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
June 30, 2019
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. (NASDAQ:TGEN)
(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
o
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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, July 31, 2019
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Common Stock, $0.001 par value
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24,843,261
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TECOGEN INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED
JUNE 30, 2019
TABLE OF CONTENTS
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PART I
- FINANCIAL INFORMATION
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||
References in this Form 10-Q to "we", "us", "our"', the "Company" and "Tecogen" refers to Tecogen Inc. and its consolidated subsidiaries, unless otherwise noted.
TECOGEN INC.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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June 30, 2019
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December 31, 2018
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|||||
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ASSETS
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|||||||
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Current assets:
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|||
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Cash and cash equivalents
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$
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1,087,970
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$
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272,552
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Accounts receivable, net
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11,628,702
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14,176,452
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|||
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Unbilled revenue
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5,829,365
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4,893,259
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|||
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Inventory, net
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6,990,697
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6,294,862
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|||
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Due from related party
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—
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9,405
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|||
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Prepaid and other current assets
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640,516
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722,042
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|||
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Total current assets
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26,177,250
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26,368,572
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Property, plant and equipment, net
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3,763,500
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11,273,115
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|||
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Right of use assets
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2,421,581
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—
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|||
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Intangible assets, net
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1,554,634
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2,893,990
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|||
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Goodwill
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5,281,867
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8,975,065
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|||
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Other assets
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557,544
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393,651
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|||
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TOTAL ASSETS
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$
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39,756,376
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$
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49,904,393
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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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—
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$
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2,009,435
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Accounts payable
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6,234,846
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7,153,330
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|||
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Accrued expenses
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2,061,601
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1,528,014
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Deferred revenue
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1,832,493
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2,507,541
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Lease obligations, current
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520,667
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—
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|||
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Total current liabilities
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10,649,607
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13,198,320
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Long-term liabilities:
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Deferred revenue, net of current portion
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96,937
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2,375,700
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Lease obligations, long-term
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1,900,914
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—
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Unfavorable contract liability, net
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2,754,497
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6,292,599
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|||
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Total liabilities
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15,401,955
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21,866,619
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|||
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Commitments and contingencies (Note 11)
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Stockholders’ equity:
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Tecogen Inc. stockholders’ equity:
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Common stock, $0.001 par value; 100,000,000 shares authorized; 24,840,806 and 24,824,746 issued and outstanding at June 30, 2019 and December 31, 2018, respectively
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24,841
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24,825
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Additional paid-in capital
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56,525,590
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56,427,928
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Accumulated deficit
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(32,307,301
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)
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(28,670,095
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)
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Total Tecogen Inc. stockholders’ equity
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24,243,130
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27,782,658
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Noncontrolling interest
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111,291
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255,116
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Total stockholders’ equity
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24,354,421
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28,037,774
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|||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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39,756,376
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$
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49,904,393
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The accompanying notes are an integral part of these consolidated financial statements.
1
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended
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|||||||
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June 30, 2019
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June 30, 2018
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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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2,445,448
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$
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2,483,657
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Services
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4,843,649
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4,461,283
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Energy production
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578,299
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1,508,225
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Total revenues
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7,867,396
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8,453,165
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|||
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Cost of sales
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|||||||
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Products
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1,546,752
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1,491,810
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Services
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2,530,175
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2,962,040
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|||
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Energy production
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364,554
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839,721
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|||
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Total cost of sales
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4,441,481
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5,293,571
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|||
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Gross profit
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3,425,915
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3,159,594
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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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2,683,252
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2,750,705
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|||
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Selling
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704,700
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635,396
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|||
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Research and development
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372,545
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409,779
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|||
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Total operating expenses
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3,760,497
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3,795,880
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|||
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Loss from operations
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(334,582
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)
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(636,286
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)
|
|||
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Other income (expense)
|
|||||||
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Interest income
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66
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4,830
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|
|||
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Interest expense
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(17,005
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)
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(9,802
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)
|
|||
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Unrealized gain (loss) on investment securities
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19,681
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(59,042
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)
|
|||
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Total other income (expense), net
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2,742
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(64,014
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)
|
|||
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Loss before provision for state income taxes
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(331,840
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)
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(700,300
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)
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|||
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Provision for state income taxes
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15,955
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38,864
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Consolidated net loss
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(347,795
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)
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(739,164
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)
|
|||
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Income attributable to the noncontrolling interest
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(9,334
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)
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(15,186
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)
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|||
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Net loss attributable to Tecogen Inc.
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$
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(357,129
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)
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$
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(754,350
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)
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Net loss per share - basic and diluted
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$
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(0.01
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)
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$
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(0.03
|
)
|
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Weighted average shares outstanding - basic and diluted
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24,826,311
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|
24,818,459
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|
|||
The accompanying notes are an integral part of these consolidated financial statements.
2
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
Six Months Ended
|
|||||||
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June 30, 2019
|
June 30, 2018
|
|||||
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Revenues
|
|||||||
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Products
|
$
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5,469,974
|
|
$
|
6,157,163
|
|
|
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Services
|
8,754,945
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|
9,180,669
|
|
|||
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Energy production
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1,819,108
|
|
3,290,760
|
|
|||
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Total revenues
|
16,044,027
|
|
18,628,592
|
|
|||
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Cost of sales
|
|||||||
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Products
|
3,490,214
|
|
3,900,925
|
|
|||
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Services
|
5,004,708
|
|
5,744,894
|
|
|||
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Energy production
|
1,164,431
|
|
1,985,376
|
|
|||
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Total cost of sales
|
9,659,353
|
|
11,631,195
|
|
|||
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Gross profit
|
6,384,674
|
|
6,997,397
|
|
|||
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Operating expenses
|
|||||||
|
General and administrative
|
5,338,663
|
|
5,540,255
|
|
|||
|
Selling
|
1,397,954
|
|
1,310,514
|
|
|||
|
Research and development
|
717,627
|
|
712,009
|
|
|||
|
Gain on sale of assets
|
(1,081,049
|
)
|
—
|
|
|||
|
Goodwill impairment
|
3,693,198
|
|
—
|
|
|||
|
Total operating expenses
|
10,066,393
|
|
7,562,778
|
|
|||
|
Loss from operations
|
(3,681,719
|
)
|
(565,381
|
)
|
|||
|
Other income (expense)
|
|||||||
|
Interest income
|
598
|
|
3,758
|
|
|||
|
Interest expense
|
(45,031
|
)
|
(22,815
|
)
|
|||
|
Unrealized loss on investment securities
|
(19,680
|
)
|
(78,723
|
)
|
|||
|
Total other expense, net
|
(64,113
|
)
|
(97,780
|
)
|
|||
|
Loss before provision for state income taxes
|
(3,745,832
|
)
|
(663,161
|
)
|
|||
|
Provision for state income taxes
|
7,786
|
|
38,864
|
|
|||
|
Consolidated net loss
|
(3,753,618
|
)
|
(702,025
|
)
|
|||
|
(Income) loss attributable to the noncontrolling interest
|
116,412
|
|
(31,567
|
)
|
|||
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Net loss attributable to Tecogen Inc.
