TECOGEN INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2018
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 001-36103
TECOGEN INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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04-3536131
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(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification No.)
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45 First Avenue
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Waltham, Massachusetts
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02451
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(Address of Principal Executive Offices)
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(Zip Code)
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Registrant’s Telephone Number, Including Area Code: (781) 466-6402
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
ý
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
ý
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:
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Large accelerated filer
o
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Accelerated filer
o
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Non –accelerated filer
x
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Smaller reporting company
x
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Emerging Growth company
x
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|||
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
ý
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Title of each class
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Outstanding, October 31, 2018
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Common Stock, $0.001 par value
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24,819,646
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TECOGEN INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED
SEPTEMBER 30, 2018
TABLE OF CONTENTS
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PART I
- FINANCIAL INFORMATION
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||
References in this Form 10-Q to "we", "us", "our"', the "Company" and "Tecogen" refers to Tecogen Inc. and its consolidated subsidiaries, unless otherwise noted.
TECOGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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September 30, 2018
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December 31, 2017
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|||||
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ASSETS
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|||||||
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Current assets:
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|||
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Cash and cash equivalents
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$
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136,717
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$
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1,673,072
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Accounts receivable, net
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11,548,663
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9,536,673
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Unbilled revenue
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4,441,565
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3,963,133
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Inventory, net
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5,983,067
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5,130,805
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Due from related party
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—
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585,492
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Prepaid and other current assets
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815,269
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771,526
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Total current assets
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22,925,281
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21,660,701
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Property, plant and equipment, net
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11,107,509
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12,265,711
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Intangible assets, net
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2,935,279
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2,896,458
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Goodwill
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13,365,655
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13,365,655
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|||
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Other assets
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427,810
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482,551
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|||
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TOTAL ASSETS
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$
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50,761,534
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$
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50,671,076
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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|||
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Current liabilities:
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Revolving line of credit, bank
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$
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1,708,888
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$
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—
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Accounts payable
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5,716,426
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5,095,285
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Accrued expenses
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2,196,921
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1,416,976
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Deferred revenue
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1,718,376
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1,293,638
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Loan due to related party
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—
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850,000
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Interest payable, related party
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—
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52,265
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Total current liabilities
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11,340,611
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8,708,164
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Long-term liabilities:
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Deferred revenue, net of current portion
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343,031
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538,100
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Unfavorable contract liability, net
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6,534,074
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7,729,667
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Total liabilities
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18,217,716
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16,975,931
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Commitments and contingencies (Note 10)
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Stockholders’ equity:
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Tecogen Inc. stockholders’ equity:
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Common stock, $0.001 par value; 100,000,000 shares authorized; 24,819,646 and 24,766,892 issued and outstanding at September 30, 2018 and December 31, 2017, respectively
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24,819
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24,767
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Additional paid-in capital
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56,371,583
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56,176,330
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Accumulated other comprehensive loss-investment securities
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—
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(165,317
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)
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|||
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Accumulated deficit
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(24,298,191
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)
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(22,796,246
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)
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Total Tecogen Inc. stockholders’ equity
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32,098,211
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33,239,534
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Noncontrolling interest
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445,607
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455,611
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Total stockholders’ equity
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32,543,818
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33,695,145
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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50,761,534
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$
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50,671,076
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The accompanying notes are an integral part of these consolidated financial statements.
1
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
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Three Months Ended
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|||||||
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September 30, 2018
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September 30, 2017
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|||||
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Revenues
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|||||||
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Products
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$
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2,765,094
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$
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2,425,616
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Services
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3,713,770
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4,519,467
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Energy production
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1,459,820
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1,556,115
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Total revenues
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7,938,684
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8,501,198
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Cost of sales
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Products
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1,695,347
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1,538,515
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Services
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2,517,210
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2,981,454
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Energy production
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843,029
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723,198
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Total cost of sales
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5,055,586
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5,243,167
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Gross profit
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2,883,098
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3,258,031
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|||
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Operating expenses
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|||||||
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General and administrative
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2,582,600
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2,427,352
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Selling
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581,716
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503,415
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Research and development
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281,094
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241,725
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Total operating expenses
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3,445,410
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3,172,492
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|||
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Income (loss) from operations
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(562,312
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)
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85,539
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|||
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Other income (expense)
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|||||||
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Interest income and other expense, net
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4,168
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14,849
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|||
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Interest expense
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(33,380
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)
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(45,242
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)
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|||
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Unrealized gain on investment securities
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19,681
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—
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|||
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Total other expense, net
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(9,531
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)
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(30,393
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)
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|||
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Income (loss) before provision for state income taxes
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(571,843
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)
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55,146
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Provision for state income taxes
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3,815
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—
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Consolidated net income (loss)
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(575,658
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)
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55,146
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Income attributable to the noncontrolling interest
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(27,379
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)
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(27,935
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)
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Net income (loss) attributable to Tecogen Inc.
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$
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(603,037
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)
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27,211
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Other comprehensive income - unrealized gain on securities
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39,361
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|||||
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Comprehensive income
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$
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66,572
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||||
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Net loss per share - basic and diluted
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$
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(0.02
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)
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$
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0.00
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Weighted average shares outstanding - basic
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24,819,056
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24,720,613
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|||
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Weighted average shares outstanding - diluted
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24,819,056
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24,930,624
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|||
The accompanying notes are an integral part of these consolidated financial statements.
2
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
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Nine Months Ended
|
|||||||
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September 30, 2018
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September 30, 2017
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|||||
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Revenues
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|||||||
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Products
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$
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8,922,257
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$
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8,349,159
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Services
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12,894,439
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12,259,037
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|||
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Energy production
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4,750,580
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2,330,307
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|||
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Total revenues
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26,567,276
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|
22,938,503
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|
|||
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Cost of sales
|
|||||||
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Products
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5,596,272
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5,261,245
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|||
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Services
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8,262,104
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7,464,193
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|||
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Energy production
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2,828,405
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1,053,741
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|||
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Total cost of sales
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16,686,781
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13,779,179
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|||
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Gross profit
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9,880,495
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|
9,159,324
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|
|||
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Operating expenses
|
|||||||
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General and administrative
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8,122,856
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|
7,042,500
|
|
|||
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Selling
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1,892,229
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1,558,378
|
|
|||
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Research and development
|
993,102
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|
641,064
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|
|||
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Total operating expenses
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11,008,187
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|
9,241,942
|
|
|||
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Loss from operations
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(1,127,692
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)
|
(82,618
|
)
|
|||
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Other income (expense)
|
|||||||
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Interest and other income
|
7,926
|
|
21,033
|
|
|||
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Interest expense
|
(56,195
|
)
|
(115,026
|
)
|
|||
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Unrealized loss on investment securities
|
(59,042
|
)
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—
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|
|||
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Total other expense, net
|
(107,311
|
)
|
(93,993
|
)
|
|||
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Loss before provision for state income taxes
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(1,235,003
|
)
|
(176,611
|
)
|
|||
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Provision for state income taxes
|
42,679
|
|
—
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|
|||
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Consolidated net loss
|
(1,277,682
|
)
|
(176,611
|
)
|
|||
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Income attributable to the noncontrolling interest
|
(58,946
|
)
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(44,933
|
)
|
|||
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Net loss attributable to Tecogen Inc.
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$
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(1,336,628
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)
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(221,544
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)
|
||
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Other comprehensive loss - unrealized loss on securities
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(184,998
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)
|
|||||
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Comprehensive loss
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$
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(406,542
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)
|
||||
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Net loss per share - basic and diluted
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$
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(0.05
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)
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$
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(0.01
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)
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Weighted average shares outstanding - basic and diluted
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24,813,936
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22,643,406
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|
|||
The accompanying notes are an integral part of these consolidated financial statements.
