| Interest expense | ( | ( | |||||||||
| Gain on extinguishment of debt | |||||||||||
| Employee retention credit | |||||||||||
| Gain on sale of investment securities | |||||||||||
| Unrealized gain on investment securities | |||||||||||
| Total other income (expense), net | ( | ||||||||||
| Income (loss) before provision for state income taxes | ( | ||||||||||
| Provision for state income taxes | |||||||||||
| Consolidated net income (loss) | ( | ||||||||||
| Income attributable to non-controlling interest | ( | ( | |||||||||
| Net income (loss) attributable to Tecogen Inc. | $ | ( | $ | ||||||||
| Net income (loss) per share - basic | $ | ( | $ | ||||||||
| Net income (loss) per share - diluted | $ | ( | $ | ||||||||
| Weighted average shares outstanding - basic | |||||||||||
| Weighted average shares outstanding - diluted | |||||||||||
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 September 30, 2022 and 2021
(unaudited)
| Three months ended September 30, 2022 | Common Stock Shares | Common Stock 0.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock based compensation expense | |||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | ( | ( | |||||||||||||||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Nine months ended September 30, 2022 | Common Stock Shares | Common Stock 0.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total | |||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock based compensation expense | |||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | ( | ( | |||||||||||||||||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | Common Stock Shares | Common Stock 0.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | Common Stock Shares | Common Stock 0.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Non-controlling Interest | Total | |||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
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, 2021 | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Consolidated net income (loss) | $ | ( | $ | ||||||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation and amortization, net | |||||||||||
| Gain on extinguishment of debt | ( | ||||||||||
| Employee retention credit | ( | ||||||||||
| Stock-based compensation | |||||||||||
| Provision for doubtful accounts | ( | ||||||||||
| Gain on disposition of assets | ( | ( | |||||||||
| Gain on sale of investment securities | ( | ||||||||||
| Unrealized gain on investment securities | ( | ( | |||||||||
| Gain on termination of unfavorable contract liability | ( | ||||||||||
| Impairment of intangible asset | |||||||||||
| Changes in operating assets and liabilities | |||||||||||
| (Increase) decrease in: | |||||||||||
| Accounts receivable | |||||||||||
| Employee retention credit receivable | |||||||||||
| Unbilled revenue | |||||||||||
| Inventory | ( | ( | |||||||||
| Prepaid expenses and other current assets | |||||||||||
| Other assets | ( | ||||||||||
| Increase (decrease) in: | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued expenses and other current liabilities | ( | ||||||||||
| Deferred revenue | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Net cash (used in) provided by operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from the sale of investment securities | |||||||||||
| Purchases of intangible assets | ( | ( | |||||||||
| Proceeds from disposition of assets | |||||||||||
| Distributions to non-controlling interest | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from note payable | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of the period | |||||||||||
| Cash and cash equivalents, end of the period | $ | $ | |||||||||
| Supplemental disclosures of cash flows information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for taxes | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
Description of Business
Tecogen Inc., or we, our or us, produces commercial and industrial engine-driven, combined heat and power (CHP) products that reduce energy costs, decrease greenhouse gas emissions and alleviate congestion on the national power grid. Our products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. We also install, own, operate and maintain complete energy systems and other complementary systems at customer sites and sell electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates. The majority of our customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast.
On July 20, 2022, Tecogen announced the establishment of NetZero Greens, a new business unit focused on low carbon Controlled Environment Agriculture (CEA). Tecogen believes that CEA offers an exciting opportunity to apply the company’s expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security.
Our common stock is quoted on OTC Markets Group, Inc.'s OTCQX Best Market tier and trades under the symbol "TGEN."
On May 18, 2017, we acquired 100 % of the outstanding common stock of American DG Energy Inc., formerly a related entity, in a stock-for-stock merger.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in Tecogen's Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying unaudited condensed consolidated financial statements include our accounts and the accounts of entities in which we have a controlling financial interest. Those entities include our wholly-owned subsidiaries American DG Energy Inc., Tecogen CHP Solutions, Inc., and a joint venture, American DG New York, LLC, in which American DG Energy Inc. holds a 51 % interest. Investments in partnerships and companies in which we do not have a controlling financial interest but where we have significant influence are accounted for under the equity method. Any intercompany transactions have been eliminated in consolidation.
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.
6
TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
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.
Section 2301(c)(2)(B) of the CARES Act permits an employer to use an alternative quarter to calculate gross receipts and the employer may determine if the decline in gross receipt tests is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. Accordingly, for the first quarter of 2021, we elected to use our gross receipts for the fourth calendar quarter of 2020 compared to our gross receipts for the fourth calendar quarter of 2019. As a result of our election to use an alternative quarter, we qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20 % from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021, excluding the wages that were applied to the Paycheck Protection Loan Second Draw, were eligible for the ERC. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the ERC.
Accounting Standards Codification 105, "Generally Accepted Accounting Principles," describes the decision-making framework when no guidance exists in US GAAP for a particular transaction. Specifically, ASC 105-10-05-2 instructs companies to look for guidance for a similar transaction within US GAAP and apply that guidance by analogy. As such, forms of government assistance, such as the ERC, provided to business entities would not be within the scope of ASC 958, but it may be applied by analogy under ASC 105-10-05-2. We accounted for the Employee Retention Credit as a government grant in accordance with Accounting Standards Update 2013-06, Not-for-Profit Entities (Topic 958) ("ASU 2013-06") by analogy under ASC 105-10-05-2. Under this standard, government grants are recognized when the conditions on which they depend are substantially met. The conditions for recognition of the ERC include, but are not limited to:
•An entity has been adversely affected by the COVID-19 pandemic
•We have not used qualifying payroll for both the Paycheck Protection Program and the ERC
•We incurred payroll costs to retain employees
•The process for filing for the credit is an administrative task and not a barrier to receiving the credits
7
TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
Note 2. Revenue
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services or energy to customers.
Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. We have elected to exclude from revenue any value-added sales and other taxes which we collect concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which we historically recorded shipping and handling fees and value-added taxes. Incremental costs incurred by us to obtain a contract with a customer are negligible, if any, and are expensed ratably in proportion to the related revenue recognized.
