UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172023
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-36103
TECOGEN INC.
(Exact name of Registrant as specified in its charter)
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| Delaware | 04-3536131 |
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Delaware | 04-3536131 |
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
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| 45 First Avenue | |
| Waltham, Massachusetts 02451 | 02451(781) 466-6400 |
(Address of Principal Executive Offices) | (Offices and Zip Code) | Registrant's telephone number, including area code |
Registrant’s Telephone Number, Including Area Code: (781) 466-6400
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class | Name of each exchange on which registered |
Common Stock, $.001 par value | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:Common Stock, $.001 par value per share
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o ☐Accelerated filer oNon –accelerated filer o
Non–Accelerated Filer ☒Smaller reporting company x☒
Emerging growth company x☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.Yes ☐ No ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ý
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to (§240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ¨☐ No ý
As of June 30, 2017,2023, the last day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates was: $64,151,541.$14,886,556. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates. This determination of executive officers and directors as affiliates is not necessarily a conclusive determination for any other purposes.
As of March 21, 2018, 24,803,09625, 2024, 24,850,261 shares of common stock, $.001 par value per share, of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this Annual Report on Form 10-K is incorporated by reference from theto Tecogen Inc.'s definitive proxy statement for its 20182024 Annual Meeting of Stockholders which shallwill be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A under the Securities Act of 1934, as amended, within 120 days following its fiscal year ended December 31, 2023.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended within 120 days following(“Securities Exchange Act”), the registrant’s fiscal year ended December 31, 2017.Private Securities Litigation Reform Act of 1995 and other federal securities lawsthat involve a number of risks and uncertainties.Forward-looking statements generally can be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “contemplates,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “predicts,” “pro forma,” “potential” “seeks,” “should,” “target,” or other variations thereof (including their use in the negative), or by discussions of strategies, plans or intentions.All statements, other than statements of historical fact, included in this report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management are forward-looking statements.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause us, our customers’ or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking statements to differ. See "Item 1A. Risk Factors," "Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Item 1. Business," as well as other sections in this report that discuss some of the factors that could contribute to these differences.
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTSIn addition, such forward-looking statements are necessarily dependent upon assumptions and estimates that may prove to be incorrect.Although we believe that the assumptions and estimates reflected in such forward-looking statements are reasonable, we cannot guarantee that our plans, intentions, or expectations will be achieved.The information contained in this report, including the section discussing risk factors, identify important factors that could cause such differences.
The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they appear in this report.The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. Except as required by law, we undertake no obligation to update or release any forward-looking statements as a result of new information, future events, or otherwise, and assume no obligation to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER FEDERAL SECURITIES LAWS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, AND ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.This report also contains or may contain market data related to our business and industry and any such market data may include projections that are based on certain assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by this data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, results of operations, financial condition, and the market price of our common stock.
WE GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECTS,” “PLANS,” “ANTICIPATES,” “COULD,” “INTENDS,” “TARGET,” “PROJECTS,” “CONTEMPLATES,” “BELIEVES,” “ESTIMATES,” “PREDICTS,” “POTENTIAL” OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER SIMILAR WORDS. THESE STATEMENTS ARE ONLY PREDICTIONS. THE OUTCOME OF THE EVENTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, OUR ABILITY TO ACHIEVE THE BENEFITS AND SYNERGIES ANTICIPATED FROM THE ACQUISITION OF AMERICAN DG ENERGY, INC. IS SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE US, OUR CUSTOMERS’ OR OUR INDUSTRY’S ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS TO DIFFER.
THIS REPORT ALSO CONTAINS MARKET DATA RELATED TO OUR BUSINESS AND INDUSTRY. THIS MARKET DATA INCLUDES PROJECTIONS THAT ARE BASED ON A NUMBER OF ASSUMPTIONS. IF THESE ASSUMPTIONS TURN OUT TO BE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THE PROJECTIONS BASED ON THESE ASSUMPTIONS. AS A RESULT, OUR MARKETS MAY NOT GROW AT THE RATES PROJECTED BY THIS DATA, OR AT ALL. THE FAILURE OF THESE MARKETS TO GROW AT THESE PROJECTED RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND THE MARKET PRICE OF OUR COMMON STOCK.
SEE “ITEM 1A. RISK FACTORS,” “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND “ITEM 1. BUSINESS,” AS WELL AS OTHER SECTIONS IN THIS REPORT, THAT DISCUSS SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THESE DIFFERENCES. THE FORWARD-LOOKING STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-K RELATE ONLY TO EVENTS AS OF THE DATE OF WHICH THE STATEMENTS ARE MADE. EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR RELEASE ANY FORWARD- LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172023
TABLE OF CONTENTS
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Item 1A.1. | Risk Factors.Business. | |
| Item 1A. | Risk Factors. | |
| Item 1B. | Unresolved Staff Comments. | |
Item 2.1C. | Properties.Cybersecurity Risk Management. | |
Item 3.2. | Legal Proceedings.Properties. | |
| Item 3. | Legal Proceedings. | |
| Item 4. | Mine Safety Disclosures. | |
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| PART II |
| PART II | |
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| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | |
| Item 6. | Selected Financial Data.[Reserved]. | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. | |
| Item 8. | Financial Statements and Supplementary Data. | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | |
| Item 9A. | Controls and Procedures. | |
| Item 9B. | Other Information. | |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. | |
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| PART III |
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| Item 10. | Directors, Executive Officers and Corporate Governance. | |
| Item 11. | Executive Compensation. | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. | |
| Item 14. | Principal AccountantAccounting Fees and Services. | |
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| PART IV |
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| Item 15. | Exhibits and Financial Statement Schedules. | |
| Item 16. | Form 10-K Summary. | |
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| SIGNATURES | | |
PART 1
Item 1. Business
The Company
Tecogen® Inc. (“Tecogen,(together with its subsidiaries, “we,” “our,” or “us,” or “Tecogen”) wasdesigns, manufactures, markets, and maintains high efficiency, ultra-clean cogeneration products. These include natural gas engine driven combined heat and power (CHP) systems and chillers for multi-family residential, commercial, recreational and industrial use.We are known for products that provide customers with substantial energy savings, resiliency from utility power outages and for significantly reducing a customer’s carbon footprint. Our products are sold with our patented Ultera® emissions technology which nearly eliminates all criteria pollutants such as nitrogen oxide ("NOx") and carbon monoxide ("CO"). We developed Ultera® for other applications including stationary engines and forklifts. We were incorporated in the State of Delaware on September 15, 2000. Tecogen designs, manufactures, markets, and maintains high efficiency, ultra-clean cogeneration products including natural gas engine-driven combined heat and power, air conditioning systems, and water heaters for residential, commercial, recreational and industrial use. Tecogen is known for cost efficient, environmentally friendly and reliable products for distributed power generation that, through patented technology, nearly eliminate criteria pollutants and significantly reduce a customer’s carbon footprint.
Tecogen has twoWe have wholly-owned subsidiaries namely, American DG Energy, Inc. ("ADGE") and Tecogen CHP Solutions, Inc., and we own a Delaware corporation formed51% interest in July 2001 and acquired by Tecogen in May 2017 pursuant to the Merger described below, and Ultera Technologies, Inc. ("Ultera Technologies"), a Delaware corporation formed in November 2017. ADGE also owns 51% of American DG New York, LLC ("ADGNY"), a joint venture. Both ADGE and ADGNY distribute, own, and operate clean, on-site energy systems that produce electricity, hot water, heat and cooling. ADGE's business model is toADGE and ADGNY own the equipment that it installsis installed at customer'scustomers' facilities and to sell the energy produced by these systems to the customer on a long-term contractual basis. Ultera Technologies was organized to continue to develop and commercialize Tecogen's patented technology, Ultera®, for the automotive market. See "Our Products - Ultera Low-Emissions Technology" below for a more in depth discussion of the Ultera emissions opportunity. Tecogen, together with its wholly-owned consolidated subsidiaries, is hereinafter referred to as the "Company," "Tecogen," "we," "our," or "us."
The Company'sOur operations are comprised of twothree business segments. Oursegments:
•our Products and Services segment, which designs, manufactures and sells industrial and commercial cogeneration systems as described above. Oursystems;
•our Services segment, which provides operations and maintenance ("O&M") services for our products under long term service contracts, and
•our Energy Production segment, which installs, operates and maintains distributed generation electricity systems that we own and sells energy generated by such systems in the form of electricity, heat, hot water and cooling to our customers under long-term energy sales agreements.
The majority of our customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast.
Recent Developments
Assumption of Aegis Energy Services Maintenance Agreements
On May 18, 2017, holders ofMarch 15, 2023, we entered into an agreement ("Agreement") with Aegis Energy Services, LLC (“Aegis”) pursuant to which Aegis agreed to assign to us and we agreed to assume certain Aegis maintenance agreements, we agreed to purchase certain assets, and related matters (“Acquisition”). On April 1, 2023, the Acquisition closed. Under the Agreement, we agreed to acquire from Aegis and assume Aegis' rights and obligations arising on or after April 1, 2023 under maintenance agreements pursuant to which Aegis provided maintenance services for approximately 71% of the ADGE's outstanding common stock approved the proposed acquisition of American DG Energy Inc. (the "Merger"200 cogeneration systems, and holders of approximately 55% of the outstanding stock of Tecogen approved the issuance of Tecogen shares in the Merger. Consequently, that day Tecogen completed its acquisition,acquired certain vehicles and inventory used by means of a stock-for-stock merger, of 100% of the outstanding common shares of ADGE. As a result, ADGE became a wholly-owned subsidiary of Tecogen. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of ADGE common stock, $.001 par value per share, was automatically converted into the right to receive 0.092 shares of common stock, $.001 par value per share, of Tecogen (the “Exchange Ratio”), with cash paid in lieu of any fractional shares. As a result of the Merger, Tecogen issued approximately 4,662,937 shares of Tecogen common stock at $4.02 per share. This price was based on the closing price of Tecogen's common stock on May 18, 2017, the closing date of the Merger. The aggregate value of the consideration to be paidAegis in connection with the Mergerperformance of such maintenance services, and, following closing hired eight (8) Aegis employees to former holders of ADGE common stock was approximately $18.9 million. Upon consummation of the Merger, ADGE stock options and other equity awards were converted into stock options and equity awardsprovide services with respect to such maintenance agreements. At closing, we acquired eight (8) Aegis vehicles for consideration consisting of $170,000 in cash. Also, we issued credits against outstanding accounts receivable due from Aegis in the amount of $300,000 for the acquisition of inventory that Aegis used to provide maintenance services. On February 1, 2024, Tecogen common stock, after giving effectand Aegis amended the Agreement to the Exchange Ratio.add eighteen (18) additional maintenance contracts (the "Amendment"). The Amendment includes an undertaking by Aegis to use commercially reasonable efforts to support and assist our execution of maintenance service agreements for an additional thirty-six (36) cogeneration units sold to customers by Aegis. See Note 4 - Acquisition of American DG Energy, Inc.5."Aegis Contract and Related Asset Acquisition" of the Notes to the Consolidated Financial StatementsStatements.
Tecochill Hybrid-Drive Air-Cooled Chiller Development
During the third quarter of 2021 we began development of the Tecochill Hybrid-Drive Air-Cooled Chiller. We recognized that there were many applications where the customer wanted an easy to install roof top chiller. Using the inverter design from our InVerde e+ cogeneration module, the system can simultaneously take two inputs, one from the grid or a renewable energy source and one from our natural gas engine. This allows a customer to seek the optimum blend of operational cost savings and greenhouse gas benefits while providing added resiliency from two power sources. We introduced the Tecochill Hybrid-Drive Air-Cooled Chiller at the AHR Expo in February 2023 and received an order on February 8, 2024 for further informationthree hybrid-drive air-cooled chillers for a utility in Florida. A patent application based on this concept has been filed with the US Patent and Item 3. Legal ProceedingsTrademark Office.
Controlled Environment Agriculture
On July 20, 2022, we announced our intention to focus on opportunities for information regarding litigationlow carbon Controlled Environment Agriculture ("CEA"). We believe that CEA offers an exciting opportunity to apply our expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security. We propose to address this challenge by developing a highly efficient energy solution for CEA grown produce using our cogeneration products in conjunction with solar energy generation, energy storage, and other technologies.
CEA facilities enable multiple crop cycles (15 to 20 cycles) in one year compared to one or two crop cycles in conventional farming. In addition, growing produce close to the point of sale reduces food spoilage during transportation. Food crops grown in greenhouses typically have lower yields per square foot than in CEA facilities, and the push to situate facilities close to consumers in cities requires minimizing land area and maximizing yield per square foot. Yields are increased in CEA facilities by supplementing or replacing natural light with grow lights in a climate-controlled environment - which requires significant energy use.
In recent years our cogeneration equipment has been used in numerous cannabis cultivation facilities because our systems significantly reduce operating costs, reduce the facility GHG footprint and offer resiliency to grid outages. Our experience providing clean energy solutions to cannabis cultivation facilities has given us significant insight into requirements relating to energy-intensive indoor agriculture applications that we expect to be transferable to CEA facilities for food production.
Impact of the Russian Invasion of Ukraine
Presently, we have no operations or customers in Russia or the Ukraine. The higher energy prices for natural gas as a result of the war may affect the performance of our Energy Production Segment. However, we have also seen higher electricity prices as much of the electricity production in the United States is generated from fossil fuels. If the electricity prices continue to rise, the economic savings generated by our products are likely to increase. In addition to the direct result of changes in natural gas and electricity prices, the war in Ukraine may result in higher cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the Merger.trading prices of commodities.
Overview of Our Business
In May 2016, Tecogen entered intoProducts
Our products offer customers energy savings, resiliency and a joint venture agreement, (the "JV Agreement") with Tedom a.s.,cleaner environmental footprint. Our cogeneration, chiller and heat pump systems use an engine to generate electricity or shaft work and recover the waste heat from the engine. Our systems are greater than 88% efficient compared to typical electrical grid efficiencies of 40% to 50%. As a European combined heatresult, our greenhouse gas (GHG) emissions are typically half that of the electrical grid. Our systems generate electricity and power product manufacturer incorporatedhot water or in the Czech Republic ("Tedom")case of our Tecochill product, both chilled water and Tedom’s subsidiary, Tedom USA, Inc., a Delaware corporation. Pursuanthot water. Our products are expected to run on Renewable Natural Gas (RNG) as it is introduced into the JV Agreement, the parties formed TTcogen LLC, a Delaware limited liability company (“TTcogen”), and entered into a limited liability company operating agreement (the "LLC Agreement"), through which the joint venture is operated. TTcogen offered Tedom's line of Combined Heat and Power ("CHP") products to the United States via Tecogen's nationwide sales and service network consisting of 27 CHP modules ranging in size from 35 kW up to 4 MW and fully capable of running on a variety of fuel feedstocks (including naturalUS gas propane, and biofuel). On September 22, 2017, the Company exercised its rights under the JV Agreement to terminate the joint venture and to begin the process of winding up TTcogen. Currently the Company and Tedom are working together to wind-up TTcogen as provided for in the JV Agreement and the LLC Agreement, and the Company will continue to market, sell, and service the Tedom 35kW CHP equipment on an exclusive basis in certain territories.pipeline infrastructure.
On October 28, 2017, all the shareholders of the joint venture company organized by the Company and a group of European strategic investors, Ultra Emissions Technologies, Ltd. ("Ultratek"), including the Company, unanimously voted to terminate the joint venture. Ultratek was organized to develop and commercialize Tecogen's patented technology, Ultera®, for the automotive market. The technology is designed to reduce harmful emissions generated by engines using fossil fuels. Tecogen contributed an exclusive license for use of Ultera® in the automotive space to the joint venture, and the strategic partners had committed to financing the initial research, development and testing of a viable product. Upon termination of the joint venture, Ultratek was dissolved and the exclusive license for the use of Ultera® that was granted to Ultratek automatically reverted back to the Company. The Company received its full $2,000,000 investment in Ultratek upon the completion of the dissolution process. Upon dissolution,
the Company purchased all of the remaining assets of Ultratek, including new intellectual property that Ultratek developed and other assets, for a total purchase price of $400,000.
On December 14, 2017, Tecogen repaid $3,150,000 to Michaelson Capital Special Finance Fund LP ("Michaelson") to discharge the Senior Convertible Promissory Note (the "Note") with Michaelson. Through the Note, Michaelson was the Company's principle debt holder and a beneficial holder of approximately 5% of Tecogen's shares outstanding. There were no pre-payment penalties paid by the Company, as Michaelson provided a waiver of the pre-payment penalties that were contained in the Note. By completing the payment, we satisfied all our obligations under the Note and the Note was cancelled.
Business Overview
Tecogen designs, manufactures, markets, and maintains high efficiency, ultra-clean cogeneration products including natural gas engine-driven combined heat and power, air conditioning systems, and water heaters for residential, commercial, recreational and industrial use. The company is known for cost efficient, environmentally friendly and reliable products for distributed power generation that, through patented technology, nearly eliminate criteria pollutants and significantly reduce a customer’s carbon footprint.
Tecogen’sOur natural gas-powered cogeneration systems (also known as combined heat and power or “CHP”) are efficient because they drive electric generators or compressors, which reduce the amount of electricity purchased from the utility while recovering the engine’s waste heat for water heating, space heating, and/or air conditioning at the customer’s building.
Tecogen manufactures three types of CHP products:Our commercial product lines include:
•Cogeneration units thatthe InVerde e+® and TecoPower® cogeneration units; these systems supply electricity and hot water;
•ChillersTecochill® air-conditioning and refrigeration chillers; these systems produce chilled water and hot water;
•Tecochill® hybrid-drive air-cooled chiller; gas engine-driven chillers that provide air-conditioning and hot water marketed under the TECOCHILL® brand name; and
•High-efficiency water heaters marketed under the Ilios® brand name.