|
$
|
(3,637,206
|
)
|
(733,592
|
)
|
||
|
Net loss per share - basic and diluted
|
$
|
(0.15
|
)
|
$
|
(0.03
|
)
|
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|
Weighted average shares outstanding - basic and diluted
|
24,822,555
|
|
24,811,034
|
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
3
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three and
Six Months Ended
June 30, 2019
and
2018
(unaudited)
|
Tecogen Inc. Stockholders
|
|
|
||||||||||||||||||||
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Three months ended June 30, 2019
|
Common Stock Shares
|
Common
Stock 0.001 Par Value |
Additional
Paid-In Capital |
Accumulated
Deficit |
Noncontrolling
Interest |
Total
|
||||||||||||||||
|
Balance at March 31, 2019
|
24,834,746
|
|
$
|
24,835
|
|
$
|
56,477,342
|
|
$
|
(31,950,172
|
)
|
$
|
129,370
|
|
$
|
24,681,375
|
|
|||||
|
Exercise of stock options
|
6,060
|
|
6
|
|
8,750
|
|
—
|
|
—
|
|
8,756
|
|
||||||||||
|
Stock issuance costs
|
—
|
|
—
|
|
(400
|
)
|
—
|
|
—
|
|
(400
|
)
|
||||||||||
|
Stock based compensation expense
|
—
|
|
—
|
|
39,898
|
|
—
|
|
—
|
|
39,898
|
|
||||||||||
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Distributions to non-controlling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
(27,413
|
)
|
(27,413
|
)
|
||||||||||
|
Net income (loss)
|
—
|
|
—
|
|
—
|
|
(357,129
|
)
|
9,334
|
|
(347,795
|
)
|
||||||||||
|
Balance at June 30, 2019
|
24,840,806
|
|
$
|
24,841
|
|
$
|
56,525,590
|
|
$
|
(32,307,301
|
)
|
$
|
111,291
|
|
$
|
24,354,421
|
|
|||||
|
Tecogen Inc. Stockholders
|
|
|
||||||||||||||||||||
|
Six months ended June 30, 2019
|
Common Stock Shares
|
Common
Stock 0.001 Par Value |
Additional
Paid-In Capital |
Accumulated
Deficit |
Noncontrolling
Interest |
Total
|
||||||||||||||||
|
Balance at December 31, 2018
|
24,824,746
|
|
$
|
24,825
|
|
$
|
56,427,928
|
|
$
|
(28,670,095
|
)
|
$
|
255,116
|
|
$
|
28,037,774
|
|
|||||
|
Exercise of stock options
|
16,060
|
|
16
|
|
20,740
|
|
—
|
|
—
|
|
20,756
|
|
||||||||||
|
Stock issuance costs
|
—
|
|
—
|
|
(1,011
|
)
|
—
|
|
—
|
|
(1,011
|
)
|
||||||||||
|
Stock based compensation expense
|
—
|
|
—
|
|
77,933
|
|
—
|
|
—
|
|
77,933
|
|
||||||||||
|
Distributions to non-controlling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
(27,413
|
)
|
(27,413
|
)
|
||||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(3,637,206
|
)
|
(116,412
|
)
|
(3,753,618
|
)
|
||||||||||
|
Balance at June 30, 2019
|
24,840,806
|
|
$
|
24,841
|
|
$
|
56,525,590
|
|
$
|
(32,307,301
|
)
|
$
|
111,291
|
|
$
|
24,354,421
|
|
|||||
|
Tecogen Inc. Stockholders
|
|
|
||||||||||||||||||||
|
Three months ended June 30, 2018
|
Common Stock Shares
|
Common
Stock 0.001 Par Value |
Additional
Paid-In Capital |
Accumulated
Deficit |
Noncontrolling
Interest |
Total
|
||||||||||||||||
|
Balance at March 31, 2018
|
24,807,096
|
|
$
|
24,807
|
|
$
|
56,264,398
|
|
$
|
(22,940,804
|
)
|
$
|
448,654
|
|
$
|
33,797,055
|
|
|||||
|
Sale of common stock
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||||||||||
|
Exercise of stock options
|
—
|
|
12
|
|
15,047
|
|
—
|
|
—
|
|
15,059
|
|
||||||||||
|
Stock issuance costs
|
—
|
|
—
|
|
(347
|
)
|
—
|
|
—
|
|
(347
|
)
|
||||||||||
|
Distributions to Non-controlling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
(10,962
|
)
|
(10,962
|
)
|
||||||||||
|
Stock based compensation expense
|
—
|
|
—
|
|
38,062
|
|
—
|
|
—
|
|
38,062
|
|
||||||||||
|
Net income (loss)
|
—
|
|
—
|
|
—
|
|
(754,350
|
)
|
15,186
|
|
(739,164
|
)
|
||||||||||
|
Balance at June 30, 2018
|
24,807,096
|
|
$
|
24,819
|
|
$
|
56,317,160
|
|
$
|
(23,695,154
|
)
|
$
|
452,878
|
|
$
|
33,099,703
|
|
|||||
|
Tecogen Inc. Stockholders
|
|
|
||||||||||||||||||||||||
|
Six months ended June 30, 2018
|
Common Stock Shares
|
Common
Stock 0.001 Par Value |
Additional
Paid-In Capital |
Accumulated Other Comprehensive Loss
|
Accumulated
Deficit |
Noncontrolling
Interest |
Total
|
|||||||||||||||||||
|
Balance at December 31, 2017
|
24,766,892
|
|
$
|
24,767
|
|
$
|
56,176,330
|
|
$
|
(165,317
|
)
|
$
|
(22,796,246
|
)
|
$
|
455,611
|
|
$
|
33,695,145
|
|
||||||
|
Reclassification of Accumulated Other Comprehensive Loss
|
—
|
|
—
|
|
—
|
|
165,317
|
|
(165,317
|
)
|
—
|
|
—
|
|
||||||||||||
|
Exercise of stock options
|
40,204
|
|
52
|
|
63,252
|
|
—
|
|
—
|
|
—
|
|
63,304
|
|
||||||||||||
|
Stock issuance costs
|
—
|
|
—
|
|
(900
|
)
|
—
|
|
—
|
|
—
|
|
(900
|
)
|
||||||||||||
|
Distributions to Non-controlling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(34,299
|
)
|
(34,299
|
)
|
||||||||||||
|
Stock based compensation expense
|
—
|
|
—
|
|
78,478
|
|
—
|
|
—
|
|
—
|
|
78,478
|
|
||||||||||||
|
Net income (loss)
|
—
|
|
—
|
|
—
|
|
—
|
|
(733,591
|
)
|
31,566
|
|
(702,025
|
)
|
||||||||||||
|
Balance at June 30, 2018
|
24,807,096
|
|
$
|
24,819
|
|
$
|
56,317,160
|
|
$
|
—
|
|
$
|
(23,695,154
|
)
|
$
|
452,878
|
|
$
|
33,099,703
|
|
||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
TECOGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Six Months Ended
|
|||||||
|
|
June 30, 2019
|
June 30, 2018
|
|||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Consolidated net loss
|
$
|
(3,753,618
|
)
|
$
|
(702,025
|
)
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|||||||
|
Depreciation, accretion and amortization, net
|
267,232
|
|
386,250
|
|
|||
|
Gain on contract termination
|
—
|
|
(124,732
|
)
|
|||
|
Provision on inventory reserve
|
—
|
|
1,000
|
|
|||
|
Stock-based compensation
|
77,933
|
|
78,478
|
|
|||
|
Goodwill impairment
|
3,693,198
|
|
—
|
|
|||
|
(Gain) loss on sale of assets
|
(1,081,049
|
)
|
13,343
|
|
|||
|
Provision for losses on accounts receivable
|
29,849
|
|
4,395
|
|
|||
|
Non-cash interest expense
|
12,087
|
|
—
|
|
|||
|
Changes in operating assets and liabilities, net of effects of acquisitions
|
|||||||
|
(Increase) decrease in:
|
|||||||
|
Accounts receivable
|
2,517,901
|
|
(1,732,029
|
)
|
|||
|
Unbilled revenue
|
(936,106
|
)
|
(345,324
|
)
|
|||
|
Inventory
|
(695,835
|
)
|
(403,785
|
)
|
|||
|
Due from related party
|
9,405
|
|
585,492
|
|
|||
|
Prepaid expenses and other current assets
|
(15,282
|
)
|
(83,840
|
)
|
|||
|
Other non-current assets
|
59,683
|
|
74,424
|
|
|||
|
Increase (decrease) in:
|
|||||||
|
Accounts payable
|
(918,484
|
)
|
(1,017,610
|
)
|
|||
|
Accrued expenses and other current liabilities
|
(380,351
|
)
|
529,325
|
|
|||
|
Deferred revenue
|
(966,776
|
)
|
247,669
|
|
|||
|
Interest payable, related party
|
—
|
|
(52,265
|
)
|
|||
|
Net cash used in operating activities
|
(2,080,213
|
)
|
(2,541,234
|
)
|
|||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases of property and equipment
|
(52,444
|
)
|
(149,453
|
)
|
|||
|
Proceeds from sale of assets
|
5,000,000
|
|
3,606
|
|
|||
|
Purchases of intangible assets
|
(22,738
|
)
|
(149,264
|
)
|
|||
|
Cash acquired in asset acquisition
|
—
|
|
442,786
|
|
|||
|
Expenses associated with asset acquisition
|
—
|
|
(900
|
)
|
|||
|
Payment of stock issuance costs
|
(1,011
|
)
|
—
|
|
|||
|
Distributions to noncontrolling interest
|
(27,413
|
)
|
(34,300
|
)
|
|||
|
Net cash provided by investing activities
|
4,896,394
|
|
112,475
|
|
|||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Payments on revolving line of credit, net
|
(2,021,519
|
)
|
2,702,828
|
|
|||
|
Payments for debt issuance costs
|
—
|
|
(145,011
|
)
|
|||
|
Proceeds from the exercise of stock options
|
20,756
|
|
63,305
|
|
|||
|
Payment on loan due to related party
|
—
|
|
(850,000
|
)
|
|||
|
Net cash provided by (used in) financing activities
|
(2,000,763
|
)
|
1,771,122
|
|
|||
|
Change in cash and cash equivalents
|
815,418
|
|
(657,637
|
)
|
|||
|
Cash and cash equivalents, beginning of the period
|
272,552
|
|
1,673,072
|
|
|||
|
Cash and cash equivalents, end of the period
|
$
|
1,087,970
|
|
$
|
1,015,435
|
|
|
|
Supplemental disclosures of cash flows information:
|
|
|
|
|
|||
|
Cash paid for interest
|
$
|
23,551
|
|
$
|
79,079
|
|
|
|
Cash paid for taxes
|
$
|
28,524
|
|
$
|
38,864
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
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.