Disaggregated Revenue
In general, our business segmentation is aligned according to the nature and economic characteristics of our products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Products | Services | Energy Production | Total | ||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Installation services | |||||||||||||||||||||||
| Maintenance services | |||||||||||||||||||||||
| Energy production | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Products | Services | Energy Production | Total | ||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Installation services | |||||||||||||||||||||||
| Maintenance services | |||||||||||||||||||||||
| Energy production | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||
| Products | Services | Energy Production | Total | ||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Installation services | |||||||||||||||||||||||
| Maintenance services | |||||||||||||||||||||||
| Energy production | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
8
TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Products | Services | Energy Production | Total | ||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Installation services | |||||||||||||||||||||||
| Maintenance services | |||||||||||||||||||||||
| Energy production | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Products Segment
Products. Our Product revenues include cogeneration systems that supply electricity and hot water, chillers that provide air-conditioning and hot water, and engineered accessories, which consist of ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. We refer to the package of engineered accessories and engineering and design services necessary for the customers' installation of a cogeneration unit as light installation services.
We transfer control and generally recognize a sale when we ship a product from our manufacturing facility at which point the customer takes ownership of the product. Payment terms on product sales are generally 30 days.
We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill and hold transactions). We recognize revenue related to such transactions once, among other things, the customer has made a written fixed commitment to purchase the product(s) under normal billing and credit terms, the customer has requested the product(s) be held for future delivery as scheduled and designated by them, risk of ownership has been assumed by the customer, and the product(s) are tagged as sold and segregated for storage awaiting further direction from the customer. Due to the infrequent nature and duration of bill and hold arrangements, the value associated with custodial storage services is deemed immaterial in the context of the contract and in total, and accordingly, none of the transaction price is allocated to such service.
Depending on the product and terms of the arrangement, we may defer the recognition of a portion of the transaction price received because we have to satisfy a future obligation (e.g., product start-up service). Amounts allocated to product start-up services are recognized as revenue when the start-up service has been completed. We use an observable selling price to determine standalone selling prices where available and either a combination of an adjusted market assessment approach, an expected cost plus a margin approach, and/or a residual approach to determine the standalone selling prices for separate performance obligations as a basis for allocating contract consideration when an observable selling price is not available. Amounts received but not recognized pending completion of performance are recognized as contract liabilities and are recorded as deferred revenue along with deposits by customers.
Services Segment
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 cost to cost basis. Our performance obligation under such contracts is satisfied progressively over time as enhancements are made to customer owned and controlled properties. We measure progress towards satisfaction of the performance obligation based on a 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.
9
TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
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.
Contract Balances
The timing of revenue recognition, billings, and cash collections result in billed accounts receivable, unbilled revenue (contract assets) and deferred revenue, consisting of customer deposits and billings in excess of revenue recognized (contract liabilities) on the condensed consolidated balance sheets.
We did not recognize any revenue during the nine months ended September 30, 2022 that was included in unbilled revenue at the end of the period. Approximately $1,302,727 was billed in this period that had been recognized as revenue in previous periods.
Revenue recognized during the nine months ended September 30, 2022 that was included in deferred revenue at the beginning of the period was approximately $1,620,128 .
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, 2022 , the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $0.8 million. We expect to recognize revenue of approximately 78.2 % of the remaining performance obligations over the next 24 months, 53.0 % recognized in the first 12 months and 25.2 % recognized over the subsequent 12 months, and the remainder recognized thereafter.
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
Note 3. Income Per Common Share
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income (loss) available to stockholders | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted average shares outstanding - Basic | ||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Stock options | ||||||||||||||||||||||||||
| Weighted average shares outstanding - Diluted | ||||||||||||||||||||||||||
| Basic income (loss) per share | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Diluted income (loss) per share | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Anti-dilutive shares underlying stock options outstanding | ||||||||||||||||||||||||||
| Note 4. | |||||
| December 31, 2021 | |||||||||||
| Raw materials | $ | $ | |||||||||
| Less: reserves | ( | ( | |||||||||
| Raw materials, net | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventories, net | $ | $ | |||||||||
Note 5. Property, Plant and Equipment, net
Property, plant and equipment at September 30, 2022 and December 31, 2021 consisted of the following:
| Estimated Useful Life (in Years) | December 31, 2021 | ||||||||||||||||
| Energy systems | $ | $ | |||||||||||||||
| Machinery and equipment | |||||||||||||||||
| Furniture and fixtures | |||||||||||||||||
| Computer software | |||||||||||||||||
| Leasehold improvements | * | ||||||||||||||||
| Less - accumulated depreciation and amortization | ( | ( | |||||||||||||||
| $ | $ | ||||||||||||||||
* Lesser of estimated useful life of asset or lease term
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
Note 6. Intangible Assets and Liabilities Other Than Goodwill
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Intangible assets | Cost | Accumulated Amortization | Total | Cost | Accumulated Amortization | Total | ||||||||||||||||||||||||||||||||
| Product certifications | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||||||||||||||
| Developed technology | ( | ( | ||||||||||||||||||||||||||||||||||||
| Trademarks | ||||||||||||||||||||||||||||||||||||||
| In Process R&D | ( | ( | ||||||||||||||||||||||||||||||||||||
| Favorable contract asset | ( | ( | ||||||||||||||||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||
| Intangible liability | ||||||||||||||||||||||||||||||||||||||
| Unfavorable contract liability | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the three and nine months ended September 30, 2022 and 2021 was $49,885 and $150,376 , and $51,229 and $145,306 , respectively. The net credit to cost of sales related to the amortization of the contract related intangible asset and liability for the three and nine months ended September 30, 2022 and 2021 was $69,370 and $202,753 , and $79,570 and $238,192 , respectively. During the nine months ended September 30, 2021 we abandoned certain patent applications amounting to $7,400 and recorded an impairment charge in general and administrative expenses in the 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 us in May 2017.