3
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Nine Months Ended
|
|||||||
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|
September 30, 2018
|
September 30, 2017
|
|||||
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CASH FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
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Consolidated net loss
|
$
|
(1,277,682
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)
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$
|
(176,611
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)
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|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|||||||
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Depreciation, accretion and amortization, net
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586,188
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|
402,939
|
|
|||
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Gain on contract termination
|
(124,732
|
)
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—
|
|
|||
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Provision on inventory reserve
|
1,000
|
|
43,609
|
|
|||
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Stock-based compensation
|
133,808
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|
138,329
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|
|||
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Non-cash interest expense
|
—
|
|
577
|
|
|||
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Loss on sale of assets
|
13,343
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|
2,909
|
|
|||
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Provision for losses on accounts receivable
|
4,395
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|
8,000
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|
|||
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Changes in operating assets and liabilities, net of effects of acquisitions
|
|||||||
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(Increase) decrease in:
|
|||||||
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Accounts receivable
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(1,840,150
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)
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(1,908,655
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)
|
|||
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Unbilled revenue
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(245,892
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)
|
(776,365
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)
|
|||
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Inventory, net
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(853,262
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)
|
(1,279,847
|
)
|
|||
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Due from related party
|
585,492
|
|
(236,971
|
)
|
|||
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Prepaid expenses and other current assets
|
(43,743
|
)
|
(18,673
|
)
|
|||
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Other non-current assets
|
54,741
|
|
(32,251
|
)
|
|||
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Increase (decrease) in:
|
|||||||
|
Accounts payable
|
(262,925
|
)
|
1,641,206
|
|
|||
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Accrued expenses and other current liabilities
|
779,945
|
|
(233,824
|
)
|
|||
|
Deferred revenue
|
185,059
|
|
407,379
|
|
|||
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Interest payable, related party
|
(52,265
|
)
|
21,378
|
|
|||
|
Net cash used in operating activities
|
(2,356,680
|
)
|
(1,996,871
|
)
|
|||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases of property and equipment
|
(273,814
|
)
|
(315,205
|
)
|
|||
|
Proceeds from sale of assets
|
3,606
|
|
—
|
|
|||
|
Purchases of intangible assets
|
(203,648
|
)
|
(34,551
|
)
|
|||
|
Cash acquired in asset acquisition
|
442,746
|
|
971,454
|
|
|||
|
Expenses associated with asset acquisition
|
(900
|
)
|
—
|
|
|||
|
Payment of stock issuance costs
|
(908
|
)
|
(367,101
|
)
|
|||
|
Distributions to noncontrolling interest
|
(68,950
|
)
|
(31,362
|
)
|
|||
|
Net cash provided by (used in) investing activities
|
(101,868
|
)
|
223,235
|
|
|||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Proceeds from revolving line of credit
|
12,550,590
|
|
—
|
|
|||
|
Payments on revolving line of credit
|
(10,696,691
|
)
|
—
|
|
|||
|
Payments for debt issuance costs
|
(145,011
|
)
|
—
|
|
|||
|
Proceeds from the exercise of stock options
|
63,305
|
|
128,918
|
|
|||
|
Payment on loan due to related party
|
(850,000
|
)
|
—
|
|
|||
|
Net cash provided by financing activities
|
922,193
|
|
128,918
|
|
|||
|
Change in cash and cash equivalents
|
(1,536,355
|
)
|
(1,644,718
|
)
|
|||
|
Cash and cash equivalents, beginning of the period
|
1,673,072
|
|
3,721,765
|
|
|||
|
Cash and cash equivalents, end of the period
|
$
|
136,717
|
|
$
|
2,077,047
|
|
|
|
Supplemental disclosures of cash flows information:
|
|
|
|
|
|||
|
Cash paid for interest
|
$
|
112,460
|
|
$
|
95,550
|
|
|
|
Cash paid for taxes
|
$
|
44,864
|
|
$
|
—
|
|
|
|
Issuance of stock to acquire American DG Energy
|
$
|
—
|
|
$
|
18,745,007
|
|
|
|
Issuance of Tecogen stock options in exchange for American DG Energy options
|
$
|
—
|
|
$
|
114,896
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1.
Description of Business and Basis of Presentation
Description of business
Tecogen Inc., or the Company, we, our or us produces commercial and industrial, natural-gas-fueled engine-driven, combined heat and power (CHP) products that reduce energy costs, decrease greenhouse gas emissions and alleviate congestion on the national power grid. The Company’s products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The Company also installs, owns, operates and maintains complete energy systems and other complementary systems at customer sites and sells electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates.
The majority of the Company’s customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast. The Company's common stock is listed on NASDAQ under the ticker symbol TGEN.
On May 18, 2017, the Company acquired
100%
of the outstanding common stock of American DG Energy Inc., formerly a related entity, in a stock-for-stock merger (see
Note 4.
Acquisition of American DG Energy Inc.
).
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, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
The condensed consolidated balance sheet at
December 31, 2017
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, 2017
.
There have been certain changes in accounting principles as discussed below in the section entitled "Significant New Accounting Standards Adopted this Period."
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and entities in which it has a controlling financial interest. Those entities include the Company's wholly-owned subsidiaries American DG Energy Inc., TTcogen LLC, 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 the Company does not have a controlling financial interest but where we have significant influence are accounted for under the equity method. Any intercompany transactions have been eliminated in consolidation.
The Company’s operations are comprised of
two
business segments. Our Products and Services segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
Reclassification
Certain prior period amounts have been reclassified to conform with current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
The provisions for income taxes in the accompanying unaudited consolidated statements of operations differ from that which would be expected by applying the federal statutory tax rate primarily due to losses for which no benefit is recognized.
5
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Significant New Accounting Standards Adopted this Period
Cloud Computing Arrangement.
During the third quarter of 2018, the Company early adopted ASU 2018-15 "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract" as it is currently undertaking implementation of a new enterprise resource planning system (ERP). The Company opted to apply the provisions of ASU 2018-15 on a prospective basis. The primary effect of the provisions is to capitalize certain implementation costs during the application development phase and to amortize those costs prospectively over the life of the agreement rather than expense them currently as general and administrative costs.
Revenue Recognition.
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update (ASU 2014-09) related to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, supersedes nearly all current U.S. GAAP guidance on this topic and eliminates industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company adopted this accounting standard update on a modified retrospective basis in the first quarter of 2018. See
Note 2.
,
Revenue
for further discussion.
Investments in Equity Securities.
In January 2016, the FASB issued an accounting standard update related to investments in equity securities requiring unrealized holding gains and losses to be included in net income. Prior to this update, unrealized holding gains and losses related to available-for-sale securities were included in accumulated other comprehensive income and not included in determining net income. This accounting standard update became effective for the Company beginning in the first quarter of 2018 and is applied by means of a cumulative-effect adjustment to the balance sheet as of January 1, 2018. The Company adopted this accounting standard update in the first quarter of 2018 which resulted in reclassification of
$165,317
of cumulative unrealized holding losses from accumulated other comprehensive loss to accumulated deficit. The future impact of recognizing unrealized holding gains or losses in net income is dependent on the movement in the stock prices related to such investments.
Significant New Accounting Standards or Updates Not Yet Effective
Leases
In February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Note 2.
Revenue
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services or energy to customers.
Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. The Company has elected to exclude from revenue any value add sales and other taxes which it collects concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which the Company historically recorded shipping and handling fees and taxes. Incremental costs incurred by us in obtaining a contract with a customer are negligible, if any, and are expensed ratably in proportion to the related revenue recognized.
The application of ASU 2014-09 did not have an impact upon adoption or on the amounts reported for the interim period ended
September 30, 2018
as compared with the guidance that was in effect before the adoption and application of ASU 2014-09.
Disaggregated Revenue
In general, the Company's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.
6
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table further disaggregates our revenue by major source by segment for the three and
nine months ended
September 30, 2018
.
|
Three Months Ended
|
September 30, 2018
|
||||||||||
|
Products and Services
|
Energy Production
|
Total
|
|||||||||
|
Products
|
$
|
2,765,094
|
|
$
|
—
|
|
$
|
2,765,094
|
|
||
|
Installation services
|
1,648,119
|
|
—
|
|
1,648,119
|
|
|||||
|
Maintenance services
|
2,065,651
|
|
—
|
|
2,065,651
|
|
|||||
|
Energy production
|
—
|
|
1,459,820
|
|
1,459,820
|
|
|||||
|
Total revenue
|
$
|
6,478,864
|
|
$
|
1,459,820
|
|
$
|
7,938,684
|
|
||
|
Nine Months Ended
|
September 30, 2018
|
||||||||||
|
Products and Services
|
Energy Production
|
Total
|
|||||||||
|
Products
|
$
|
8,922,257
|
|
$
|
—
|
|
$
|
8,922,257
|
|
||
|
Installation services
|
6,350,379
|
|
—
|
|
6,350,379
|
|
|||||
|
Maintenance services
|
6,544,060
|
|
—
|
|
6,544,060
|
|
|||||
|
Energy production
|
—
|
|
4,750,580
|
|
4,750,580
|
|
|||||
|
Total revenue
|
$
|
21,816,696
|
|
$
|
4,750,580
|
|
$
|
26,567,276
|
|
||
Product and Services Segment
Products.