All of these are standardized, modular, CHP products that reduce energy costs, carbon emissions, and dependence on the electric grid. Tecogen’s products allow customers to produce power on-site in parallel with the electric grid or stand alone when no utility grid is available via inverter-based black-start capability. Because our CHP systems also produce clean, usable heat energy, they provide economic advantages to customers who can benefit from the use of hot water, chilled water, air conditioning and heating.hot water;
Following the acquisition of ADGE in May 2017, the Company also sells energy in the form of electricity, heat,•Tecofrost® gas engine-driven refrigeration compressors; these systems circulate refrigerant and provide hot water and cooling to customers under long-term energy sales agreements (withas a standard term of 10 to 15 years). The typical sales model is to installbyproduct; and, own energy systems in customers' buildings and sell the energy produced by those systems back to the customers at a cost set by a negotiated formula in customer contracts. We call this our "On-Site Utility" business, or our Energy Production segment.
•Ultera® emissions control technology.
Traditional customers for our cogenerationInVerde and chiller systemsTecopower products have a simultaneous need for electrical power and hot water. These include hospitals, and nursing homes, schools, and universities, health clubs, and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries,buildings. Conversely our Tecochill product benefits customers who have a simultaneous need for cooling and hot water which is typical in sites such as hospitals, ice rinks, swimming pools, factories, municipal buildings, indoor agriculture and military installations; however, the economic feasibility of using our systems is not limitedfood processing. Our Tecofrost refrigeration compressors are applied primarily to these customer types.industrial applications that include cold storage, wineries, dairies, ice rinks and food processing. Market drivers include the price of natural gas, local electricity rates, environmental regulations, and governmental energy policies, as well as customers’ desire to become more environmentally responsible.
Our cooling and refrigeration products provide both cooling and make use of high grade waste heat. This is of particular advantage in facilities that control both temperature and humidity. In such facilities, climate control is achieved by cooling the facility to remove humidity and then reheating to the required temperature. Using engine waste heat to perform the reheat while utilizing natural gas to generate the cooling provides significant economic and environmental benefits. As a result our product has significant competitive advantages in applications that operate year round such as controlled environment agriculture, indoor ice rinks, and hospitals.
Through our factory service centers in California, Connecticut, Florida, Massachusetts, Michigan, New Jersey, and New York, and Ontario, our specialized technical staff maintains our products via long-term service contracts. To date the Company haswe have shipped over 2,5003,200 units, some of which have been operating for almost 3035 years. We established a service center in Toronto, Canada in August 2020 to support our existing population of chillers and cogeneration units including 26 cogeneration units sold in this territory during 2020 to serve public housing facilities.
Our CHP technology uses low-cost, mass-produced engines, which we modify to run on natural gas. In the case of our mainstay cogeneration and chiller products, the engines have proven to be cost-effective and reliable. In 2009, in response to the changing regulatory requirements for stationary engines, our research team developed an economically feasible process for removing air pollutants from the engine exhaust.This technology's U.S. and foreign patents were granted beginning in October 2013 withand other domestic and foreign patents granted or applications are pending.Branded Ultera®Ultera®, the ultra cleanultra-clean emissions technology repositions our engine driven products in the marketplace, making them comparable environmentally with other technologies such as fuel cells, but at a much lower cost and greater efficiency. BecauseIn 2018, a group of this breakthrough design for emission control, our natural gas-fueled CHP modulesgas engine-generators fitted with the patented Ultera® control technology are certified by system were successfully permitted in the Los Angeles region for unrestricted operation, the first natural gas engines to do so without operating time limits or other exemption. These engines were permitted to levels matchingthe California Air Resources Board ("CARB") as meeting its stringent 2007 emissions requirements, the same emissions standard used to certify fuel cells, and the same emissions levels as a state-of-the-art central power plant.We now offer our Ultera emissions control technology as an option on all our products or as a stand-alone application for the retrofitting of other rich-burn spark-ignited reciprocating internal combustion engines.engines such as the engine-generators described above.
TecogenOur products are designed as compact modular units that are intended to be installed in multiples when utilized in larger CHP plants. The majority of our CHP modules are installed in multi-unit sites with applications ranging up to 12 units.
multiples. This approach has significant advantages over utilizing a single larger units,cogeneration or chiller unit, allowing building placement in constrained urban settings and redundancy to mitigate service outages.Redundancy is particularly relevant in regions where the electric utility has formulated tariff structures that include high “peak demand” charges.Such tariffs are common in many areas of the country, and are applied by such utilities as Southern California Edison, Pacific Gas and Electric, Consolidated Edison of New York, and National Grid of Massachusetts.Because these tariffs are assessed based on customers’ peak monthly demand charge over a very short interval, typically only 15 minutes, a brief service outage for a system comprised of a single unit can create a high demand charge, and therefore be highly detrimental to the monthly savings of the system.For multiple unit sites, the likelihood of a full system outage that would result in a high demand charge is dramatically reduced, so consequently, these customers have a greater probability of capturing peak demand savings.
Our CHP products are sold directly to customers by our in-house marketing team, and by established independent sales agents and representatives.
ADGE installs, owns, operates and maintains complete distributed generation, 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. As of December 31, 2017 we had 81 operational energy systems, representing an aggregate of approximately 5,035 kilowatts, or kW, 39.0 million British thermal units, or MMBtu's, of heat and hot water and 4,660 tons of cooling (kW is a measure of electricity generated, MMBtu is a measure of heat generated and a ton is a measure of cooling generated).
The Company'sOur operations are comprised of twothree business segments. Our Products and Services segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Services segment provides O&M services for our products under long term service contracts. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
Products and Services
Our Products and Services segment represented 88.5% and 100.0% of our consolidated revenues for the years ended December 31, 2017 and 2016, respectively. See Note 16. "Segments" of the Notes to the Consolidated Financial Statements. Our products and services are described below.
Our Products
We manufacture natural gas engine-driven cogeneration systems, heat pumps, and chillers, all of which are CHP products that deliver more than one form of energy. Our cogeneration products are all standard, modular units that come pre-packaged from the Company’s factory for ease of installation at a customer’s site. The package incorporates the engine, generator, heat-recovery equipment, system controls, electrical switchgear, emission controls, and a data controller for remote monitoring and data transmission; minimizing the cost and complexity of installing the equipment at a site. This packaged, modular system simplifies CHP technology for small to mid-sized customers who typically are less experienced with the implementation and benefits of a CHP system.
Traditionally all of our cogeneration systems and most of our chillers have utilized the same engine, the TecoDrive 7400 model. This is an engine modified by us to use natural gas fuel. In the past year, we have introduced a new, slightly larger engine into certain products with advanced features, including improved efficiency and an advanced ignition system. The CHP products utilizing the new engine are the InVerde e+® and the TecoPower models CM-60 and CM-75. The new engine and the older TecoDrive model share custom features that enhance durability and efficiency, many of which date from our extensive research done previously with engine manufacturers and the gas industry, including the Gas Research Institute. For the Ilios® water heater, we introduced a technologically advanced Ford engine that is enhanced for industrial applications.
Our commercial product lines includes:
•the InVerde e+® and TecoPower cogeneration units;
•TECOCHILL® air-conditioning and refrigeration chillers;
•Ilios® high-efficiency water heaters; and
•Ultera® emissions control technology.
InVerde Cogeneration Units
Our premier cogeneration product has been the InVerde, a 100-kW CHP system that not only provides electricity and hot water, but also satisfies the growing customer demand for operation during a utility outage, commonly referred to as “black-start” capability. Our exclusively licensed microgrid technology (see “Intellectual Property” below) enables our InVerde CHP products to provide backup power in the event of power outages that may be experienced by local, regional, or national grids. In 2017 we introduced an extensively redesigned version of the unit, the InVerde e+®, which includes a state of the art power conversion system, more effective acoustic treatment, and the larger, more efficient engine. The InVerde e+® includes variations with power ratings from 75kW to 125kW.
The InVerde e+® incorporates an inverter, which converts direct current, or DC, electricity to alternating current, or AC. With an inverter, the engine and generator can run at variable speeds, which maximizes efficiency at varying loads. The inverter then converts the generator’s variable output to the constant-frequency power required by customers in 50 or 60 Hertz.
This inverter technology was developed originally for solar and wind power generation. The Company believes that the InVerde is the first commercial engine-based CHP system to use an inverter. Electric utilities accept inverter technology as “safe” by virtue of its certification to the Underwriters Laboratory interconnection standard 1741. Our InVerde has earned this certification. This qualifies our product for a much simpler permitting process nationwide and is mandatory in some areas such as New York City and California, a feature we consider to be a competitive advantage. The inverter also improves the CHP system’s efficiency at partial load, when less heat and power are needed by the customer.
The InVerde`s black-start feature addresses a crucial demand from commercial and institutional customers who are increasingly concerned about utility grid blackouts and brownouts, natural disasters, security threats, and antiquated utility infrastructure. Multiple InVerde units can operate collectively as a stand-alone microgrid, which is a group of interconnected loads served by one or more power sources. The InVerde is equipped with software that allows a cluster of units to seamlessly share the microgrid load without complex controls; a proprietary cost advantage for multiple modules at a single location.
The InVerde CHP system was developed in 2007 and began shipping in 2008. Our largest InVerde installation utilizes 12 units, which supply 1.2 MW of on-site power and about 8.5 million Btu/hr of heat (700,000 Btu/hr per unit).
TECOGEN Cogeneration Units
The TECOGEN cogeneration system is the original model introduced in the 1980s; available in sizes of 60 kW and 75 kW and capable of producing up to 500,000 Btu/hr of hot water. This technology is based on a conventional single-speed generator. It is meant only for grid-connected operation and is not universally accepted by utilities for interconnection, in contrast to the InVerde. Although this cogeneration product has the longest legacy and largest installed population, much of its production volume has been supplanted by the InVerde and its broader array of product features. In 2017 the Company introduced an upgraded version of the 60kW and 75kW models under the new name TecoPower. The key features of the TecoPower models are the larger engine with improved efficiency, advanced ignition system, more effective acoustic aftertreatment, and the ability to operate even at the very low gas supply pressures in New York City with a pressure booster.
TECOCHILL Chillers
Our TECOCHILL® natural gas engine-driven chillers are available in capacities ranging from 25 to 400 tons, with the smaller units air-cooled and the larger ones water-cooled. Using technology first developed in 1987, the engine drives a compressor that makes chilled water, while the engine’s free waste heat can be recovered to satisfy the building’s needs for heat or hot water. This process is sometimes referred to as “mechanical” cogeneration, as it generates no electrical power, and the equipment does not have to be connected to the utility grid.
A gas-fueled chiller provides enough air conditioning to avoid most of the utility’s seasonal peak charges for electric usage and capacity. In summer when electric rates are at their highest, natural gas is “off-peak” and quite affordable, allowing TECOCHILL® customers to avoid typically higher summer-time “peak-usage” electric rates. Gas-fueled chillers also free up the building’s existing electrical capacity to use for other loads and can operate on minimal electric load in case of electric grid blackout; a key feature for customers concerned about load demand on backup power generators.
Ilios High-Efficiency Water Heaters
Tecogen has developed several heat pumps under the Ilios® brand name including a High Efficiency ("HE") Air-Source Water Heater, HE Water-Sourced Water Heater, and HE Air-Sourced “Split System” Water Heater. Our water heater products operate like an electric heat pump but use a natural gas engine instead of an electric motor to power the system. The Ilios® high-efficiency water heater uses a heat pump, which captures warmth from outdoor air even if it is moderately cool outside. Heat pumps work somewhat like a refrigerator, but in reverse. Refrigerators extract heat from inside the refrigerator and move it outside the refrigerator while heat pumps extract heat from outside and move it indoors.
The gas engine’s waste heat is recovered and used in the process, unlike its electric counterpart, which runs on power that has already lost its waste heat. This means that the heat being captured from outdoors is supplemented by the engine’s waste heat, which increases the efficiency of the process. The net effect is that an Ilios® heat pump’s efficiency far surpasses that of conventional boilers for water heating. Gas engine heat pumps can deliver efficiencies in excess of 200%.
Similarly, if used for space heating, the engine-powered heat pump is more efficient than an electric heat pump, again because heat is recovered and used for other building processes. The product’s higher efficiency translates directly to lower fuel consumption and, for heavy use customers, significantly lowers operating costs when compared with conventional equipment.
In 2013, a water-sourced model of the heat pump was added to our product line. This heat pump captures heat from a water source such as a geothermal well or from a pre-existing chilled water loop in the facility; the latter configuration provides simultaneous heating and cooling benefits, doubling the effect.
Following on the success of the water-sourced model, in early 2015 a 'split system' Ilios® model was introduced. The new split system offers increased flexibility because its air-source evaporator package can be installed remotely. The engine driven heat pump, which is contained in a small acoustic enclosure, can be located within a building's mechanical space while the quiet air-source evaporator package can be installed on a roof, or in any outdoor space. The outdoor evaporator component is connected to the indoor heat pump via refrigerant lines, therefore eliminating all freeze protection issues in colder climates. All of the water being heated remains inside the conditioned space, eliminating the need for a costly isolation heat exchanger and additional pumps, which simplifies installation and increases efficiency because it can operate at a lower delivery temperature.
The heat pump water heater serves as a boiler, producing hot water for drinking and washing, space heating, swimming pools, or other building loads. Energy cost savings to the customer depend on the climate. Heat pumps in general, whether gas or electric, perform best in moderate weather conditions although the performance of the Ilios® water-source heat pump is not impacted by weather or climate conditions. In a typical building, the Ilios® heat pump would be added on to an existing heating or water heating system, and would operate as many hours as possible. The conventional boiler would be left in place, but would serve mainly as a backup when the heat pump’s engine is down for maintenance or when the heat pump cannot meet the building’s peak heating load. In areas where low electric rates make CHP less economical, the Ilios® heat pump could be a financially attractive alternative because its economics depend only on natural gas rates. In some areas with high electric rates, the Ilios® option could have advantages over CHP; for example where it is hard to connect to the utility grid or where the building’s need for electricity is too low for CHP to be economically sound.
Ultera Low-Emissions Technology
All of our CHP products are available with the patented Ultera® low-emissions technology as an equipment option.This breakthrough technology was developed in 2009 and 2010 as part of a research effort partially funded by the California Energy Commission and Southern California Gas Company. The objective was to bring our natural-gas engines into compliance with California’s stringent air quality standards.
The chart below compares emission levels of the Company'sour Ultera® technology to other technologies. As of December 31, 20172023, our Ultera® CHP and fuel cell technologies are the only technologies that we know of which comply with California's air quality standards for CO and NOx, represented in the chart by the colored horizontal lines, shown as the world's strictest air quality standards on the lower right of the chart. We believe that as environmental regulation becomes more stringent in the United States, our emissions technology may be used in markets including generators, fork trucks and biogas engines.
(5)(2)(4)(4)(3)(1)
(1) California has the strictest air quality standards for engines in the world
(2) Conventional Energy Source is U.S. powerplantpower plant and gas boiler.Average U.S. powerplantpower plant NOx emission rate of 0.9461 lb/MWh from (USEPA eGrid 2012),
CO data not available. Gas boiler efficiency of 78% (www.eia.gov) with emissions of 20 ppm NOx @ 3% O2 (California Regulation SCAQMD Rule 1146.2
and <50 ppmv CO @ 3% O2 (California Regulation SCAQMD BACT).
(3) Tecogen emissions based upon actual third party source test data.
(4) Microturbine and Fuel Cell emissions from EPA CHP Partnership - Catalog of CHP Technologies- March 2015.
(5) Stationary Engine BACT as defined by SCAQMD.
Through development of a two stage catalyst emission treatment system, the Company was able to meet or exceed the strict air quality regulations with a solution that is cost-effective, robust, and reliable. Inclusion of the patent-protected Ultera® low-emissions technology as an option keeps our CHP systems compliant with air quality regulations. The first commercial CHP units equipped with Ultera® low-emissions technology shipped to a California utility in 2011. We conducted three validation programs for this technology:
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1. | Third-party laboratory verification. The AVL California Technology Center, a long-standing research and technology partner with the international automotive industry, confirmed our results in their state-of-the-art dynamometer test cell, which was outfitted with sophisticated emissions measurement equipment.
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2. | Verifying longevity and reliability in the field. By equipping one of our 75 kW units, already operating at a customer location in Southern California with the Ultera® low-emissions technology and a device to continuously monitor emissions we verified longevity and reliability. The Ultera® low-emissions system operated successfully for more than 25,000 hours, approximately 3.5 years, and consistently complied with California’s stringent emission standards over the entire field testing period.
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3. | Additional independent tests. During the field test, two companies licensed in California to test emissions each verified our results at different times. The results from one of these tests, obtained in August 2011, enabled us to qualify for New Jersey’s fast-track permitting. Virtually every state nationwide requires some kind of permit related to local air quality, but New Jersey allows an exemption for systems such as ours that demonstrate superior emissions performance. This certification was granted in November 2011, and since then we have sold Ultera® low-emissions systems to customers in this territory.
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In 2012, a 75 kW CHP unit equipped with the Ultera® system became our first unit to obtain a conditional air permit (i.e., pending a third party source test to verify compliance) in Southern California since the strict regulations went into effect in 2009. A state-certified source test, administered in January 2013, verified that our emissions levels were well below the new permitting requirements, and the final permit was approved in August 2013.
Standby Generators
After successfully developing the Ultera® technology for our own equipment, the Company'sour research &and development team began exploring other possible emissions control applications in an effort to expand the market for the ultra-clean emissions system.Retrofit kits were developed in 2014 for other stationary engines and in 2015 the Ultera Retrofit Kit was applied successfully to natural gas stand-by generators from other manufacturers, including Generac and Caterpillar.
Historically, standby generators have not been subjected to the strict air quality emissions standards of traditional power generation.However, generators which run for more than 200 hours per year or run for non-emergency purposes (other than routine scheduled maintenance) in some territories are subject to compliance with the same stringent regulations applied to a typical electric utility. As demand response programs become more economically attractive and air quality regulations continue to become more stringent, there could be strongincreased demand for retrofitting standby generators with our Ultera® emissions control technology, thus providing a cost-effective solution to keeping the installed base of standby generators operational and in compliance.compliance with regulatory requirements.