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
six months ended
June 30, 2019
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
.
The condensed consolidated balance sheet at
December 31, 2018
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, 2018
.
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.
6
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Significant New Accounting Standards Adopted this Period
Cloud Computing Arrangement.
During the third quarter of 2018, the Company early adopted ASU 2018-15 "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract" as it is currently undertaking implementation of a new enterprise resource planning system (ERP). The Company opted to apply the provisions of ASU 2018-15 on a prospective basis. The primary effect of the provisions is to capitalize certain implementation costs amounting to
$85,372
during the application development phase in 2018 and to amortize those costs prospectively over the life of the agreement rather than expense them currently as general and administrative costs.
Leases.
On January 1, 2019, we adopted the guidance under ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”) under the cumulative-effect method of transition where comparative information has not been restated and continues to be reported under the standards in effect for those periods. The adoption did not result in any cumulative-effect adjustment to beginning retained earnings.
The Company has elected certain practical expedients upon adoption and therefore has not reassessed whether any expired or existing contracts contain leases, has not reassessed the lease classification for any expired or existing leases and has not reassessed initial direct costs for any existing leases.
The new standard requires lessees to recognize most leases on their balance sheets as a right-of-use ("ROU") asset with a corresponding lease liability. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
As of
June 30, 2019
,
$2.42 million
was included in ROU assets
$0.52 million
in Lease obligations, current, and
$1.90 million
in Lease obligations, long-term, on the Condensed Consolidated Balance Sheets as a result of the new lease standard. There was no impact on our Condensed Consolidated Statements of Operations and Comprehensive Income or Condensed Consolidated Statements of Cash Flows. See
Note 7.
Leases
for further discussion.
Significant New Accounting Standards or Updates Not Yet Effective
Measurement of Credit Losses on Financial Instruments.
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments
. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about an entity's expected credit losses on financial instruments and other commitments to extend credit at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19,
Codification Improvements to Topic 326, Financial Instruments - Credit Losses
, for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 will be effective for the Company's fiscal year beginning January 1, 2020, using a modified retrospective approach. Early adoption is permitted. The Company is currently assessing the impact this ASU will have on its condensed consolidated financial statements.
Note 2.
Revenue
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services or energy to customers.
Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. The Company has elected to exclude from revenue any value add sales and other taxes which it collects concurrent with revenue-producing activities. These accounting 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.
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.
7
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table further disaggregates our revenue by major source by segment for the three and
six months ended
June 30, 2019
and
2018
.
|
Three Months Ended
|
June 30, 2019
|
||||||||||
|
Products and Services
|
Energy Production
|
Total
|
|||||||||
|
Products
|
$
|
2,445,448
|
|
$
|
—
|
|
$
|
2,445,448
|
|
||
|
Installation services
|
2,291,027
|
|
—
|
|
2,291,027
|
|
|||||
|
Maintenance services
|
2,552,622
|
|
—
|
|
2,552,622
|
|
|||||
|
Energy production
|
—
|
|
578,299
|
|
578,299
|
|
|||||
|
Total revenue
|
$
|
7,289,097
|
|
$
|
578,299
|
|
$
|
7,867,396
|
|
||
|
Six Months Ended
|
June 30, 2019
|
||||||||||
|
Products and Services
|
Energy Production
|
Total
|
|||||||||
|
Products
|
$
|
5,469,974
|
|
$
|
—
|
|
$
|
5,469,974
|
|
||
|
Installation services
|
3,846,891
|
|
—
|
|
3,846,891
|
|
|||||
|
Maintenance services
|
4,908,054
|
|
—
|
|
4,908,054
|
|
|||||
|
Energy production
|
—
|
|
1,819,108
|
|
1,819,108
|
|
|||||
|
Total revenue
|
$
|
14,224,919
|
|
$
|
1,819,108
|
|
$
|
16,044,027
|
|
||
|
Three Months Ended
|
June 30, 2018
|
||||||||||
|
Products and Services
|
Energy Production
|
Total
|
|||||||||
|
Products
|
$
|
2,483,657
|
|
$
|
—
|
|
$
|
2,483,657
|
|
||
|
Installation services
|
2,296,606
|
|
—
|
|
2,296,606
|
|
|||||
|
Maintenance services
|
2,164,677
|
|
—
|
|
2,164,677
|
|
|||||
|
Energy production
|
1,508,225
|
|
1,508,225
|
|
|||||||
|
Total revenue
|
$
|
6,944,940
|
|
$
|
1,508,225
|
|
$
|
8,453,165
|
|
||
|
Six Months Ended
|
June 30, 2018
|
||||||||||
|
Products
|
$
|
6,157,163
|
|
$
|
—
|
|
$
|
6,157,163
|
|
||
|
Installation services
|
4,698,404
|
|
—
|
|
4,698,404
|
|
|||||
|
Maintenance services
|
4,482,265
|
|
—
|
|
4,482,265
|
|
|||||
|
Energy production
|
3,290,760
|
|
3,290,760
|
|
|||||||
|
Total revenue
|
$
|
15,337,832
|
|
$
|
3,290,760
|
|
$
|
18,628,592
|
|
||
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
8
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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.
9
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Contract Balances
The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled revenue (contract assets) and deferred revenue, consisting of customer deposits and billings in excess of revenue recognized (contract liabilities) on the Consolidated Condensed Balance Sheets.
Revenue recognized during the quarter ended
June 30, 2019
that was included in unbilled revenue at the beginning of the period was approximately
$1.4 million
. Approximately
$3.7 million
was billed in this period that had been recognized as revenue in previous periods.
Revenue recognized during the quarter ended
June 30, 2019
that was included in deferred revenue at the beginning of the period was approximately
$1.4 million
.
The decrease in the deferred revenue balance during the quarter ended
June 30, 2019
is primarily the result of of revenue recognized during the period that was included in the deferred revenue balance at the beginning of the period, offset by cash payments of
$379 thousand
received in advance of satisfying performance obligations.