We transfer control and generally recognize a sale when we ship a product from our manufacturing facility at which point a 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.
Installation Services.
We provide both complete turnkey installation services and what we refer to as light installation services. Complete turnkey installation services typically include all necessary engineering and design, labor, subcontract labor and service, and ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. Light installation services typically include some engineering and design as well as certain ancillary products and parts necessary for the customers’ installation of a cogeneration unit.
Under light installation contracts, revenue related to ancillary products and parts is recognized when we transfer control of such items to the customer, generally when we ship them from our manufacturing facility, with revenue related to engineering and design services being recognized at the point where the customer can benefit from the service, generally as completed. Generally billings under light installation contracts are made when shipped and/or completed, with payment terms generally being
30
days.
7
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
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 an input method based on cost which we believe is the most faithful depiction of the transfer of products and services to the customer under these contracts. When the financial metrics of a contract indicate a loss, our policy is to record the entire expected loss as soon as it is known. Contract costs and profit recognized to date under the percentage-of-completion method in excess of billings are recognized as contract assets and are recorded as unbilled revenue. Billings in excess of contract costs and profit are recognized as contract liabilities and are recorded as deferred revenue. Generally billings under complete turnkey installation contracts are made when contractually determined milestones of progress have been achieved, with payment terms generally being
30
days.
Maintenance Services.
Maintenance services are provided under either long-term maintenance contracts or one-time maintenance contracts. Revenue under one-time maintenance contracts is recognized when the maintenance service is completed. Revenue under long-term maintenance contracts is recognized either ratably over the term of the contract where the contract price is fixed or when the periodic maintenance activities are completed where the invoiced cost to the customer is based on run hours or kilowatts produced in a given period. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to that amount to which we have the right to invoice the customer under the contract.
Energy Production Segment
Energy Production.
Revenue from energy contracts is recognized when electricity, heat, hot and/or chilled water is produced by the Company owned on-site cogeneration systems. Each month we bill the customer and recognize revenue for the various forms of energy delivered, based on meter readings which capture the quantity of the various forms of energy delivered in a given month, under a contractually defined formula which takes into account the current month's cost of energy from the local power utility.
As the various forms of energy delivered by us under energy production contracts are simultaneously delivered and consumed by the customer, our performance obligation under these contracts is considered to be satisfied over time. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to that amount to which we have the right to invoice the customer under the contract. Payment terms on invoices under these contracts are generally
30
days.
Contract Balances
The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled revenue (contract assets) and deferred revenue, consisting of customer deposits and billings in excess of revenue recognized (contract liabilities) on the Consolidated Condensed Balance Sheets.
Revenue recognized during the quarter ended
September 30, 2018
that was included in unbilled revenue at the beginning of the period was approximately
$1.0 million
. Approximately
$0.9 million
of revenue was billed in this period that had been recognized in previous periods.
Revenue recognized during the quarter ended
September 30, 2018
that was included in deferred revenue at the beginning of the period was approximately
$1.8 million
.
The decrease in the deferred revenue balance during the quarter ended
September 30, 2018
is primarily a result of
$1.8 million
of revenue recognized during the period that was included in the deferred revenue balance at the beginning of the quarter, offset by cash payments of
$1.7 million
received in advance of satisfying performance obligations.
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year, excluding certain maintenance contracts and all energy production contracts where a direct measurement of the value to the customer is used as a method of measuring progress
8
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
towards completion of our performance obligation. Exclusion of these remaining performance obligations is due in part to the inability to quantify values based on unknown future levels of delivery and in some cases rates used to bill customers. Remaining performance obligations therefore consist of unsatisfied or partially satisfied performance obligations related to fixed price maintenance contracts and installation contracts.
As of
September 30, 2018
, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately
$12.2 million
. The Company expects to recognize revenue of approximately
95%
of the remaining performance obligations over the next 24 months,
54%
recognized in the first 12 months and
41%
recognized over the subsequent 12 months, and the remainder recognized thereafter.
Note 3.
Income (loss) Per Common Share
Basic and diluted income (loss) per share for the three and
nine months ended
September 30, 2018
and
2017
, respectively, were as follows:
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
||||||||||||
|
Net income (loss) attributable to stockholders
|
$
|
(603,037
|
)
|
$
|
27,211
|
|
$
|
(1,336,628
|
)
|
$
|
(221,544
|
)
|
||||
|
Weighted average shares outstanding - Basic
|
24,819,056
|
|
24,720,613
|
|
24,813,936
|
|
22,643,406
|
|
||||||||
|
Basic income (loss) per share
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
||||
|
Weighted average shares outstanding - Diluted
|
24,819,056
|
|
24,930,624
|
|
24,813,936
|
|
22,643,406
|
|
||||||||
|
Diluted income (loss) per share
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
||||
|
Anti-dilutive shares underlying stock options outstanding
|
149,722
|
|
—
|
|
137,410
|
|
235,736
|
|
||||||||
|
Anti-dilutive convertible debentures
|
—
|
|
—
|
|
—
|
|
889,830
|
|
||||||||
|
Anti-dilutive warrants outstanding
|
—
|
|
—
|
|
—
|
|
250,000
|
|
||||||||
Note 4.
Acquisition of American DG Energy Inc.
On May 18, 2017, we completed our acquisition, by means of a stock-for-stock merger, of
100%
of the outstanding common shares of American DG Energy Inc. (“American DG Energy" or "ADGE”), a company which installs, owns, operates and maintains complete distributed generation of electricity systems, or DG systems or energy systems, and other complementary systems at customer sites and sells electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates, by means of a merger of one of our wholly owned subsidiaries with and into ADGE such that ADGE became a wholly owned subsidiary of Tecogen. We acquired ADGE to, among other reasons, expand our product offerings and benefit directly from the long-term contracted revenue streams generated by these installations. We gained control of ADGE on May 18, 2017 by issuing common stock of the Company to the prior stockholders of ADGE.
Note 5.
Property, Plant and Equipment
Property, plant and equipment at
September 30, 2018
and
December 31, 2017
consisted of the following:
|
Estimated Useful
Life (in Years) |
September 30, 2018
|
December 31, 2017
|
|||||||
|
Energy systems
|
1 - 15 years
|
$
|
12,209,144
|
|
$
|
12,466,642
|
|
||
|
Machinery and equipment
|
5 - 7 years
|
1,355,617
|
|
1,215,951
|
|
||||
|
Furniture and fixtures
|
5 years
|
104,317
|
|
205,320
|
|
||||
|
Computer software
|
3 - 5 years
|
274,169
|
|
115,253
|
|
||||
|
Leasehold improvements
|
*
|
450,792
|
|
440,519
|
|
||||
|
|
|
14,394,039
|
|
14,443,685
|
|
||||
|
Less - accumulated depreciation and amortization
|
|
(3,286,530
|
)
|
(2,177,974
|
)
|
||||
|
|
$
|
11,107,509
|
|
$
|
12,265,711
|
|
|||
* Lesser of estimated useful life of asset or lease term
9
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Depreciation and amortization expense on property and equipment for the three and
nine months ended
September 30, 2018
and
2017
was
$404,315
and
$1,234,731
and
$425,911
and
$751,960
, respectively. During the third quarter of
2018
the Company capitalized
$40,690
of implementation costs incurred in connection with the implementation of an ERP system as discussed in
Note 1.
Description of Business and Basis of Presentation
.
Note 6.
