Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,077,047
|
|
|
$
|
3,721,765
|
|
Accounts receivable, net
|
11,094,287
|
|
|
8,630,418
|
|
Unbilled revenue
|
3,063,089
|
|
|
2,269,645
|
|
Inventory, net
|
6,118,835
|
|
|
4,774,264
|
|
Due from related party
|
496,655
|
|
|
260,988
|
|
Prepaid and other current assets
|
742,701
|
|
|
401,876
|
|
Total current assets
|
23,592,614
|
|
|
20,058,956
|
|
Property, plant and equipment, net
|
15,502,974
|
|
|
517,143
|
|
Intangible assets, net
|
2,430,178
|
|
|
1,065,967
|
|
Excess of cost over fair value of net assets acquired
|
12,602,409
|
|
|
—
|
|
Goodwill
|
40,870
|
|
|
40,870
|
|
Other assets
|
2,462,870
|
|
|
2,058,425
|
|
TOTAL ASSETS
|
$
|
56,631,915
|
|
|
$
|
23,741,361
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
5,356,449
|
|
|
$
|
3,367,481
|
|
Accrued expenses
|
1,676,307
|
|
|
1,378,258
|
|
Deferred revenue
|
1,477,124
|
|
|
876,765
|
|
Loan due to related party
|
850,000
|
|
|
—
|
|
Interest payable, related party
|
39,403
|
|
|
—
|
|
Total current liabilities
|
9,399,283
|
|
|
5,622,504
|
|
Long-term liabilities:
|
|
|
|
|
|
Deferred revenue, net of current portion
|
386,494
|
|
|
459,275
|
|
Senior convertible promissory note, related party
|
3,149,086
|
|
|
3,148,509
|
|
Unfavorable contract liability
|
10,358,283
|
|
|
—
|
|
Total liabilities
|
23,293,146
|
|
|
9,230,288
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Tecogen Inc. stockholders’ equity:
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized; 24,724,392 and 19,981,912 issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
24,724
|
|
|
19,982
|
|
Additional paid-in capital
|
56,081,026
|
|
|
37,334,773
|
|
Accumulated other comprehensive loss-investment securities
|
(184,998
|
)
|
|
—
|
|
Accumulated deficit
|
(23,065,226
|
)
|
|
(22,843,682
|
)
|
Total Tecogen Inc. stockholders’ equity
|
32,855,526
|
|
|
14,511,073
|
|
Noncontrolling interest
|
483,243
|
|
|
—
|
|
Total stockholders’ equity
|
33,338,769
|
|
|
14,511,073
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
56,631,915
|
|
|
$
|
23,741,361
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
Revenues
|
|
|
|
Products
|
$
|
2,425,616
|
|
|
$
|
2,850,901
|
|
Services
|
4,519,467
|
|
|
3,765,554
|
|
Energy production
|
1,556,115
|
|
|
—
|
|
Total revenues
|
8,501,198
|
|
|
6,616,455
|
|
Cost of sales
|
|
|
|
Products
|
1,538,515
|
|
|
1,715,462
|
|
Services
|
2,981,454
|
|
|
2,126,175
|
|
Energy production
|
723,198
|
|
|
—
|
|
Total cost of sales
|
5,243,167
|
|
|
3,841,637
|
|
Gross profit
|
3,258,031
|
|
|
2,774,818
|
|
Operating expenses
|
|
|
|
General and administrative
|
2,427,352
|
|
|
2,003,838
|
|
Selling
|
503,415
|
|
|
367,412
|
|
Research and development
|
241,725
|
|
|
154,075
|
|
Total operating expenses
|
3,172,492
|
|
|
2,525,325
|
|
Income from operations
|
85,539
|
|
|
249,493
|
|
Other income (expense)
|
|
|
|
Interest and other income
|
14,849
|
|
|
3,914
|
|
Interest expense
|
(45,242
|
)
|
|
(45,539
|
)
|
Total other expense, net
|
(30,393
|
)
|
|
(41,625
|
)
|
Consolidated net income
|
55,146
|
|
|
207,868
|
|
Income attributable to the noncontrolling interest
|
(27,935
|
)
|
|
—
|
|
Net income attributable to Tecogen Inc.
|
27,211
|
|
|
207,868
|
|
Other comprehensive income - unrealized gain on securities
|
39,361
|
|
|
—
|
|
Comprehensive income
|
$
|
66,572
|
|
|
$
|
207,868
|
|
|
|
|
|
Net income per share - basic
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Net income per share - diluted
|
$
|
0.00
|
|
|
$
|
0.01
|
|
Weighted average shares outstanding - basic
|
24,720,613
|
|
|
19,640,812
|
|
Weighted average shares outstanding - diluted
|
24,930,624
|
|
|
20,229,120
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
Revenues
|
|
|
|
Products
|
$
|
8,349,159
|
|
|
$
|
7,525,909
|
|
Services
|
12,259,037
|
|
|
9,853,369
|
|
Energy production
|
2,330,307
|
|
|
—
|
|
Total revenues
|
22,938,503
|
|
|
17,379,278
|
|
Cost of sales
|
|
|
|
Products
|
5,261,245
|
|
|
5,035,230
|
|
Services
|
7,464,193
|
|
|
5,746,992
|
|
Energy production
|
1,053,741
|
|
|
—
|
|
Total cost of sales
|
13,779,179
|
|
|
10,782,222
|
|
Gross profit
|
9,159,324
|
|
|
6,597,056
|
|
Operating expenses
|
|
|
|
General and administrative
|
7,042,500
|
|
|
5,898,230
|
|
Selling
|
1,558,378
|
|
|
1,217,533
|
|
Research and development
|
641,064
|
|
|
524,696
|
|
Total operating expenses
|
9,241,942
|
|
|
7,640,459
|
|
Loss from operations
|
(82,618
|
)
|
|
(1,043,403
|
)
|
Other income (expense)
|
|
|
|
Interest and other income
|
21,033
|
|
|
9,575
|
|
Interest expense
|
(115,026
|
)
|
|
(131,973
|
)
|
Total other expense, net
|
(93,993
|
)
|
|
(122,398
|
)
|
Consolidated net loss
|
(176,611
|
)
|
|
(1,165,801
|
)
|
(Income) loss attributable to the noncontrolling interest
|
(44,933
|
)
|
|
64,962
|
|
Net loss attributable to Tecogen Inc.