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year, excluding certain maintenance contracts and all energy production contracts where a direct measurement of the value to the customer is used as a method of measuring progress towards completion of our performance obligation. Exclusion of these remaining performance obligations is due in part to the inability to quantify values based on unknown future levels of delivery and in some cases rates used to bill customers. Remaining performance obligations therefore consist of unsatisfied or partially satisfied performance obligations related to fixed price maintenance contracts and installation contracts.
As of
June 30, 2019
, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately
$20.4 million
. The Company expects to recognize revenue of approximately
93%
of the remaining performance obligations over the next 24 months,
29%
recognized in the first 12 months and
64%
recognized over the subsequent 12 months, and the remainder recognized thereafter.
Note 3.
Income (loss) Per Common Share
Basic and diluted income (loss) per share for the three and
six months ended
June 30, 2019
and
2018
, respectively, were as follows:
|
Three months ended June 30,
|
Six months ended June 30,
|
|||||||||||||||
|
|
2019
|
2018
|
2019
|
2018
|
||||||||||||
|
Net loss attributable to stockholders
|
$
|
(357,129
|
)
|
$
|
(754,350
|
)
|
$
|
(3,637,206
|
)
|
$
|
(733,592
|
)
|
||||
|
Weighted average shares outstanding - Basic and diluted
|
24,826,311
|
|
24,818,459
|
|
24,822,555
|
|
24,811,034
|
|
||||||||
|
Basic loss per share
|
$
|
(0.01
|
)
|
$
|
(0.03
|
)
|
$
|
(0.15
|
)
|
$
|
(0.03
|
)
|
||||
|
Anti-dilutive shares underlying stock options outstanding
|
205,036
|
|
176,812
|
|
228,537
|
|
135,517
|
|
||||||||
10
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 4.
Property, Plant and Equipment
Property, plant and equipment at
June 30, 2019
and
December 31, 2018
consisted of the following:
|
Estimated Useful
Life (in Years) |
June 30, 2019
|
December 31, 2018
|
|||||||
|
Energy systems
|
1 - 15 years
|
$
|
4,372,639
|
|
$
|
12,709,990
|
|
||
|
Machinery and equipment
|
5 - 7 years
|
1,419,009
|
|
1,355,617
|
|
||||
|
Furniture and fixtures
|
5 years
|
193,697
|
|
222,542
|
|
||||
|
Computer software
|
3 - 5 years
|
192,865
|
|
200,626
|
|
||||
|
Leasehold improvements
|
*
|
450,792
|
|
450,792
|
|
||||
|
|
|
6,629,002
|
|
14,939,567
|
|
||||
|
Less - accumulated depreciation and amortization
|
|
(2,865,502
|
)
|
(3,666,452
|
)
|
||||
|
|
$
|
3,763,500
|
|
$
|
11,273,115
|
|
|||
* Lesser of estimated useful life of asset or lease term
Depreciation and amortization expense on property and equipment for the
three
and
six months ended
June 30, 2019
and
2018
was
$164,356
and
$506,218
and
$402,336
and
$830,416
, respectively.
In March 2019, the Company sold certain energy systems related assets and related energy production contracts. See
Note 6.
Sale of Energy Producing Assets and Goodwill Impairment
for further discussion.
Note 5.
Intangible Assets and Liabilities Other Than Goodwill
As of
June 30, 2019
and
December 31, 2018
the Company had the following amounts related to intangible assets and liabilities other than goodwill:
|
June 30, 2019
|
December 31, 2018
|
|||||||||||||||||||||||
|
Intangible assets
|
Cost
|
Accumulated Amortization
|
Total
|
Cost
|
Accumulated Amortization
|
Total
|
||||||||||||||||||
|
Product certifications
|
$
|
726,159
|
|
$
|
(372,782
|
)
|
$
|
353,377
|
|
$
|
726,159
|
|
$
|
(345,658
|
)
|
$
|
380,501
|
|
||||||
|
Patents
|
930,509
|
|
(198,362
|
)
|
732,147
|
|
910,569
|
|
(188,239
|
)
|
722,330
|
|
||||||||||||
|
Developed technology
|
240,000
|
|
(100,000
|
)
|
140,000
|
|
240,000
|
|
(92,000
|
)
|
148,000
|
|
||||||||||||
|
Trademarks
|
25,552
|
|
—
|
|
25,552
|
|
22,752
|
|
—
|
|
22,752
|
|
||||||||||||
|
In Process R&D
|
263,936
|
|
—
|
|
263,936
|
|
263,936
|
|
—
|
|
263,936
|
|
||||||||||||
|
Favorable contract asset
|
274,858
|
|
(260,217
|
)
|
14,641
|
|
1,561,739
|
|
(232,099
|
)
|
1,329,640
|
|
||||||||||||
|
TTcogen intangible assets
|
29,607
|
|
(4,626
|
)
|
24,981
|
|
—
|
|
—
|
|
—
|
|
||||||||||||
|
$
|
2,490,621
|
|
$
|
(935,987
|
)
|
$
|
1,554,634
|
|
$
|
3,754,762
|
|
$
|
(860,772
|
)
|
$
|
2,893,990
|
|
|||||||
|
Intangible liability
|
||||||||||||||||||||||||
|
Unfavorable contract liability
|
$
|
4,689,025
|
|
$
|
(1,934,528
|
)
|
$
|
2,754,497
|
|
$
|
7,912,275
|
|
$
|
(1,619,676
|
)
|
$
|
6,292,599
|
|
||||||
The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the
three
and
six months ended
June 30, 2019
and
2018
was
$23,649
and
$47,748
and
$26,473
and
$51,376
, respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the
three
and
six months ended
June 30, 2019
and
2018
was
$113,442
and
$286,734
and
$216,107
and
$444,166
, respectively.
Favorable/Unfavorable Contract Assets and Liabilities
The favorable contract asset and unfavorable contract liability in the foregoing table represent the estimated fair value of American DG Energy's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Company in May 2017.
11
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
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
|
$
|
(179,760
|
)
|
|
|
Year 2
|
(190,417
|
)
|
||
|
Year 3
|
(214,440
|
)
|
||
|
Year 4
|
(176,316
|
)
|
||
|
Year 5
|
(116,609
|
)
|
||
Note 6. Sale of Energy Producing Assets and Goodwill Impairment
During the first quarter of 2019, the Company recognized
two
individual sales of energy producing assets, for a total of
eight
power purchase agreements, including the associated energy production contracts for total consideration of
$7 million
, which resulted in a combined gain on sale of assets of
$1,081,049
included in the accompanying statement of operations.
In connection with the sales, the Company entered into agreements with the purchaser to maintain and operate the assets over the remaining periods of the associated energy production contracts (through August 2033 and January 2034, respectively) in exchange for monthly fees for both maintenance and operation. These agreements contain provisions whereby the Company has guaranteed to the purchaser a minimum level or threshold of cash flows from the associated energy production contracts. Actual results are compared to the minimum threshold bi-annually, with the Company making up any shortfall. To the extent actual results are in excess of the minimum threshold, the Company is entitled to forty percent of such excess under the agreements.
The foregoing agreements also contain provisions whereby the Company has agreed to make whole the purchaser in the event the counterparty to the energy production contract(s) defaults on or otherwise terminates before the stated expiration of the energy production contract. Should the Company be required to make whole the purchaser under such provisions, the Company would be entitled to seek recovery from the counterparty to the energy production contract(s) under a similar provision contained in those contracts in respect of early termination.
The Company is also responsible under the agreements for site decommissioning costs, if any, in excess of certain threshold amounts by site. Decommissioning of site assets is performed when, if and as requested by the counterparty to the energy production contract upon termination of the energy production contract.