In 2017, a group of generators owned by a single customer in Southern California were supplied Ultera® kits because of their particular requirement to exceed the 200-hour annual limit. These units are now operational and have been tested by the customer and shown to be compliant with the local pollution limits which we believe to be the strictest anywhere in the United States, and potentially the world. Our CHP products have been permitted to this same standard. However, CHP products are
given a heat credit which effectively increases the allowable limit. OnceIn 2018, permitting is completewas completed making these certification levels the lowest we have achieved. We believe no other engines will behave been certified to these levels since the lowest level wecurrent regulations in the Los Angeles region became effective.
It is noteworthy that these engine-generators have achieved.
Biogas
The Ultera® emissions control technology developed by our engineering team applies specificallybeen used in California to rich-burn, spark-ignited, internal combustion engines. While originally intendedpower dispersed loads in a fire-prone area where frequent de-energizing of the electric overhead power lines is required for natural gas powered engines, wesafety. We believe that our technology may be adapted for other fuel types as long as the engine meets the rich-burn criteria.
In 2015 the Ultera® system was applied to a biogas powered engine operating at the Eastern Municipal Water District’s (EMWD) Moreno Valley Region Water Reclamation Facility in Perris, California. The demonstration project was a result of an ongoing collaboration between Tecogen, the EMWD and various other partners, and successfully applied an Ultera Retrofit Kit to a 50 liter Caterpillar engine fueled by biogas extracted from an anaerobic digester.
Biogas is a significant byproduct of wastewater treatment plants. Consideredthis application to be a renewable source of fuel, it is becoming an increasingly important resource for power generation. According to the American Biogas Council, nationwide there are over 1,100 engines fueled by wastewater-derived biogas, over 600 fueled by landfill-generated biogas,new and over 100 running
on biogas from agricultural waste. This represents a significant potential marketapplication for the Ultera Retrofit Kit application as these biogas engines become subject to the same air quality standards as traditional power generation sources.
Automotive Emissions Control
In October 2015, following revelations of wide-scale problems with vehicle emissions compliance and testing, Tecogen formed an Emissions Advisory Committee to examine the potential application of Ultera® to the automotive gasoline market. According to the U.S. EPA, 50 percent of nitrogen oxides (NOx) and 60 percent of all carbon monoxide (CO) emissionstechnology in the United States come from vehicle exhaust. The Ultera® emission control system is designed to target both NOx and CO. After a thorough investigative process on the partlight of the Emissions Advisory Committee and various industry expert consultants, the group recommended that the Company pursue a funded initiative to develop the technology for gasoline vehicles.widely publicized widespread outages in California which have occurred in recent years.
In December 2015, the Company and a group of strategic investors formed a joint venture company, Ultra Emissions Technologies, Ltd. ("Ultratek"), to advance the Ultera® near-zero emissions technology for adaptation to transportation applications powered by spark-ignited rich-burn engines in the automobile and truck categories. Tecogen granted Ultratek an exclusive license for the development of its patented, emissions-related, intellectual property for the vehicle market.Services
Initially Ultratek's focus was on preliminary research, testing, and verification that the Ultera® technology can in fact be applied to gasoline engines while maintaining similar near-zero emission results as have been demonstrated in other use cases. Having completed multiple phases of testing at AVL's California Technology Center, the Ultratek team verified the viability of the Ultera® technology for gasoline automotive use.
On October 24, 2017, the Company and the group of strategic investors agreed to dissolve Ultratek due to varying opinions regarding next steps toward potential commercialization. Upon dissolution, the remaining cash was disbursed in accordance with the joint venture agreement, first to the Company which was entitled to receive its cash investment of $2,000,000, with the remainder, on a pro rata basis, to the strategic investors. Additionally, the license the Company originally granted to Ultratek reverted back to the Company, and the Company purchased all of the remaining Ultratek assets and intellectual property that Ultratek had created for a total purchase price of $400,000.
On November 28, 2017 Tecogen formed Ultera Technologies, Inc., a Delaware Corporation, as its wholly owned subsidiary of the Company, to continue the effort toward commercialization that was begun by Ultratek. Ultera Technologies Inc. intends to continue research and development and to produce a prototype for commercialization. If successfully developed, the market for automotive emissions control could be a source of future growth for the Company; although it could take years to realize that goal, and there is no guarantee that such efforts will be successful.
Fork-Truck Research
In October 2016, the Company was awarded a Propane Education & Research Council (PERC) research grant funding the Company's proposal to develop the Ultera®ultra-clean emissions control technology for the propane powered fork truck market.
Electric fork trucks have been making significant in-roads in the fork truck industry, in part, because of their green image and indoor air quality benefit. The primary benefit of the Ultera-equipped ultra-clean propane fork truck will be fuel cell like emissions and a propane-green brand that offers a robust indoor air quality advantage without compromising vehicle performance. The project will assess the adaption of the Ultera® near-zero emissions technology for the fork truck category and demonstrate the technical performance on popular propane fork truck models. Select industry-leading fork truck manufacturers are also participating in the research initiative.
Management believes that approximately 70,000 propane powered fork trucks are sold annually in the United States. Successful completion of this project could open a new emissions control market to the Company.
Other Ultera Applications
According to a 2013 Massachusetts Institute of Technology study, the U.S. experiences 200,000 early deaths each year due to emissions from heavy industry, transportation, and commercial and residential heating. As climate change and air quality continue to develop as areas of focus for government regulators, emissions restrictions are expected to become increasingly stringent around the world. These tightening regulations could open up new markets and applications for the Ultera® near-zero emissions control technology. These opportunities may include:
commercial and industrial natural gas fueled engines from other manufacturers; and
natural gas and biogas powered vehicle fleets - such as municipal bus fleets
Product Service
We provide long-term maintenance contracts, parts sales, and turnkey installation for our products through a network of nineeleven well-established field service centers in California, the Midwest, the Northeast, the Southeast and the Northeast. in Ontario, Canada.These centers are staffed by our full-time Company technicians, working from local leased facilities.The facilities provide officesoffice and warehouse space for inventory. We encourage our customers to provide internet or phone connections to our units so that we may maintain remote monitoring and communications with the
installed equipment.For connected installations, the machines are contacted daily andto download their status and provide regular operational reports (daily, monthly, and quarterly) to our service managers.This communicationcommunications link is used to support the diagnosisdiagnostic efforts of our service staff, and to send messages to preprogrammedpre-programmed phones if a unit has experienced an unscheduled shutdown.In many cases, communications received by service technicians from connected devices allow for proactive maintenance, minimizing equipment downtime and improving operating efficiency for the customer.
The work of our service managers, supervisors, and technicians focuses on our products.Because we manufacture our own equipment, our service technicians bring hands-on experience and competence to their jobs.They are trained at our corporate headquarters and primary manufacturing facility in Waltham, Massachusetts.
Most of our service revenue is in the form of annual service contracts, which are typically of an all-inclusive “bumper-to-bumper” type, with billing amounts proportional to the equipment's achieved operating hours for the period.Customers are thus invoiced in level, predictable amounts without unforeseen add-ons for such items as unscheduled repairs or engine replacements.We strive to maintain these contracts for many years, and work to maintain the integrity and performance of our equipment.
Our products have a long history of reliable operation.Since 1995, we have had a remote monitoring system in place that connects to hundreds of units daily and reports their “availability,” which is the amount of time a unit is running or is ready to run.More than 80% of the units operate above 90% availability, with the average being 93.8%. Our factory service agreements have directly impacted these positive results and represent an important long-term annuity-like stream of revenue for the Company.us.
New equipment sold beginning in 2016 and select upgrades to the existing installed equipment fleet includes aninclude industrial internet solution which enables Tecogenus to collect, analyze, and manage valuable asset data continuously and in real-time. This provides the service team with improved insight into the functionality of our installed CHP fleet. Specifically, it enables the service department to perform remote monitoring and diagnostics and to view system results in real time via a computer, smart phone or tablet. Consequently, we can better utilize monitoring data ensuring customers are capturing maximum possible savings and efficiencies from their installation. Through constant monitoring and analysis of equipment data, Tecogen expects to enhance the performance of installed equipment by ensuring machinery consistently operates at peak performance and is available to deliver maximum potential value for customers. For the past two years we have used General Electric's Company's Equipment Insight product for online monitoring. Management believes that similar monitoring solutions are available from other alternative sources.cogeneration equipment.
Energy Production
Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements which represented 11.5% and 0%7.0% of our consolidated revenues for the years ended December 31, 20172023 and 2016, respectively.2022. See Note 1618. "Segments" of the Notes to the Consolidated Financial Statements. Our on-site utility business is described below.
On-Site Utility
Our wholly-owned subsidiary, ADGE, distributes, owns and operates clean, on-site energy systems that produce electricity, hot water, heat, and cooling. Our business model is to own the equipment that ADGE installs at customers' facilities and to sell the energy produced by these systems to customers on a long-term contractual basis. We call this business the “On-Site Utility” and offer natural gas powered cogeneration systems that are reliable and energy efficient. ADGE utilizes energy equipment supplied by Tecogen and other cogeneration manufactures. Our cogeneration systems produce electricity from an internal combustion engine driving a generator, while the heat from the engine and exhaust is recovered and typically used to produce heat and hot water for use on-site. ADGE also distributes and operates water chiller systems for building cooling applications that operate in a similar manner, except that the engines in the water chiller systems drive a large air-conditioning compressor while recovering heat for hot water.
Cogeneration systems reduce the amount of electricity that a customer must purchase from the local utility and produce valuable heat and hot water on-site to use as required. By simultaneously providing electricity, hot water and heat, cogeneration systems also have a significant positive impact on the environment by reducing the carbon dioxide, or CO2, produced by replacing a portion of the traditional energy supplied by the electric grid and conventional hot water boilers. Distributed generation of electricity, or DG, often referred to as cogeneration systems or combined heat and power systems, or CHP, is an attractive option for reducing energy costs and increasing the reliability of available energy. DG has been successfully implemented by others in large industrial installations over 10 Megawatts ("MW"), where the market has been growing for a number of years, and is increasingly being accepted in smaller sized units because of technology improvements, increased energy costs, and better DG economics. We believe that our target market for DG, users of up to 1 MW, has been barely penetrated and that the reduced reliability of the utility grid, increasing cost pressures experienced by energy users, advances in new, low cost technologies, and DG-favorable legislation and regulation at the state and federal level will drive our near-term growth and penetration of this market.
We believe that the primary opportunity for DG energy and equipment sales is in regions of the U.S. where commercial electricity rates exceed $0.12 per kW hour, or kWh, which is predominantly in the Northeast and California. Attractive DG economics are currently attainable in applications that include hospitals, nursing homes, multi-tenant residential housing, hotels,
schools and colleges, recreational facilities, food processing plants, dairies, and other light industrial facilities. We also believe that the largest number of potential DG users in the U.S. require less than 1 MW of electric power and less than 1,200 tons of cooling capacity. We are able to design our systems to suit a particular customer's needs because of our ability to place multiple units at a site. This approach is part of what allows our products and services to meet changing power and cooling demands throughout the day (also from season-to-season) and greatly improves efficiency. As these technologies mature to the point that they are both reliable and economical, the Company will consider employing these power sources to supply energy for our customers. Management regularly assesses the technical, economic, reliability, and emissions issues associated with systems that use solar, micro-turbine, or fuel cell technologies to generate power.
Sales & Distribution
Our products are sold directly to end-users by our sales team and by established independent sales agents and representatives. VariousWe have agreements are in place with distributorsmanufacturers' representatives and outside sales representatives who are compensated by commissions for certaindesignated territories and product lines. Sales through our in-house team or sales that are not covered by a representative’s territory carry no or nominal commissions. ForDuring the fiscal years ended 2017December 31, 2023 and 2016,December 31, 2022, no distribution partner or customer relationship accounted for more than 10% of totalour revenues. We typically sell our chiller products through our manufacturing representatives with assistance from our internal sales team. Our combined company revenue.
Our productheat and power products are typically sold direct to end customers by our internal sales cycle exhibits typical seasonality for the HVAC industry with sales of chillers generally stronger in the warmer months while heat pump sales are stronger in the cooler months.
Total product and installation backlog as of December 31, 2017 was $15.6 million compared to year end backlog 2016 of $11.1 million. Please see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and related Risk Factors below for additional information about the Company’s backlog.team.
Markets and Customers
Worldwide, stationary power generation applications vary from huge central stationary generating facilities (traditional electric utility providers) to back-up generators as small as 2 kW.Historically, power generation in most developed countries such as the United States has been part of a regulated central utility system utilizing high-temperature steam turbines powered
by fossil-fuels.This turbine technology, though steadily refined over the years, reached a maximum efficiency (where efficiency means electrical energy output per unit of fuel energy input) of approximately 40% to 50%.
A number of developments related primarily to the deregulation of the utility industry as well as significant technological advances have now broadened the range of power supply choices available to all types of customers. CHP,Cogeneration, which harnesses waste energy from power generation processes and puts it to work for other uses on-site, can boost the energy conversion efficiency to nearly 90%, a better than two-fold improvement over the average efficiency of a fossil fuel plant. This distributed generation, or power generated on-site at the point of consumption rather than power generated centrally, eliminates the cost, complexity, and inefficiency associated with electric transmission and distribution. The implications of the CHP distributed generation approach are significant. Management believesWe believe that if CHPcogeneration were applied on a large scale, global fuel usage might be dramatically curtailed and the utility grid made far more resilient.
Our CHP products address the inherent efficiency limitation of central power plants by siting generation close to the loads being served. This allows customers with energy-intensive buildings or processes to reduce energy costs and operate with a lower carbon footprint. Furthermore, with technology we have introduced, like the Ultera® low-emissions technology, our products can now contribute to better air quality at the local level while complying with the strictest air quality regulations in the United States.
Cogeneration and chillerWe estimate that our products can often reduce the customer’s operating costs (for the portion of the facility loads to which they are applied) by approximately 30% to 60% based on Company estimates,, which provides an excellent rate of return on the equipment’s capital cost in many areas of the country with high electricity rates. Our chillers are especially suited to regions where utilities impose extra charges during times of peak usage, commonly called “demand” charges. In these cases, the gas-fueled chiller reduces the use of electricity during the summer, the most costlycostliest time of year.
On-site CHP not only eliminates the loss of electric power during transmission, but also offsets the capital expense of upgrading or expanding the utility infrastructure. The national electric grids of many developed countries are already challenged to keep up with existing power demand. In addition, the transmission and distribution network is operating at capacity in a majority of urban areas. Decentralizing power generation by installing equipmentor reducing energy requirements at customer sitesa customer's site not only relieves the capacity burden on existing power plants, but also lessonslessens the burden on transmission and distribution lines. This ultimately improves the grid’s reliability and reduces the need for costly upgrades.
Increasingly favorable economic conditions couldmay improve our business prospects domestically and abroad. Specifically, we believe that natural gas prices mightare expected to increase from their historically depressedcurrent values, but only modestly, whileand that electric rates wouldare expected to continue to rise more significantly over the long-term as utilities pay for grid expansion, better emission controls, efficiency improvements, and the integration of renewable power sources.
The largest numbers ofMost potential new customers in the U.S. require less than 1 MW of electric power and less than 1,200 tons of cooling capacity. We are targeting customers in states with high electricity rates in the commercial sector, such as California, Connecticut, Massachusetts, New Hampshire, New Jersey, and New York. These regionsMost of these states also have high peak demand rates, which favor utilization of our modular units in groups so as to assure redundancy and peak demand savings. Governmental agencies in some of these regions may also provide generous rebates that can improve the economic viability of our systems.
The Inflation Reduction Act of 2022 increased Federal tax credits, including the investment tax credit (ITC), to up to thirty percent (30%) of the project cost for projects incorporating certain low emission technologies, including CHP equipment, that begin construction before January 1, 2025 and provides for an additional ten percent (10%) credit if the taxpayer satisfies additional requirements relating to domestic content. State and local governments and tax-exempt entities may also benefit from certain tax credits through direct payments or transfers of tax credits to unrelated third parties. This particular new direct pay option is especially impactful given the fact that many ideal facilities for CHP systems are not-for-profit, including many healthcare and hospital facilities, schools and universities, as well as recreation centers. These customers historically have not been able to benefit from previous iterations of the ITC. Under the federal definition for CHP systems, all of our products, including our air-conditioning and cooling models (Tecochill and Tecofrost) qualify for the tax credit when heat recovery is incorporated into the system design.
We aggressively market to both potential domestic and international customers where utility pricing aligns with our advantages. These areas include regions that have strict emissions regulations, such as California, or those that reward CHP systems that are especially non-polluting, such as New Jersey. There are currentlyCurrently, more than 23 states that recognize CHP as part of their Renewable Portfolio Standards or Energy Efficiency Resource Standards and several of them, including New York, California, Massachusetts, New Jersey, and North Carolina, have initiated specific incentive programs for CHP.Standards.
The traditional markets for CHP systems are buildings with long hours of operation and with corresponding demand for electricity or cooling and heat. Traditional customers for our cogeneration systems include controlled environment agriculture, 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, and military installations.
Traditional customers for our chillers, refrigeration compressors and heat pumps overlap with those for our cogeneration systems. Engine-driven chillers are often used as replacements for aging electric chillers because they both occupy similar amounts of floor space and require similar maintenance schedules. This is also the case with refrigeration compressors.
On-site utility services are provided in standardized packages of energy, equipment, and services suited to the needs of property owners and operators in healthcare, hospitality, large residential, athletic facilities, and certain industrial sites. This includes national accounts and other customer groups having a common set of energy requirements at multiple locations.
Competition
AlthoughThe markets for our products are highly competitive, though we believe that the Company offerswe offer customers a suite of premier best-in-class clean energy and thermal solutions, the markets for oursolutions.