Amortization of intangibles including contract related amounts is calculated using the straight-line method over the remaining useful life or contract term. Aggregate future amortization over the next five years and thereafter as of September 30, 2022 is estimated to be as follows:
| Non-contract Related Intangibles | Contract Related Intangibles | Total | ||||||||||||||||||
| Year 1 | $ | $ | ( | $ | ( | |||||||||||||||
| Year 2 | ( | ( | ||||||||||||||||||
| Year 3 | ( | |||||||||||||||||||
| Year 4 | ( | |||||||||||||||||||
| Year 5 | ( | |||||||||||||||||||
| Thereafter | ( | ( | ||||||||||||||||||
| Total | $ | ( | $ | |||||||||||||||||
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
| Note 7. | |||||
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. In October 2021 the minimum guarantee with respect to one of the energy purchase agreements was modified by reducing the guaranteed minimum collections by $35,000 per year, the guaranteed minimum collection amount associated with one site that was sold by the customer. 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. Based upon an analysis of these energy producing assets expected future performance, as of September 30, 2022 we do not expect to make any material payments under the guarantee. At September 30, 2022, our obligation under the energy production contracts was $7,236 .
The foregoing agreements also contain provisions whereby we have agreed to make whole the purchaser in the event the counterparty to the energy production contract(s) defaults on or otherwise terminates before the stated expiration of the energy production contract. Should we be required to make whole the purchaser under such provisions, we would be entitled to seek recovery from the counterparty to the energy production contract(s) under a similar provision contained in those contracts in respect of early termination.
| Note 8. | |||||
Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing and storage facilities.
At inception, we determine if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of our lease agreements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). We account for each component separately based on the estimated standalone price of each component.
Operating leases are included in Right-of-use assets, Lease obligations, current, and Lease obligations, long term on the condensed consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term and using an incremental borrowing rate consistent with the lease terms or implicit rates, when readily determinable. For those leases where it is reasonably certain at the commencement date that we will exercise the option to extend the lease, then the lease term will include the lease extension term. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease expense for operating leases, which principally consist of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Lease expense for the three and nine months ended September 30, 2022 and 2021 was $201,578 and $608,652 , and $197,651 and $591,867 , respectively.
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||||||||
| Weighted-average remaining lease term - operating leases | ||||||||||||||
| Weighted-average discount rate - operating leases | % | % | ||||||||||||
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
Supplemental information related to operating leases as of September 30, 2022 and December 31, 2021 was as follows:
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Operating leases | ||||||||||||||
| Right-of-use assets | $ | $ | ||||||||||||
| $ | $ | |||||||||||||
| Total operating lease liability | $ | $ | ||||||||||||
| Operating Leases | ||||||||
| Year 1 | $ | |||||||
| Year 2 | ||||||||
| Year 3 | ||||||||
| Year 4 | ||||||||
| Year 5 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: imputed interest | ||||||||
| Total | $ | |||||||
Note 9. Stock-Based Compensation
Stock-Based Compensation
We adopted a 2006 Stock Option and Incentive Plan, or the Plan, under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Amended Plan to 3,838,750 as of September 30, 2022 , and in June 2017 stockholders approved an amendment to extend the 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, 2022 was 210,793 .
During the nine months ended September 30, 2022 , we granted nonqualified options to purchase an aggregate of 761,650 shares of common stock at a weighted-average price of $1.11 per share to certain officers and employees. These options have a vesting schedule of two years and expire in ten years. The fair value of the options issued in 2022 was $321,910. The weighted-average grant date fair value of stock options granted during 2022 was $0.42 per share.
We adopted the 2022 Stock Incentive Plan (the "2022 Plan"), under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. We have reserved 3,800,000 shares of our common stock for issuance pursuant to awards under the 2022 Plan. The adoption of the 2022 Plan was approved by our shareholders on June 9, 2022.
Under the 2022 Plan, stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the 2022 Plan. The options are not transferable except by will or domestic relations order. The option price per share under the 2022 Plan cannot be less than the fair market value of the underlying shares on the date of the grant.
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
During the nine months ended September 30, 2022 , we granted nonqualified options to purchase an aggregate of 175,000 shares of common stock at a weighted-average price of $1.14 per share to certain directors and a consultant. These options have a vesting schedule of four years and expire in ten years. The fair value of the options issued in 2022 was $84,600 . The weighted-average grant date fair value of stock options granted during 2022 was $0.48 per share. The number of shares remaining available for future issuance under the 2022 Plan as of September 30, 2022 was 3,650,000 .
Stock option activity for the nine months ended September 30, 2022 was as follows:
| Common Stock Options | Number of Options | Exercise Price Per Share | Weighted Average Exercise Price | Weighted Average Remaining Life | Aggregate Intrinsic Value | ||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | ||||||||||||||||||||||||||
Granted | $ | $ | |||||||||||||||||||||||||||
Exercised | |||||||||||||||||||||||||||||
Canceled and forfeited | ( | $ | $ | ||||||||||||||||||||||||||
| Outstanding, September 30, 2022 | $ | $ | $ | ||||||||||||||||||||||||||
| Exercisable, September 30, 2022 | $ | $ | |||||||||||||||||||||||||||
| Vested and expected to vest, September 30, 2022 | $ | $ | |||||||||||||||||||||||||||
Consolidated stock-based compensation expense for the three and nine months ended September 30, 2022 and 2021 was $69,118 and $254,718 , and $56,889 and $150,655 , respectively. No tax benefit was recognized related to the stock-based compensation recorded during the period.
Note 10. Fair Value Measurements
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. We currently do not have any Level 1 financial assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. We have Level 2 financial assets and liabilities as provided below.
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. We do not currently have any Level 3 financial assets or liabilities.
15
TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
| September 30, 2022 | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Unrealized | ||||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | Gains | |||||||||||||||||||||||||||
| Recurring fair value measurements | ||||||||||||||||||||||||||||||||
| Marketable equity securities | ||||||||||||||||||||||||||||||||
| EuroSite Power Inc. | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total recurring fair value measurements | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| September 30, 2021 | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Unrealized | ||||||||||||||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | Gains | |||||||||||||||||||||||||||
| Recurring fair value measurements | ||||||||||||||||||||||||||||||||
| Marketable equity securities | ||||||||||||||||||||||||||||||||
| EuroSite Power Inc. | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total recurring fair value measurements | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
We utilize a Level 2 category fair value measurement to value our investment in EuroSite Power, Inc. as a marketable equity security at period end. That measurement is equal to the quoted market closing price at period end. Since this security is not actively traded we classify it as Level 2.
| Fair value at December 31, 2021 | $ | |||||||
| Unrealized gains | ||||||||
| Fair value at September 30, 2022 | $ | |||||||
| Fair value at December 31, 2020 | $ | |||||||
| Sale of 93,187 shares | ( | |||||||
| Unrealized gains | ||||||||
| Fair value at September 30, 2021 | $ | |||||||
Note 11. Notes Payable
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").