The combined gain on sale of these assets of
$1,081,049
was determined after deducting from the gross proceeds the remaining net book value of the assets sold and an estimate of the remaining costs to complete installation of certain of the site assets as well as deducting an estimate of amounts which the Company believes it will be required to pay under the minimum cash flow guarantee described above. In determining the
$1,081,049
combined gain on the sale of these assets, no amount of goodwill assigned to the energy production segment and reporting unit was included as individual sites and related site energy producing assets are not considered businesses. The aggregate of the assets sold represents a significant portion of the energy production segment and reporting unit’s assets and cash flows which is the basis for determination of the fair value of the energy production reporting unit as used for goodwill impairment determinations. Accordingly, the sale of these assets caused the Company to assess the impact of the sales on the valuation of remaining goodwill assigned to the energy production reporting unit. That assessment included a determination of whether the remaining carrying value of the energy production reporting unit including goodwill exceeded its fair value. Following a goodwill impairment charge in 2018 which reduced the carrying value of the energy production reporting unit including goodwill to fair value based on discounted cash flows, exclusion of the discounted cash flows related to the assets sold resulted in impairment of the remaining goodwill assigned to the energy production reporting unit in an amount proportionate to the discounted cash flows related to the assets sold to the total discounted cash flows of the energy production reporting unit before the sales. The goodwill impairment as a result of the sales and recognized in the first quarter of 2019 totaled approximately
$3.7 million
, reducing the remaining carrying value of the energy production reporting unit, including goodwill to the discounted cash flow of the remaining sites or fair value.
Note 7. Leases
Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing and storage facilities. Our lease terms do not include options to extend or terminate the lease until we are reasonably certain that we will exercise that option.
12
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally accounts for each component separately based on the estimated standalone price of each component.
Operating leases are included in Right-of-use assets, Lease obligations, current and Lease obligations, long term on the Condensed Consolidated Balance Sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using an incremental borrowing rate consistent with the lease terms or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease expense for operating leases, which principally consists of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Lease expense for the
three and six
months ended
June 30, 2019
was
$192,674
and
$372,371
,respectively.
Supplemental information related to leases for the
six
months ended
June 30, 2019
was as follows:
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
319,436
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
$
|
2,628,299
|
|
|
|
Weighted-average remaining lease term - operating leases
|
4.5 years
|
|
||
|
Weighted-average discount rate - operating leases
|
6
|
%
|
||
Future minimum lease commitments under non-cancellable operating leases as of
June 30, 2019
were as follows:
|
Operating Leases
|
||||
|
Q3 through Q4 2019
|
$
|
375,423
|
|
|
|
2020
|
649,801
|
|
||
|
2021
|
576,698
|
|
||
|
2022
|
529,115
|
|
||
|
2023
|
536,863
|
|
||
|
Thereafter
|
134,700
|
|
||
|
Total lease payments
|
2,802,600
|
|
||
|
Less: imputed interest
|
381,019
|
|
||
|
Total
|
$
|
2,421,581
|
|
|
Note 8.
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
June 30, 2019
.
Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the Amended Plan. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of
June 30, 2019
was
1,903,180
.
13
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Stock option activity for the
six months ended
June 30, 2019
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, 2018
|
1,292,589
|
|
$0.79-$10.33
|
$
|
3.52
|
|
5.93 years
|
$
|
671,331
|
|
||||
|
Granted
|
88,500
|
|
$3.40-$3.80
|
$
|
3.70
|
|
||||||||
|
Exercised
|
(16,060
|
)
|
$1.20-$2.60
|
$
|
1.29
|
|
||||||||
|
Canceled and forfeited
|
(700
|
)
|
$4.50
|
$
|
4.50
|
|
||||||||
|
Outstanding, June 30, 2019
|
1,364,329
|
|
$0.79-$10.33
|
$
|
3.56
|
|
5.78 years
|
$
|
722,514
|
|
||||
|
Exercisable, June 30, 2019
|
910,329
|
|
$
|
3.50
|
|
$
|
655,677
|
|
||||||
|
Vested and expected to vest, June 30, 2019
|
1,296,229
|
|
$
|
3.55
|
|
|
$
|
712,488
|
|
|||||
Consolidated stock-based compensation expense for the three and
six months ended
June 30, 2019
and
2018
was
$39,898
and
$77,933
, and
$38,062
and
$78,478
, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the periods.
Note 9.
Fair Value Measurements
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1
- Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
Level 2 -
Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company has Level 2 financial assets and liabilities as provided below.
Level 3
- Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not currently have any Level 3 financial assets or liabilities.
The following table presents the asset reported in the consolidated balance sheet measured at its fair value on a recurring basis as of
June 30, 2019
by level within the fair value hierarchy.
|
June 30, 2019
|
Quoted prices in active markets for identical assets
|
Significant other observable inputs
|
Significant unobservable inputs
|
||||||||||||
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
|
Recurring fair value measurements
|
|||||||||||||||
|
Marketable equity securities
|
|||||||||||||||
|
EuroSite Power Inc.
|
$
|
216,487
|
|
$
|
—
|
|
$
|
216,487
|
|
$
|
—
|
|
|||
|
Total recurring fair value measurements
|
$
|
216,487
|
|
$
|
—
|
|
$
|
216,487
|
|
$
|
—
|
|
|||
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.
The following table summarizes changes in Level 2 assets which are comprised of marketable equity securities for the period:
14
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
Fair value at December 31, 2018
|
$
|
236,167
|
|
|
Unrealized loss included in net income for the six months ended June 30, 2019
|
(19,680
|
)
|
|
|
Fair value at June 30, 2019
|
$
|
216,487
|
|
Note 10.
Revolving Line of Credit, Bank
On May 4, 2018 ("Closing Date") the Company, and its wholly owned subsidiaries, American DG Energy Inc. and TTcogen LLC (collectively, the "Borrowers"), entered into a Credit Agreement with Webster Business Credit Corporation (the "Lender") that matures in May 2021 and provides Borrowers a line of credit of up to
$10 million
on a revolving and secured basis, with availability based on certain accounts receivables, raw materials, and finished goods.
Borrowings under the Credit Agreement bear interest at a rate equal to, at the Borrower's option, either (1) One Month LIBOR, plus
3.00%
, or (2) Lender’s Base Rate, plus
1.5%
. Lender’s Base Rate is defined as the highest of (a) the Federal Funds rate plus
0.5%
, (b) Lender’s Prime Rate as adjusted by Lender from time to time, and (c) One Month LIBOR, plus
2.75%
.
The Credit Agreement contains certain affirmative and negative covenants applicable to the Company and its subsidiaries, which include, among other things, restrictions on their ability to (i) incur additional indebtedness, (ii) make certain investments, (iii) acquire other entities, (iv) dispose of assets and (v) make certain payments including those related to dividends or repurchase of equity. The Credit Agreement also contains financial covenants including maintaining a fixed charge coverage ratio of not less than
1.10
:1.00 and the Company may not make any financed capital expenditures in excess of
$500,000
in the aggregate in any fiscal year. As of
June 30, 2019
, the Company believes it is in compliance with all of the covenants.
The
$145,011
of costs incurred in connection with the issuance of the revolving credit facility were capitalized and are being amortized to interest expense on a straight-line basis over
three
years based on the contractual term of the Agreement. As of
June 30, 2019
, the outstanding balance on the line of credit was
$0
and the unamortized portion of debt issuance cost related to the Credit Agreement was
$97,669
and is included in prepaid and other current assets in the accompanying Condensed Consolidated Balance Sheet.
Note 11.
Commitments and Contingencies
The Company guarantees certain obligations of a former subsidiary of American DG Energy, EuroSite Power Inc. These guarantees include a payment performance guarantee in respect of collateralized equipment financing loans, with a remaining principal amount outstanding subject to the guarantee at
June 30, 2019
of approximately
$168,000
due ratably in equal installments through September 2021, and certain guarantees of performance in respect of certain customer contracts. Based on current conditions, the Company does not believe there to be any amounts probable of payment by the Company under any of the guarantees and has estimated the value associated with the non-contingent aspect of the guarantees is approximately
$7,000
which is recorded as a liability in the accompanying financial statements.