|
(221,544
|
)
|
|
(1,100,839
|
)
|
Other comprehensive loss - unrealized loss on securities
|
(184,998
|
)
|
|
—
|
|
Comprehensive loss
|
$
|
(406,542
|
)
|
|
$
|
(1,100,839
|
)
|
|
|
|
|
Net loss per share - basic and diluted
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
Weighted average shares outstanding - basic and diluted
|
22,643,406
|
|
|
19,071,497
|
|
The accompanying notes are an integral part of these consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2017
|
|
September 30, 2016
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Consolidated net loss
|
$
|
(176,611
|
)
|
|
$
|
(1,165,801
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
Depreciation and amortization, net
|
402,939
|
|
|
198,766
|
|
Provision (recovery) of inventory reserve
|
43,609
|
|
|
(90,000
|
)
|
Stock-based compensation
|
138,329
|
|
|
117,065
|
|
Non-cash interest expense
|
577
|
|
|
37,923
|
|
Loss on sale of assets
|
2,909
|
|
|
640
|
|
Provision (recovery) for losses on accounts receivable
|
8,000
|
|
|
(6,000
|
)
|
Changes in operating assets and liabilities, net of effects of acquisitions
|
|
|
|
(Increase) decrease in:
|
|
|
|
Short term investments
|
—
|
|
|
294,802
|
|
Accounts receivable
|
(1,908,655
|
)
|
|
(2,664,462
|
)
|
Unbilled revenue
|
(776,365
|
)
|
|
(1,024,276
|
)
|
Inventory, net
|
(1,279,847
|
)
|
|
714,896
|
|
Due from related party
|
(236,971
|
)
|
|
744,266
|
|
Prepaid expenses and other current assets
|
(18,673
|
)
|
|
(100,398
|
)
|
Other non-current assets
|
(32,251
|
)
|
|
—
|
|
Increase (decrease) in:
|
|
|
|
Accounts payable
|
1,641,206
|
|
|
(279,196
|
)
|
Accrued expenses and other current liabilities
|
(233,824
|
)
|
|
122,809
|
|
Deferred revenue
|
407,379
|
|
|
184,103
|
|
Interest payable, related party
|
21,378
|
|
|
—
|
|
Net cash used in operating activities
|
(1,996,871
|
)
|
|
(2,914,863
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchases of property and equipment
|
(315,205
|
)
|
|
(130,499
|
)
|
Purchases of intangible assets
|
(34,551
|
)
|
|
(71,223
|
)
|
Cash acquired in acquisition
|
971,454
|
|
|
—
|
|
Cash paid for investment in Ultra Emissions Technologies Ltd
|
—
|
|
|
(2,000,000
|
)
|
Payment of stock issuance costs
|
(367,101
|
)
|
|
—
|
|
Distributions to noncontrolling interest
|
(31,362
|
)
|
|
—
|
|
Net cash provided by (used in) investing activities
|
223,235
|
|
|
(2,201,722
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from demand notes payable, related party
|
—
|
|
|
150,000
|
|
Payment of stock issuance costs
|
—
|
|
|
(28,548
|
)
|
Proceeds from debt issuance costs
|
—
|
|
|
(2,034
|
)
|
Proceeds from the exercise of stock options
|
128,918
|
|
|
312,698
|
|
Proceeds from exercise of warrants
|
—
|
|
|
2,700,000
|
|
Net cash provided by financing activities
|
128,918
|
|
|
3,132,116
|
|
Net decrease in cash and cash equivalents
|
(1,644,718
|
)
|
|
(1,984,469
|
)
|
Cash and cash equivalents, beginning of the period
|
3,721,765
|
|
|
5,486,526
|
|
Cash and cash equivalents, end of the period
|
$
|
2,077,047
|
|
|
$
|
3,502,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flows information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
95,550
|
|
|
$
|
94,049
|
|
Exchange of stock for non-controlling interest in Ilios
|
$
|
—
|
|
|
$
|
330,852
|
|
Issuance of stock to acquire American DG Energy
|
$
|
18,745,007
|
|
|
$
|
—
|
|
Issuance of Tecogen stock options in exchange for American DG Energy options
|
$
|
114,896
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
Description of business
Tecogen Inc., or the Company, we, our or us produces commercial and industrial, natural-gas-fueled engine-driven, combined heat and power (CHP) products that reduce energy costs, decrease greenhouse gas emissions and alleviate congestion on the national power grid. The Company’s products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The Company also installs, owns, operates and maintains complete energy systems and other complementary systems at customer sites and sells electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates.
The majority of the Company’s customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast. The Company's common stock is listed on NASDAQ under the ticker symbol TGEN.
On May 18, 2017, the Company acquired
100%
of the outstanding common stock of American DG Energy Inc., formerly a related entity, in a stock-for-stock merger (see Note 3. "Acquisition of American DG Energy Inc.").
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the
nine months ended
September 30, 2017
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2017
.
The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in Tecogen Inc.'s Annual Report on Form 10-K and American DG Energy Inc.'s Annual Report on Form 10-K for the year ended December 31, 2016.
There have been no significant changes in accounting principles, practices or methods for making estimates.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and entities in which it has a controlling financial interest. Those entities include the Company's wholly-owned subsidiaries American DG Energy Inc. and Ilios Inc. and a joint venture, American DG New York, LLC, in which American DG Energy Inc. holds a
51.0%
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.
Significant New Accounting Standards or Updates Not Yet Effective
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update related to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This accounting standard update, as amended, will be effective for the Company beginning in the first quarter of fiscal 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective basis"). The Company expects to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2018, and has engaged an outside expert to assist with the evaluation of the impact of this accounting standard update on its consolidated financial statements and its implementation.
Leases
In February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
Note 2. Income (Loss) Per Common Share
Basic and diluted income (loss) per share for the three and
nine months ended
September 30, 2017
and
2016
, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income (loss) attributable to stockholders
|
|
$
|
27,211
|
|
|
$
|
207,868
|
|
|
$
|
(221,544
|
)
|
|
$
|
(1,100,839
|
)
|
Weighted average shares outstanding - Basic
|
|
24,720,613
|
|
|
19,640,812
|
|
|
22,643,406
|
|
|
19,071,497
|
|
Basic income (loss) per share
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
Weighted average shares outstanding - Diluted
|
|
24,930,624
|
|
|
20,229,120
|
|
|
22,643,406
|
|
|
19,071,497
|
|
Diluted income (loss) per share
|
|
$0.00
|
|
$0.01
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
Anti-dilutive shares underlying stock options outstanding
|
|
|
|
|
|
|
|
235,736
|
|
|
1,130,158
|
|
Anti-dilutive convertible debentures
|
|
|
|
|
|
|
|
889,830
|
|
|
889,830
|
|
Anti-dilutive warrants outstanding
|
|
|
|
|
|
250,000
|
|
|
250,000
|
|
Note 3. Acquisition of American DG Energy Inc.
On May 18, 2017, we completed our acquisition, by means of a stock-for-stock merger, of
100%
of the outstanding common shares of American DG Energy Inc. (“American DG Energy" or "ADGE”), a company which installs, owns, operates and maintains complete distributed generation of electricity systems, or DG systems or energy systems, and other complementary systems at customer sites and sells electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates, by means of a merger of one of our wholly owned subsidiaries with and into ADGE such that ADGE became a wholly owned subsidiary of Tecogen. We acquired ADGE to, among other reasons, expand our product offerings and benefit directly from the long-term contracted revenue streams generated by these installations. We gained control of ADGE on May 18, 2017 by issuing common stock to the prior stockholders of ADGE.