InVerde and Tecopower
Our combined heat and power products are highly competitive. Our cogeneration productsthat produce electricity and hot water compete with the utility grid, existing technologies such as other reciprocating engine and microturbine CHP systems, and other emerging distributed generation technologies including solar power, wind-powered systems, and fuel cells. Our products are highly competitive between 60KW and 1.5MW in electrical generation capacity. In this size range we have other reciprocating engine competitors, although we have strong competitive advantages when it comes to ease of utility interconnection, ease of installation in tight spaces and our microgrid capabilities. We believe that Capstone Turbine Corporation is the only microturbine manufacturer with a commercial presence in CHP.
Although operating solar and wind powered systems produce no emissions, the main drawbacks to these renewable powered systems are their dependence on weather conditions, their reliance on backup utility grid-provided power, and high capital costs that can often make these systems uneconomical without government subsidies. Similarly, while the market for fuel cells is still developing, a number of fuel cell companies are focused on markets similar to ours. Fuel cells, like solar and wind powered systems, have received higher levels of incentives for the same type of applications as CHP systems in many territories. We believe that, absentnotwithstanding these higher government incentives, our CHP solutions provide a better value and more robust solution to end users in most applications.
Additionally, our patents relating to the Ultera® ultra-low emissions technology give Tecogenour products a strong competitive advantage in markets where severe emissions limits are imposed or where very clean power is favored, such as New Jersey, California, and Massachusetts.
Our products fall into the broad market category of distributed generation systems that produce electric power on-site to mitigate the drawbacks of traditional central power and the low efficiency of conventional heating processes.
Overall, we compete with end users’ other options for electrical power, heating, and cooling on the basis of our clean technology’s ability to:
•Provide a more efficient solution that provides operational savings for a facility's energy needs including cooling, electricity and hot water;
•Provide power when a utility grid is not available or goes out of service;
Reduce the customer’s total cost of purchasing electricity and other fuel;
•Reduce emissions of criteria pollutants (NOx and CO) to near-zero levels and cut the emission of greenhouse gases such as carbon dioxide;dioxide due to increased efficiencies compared to the electric grid;
•Provide reliable on-site power generation, heating and cooling services; andservices.
Control maintenance costs and ensure optimal peak equipment performance.
InVerde e+®CHP
We believe that no other company has developed a product that competes withprovides the features and benefits provided by our inverter-based InVerde e+®, which offers UL-certified grid connection black-start capability, and patented variable-speed operation.sophisticated off-grid and microgrid capabilities. An inverter-based product with at least some of these features has been introduced by others, but we believe that they face serious challenges in duplicating all the unique features of the InVerde e+®. CompetitorsCompetitors' product development time and costs could be significant. The Company hasWe have exclusive license rights to Microgrid algorithms developed by the University of Wisconsin researchers. We have exclusive rights for engine-driven systems utilizing natural gas or diesel fuel in the application of power generation where the per-unit output is
less than 500kW. The software allows our products to be integrated as a Microgrid, where multiple InVerde e+® units can be seamlessly isolated from the main utility grid in the event of an outage and re-connected to it afterward. We expect that our patents and license for Microgrid software will deter others from offering certain important functions. See "Business-Intellectual Property"."Business-Intellectual Property."
Similarly, in the growing Microgrid segment, neither fuel cells nor microturbines can respond to changing energy loads when the system is disconnected from the utility grid. Engines such as those used in the Company'sour equipment inherently have a fast dynamicfast-dynamic response to step load changes, which is why they are the primary choice for emergency generators. Fuel cells and microturbines require additional energy storage systems to be utilized infor time-limited off-grid operation, giving our engine-driven solutions an advantage for Microgrid and resiliency applications.
TECOCHILLTecochill Chillers
The Company's TECOCHILLOur Tecochill line of chillers are the only gas-engine-driven chillers available on the market. Natural gas can also fuel absorption chillers, which use fluids to transfer heat without an engine drive. However, engine driven chillers continue to have an efficiency advantage over absorption machines. TECOCHILLTecochill chillers reach efficiencies well above levels achieved by similarly sized absorption systems. Today’s relatively lowLow natural gas prices in the United States improve the economics of natural gas-fueled chillers while their minimal electric demand on back upbackup power systems make them ideal for facilities requiring critical precision climate control. In 2023 we expanded our Tecochill range of products with the introduction of a hybrid air cooled chiller based on the inverter design used in the InVerde. The hybrid-drive air-cooled chiller will take simultaneous inputs from the electrical grid
TECOGEN INC.
Ilios®Heat Pump
There are a few companies manufacturing gas-engine heat pumps. Two companies that we deem to be competitors are Yanmar and Tedom. The Ilios® water heater and other heat pump products compete in both the high-efficiency water heating market and the CHP market.
On-Site Utility
Our on-site utility business competes with established utilitiesnatural gas engine so that provide electricity, wholesale electricity and gas utility distributors, companies that provide services similar to ours, and other forms of alternative energy. We believe DG is gaining acceptance in regions where energy customers are dissatisfiedit can operate with the lowest cost and reliability of traditional electricity services. These end-users, together with growing support from state legislatures and regulators, are creating a favorable climate for the growth of DG that is overcoming the objections of established utility providers. In our target markets, we compete with large utility companies such as Con Edison Inc. and Long Island Power authority in New York, Public Service Electric and Gas Company in New Jersey, and Eversource and National Grid USA Service Company, Inc. in Massachusetts. These companies are much larger than us in terms of revenues, assets, marketing, and other resources, but we target the same markets and customers. We compete with large utility companies by marketing our electricity services to the same potential commercial building customers. We competeand/or greenhouse gas footprint at any time based on the basis of the cost, service, price, and favorable environmental benefits of generating energy with our installed systems. We also compete with other on-site utility companies, such as Aegis Energy Services Inc. and All Systems Cogeneration Inc.changing conditions.
Research & Development
Tecogen'sOur long and rich research and development tradition and sustained programs have allowed us to cultivate deep engineering expertise. We have strong core technical knowledge that is critical to product support and continuous product improvement efforts. Our TecoDrive engine, permanent magnet generator, cogeneration and chiller products, InVerde, Ilios® heat pumps, and most recently the Ultera® emissions control system, and our hybrid-drive air-cooled chiller were all created and optimized in-house with both public and private funding support.support from third-parties.
We continue to seek to forge alliances with utilities, government agencies, universities, research facilities, and manufacturers. The Company has alreadyWe have succeeded in developing new technologies and products in collaboration with several entities, including:
•Sacramento Municipal Utility District has provided test sites for the Companyto us since 2010.
•Southern California Gas Company and San Diego Gas & Electric Company, each a Sempra Energy subsidiary, have granted us research and development contracts since 2004.
•Department of Energy’s Lawrence Berkeley National Laboratory, with which the Company haswhom we have had research and development contracts since 2005, including ongoing Microgrid development work related to the InVerde.
•Eastern Municipal Water District in Southern California has co-sponsored demonstration projects to retrofit both a natural-gas powered municipal water pump engine and a biofuel powered pumping station engine with the Ultera low emissions technology since 2012.
•Consortium for Electric Reliability Technology Solutions executed research and development contracts with the Company,us, and has provided a test site to the Companyus since 2005.
•California Energy Commission executedwith whom we had a research and development contract from 2004 until March 2013.
•The AVL California Technology Center performed a support role in research and development contracts with the Company from 2004 until March 2013.
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• | The AVL California Technology Center performed a support role in research and development contracts as well as internal research and development on our Ultera® emission control system from August 2009 to November 2011. Currently, this testing center's work on emissions from gasoline vehicles which began in January of 2016 continues for the Ultra Emissions products.
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Propane Education & Research Council (PERC) executed research and development contracts withon our Ultera emission control system from August 2009 to November 2011. In addition, the Company for work related to developing Ultera lowCenter supported our research on emissions control systems for the propane powered fork truck market.
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• | The Southwest Research Institute (SWRI), a non-profit independent research center located in San Antonio, Texas, has been engaged by the Company to complete the next phase of research in the Ultera® automotive application. This effort will focus on evaluation of advanced catalyst formulations tailored to the Ultera® process.
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Our efforts to forge partnerships continue to focus on utilities, particularly to promote the InVerde, our most utility-friendly product. The naturefrom gasoline vehicles from January of these alliances varies by utility, but includes simplified interconnection, joint marketing, ownership options, peak demand mitigation agreements, and customer services. We have commissioned a Microgrid with the Sacramento Municipal Utility District at its headquarters in Sacramento, California, where the central plant incorporated three InVerde systems equipped2016 through October 2017. AVL researchers collaborated with our Ultera® low-emissions technology. Some expenses for this project were reimbursed to the utility through a grant from the California Energy Commission.engineers on several peer reviewed papers published by technology association SAE International in 2017 and 2018.
Certain components of our InVerde product were developed through a grant from the California Energy Commission.This grant includes a requirement that we pay royalties on all sales of all products related to the grant. grant, which obligation expired in 2022.As of December 31, 2017, such2023, royalties accrued in accordance with this grant agreement were less than $6,000$10,000 on an annual basis.
Our relationship with the Propane Education & Research Council (PERC) plays an instrumental role in the development of our Ultera® emissions control system for the propane powered fork truck market.
We also continue to leverage our resources with government and industry funding, which has yielded a number of successful developments, including the Ultera® low-emissions technology, sponsored by the California Energy Commission and Southern California Gas Company. Pursuant to the terms of the grants from the California Energy Commission, the California Energy Commission has a royalty-free, perpetual, non-exclusive license to these technologies for government purposes.
Our current internal R&D efforts are focused on the hybrid-drive air-cooled chiller that utilizes the basic inverter design used in the InVerde e+. Management believes that this chiller will address a significant market segment that is currently not addressed by our existing Tecochill product. For the years ended December 31, 20172023 and 2016,2022, we spent approximately $936,929$840,011 and $667,064,$732,873, respectively, inon research and development activities.
Intellectual Property
Patents
We currentlyCurrently, we hold sixtwelve United States patents for our technologies:
•10,774,720: “NOx Reduction Using a Dual-Stage Catalyst System with Intercooling in Vehicle Gasoline Engines under Real Driving Condition.” This patent, granted in September 2020, improves the removal of Non-Methane Organic Gases (NMOG) and Carbon Monoxide (CO) from vehicle emissions. The improved performance, consisting of up to 90% reductions in NMOG and CO results from increased oxidation of NMOG and CO due to a lower temperature environment in the second stage catalyst.
•10,774,724: “Dual Stage Internal Combustion Engine Aftertreatment System Using Exhaust Gas Intercooling and Charger Driven Air Ejector.” This patent, granted in September 2020, relates to the use of turbo
compressors and exhaust gas intercoolers in turbocharged engines to reduce the complexity and cost of Ultera emissions reduction systems.
•9,995,195: “Emissions control systems and methods for vehicles.” This patent, granted in June 2018, is a method for vehicle cold start to enhance the removal of CO and hydrocarbons emissions, which are extremely problematic for cold engines. Air is injected in the exhaust between the engine’s close-coupled catalyst and underbody catalyst. Once the engine is warmed (> 500 F exhaust) this air stream is shut off. This method synergizes well with the Ultera system by utilizing the injection air feed for an alternative purpose during engine start.
•9,956,526: “Poison-Resistant Catalyst and Systems Containing Same.” This patent, granted in May 2018, relates to a special catalyst formulation that is resistant to contaminant induced corrosion in conditions like those of the Ultera second stage. These poisons or contaminants are most commonly sulfur compounds.
•9,702,306: “Internal Combustion Engine Controller.” This patent granted in July of 2017 relates to the unique control methodology used in the InVerde e+ CHP unit that maximizes engine fuel economy under variable speed operation.
•9,470,126: "Assembly and method for reducing ammonia in exhaust of internal combustion engines." This patent, granted in October 2016, is related to the Ultera emission control system applicable to all of our products.
•9,856,767: “Systems and methods for reducing emissions in exhaust of vehicles and producing electricity." This patent, filed in November 2015 and published in March 2016, relates to the development of the Ultera emission control system for vehicle applications.
•9,121,326: “Assembly and method for reducing nitrogen oxides, carbon monoxide and hydrocarbons in exhausts of internal combustion engines.” This patent, granted in September 2015, is related to the Ultera emission control system applicable to all of our products.
8,829,698: “Power generation systems.”•9,651,534: "Assembly and Method for reducing nitrogen oxides, carbon monoxide, hydrocarbons and hydrocarbon gas in exhausts of internal combustion engines and producing and electrical output." This patent granted in September 2014,April 2017, is for a power generationrelated to the Ultera emission control system that includes an internal combustion engine configuredapplicable to provide rotational mechanical energy.all our products.
•8,578,704: “Assembly and method for reducing nitrogen oxides, carbon monoxide, and hydrocarbons in exhausts of internal combustion engines.” This patent, granted in November 2013, is for the Ultera emission control system applicable to all our products.
7,239,034: “Engine driven power inverter system with cogeneration.” This patent, granted in July 2007, pertains to the utilization of an engine-driven CHP module combined with an inverter and applies to our InVerde product specifically.
•7,243,017: “Method for controlling internal combustion engine emissions.” This patent, granted in July 2007, applies to the specific algorithms used in our engine controller for metering fuel usage to obtain the correct combustion mixture and is technology used by most of our engines.
We have filed for several additional patents, most notable among them are the following:
"Systems and methods for reducing emissions•7,239,034: “Engine driven power inverter system with cogeneration.” This patent, granted in exhaust of vehicles and producing electricity." This application, filed in November 2015 and published in March 2016, is relatedJuly 2007, pertains to the developmentutilization of the Ultera emission control system for vehicle applications.
an engine-driven CHP module combined with an inverter and applies to our InVerde product specifically.“Poison-Resistant CatalystOur patents expire between 2024 and Systems Containing Same.” This application, filed in March 2016, relates to treatment of exhaust generated by internal combustion engines, combustion turbines, and boilers, and more particularly to systems and method for treating exhausts containing one or more poisons, such as sulfur.
“Internal Combustion Engine Controller.” This application, filed in October 2015, relates to controllers and control circuits for controlling an internal combustion engine, including a gas fired internal combustion prime motor used for driving a generator for generating electrical power.
“Emissions Control Systems and Methods for Vehicles.” This application, filed in April 2016 relates to emissions control systems for vehicles.
"Assemblies and Methods for Reducing Particulate Matter, Hydrocarbons, and Gaseous Oxides from Internal Combustion Engine Exhaust." This application, filed in February 2017 relates to emissions controls system for vehicles.
"Dual Stage Internal Combustion Engine Aftertreatment System Using Exhaust Gas Intercooling and Charger-Driven Air Ejector." This application filed in February 2017 relates to emissions controls systems for vehicles.2037.
In addition, the Companywe have licensed specific rights to Microgrid software algorithms developed by University of Wisconsin researchers for which we pay royalties to the assignee, The Wisconsin Alumni Research Foundation (WARF). The specific patent named in our agreement isPursuant to U.S. Patent 7,116,010, titled “Control of small distributed energy resources” (7,116,010), granted in 2006.2006 and expires on March 27, 2024. Our exclusive rights are valid for engine-driven systems utilizing natural gas or diesel fuel in the application of power generation where the per-unit output is less than 500 kW. The software allows our products to be integrated as a Microgrid, where multiple InVerde units can be seamlessly isolated from the main utility grid in the event of an outage and re-connected to it afterward. The licensed software allows us to implement such a Microgrid with minimal control devices and associated complexity and cost. Tecogen paysWe consider the Microgrid software algorithm licensed from WARF to be a key feature of our InVerde product, and one that would be difficult to duplicate outside the patent. We pay WARF a royalty for each cogeneration module sold using the licensed technology. Such royalty payments have been in the range of $5,000 to $20,500$15,000 on an annual basis through the year ended December 31, 2017.2023. In addition, WARF reserved the right to grant non-profit research institutions and governmental agencies non-exclusive licenses to practice and use, for non-commercial research purposes, the technology developed by the Companyus that is based on the licensed software.
We consider our patents and licensed intellectual property to be important in the operation of our business. The expiration, termination, or invalidity of one or more of these patents may have a material adverse effect on our business. Our earliest patent, licensed from WARF, was issued in 2006 and expires in 2022. Most of our current patents expire between 2022 and 2027.
We believe that oneOne other company Aegis Energy Service Inc., has developed a product that competesseeks to compete with our inverter-based InVerde.InVerde, although it does not offer all of the same benefits and features offered by our InVerde products. We anticipate that an inverter-based product with at least some of thesethe features offered by our InVerde products will be introduced by others, but we believe that our competitors will face serious challenges in duplicating the InVerde. Product development time and costs would likely be significant, and we expect that our patent for the inverter-based CHP system, (7,239,034) would offerU.S. Patent 7,239,034, provides significant protection,protections for key features. We consider the Microgrid software algorithm licensed from WARF to be a key feature of our InVerde product, and one that would be difficult to duplicate outside the patent.
In 2013, we purchased rights to designs and technologies,technology, including patents granted or pending for our permanent magnet generators. A key component of our InVerde module uses this acquired technology.
The recent issuance by the U.S. PTO of the patentOur patents for the Ultera® low-emissions control technology keeps that technology exclusive to us. It applies to all of our gas engine-driven products and may have applications to other rich-burn spark-ignited internal combustion engines. We have also filed for or been granted patents for this technology in Europe, Australia, Brazil, Canada, China, Costa Rica, Dominican Republic, India, Japan, Mexico, New Zealand, Republic of Korea Singapore, and South Africa. There is no assurance, however, that the Ultera low-emissions control patent applications will be approved in any other country.Singapore.
Copyrights
Our control software is protected by copyright laws or onthrough an exclusive license agreement.
Trademarks
The Company hasWe have registered the brand names of our equipment and logos used on our equipment. These registered and pending trademarks include Tecogen, Tecochill, Tecopower, Ultera, InVerde, Ilios, InVerde e+ and the associated logos. We will continue to trademark our product names and symbols.