In connection with the sale of energy producing assets, the Company made certain guarantees to the purchaser as discussed in
Note 6.
Sale of Energy Producing Assets and Goodwill Impairment
. In the first quarter of 2019 the Company recorded a reduction on the gain on sale and a corresponding liability of
$350,000
in the financial statements to reserve for such future costs.
Note 12.
Related Party Transactions
In connection with the acquisition of American DG Energy, the Company assumed a loan from John N. Hatsopoulos, the Company's former Co-Chief Executive Officer and a Company Director. The loan was 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.
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
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
15
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
granted TTcogen the sole and exclusive right to market, sell, offer for sale, and distribute certain products as agreed to by the parties throughout the United States. The product offerings of the joint venture 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 was 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 terminated the Joint Venture Agreement dated May 19, 2016 ("JVA") and the TTcogen LLC Operating Agreement ("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 followed the mutual agreement of the parties to terminate the joint venture between the Company and Tedom that resulted in the creation of TTcogen, and implemented the acquisition by the Company of Tedom USA’s
50%
membership interest in TTcogen for a purchase price of
one
dollar, plus
$72,597
, which represents a portion of Tedom USA's initial investment in TTcogen, minus certain adjustments.
The Purchase Agreement also granted TTcogen and the Company the exclusive right to market, sell, and distribute Tedom’s Micro T35 combined heat and power equipment within an agreed territory in the northeastern United States under certain conditions, and limited the Company’s right to sell certain competing products. The Company will provide services for Tedom equipment sold by TTcogen or the Company.
The acquisition of Tedom's
50%
membership interest for
$72,598
was accounted for as an acquisition of assets, and not a business combination, due to the lack of an assembled workforce. The Company adopted the provisions of ASU 2017-01 "Business Combinations - Clarifying the Definition of a Business" at the beginning of 2018, which require, at a minimum, the presence of an input and substantive process that together significantly contribute to the ability to create an output. The lack of an assembled workforce results in the non presence of a substantive process. The following represents the consideration for and the fair value of assets acquired and liabilities assumed recognized at the acquisition date:
|
Cash
|
$
|
442,786
|
|
|
Accounts receivable
|
176,235
|
|
|
|
Unbilled revenue
|
232,540
|
|
|
|
Fixed assets
|
47,508
|
|
|
|
Intangible assets
|
29,607
|
|
|
|
Accounts payable
|
(811,468
|
)
|
|
|
Deferred revenue
|
(44,610
|
)
|
|
|
Cash payable
|
$
|
72,598
|
|
The intangible asset represents contract backlog related to acquired contracts. The value assigned to contract backlog was determined based on the result of a discounted cash flow analysis, which resultant value was capped so as to preclude recognition of any amount in excess of cost after considering the fair values assigned to other assets acquired and liabilities assumed.
Note 13.
Segments
As of
June 30, 2019
, 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. The following table presents information by reportable segment for the three and
six months ended
June 30, 2019
and
2018
:
16
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
Products and Services
|
Energy Production
|
Corporate, other and elimination (1)
|
Total
|
|||||||||||||
|
Six months ended June 30, 2019
|
||||||||||||||||
|
Revenue - external customers
|
$
|
14,224,919
|
|
$
|
1,819,108
|
|
$
|
—
|
|
$
|
16,044,027
|
|
||||
|
Intersegment revenue
|
357,161
|
|
—
|
|
(357,161
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
14,582,080
|
|
$
|
1,819,108
|
|
$
|
(357,161
|
)
|
$
|
16,044,027
|
|
||||
|
Gross profit
|
$
|
5,729,997
|
|
$
|
654,677
|
|
$
|
—
|
|
$
|
6,384,674
|
|
||||
|
Identifiable assets
|
$
|
24,448,764
|
|
$
|
3,551,619
|
|
$
|
11,755,993
|
|
$
|
39,756,376
|
|
||||
|
Six months ended June 30, 2018
|
||||||||||||||||
|
Revenue - external customers
|
$
|
15,337,832
|
|
$
|
3,290,760
|
|
$
|
—
|
|
$
|
18,628,592
|
|
||||
|
Intersegment revenue
|
646,084
|
|
—
|
|
(646,084
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
15,983,916
|
|
$
|
3,290,760
|
|
$
|
(646,084
|
)
|
$
|
18,628,592
|
|
||||
|
Gross profit
|
$
|
5,692,013
|
|
$
|
1,305,384
|
|
$
|
—
|
|
$
|
6,997,397
|
|
||||
|
Identifiable assets
|
$
|
20,619,262
|
|
$
|
12,853,001
|
|
$
|
17,999,924
|
|
$
|
51,472,187
|
|
||||
|
Three months ended June 30, 2019
|
||||||||||||||||
|
Revenue - external customers
|
$
|
7,289,097
|
|
$
|
578,299
|
|
$
|
—
|
|
$
|
7,867,396
|
|
||||
|
Intersegment revenue
|
83,649
|
|
—
|
|
(83,649
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
7,372,746
|
|
$
|
578,299
|
|
$
|
(83,649
|
)
|
$
|
7,867,396
|
|
||||
|
Gross profit
|
$
|
3,212,170
|
|
$
|
213,745
|
|
$
|
—
|
|
$
|
3,425,915
|
|
||||
|
Identifiable assets
|
$
|
24,448,764
|
|
$
|
3,551,619
|
|
$
|
11,755,993
|
|
$
|
39,756,376
|
|
||||
|
Three months ended June 30, 2018
|
||||||||||||||||
|
Revenue - external customers
|
$
|
6,944,940
|
|
$
|
1,508,225
|
|
$
|
—
|
|
$
|
8,453,165
|
|
||||
|
Intersegment revenue
|
290,915
|
|
—
|
|
(290,915
|
)
|
—
|
|
||||||||
|
Total revenue
|
$
|
7,235,855
|
|
$
|
1,508,225
|
|
$
|
(290,915
|
)
|
$
|
8,453,165
|
|
||||
|
Gross profit
|
$
|
2,491,090
|
|
$
|
668,504
|
|
$
|
—
|
|
$
|
3,159,594
|
|
||||
|
Identifiable assets
|
$
|
20,619,262
|
|
$
|
12,853,001
|
|
$
|
17,999,924
|
|
$
|
51,472,187
|
|
||||
|
(1) Corporate, intersegment revenue, other and elimination includes various corporate assets.
|
||||||||||||||||
Note 14.
Subsequent Events
The Company has evaluated subsequent events through the date of this filing and determined that no material subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
17
TECOGEN INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company’s estimates change, and readers should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2018
.
Overview
Tecogen designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning using automotive engines that have been adapted to run on natural gas. In some cases, our customers may choose to have the Company engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because, in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes, such as space and portable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and MCHP (mechanical power plus heat).
Our products are sold directly to end-users by our in-house marketing team and by established sales agents and representatives. We have agreements in place with distributors and sales representatives. Our existing customers include hospitals and nursing homes, colleges and universities, health clubs and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries, ice rinks, swimming pools, factories, municipal buildings, military installations and indoor growing facilities. We have an installed base of more than 3,000 units. Our products have long useful lives with proper maintenance. Some of our units have been operating for over 35 years.
With the acquisition of American DG Energy Inc. ("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.
18
TECOGEN INC.
Results of Operations
Second Quarter
of
2019
Compared to
Second Quarter
of
2018
Revenues
Total revenues in the
second
quarter of
2019
were
$7,867,396
compared to
$8,453,165
for the same period in
2018
,
a decrease
of
$585,769
or
6.9%
. This decrease is due to the sale of certain energy producing assets in the first quarter, therefore reducing the energy production revenue in the
second
quarter of
2019
compared to the same period in
2018
.