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, 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 it as a separate component of other income (expense), net in the condensed consolidated
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
statements of operations for the nine months ended September 30, 2021. The loan forgiveness is nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
Paycheck Protection Program Second Draw Loan
On February 5, 2021, we obtained a Paycheck Protection Program Second Draw unsecured loan through Webster Bank, N.A. in the amount of $1,874,269 pursuant to the CARES Act.
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, 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 it 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 nontaxable for both state and federal purposes and has been treated accordingly in our condensed consolidated financial statements.
Note 12. Commitments and Contingencies
Note 13. Segments
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TECOGEN INC.
Notes to Condensed Consolidated Financial Statements
| Products | Services | Energy Production | Corporate, other and elimination (1) | Total | ||||||||||||||||||||||||||||
| Three months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Revenue - external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment revenue | ( | |||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Revenue - external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment revenue | ( | |||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three months ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Revenue - external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment revenue | ( | |||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Revenue - external customers | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Intersegment revenue | ( | |||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Identifiable assets | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| (1) Corporate, intersegment revenue, other and elimination includes various corporate assets. | ||||||||||||||||||||||||||||||||
Note 14. Subsequent Events
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TECOGEN INC.
Management's Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on our business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Such forward-looking statements include, among other things, statements regarding the impact of the coronavirus pandemic on demand for our products and services, the availability of incentives, rebates, and tax benefits relating to our products, changes in the regulatory environment relating to our products, competing technological developments, and the availability of financing to fund our operations and growth. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”), as supplemented, and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors.” The following discussion should be read in conjunction with the 2021 Form 10-K filed with the Securities and Exchange Commission (“SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. Each of the terms “Tecogen,” “we,” “our,” and “us” as used herein refer collectively to Tecogen Inc. and our wholly owned subsidiaries, unless otherwise stated. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of the filing of this Form 10-Q.
Recent Developments
Controlled Environment Agriculture: NetZero Greens
On July 20, 2022, Tecogen announced the establishment of NetZero Greens, a new business unit focused on low carbon Controlled Environment Agriculture (CEA). Tecogen believes that CEA offers an exciting opportunity to apply the company’s expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security. Tecogen proposes to address this challenge by developing a highly efficient energy solution for CEA grown produce using Tecogen’s cogeneration products in conjunction with solar energy generation, energy storage, and other technologies.
CEA facilities enable multiple crop cycles (15 to 20 cycles) in one year compared to one or two crop cycles in conventional farming. In addition, growing produce close to the point of sale reduces food spoilage during transportation. Food crops grown in greenhouses typically have lower yields per square foot than in CEA facilities, and the push to situate facilities close to consumers in cities requires minimizing land area and maximizing yield per square foot. Yields are increased in CEA facilities by supplementing or replacing natural light with grow lights in a climate-controlled environment - which requires significant energy use.
In recent years our cogeneration equipment has been used in numerous cannabis cultivation facilities because our systems significantly reduce operating costs, reduce the facility GHG footprint and offer resiliency to grid outages. Tecogen’s experience providing clean energy solutions to cannabis cultivation facilities has given Tecogen significant insight into requirements relating to energy-intensive indoor agriculture applications that we expect to be transferable to CEA facilities for food production. Further information can be found in our CEA presentation on the investor relations section of our website.
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.
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TECOGEN INC.
Management's Discussion and Analysis
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. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the ERC
A current receivable in the amount of $713,269 is included in our condensed consolidated balance sheet as of September 30, 2022 . On April 14, 2022, we received $564,027 from the Internal Revenue Service representing the ERC claim for the third quarter of 2021 and $1,275 of accrued interest. We are still awaiting payment from the Internal Revenue Service for the ERC claim from the first and second quarters of 2021.
Air Cooled Chiller Development
During the third quarter of 2021 we began development of a hybrid air-cooled chiller. We recognized that there were many applications where the customer wanted an easy to install roof top chiller. Using the inverter design from our InVerde e+ cogeneration module, the system can simultaneously take two inputs, one from the grid or a renewable energy source and one from our natural gas engine. This allows a customer to seek the optimum blend of operational cost savings and greenhouse gas benefits while providing added resiliency from two power sources. We expect to have a prototype completed by the first quarter of 2023, and expect to see incremental revenue in 2024. A patent application based on this concept has been filed with the US Patent and Trademark Office.
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 impacted supply chains, curtailed global economic activity, and caused significant volatility and disruption in global markets. The COVID-19 pandemic and the measures taken by U.S. Federal, state and local governments in response have materially adversely affected and could in the future materially impact our business, results of operations, financial condition and stock price. The impact of the pandemic remains uncertain and will depend on the growth in the number of infections, fatalities, the duration of the pandemic, steps taken to combat the pandemic, and the development and availability of effective treatments. We have made every effort to keep our employees who operate our business safe and minimize unnecessary risk of exposure to the virus.
Impact of the Russian Invasion of Ukraine
Presently the company has no operations or customers in Russia or the Ukraine. The higher energy prices for natural gas as a result of the war may affect the performance of our Energy Production Segment. However, we have also seen higher electricity prices as much of the electricity production in the United States is generated from fossil fuels. If the electricity prices continue to rise, the economic savings generated by our products are likely to increase. In addition to the direct result of changes in natural gas and electricity prices, the war in Ukraine may result in higher cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities.
Overview
Tecogen designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning using automotive engines that have been adapted to run on natural gas. In some cases, our customers may choose to have us engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because, in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes, such as space and potable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and Engine driven chillers (cooling plus heat).
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TECOGEN INC.
Management's Discussion and Analysis
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. ("ADGE") in May 2017, we added an additional source of revenue. Through ADGE, we install, own, operate and maintain complete distributed generation electricity systems, or DG systems or energy systems, and other complementary systems at customer sites, and sell electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We use a contractually defined formula to multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from each customer's local energy utility, to derive the value of our monthly energy sale, which includes a negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customer's local energy utility that month.
Our operations are comprised of three business segments. Our Products segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Services segment provides operation and maintenance services for our products under long term service contracts. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
21
TECOGEN INC.