We have included the financial results of ADGE in our condensed consolidated financial statements from the date of acquisition. For the
three
and
nine
months ended
September 30, 2017
, ADGE contributed
$1,556,115
and
$2,330,307
to our total revenues and
$832,917
and
$1,276,566
to our gross profit, respectively.
Acquisition related costs included in general and administrative expenses totaled
$37,445
and
$374,042
, respectively for the three and
nine months
ended
September 30, 2017
. Stock issuance related costs totaling
$367,101
were netted against additional paid in capital during the
nine months
ended
September 30, 2017
.
The merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986. Subject to the terms and conditions of the merger agreement, at the
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
closing of the merger, each outstanding share of ADGE common stock was converted into the right to receive approximately
0.092
shares of common stock of Tecogen (the "Exchange Ratio").
Also in connection with the merger, Tecogen, at the effective time of the merger, assumed the (a) outstanding stock options of ADGE and (b) outstanding warrants to purchase common stock of ADGE, each as adjusted pursuant to the Exchange Ratio and subject to the terms of the merger agreement.
The fair value of the
4,662,937
shares of common stock issued as part of the consideration for the acquisition was determined based on the closing market price of Tecogen’s stock on the date of acquisition. Additionally, as there is no required service condition in the assumed equity-based awards, 100% of the estimated fair value of the replacement equity-based awards at the date of the merger is considered attributable to pre-combination service and accordingly is included in the consideration.
The following table summarizes the consideration paid for ADGE and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE.
|
|
|
|
|
|
Consideration
|
|
|
Tecogen common stock - 4,662,937 shares
|
|
$
|
18,745,007
|
|
Assumed fully vested equity awards
|
|
114,896
|
|
|
|
$
|
18,859,903
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
|
Financial assets
|
|
$
|
1,551,590
|
|
Inventory
|
|
108,333
|
|
Prepaid and other current assets
|
|
358,628
|
|
Property, plant and equipment
|
|
15,430,250
|
|
Investment securities
|
|
519,568
|
|
Identifiable intangibles assets
|
|
1,456,166
|
|
Financial liabilities
|
|
(1,857,859
|
)
|
Unfavorable contract liability
|
|
(10,838,571
|
)
|
Other liabilities
|
|
(939
|
)
|
Total identifiable net assets
|
|
6,727,166
|
|
Noncontrolling interest in American DG New York, LLC
|
|
(469,672
|
)
|
Excess of cost over fair value of net assets acquired
|
|
12,602,409
|
|
|
|
$
|
18,859,903
|
|
Amounts recognized in respect of inventory, property, plant and equipment, identifiable intangible assets, unfavorable contract liability and noncontrolling interest are provisional, pending completion of the necessary valuations and analysis.
Excess of cost over fair value of net assets acquired of $
12.6 million
arising from the acquisition is primarily attributable to the going concern element of ADGE’s business, including its assembled workforce and the long-term contractual nature of its business, as well as expected cost synergies from the merger related primarily to the elimination of administrative overhead and duplicative personnel. None of the excess purchase price over net assets acquired recognized is expected to be deductible for income tax purposes.
Identified intangible assets and the unfavorable contract liability, both of which relate to existing customer contracts, and the estimated amortization are more fully described in Note 5, "Intangible Assets and Liabilities Other Than Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired".
The fair value of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE, was estimated using the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within level 3 of the fair value hierarchy described in ASC Section 820-10-35. Key assumptions include a discount rate of
5.61%
and the run out of existing contracts at current levels of profitability.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for Tecogen and ADGE as though the companies were combined as of the beginning of fiscal 2016. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition including amortization charges and credits from acquired intangible assets and liabilities (certain of which are preliminary), and depreciation adjustments related to fair value as though the aforementioned companies were combined as of the beginning of fiscal 2016. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016.
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
2017
|
|
2016
|
Total revenues
|
|
$
|
25,030,586
|
|
|
$
|
21,240,102
|
|
Net income (loss)
|
|
(998,323
|
)
|
|
(2,236,396
|
)
|
Basic earnings (loss) per share
|
|
(0.04
|
)
|
|
(0.09
|
)
|
Diluted earnings (loss) per share
|
|
(0.04
|
)
|
|
(0.09
|
)
|
One-time acquisition-related expenses related to the merger incurred during the three-month and
nine
-month periods ended
September 30, 2017
are not included in the unaudited pro forma financial information as they are not expected to have a continuing impact on the consolidated results.
The unaudited pro forma financial information does not include the revenues or results of operations of a subsidiary previously owned and consolidated by American DG Energy as that subsidiary was disposed of in 2016 prior to the acquisition by Tecogen and was considered to be a discontinued operation by American DG Energy. Additionally, the unaudited pro forma financial information does not include a gain recognized on deconsolidation of that same subsidiary by American DG Energy and an amount of interest cost related to American DG Energy's long-term debt which was extinguished contemporaneously with the disposition of the subsidiary.
Note 4. Property, Plant and Equipment
Property, plant and equipment at
September 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
Life (in Years)
|
|
September 30, 2017
|
|
December 31, 2016
|
Energy systems
|
1 - 15 years
|
|
$
|
12,823,745
|
|
|
$
|
—
|
|
Machinery and equipment
|
5 - 7 years
|
|
1,127,264
|
|
|
1,009,893
|
|
Furniture and fixtures
|
5 years
|
|
103,971
|
|
|
141,874
|
|
Computer software
|
3 - 5 years
|
|
196,417
|
|
|
102,415
|
|
Leasehold improvements
|
*
|
|
440,519
|
|
|
437,341
|
|
|
|
|
14,691,916
|
|
|
1,691,523
|
|
Less - accumulated depreciation and amortization
|
|
|
(2,017,401
|
)
|
|
(1,174,380
|
)
|
|
|
|
12,674,515
|
|
|
517,143
|
|
Construction in progress
|
|
|
2,828,459
|
|
|
—
|
|
|
|
|
$
|
15,502,974
|
|
|
$
|
517,143
|
|
* Lesser of estimated useful life of asset or lease term
Depreciation and amortization expense on property and equipment for the
three
and
nine months ended
September 30, 2017
and
2016
was
$425,911
and
$751,960
, and
$42,084
and
$125,255
, respectively.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 5. Intangible Assets and Liabilities Other Than Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired
As of
September 30, 2017
and
December 31, 2016
the Company had the following amounts related to intangible assets and liabilities other than goodwill and excess of cost over fair value of net assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Intangible assets
|
|
Cost
|
|
Accumulated Amortization
|
|
Total
|
|
Cost
|
|
Accumulated Amortization
|
|
Total
|
Product certifications
|
|
$
|
602,202
|
|
|
$
|
(272,503
|
)
|
|
$
|
329,699
|
|
|
$
|
544,651
|
|
|
$
|
(233,992
|
)
|
|
$
|
310,659
|
|
Patents
|
|
656,105
|
|
|
(146,983
|
)
|
|
509,122
|
|
|
681,155
|
|
|
(123,012
|
)
|
|
558,143
|
|
Developed technology
|
|
240,000
|
|
|
(72,000
|
)
|
|
168,000
|
|
|
240,000
|
|
|
(60,000
|
)
|
|
180,000
|
|
Trademarks
|
|
19,215
|
|
|
—
|
|
|
19,215
|
|
|
17,165
|
|
|
—
|
|
|
17,165
|
|
Favorable contract asset
|
|
1,456,166
|
|
|
(52,024
|
)
|
|
1,404,142
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
2,973,688
|
|
|
$
|
(543,510
|
)
|
|
$
|
2,430,178
|
|
|
$
|
1,482,971
|
|
|
$
|
(417,004
|
)
|
|
$
|
1,065,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible liability
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfavorable contract liability
|
|
$
|
10,838,571
|
|
|
$
|
(480,288
|
)
|
|
$
|
10,358,283
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the
nine months ended
September 30, 2017
and
2016
was $
74,482
and
$73,511
, respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the
nine months ended
September 30, 2017
and
2016
was
$428,264
and $-
0
-, respectively.