Segment 1 - Products and Services
Product revenues in the
second
quarter of
2019
were
$2,445,448
compared to
$2,483,657
for the same period in
2018
,
a decrease
of
$38,209
or
1.5%
. This
decrease
was the net of an increase in cogeneration sales of
$125,127
and a decrease in chiller sales of
$163,336
, year over year. Such variations in product mix are to be expected. Service revenues in the
second
quarter of
2019
were $
4,843,649
compared to
$4,461,283
for the same period in
2018
,
an increase
of
$382,366
or
8.6%
. This
increase
in the
second
quarter is due to
a decrease
in installation activity of
$5,579
and
an increase
of
$387,945
in service contract revenues. Service contract revenue in the
second
quarter of
2019
included certain engineering service projects accounting for this increase.
Segment 2 - Energy Production
Energy production revenues in the
second
quarter of
2019
were
$578,299
, compared to
$1,508,225
for the same period in
2018
, a decrease of
$929,926
or
61.7%
. Energy production revenue represents energy revenues earned during the quarter by our American DG Energy sites. This decrease is representative of the reduction in energy producing assets owned due to the sales of a portion of these assets as discussed in
Note 6.
Sale of Energy Producing Assets and Goodwill Impairment
.
Cost of Sales
Cost of sales in the
second
quarter of
2019
was
$4,441,481
compared to
$5,293,571
for the same period in
2018
,
a decrease
of
$852,090
, or
16.1%
due to the decrease in revenue. Overall gross margin for the
second
quarter of
2019
was
43.5%
compared to
37.4%
for the same period in
2018
.
Segment 1 - Products and Services
Cost of sales for products and services in the
second
quarter of
2019
was
$4,076,927
compared to
$4,453,850
for the same period in
2018
, a decrease of
$376,923
or
8.5%
. During the
second
quarter our overall gross margin for our product and services segment was
44.1%
compared to
35.9%
for the same period in
2018
.
Segment 2 - Energy Production
Cost of sales for energy production in the
second
quarter of
2019
was
$364,554
compared to
$839,721
for the same period in
2018
, a decrease of
$475,167
or
56.6%
due to the decrease in revenue as discussed above. Gross margin for this segment was
37.0%
for the
second
quarter of
2019
compared to
44.3%
for the same period in
2018
.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the quarter ended
June 30, 2019
were
$2,683,252
compared to
$2,750,705
for the same period in
2018
,
a decrease
of
$67,453
or
2.5%
.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the
second
quarter of
2019
were
$704,700
compared to
$635,396
for the same period in
2018
,
an increase
of
$69,304
or
10.9%
which tends to vary quarter to quarter depending on timing of certain activities.
19
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
June 30, 2019
were
$372,545
compared to
$409,779
for the same period in
2018
,
a decrease
of
$37,234
or
9.1%
. R&D expenses were incurred due to the Company's continued efforts in connection with the Tecofrost and projects relating to industrial refrigeration and potential commercialization of the Company's Ultera emissions technology for certain non-stationary applications.
Income (Loss) from Operations
Loss from operations for the
second
quarter of
2019
was
$334,582
compared to a loss of
$636,286
for the same period in
2018
, a difference of
$301,704
. The improvement was a result of the increase in gross profit and margin for the
second
quarter of
2019
compared to the same period in
2018
.
Other Income (Expense), net
Other income, net for the
three months ended
June 30, 2019
was income of
$2,742
compared to expense of
$64,014
for the same period in
2018
. Other income (expense) includes interest and other income and expense of
$66
, interest expense of
$17,005
and an unrealized gain from market value fluctuation of our investment in EuroSite Power Inc.'s common stock of
$19,681
for the
second
quarter of
2019
. For the same period in
2018
, interest and other income and expense was
$4,830
, unrealized loss from market fluctuation of
$59,042
and interest expense was
$9,802
.
Provision for state income taxes
The provision for state income taxes in the
second
quarter of
2019
and
2018
was
$15,955
and
$38,864
, respectively and represents estimated income tax payments net of refunds to various states.
Noncontrolling Interest
The income attributable to the noncontrolling interest was
$9,334
and income of
$15,186
for the
three months ended
June 30, 2019
and
2018
, which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC.
Net Loss Attributable to Tecogen Inc.
Net loss attributable to Tecogen Inc. for the
three months ended
June 30, 2019
was
$357,129
compared to a loss of
$754,350
for the same period in
2018
, a difference of
$397,221
, year over year. The improvement was a result of the increase in gross profit and margin for the
second
quarter of
2019
compared to the same period in
2018
.
20
TECOGEN INC.
First
Six
Months of
2019
Compared to First
Six
Months of
2018
Revenues
Total revenues for the
first six months
of
2019
were
$16,044,027
compared to
$18,628,592
for the same period in
2018
, a decrease of
$2,584,565
or
13.9%
.
Segment 1 - Products and Services
Product revenues in the
first six months
of
2019
were
$5,469,974
compared to
$6,157,163
for the same period in
2018
, a decrease of
$687,189
or
11.2%
.This decrease was a combination of an decrease in chiller sales of
$867,104
and a increase in cogeneration sales of
$179,915
. Such variations in product mix from period to period are to be expected. Service revenues in the
first six months
of
2019
were
$8,754,945
, compared to
$9,180,669
for the same period in
2018
, a decrease of
$425,724
or
4.6%
. This decrease in the
first six months
of
2019
is due to an decrease in installation activity of
$851,513
and an increase of
$425,789
in service contract revenues. While service contract revenue remains relatively constant, the first half of
2019
included certain engineering service projects accounting for this increase. Installation activity can vary widely depending on the status of various projects.
Segment 2 - Energy Production
Energy production revenues in the
first six months
of
2019
were
$1,819,108
, compared to
$3,290,760
for the same period in
2018
. This decrease is representative of the reduction in energy producing assets owned due to the sales of a portion of these assets as discussed in
Note 6.
Sale of Energy Producing Assets and Goodwill Impairment
Cost of Sales
Cost of sales in the
first six months
of
2019
was
$9,659,353
compared to
$11,631,195
for the same period in
2018
, a decrease of
$1,971,842
, or
17.0%
.
Segment 1 - Products and Services
Cost of sales for products and services in the
first six months
of
2019
was
$8,494,922
compared to
$9,645,819
for the same period in
2018
, a decrease of
$1,150,897
or
11.9%
. During the
first six months
of
2019
, our product and service gross margin was
40.3%
compared to
37.1%
for the same period in
2018
, a
3%
increase. The increase in margin was a result of an increase in installation margin.
Segment 2 - Energy Production
Cost of sales for energy production in the
first six months
of
2019
was
$1,164,431
compared to
$1,985,376
for the same period in
2018
. During this period our gross margin for energy production was
36.0%
for
2019
compared to
39.7%
for the same period in
2018
.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the
six months ended
June 30, 2019
were
$5,338,663
compared to
$5,540,255
for the same period in
2018
,
a decrease
of
$201,592
or
3.6%
. The
decrease
was mainly due to management's focus on cutting costs wherever possible.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the
six months ended
June 30, 2019
were
$1,397,954
compared to
$1,310,514
for the same period in
2018
,
an increase
of
$87,440
or
6.7%
. The
increase
is due to a larger sales team and increased 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
six months ended
June 30, 2019
were
$717,627
compared to
$712,009
for the same period in
2018
,
an increase
of
$5,618
or
0.8%
. R&D expenses were incurred due to the Company's continued efforts in connection with the Tecofrost and projects relating to industrial refrigeration and potential commercialization of the Company's Ultera emissions technology for certain non-stationary applications.
21
TECOGEN INC.
A gain on the sale of assets of
$1,081,049
was recognized during the
six months ended
June 30, 2019
in connection with the sale of certain energy producing assets. See discussion in
Note 6.
Sale of Energy Producing Assets and Goodwill Impairment
in the accompanying consolidated financial statements.
Goodwill impairment relating to the ADG sites of
$3,693,198
was recognized during the
six months ended
June 30, 2019
. See
Note 6.
Sale of Energy Producing Assets and Goodwill Impairment
to the accompanying consolidated financial statements for further discussion of this charge.