Management's Discussion and Analysis
Results of Operations
Third Quarter of 2022 Compared to Third Quarter of 2021
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, 2022 | September 30, 2021 | ||||||||||
| Revenues | 100.0% | 100.0% | |||||||||
| Cost of sales | 56.3% | 53.3% | |||||||||
| Gross profit | 43.7% | 46.7% | |||||||||
| Operating expenses | |||||||||||
| General and administrative | 35.4% | 49.3% | |||||||||
| Selling | 8.6% | 13.1% | |||||||||
| Research and development | 3.1% | 2.4% | |||||||||
| Gain on disposition of assets | (0.1) | % | —% | ||||||||
| Total operating expenses | 47.0 | % | 64.8 | % | |||||||
| Loss from operations | (3.2) | % | (18.1) | % | |||||||
| Total other income (expense), net | (0.1) | % | 47.9 | % | |||||||
| Consolidated net income (loss) | (3.5) | % | 29.7 | % | |||||||
| Income attributable to the non-controlling interest | (0.4) | % | (0.4) | % | |||||||
| Net income (loss) attributable to Tecogen, Inc. | (3.9) | % | 29.2 | % | |||||||
Revenues
Total revenues for the three months ended September 30, 2022 were $6,618,110 compared to $5,015,868 for the same period in 2021, an increase of $1,602,242 or 31.9% year over year.
The following table presents revenue for the periods indicated, by segment and the change from the prior year:
| Three Months Ended | |||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | Increase (Decrease) $ | Increase (Decrease) % | ||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Cogeneration | $ | 1,547,761 | $ | 1,446,001 | $ | 101,760 | 7.0 | % | |||||||||||||||
| Chiller | 1,642,478 | 383,100 | 1,259,378 | 328.7 | % | ||||||||||||||||||
| Engineered accessories | 16,493 | 42,231 | (25,738) | (60.9) | % | ||||||||||||||||||
| Total Product revenues | 3,206,732 | 1,871,332 | 1,335,400 | 71.4 | % | ||||||||||||||||||
| Services | |||||||||||||||||||||||
| Maintenance services | 3,078,604 | 2,766,168 | 312,436 | 11.3 | % | ||||||||||||||||||
| Installation services | — | 63,076 | (63,076) | (100.0) | % | ||||||||||||||||||
| Total Service revenues | 3,078,604 | 2,829,244 | 249,360 | 8.8 | % | ||||||||||||||||||
| Products and Services | 6,285,336 | 4,700,576 | 1,584,760 | 33.7 | % | ||||||||||||||||||
| Energy Production revenues | 332,774 | 315,292 | 17,482 | 5.5 | % | ||||||||||||||||||
| Total revenues | $ | 6,618,110 | $ | 5,015,868 | $ | 1,602,242 | 31.9 | % | |||||||||||||||
22
TECOGEN INC.
Management's Discussion and Analysis
Products
Product revenues in the three months ended September 30, 2022 were $3,206,732 compared to $1,871,332 for the same period in 2021, an increase of $1,335,400, or 71.4%. The increase in revenue during the three months ended September 30, 2022 is due to an increase in chiller sales of $1,259,378 and by an increase of $101,760 in cogeneration sales, offset partially by a decrease in sales of engineered accessories of $25,738. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales.
Services
Service revenues in the three months ended September 30, 2022 were $3,078,604, compared to $2,829,244 for the same period in 2021, an increase of $249,360, or 8.8%. The increase in revenue during the three months ended September 30, 2022 is due primarily due to an increase of $312,436, or 11.3%, in service contract revenues, offset partially by a decrease in installation revenues of $63,076. While service contract revenue generally remains relatively constant, installation activity is likely to remain low due to our strategy of focusing on higher margin segments of our business.
Energy Production
Energy production revenues in the three months ended September 30, 2022 were $332,774, compared to $315,292 for the same period in 2021, an increase of $17,482, or 5.5%. The increase in energy production revenue is due to increased runtimes
Cost of Sales
Cost of sales in the three months ended September 30, 2022 was $3,724,776 compared to $2,673,933 for the same period in 2021, an increase of $1,050,843, or 39.3%. The increase in cost of sales is due to increased product revenue volume and the impact of inflation on material costs. During the three months ended September 30, 2022 our gross margin decreased to 43.7% compared to 46.7% for the same period in 2021, a 3.0% percentage point decrease due to higher material costs.
Products
Cost of sales for products in the three months ended September 30, 2022 was $2,074,243 compared to $1,036,396 for the same period in 2021, an increase of $1,037,847, or 100.1% due to increased product revenue volume and higher material costs. During the three months ended September 30, 2022, our products gross margin was 35.3% compared to 44.6% for the same period in 2021, an 9.3% percentage point decrease. The decrease in margin is primarily a function of increased material costs.
Services
Cost of sales for services in the three months ended September 30, 2022 was $1,482,355 compared to $1,467,019 for the same period in 2021, an increase of $15,336, or 1.0%. During the three months ended September 30, 2022, our services gross margin increased to 51.8% compared to 48.1% for the same period in 2021, a 3.7% percentage point increase due to price increases on service contracts and lower installation revenues.
Energy Production
Cost of sales for energy production in the three months ended September 30, 2022 was $168,178 compared to $170,518 for the same period in 2021, a decrease of $2,340, or 1.4%. During the three months ended September 30, 2022 our energy production gross margin was 49.5% compared to 45.9% for the same period in 2021, a 3.6% percentage point increase.
Operating Expenses
Operating expenses decreased $144,476, or 4.4%, to $3,107,630 in the three months ended September 30, 2022 compared to $3,252,106 in the same period in 2021. The total operating expenses were lower primarily due to a $281,955 reduction in the bad debt expense and lower sales commissions, partially offset by an increase in R&D expense associated with the air-cooled chiller development.
23
TECOGEN INC.