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 on May 18, 2017 (see Note 3. "Acquisition of American DG Energy Inc."). These contracts are long-term and provide customers with an alternative source of electrical power in addition to that provided by the local power utility, at rates that are lower than local utilities. This alternative electrical power is typically produced by ADGE owned, operated and maintained natural gas powered systems installed at the customers' sites, with ADGE bearing all costs of operation and maintenance. In addition to the alternative source of electrical power provided by ADGE’s systems, customers can opt to add and take advantage of the heat generated in the electrical production process in the form of hot water and/or space heating. Pricing to the customer for electrical power produced and supplied by ADGE under the contracts is under a fixed formula which requires the customer to pay for the kilowatts of electrical power provided at a fixed percentage discount to the local utility’s electric rate for that period. As a result, as utility rates for electrical power change, the amount ADGE is able to charge the customer under the contract also changes. There has been a sharp decrease in electric rates over the past several years, subsequent to the vast majority of customer contract dates, causing the billable value of the electrical power generated by ADGE’s systems to decrease, resulting in a deterioration of expected profitability. As of the date of acquisition, utility electric rates were significantly below the level anticipated at the time the fixed percentage discounts contained in the vast majority of ADGE’s customer contracts were contracted for, thus these contract terms, although they produce cash flow, were considered to be off market in the vast majority of ADGE’s customer contracts. Additionally, the demand and volume of kilowatts produced and billed for vary by contract and by period and in certain instances have been significantly below what was originally expected such that had it been known at the time the contract(s) were negotiated, it would have influenced ADGE’s determination of the level of the fixed percentage discount in those contracts.
The determination of fair value requires development of an estimate of the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Contracts are considered to be assets or liabilities by virtue of the rights and obligations inherent in the contract terms. Typically, contracts with terms considered to be at market are considered to have no fair value as in order to be entitled to the rights under the contract performance must occur for which a market rate of return is earned due to the at market terms. The fair value of a contract is primarily a measurement of its off market terms. The obligation to perform under a contract with terms that are unfavorable to market results in a liability to the extent its terms are off market. The resulting liability is an estimate of the price that would need to be paid to a willing market participant to assume the obligations under the contract in order for them to receive a market rate of return for their remaining performance obligation under the contract. The exact
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
opposite holds true in instances where the terms of a contract are considered to be favorable to market. In that case an asset would exist as an estimate of the price that would be received from a willing market participant in order to be entitled to the rights under the contract.
In determining the estimate of fair value of ADGE’s customer contracts, the measure of at market, and thus the baseline to measure the amount related to any of the off market terms or conditions with respect to the contracts, was considered best determined, given the nature of the services provided under the contracts, by utilizing a benchmark level of margin, in this case
35%
of revenue which is consistent with the average return on revenue of US investor owned public utilities. It is believed that a market participant would have utilized a similar margin in arriving at a buy price for the contract(s).
Amortization of intangibles including contract related amounts is calculated using the straight line method over the remaining useful life or contract term. Aggregate future amortization over the next five years is estimated to be as follows:
|
|
|
|
|
|
Year 1
|
|
$
|
(993,749
|
)
|
Year 2
|
|
(911,514
|
)
|
Year 3
|
|
(847,307
|
)
|
Year 4
|
|
(858,084
|
)
|
Year 5
|
|
(840,273
|
)
|
Note 6. Goodwill and Excess of Cost Over Fair Value of Net Assets Acquired
Changes in the carrying amount of goodwill and excess of cost over fair value of net assets acquired
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Excess of cost over fair value of net assets acquired
|
Balance at December 31, 2016
|
|
$
|
40,870
|
|
|
$
|
—
|
|
Acquisitions
|
|
—
|
|
|
12,602,409
|
|
Balance at September 30, 2017
|
|
$
|
40,870
|
|
|
$
|
12,602,409
|
|
Excess of cost over fair value of net assets acquired at
September 30, 2017
has not as of yet been allocated to the respective segments pending completion of the necessary analysis.
Note 7. Stock-Based Compensation
Stock-Based Compensation
The Company adopted the 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 Plan to
3,838,750
as of
September 30, 2017
, or the Amended Plan.
Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the Amended Plan. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of
September 30, 2017
was
2,250,536
.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Stock option activity for the
nine months ended
September 30, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
Number of
Options
|
|
Exercise
Price
Per
Share
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding, December 31, 2016
|
1,117,918
|
|
|
$0.79-$5.39
|
|
$
|
3.10
|
|
|
5.00 years
|
|
$
|
1,415,150
|
|
Granted
|
45,000
|
|
|
$3.22-$3.72
|
|
3.35
|
|
|
|
|
|
Assumed in merger
|
156,124
|
|
|
$3.15-$30.33
|
—
|
|
10.35
|
|
|
|
|
|
Exercised
|
(79,543
|
)
|
|
$0.79-$2.00
|
|
1.62
|
|
|
|
|
|
Canceled and forfeited
|
(106,112
|
)
|
|
$2.60-$30.33
|
|
9.67
|
|
|
|
|
|
Outstanding, September 30, 2017
|
1,133,387
|
|
|
$0.79-$25.11
|
|
$
|
3.62
|
|
|
5.25 years
|
|
$
|
484,535
|
|
Exercisable, September 30, 2017
|
883,631
|
|
|
|
|
$
|
3.42
|
|
|
|
|
$
|
201,957
|
|
Vested and expected to vest, September 30, 2017
|
1,095,925
|
|
|
|
|
$
|
3.59
|
|
|
|
|
$
|
605,063
|
|
Consolidated stock-based compensation expense for the
nine months ended
September 30, 2017
and
2016
was
$138,329
and
$117,065
, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the periods.
Note 8. Fair Value Measurements
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1
- Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
Level 2 -
Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3
- Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability.