We rely on treatment of our technology as trade secrets through confidentiality agreements, which our employees and vendors are required to sign. Also, we rely on non-disclosure agreements with others that have or may have access to confidential information to protect our trade secrets and proprietary knowledge.
Sourcing & Manufacturing
We are focused on continuously strengthening our manufacturing processes and increasing operational efficiencies within the Company.efficiencies. Many of the components used in the manufacture of our highly-efficient clean energy equipment are readily fabricated from commonly available raw materials or are standard available parts sourced from multiple suppliers. We believe that in most cases, adequate supplies exist to meet our near to medium term manufacturing needs. Tecogen hasWe have an on-going focus on developing and implementing new systems to simplify our manufacturing processes, product sourcing methods, and our supply chain.
The Company hasWe have a combined total of approximately 26,00027,000 square feet of manufacturing and warehouse space running on a single 5-day per week shift at theour Waltham, Massachusetts facility. We believe we have sufficient spare capacity to meet near to medium term demand without incurring additional fixed costs. The lease for our headquarters located in Waltham, Massachusetts was extended on March 1, 2024 and expires on April 30, 2024.
On March 31, 2023, we entered into two lease agreements for two adjoining buildings, located in Billerica, Massachusetts, containing approximately 26,412 square feet of manufacturing, storage and office space to serve as our headquarters and manufacturing facilities. We have a total of approximately 21,000 square feet of manufacturing and warehouse space at the Billerica, Massachusetts facility. The lease agreements which commenced on January 1, 2024, provide for initial lease terms of five (5) years, expiring on December 31, 2028, with two successive options to renew for additional terms of five (5) years.
Government & Regulation
Several kinds of federal, state and local government regulations affect our products and services, including but not exclusive to:
Product•product safety certifications and interconnection requirements;
Air•air pollution regulations which govern the emissions allowed in engine exhaust;
State•state and federal incentives for CHP technology;
Various•various local building and permitting codes and third partythird-party certifications;
Electric•electric utility pricing and related regulations; and
Federal versus•federal and state laws regarding the legalization of cannabis for medicinal and recreational use.
Our markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We are impacted not only by energy policy, laws, regulations and incentives of governments in the markets in which we sell, but also by rules, regulations and costs imposed by utilities. Utility companies or governmental entities may place barriers on the installation or interconnection of our products with the electric grid. Further, utility companies may charge additional fees to customers who install on-site power generation; thereby reducinggeneration to reduce the electricity they take from the utility or for having theand to preserve electric capacity to use poweravailable from the grid for back-up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our product or increase the cost to our potential customers for using our systems. This could make our systems less desirable, adversely impacting our revenue and profitability. In addition, utility rate reductions can make our products less competitive, causing a material adverse effect on our operations. These costs, incentives and rules are not always the same as those faced by technologies with which we compete.
Similarly, rules, regulations, laws and incentives could also provide an advantage to our distributed generation solutions as compared with competing technologies if we are able to achieve requiredbecause they enable compliance in a lower cost, more efficient manner. Additionally,manner with reduced emissions and higher fuel efficiency could helpwhich helps our customers combat the effects of global warming. Accordingly, weWe may benefit from increased government regulations that impose tighter emission and fuel efficiency standards. We encourage investors and potential investors to carefully consider associatedthe risks described under "Item 1A. Risk Factors detailedFactors" below which highlightregarding various aspects of the regulatory environment and other related risks.
Our products are well-suited to meet the needs of the rapidly emerging indoor agriculture market, including cannabis.cannabis and other high volume leafy greens. To date our focus in the indoor agricultural market has primarily involved cannabis, a product with high revenue generating potential. However, we have sold to other indoor agricultural growers, and we believe that the indoor food production market will provide significant opportunities for the Company. While sales to cannabis growers made up less than 5% of total revenue in 2017, we believe this segment of theus. The indoor agriculture market in particular has the potential to be a major driver of growth as states move to legalize the use of cannabis for medicinal purposes and possibly even recreational use. However, under the Controlled Substances Act (CSA) cannabis continues to be categorized as a Schedule I drug, so that cannabis growers continue to face significant uncertainty regarding their ability to conduct business.
First passed by Congress in 2014, the Rohrabcher-FarrRohracher-Farr Amendment is an amendment to the annual appropriations bill that, among other things, funds the Department of Justice. It prohibits the US Attorney General from using funds to prosecute the medical use of cannabis. It does not address recreational use. On January 4, 2018, US Attorney General Jeff Sessions rescinded the Cole memo. Written in 2013, the Cole memo had directed US Attorneys not to allocate resources to prosecute "individuals whose actions are in clear and unambiguous compliance with existing state laws" regarding the cannabis market. As of the date of the filing of this filing, to our knowledge, noreport, we are not aware of any US Attorney in a district where the recreational use of cannabiswho has taken action against
participants in the recreational cannabis market operating in accordance with state law. However, none have unambiguously stated that they intend to take no action. Consequently,The uncertainty we face uncertainty regarding the potential for growth from the sales to the cannabis industry.industry is due in part to uncertainty regarding prosecutorial priorities of the current Presidential administration as well as the ability of cannabis growers to obtain funding in an environment where national bankers are not permitted to fund cannabis growth facilities.
Our Energy Production segment is subject to extensive government regulation. We are required to file for local construction permits (electrical, mechanical and the like) and utility interconnects, and mustare required to make various local and state filings related to environmental emissions.
In the past, many electric utility companies have raised opposition to DG,distributed generation of energy, a critical element of our On-Site Utility business.business model. Such resistance has generally taken the form of stringent standards for interconnection and the use of target rate structures as disincentives to combined generation of on-site power and heating or cooling services. A DG company'sdistributed generation facility's ability to obtain reliable and affordable back-up power through interconnection with the grid is essential to theour business model. Utility policies and regulations in most states are often do not prepared to accommodate widespread on-site generation. These barriersBarriers erected by electric utility companies and unfavorable regulations, where applicable, make more difficult or uneconomic our ability to connect to the electric grid at customer sites more difficult or uneconomic and areis an impediment to the growth of this segment.our business. The development of this segmentour business could be adversely affected by any slowdown or reversal in the utility deregulation process or by difficulties in negotiating back-up power supply agreements with electric providers in the areas where we intendseek to do business.
Environmental Matters
We are regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and service operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, the necessary research and development and capital expenditures to comply with these emissions standards.
Human Capital Resources
We believe our success in delivering energy efficient, ultra clean cogeneration systems, chillers and energy production services relies on our culture, values, and the creativity and commitment of our people. We strive to maintain healthy, safe, and secure working conditions and a workplace where our employees are treated with respect and dignity. Our vision is to create an inclusive, diverse and authentic community that inspires collaboration, integrity, engagement, and innovation. We are striving to create employee experience that offers opportunity for personal and professional growth, and enables work-life balance that aligns with our core values.
Employee Health and Safety
Employee health and safety continues to be a priority in every aspect of our business. We have taken a common-sense approach to safety that helps us understand and reduce hazards in our business. Training, risk assessment, safety coaching, and employee engagement are all programs that help us consistently manage our facility and employee safety. As resources are available, we expect to continue to expand and evolve our safety programs to better meet our employee needs and workplace conditions as our business grows.
We understand the benefits of employee health and safety and continue to invest in programs, products, and resources. We also understand the environment of trust and fairness that exists when information is openly shared. We also continue to invest in products and services to meet the health and safety needs of our customers and communities.
Talent Acquisition and Development
Our values are integral to our employment process and serve as guideposts for leadership. The ultimate goal is straightforward: find great people, ask them to join, and give them a reason to stay. Reasons include fair compensation, a complete array of employee benefits to include: health, dental and life insurance; short-term and long-term disability insurance; HSA account funding; generous time off benefits; and the grant of options or awards to purchase shares of our common stock. Recently we instituted web-based training for all of our employees.
Employees
As of December 31, 2017,2023, we employed 9192 full-time employees and 41 part-time employees,employee, including 74 sales and marketing personnel, 63 service personnel, 17 manufacturing personnel and 46 service9 finance and administrative personnel. We believe that our relationship with our employees is satisfactory. SevenNine of our New Jersey service employees are represented by a collective bargaining agreement which was executedexpires on December 30, 201631, 2025 and thereafter renews annually unless terminated by either party by written notice within sixty days prior to the expiration date.
Working Capital Requirements
Our ability to maintain sufficient working capital is highly dependent upon achieving expected operating results and cash flows. Failure to achieve the operating results could have a material adverse effect on our working capital, our ability to obtain financing, and our operations in the future.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of obligations in the normal course of business. As of December 31, 2023, our cash and cash equivalents were $1,351,270, compared to $1,913,969 at December 31, 2022, a decrease of $562,699. For the year ended December 31, 2023 we used $823,315 in cash from operations and generated net operating losses of $4,413,612, due to due to lower Products sales, a decrease in gross margin due to higher products material costs and the increased provision for obsolete inventory and an effective dateincrease in operating expenses due primarily to increased bad debt expense and a general increased in other administrative expenses. Working capital at December 31, 2023 was $9,822,546, compared to $14,344,288 at December 31, 2022, a decrease of January 1, 2017.$4,521,742 and our accumulated deficit was $42,879,656.
As a result of the above factors, management has performed an analysis to evaluate the entity’s ability to continue as a going concern for one year after the financial statements issuance date. Management’s analysis includes forecasting future revenues, expenditures and cash flows, taking into consideration past performance as well as key initiatives recently undertaken. Our forecasts are dependent on our ability to maintain margins based on the Company's ability to close on new and expanded business, leverage existing working capital, and effectively manage expenses. New and expanded business includes the sale and shipment of newly developed hybrid-drive air-cooled chillers and the acquisition of additional maintenance contracts in February 2024 (see Note 20. "Subsequent Events"). Our backlog at December 31, 2023 was $7,388,145, which is an increase of $666,007 from the December 31, 2022 backlog. We may also be required to borrow funds under note subscription agreements with related parties (see Note 11. "Related Party Notes").Based on management's analysis, we believe that cash flows from operations and the note agreements will be sufficient to fund operations over the next twelve months. There can, however, be no assurance we will be able to do so. Based on our analysis, the consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if we were unable to continue as a going concern.
Our liquidity and cash flows are discussed in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations."
Available Information
Our internet website address is http://www.tecogen.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and filings with the SEC are available free of charge on our website as soon as reasonably practicable after the reports are filed with, or furnished to, the SEC. Information contained on our website is not incorporated into this Annual Report on Form 10-K or our other securities filings with the SEC. The SEC maintains an internet website at www.sec.gov which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors
Our business operations, financial condition, results of operations and stock price may be affected by a number of factors. In addition to the other information in this Form 10-K, the following factors and the Company face many risks.information contained under the heading ''Cautionary Note Concerning Forward-Looking Statements'' should be considered in evaluating our company and our business. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in the following risks occur, our business, financial condition orand results of operations could suffer and the trading price of our common stock could decline. Investors and prospective investors should consider the following risks and the information contained under the heading ''Cautionary Note Concerning Forward-Looking Statements'' above before deciding whether to invest in our securities.
Risks Relating to Our Business Strategy and Industry
We may need to raise additional financing if cash generated from our operations is insufficient.
During the year ended December 31, 2023, our revenues continued to be negatively impacted due to supply chain issues and project deferrals. The extent to which the coronavirus will continue to impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. As part of our pandemic response plan, our sales, engineering, and select administrative functions may be operated remotely when necessary or appropriate while our manufacturing and service teams continues to function normally, subject to customer-initiated disruptions in service.
To the extent cash generated from operations in the future is insufficient to fund our operating requirements, we will be required to seek additional outside financing. Our inability to obtain necessary capital or financing to fund these working capital needs will adversely affect our ability to expand our operations.
If the cash generated by operations istogether with proceeds of funds available under our related party loans with John N. Hastopoulos, a director and principal shareholder and Earl R. Lewis, III, a director, are insufficient to fund our future operating requirements, we will need to raise additional funds through public or private equity or debt financings. Such financing may not be available to us when needed, or if available, may not be available on terms that are favorable to us and could result in significant dilution to the holdings of our stockholders. Furthermore, any such debt financing is likely to include financial and other covenants that may impede our ability to react to changes in the economy or industry. AlthoughIf adequate financing is not available when needed, we are in discussions with various possible funding sourcesmay be required to implement cost-cutting strategies, delay production, curtail research and have executed a term sheet,development efforts, or implement other measures, which may adversely affect our results of operations and financial conditions and the price of our stock.
Based upon our operating and cash flow plan, we have no commitmentsbelieve existing resources, including cash and cash flows from operations will be sufficient to meet our working capital needs for any such financing at this time.the next twelve months. If adequate financing is not available when needed, we may be required to implement cost-cutting strategies, delay production, curtail research and development efforts, or implement other measures, which may adversely affect our overall business results of operations and financial condition.condition and the price of our stock.
If we experience a period of significant growth or expansion, it could place a substantial strain on our resources.
If our cogeneration and chiller products penetrate the market rapidly, we may be unable to deliver large volumes of technically complex products or components to our customers on a timely basis and at a reasonable cost to us. We have never ramped up our manufacturing capabilities to meet significant large-scale production requirements. If we were to commit to deliver large volumes of products, we may not be able to satisfy these commitments on a timely and cost-effective basis.
Our operating history is characterized by net losses and there can be no assurance we will be able to increase our sales and sustain profitability in the future.
Although we were able to generate net income from our Products and Services segment for the year ended December 31, 2017, weWe have historically incurred annual operatingnet losses, from such segment. Suchincluding a net loss of $4,598,108 in 2023. Our business is capital intensive and, because our products generally are built to order with customized configurations, the lead time to build and deliver a unit can be significant. We may be required to purchase key components long before we can deliver a unit.unit and receive
payment. Changes in customer orders or lack of demand may also impact our profitability. There can be no assurance we will be able to increase our sales and achieve and sustain or increase or profitability in the future.
We are dependent on a limited number of third-party suppliers for the supply of key components for our products.
We use third-party suppliers for components in all of our products. Our engine supplier, generator supplier forengines and generators required in our cogeneration products (other than the InVerde), and the compressor and vessel sets in our chillers, are all purchased from large multinational equipment manufacturers. The loss of one or more of our suppliers could materially and adversely affect our business if we are unable to replace them. While alternate suppliers for the manufacture of our engine, generatorgenerators and compressorcompressors have been identified, should the need arise, there can be no assurance that alternate suppliers will be available and able to provide such items on acceptable terms or on a timely basis.
From time to time, shipments of components for our products can be delayed because of industry-wide or other shortages of necessary materials and components from third-party suppliers, as well as shipping delays at points of importation. A supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity, or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to deliver our products in accordance with contractual obligations.
The amount of the Company'sour backlog is subject to fluctuation due to itsour customers’ experiencing unexpected delays in financing, permitting or modifications in specifications of the equipment.
The Company'sOur total product and installation backlog as of December 31, 20172023 was $15.7 million$7,388,145 compared to $11.1 million$6,722,138 as of 2016.December 31, 2022. Although Tecogen expects itswe expect our customers to issue definitive purchase orders with respect to such backlog, there can be no assurance that such amounts will not be subject to modification in the event customers experience unexpected delays in obtaining permits, interconnection agreements or financing. We have experienced order delays and deferrals for our products due to business closures or the inability to obtain government issued permits to conduct product installations. Any of such events may result in customers modifying the equipment or the terms or timing of the expected installation, which may result in changes to the amount of backlog attributed to those projects.
We experience significant fluctuations in revenues from quarter to quarter on our product sales which may make period to period comparisons difficult.
We have low volume, high dollar sales for projects that are generally non-recurring, and therefore our sales have fluctuated significantly from period to period. Fluctuations cannot be predicted because they are affected by the purchasing decisions and timing requirements of our customers, which are unpredictable. Such fluctuations may make quarter to quarter and year to year comparisons difficult.
We expect significant competition for our products and services.
Many of our competitors and potential competitors are well established and have substantially greater financial, research and development, technical, manufacturing and marketing resources than we do. If these larger competitors decide to focus on the development of distributed power or cogeneration, they have the manufacturing, marketing and sales capabilities to complete research, development, and commercialization of these products more quickly and effectively than we can. There can also be no assurance that current and future competitors will not develop new or enhanced technologies or more cost-effective systems, and therefore, there can be no assurance that we will be successful in this competitive environment.
If we are unable to maintain our technological expertise in design and manufacturing processes, we will not be able to successfully compete.
We believe that our future success will depend upon our ability to continue to develop and provide innovative products and product enhancements that meet the increasingly sophisticated needs of our customers.
However, this requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. The development of new, technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs, and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
The introduction of products embodying new technologies and the shifting of customer demands or changing industry standards could render our existing products obsolete and unmarketable. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products or product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.
Our intellectual property may not be adequately protected.
We seek to protect our intellectual property rights through patents, trademarks, copyrights, trade secret laws, confidentiality agreements, and licensing arrangements, but we cannot ensure that we will be able to adequately protect our technology from misappropriation or infringement. We cannot ensure that our existing intellectual property rights will not be invalidated, circumvented, challenged, or rendered unenforceable.
Our competitors may successfully challenge the validity of our patents, design non-infringing products, or deliberately infringe our patents. There can be no assurance that other companies are not investigating or developing other similar technologies. In addition, our intellectual property rights may not provide a competitive advantage to us or ensure that our products and technology will be adequately covered by our patents and other intellectual property. Any of these factors or the expiration, termination, or invalidity of one or more of our patents may have a material adverse effect on our business.
Others may assert that our technology infringes their intellectual property rights.
We may be subject to infringement claims from time to time. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay additional royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results would suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.
Our success is dependent upon attracting and retaining highly qualified personnel and the loss of key personnel could significantly hurt our business.
To achieve success, we must attract and retain highly qualified technical, operational and executive employees. The loss of the services of key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering, operations, and business development personnel, could result in the loss of business or could otherwise negatively impact our ability to operate and grow our business successfully.
Our business is subject to product liability and warranty claims.
Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may face substantial liability for damages resulting from the faulty design of products, manufacture of products or improper use of products by end users. We currently maintain a moderate level of product liability insurance, but there can be no assurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our ability to market and sell our products.
We sell our products with limited warranties. There can be no assurance that the provision in our financial statements for estimated product warranty expense will be sufficient. We cannot ensure that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant occurrence of warranty expense in excess of estimates could have a material adverse effect on our operating results, financial condition and cash flow. Further, we have at times undertaken programs to enhance the performance of units previously sold. These enhancements have at times been provided at no cost or below our cost. If we choose to offer such programs again in the future, such actions could result in significant costs.
Utilities or governmental entities could hinder our entry into and growth in the marketplace, and we may not be able to effectively sell our products.
Utilities or governmental entities on occasion have placed barriers to the installation of our products or their interconnection with the electric grid, and they may continue to do so. Utilities may charge additional fees to customers who install on-site CHP and rely on the grid for back-up power. These types of restrictions, fees, or charges could make it harder for customers to install our products or use them effectively, as well as increasing the cost to our potential customers. This could make our systems less desirable, thereby adversely affecting our revenue and other operating results.
The reduction, elimination or expiration of government and economic incentives for applications of our equipment could reduce demand for our equipment and harm our business.
The market for cogeneration equipment depends in part on the availability and size of government and economic incentives that vary by geographic market. Because our sales to customers are typically into geographic areas with such incentives, elimination, or expiration of government subsidies and economic incentives for cogeneration equipment may negatively affect the competitiveness of equipment relative to other sources of electricity, heating, and cooling equipment, and could harm or halt the growth of the cogeneration industry and our business. In particular, the Company depends on the New York State Energy Development Authority CHP Program (PON 2568) and the New Jersey Smart Start Combined Heat and Power Incentive.
The Company sometimes incorporates price reduction on equipment sold to customers based on the anticipated receipt of governmental economic incentive payments, and applies for and collects the incentives payments. If such incentives become unavailable to the Company the Company may be materially adversely affected.
Competing sources of electricity, heating, and cooling equipment may successfully lobby for changes in the relevant legislation in their markets that are harmful to the cogeneration industry. Reductions in, or eliminations or expirations of, governmental incentives in regions where we focus our sales efforts could result in decreased demand for and lower revenue from cogeneration equipment there, which would adversely affect the Company. In addition, our ability to successfully penetrate new geographic markets may depend on new geographic areas adopting and maintaining incentives to promote cogeneration, to the extent such incentives are not currently in place. Additionally, electric utility companies may establish pricing structures or interconnection requirements that could adversely affect our sales and be harmful to cogeneration.
We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.
We believe that we will need to reduce the unit production cost of our products over time to maintain our ability to offer competitively priced products. Our ability to achieve cost reductions will depend on our ability to develop low-cost design enhancements, to obtain necessary tooling and favorable supplier contracts, and to increase sales volumes so we can achieve economies of scale. We can make no assurance that we will be able to achieve any such production cost reductions. Our failure to do so could have a material adverse effect on our business and results of operations.
Our products involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our results of operations.
The sale of our products typically involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we have little or no control. We expect to plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, our financial condition, results of operations and cash flow would suffer. If demand in any period increases well above anticipated levels, we may have difficulties in responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the order, which would negatively impact our operations. In addition, our operating expenses are based on anticipated sales levels, and a high
percentage of our expenses are generally fixed in the short term. As a result of these factors, a small fluctuation in timing of sales can cause operating results to vary materially from period to period.
The economic viability of our projects depends on the price spread between natural gas and other fuel and electricity, and the variability of these prices creates a risk that our projects will not be economically viable and that potential customers will avoid such energy price risks.
The economic viability of our CHP products depends on the spread between natural gas fuel and electricity prices. Volatility in one component of the spread, such as the cost of natural gas and other fuels (e.g., propane or distillate oil), can be managed to some extent by means of futures contracts. However, the regional rates charged for both base load and peak electricity may decline periodically due to excess generating capacity or general economic recessions.recessions, and both the cost of natural gas and the cost of electricity for base load and peak load may be adversely affected by geopolitical disruptions such as Russian expansion into the Ukraine and political and other responses to such expansionist activity.
Our products and on-site utility service could become less competitive if electric rates were to fall substantially in the future, although, historically, electric rates have not had any sustained decline in price. Potential customers may perceive the risk of unpredictable swings in natural gas and electricity prices as a risk of investing in on-site CHP, and may decide not to purchase CHP products.
We are exposed to credit risks with respect to some of our customers.
To the extent our customers do not advance us sufficient funds to finance our costs during the execution phase of our contracts, we are exposed to the risk that they will be unable to accept delivery or that they will be unable to make payment at the time of delivery.
We may make acquisitions or take other corporate strategic actions that could harm our financial performance.
To expedite development of our business, including with regard to equipment installation and service functions, we anticipate investigating and potentially pursuing future acquisitions of complementary businesses. Risks associated with such acquisitions include the diversion of management attention and cash from operatingoperations to cover the costs associated with acquisitions, disruption of our existing operations, loss of key personnel in the acquired companies, dilution through the issuance of additional securities, assumptions of existing liabilities, and commitment to further increase operating expenses. If any or all of these problems actually occur, acquisitions could negatively impact our financial performance and future stock value.
The Company has recently completed the acquisition of ADGE. As the Company continues to integrate ADGE's business model into its operations, the Company's financial condition, cash flows, and results of operations could be negatively impacted.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), was signed into law, significantly reforming the U.S. Internal Revenue Code. The TCJA contains significant changes to the U.S. federal corporate income taxation, including reduction of the corporate tax rate from 35% to 21% for US taxable income. Further, it imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, puts into effect the migration from a "worldwide" system of taxation to a territorial system, and modifies or repeals many business deductions and credits. We continue to examine the impact the TCJA may have on our business. The Company is in the process of quantifying the impact of the TCJA and will record any adjustments in accordance with the guidance provided in SAB118.
The impact of the TCJA on holders of common stock is uncertain and could be adverse. This Annual Report does not discuss any such tax legislation or the manner in which it might affect investors of our common stock. Investors should consult with their own tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.
Our business and financial performance may be adversely affected by information systems interruptions, cybersecurity attacks or other disruptions which could have a material adverse effect on our business and results from operations.
We depend upon information technology, infrastructure, including network, hardware and software systems to conduct our business. Despite our implementation of network and other cybersecurity measures, our information technology system and networks could be disrupted or experience a security breach from computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Our security measures may not be adequate to protect against highly targeted sophisticated cyber-attacks, or other improper disclosures of confidential and/or sensitive information. Additionally, we may have access to confidential or other sensitive information of our customers, which despite our efforts to protect, may be vulnerable to security breaches, theft, or improper disclosure any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
Risks Relating to the Company's Acquisition of ADGE
Through ADGE, we may be exposed to substantial liability claims if we fail to fulfill our obligations to our customers or our on-site equipment malfunctions.
Through ADGE we enter into contracts with large commercial and not-for-profit customers under which we assume responsibility for meeting a portion of the customers' building energy demand and equipment installation. We may be exposed to substantial liability claims if we fail to fulfill our obligations to customers. If the equipment malfunctions, it may be costly to repair or replace. There can be no assurance that we will not be vulnerable to claims by customers and by third parties that are beyond any contractual protections that we are able to negotiate. As a result, liability claims could cause us significant financial harm.
Expiring ADGE customer contracts may lead to decreases in revenue and increases in expenses.
Each year, a portion of our customer contracts expire and need to be renewed or replaced. We may not be able to renew or extend contracts with existing customers or obtain replacement contracts at attractive rates or for the same term as the expiring contracts. To the extent ADGE iswe are unable to extend customer contracts prior to their expiration date,dates, energy production revenue will decline due to less energy billing. Expiring customer contracts can also lead to an increase in expenses because we are obligated to remove the equipment from the customer location at our own expense at the end of the customer contract. The investment required to obtain replacement contracts, including the manufacture and installation of the cogeneration or chiller equipment and the costs to incorporate this equipment into a facility are significant. To the extent that we do not have sufficient liquidity, our ability to add new contracts with energy production sites may be adversely impacted.
ADGEOur revenue from energy billing is partly dependent onmay be adversely impacted by increases in the price of natural gas, reductions in utility rates for electrical power, weather conditions, or by an increase in remote work and increased temperaturesstudy environments, all of which could reduce our revenue.
Over the past several years electric rates have fluctuated, in some instances rates have decreased, subsequent to the vast majority of customer contract dates, causing the billable value of the electrical power generated by our systems to decrease which has an adverse effect on our results of operations. In warmer months the customers do not use as much thermal energy because they do not have as much demand for heat at their locations. Due to lower demand in warmer months, we may not be able to bill for thermal energy and in turn may have a decrease in revenue. In addition, increases in the cost of natural gas may increase the cost of power generation in comparison to the cost of power from the electric grid and may result in decreased revenue and adversely affect our results of operation.
We may be affected by global climate change or by legal, regulatory, or market responses to such change.
The growing political and scientific sentiment is that global weather patterns are being influenced by increased levels of greenhouse gases in the earth’s atmosphere. This growing sentiment and the concern over climate change have led to legislative and regulatory initiatives aimed at reducing greenhouse gas emissions which warm the earth’s atmosphere. These warmer weather conditions could result in a decrease in demand for our products in general. Moreover, proposals that would impose mandatory requirements on greenhouse gas emissions continue to be considered by policy makers in the United States. Laws enacted that could impact demand for the products we sell could adversely affect our business, financial condition, results of operations and cash flows. Significant increases in federal, state or municipal restrictions on emissions of carbon dioxide that may be imposed on gas-driven cogeneration and chillers could adversely affect demand for our product. Our inability to respond to such changes could adversely impact the demand for our products and our business, financial condition, results of operations or cash flows.
Our financial condition and results of operations could suffer if there is an impairment of goodwill or intangible assets.
As of December 31, 2023, our goodwill was $2,743,424, and our intangible assets were $2,436,230. We performed a goodwill impairment test at December 31, 2023 and determined that the acquisitionestimated fair value of ADGEthe energy production business assets and the Aegis maintenance service contracts, based on a discounted cash flow analysis, exceeded the carrying value of the assets and did not recognize goodwill impairment relating to our energy production segment or service segment for the year ended December 31, 2023. We are required to test intangible assets with indefinite lives, including goodwill, annually or, in certain instances, more frequently, and may be required to record impairment charges, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred. Our goodwill impairment analysis is sensitive to changes in key assumptions used in our analysis. If the assumptions used in our analysis are not realized, it is possible that an impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of goodwill or other intangible assets. However, any such impairment would have an adverse effect on our results of operations.
Risks Related to our Technology and Business Operations
If we are unable to maintain our technological expertise in design and manufacturing processes, we will resultnot be able to successfully compete.
We believe that our future success will depend upon our ability to continue to develop and provide innovative products and product enhancements that meet the increasingly sophisticated needs of our customers. However, this requires that we successfully anticipate and respond to technological changes in synergiesdesign and other benefitsmanufacturing processes in a cost-effective and timely manner. The development of new, technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs, and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
The introduction of products embodying new technologies and the Company,shifting of customer demands or changing industry standards could render our existing products obsolete and unmarketable. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products or product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.
Legal, Regulatory and Compliance Risks
Our business is subject to product liability and warranty claims.
Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may not realize those benefits becauseface substantial liability for damages resulting from the faulty design of difficulties related to integration, the realizationproducts, manufacture of synergies, and other challenges.
Tecogen and ADGE operated, until completionproducts or improper use of the Merger, independently, andproducts by end users. We currently maintain product liability insurance, but there can be no assurancesassurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our ability to market and sell our products.
We sell our products with limited warranties. There can be no assurance that the respective businessesprovision in our financial statements for estimated product warranty expense will be sufficient. There can be combinedno assurance that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant occurrence of warranty expense in excess of estimates could have a manner that allows formaterial adverse effect on our operating results, financial condition and cash flow. Further, we have at times
undertaken programs to enhance the achievementperformance of substantial benefits. It is possible that thereunits previously sold. These enhancements have at times been provided at no cost or below our cost. If we choose to offer such programs again in the future, such actions could be loss of Tecogen’sresult in significant costs.
Agreements with our customers may include potential liquidated damages relating to construction delays or ADGE’s key employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses or unexpected issues, higher than expected costs and an overall post-completion process that takes longer than originally anticipated. Specifically, the following issues, among others, must be successfully addressed in combining Tecogen’s and ADGE’s operations in orderperformance guaranties.
Turnkey construction contracts to realize the anticipated benefits of the transaction:
combining Tecogen’s and ADGE’s businesses inwhich we are a manner that permits Tecogenparty may contain liquidated damages provisions resulting from failure to achieve agreed milestones relating to construction activity. Agreements relating to the synergies anticipated to result from the transaction, the failuresale of which wouldequipment or energy may include performance and other obligations that may result in the anticipated benefits of the transaction not being realizedpayment obligations to customers.
Utilities or governmental entities could hinder our entry into and growth in the time frame currently anticipated or at all;
maintaining existing agreements with customers, distributors,marketplace, and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, and vendors; and
addressing possible differences in corporate cultures and management philosophies.
The transactionwe may not be accretive, and may be dilutive,able to effectively sell our products.
Utilities or governmental entities on occasion have placed barriers to the Company's earnings per share, whichinstallation of our products or their interconnection with the electric grid, and they may continue to do so. Utilities may charge additional fees to customers who install on-site CHP and rely on the grid for back-up power. These types of restrictions, fees, or charges could make it harder for customers to install our products or use them effectively, as well as increase costs to potential customers. This could make our systems less desirable, thereby adversely affecting our revenue and other operating results.
The reduction, elimination or expiration of government and economic incentives for applications of our equipment could reduce demand for our equipment and harm our business.
The market for cogeneration equipment depends in part on the availability and size of government and economic incentives that vary by geographic market. Because our sales to customers are typically into geographic areas with such incentives, elimination, or expiration of government subsidies and economic incentives for cogeneration equipment may negatively affect the market pricecompetitiveness of equipment relative to other sources of electricity, heating, and cooling equipment, and could harm or halt the growth of the Company's common stock.cogeneration industry and our business. For example, we are eligible for the New Jersey Smart Start Combined Heat and Power Incentive.
The CompanyWe may incorporate price reduction on equipment sold to customers based on the anticipated receipt of governmental economic incentive payments and apply and collect the incentives payments. If such incentives become unavailable to us our financial condition may be adversely affected.
Competing sources of electricity, heating, and cooling equipment may successfully lobby for changes in the relevant legislation in their markets that are harmful to the cogeneration industry. Reductions in, or eliminations or expirations of, governmental incentives in regions where we focus our sales efforts could result in decreased demand for and lower revenue from cogeneration equipment there, which would adversely affect us. In addition, our ability to successfully penetrate new geographic markets may depend on new geographic areas adopting and maintaining incentives to promote cogeneration, to the extent such incentives are not currently expects the Mergerin place. Additionally, electric utility companies may establish pricing structures or interconnection requirements that could adversely affect our sales and be harmful to cogeneration.
We may be accretiveexposed to its adjusted earnings per share within 12 months after the completionsubstantial liability claims if we fail to fulfill our obligations to our customers or our on-site equipment malfunctions.
We enter into contracts with large commercial and not-for-profit customers under which we assume responsibility for meeting a portion of the transaction. This expectation, however, is based on preliminary estimates thatcustomers' building energy demand and equipment installation. We may materially change. In addition, the Company couldbe exposed to substantial liability claims if we fail to realize allfulfill our obligations to such customers. If the benefits anticipatedequipment malfunctions, it may be costly to repair or replace. There can be no assurance that we will not be vulnerable to claims by customers and by third parties that are beyond any contractual protections that we are able to negotiate. As a result, liability claims could cause us significant financial harm.
We may be subject to litigation, which is expensive and could divert management attention.
Our share price may be volatile and in the transaction or experience delays or inefficienciespast companies that have experienced volatility in realizing
such benefits. Such factors could, combined with the issuance of shares of the Company's common stock in the Merger, result in the transaction being dilutive to the Company's earnings per share, which could negatively affect the market price of shares of the Company's common stock.
Pending litigation relating to the Merger pursuant to which the Company acquired ADGE or any future litigation, has required, and may continue to require, the Company to incur significant costs.
The Company, along with ADGE and certain of our current and ADGE’s former directors and officers,their stock have been named as defendants in asubject to an increased incidence of securities class action lawsuit filed prior to the Merger. Thislitigation. Securities litigation has beenagainst us could result in substantial costs and any future litigation may be costly and a distractiondivert our management’s attention from the daily operation ofother business concerns, which could seriously harm our business.
Although the Company maintains, and ADGE maintained prior to the Merger,we maintain directors’ and officers’ insurance coverage, there can be no assurances that this insurance coverage will be sufficient to cover the substantial fees and expenses of lawyers and other professional advisors relating to the pending lawsuit or any future litigation, our obligations to indemnify our officers and directors who are or may become parties to such pending and future actions, or the amount of any judgments or settlements that we may be obligated to pay in connection with such actions. We may be required to make material payments in connection with the defense of or to settle such litigation or to satisfy any adverse judgment. In addition, such action, or thoseactions that arise in the future could be excluded from coverage or, if covered, could exceed our deductibles and/or the coverage provided. In addition, an adverse outcome of the litigation could cause our insurance premiums and retention amounts to increase in the future. Any of these consequences could have a material adverse effect on our business,
financial condition and results of operations. The Company believes that the lawsuit is without merit and intends to defend it vigorously. For more information regarding the pending litigation, see "Item"Item 3. Legal Proceedings" and Note 1012 "Commitments and Contingencies" in the Notes to our Consolidated Financial Statements included elsewhere herein.
Losses or unauthorized access to or releases of confidential information, including personal information, could subject us to significant reputational, financial, legal and operational consequences.