Intangible Assets and Liabilities Other Than Goodwill
As of
September 30, 2018
and
December 31, 2017
the Company had the following amounts related to intangible assets and liabilities other than goodwill:
|
September 30, 2018
|
December 31, 2017
|
|||||||||||||||||||||||
|
Intangible assets
|
Cost
|
Accumulated Amortization
|
Total
|
Cost
|
Accumulated Amortization
|
Total
|
||||||||||||||||||
|
Product certifications
|
$
|
726,159
|
|
$
|
(329,812
|
)
|
$
|
396,347
|
|
$
|
605,704
|
|
$
|
(285,341
|
)
|
$
|
320,363
|
|
||||||
|
Patents
|
888,382
|
|
(182,107
|
)
|
706,275
|
|
808,323
|
|
(154,972
|
)
|
653,351
|
|
||||||||||||
|
Developed technology
|
240,000
|
|
(88,000
|
)
|
152,000
|
|
240,000
|
|
(76,000
|
)
|
164,000
|
|
||||||||||||
|
Trademarks
|
21,740
|
|
—
|
|
21,740
|
|
19,540
|
|
—
|
|
19,540
|
|
||||||||||||
|
In Process R&D
|
263,936
|
|
—
|
|
263,936
|
|
263,001
|
|
—
|
|
263,001
|
|
||||||||||||
|
Favorable contract asset
|
1,561,739
|
|
(195,440
|
)
|
1,366,299
|
|
1,561,739
|
|
(85,536
|
)
|
1,476,203
|
|
||||||||||||
|
TTcogen intangible assets
|
29,607
|
|
(925
|
)
|
28,682
|
|
—
|
|
—
|
|
—
|
|
||||||||||||
|
$
|
3,731,563
|
|
$
|
(796,284
|
)
|
$
|
2,935,279
|
|
$
|
3,498,307
|
|
$
|
(601,849
|
)
|
$
|
2,896,458
|
|
|||||||
|
Intangible liability
|
||||||||||||||||||||||||
|
Unfavorable contract liability
|
$
|
7,912,275
|
|
$
|
(1,378,201
|
)
|
$
|
6,534,074
|
|
$
|
8,341,922
|
|
$
|
(612,255
|
)
|
$
|
7,729,667
|
|
||||||
The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the three and
nine months ended
September 30, 2018
and
2017
was
$25,981
and
$77,357
, and
$23,106
and
$74,482
, respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the three and
nine months ended
September 30, 2018
and
2017
was
$211,876
and
$656,042
, and
$290,677
and
$428,264
, respectively.
Favorable/Unfavorable Contract Assets and Liabilities
The favorable contract asset and unfavorable contract liability in the foregoing table represent the estimated fair value of American DG Energy's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Company in May 2017 (see
Note 4.
Acquisition of American DG Energy Inc.
).
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 is estimated to be as follows:
|
Year 1
|
$
|
(489,690
|
)
|
|
|
Year 2
|
(433,817
|
)
|
||
|
Year 3
|
(469,177
|
)
|
||
|
Year 4
|
(464,601
|
)
|
||
|
Year 5
|
(397,276
|
)
|
||
Note 7.
Stock-Based Compensation
Stock-Based Compensation
The Company 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 of the Company. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Amended Plan to
3,838,750
as of
September 30, 2018
.
10
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
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, 2018
was
1,961,736
.
Stock option activity for the
nine months ended
September 30, 2018
was as follows:
|
Common Stock Options
|
Number of
Options
|
Exercise
Price Per
Share
|
Weighted
Average Exercise
Price
|
Weighted
Average Remaining
Life
|
Aggregate
Intrinsic
Value
|
|||||||||
|
Outstanding, December 31, 2017
|
1,061,552
|
|
$0.79-$18.15
|
$
|
3.60
|
|
4.95 years
|
$
|
291,449
|
|
||||
|
Granted
|
297,500
|
|
$2.30-$4.04
|
$
|
3.52
|
|
||||||||
|
Exercised
|
(52,754
|
)
|
$1.20
|
$
|
1.20
|
|
||||||||
|
Canceled and forfeited
|
(72,009
|
)
|
$2.30-$18.15
|
$
|
6.70
|
|
||||||||
|
Outstanding, September 30, 2018
|
1,234,289
|
|
$0.79-$10.33
|
$
|
3.50
|
|
5.94 years
|
$
|
422,771
|
|
||||
|
Exercisable, September 30, 2018
|
819,914
|
|
$
|
3.37
|
|
$
|
396,971
|
|
||||||
|
Vested and expected to vest, September 30, 2018
|
1,172,133
|
|
$
|
3.49
|
|
|
$
|
418,901
|
|
|||||
Consolidated stock-based compensation expense for the
nine months ended
September 30, 2018
and
2017
was
$133,808
and
$138,329
, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the periods.
Note 8.
Fair Value Measurements
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1
- Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
Level 2 -
Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company has Level 2 financial assets and liabilities as provided below.
Level 3
- Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not currently have any Level 3 financial assets or liabilities.
The following table presents the asset reported in the consolidated balance sheet measured at its fair value on a recurring basis as of
September 30, 2018
by level within the fair value hierarchy.
|
September 30, 2018
|
Quoted prices in active markets for identical assets
|
Significant other observable inputs
|
Significant unobservable inputs
|
||||||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total gains (losses)
|
|||||||||||||||
|
Recurring fair value measurements
|
|||||||||||||||||||
|
Marketable equity securities
|
|||||||||||||||||||
|
EuroSite Power Inc.
|
$
|
295,209
|
|
$
|
—
|
|
$
|
295,209
|
|
$
|
—
|
|
$
|
(224,359
|
)
|
||||
|
Total recurring fair value measurements
|
$
|
295,209
|
|
$
|
—
|
|
$
|
295,209
|
|
$
|
—
|
|
$
|
(224,359
|
)
|
||||
11
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company utilizes a Level 2 category fair value measurement to value its investment in EuroSite Power 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 the Company classifies it as Level 2.
Note 9.
Revolving Line of Credit, Bank
On May 4, 2018 ("Closing Date") the Company, and its wholly owned subsidiaries, American DG Energy Inc. and TTcogen LLC (collectively, the "Borrowers"), entered into a Credit Agreement with Webster Business Credit Corporation (the "Lender") that matures in May 2021 and provides Borrowers a line of credit of up to
$10 million
on a revolving and secured basis, with availability based on certain accounts receivables, raw materials, and finished goods.
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Borrower's option, either (1) One Month LIBOR, plus
3.00%
, or (2) Lender’s Base Rate, plus
1.5%
. Lender’s Base Rate is defined as the highest of (a) the Federal Funds rate plus
0.5%
, (b) Lender’s Prime Rate as adjusted by Lender from time to time, and (c) One Month LIBOR, plus
2.75%
.
The Credit Agreement contains certain affirmative and negative covenants applicable to the Company and its subsidiaries, which include, among other things, restrictions on their ability to (i) incur additional indebtedness, (ii) make certain investments, (iii) acquire other entities, (iv) dispose of assets and (v) make certain payments including those related to dividends or repurchase of equity. The Credit Agreement also contains financial covenants including maintaining a fixed charge coverage ratio of not less than
1.10
:1.00 and the Company may not make any financed capital expenditures in excess of
$500,000
in the aggregate in any fiscal year. The bank has agreed to provide a waiver to the Company as it is not in compliance with all of the covenants.
The
$145,011
of costs incurred in connection with the issuance of the revolving credit facility were capitalized and are being amortized to interest expense on a straight-line basis over
three
years based on the contractual term of the Agreement. As of
September 30, 2018
, the outstanding balance on the line of credit was
$1,833,758
and the unamortized portion of debt issuance cost related to the Credit Agreement was
$124,870
and is included as a reduction to the revolving line of credit in the accompanying Condensed Consolidated Balance Sheet.
Note 10.
Commitments and Contingencies
The Company guarantees certain obligations of a former subsidiary of American DG Energy, EuroSite Power Inc. These guarantees include a payment performance guarantee in respect of collateralized equipment financing loans, with a remaining principal amount outstanding subject to the guarantee at
September 30, 2018
of approximately
$225,207
due ratably in equal installments through September 2021, and certain guarantees of performance in respect of certain customer contracts. Based on current conditions, the Company does not believe there to be any amounts probable of payment by the Company under any of the guarantees and has estimated the value associated with the non-contingent aspect of the guarantees is approximately
$10,000
which is recorded as a liability in the accompanying financial statements.
Legal Proceedings
The Company is a party to a pending action in the United States District Court for the District of Massachusetts, described below, related to the merger with ADGE.
Massachusetts Superior Court Action
On or about February 6, 2017, ADGE, John Hatsopoulos, George N. Hatsopoulos, Charles T. Maxwell, Deanna M. Petersen, Christine Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen, and the wholly owned subsidiary of the Company that merged with ADGE ("Merger Sub") were served with a Verified Complaint by William C. May ("May"), individually and on behalf of the other shareholders of ADGE as a class. The action was commenced in the Business Litigation Session of the Superior Court of the Commonwealth of Massachusetts, Civil Action No. 17-0390. The complaint alleged class action claims arising out of the proposed Merger. On May 31, 2017, May voluntarily dismissed the action and consolidated his claims with the pending federal action in the United States District Court for the District of Massachusetts, described below. If the complaint in the federal court is dismissed, it is possible that May or another plaintiff will recommence an action in state court with similar claims to those asserted by May.