The following table presents the asset reported in the consolidated balance sheet measured at its fair value on a recurring basis as of
September 30, 2017
by level within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Quoted prices in active markets for identical assets
|
|
Significant other observable inputs
|
|
Significant unobservable inputs
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total gains (losses)
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
Available-for-sale equity securities
|
|
|
|
|
|
|
|
|
|
EuroSite Power Inc.
|
$
|
334,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
334,570
|
|
|
$
|
(184,998
|
)
|
Total recurring fair value measurements
|
$
|
334,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
334,570
|
|
|
$
|
(184,998
|
)
|
The Company utilizes a Level 3 category fair value measurement to value its investment in EuroSite Power as an available-for-sale security at period end. That measurement is determined by management based on the lowest closing sales price in a
15
day trading period prior to period end.
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes changes in level 3 assets which are comprised of available-for-sale securities for the period:
|
|
|
|
|
Fair value at acquisition on May 18, 2017
|
$
|
519,568
|
|
Unrealized loss recognized in other comprehensive loss
|
(184,998
|
)
|
Fair value at September 30, 2017
|
$
|
334,570
|
|
Note 9. Commitments and Contingencies
The Company guarantees certain obligations of a former subsidiary of American DG Energy, EuroSite Power Inc. These guarantees include a payment performance guarantee in respect of collateralized equipment financing loans, with a remaining principal amount outstanding subject to the guarantee at
September 30, 2017
of approximately
$301,000
due ratably in equal installments through September 2021, and certain guarantees of performance in respect of certain customer contracts. Based on current conditions, the Company does not believe there to be any amounts probable of payment by the Company under any of the guarantees and has estimated the value associated with the non-contingent aspect of the guarantees is approximately
$10,000
which is recorded as liability in the accompanying financial statements.
Legal Proceedings
Tecogen is not currently a party to any material litigation arising from its operations, and it is not aware of any pending or threatened litigation against it relating to its operations that could have a material adverse effect on its business, operating results or financial condition. However, it is or has been a party to a claim in the Superior Court of the Commonwealth of Massachusetts and named as a defendant in a case in the United States District Court for the District of Massachusetts, described below, related
to the Merger.
Massachusetts Superior Court Action
On or about February 6, 2017, ADGE, John Hatsopoulos, George N. Hatsopoulos, Charles T. Maxwell, Deanna M. Petersen, Christine Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen, and Merger Sub were served with a Verified Complaint by William C. May ("May"), individually and on behalf of the other shareholders of ADGE as a class. The action was commenced in the Business Litigation Session of the Superior Court of the Commonwealth of Massachusetts, Civil Action No. 17-0390. The complaint alleged class action claims arising out of the proposed Merger. On May 31, 2017, May voluntarily dismissed the action and consolidated his claims with the pending federal action in the United States District Court for the District of Massachusetts. If the complaint in the federal court is dismissed, it is possible that May or another plaintiff will recommence an action in state court with similar claims to those asserted by May.
United States District Court Action
On or about February 15, 2017, a lawsuit was filed in the United States District Court for the District of Massachusetts by Lee Vardakas (“Vardakas”), individually and on behalf of other stockholders of ADGE, naming ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Benjamin Locke, Charles T. Maxwell, Deanne M. Petersen, Christine M. Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants. The action is captioned
Vardakas v. American DG Energy, Inc.
, Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
On May 18, 2017, ADGE’s and Tecogen’s shareholders approved the Merger.
Following the consummation of the Merger (and the appointment of May, from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint discontinued the claims against Cassel Salpeter & Co., LLC but asserted against the remaining defendants claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 14a-9; claims against certain defendants for control person liability under § 20(a) of the Exchange Act (collectively, the “Federal Securities Law Claims”); and common law claims for breach of fiduciary duty and aiding and abetting (the “State Law Claims”). The Federal Securities Law Claims allege, in substance, that defendants made material nondisclosure in the proxy statement about the process leading to the Merger and about the fairness opinion relied upon by ADGE’s Board of Directors in recommending the Merger to shareholders. The State Law Claims assert, in substance, that defendants breached their fiduciary duties in negotiating and approving the Merger, which, plaintiff claims, deprived ADGE’s nonaffiliated shareholders of fair value for their shares.
On July 19, 2017, defendants moved to dismiss the Amended Complaint. In their motion papers, defendants contend that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim. Defendants also assert that
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
if the Federal Securities Law Claims are dismissed, the district court must also dismiss the State Law Claims because it would lack subject matter jurisdiction. The parties are awaiting a decision from the court.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimed and the likelihood of an unfavorable outcome is not reasonably estimable.
Note 10. Related Party Transactions
The Company has
two
affiliated companies, namely Ultra Emissions Technologies Ltd, and TTcogen LLC. These companies are related because either several of the major stockholders of those companies have a significant ownership position in the Company or they are joint ventures between Tecogen and other parties.
In January of 2017, prior to its acquisition of American DG Energy, the Company purchased a large quantity of used equipment from American DG Energy for approximately
$985,000
. Tecogen plans to sell this equipment to specific customers in the coming quarters.
In connection with the acquisition of American DG Energy, the Company assumed a loan from John N. Hatsopoulos, the Company's Co-Chief Executive Officer and a Company Director. The loan is in the amount of
$850,000
and bears interest at
6%
, payable quarterly, and matures and becomes due and payable on May 25, 2018.
Ultra Emissions Technologies Ltd.
On December 28, 2015, the Company entered into a joint venture agreement relating to the formation of a joint venture company (the “JV”) organized to develop and commercialize Tecogen’s patented technology (“Ultera
®
Technology”) designed to reduce harmful emissions generated by engines using fossil fuels. The joint venture company, called Ultra Emissions Technologies Limited, was organized under the laws of the Island of Jersey, Channel Islands.
The Company received a
50%
equity interest in the JV in exchange for a fully paid-up worldwide license to use Tecogen’s Ultera emissions control technology in the field of mobile vehicles burning fossil fuels. The other half of the joint venture equity interests were purchased for
$3,000,000
by a small group of offshore investors. Warrants to purchase additional equity securities in the JV were granted to all parties pro rata. If the venture is not successful, all licensed intellectual property rights will revert to Tecogen.
On August 2, 2016, Tecogen exercised
2,000,000
warrants (the "Ultratek Warrants"), in the JV, at
$1.00
per share, for an aggregate amount of
$2 million
. The funds used to exercise the Ultratek Warrants were acquired by the Company from the holders of certain Company warrants (the "Tecogen Warrant Holders"), when they partially exercised their Tecogen warrants (the "Tecogen Warrants"), in July of 2016. The Tecogen Warrant Holders exercised a total of
675,000
Tecogen Warrants with a
$4.00
exercise price, resulting in cash proceeds of
$2,700,000
to the Company, which the Company then used in part to invest in the JV. An additional
$8,500,000
was raised from other outside investors for a total equity investment in the JV to date of
$13,500,000
. Due to this investment, Tecogen's ownership has decreased to
43%
.
The JV is expected to have losses as it performs the necessary research and development with the Ultera technology. The Company accounts for its interest in the JV using the equity method. Income and losses will be recorded consistent with an agreement between the JV shareholders as to how income and losses will be allocated. These allocations are consistent with the allocation of cash distributions and liquidating distributions of the JV. The shareholder agreement calls for Tecogen's investment to be returned before any other shareholder if the venture does not achieve commercialization. As a result, as of
September 30, 2017
, Tecogen has not recorded any of the losses of the JV as the cumulative losses of the JV have not exceeded the other owners' investments to date. As of
September 30, 2017
,
$94,777
is due to Tecogen from Ultratek.