Management's Discussion and Analysis
| Three Months Ended | |||||||||||||||||||||||
| Operating Expenses | September 30, 2022 | September 30, 2021 | Increase (Decrease) $ | Increase (Decrease) % | |||||||||||||||||||
| General and Administrative | $ | 2,343,449 | $ | 2,473,190 | $ | (129,741) | (5.2) | % | |||||||||||||||
| Selling | 567,529 | 656,885 | (89,356) | (13.6) | % | ||||||||||||||||||
| Research and Development | 202,138 | 122,031 | 80,107 | 65.6 | % | ||||||||||||||||||
| Gain on disposition of assets | (5,486) | — | (5,486) | ||||||||||||||||||||
| Total | $ | 3,107,630 | $ | 3,252,106 | $ | (144,476) | (4.4) | % | |||||||||||||||
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the three months ended September 30, 2022 were $2,343,449 compared to $2,473,190 for the same period in 2021, a decrease of $129,741 or 5.2% due primarily to a $281,995 decrease in bad debt expense in the three months ended September 30, 2022, partially offset by an increase in payroll costs, stock compensation costs and franchise taxes.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the three months ended September 30, 2022 were $567,529 compared to $656,885 for the same period in 2021, a decrease of $89,356 or 13.6% due to lower payroll costs and reduced sales commissions.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the three months ended September 30, 2022 were $202,138 compared to $122,031 for the same period in 2021, an increase of $80,107 or 65.6% due to increased payroll costs and costs incurred in the development of a hybrid air-cooled chiller.
Loss from Operations
Loss from operations for the three months ended September 30, 2022 was $214,296 compared to a loss of $910,171 for the same period in 2021, a decrease of $695,875. The decrease in loss from operations is due primarily to higher revenues and a $144,476 decrease in operating expenses.
Other Income (Expense), net
Other expense, net for the three months ended September 30, 2022 was $9,420 compared to other income of $2,401,758 for the same period in 2021, a decrease of $2,411,178. The decrease in other income is due primarily to the gain on extinguishment of debt of $1,885,655 as a result of the Paycheck Protection Program Second Draw Loan forgiveness and the recognition of the Employee Retention Credit of $562,253 for the third calendar quarter of 2021 recognized in the three months ended September 30, 2021.
Provision for State Income Taxes
The provision for state income taxes for the three months ended September 30, 2022 and 2021 was $5,922 and $3,000, respectively, and represents estimated income tax payments, net of refunds, to various states.
Non-controlling Interest
Income attributable to the non-controlling interest was $27,074 for the three months ended September 30, 2022 which represents the non-controlling interest portion of American DG Energy's 51% owned subsidiary, American DG New York, LLC. For the same period in 2021, income attributable to the non-controlling interest was $21,890.
Net Income (Loss) Attributable to Tecogen Inc
The net loss attributable to Tecogen for the three months ended September 30, 2022 was $256,712 compared to a net income of $1,466,697 for the same period in 2021, a decrease of $1,723,409, or 117.5%. The decrease in other income is due primarily to the gain on extinguishment of debt of $1,885,655 as a result of the Paycheck Protection Program Second Draw Loan forgiveness and the recognition of the Employee Retention Credit of $562,253 for the third calendar quarter of 2021
24
TECOGEN INC.
Management's Discussion and Analysis
recognized in the three months ended September 30, 2021, offset partially by higher gross profit for our Products and Services Segments and decreased operating expenses.
Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
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:
| Nine Months Ended | |||||||||||
| September 30, 2022 | September 30, 2021 | ||||||||||
| Revenues | 100.0% | 100.0% | |||||||||
| Cost of sales | 57.6% | 52.7% | |||||||||
| Gross profit | 42.4% | 47.3% | |||||||||
| Operating expenses | |||||||||||
| General and administrative | 37.3% | 42.8% | |||||||||
| Selling | 7.7% | 10.2% | |||||||||
| Research and development | 2.6% | 2.2% | |||||||||
| Gain on disposition of assets | (0.2) | % | —% | ||||||||
| Gain on termination of unfavorable contract liability | (0.3) | % | —% | ||||||||
| Total operating expenses | 47.1 | % | 55.1 | % | |||||||
| Loss from operations | (4.6) | % | (7.9) | % | |||||||
| Total other income (expense), net | — | % | 29.3 | % | |||||||
| Consolidated net income (loss) | (4.7) | % | 21.3 | % | |||||||
| Income attributable to the non-controlling interest | (0.3) | % | (0.2) | % | |||||||
| Net income (loss) attributable to Tecogen, Inc. | (5.0) | % | 21.1 | % | |||||||
Revenues
Total revenues for the nine months ended September 30, 2022 were $20,471,026 compared to $17,218,131 for the same period in 2021, an increase of $3,252,895 or 18.9% year over year.
The following table presents revenue for the periods indicated, by segment and the change from the prior year:
25
TECOGEN INC.
Management's Discussion and Analysis
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | Increase (Decrease) $ | Increase (Decrease) % | ||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||||
| Products | |||||||||||||||||||||||
| Cogeneration | $ | 4,675,629 | $ | 2,542,962 | $ | 2,132,667 | 83.9 | % | |||||||||||||||
| Chiller | 4,987,937 | 2,929,411 | 2,058,526 | 70.3 | % | ||||||||||||||||||
| Engineered accessories | 492,762 | 967,608 | (474,846) | (49.1) | % | ||||||||||||||||||
| Total Product revenues | 10,156,328 | 6,439,981 | 3,716,347 | 57.7 | % | ||||||||||||||||||
| Services | |||||||||||||||||||||||
| Maintenance services | 9,025,966 | 8,613,377 | 412,589 | 4.8 | % | ||||||||||||||||||
| Installation services | 20,109 | 825,325 | (805,216) | (97.6) | % | ||||||||||||||||||
| Total Service revenues | 9,046,075 | 9,438,702 | (392,627) | (4.2) | % | ||||||||||||||||||
| Products and Services | 19,202,403 | 15,878,683 | 3,323,720 | 20.9 | % | ||||||||||||||||||
| Energy Production revenues | 1,268,623 | 1,339,448 | (70,825) | (5.3) | % | ||||||||||||||||||
| Total revenues | $ | 20,471,026 | $ | 17,218,131 | $ | 3,252,895 | 18.9 | % | |||||||||||||||
Products
Product revenues in the nine months ended September 30, 2022 were $10,156,328 compared to $6,439,981 for the same period in 2021, an increase of $3,716,347, or 57.7%. The increase in revenue during the nine months ended September 30, 2022 is due to an increase in cogeneration sales of $2,132,667 and an increase in chiller sales of $2,058,526, offset partially by a $474,846 decrease in sales of engineered accessories. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales.