Loss from Operations
Loss from operations for the
six months ended
June 30, 2019
was
$3,681,719
compared to a loss of
$565,381
for the same period in
2018
, a difference of
$3,116,338
. The goodwill impairment of
$3,693,198
accounts for the significant difference from the
six months ended
June 30, 2019
compared to the same period in
2018
.
Other Income (Expense), net
Other expense, net for the
six months ended
June 30, 2019
was
$64,113
compared to
$97,780
for the same period in
2018
. Other income (expense) includes interest and other income of
$598
, interest expense of
$45,031
, and unrealized loss on investment securities of
$19,680
. For the same period in
2018
, interest and other income was
$3,758
, interest expense was
$22,815
, and unrealized loss on investment securities was
$78,723
.
Provision for state income taxes
The provision for state income taxes
six months ended
June 30, 2019
and
2018
was
$7,786
and
$38,864
, respectively and represents estimated income tax payments net of refunds to various states.
Noncontrolling Interest
The loss attributable to the noncontrolling interest was
$116,412
for the
six months ended
June 30, 2019
which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC. For the same period in
2018
, income attributable to noncontrolling interest was
$31,567
.
Net Loss Attributable to Tecogen Inc
Net loss attributable to Tecogen for the
six months ended
June 30, 2019
was
$3,637,206
compared to
$733,592
for the same period in
2018
, an increase of
$2,903,614
. The goodwill impairment of
$3,693,198
accounts for the significant difference from the
six months ended
June 30, 2019
compared to the same period in
2018
.
Liquidity and Capital Resources
Consolidated working capital at
June 30, 2019
was
$15,527,643
compared to
$13,170,252
at
December 31, 2018
,
an increase
of
$2,357,391
. Included in working capital were cash and cash equivalents of
$1,087,970
at
June 30, 2019
, compared to
$272,552
at
December 31, 2018
,
an increase
of
$815,418
. The increase in working capital and cash was the result of the cash received upon the sale of certain energy production assets.
Cash used in operating activities for the
six months ended
June 30, 2019
was
$2,080,213
compared to
$2,541,234
for the same period in
2018
. Our accounts receivable balance
decreased
to
$11,628,702
at
June 30, 2019
compared to
$14,176,452
at
December 31, 2018
, providing
$2,517,901
of cash due to timing of billing, shipments, and collections. In addition, inventory and unbilled revenue increased using
$695,835
and
$936,106
, respectively, using
$1,631,941
of cash from operations.
Accounts payable
decreased
to
$6,234,846
as of
June 30, 2019
from
$7,153,330
at
December 31, 2018
, using $
918,484
, in cash flow from operations. Deferred revenue decreased as of
June 30, 2019
compared to
December 31, 2018
, using
$966,776
of cash from operations. The Company expects accounts payable and deferred revenue to fluctuate with routine changes in operations.
22
TECOGEN INC.
During the
first six months
of
2019
our investing activities provided
$4,896,394
of cash from the proceeds of the sale of energy producing assets of
$5.0 million
, offset by purchases of property and equipment of
$52,444
, and expenditures related to purchases of intangible assets of
$22,738
.
During the
first six months
of
2019
our financing activities used
$2,000,763
compared to cash provided by financing activities of
$1,771,122
for the same period in
2018
. Financing activities for the
first six months
of 2019 included net payments on the line of credit of
$2,021,519
as well as proceeds from the exercise of stock options of
$20,756
.
As of
June 30, 2019
, the Company's backlog of product and installation projects, excluding service contracts, was
$25.3 million
, consisting of
$19.0 million
of purchase orders received by us and
$6.3 million
of projects in which the customer's internal approval process is complete, financial resources have been allocated and the customer has made a firm verbal commitment that the order is in the process of execution. Backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.
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 lease accounting policy for the adoption of ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”)
,
the Company's critical accounting policies have remained consistent as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 29, 2019.
See Note 1,
Description of Business and Basis of Presentation
, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Seasonality
We expect that the majority of our heating systems sold will be operational for the winter and the majority of our chilling systems sold 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. Chiller units are generally shut down in the winter and started up again in the spring. The chiller "busy season' for the service team generally runs from May through the end of September.
Off-Balance Sheet Arrangements
Currently, we do not have any material off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
23
TECOGEN INC.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
The Company maintains "disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company's management, including our principal executive officers and principal 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:
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 had the system partially implemented as of year end 2018 and continues to work on its implementation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was previously a party to an action in the United States District Court for the District of Massachusetts, described below, related to the acquisition of American DG Energy Inc. through merging with and into a subsidiary of the Company (the "Merger"). All claims in the litigation relating to the Merger have been dismissed.
On November 16, 2018, the US District Court for the District of Massachusetts dismissed all remaining claims against all defendants in the litigation against Tecogen Inc. and its affiliates, including American DG Energy Inc., and their directors and certain officers, relating to the Merger in a case filed on May 15, 2017 titled Vardakas v. American DG. Energy, Inc., Case No. 17-CV-1024(LTS).
The case was originally filed in February 2017 in Massachusetts state court by William C. May ("May"), individually and on behalf of the other shareholders of American DG Energy Inc. as a class in the Business Litigation Session of the Superior Court of the Commonwealth of Massachusetts, Civil Action N. 17-0390. Plaintiff May voluntarily dismissed the state court case on May 31, 2017 and consolidated that case with the case filed by plaintiff Lee Vardakas on May 15, 2017 in US District Court for the District of Massachusetts, alleging violations of federal securities laws and breaches of fiduciary duties to minority shareholders of American DG Energy Inc. in connection with the Merger . The US District Court dismissed all federal securities law claims in the case on March 2, 2018. On November 16, 2018 the remaining state law claims alleging breach of fiduciary duties to minority stockholders, and aiding and abetting breaches of fiduciary duties, were dismissed on the basis of the defendants' Motion for Judgment on the Pleadings. Plaintiff's motion for class certification was also dismissed on November 16, 2018.
Except as set forth above, as of the date of this filing the Company is currently not a party to any legal or administrative proceedings material to the Company's financial statements and is not aware of any pending or threatened legal or administrative proceeding that is material to the Company's financial statement.
Item 1A. Risk Factors
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, 2018
. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
24
TECOGEN INC.
Item 6. Exhibits
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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
|
|
|
10.41
|
|
|
10.42+
|
|
|
10.43
|
|
|
10.44
|
|
|
10.45
|
|
|
10.46
|
|
|
10.47
|
|
|
10.48
|
|
|
10.49
|
|
|
10.50
|
|
25
TECOGEN INC.
|
10.51
|
|
|
10.52
|
|
|
10.53
|
|
|
10.54
|
|
|
10.55
|
|
|
31.1*
|
|
|
31.2*
|
|
|
32.1*
|
|
|
101.INS**
|
XBRL Instance Document
|
|
101.SCH**
|
XBRL Taxonomy Extension Schema
|
|
100.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
100.DEF**
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase
|
____________________________________________
|
*
|
Filed herewith
|
|
**
|
Furnished herewith
|
|
+
|
Compensatory plan or arrangement
|
26
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
August 13, 2019
.
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TECOGEN INC.
|
|
|
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(Registrant)
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|
|
|
||
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By:
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/s/ Benjamin M. Locke
|
|
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Chief Executive Officer
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||
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(Principal Executive Officer)
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||
|
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||
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By:
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/s/ Bonnie J. Brown
|
|
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Chief Accounting Officer, Treasurer and Secretary
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(Principal Accounting Officer)
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27
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. Property, Plant and EquipmentNote 5. Intangible Assets and Liabilities Other Than GoodwillNote 6. Sale Of Energy Producing Assets and Goodwill ImpairmentNote 7. LeasesNote 8. Stock-based CompensationNote 9. Fair Value MeasurementsNote 10. Revolving Line Of Credit, BankNote 11. Commitments and ContingenciesNote 12. Related Party TransactionsNote 13. SegmentsNote 14. 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