United States District Court Action
On or about February 15, 2017, a lawsuit was filed in the United States District Court for the District of Massachusetts by Lee Vardakas (“Vardakas”), individually and on behalf of other stockholders of ADGE, naming ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Benjamin Locke, Charles T. Maxwell, Deanna M. Petersen, Christine M. Klaskin, John
12
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Rowe, Joan Giacinti, Elias Samaras, Tecogen., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants (the "Defendants"). The action is captioned
Vardakas v. American DG Energy, Inc.
, Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
Following the consummation of the Merger (and the appointment of May, from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint discontinued the claims against Cassel Salpeter & Co., LLC but asserted against the remaining defendants claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 14a-9; claims against certain defendants for control person liability under § 20(a) of the Exchange Act (collectively, the “Federal Securities Law Claims”); and common law claims for breach of fiduciary duty and aiding and abetting (the “State Law Claims”). The Federal Securities Law Claims allege, in substance, that defendants made material nondisclosure in the proxy statement about the process leading to the Merger and about the fairness opinion relied upon by ADGE’s Board of Directors in recommending the Merger to shareholders. The State Law Claims assert, in substance, that defendants breached their fiduciary duties in negotiating and approving the Merger, which, plaintiff claims, deprived ADGE’s nonaffiliated shareholders of fair value for their shares.
On July 19, 2017, defendants moved to dismiss the Amended Complaint. In their motion papers, defendants contended that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim.
On February 28, 2018, the parties presented their oral arguments on the defendant's motion to dismiss. On March 2, 2018, the district court rendered its decision, dismissing the Federal Securities Law Claims, but retaining the State Law Claims. The district court exercised supplemental jurisdiction over the State Law Claims and ordered the Defendants to file an answer to the Amended Complaint addressing the State Law Claims. On March 12, 2018, the Defendants filed their first answer. On May 2, 2018, the Defendants filed their amended answer to assert further defenses, and the judge in the district court ordered the parties to hold a mediation session.
On May 21, 2018, defendants filed a motion for judgment on the pleadings. A hearing on the motion for judgment on the pleadings was held on November 2, 2018, and the parties are awaiting a decision on the motion.
On July 6, 2018 plaintiff filed a motion for class certification and plaintiff and defendants filed briefs regarding class certification in August and September 2018. The parties are awaiting a hearing or a decision on the class certification motion if defendants' motion for judgment on the pleadings is not granted.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimed and the likelihood of an unfavorable outcome is not reasonably estimable.
Note 11.
Related Party Transactions
In January of 2017, prior to its acquisition of American DG Energy, the Company purchased a large quantity of used equipment from American DG Energy for approximately
$985,000
. Tecogen has sold a majority of this equipment to specific customers during the previous quarters.
In connection with the acquisition of American DG Energy, the Company assumed a loan from John N. Hatsopoulos, the Company's former Co-Chief Executive Officer and a former Company Director. The loan is in the amount of
$850,000
and bore interest at
6%
, payable quarterly. On May 4, 2018, the Company, through payment of
$919,590
, terminated the loan and all obligations under the loan.
Ultra Emissions Technologies Ltd. ("Ultratek")
By unanimous written consent on October 24, 2017, the shareholders of Ultratek voted to dissolve Ultratek, thus terminating the joint venture agreement dated December 28, 2015 and the license agreement between the Company and Ultratek. This joint venture agreement and license agreement is described in its entirety on the Company's Form 8-K that was filed with the Securities and Exchange Commission on December 31, 2015.
Pursuant to the unanimous shareholder consent dissolving Ultratek, the Company received its full
$2,000,000
investment in Ultratek upon the completion of the liquidation process. Further, upon termination of the license agreement all intellectual property immediately reverted to the Company. Upon dissolution, the Company purchased all of the remaining assets of Ultratek, including new intellectual property that Ultratek developed and other assets, for a total purchase price of
$400,000
.
TTcogen LLC
On May 19, 2016, the Company along with Tedom a.s., a corporation incorporated in the Czech Republic and a European combined heat and power product manufacturer ("Tedom"), entered into a joint venture, where the Company held a
13
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
50%
participating interest and the remaining
50%
interest was held by Tedom. As part of the joint venture, the parties agreed to create a Delaware limited liability company, TTcogen LLC ("TTcogen"), to carry out the business of the venture. Tedom granted TTcogen the sole and exclusive right to market, sell, offer for sale, and distribute certain products as agreed to by the parties throughout the United States. The product offerings of the joint venture expanded the current Tecogen product offerings to the MicroCHP for 35kW to large 4,000kW plants. Tecogen agreed to refer all appropriate sale leads to TTcogen regarding certain products and Tecogen would have the first right to repair and maintain the products sold by TTcogen.
Until the Company acquired the assets of TTcogen, the Company accounted for its interest in TTcogen's operations using the equity method of accounting. Any initial operating losses of TTcogen were borne and funded by Tedom. To the extent any such losses were borne and funded solely by Tedom, the Company did not recognize any portion of such losses given the Company did not guarantee the obligations of the joint venture nor is it committed to provide funding to the joint venture.
On September 22, 2017, the Company provided written notice to Tedom and Tedom USA Inc., a Delaware subsidiary of Tedom (“Tedom USA”) that the Company is exercising its rights under the Joint Venture Agreement dated May 19, 2016 ("JVA") and the TTcogen LLC Operating Agreement ("LLC Operating Agreement"), to termination the JVA and LLC Operating Agreement. This notice began the dissolution process under the LLC Operating Agreement.
On March 27, 2018, the Company entered into a Membership Interest Purchase and Wind-Down Agreement (the “Purchase Agreement”) among the Company, Tedom, Tedom USA, and TTcogen. The Purchase Agreement follows the mutual agreement of the parties to terminate the joint venture between the Company and Tedom that resulted in the creation of TTcogen, and implements the acquisition by the Company of Tedom USA’s
50%
membership interest in TTcogen for a purchase price of
one
dollar, plus
$72,597
, which represents a portion of Tedom USA's initial investment in TTcogen, minus certain adjustments.
The Purchase Agreement also grants TTcogen and the Company the exclusive right to market, sell, and distribute Tedom’s Micro T35 combined heat and power equipment within an agreed territory in the northeastern United States under certain conditions, and limits the Company’s right to sell certain competing products. The Company will provide services for Tedom equipment sold by TTcogen or the Company.
The acquisition of Tedom's
50%
membership interest for
$72,598
was accounted for as an acquisition of assets, and not a business combination, due to the lack of an assembled workforce. The Company adopted the provisions of ASU 2017-01 "Business Combinations - Clarifying the Definition of a Business" at the beginning of 2018, which require, at a minimum, the presence of an input and substantive process that together significantly contribute to the ability to create an output. The lack of an assembled workforce results in the non presence of a substantive process. The following represents the consideration for and the fair value of assets acquired and liabilities assumed recognized at the acquisition date:
|
Cash
|
$
|
442,786
|
|
|
Accounts receivable
|
176,235
|
|
|
|
Unbilled revenue
|
232,540
|
|
|
|
Fixed assets
|
47,508
|
|
|
|
Intangible assets
|
29,607
|
|
|
|
Accounts payable
|
(811,468
|
)
|
|
|
Deferred revenue
|
(44,610
|
)
|
|
|
Cash payable
|
$
|
72,598
|
|
The intangible asset represents contract backlog related to acquired contracts. The value assigned to contract backlog was determined based on the result of a discounted cash flow analysis, which resultant value was capped so as to preclude recognition of any amount in excess of cost after considering the fair values assigned to other assets acquired and liabilities assumed.
Note 12.