Services
Service revenues in the nine months ended September 30, 2022 were $9,046,075, compared to $9,438,702 for the same period in 2021, a decrease of $392,627, or 4.2%. The decrease in revenue during the nine months ended September 30, 2022 is due primarily to a decrease in installation revenues of $805,216, offset partially by an increase of $412,589, or 4.8%, in service contract revenues. While service contract revenue generally remains relatively constant, installation activity is likely to remain low due to our strategy of focusing on higher margin segments of our business.
Energy Production
Energy production revenues in the nine months ended September 30, 2022 were $1,268,623, compared to $1,339,448 for the same period in 2021, a decrease of $70,825, or 5.3%. The decrease in energy production revenue is a consequence of certain energy production sites that have permanently closed and seasonality.
Cost of Sales
Cost of sales in the nine months ended September 30, 2022 was $11,783,455 compared to $9,082,349 for the same period in 2021, an increase of $2,701,106, or 29.7%. The increase in cost of sales is due to increased product revenue volume and the impact of inflation on material costs. During the nine months ended September 30, 2022 our gross margin decreased to 42.4% compared to 47.3% for the same period in 2021, a 4.9% percentage point decrease due to higher material costs.
26
TECOGEN INC.
Management's Discussion and Analysis
Products
Cost of sales for products in the nine months ended September 30, 2022 was $6,734,465 compared to $3,601,408 for the same period in 2021, an increase of $3,133,057, or 87.0% due to increased product revenue volume and higher material costs. During the nine months ended September 30, 2022, our Products Segment gross margin was 33.7% compared to 44.1% for the same period in 2021, an 10.4% percentage point decrease. The decrease in margin is primarily a function of increased material costs.
Services
Cost of sales for services in the nine months ended September 30, 2022 was $4,322,693 compared to $4,684,008 for the same period in 2021, a decrease of $361,315, or 7.7%. During the nine months ended September 30, 2022, our Services Segment gross margin increased to 52.2% compared to 50.4% for the same period in 2021, a 1.8% percentage point increase due to lower installation activity.
Energy Production
Cost of sales for energy production in the nine months ended September 30, 2022 was $726,297 compared to $796,933 for the same period in 2021, a decrease of $70,636, or 8.9%. During the nine months ended September 30, 2022 our energy production gross margin was 42.8% compared to 40.5% for the same period in 2021, a 2.3% percentage point increase.
Operating Expenses
Operating expenses increased $143,706, or 1.5%, to $9,638,224 in the nine months ended September 30, 2022 compared to $9,494,518 in the same period in 2021. The total operating expenses were higher primarily due to higher salary costs, taxes and costs related to the air-cooled chiller development, offset partially by a reduction in bad debt expense and lower sales commissions.
| Nine Months Ended | |||||||||||||||||||||||
| Operating Expenses | September 30, 2022 | September 30, 2021 | Increase (Decrease) $ | Increase (Decrease) % | |||||||||||||||||||
| General and Administrative | $ | 7,642,183 | $ | 7,365,495 | $ | 276,688 | 3.8 | % | |||||||||||||||
| Selling | 1,572,221 | 1,747,959 | (175,738) | (10.1) | % | ||||||||||||||||||
| Research and Development | 537,126 | 381,064 | 156,062 | 41.0 | % | ||||||||||||||||||
| Gain on disposition of assets | (41,931) | — | (41,931) | — | % | ||||||||||||||||||
| Gain on termination of unfavorable contract liability | (71,375) | — | (71,375) | — | % | ||||||||||||||||||
| Total | $ | 9,638,224 | $ | 9,494,518 | $ | 143,706 | 1.5 | % | |||||||||||||||
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, 2022 were $7,642,183 compared to $7,365,495 for the same period in 2021, an increase of $276,688 or 3.8% due primarily to a $235,955 decrease in bad debt expense.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the nine months ended September 30, 2022 were $1,572,221 compared to $1,747,959 for the same period in 2021, a decrease of $175,738 or 10.1% due primarily to lower payroll costs and reduced sales commissions.
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, 2022 were $537,126 compared to $381,064 for the same period in 2021, an increase of $156,062 or 41.0% due to increased payroll costs and costs incurred in the development of a hybrid air-cooled chiller.
27
TECOGEN INC.
Management's Discussion and Analysis
Loss from Operations
Loss from operations for the nine months ended September 30, 2022 was $950,653 compared to a loss of $1,358,736 for the same period in 2021, a decrease of $408,083. The decrease in the loss from operations is due primarily to higher Products Segment gross profit and a $143,706 decrease in operating expenses.
Other Income (Expense), net
Other expense, net for the nine months ended September 30, 2022 was $900 compared to other income of $5,053,120 for the same period in 2021, a decrease of $5,054,020. The decrease in other income is due primarily to the gain on extinguishment of debt of $3,773,014 as a result of the Paycheck Protection Program Loan forgiveness and the recognition of the Employee Retention Credit of $1,276,021 for the three calendar quarters of 2021 recognized in the nine months ended September 30, 2021.
Provision for State Income Taxes
The provision for state income taxes for the nine months ended September 30, 2022 and 2021 was $16,352 and $18,991, respectively and represents estimated income tax payments, net of refunds, to various states.
Non-controlling Interest
Income attributable to the non-controlling interest was $55,616 for the nine months ended September 30, 2022 which represents the non-controlling interest portion of American DG Energy's 51% owned subsidiary, American DG New York, LLC. For the same period in 2021, income attributable to the non-controlling interest was $42,358.
Net Income (Loss) Attributable to Tecogen Inc
The net loss attributable to Tecogen for the nine months ended September 30, 2022 was $1,023,521 compared to a net income of $3,633,035 for the same period in 2021, a decrease of $4,656,556, or 128.2%. The decrease is due primarily to the gain on extinguishment of debt of as a result of the Paycheck Protection Program Loan forgiveness and the recognition of the Employee Retention Credit in the nine months ended September 30, 2021, offset partially by higher gross profit margins for our Products Segment and the decrease in operating expenses.