TTcogen LLC
On May 19, 2016, the Company along with Tedom a.s., a corporation incorporated in the Czech Republic and a European combined heat and power product manufacture ("Tedom"), entered into a joint venture, where the Company will hold a
50%
participating interest and the remaining
50%
interest will be with Tedom. As part of the joint venture, the parties agreed to create a Delaware limited liability company, TTcogen LLC ("TTcogen"), to carry out the business of the venture. Tedom granted TTcogen the sole and exclusive right to market, sell, offer for sale, and distribute certain products as agreed to by the parties throughout the United States. The product offerings of the joint venture expand the current Tecogen product offerings to the MicroCHP of 35kW to large 4,000kW plants. Tecogen agreed to refer all appropriate sale leads to TTcogen regarding the products agreed to by the parties and Tecogen shall have the first right to repair and maintain the products sold by TTcogen.
The Company accounts for its interest in TTcogen's operations using equity method accounting. Any initial operating losses of TTcogen are to be borne and funded by Tedom. To the extent any such losses are borne and funded solely by Tedom, the
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Company will not recognize any portion of such losses given the Company does not guarantee the obligations of the joint venture nor is it committed to provide funding to the joint venture. As of period ending
September 30, 2017
,
$391,618
is due to Tecogen from TTcogen.
On September 22, 2017, the Company provided written notice to Tedom and Tedom USA Inc., a Delaware subsidiary of Tedom (“Tedom USA”) in exercise of its rights under the Join Venture Agreement dated May 19, 2016 ("JVA") and its corresponding LLC Operating Agreement ("LLC Operating Agreement"), of the immediate termination of the JVA and LLC Operating Agreement. This notice begins the dissolution process under the LLC Operating Agreement. The termination notice was the result of a material and incurable breach of certain provisions thereunder by Tedom and/or Tedom USA. The Company intends to work together with Tedom to come to an amicable decision to create a new path forward for TTcogen and the relationship between the Company and Tedom and/or facilitate an amicable wind up of TTcogen's affairs as provided for in the LLC Operating Agreement and in accordance with the terms therewith.
Note 11. Segments
As of
September 30, 2017
, the Company was organized into
two
operating divisions through which senior management evaluates the Company’s business. These divisions, as described in more detail in Note 1, are organized around the products and services provided to customers and represent the Company’s reportable segments. Prior to the acquisition of ADGE (see Note 3. “Acquisition of American DG Energy Inc.”), the Company’s operations were comprised of a single segment.The following table presents information by reportable segment for the
three months ended
September 30, 2017
and
2016
and the
nine months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and Services
|
|
Energy Production
|
|
Corporate, other and elimination (1)
|
|
Total
|
|
Three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue - external customers
|
|
$
|
6,945,083
|
|
|
$
|
1,556,115
|
|
|
$
|
—
|
|
|
$
|
8,501,198
|
|
|
Intersegment revenue
|
|
250,525
|
|
|
—
|
|
|
(250,525
|
)
|
|
—
|
|
|
Total revenue
|
|
7,195,608
|
|
|
1,556,115
|
|
|
(250,525
|
)
|
|
8,501,198
|
|
|
Gross profit
|
|
2,425,114
|
|
|
832,917
|
|
|
—
|
|
|
3,258,031
|
|
|
Identifiable assets
|
|
19,179,530
|
|
|
16,028,115
|
|
|
21,424,270
|
|
|
56,631,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue - external customers
|
|
$
|
6,616,455
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,616,455
|
|
|
Intersegment revenue
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total revenue
|
|
6,616,455
|
|
|
—
|
|
|
—
|
|
|
6,616,455
|
|
|
Gross profit
|
|
2,774,818
|
|
|
—
|
|
|
—
|
|
|
2,774,818
|
|
|
Identifiable assets
|
|
15,112,139
|
|
|
—
|
|
|
8,078,531
|
|
|
23,190,670
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue - external customers
|
|
$
|
20,608,196
|
|
|
$
|
2,330,307
|
|
|
$
|
—
|
|
|
$
|
22,938,503
|
|
|
Intersegment revenue
|
|
442,343
|
|
|
—
|
|
|
(442,343
|
)
|
|
—
|
|
|
Total revenue
|
|
21,050,539
|
|
|
2,330,307
|
|
|
(442,343
|
)
|
|
22,938,503
|
|
|
Gross profit
|
|
7,882,758
|
|
|
1,276,566
|
|
|
—
|
|
|
9,159,324
|
|
|
Identifiable assets
|
|
19,179,530
|
|
|
16,028,115
|
|
|
21,424,270
|
|
|
56,631,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue - external customers
|
|
$
|
17,379,278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,379,278
|
|
|
Intersegment revenue
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total revenue
|
|
17,379,278
|
|
|
—
|
|
|
—
|
|
|
17,379,278
|
|
|
Gross profit
|
|
6,597,056
|
|
|
—
|
|
|
—
|
|
|
6,597,056
|
|
|
Identifiable assets
|
|
15,112,139
|
|
|
—
|
|
|
8,078,531
|
|
|
23,190,670
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Corporate, intersegment revenue, other and elimination includes various corporate assets. Excess of cost over fair value of net assets acquired at September 30, 2017 has not as of yet been allocated to the respective segments pending completion of the necessary analysis.
|
|
TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 12. Subsequent Events
By unanimous written consent on October 24, 2017, the shareholders of Tecogen Inc.'s (the "Company") joint venture, Ultra Emissions Technologies S.ar.L, ("Ultratek"), voted to dissolve Ultratek, thus terminating the joint venture agreement dated December 28, 2015 and the license agreement between the Company and Ultratek, dated December 28, 2015. This joint venture agreement and license agreement is described in its entirety on the Company's Form 8-K that was filed with the Securities and Exchange Commission on December 31, 2015.
Pursuant to the unanimous shareholder consent dissolving Ultratek, the Company will be receiving its full
$2,000,000
investment into Ultratek back upon the completion of the liquidation process. Further, upon termination of the license agreement all intellectual property immediately reverts back to the Company. The Company has also agreed to purchase all of the assets of Ultratek upon dissolution, including new intellectual property that Ultratek developed, for a total purchase price of
$400,000
.
The Company has evaluated subsequent events through the date of this filing and determined that no additional subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company’s estimates change, and readers should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in this Quarterly Report.
Overview
Tecogen Inc., or the Company, or Tecogen, designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning using automotive engines that have been specially adapted to run on natural gas. In some cases, our customers may choose to have the Company engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide 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).