Segments
As of
September 30, 2018
, the Company was organized into
two
operating segments through which senior management evaluates the Company’s business. These segments, as described in more detail in Note 1, are organized around the products and services provided to customers and represent the Company’s reportable segments. Prior to the acquisition of ADGE (see Note 4. “Acquisition of American DG Energy Inc.”), the Company’s operations were comprised of a single
14
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
segment. The following table presents information by reportable segment for the three and
nine months ended
September 30, 2018
and
2017
:
|
Products and Services
|
Energy Production
|
Corporate, other and elimination (1)
|
Total
|
|||||||||||||
|
Three months ended September 30, 2018
|
||||||||||||||||
|
Revenue - external customers
|
$
|
6,478,864
|
|
$
|
1,459,820
|
|
$
|
—
|
|
$
|
7,938,684
|
|
||||
|
Intersegment revenue
|
216,993
|
|
—
|
|
(216,993
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
6,695,857
|
|
$
|
1,459,820
|
|
$
|
(216,993
|
)
|
$
|
7,938,684
|
|
||||
|
Gross profit
|
$
|
2,266,307
|
|
$
|
616,791
|
|
$
|
—
|
|
$
|
2,883,098
|
|
||||
|
Identifiable assets
|
$
|
21,311,668
|
|
$
|
12,870,771
|
|
$
|
16,579,095
|
|
$
|
50,761,534
|
|
||||
|
Three months ended September 30, 2017
|
||||||||||||||||
|
Revenue - external customers
|
$
|
6,945,083
|
|
$
|
1,556,115
|
|
$
|
—
|
|
$
|
8,501,198
|
|
||||
|
Intersegment revenue
|
250,525
|
|
—
|
|
(250,525
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
7,195,608
|
|
$
|
1,556,115
|
|
$
|
(250,525
|
)
|
$
|
8,501,198
|
|
||||
|
Gross profit
|
$
|
2,425,114
|
|
$
|
832,917
|
|
$
|
—
|
|
$
|
3,258,031
|
|
||||
|
Identifiable assets
|
$
|
19,179,530
|
|
$
|
16,028,115
|
|
$
|
21,424,270
|
|
$
|
56,631,915
|
|
||||
|
Nine months ended September 30, 2018
|
||||||||||||||||
|
Revenue - external customers
|
$
|
21,816,696
|
|
$
|
4,750,580
|
|
$
|
—
|
|
$
|
26,567,276
|
|
||||
|
Intersegment revenue
|
863,077
|
|
—
|
|
(863,077
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
22,679,773
|
|
$
|
4,750,580
|
|
$
|
(863,077
|
)
|
$
|
26,567,276
|
|
||||
|
Gross profit
|
$
|
7,958,320
|
|
$
|
1,922,175
|
|
$
|
—
|
|
$
|
9,880,495
|
|
||||
|
Identifiable assets
|
$
|
21,311,668
|
|
$
|
12,870,771
|
|
$
|
16,579,095
|
|
$
|
50,761,534
|
|
||||
|
Nine months ended September 30, 2017
|
||||||||||||||||
|
Revenue - external customers
|
$
|
20,608,196
|
|
$
|
2,330,307
|
|
$
|
—
|
|
$
|
22,938,503
|
|
||||
|
Intersegment revenue
|
442,343
|
|
—
|
|
(442,343
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
21,050,539
|
|
$
|
2,330,307
|
|
$
|
(442,343
|
)
|
$
|
22,938,503
|
|
||||
|
Gross profit
|
$
|
7,882,758
|
|
$
|
1,276,566
|
|
$
|
—
|
|
$
|
9,159,324
|
|
||||
|
Identifiable assets
|
$
|
19,179,530
|
|
$
|
16,028,115
|
|
$
|
21,424,270
|
|
$
|
56,631,915
|
|
||||
|
(1) Corporate, intersegment revenue, other and elimination includes various corporate assets.
|
||||||||||||||||
Note 13.
Subsequent Events
The Company has evaluated subsequent events through the date of this filing and determined that, other than the events discussed in
Note 10.
Commitments and Contingencies
, no other material subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
15
TECOGEN INC.
Forward-looking statements are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company’s estimates change, and readers should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2017
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 specially adapted to run on natural gas. In some cases, our customers may choose to have the Company engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes, such as space and portable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and MCHP (mechanical power plus heat).
Our products are sold directly to end-users by our in-house marketing team and by established sales agents and representatives. We have agreements in place with distributors and sales representatives. Our existing customers include hospitals and nursing homes, colleges and universities, health clubs and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries, ice rinks, swimming pools, factories, municipal buildings, military installations and indoor growing facilities. We have an installed base of more than 3,000 units. Our products have long useful lives with proper maintenance. Some of our units have been operating for almost 35 years.
With the acquisition of American DG Energy Inc. ("ADGE") in May 2017, we added an additional source of revenue. Through ADGE, we install, own, operate and maintain complete distributed generation of electricity systems, or DG systems or energy systems, and other complementary systems at customer sites, and sell electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We use a contractually defined formula to multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from each customer's local energy utility, to derive the value of our monthly energy sale, which includes a negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customer's local energy utility that month.
The Company’s operations are comprised of two business segments. Our Products and Services segment ("Segment 1") designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Energy Production segment ("Segment 2") sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
In addition to being a smaller reporting company, Tecogen is an emerging growth company as that term is defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act).
16
TECOGEN INC.
Results of Operations
Third Quarter
of
2018
Compared to
Third Quarter
of
2017
Revenues
Total revenues in the
third
quarter of
2018
were
$7,938,684
compared to
$8,501,198
for the same period in
2017
,
a decrease
of
$562,514
or
6.6%
.
Segment 1 - Products and Services
Product revenues in the
third
quarter of
2018
were
$2,765,094
compared to
$2,425,616
for the same period in
2017
,
an increase
of
$339,478
or
14.0%
. This
increase
was the net of a decrease in cogeneration sales of
$178,307
and an increase in chiller sales of
$517,785
, year over year. We are seeing a marked increase in chiller interest due, in part, to the indoor agriculture market. Service revenues in the
third
quarter of
2018
were $
3,713,770
compared to
$4,519,467
for the same period in
2017
,
a decrease
of
$805,697
or
17.8%
. This
decrease
in the
third
quarter is due to
a decrease
in installation activity of
$761,694
and
a decrease
of
$44,003
in service contract revenues. While service contract revenue remains relatively constant, installation activity can vary widely depending on the status of various projects.
Segment 2 - Energy Production
Energy production revenues in the
third
quarter of
2018
were
$1,459,820
, compared to
$1,556,115
for the same period in
2017
, a decrease of
$96,295
or
6.2%
. Energy production revenue represents energy revenues earned during the quarter by our American DG Energy sites.
Cost of Sales
Cost of sales in the
third
quarter of
2018
was
$5,055,586
compared to
$5,243,167
for the same period in
2017
,
a decrease
of
$187,581
, or
3.6%
.
Segment 1 - Products and Services
Cost of sales for products and services in the
third
quarter of
2018
was
$4,212,557
compared to
$4,519,969
for the same period in
2017
, a decrease of
$307,412
or
6.8%
. During the
third
quarter our overall gross margin for our product and services segment was
35.0%
compared to
34.9%
for the same period in
2017
. The increase is primarily due to a change in product mix.
Segment 2 - Energy Production
Cost of sales for energy production in the
third
quarter of
2018
was
$843,029
compared to
$723,198
for the same period in
2017
, an increase of
$119,831
or
16.6%
. Gross margin for this segment was
42.3%
for the
third
quarter of
2018
compared to
53.5%
for the same period in
2017
. The
third
quarter of 2017 was an unusually high margin quarter.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the quarter ended
September 30, 2018
were
$2,582,600
compared to
$2,427,352
for the same period in
2017
,
an increase
of
$155,248
or
6.4%
. The increase was primarily due to additional insurance costs, employee and employee benefits costs.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the
third
quarter of
2018
were
$581,716
compared to
$503,415
for the same period in
2017
,
an increase
of
$78,301
or
15.6%
. This difference is due to larger sales commissions on chiller sales and increased trade show and sales activities.
17
TECOGEN INC.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses in the quarter ended
September 30, 2018
were
$281,094
compared to
$241,725
for the same period in
2017
,
an increase
of
$39,369
or
16.3%
. This
increase
was due to the Company's continued efforts in connection with the potential commercialization of its Ultera emissions technology for certain non-stationary applications.
Loss from Operations
Loss from operations for the
third
quarter of
2018
was
$562,312
compared to income of
$85,539
for the same period in
2017
, a difference of
$647,851
. The decrease was a result of increased operating expenses and lower gross profit as discussed above. Loss from operations for the
third
quarter of
2018
included non-recurring merger related expenses of
$75,768
in connection with litigation and depreciation and amortization expense on the energy producing sites of
$115,968
.