Our business requires us to use and store confidential information, including personal information, with respect to our customers and employees and also requires us to share confidential information with suppliers and other third parties. We rely on suppliers that are also exposed to ransomware and other malicious attacks that can disrupt business operations. Although we take steps to secure confidential information that is provided to or accessible by third parties working on our behalf, such measures may not always be effective and losses or unauthorized access to or releases of confidential information occur. Such incidents and other malicious attacks could materially adversely affect our business, reputation, results of operations and financial condition.
We have implemented systems and processes intended to secure our information technology systems and prevent unauthorized access to or loss of sensitive data, and mitigate the impact of unauthorized access, including through the use of encryption and authentication technologies and we continue to undertake regular reviews of our IT infrastructure and have investigated improved software and hardware cyber threat protection solutions. But these measures cannot provide absolute security, and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect our business, reputation, results of operations and financial condition.
We have experienced malicious attacks and other attempts to gain unauthorized access to our systems, including the ransomware attack on our computer network which occurred on April 28, 2023 which required that we limit user access, remove the hard drives from two affected workstations from service and restore network files from systems backups. Our network returned to full operation on May 1, 2023. Since this incident, we have implemented changes to user access passwords, conducted a full audit of user accounts and implemented multi-factor authentication for network and workstation access. These attacks seek to compromise the confidentiality, integrity or availability of confidential information or disrupt normal business operations, and could, among other things, impair our ability to attract and retain customers for its products and services, impact our stock price, materially damage commercial relationships, and expose us to litigation or government investigations, which could result in penalties, fines or judgments against us. Globally, attacks are expected to continue accelerating in both frequency and sophistication with increasing use by actors of tools and techniques that are designed to circumvent controls, avoid detection, and remove or obfuscate forensic evidence, all of which hinders our ability to identify, investigate and recover from incidents. In addition, attacks against us and our customers can escalate during periods of severe diplomatic or armed conflict.
Credit and Liquidity Risks
We are exposed to credit risks with respect to some of our customers.
To the extent our customers do not advance us sufficient funds to finance our costs during the execution phase of our contracts, we are exposed to the risk that they may be unable to accept delivery or that they will be unable to make payment at the time of delivery or within agreed upon payment terms. Our bad debt expense increased to $902,432 in the year ended December 31, 2023, compared to a benefit of $70,987 in the year ended December 31, 2022, due to the write down of certain install receivables which were deemed uncollectible in the year ended December 31, 2023. Our provision for doubtful accounts receivable was $149,922 as of December 31, 2023, a decrease of $211,275 when compared to the provision for doubtful accounts as of December 31, 2022. We have experienced customer payment delays due to COVID-19, which are attributable to temporary business shutdowns, resulting in declines in revenues and cash flows from our customers and delays in project completion due to delays in government project inspections and a general slowdown in business activity and in some cases, customers ceasing business activities altogether.
We received short-term debt financing from a director and principal shareholder to fund our business and ongoing operations.If we are unable to generate sufficient funds from operations or obtain additional financing, we may not be able to repay the loan when it becomes due.
On October 9, 2023, we entered into an agreement with Mr. John Hatsopoulos, a director and principal shareholder, under which he agreed to loan us up to $1,000,000. Under this agreement, on October 10, 2023, we borrowed $500,000 from Mr. Hatsopoulos pursuant to the terms of a promissory note.The note, as amended on March 21, 2024, is due and repayable two years from the date of issuance and bears interest at 5.12% per annum payable in full at maturity. The loan is required to be repaid in the event of a change of control of the company and upon the occurrence of an event of default under the note, including upon a failure to pay when due the principal and interest when due, or the commencement of voluntary or involuntary bankruptcy or insolvency proceeding.As of December 31, 2023, we have outstanding accounts payable of $4,514,415, other accrued expenses of $2,504,629, lease obligations of $289,473, and acquisition liabilities of $845,363. If we are unable to generate sufficient funds from operations or raise additional financing, we may have insufficient funds to repay the loan to Mr.
Hatsopoulos when it becomes due unless Mr. Hatsopoulos is willing to extend the term of the loan or renegotiate the terms, of which there can be no assurance.
Risks Relating to Ownership of our Common Stock
Investment in our Common Stock is subject to price fluctuations and market volatility.
Historically, valuations of many small companies have been highly volatile. The securities of many small companies have experienced significant price and trading volume fluctuations unrelated to the operating performance or the prospects of such companies. The market price of shares of our Common Stockcommon stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
•results and timing of our product development;
•results of the development of our competitors’ products;
•regulatory actions with respect to our products or our competitors’ products;
•actual or anticipated fluctuations in our financial condition and operating results;
•actual or anticipated changes in our growth rate relative to our competitors;
•actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
•competition from existing products or new products that may emerge;
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
•issuance of new or updated research or reports by securities analysts;
•fluctuations in the valuation of companies perceived by investors to be comparable to us;
•share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
•additions or departures of key management or personnel;
•disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain, maintain, defend or enforce proprietary rights relating to our products and technologies;
•announcement or expectation of additional financing efforts;
•sales of our Common Stock by us, our insiders, or our other stockholders; and
•general economic and market conditions.
Furthermore, the U.S. stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, or international currency fluctuations, may negatively impact the market price of shares of our Common Stock.common stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could potentially harm our business.
We experience significant fluctuations in revenues from quarter to quarter on our product sales which may make period to period comparisons difficult.
We have low volume, high dollar sales for projects that are generally non-recurring, and therefore our sales have fluctuated significantly from period to period. Fluctuations cannot be predicted because they are affected by the purchasing decisions and timing requirements of our customers, which are unpredictable. Such fluctuations may make quarter to quarter and year to year comparisons difficult.
We may be subject to litigation, which is expensive and could divert management attention.
Our share price may be volatile and in the past companies that have experienced volatility in the market price of their stock have been subject to an increased incidence of securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our Common Stockshares will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more analysts downgrade our Common Stockshares or change their opinion of our Common Stockshare price our share price would likelymay decline. In addition, if one or more analysts cease coverage of the Companyus or failfails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Because our directors and executive officers are among our largest stockholders, they can exert influence over our business and affairs and have actual or potential interests that may departdiffer from other stockholders or investors.
As of the date of this report, our directors and executive officers collectively beneficially own approximately 13%14.8% of our issued and outstanding Common Stock.shares. John Hatsopoulos, our co-Chief Executive Officer and a director, beneficially owns approximately 9%12.3% of our issued and outstanding Common Stock.shares. Additionally, the holdings of our directors and executive officers may increase in the future upon vesting or other maturation of exercise rights under any of the options or warrantsother stock awards they may hold or in the future may be granted or if they otherwise acquire
additional shares of our Common Stock.in the open market or otherwise. The interests of such persons may differ from the interests of our other stockholders. As a result, in addition to their board seats and offices, such persons will have influence over corporate actions requiring shareholder approval. These matters would include the election of directors and the approval of mergers or other business combination transactions.
Such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to acquire us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Current stockholdingsstock holdings may be diluted if we make future equity issuances or if outstanding warrants or options are exercised for shares of our common stock.
“Dilution” refers to the reduction in the voting effect and proportionate ownership interest of a given number of shares of common stock as the total number of shares increases. Our issuance of additional stock, convertible preferred stock, or convertible debt may result in dilution to the interests of shareholders and may also result in the reduction of your stock price. The sale of a substantial number of shares into the market, or even the perception that sales could occur, could depress the price of our Common Stock.common stock. Also, the exercise of warrants and options may result in additional dilution.
The holders of outstanding options, and warrants (and otherand convertible securities or derivatives, if any, are subsequently issued) have the opportunity to profit from a rise in the market price of our Common Stock,shares, if any, without assuming the risk of ownership, with a resulting dilution in the interests of other stockholders. We may find it more difficult to raise additional equity capital if it should be needed for our business while the options, warrants and convertible securities are outstanding.
Future sales of our Common Stockshares by our existing stockholders may cause our stock price to fall.
The market price of our Common Stockshares could decline as a result of sales by our existing stockholders of shares of our Common Stockshares in the market or the perception that these sales could occur. These sales might also make it more difficult for us to sellconduct an equity securitiesor equity-based financing at a time and price that we deem appropriate and thus inhibit our ability to raise additional capital when it is needed.
Because we have not and do not intend to pay cash dividends, our stockholders receive no current income from holding our stock.
We have paid no cash dividends on our capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. We currently expect to retain earnings for use in the operation and expansion
of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt or credit facility may preclude us from paying any cash dividends. As a result, capital appreciation, if any, of our Common Stock could be the sole source of gain for our stockholders for the foreseeable future.
FailureWe incur substantial costs to complyoperate as a public reporting company.
We incur substantial legal, financial, accounting and other costs and expenses to operate as a public reporting company. We believe that these costs are a disproportionately larger percentage of our revenues than they are for many larger companies. In addition, the rules and regulations of the SEC impose significant requirements on public companies, including ongoing disclosure obligations and mandatory corporate governance practices. Our senior management and other personnel need to devote a substantial amount of time to ensure ongoing compliance with these requirements. Our common stock is currently quoted on the Nasdaq CapitalOTC Markets Group Inc.’s OTCQX Best Market tier. Under the OTC Markets Group Inc.’s OTCQX continued listingqualification requirements, could leadwe are required to have a minimum bid price of $0.10 per share as of the commencementclose of delisting proceedingsbusiness for at least one of every 30 consecutive calendar days, a market capitalization of at least $5 million for at least one of every 30 consecutive calendar days, and at least two market makers. Also, we must be current in accordance with the Nasdaq rules. Delisting could limit investors' abilityour SEC reporting obligations. If we seek to effect transactions in the Company'slist our stock for trading on a national securities and subject the stock to additional trading restrictions.
The Company’s Common Stock is listedexchange or be quoted on the Nasdaq CapitalStock Market, we will be subject to additional disclosure and governance obligations. There can be no assurance that we will continue to meet all of the public company requirements to which we are subject on a timely basis, or at all, or that our compliance costs will not continue to be material.
Because our common stock is not traded on a national securities exchange. To maintain such listing, the Company is required to meet its continued listing requirements. If the Company is unable to maintain the listing of itsexchange, our stock on Nasdaq or another exchange for failure to comply with the continued listing requirements, including timely filing of Exchange Act reportshas limited liquidity and compliance with Nasdaq’s corporate governance requirements, the Company and its security holders could face significant material adverse consequences including a limited availability of market quotations for its stock and a decreasedour ability to issueraise capital is impaired.
On June 19, 2020, we voluntarily delisted our common stock from Nasdaq and transitioned the quotation of our shares to OTC Markets Group Inc.’s OTCQX Best Market. Our common stock has been quoted on the OTC Markets Group Inc.’s OTCQX Best Market since June 19, 2020 under the symbol “TGEN”. We believe that trading “over the counter” has limited our stock’s liquidity and may impair our ability to raise additional securities or obtain additional financingcapital. Also, and as a result, relatively small trades in the future.our stock could have a disproportionate effect on our stock price.
Certain provisions of our charter and bylaws may discourage mergers and other transactions.
Certain provisions of our certificate of incorporation and bylaws may make it more difficult for someone to acquire control of the Company.company. These provisions may make it more difficult for stockholders to take certain corporate actions and could delay or prevent someone from acquiring our business. These provisions could limit the price that certain investors might be willing to pay for shares of our Common Stock.common stock. The ability to issue “blank check” preferred stock is a traditional anti-takeover measure. This provision may be beneficial to our management and the board of directors in a hostile tender offer and may have an adverse impact on stockholders who may want to participate in such tender offer, or who may want to replace some or all of the members of the board of directors.
Our board of directors may issue additional shares of preferred stock without stockholder approval.
Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock. Accordingly, our board of directors may, without shareholder approval, issue one or more new series of preferred stock with rights which could adversely affect the voting power or other rights of the holders of outstanding shares of our Common Stock.common stock. In addition, the issuance of shares of preferred stock may have the effect of rendering more difficult or discouraging, an acquisition or change of control of the Company.company. Although we do not have any current plans to issue any shares of preferred stock, we may do so in the future.
In order to comply with public reporting requirements, we must continue to strengthen our financial systems and internal controls, and failure to do so could adversely affect our ability to provide timely and accurate financial statements.
Refinement of our internal controls and procedures will be required as we manage future growth and operate effectively as a public company. Such refinement of our internal controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, is costly and puts a significant burden on management. We cannot assure you that measures already taken, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve our disclosure controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could adversely affect our business and stock price.
Investor confidence in the price of our stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.As of the end of the period covered by this report, our principal executive officers and our principal accountingfinancial officer have concluded there is a material weakness in our disclosure controls and procedures and our internal control over financial reporting, which could harm our operating results or cause us to fail to meet our reporting obligations.
Our Chief Executive Officer and Chief Financial Officer (“certifying officers”) are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). The certifying officers designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and is made known to management (including the certifying officer) by others within the company, including its subsidiaries. We regularly evaluate the effectiveness of our disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly in our Forms 10-Q and annually in our Forms 10-K. In completing such reporting, we disclose, as appropriate, any significant change in our internal control over financial reporting that occurred during our most recent fiscal period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As a public company, we are subject to the rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management’s report on, and assessment of the effectiveness of, our internal control over financial reporting (“management’s report”). If we fail to achieve and maintain the adequacy of our disclosure control or internal control over financial reporting, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal control over financial reporting, particularly that relating to revenue recognition, is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss in investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our common stock. Investor confidence and the price of our common stock may be adversely affected if we are unable to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
As of the end of the period covered by this Annual Report, December 31, 2017,2023, our principal executive officersofficer and principal accountingfinancial officer performed an evaluation of our disclosure controls and procedures and concluded that our controls were not effective to provide reasonable assurance that information required to be disclosed by our Companyus in reports that we file under
the Securities Exchange Act, is recorded, processed, summarized and reported when required. Management conducted an evaluation of our internal control over financial reporting and based on this evaluation, management concluded that the company’s internal control over financial reporting was not effective as of December 31, 2017. The Company has2023. We have a small number of employees dealing with general controls over information technology security and user access. This constitutes a material weakness in financial reporting. Any failure to implement effective internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock and may require us to incur additional costs to improve our internal control system.
TECOGEN INC.General Business Risks
We seek to protect our intellectual property rights through patents, trademarks, copyrights, trade secret laws, confidentiality agreements, and licensing arrangements, but we cannot ensure that we will be able to adequately protect our technology from misappropriation or infringement. We cannot ensure that our existing intellectual property rights will not be invalidated, circumvented, challenged, or rendered unenforceable.
Our competitors may successfully challenge the validity of Contents
our patents, design non-infringing products, or deliberately infringe our patents. There can be no assurance that other companies are not investigating or developing other similar technologies. In addition, our intellectual property rights may not provide a competitive advantage to us or ensure that our products and technology will be adequately covered by our patents and other intellectual property. Any of these factors or the expiration, termination, or invalidity of one or more of our patents may have a material adverse effect on our business.
Others may assert that our technology infringes their intellectual property rights.
In orderWe may be subject to comply with public reporting requirements,infringement claims from time to time. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time from our business operations. If we mustare unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay additional royalties to continue to strengthenuse our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results would suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.
Our business and financial performance may be adversely affected by information systems interruptions, cybersecurity attacks or other disruptions which could have a material adverse effect on our business and results from operations.
We depend upon information technology, infrastructure, including network, hardware and software systems to conduct our business. Despite our implementation of security measures, there are numerous and evolving risks to cybersecurity and privacy, including risks originating from intentional acts of criminal hackers, nation states and competitors, intentional and unintentional acts or omissions of customers, vendors, contractors, employees and other third parties that may result in damage, breakdown, or interruption from computer viruses, ransomware, malware, phishing, social engineering, fraudulent inducement, electronic fraud, wire fraud, human error or malfeasance, unauthorized access, natural disasters, and telecommunications and electrical failures.We directly or indirectly store, collect and transmit sensitive data, including intellectual property, confidential information, proprietary business information, customer or personal data. The secure processing of such data, maintenance, and transmission of such data is important to our operations.We face increased cybersecurity risks due to our reliance on internet technology, among other things, to monitor our installed products or systems remotely. We may not be able to anticipate all types of security threats or be able to implement security measures effective against all such threats or implement preventive measures effective against all such threats.The techniques used by cybercriminals change frequently and may not be recognized until launched and can originate from a wide variety of sources, as discussed above.Even if identified, we may not be able to adequately investigate or remediate incidents or breaches due to attacks increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and failure to do so could adversely affectremove or obfuscate forensic evidence.Accordingly, our abilitydata protection efforts and related security measures may not be adequate to provide timely and accurate financial statements.
Refinementprotect against highly targeted sophisticated cyber-attacks, or other improper disclosures of confidential and/or sensitive information. Additionally, we may have access to confidential or other sensitive information of our internal controls and procedures willcustomers or suppliers, which despite our efforts to protect, may be required as we manage future growth, integrate the operations of ADGE and operate effectively as a public company. Such refinement of our internal controls, as well as compliance with the Sarbanes-Oxley Act of 2002 and related requirements, will be costly and will place a significant burden on management. We cannot assure you that measures already taken,vulnerable to security breaches, theft, or any future measures, will enable us to provide accurate and timely financial reports, particularly if we are unable to hire additional personnel in our accounting and financial department, or if we lose personnel in this area. Any failure to improve ourimproper disclosure controls or other problems with our financial systems or internal controls could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. The increase in personnel working remotely during and after the recent pandemic has increased the risk for our and our vendors and suppliers’ security breaches and incidents. If a security breach or other incident results in the unauthorized access to or use, disclosure, release, or other processing of confidential or proprietary information, we could incur liability and it may be necessary to notify persons, governmental authorities, supervisory bodies, the media and other parties pursuant to privacy and security laws. Any such
access, disclosure or other loss of information could result in legal claims, proceedings, liability under laws that protect the privacy of personal information of our employees or others, and any such event could disrupt our operations, damage our reputation, and cause loss of confidence in us. Our contracts with our customer and suppliers may not contain limitation of liability and there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to privacy, data protection, or data security.Further, we can give no assurance that our insurance coverage will be adequate or sufficient to cover the financial, legal, business or reputational losses that may result from an interruption or breach of our systems, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
Our success is dependent upon attracting and retaining highly qualified personnel and the loss of key personnel could significantly hurt our business.