With the acquisition of American DG Energy Inc., or American DG or ADGE, on May 18, 2017, we now also sell energy in the form of electricity, heat, hot water and cooling to our customers under long-term energy sales agreements (with a standard term of 10 to 15 years). Our typical sales model is to own and install energy systems in our customers’ buildings and sell the energy produced by those systems back to the customers at a cost set by a negotiated formula in our customer contracts. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We use a contractually defined formula to multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from each customer's local energy utility, to derive the value of our monthly energy sale, which includes a negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customers’ local energy utility that month. Our revenues commence as new energy systems become operational. As of
September 30, 2017
, we had
93
energy systems operational.
The Company’s operations are comprised of two business segments. Our Products and Services segment ("Segment 1")
designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Energy Production segment ("Segment 2") sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
In addition to being a smaller reporting company, Tecogen is an emerging growth company as that term is defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act).
Results of Operations
Third Quarter
of
2017
Compared to
Third Quarter
of
2016
Revenues
Total revenues in the
third
quarter of
2017
were
$8,501,198
compared to
$6,616,455
for the same period in
2016
,
an increase
of
$1,884,743
or
28.5%
.
Segment 1 - Product and Services
Product revenues in the
third
quarter of
2017
were
$2,425,616
compared to
$2,850,901
for the same period in
2016
,
a decrease
of
$425,285
or
14.9%
. This
decrease
was the aggregate of a decrease in cogeneration sales of
$797,528
and an increase in chiller and heat pump sales of
$372,243
. Service revenues in the
third
quarter of
2017
were
$4,519,467
compared to
$3,765,554
for the same period in
2016
,
an increase
of
$753,913
or
20.0%
. This
increase
in the
third
quarter is due to
an increase
in installation activity of
$757,554
and
a decrease
of
$3,641
in service contract revenues.
Segment 2 - Energy Production
Energy production revenues in the
third
quarter of
2017
were
$1,556,115
, which represents energy revenues earned for the entire quarter as American DG Energy was acquired during Q2 2017.
Cost of Sales
Cost of sales in the
third
quarter of
2017
was
$5,243,167
compared to
$3,841,637
for the same period in
2016
,
an increase
of
$1,401,530
, or
36.5%
.
Segment 1 - Product and Services
Cost of sales for product and services in the
third
quarter of
2017
was
$4,519,969
compared to
$3,841,637
for the same period in
2016
, an increase of
$678,332
or
17.7%
. During the
third
quarter our overall gross margin was
34.9%
compared to
41.9%
for the same period in
2016
,
a decrease
of
16.7%
. This decrease is due to a change in product mix.
Segment 2 - Energy Production
Cost of sales for energy production in the
third
quarter of
2017
was
$723,198
which represents the cost associated with energy revenues earned during the quarter. During this period our gross margin for energy production was
53.5%
.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses in the quarter ending
September 30, 2017
were
$2,427,352
compared to
$2,003,838
for the same period in
2016
,
an increase
of
$423,514
or
21.1%
. The increase was due to increased costs from the addition of American DG Energy's operations.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the
third
quarter of
2017
were
$503,415
compared to
$367,412
for the same period in
2016
,
an increase
of
$136,003
or
37.0%
. This difference is due to a larger sales force and increased public relations and trade show costs.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses in the quarter ending
September 30, 2017
were
$241,725
compared to
$154,075
for the same period in
2016
,
an increase
of
$87,650
or
56.9%
. This
increase
was due to the Company's cost sharing in connection with a research and development grant, which pertains to the potential commercialization of the Company's Ultera emissions technology for certain non-stationary applications.
Income from Operations
Income from operations for the
third
quarter of
2017
was
$85,539
compared to
$249,493
for the same period in
2016
, a decrease of
$163,954
. The decrease was a result of lower margins due to change in product mix. Income for the
third
quarter of
2017
included one-time merger related expenses of
$37,445
and depreciation and amortization expense on the energy producing sites of
$160,061
.
Other Income (Expense), net
Other expense, net for the
three months ended
September 30, 2017
was
$30,393
compared to
$41,625
for the same period in
2016
. Other income (expense) includes interest and other income of
$14,849
, and interest expense on notes payable of
$45,242
for the
third
quarter of
2017
. For the same period in
2016
, interest and other income was
$3,914
and interest expense was
$45,539
.
Noncontrolling Interest
The income attributable to the noncontrolling interest was
$27,935
for the
three months ended
September 30, 2017
which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC.
Net Income Attributable to Tecogen Inc.
Net income attributable to Tecogen for the
three months ended
September 30, 2017
was
$27,211
compared to
$207,868
for the same period in
2016
, a decrease of
$180,657
, year over year. The decrease was the result of a change in product mix.
Other Comprehensive Income
The unrealized gain on securities of
$39,361
for the
third
quarter of
2017
represents a market fluctuation impacting the fair value of American DG Energy's remaining common stock ownership in its former partially owned subsidiary, EuroSite Power Inc. as of
September 30, 2017
.
First Nine Months
of
2017
Compared to
First Nine Months
of
2016
Revenues
Total revenues for the
first nine months
of
2017
were
$22,938,503
compared to
$17,379,278
for the same period in
2016
, an increase of
$5,559,225
or
32.0%
.
Segment 1 - Product and Services
Product revenues in the
first nine months
of
2017
were
$8,349,159
compared to
$7,525,909
for the same period in
2016
,
an increase
of
$823,250
or
10.9%
. This
increase
was the net of an increase in cogeneration sales of
$648,863
and an increase in chiller and heat pump sales of
$174,387
. Service revenues for the
first nine months
of
2017
were
$12,259,037
compared to
$9,853,369
for the same period in
2016
,
an increase
of
$2,405,668
or
24.4%
. This
increase
in the
first nine months
of
2017
is due to
an increase
in installation activity of
$2,095,758
and an increase of
$309,910
in service contract revenues.
Segment 2 - Energy Production
Energy production revenues in the
first nine months
of
2017
were
$2,330,307
, which represents energy revenues earned from May 19, 2017, the date after acquisition of American DG Energy through
September 30, 2017
.
Cost of Sales
Cost of sales for the
first nine months
of
2017
was
$13,779,179
compared to
$10,782,222
for the same period in
2016
, an increase of
$2,996,957
, or
27.8%
.
Segment 1 - Product and Services
Cost of sales for product and services in the
first nine months
of
2017
was
$12,725,438
compared to
$10,782,222
for the same period in
2016
, an increase of
$1,943,216
or
18.0%
. During the
first nine months
of
2017
, our product and services gross margin was
38.3%
compared to
38.0%
for the same period in
2016
, a
0.8%
improvement. The
increase
in margin was a result of material cost savings in production and ongoing product development.
Product gross margin for the
first nine months
of
2017
was
37.0%
compared to
33.1%
for the same period in
2016
, a
11.8%
improvement. Service gross margin for the
first nine months
of
2017
was
39.1%
compared to
41.7%
, a decrease of
6.2%
due to normal fluctuations in cost.
Segment 2 - Energy Production
Cost of sales for energy production in the
first nine months
of
2017
was
$1,053,741
which represents the cost associated with energy revenues earned from May 19, 2017, the date after acquisition of American DG Energy through
September 30, 2017
; this represents approximately 42% of the second quarter's revenue plus the entire
third
quarter's revenue for American DG Energy. During this period our gross margin for energy production was
54.8%
; higher than expected, due to seasonality and a retroactive rate change which reduced fuel costs.