Other Income (Expense), net
Other expense, net for the
three months ended
September 30, 2018
was
$9,531
compared to
$30,393
for the same period in
2017
. Other income (expense) includes interest and other income and expense of
$4,168
, interest expense of
$33,380
and an unrealized gain from market value fluctuation of our investment in EuroSite Power Inc.'s common stock of
$19,681
for the
third
quarter of
2018
. For the same period in
2017
, interest and other income and expense was
$14,849
and interest expense was
$45,242
.
Provision for state income taxes
The provision for state income taxes in the
third
quarter of
2018
was
$3,815
and represents estimated income tax payments to various states for
2018
.
Noncontrolling Interest
The income attributable to the noncontrolling interest was
$27,379
and
$27,935
for the
three months ended
September 30, 2018
and
2017
, which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC.
Net Income (Loss) Attributable to Tecogen Inc. and Comprehensive Income
Net loss attributable to Tecogen Inc. for the
three months ended
September 30, 2018
was
$603,037
compared to income of
$27,211
for the same period in
2017
, an increase of
$630,248
, year over year. Comprehensive income for the
three months ended
September 30, 2017
was
$66,572
, a difference of
$669,609
when compared to net loss attributable to the Company for the same period in
2018
, due to the unrealized gain on marketable equity securities in addition to the increased operating expenses discussed above.
18
TECOGEN INC.
First
Nine
Months of
2018
Compared to First
Nine
Months of
2017
Revenues
Total revenues for the
first nine months
of
2018
were
$26,567,276
compared to
$22,938,503
for the same period in
2017
, an increase of
$3,628,773
or
15.8%
.
Segment 1 - Products and Services
Product revenues in the
first nine months
of
2018
were
$8,922,257
compared to
$8,349,159
for the same period in
2017
, an increase of
$573,098
or
6.9%
.This increase was a combination of an increase in chiller sales of
$1,833,177
and a decrease in cogeneration sales of
$1,260,079
. We are seeing a marked increase in chiller interest due, in part, to the indoor agriculture market. Service revenues in the
first nine months
of
2018
were
$12,894,439
, compared to
$12,259,037
for the same period in
2017
, an increase of
$635,402
or
5.2%
. This increase in the
first nine months
of
2018
is due to an increase in installation activity of
$785,513
and a decrease of
$150,111
in service contract revenues. While service contract revenue remains relatively constant, installation activity can vary widely depending on the status of various projects.
Segment 2 - Energy Production
Energy production revenues in the
first nine months
of
2018
were
$4,750,580
, compared to
$2,330,307
for the same period in
2017
. The
2017
energy production revenue represents revenues earned after May 19, 2017, the day after the acquisition of American DG Energy through
September 30, 2017
.
Cost of Sales
Cost of sales in the
first nine months
of
2018
was
$16,686,781
compared to
$13,779,179
for the same period in
2017
, an increase of
$2,907,602
, or
21.1%
.
Segment 1 - Products and Services
Cost of sales for products and services in the
first nine months
of
2018
was
$13,858,376
compared to
$12,725,438
for the same period in
2017
, an increase of
$1,132,938
or
8.9%
. During the
first nine months
of
2018
, our product and service gross margin was
36.5%
compared to
38.3%
for the same period in
2017
, a
2%
decrease. The decrease in margin was a result of the increase in lower margin installation revenue.
Segment 2 - Energy Production
Cost of sales for energy production in the
first nine months
of
2018
was
$2,828,405
compared to
$1,053,741
for the same period in
2017
. The
2017
cost of sales represents costs associated with energy revenues earned from May 19, 2017, the date after acquisition of American DG Energy through
September 30, 2017
. During this period our gross margin for energy production was
40.5%
for
2018
compared to
54.8%
for
2017
, with 2017 having an unusually high margin.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the
nine months ended
September 30, 2018
were
$8,122,856
compared to
$7,042,500
for the same period in
2017
,
an increase
of
$1,080,356
or
15.3%
. The
increase
was mainly due to the increased salaries and overhead added as a result of the merger with ADGE in May 2017, with the
nine months ended
September 30, 2018
including a full nine months of ADGE revenue and expense whereas the same period in
2017
included only approximately four and a half months.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the
nine months ended
September 30, 2018
were
$1,892,229
compared to
$1,558,378
for the same period in
2017
,
an increase
of
$333,851
or
21.4%
. The
increase
is due to a larger sales team and increased trade show and sales activities.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the
nine months ended
September 30, 2018
were
$993,102
compared to
$641,064
for the same period in
2017
,
an increase
of
$352,038
or
54.9%
. This
increase
is due to the Company's continued
19
TECOGEN INC.
efforts in connection with the potential commercialization of its Ultera emissions technology for certain non-stationary applications.
Loss from Operations
Loss from operations for the
nine months ended
September 30, 2018
was
$1,127,692
compared to a loss of
$82,618
for the same period in
2017
, an increase of
$1,045,074
. In addition to the expenses discussed above, loss from operations for the
nine months ended
September 30, 2018
included depreciation and amortization expense on the energy producing sites amounting to
$346,537
.
Other Income (Expense), net
Other expense, net for the
nine months ended
September 30, 2018
was
$107,311
compared to
$93,993
for the same period in
2017
. Other income (expense) includes interest and other income of
$7,926
, interest expense of
$56,195
, and unrealized loss on investment securities of
$59,042
. For the same period in
2017
, interest and other income was
$21,033
and interest expense was
$115,026
. Unrealized loss on investment securities of
$184,998
was included in other comprehensive loss in
2017
in accordance with Generally Accepted Accounting Principles for that year. As of January 1, 2018, the Company presents such unrealized holding gains or losses in the other income (expense) section of the statement of operations.
Noncontrolling Interest
The income attributable to the noncontrolling interest was
$58,946
for the
nine months ended
September 30, 2018
which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC. For the same period in
2017
, income attributable to noncontrolling interest was
$44,933
.
Net Loss Attributable to Tecogen Inc
Net loss attributable to Tecogen for the
nine months ended
September 30, 2018
was
$1,336,628
compared to
$221,544
for the same period in
2017
, an increase of
$1,115,084
. Comprehensive loss for the
nine months ended
September 30, 2017
was
$406,542
, a difference of
$930,086
when compared to net loss attributable to Tecogen Inc for the same period in
2018
, due to the unrealized loss on marketable equity securities in addition to the increased operating expenses discussed above.
Other Comprehensive Loss
The unrealized loss on securities of
$184,998
for the
nine months ended
September 30, 2017
represents a market fluctuation impacting the fair value of American DG Energy's remaining common stock ownership in its former partially owned subsidiary, EuroSite Power Inc. as of
September 30, 2017
. In accordance with an accounting standard update, unrealized holding gains and losses, as of January 1, 2018, are no longer accounted for as other comprehensive income or loss, but instead are included in the other income (expense) section of the statement of operations.
Liquidity and Capital Resources
Consolidated working capital at
September 30, 2018
was
$11,584,670
compared to
$12,952,537
at
December 31, 2017
,
a decrease
of
$1,367,867
. Included in working capital were cash and cash equivalents of
$136,717
at
September 30, 2018
, compared to
$1,673,072
in cash and cash equivalents at
December 31, 2017
,
a decrease
of
$1,536,355
. The decrease in working capital and cash was the result of the pay off of related party debt, longer collection periods and pre-buying for production.
Cash used in operating activities for the
nine months ended
September 30, 2018
was
$2,356,680
compared to
$1,996,871
for the same period in
2017
. Our accounts receivable balance
increased
to
$11,548,663
at
September 30, 2018
compared to
$9,536,673
at
December 31, 2017
, using
$1,840,150
of cash due to timing of billing, shipments, and collections. In addition, inventory and unbilled revenue increased using
$853,262
and
$245,892
, respectively.
Accounts payable
increased
to
$5,716,426
as of
September 30, 2018
from
$5,095,285
at
December 31, 2017
, with $884 thousand purchased using $
262,925
, in cash flow from operations. Accrued expenses
increased
to
$2,196,921
as of
September 30, 2018
from
$1,416,976
as of
December 31, 2017
,
providing
$779,945
of cash from operations. The Company expects accounts payable and accrued expenses to fluctuate with routine changes in operations.