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, 2022 | September 30, 2021 | Increase (Decrease) | |||||||||||||||||
| Operating activities | $ | (433,810) | $ | 171,996 | $ | (605,806) | ||||||||||||||
| Investing activities | (300,493) | (185,253) | (115,240) | |||||||||||||||||
| Financing activities | — | 1,874,269 | (1,874,269) | |||||||||||||||||
| Change in cash and cash equivalents | $ | (734,303) | $ | 1,861,012 | $ | (2,595,315) | ||||||||||||||
Consolidated working capital at September 30, 2022 was $15,553,490 compared to $16,193,881 at December 31, 2021, a decrease of $640,391. Included in working capital were cash and cash equivalents of $2,880,160 at September 30, 2022, compared to $3,614,463 at December 31, 2021, a decrease of $734,303, or 20.3%.
Cash Flows from Operating Activities
28
TECOGEN INC.
Management's Discussion and Analysis
Cash used by operating activities for the nine months ended September 30, 2022 was $433,810 compared to $171,996 of cash provided by operating activities for the same period in 2021, a decrease of $605,806, or 352.2%. Our accounts receivable and unbilled revenue balances were $8,598,302 and $1,956,002, respectively, at September 30, 2022 compared to $8,482,286 and $3,258,189 at December 31, 2021, providing $67,940 and $1,302,187 of cash respectively. Inventories increased $947,031 during the nine months ended September 30, 2022 due to increased safety stock.
Accounts payable decreased to $3,325,452 as of September 30, 2022 from $3,508,354 at December 31, 2021, using $182,903 in cash flow from operations. The decrease in accounts payable was due to vendor payment timing. Deferred revenue decreased as of September 30, 2022 compared to December 31, 2021, using $487,676 of cash from operations. We expect accounts payable and deferred revenue to fluctuate with routine changes in operations.
Cash Flows from Investing Activities
During the nine months ended September 30, 2022 we used $300,493 in cash from investing activities. We used $286,820 of cash to purchase property, plant and equipment, $29,505 to acquire intangible assets, and distributed $56,823 to the 49% non-controlling interest holders of American DG New York LLC, partially offset by the receipt of $72,655 in insurance and other proceeds from the disposition of assets.
For the nine months ended September 30, 2021 cash used in investing activities was $185,253. We used $84,160 of cash to purchase property, plant and equipment, $56,349 to acquire intangible assets and, distributed $66,168 to the non-controlling interest holders of American DG New York LLC, partially offset by receipt of $11,637 in proceeds from the sale of investment securities and proceeds of $9,787 from the disposition of assets.
Cash Flows from Financing Activities
During the nine months ended September 30, 2022 our financing activities provided $0 compared to $1,874,269 for the same period in 2021. Financing activities for the nine months ended September 30, 2021 included the proceeds of $1,874,269 received under the Paycheck Protection Program Second Draw Loan.
Backlog
As of September 30, 2022, our backlog of product and installation projects, excluding service contracts, was $6.9 million, consisting of $2.7 million of purchase orders received by us and $4.2 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.
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"). 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. 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 nine months ended September 30, 2021.
29
TECOGEN INC.
Management's Discussion and Analysis
Employee Retention Credit
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
As a result of our election to use an alternative quarter, we qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021, excluding the wages applied to the Paycheck Protection Program Second Draw Loan, were eligible for the ERC.
A current receivable in the amount of $713,269 is included in our condensed consolidated balance sheet as of September 30, 2022. On April 14, 2022, we received $564,027 from the Internal Revenue Service representing the ERC claim for the third quarter of 2021 and $1,275 of accrued interest. We are still awaiting payment from the Internal Revenue Service for the ERC claim from the first and second quarters of 2021.
Liquidity
At September 30, 2022, we had cash and cash equivalents of $2,880,160, a decrease of $734,303 or 20.3% from the cash and cash equivalents balance at December 31, 2021. During the nine months ended September 30, 2022, our revenues continued to be negatively impacted due to the aftermath of COVID-19, including supply chain disruption resulting in customer order delays or deferrals; service delays due to parts shortages, 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 cash and cash flows from operations, together with 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 to finance the company during the periods beyond twelve months in the future. If sufficient funds from operating activities are not available to finance our business, we may need to raise additional capital through debt financing or an equity offering to meet our operating and capital needs.
Significant Accounting Policies and Critical Estimates
Our significant accounting policies are discussed in the Notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. The accounting policies and estimates that can have a significant impact upon our operating results, financial position and footnote disclosures are described in the above notes and in the Annual Report.
Significant New Accounting Standards or Updates Not Yet Effective
The Company's critical accounting policies have remained consistent as discussed in our Annual Report on
Form 10-K for the year ended December 31, 2021, filed with the SEC on March 10, 2022.
See Note 1, Description of Business and Basis of Presentation, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
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Management's Discussion and Analysis
Seasonality
The majority of our chilling systems sold will be operational for the summer. Demand for our service team is higher in the warmer months when cooling is required. Chiller units are generally shut down in the winter and started up again in the spring. The chiller 'busy season' for the service team generally runs from May through the end of September. Our cogeneration sales are not generally affected by seasonality.
Off-Balance Sheet Arrangements
Currently, we do not have any material off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer ("Certifying Officers") conducted evaluations of our disclosure controls and procedures. As defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), the term "disclosure controls and procedures" means controls and procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under the Section 13(a) or 15(d) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report, have concluded that our disclosure controls and procedures were not effective due to a material weakness with respect to a small number of individuals dealing with general controls over information technology. Management will continue to evaluate the above weaknesses and we are taking steps to remediate the weaknesses as resources become available.
Changes in Internal Control over Financial Reporting:
There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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TECOGEN INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of the date of the filing of this Report, we are not a party to any material pending legal proceedings and know of no contemplated governmental proceeding involving us. However, from time to time, we may be involved in ordinary routine litigation incidental to our business.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Item1A - Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2021 ("2021 Form 10-K") The risks discussed in our 2021 Form 10-K could materially affect our business, financial condition and future results. The risks described in our 2021 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| Exhibit No. | Description of Exhibit | |||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 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
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.
| TECOGEN INC. | ||||||||
| (Registrant) | ||||||||
| Dated: November 10, 2022 | By: | /s/ Benjamin Locke | ||||||
| Benjamin Locke | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Dated: November 10, 2022 | By: | /s/ Abinand Rangesh | ||||||
| Abinand Rangesh | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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