Operating Expenses
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the
nine months ended
September 30, 2017
were
$7,042,500
compared to
$5,898,230
for the same period in
2016
,
an increase
of
$1,144,270
or
19.4%
. The increase was mainly due to a combination of costs incurred in connection with the merger and related litigation as well as increased costs from the addition of American DG Energy's operations.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the
nine months ended
September 30, 2017
were
$1,558,378
compared to
$1,217,533
for the same period in
2016
,
an increase
of
$340,845
or
28.0%
. This difference is due to the mix of in-house sales versus representation commissions and increased public relations and trade show costs.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the
nine months ended
September 30, 2017
were
$641,064
compared to
$524,696
for the same period in
2016
,
an increase
of
$116,368
or
22.2%
. This
increase
was due to the Company's cost sharing in connection with a research and development grant in process.
Loss from Operations
Loss from operations for the
nine months ended
September 30, 2017
was
$82,618
compared to a loss of
$1,043,403
for the same period in
2016
, an improvement of
$960,785
. The improvement was due to increased product and services revenues, as well as the addition of our energy production revenue stream. The loss for the
nine months ended
September 30, 2017
included one-time merger related expenses of
$156,298
and depreciation and amortization expense of
$402,939
.
Other Income (Expense), net
Other expense, net for the
nine months ended
September 30, 2017
was
$93,993
compared to
$122,398
for the same period in
2016
. Other income (expense) includes interest and other income of
$21,033
, and interest expense on notes payable of
$115,026
for the
nine months ended
September 30, 2017
. For the same period in
2016
, interest and other income was
$9,575
and interest expense was
$131,973
.
Noncontrolling Interest
The income attributable to the noncontrolling interest was
$44,933
for the
nine months ended
September 30, 2017
which represents the noncontrolling interest portion of American DG Energy's 51% owned subsidiary, ADGNY, LLC. For the same period in
2016
, the loss attributable to the noncontrolling interest was
$64,962
which was the result of Tecogen's ownership in its former partially owned subsidiary Ilios Inc.
Net Loss Attributable to Tecogen Inc.
Net loss attributable to Tecogen for the
nine months ended
September 30, 2017
was
$221,544
compared to a loss of
$1,100,839
for the same period in
2016
, an improvement of
$879,295
. The improvement was the result of the Company's merger with American DG Energy in addition to
10.9%
growth in product revenue and
24.4%
growth in services revenue.
Other Comprehensive Loss
The unrealized loss on securities of
$184,998
for the
nine months ended
September 30, 2017
represents the market fluctuation impacting the fair value of American DG Energy's remaining common stock ownership in its former partially owned subsidiary, EuroSite Power Inc. as of
September 30, 2017
.
Liquidity and Capital Resources
Consolidated working capital at
September 30, 2017
was
$14,193,331
compared to
$14,436,452
at
December 31, 2016
,
a decrease
of
$243,121
. Included in working capital were cash and cash equivalents of
$2,077,047
at
September 30, 2017
, compared to
$3,721,765
in cash and cash equivalents at
December 31, 2016
,
a decrease
of
$1,644,718
. The decrease in working capital and cash was the result of longer collection periods and pre-buying for production.
Cash used in operating activities for the
nine months ended
September 30, 2017
was
$1,996,871
compared to
$2,914,863
for the same period in
2016
. Our accounts receivable balance
increased
to
$11,094,287
at
September 30, 2017
compared to
$8,630,418
at
December 31, 2016
, using
$1,908,655
of cash due to timing of billing, shipments, and collections. In addition, amounts due from related parties increased by
$236,971
using cash due to timing of billing and collections. Our inventory
increased
to
$6,118,835
as of
September 30, 2017
compared to
$4,774,264
as of
December 31, 2016
,
an increase
of
$1,344,571
. This increase is due to increased product sales as well as the purchase of used equipment from American DG. Although lowering inventory is a goal, management expects inventory to vary significantly based on production and customer delivery requirements.
As of
September 30, 2017
, the Company's backlog of product and installation projects, excluding service contracts, was
$14.5 million
, consisting of
$11.5 million
of purchase orders received by us and
$3.0 million
of projects in which the customer's internal approval process is complete, financial resources have been allocated and the customer has made a firm verbal commitment that the order is in the process of execution. Backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.
Accounts payable
increased
to
$5,356,449
as of
September 30, 2017
from
$3,367,481
at
December 31, 2016
, including $369,913 from the ADGE acquisition,
providing
$
1,641,206
, in cash flow from operations. Accrued expenses
increased
to
$1,676,307
as of
September 30, 2017
, including $531,617 from the ADGE acquisition, from
$1,378,258
as of
December 31, 2016
,
providing
$233,824
of cash from operations. The Company expects accounts payable and accrued expenses to fluctuate with routine changes in operations.
During the
first nine months of 2017
, our investing activities provided
$223,235
of cash and included the acquisition of American DG Energy cash through merger of
$971,454
, offset by purchases of property and equipment of
$315,205
, expenditures related to intangible assets of
$34,551
and cash paid for certain expenses associated with the merger of
$367,101
.
During the
first nine months of 2017
, our financing activities included
$128,918
in proceeds from the exercise of stock options.
Significant Accounting Policies and Critical Estimates
The Company’s, and it's now wholly-owned subsidiary, American DG Energy Inc.'s significant accounting policies are discussed in the Notes to their respective Consolidated Financial Statements in their Annual Reports on Form 10-K. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in the above notes and in the respective Annual Reports.
Significant New Accounting Standards or Updates Not Yet Effective
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 sales will be in the winter and the majority of our chilling systems sales will be in the summer. Unreasonable weather may therefore have an effect on our revenues throughout the year. Our cogeneration and chiller system sales are not generally affected by the seasons, although customer goals will be to have chillers installed and running in the spring. Our service team does experience higher demand in the warmer months when cooling is required. These units are generally shut down in the winter and started up again in the spring. This “busy season” for the service team generally runs from May through the end of September.
Off-Balance Sheet Arrangements
Currently, we do not have any material off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
The Company maintains "disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company's management, including our principal executive officers and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Co-Chief Executive Officers 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 material weaknesses with respect to a small number of individuals dealing with general controls over information technology and inadequate controls over revenue recognition with respect to the Company's recently acquired subsidiary, American DG Energy Inc. Management will continue to evaluate the above weaknesses. The Company is taking certain steps to remediate the weaknesses as resources become available.
Changes in Internal Control over Financial Reporting:
During the second and third quarters of 2017 and in connection with the acquisition of American DG Energy Inc. the Company augmented its capabilities with respect to application and implementation of generally accepted accounting principles as it relates to complex transactions and the related financial reporting requirements through modifications to financial management including a new Chief Accounting Officer. Such modifications also included securing timely access to and involvement of individuals with a high level of training and expertise with respect to complex accounting and financial reporting matters.