20
TECOGEN INC.
During the
first nine months of 2018
, our investing activities used
$101,868
of cash and included the acquisition of TTcogen LLC of
$442,746
, offset by purchases of property and equipment of
$273,814
, expenditures related to purchases of intangible assets of
$203,648
and cash paid for certain expenses associated with TTcogen LLC of
$900
.
During the
first nine months of 2018
, our financing activities provided
$922,193
compared to
$128,918
for the same period in
2017
. Financing activities for the
first nine months of 2018
included proceeds from the revolving line of credit of
$12,550,590
offset by payments on this line of credit of
$10,696,691
, debt issuance costs in connection with the revolving line of
$145,011
and the repayment of the loan due to related party of
$850,000
plus accrued interest.
As of
September 30, 2018
, the Company's backlog of product and installation projects, excluding service contracts, was
$15.7 million
, consisting of
$7.5 million
of purchase orders received by us and
$8.2 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.
Significant Accounting Policies and Critical Estimates
The Company’s significant accounting policies are discussed in the Notes to its respective Consolidated Financial Statements in its Annual Report on Form 10-K. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in the above notes and in the respective Annual Report.
Significant New Accounting Standards or Updates Not Yet Effective
Except for the updates to the Company's revenue recognition policy for the adoption of ASU 2014-09,
Revenue from Contracts with Customers (Topic 606),
the Company's critical accounting policies have remained consistent as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 21, 2018.
Revenue Recognition - Tecogen formally adopted ASU 2014-09,
Revenue from Contracts with Customers
effective January 1, 2018,
however, the adoption of the new revenue standard did not have an impact on the Company’s revenue recognition policy as performance obligations are satisfied in a similar recognition pattern.
See Note 1,
Description of Business and Basis of Presentation
, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Seasonality
We expect that the majority of our heating system sales will be operational for the winter and the majority of our chilling system sales will be operational for the summer. Our cogeneration sales are not generally affected by the seasons. Our service team does experience higher demand in the warmer months when cooling is required. These chiller units are generally shut down in the winter and started up again in the spring. This chiller "busy season' for the service team generally runs from May through the end of September.
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.
Not applicable.
21
TECOGEN INC.
Management’s Evaluation of Disclosure Controls and Procedures:
The Company maintains "disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company's management, including our principal executive officers and principal accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Chief Executive Officer and Chief Accounting Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, have concluded that our disclosure controls and procedures were not effective due to a material weakness with respect to a small number of individuals dealing with general controls over information technology. Management will continue to evaluate the above weaknesses. The Company is taking certain steps to remediate the weaknesses as resources become available.
Changes in Internal Control over Financial Reporting:
During the last half of 2017 and the first three quarters of 2018 the Company has been in the process of implementing a new computer system to remediate its material weakness with respect to the small number of individuals dealing with general controls over information technology. Management expects to have partially implemented this system by year end 2018.
The Company is a party to a pending action in the United States District Court for the District of Massachusetts, described below, related to the merger with ADGE.
Massachusetts Superior Court Action
On or about February 6, 2017, ADGE, John Hatsopoulos, George N. Hatsopoulos, Charles T. Maxwell, Deanna M. Petersen, Christine Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen, and the wholly owned subsidiary of the Company that merged with ADGE ("Merger Sub") were served with a Verified Complaint by William C. May ("May"), individually and on behalf of the other shareholders of ADGE as a class. The action was commenced in the Business Litigation Session of the Superior Court of the Commonwealth of Massachusetts, Civil Action No. 17-0390. The complaint alleged class action claims arising out of the proposed Merger. On May 31, 2017, May voluntarily dismissed the action and consolidated his claims with the pending federal action in the United States District Court for the District of Massachusetts, described below. If the complaint in the federal court is dismissed, it is possible that May or another plaintiff will recommence an action in state court with similar claims to those asserted by May.
United States District Court Action
On or about February 15, 2017, a lawsuit was filed in the United States District Court for the District of Massachusetts by Lee Vardakas (“Vardakas”), individually and on behalf of other stockholders of ADGE, naming ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Benjamin Locke, Charles T. Maxwell, Deanne M. Petersen, Christine M. Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants. The action is captioned
Vardakas v. American DG Energy, Inc.
, Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
Following the consummation of the Merger (and the appointment of May, from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint discontinued the claims against Cassel Salpeter & Co., LLC but asserted against the remaining defendants claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 14a-9; claims against certain defendants for control person liability under § 20(a) of the Exchange Act (collectively, the “Federal Securities Law Claims”); and common law claims for breach of fiduciary duty and aiding and abetting (the “State Law Claims”). The Federal Securities Law Claims allege, in substance, that defendants made material nondisclosure in the proxy statement about the process leading to the Merger and about the fairness opinion relied upon by ADGE’s Board of Directors in recommending the Merger to shareholders. The State Law Claims assert, in substance, that defendants breached their fiduciary duties in negotiating and approving the Merger, which, plaintiff claims, deprived ADGE’s nonaffiliated shareholders of fair value for their shares.
22
TECOGEN INC.
On July 19, 2017, defendants moved to dismiss the Amended Complaint. In their motion papers, defendants contended that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim.
On February 28, 2018 the parties presented their oral arguments on the defendant's motion to dismiss. On March 2, 2018 the district court rendered its decision, dismissing the Federal Securities Law Claims, but retaining the State Law Claims. The district court exercised supplemental jurisdiction over the State Law Claims and ordered the Defendants to file an answer to the Amended Complaint addressing the State Law Claims. On March 12, 2018 the Defendants filed their first answer. On May 2, 2018, the Defendants filed their amended answer to assert further defenses, and the judge in the district court ordered the parties to hold a mediation session. The parties participated in mediation on June 19, 2018 and did not reach agreement regarding settlement.
On May 21, 2018, defendants filed a motion for judgment on the pleadings. A hearing on the motion for judgment on the pleadings was held on November 2, 2018, and the parties are awaiting a decision on the motion.
On July 6, 2018 plaintiff filed a motion for class certification and plaintiff and defendants filed briefs regarding class certification in August and September 2018. The parties are awaiting a hearing or a decision on the class certification motion if defendants' motion for judgment on the pleadings is not granted.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimed and the likelihood of an unfavorable outcome is not reasonably estimable.
Except as set forth above, as of the date of this filing the Company is currently not a party to any legal or administrative proceedings material to the Company's financial statements and is not aware of any pending or threatened legal or administrative proceeding that is material to the Company's financial statement.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2017
. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
23
TECOGEN INC.
|
Exhibit No.
|
Description of Exhibit
|
|
2.1
|
|
|
2.2
|
|
|
3.1
|
|
|
3.2
|
|
|
4.1
|
|
|
4.3+
|
|
|
10.1+
|
|
|
10.7
|
|
|
10.8
|
|
|
10.13
|
|
|
10.40+
|
|
|
10.41
|
|
|
10.42+
|
|
|
10.43
|
|
|
10.44
|
|
|
10.45
|
|
|
31.1*
|
|
|
31.2*
|
|
|
32.1*
|
|
|
101.INS**
|
XBRL Instance Document
|
|
101.SCH**
|
XBRL Taxonomy Extension Schema
|
|
100.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase
|
24
TECOGEN INC.
|
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
|
25
TECOGEN INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, on
November 13, 2018
.
|
|
TECOGEN INC.
|
|
|
|
(Registrant)
|
|
|
|
||
|
By:
|
/s/ Benjamin M. Locke
|
|
|
Chief Executive Officer
|
||
|
(Principal Executive Officer)
|
||
|
|
||
|
|
By:
|
/s/ Bonnie J. Brown
|
|
|
Chief Accounting Officer, Treasurer and Secretary
|
|
|
|
(Principal Accounting Officer)
|
|
26
TABLE OF CONTENTS
Part I - Financial InformationItem 1 - Financial StatementsNote 1. Description Of Business and Basis Of PresentationNote 2. RevenueNote 3. Income (loss) Per Common ShareNote 4. Acquisition Of American Dg Energy IncNote 5. Property, Plant and EquipmentNote 6. Intangible Assets and Liabilities Other Than GoodwillNote 7. Stock-based CompensationNote 8. Fair Value MeasurementsNote 9. Revolving Line Of Credit, BankNote 10. Commitments and ContingenciesNote 11. Related Party TransactionsNote 12. SegmentsNote 13. Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 6. Exhibits