To achieve success, we must attract and retain highly qualified technical, operational and executive employees. The loss of the services of key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering, operations, and business development personnel, could result in the loss of business or could otherwise negatively impact our ability to operate and grow our business successfully.
Our business may be impacted by political events, war, terrorism, public health issues, natural disasters and other circumstances that are not within our control.
War, terrorism, geopolitical uncertainties, public health issues, and other business interruptions have caused and could cause damage or disruption to international commerce and the global economy, and thus could have a material adverse effect on us, our suppliers, and manufacturing vendors. Our business operations are subject to interruption by natural disasters, fire, power shortages, nuclear power plant accidents, terrorist attacks, and other hostile acts, labor disputes, public health issues, and other events beyond our control. Such events could decrease demand for our products, make it difficult or impossible for us to make and deliver products to our customers, or to receive products from our manufacturers and suppliers, and create delays and inefficiencies in our supply chain. If major public health issues, including pandemics, arise, we could be adversely affectaffected by more stringent employee travel restrictions, additional limitations in freight services, governmental actions limiting the movement of products between regions, delays in production ramps of new products, and disruptions in the operations of our manufacturing vendors and suppliers. In the event of a natural disaster, we could incur significant losses, require substantial recovery time and experience significant expenditures in order to resume operations.
We depend on a small number of customers for a substantial portion of our product revenues. The loss of one or more of these customers, or our inability to collect outstanding receivables from such customers could have a material adverse effect on our financial results.
For the years ended December 31, 2023 and December 31, 2022, no customer represented more than 10% of revenues for the respective years. There was one customer who represented 14% of the accounts receivable balance as of our December 31, 2023, and one customer who represented 15% of the accounts receivable balance as of December 31, 2022. The loss of any one or more of our major customers or our inability to collect on outstanding accounts receivable from one or more of these customers could have a material adverse effect on our business and stock price.
The JOBS Act allows usfinancial condition. Our bad debt expense increased to postpone the date by which we must comply with certain laws and regulations and reduces the amount of information provided by us in reports filed with the SEC. We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.
We are and we will remain an “emerging growth company”, as defined$902,432 in the Jumpstartyear ended December 31, 2023, compared to a benefit of $70,987 in the year ended December 31, 2022, due to the write down of certain install receivables which were deemed uncollectible in the year ended December 31, 2023. Our Business Startups Actprovision for doubtful accounts receivable decreased $211,275 to $149,922 in the year ended December 31, 2023, compared to the year ended December 31, 2022. Although we are seeking to increase and diversify our customer base and reduce our reliance upon sales to a small number of 2012, or the JOBS Act, until the earliestcustomers, we expect sales to occur of (i) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1 billion (subjectsuch customers to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversarycontinue to constitute a significant portion of our initial public offering, (iii)revenues in the date on whichnear term given we have, during the previous three-year period, issuedactively pursue large contracts and projects. The loss of any one or more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a large accelerated filer under the Exchange Act.
For so long as we remain an emerging growth company we are not required to:
have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
submit certain executive compensation matters to shareholder non-binding advisory votes;
submit for shareholder approval golden parachute payments not previously approved; and
disclose certain executive compensation related items such as the correlation between executive compensation and financial performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation, when such disclosure requirements are adopted.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period,customers or an inability to collect such accounts receivable could have a material adverse effect our business, financial condition and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoptionresults of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.operations.
We cannot predict if investors will find our Common Stock less attractive because we may rely on some of these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from various reporting requirements, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate us and may result in less investor confidence.
Item 1B. Unresolved Staff Comments.
DisclosureNone.
Item 1C. Cybersecurity
Risk Management Strategy
Our business is dependent upon our information technology (“IT”) systems, devices and networks to collect, process and store the data necessary to conduct our business and record and report our business and financial information. We recognize the importance of developing, implementing, and maintaining effective cybersecurity measures to safeguard our IT systems and protect the confidentiality, integrity, and availability of our confidential and personal data, including with respect to our customers, suppliers, and employees, as well as our intellectual property.
We maintain a cybersecurity risk management program to identify, assess, manage, mitigate, and respond to cybersecurity threats.Our cybersecurity risk management program incorporates various mechanisms to detect and monitor unusual network activity, as well as containment and incident response tools. We monitor issues that are internally discovered or externally reported that may affect our business and have processes to assess those issues for potential cybersecurity impact or risk.
We have integrated our cybersecurity risk management program into our broader enterprise risk management program. This integration is designed to make cybersecurity considerations an integral part of our decision-making processes at every level and we believe that this integration allows cybersecurity risks to be evaluated and addressed in alignment with our business objectives and operational needs. While we work to maintain our information security program and risk management efforts, there can be no assurance that such actions will be sufficient to prevent cybersecurity incidents or mitigate all potential risks to our systems, networks, and data or those of our third-party providers.
We rely on suppliers that are also exposed to ransomware and other malicious attacks that can disrupt business operations. Although we take steps to secure confidential information that is provided to or accessible by third parties, such measures may not always be effective and losses or unauthorized access to, or releases of, confidential information occur. Such incidents and other malicious attacks could materially adversely affect our business, reputation, results of operations and financial condition.
We have experienced malicious attacks and other attempts to gain unauthorized access to our systems, including a ransomware attack on our computer network which occurred on April 28, 2023. Following remediation, our network returned to full operation on May 1, 2023.
We have engaged a third-party consultant in connection with our risk management and assessment processes.Our consultant assists us in the design and implementation of our cybersecurity policies and procedures, as well as the monitoring and testing of our safeguards. In the event of an incident, our incident response plan outlines the steps to this itembe followed from incident detection to mitigation, recovery and notification, and involves notifying senior management, our legal department, and the board of directors and/or our audit committee, if appropriate, and mitigation and remediation steps by our third-party consultant.
Governance
Our board of directors has overall responsibility for informed oversight of our risk management process, including risks from cybersecurity threats. Our board of directors is not requiredresponsible for monitoring and assessing strategic risk exposure. Our executive officers are responsible for the day-to-day management of the material risks we face. Our board of directors has delegated to our audit committee its cybersecurity risk oversight processes, including oversight and mitigation of risks from cybersecurity threats.
Our audit committee receives periodic reports from management regarding our cybersecurity risks and is notified of any significant cybersecurity threat or incident.The audit committee reports to the board of directors regarding its activities, including with respect to cybersecurity matters and the occurrence of any material cybersecurity incident, if appropriate.
We have engaged a smaller reporting company.third-party consultant to manage risks associated with network protection and workstation management. Our consultant performs an annual assessment of our cybersecurity risk policies and procedures.
Item 2. Properties.
Our headquarters is located in Waltham, Massachusetts, and consists of approximately 43,000 square feet of manufacturing, storage and office space. OurOn March 1, 2024, we extended the Waltham lease will expirewhich now expires on April 30, 2024. Currently, our monthly base rent for our Waltham, Massachusetts facility is $44,254.
On March 31, 2023, we entered into two lease agreements for two adjoining buildings, located in Billerica, Massachusetts, containing approximately 26,412 square feet of manufacturing, storage and office space to serve as our headquarters and manufacturing facilities. The lease agreements provide for initial lease terms of five (5) years with two successive options to renew for additional terms of five (5) years. Both leases commence on January 1, 2024 and require payment of the base rent, real estate taxes, common maintenance expenses and aggregate deposits of $38,200. Our costs for initial improvements required to the leased premises is estimated to range between $500,000 and $750,000. The estimated straight-line monthly rent expense for the initial term of the lease is approximately $26,962 per month. In accordance with ASC 842-20-30-1, we will record the lease liability and right-of-use asset using the discount rate for the lease upon the lease commencement date, January 1, 2024. We believe that our facilities are appropriate and adequate for our current needs.
Our nineeleven leased service centers can be broken into two different sizes. The larger leased spaces have office space to accommodate administrative, sales and engineering personnel, and warehouse space to stock parts in support of our service contracts.
As of December 31, 2017,2023, the service centers that fit this larger category are based in Piscataway, New Jersey and
Valley Stream and Buchanan, New York to service the Metro New York City and the Mid-Atlantic region. The San Francisco bayBay area and Northern California is served by such a center in Hayward, California. A portion of the corporate headquarters in Waltham, Massachusetts isand the new corporate headquarters in Billerica, Massachusetts are used in this manner to service Boston and New England.
The smaller type service centers are a parts depotdepots or warehousewarehouses for the stocking of parts in support of our service contracts. These centers are located in Los Angeles, California; Sterling Heights, Michigan; Newark, New York; andYork, East Windsor, Connecticut.
TECOGEN INC.Connecticut; East Syracuse, New York, Toronto, Ontario and Wellesley Chapel, Florida.
Item 3. Legal Proceedings.
The Company is a party to a pending action in the United States District Court for the District of Massachusetts, described below, related to the Merger.
Massachusetts Superior Court Action
On or about February 6, 2017, ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Charles T. Maxwell, Deanna M. Petersen, Christine Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen, and Merger SubNovember 23, 2022, we were served with a Verified Complaint by William C. May ("May"), individually andsuit filed against us on behalf of the other shareholders of ADGE as a class. The action was commencedAugust 24, 2022 in the Business Litigation Session of theOntario Superior Court of the Commonwealth of Massachusetts, Civil Action No. 17-0390.Justice by The complaint alleged class action claims arising outCorporation of the proposed Merger. On May 31, 2017, May voluntarily dismissed the action without prejudiceTown of Milton, Milton Energy Generation Solutions Inc. and consolidated his claims with the pending federal actionMilton Hydro Distribution Inc (the "Plaintiffs"), all of whom are municipal corporations incorporated in the United States District CourtProvince of Ontario. The plaintiffs sued for the District of Massachusetts. There can be no assurance, if the complaintdamages in the federal court is dismissed, that May or another plaintiff will recommence an action in state court with similar claims to those originally 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 Inc., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants. The action is captioned Vardakas v. American DG Energy Inc., Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
Following the consummation of the Merger (and the appointment of May from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the "Amended Complaint"). The Amended Complaint discontinued the claims against Cassel Salpeter & Co., LLC but asserted against the remaining defendants claims under Section 14(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") and SEC Rule 14a-19; claims against certain defendants for control person liability under Section 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 failed to disclose material information 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 the 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 to dismiss, defendants contend that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim. Defendants also assert that if the Federal Securities Law Claims are dismissed, the district court must also dismiss the State Law Claims because it would lack subject matter jurisdiction.
On February 28, 2018 the parties presented their oral arguments on the defendant's motion to dismiss. On March 2, 2018 the district court rendered its decision, dismissing the Federal Securities Law Claims, but retaining the State Law Claims. The district court exercised supplemental jurisdiction over the State Law Claims and ordered the Defendants to file an answer to the Amended Complaint addressing the State Law Claims. On March 12, 2018 the Defendants filed their answer.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimedCDN $1,000,000, pre-judgment and post-judgment interest, legal fees, and any further relief the court may deem, alleging breach of contract, breach of warranty, negligent misrepresentations and nuisance. Plaintiffs allege that on or about July 10, 2022, a Tecogen cogenerator installed by us at the plaintiffs facility caught fire, causing damage to the cogenerator and the likelihood of an unfavorable outcome isplaintiff's facility. We have filed a response denying liability and are represented by Canadian counsel. For the year ended December 31, 2022, we reserved $150,000 for anticipated damages which may not reasonably estimable.be covered by our insurance and continue to maintain the reserve at December 31, 2023.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Our Shares
The Company'sOur common stock has been listedis quoted on the NASDAQ CapitalOTC Markets Group’s OTCQX Best Market since May 2014tier and trades under the ticker symbol TGEN. The following table sets forth, for the periods indicated, the high and low sale prices per share of common stock as quoted by the NASDAQ.
|
| | | | | | | | |
| Year Ended December 31, 2017 | | High | | Low |
| 1st Quarter | | $ | 4.35 |
| | $ | 3.50 |
|
| 2nd Quarter | | 4.17 |
| | 3.04 |
|
| 3rd Quarter | | 3.50 |
| | 2.95 |
|
| 4th Quarter | | 3.38 |
| | 2.20 |
|
|
| | | | | | | | |
| Year Ended December 31, 2016 | | High | | Low |
| 1st Quarter | | $ | 6.50 |
| | $ | 2.80 |
|
| 2nd Quarter | | 5.75 |
| | 3.50 |
|
| 3rd Quarter | | 5.20 |
| | 4.00 |
|
| 4th Quarter | | 4.80 |
| | 3.75 |
|
Holders
As of March 21, 2018,25, 2024, there were more than 300 beneficial owners57 holders of record of our Common Stock including 66 holders of record.common stock. Any over-the-market quotations reflect inter-dealer prices, without mark-up, markdown or commission and may not necessarily represent actual transactions.
Dividends
To date, weWe have notnever declared or paid any dividendsa cash dividend on our outstanding Common Stock. We currentlycommon stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors and will depend on our Common Stock. Althoughfinancial condition, results of operations, contractual restrictions and covenants included under any bank or other indebtedness that we intendmay enter into, capital requirements, business prospects and other factors that our board of directors considers relevant.
Equity Compensation Plan Information
We adopted the 2006 Stock Option and Incentive Plan (the “Plan”), under which the board of directors may grant incentive or non-qualified stock options and stock grants to retainkey employees, directors, advisors and our earnings to finance our operations and future growth, ourconsultants. The Plan was amended at various dates by the Board of Directors will have discretion to declareincrease the reserved shares of common stock issuable under the Plan to 3,838,750 as of December 31, 2023, and pay dividendsin June 2017 stockholders approved an amendment to extend the termination date of the Plan to January 1, 2026 and to ratify all of our option grants issued after January 1, 2016 (the “Amended Plan”).
Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the future. PaymentAmended 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 dividends in the underlying shares on the date of the grant. The number of shares remaining available for future will depend upon our earnings, capital requirementsissuance under the Amended Plan as of December 31, 2023 and other factors2022 was 243,818 and 146,393, respectively.
We adopted the 2022 Stock Incentive Plan (the "2022 Plan"), under which ourthe Board of Directors may deem relevant.grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. We have reserved 3,800,000 shares of our common stock for issuance pursuant to awards under the 2022 Plan. The adoption of the 2022 Plan was approved by our shareholders on June 9, 2022.
Issuer PurchasesUnder the 2022 Plan, stock options vest based upon the terms within the individual option grants, with an acceleration of Equity Securitiesthe unvested portion of such options upon a change in control event, as defined in the 2022 Plan. The options are not transferable except by will or domestic relations order. The option price per share under the 2022 Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the 2022 Plan as of December 31, 2023 was 3,068,750.
Not applicable.25
Item 6. Selected Financial Data.
Disclosure in response to this item is not required of a smaller reporting company.
The following table provides information as of December 31, 2023, regarding Common Stock that may be issued under the Amended Plan and the 2022 Plan.
| | | | | | | | | | | | | | | | | | | | |
| | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) |
| Equity compensation plans approved by security holders | | 3,638,122 | | | $ | 1.49 | | | 3,312,568 | |
| Equity compensation plans not approved by security holders | | — | | | — | | | — | |
| Total | | 3,638,122 | | | $ | 1.49 | | | 3,312,568 | |
Item 6. [Reserved].
Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review “Item 1A. Risk Factors” of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Except as required by federal securities law or other disclosure requirements applicable to us, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
Tecogen designs, manufactures, markets, and sells industrial and commercialmaintains high efficiency, ultra-clean cogeneration systems that produce combinations of electricity, hot water, and air conditioning using automotive engines that have been specially adapted to run onproducts. These include natural gas. Cogeneration systems are efficient because in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes such as space and potable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to thesegas engine driven combined heat and power (CHP) systems, chillers and heat pumps for multi-family residential, commercial, recreational and industrial use. We are known for products that provide customers with substantial energy savings, resiliency from utility power outages and for significantly reducing a customer’s carbon footprint. Our products are sold with our patented Ultera® technology which nearly eliminates all criteria pollutants such as CHP (electricity plus heat)NOx and MCHP (mechanical power plus heat)CO. Our systems are greater than 88% efficient compared to typical electrical grid efficiencies of 40% to 50%. As a result, our greenhouse gas (GHG) emissions are typically half that of the electrical grid. Our systems generate electricity and hot water or in the case of our Tecochill product, both chilled water and hot water. These result in savings of energy related costs of up to 60% for our customers. Our products are expected to run on Renewable Natural Gas (RNG) as it is introduced into the US gas pipeline infrastructure.
Our products are sold directly to end-users by our in-house marketingsales 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. WeTo date we have an installed baseshipped over 3,200 units, some of more than 2,500 units. Many of thesewhich have been operating for almost 3035 years.
As a result of our acquisition of American DG Energy ("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 customers' local energy utility that month. As of December 31, 2017, we had 81 operational energy systems, representing an aggregate of approximately 5,035 kilowatts, or kW, 39.0 million British thermal units, or MMBtu's, of heat and hot water and 4,660 tons of cooling. kW is a measure of electricity generated, MMBtu is a measure of heat generated and a ton is a measure of cooling generated.
Although we may, from time to time, have one or a few customers who may represent more than 10% of our product revenue for a given year, we are not dependent on the recurrence of revenue from those customers. Our product revenue is such that customers may make a large purchase once and may not ever make a purchase again. Our equipment is built to last 30 or more years. Therefore, on the one hand, our product revenue model is not dependent on recurring sales transactions from the same customer. Our service revenue on the other hand, does lend itself to recurring revenue from particular customers, although we currently do not have any service revenue customers who make up more than 10% of our total revenues on an annual basis.customers.
For the last two fiscal years, more than one thirdhalf of our revenue was generated from long-term maintenance contracts, or serviceand energy production contracts, which provideprovides us with a predictable revenue stream, especially during the summer months. We haveexperience a slight surge of activity from May through September as our “chiller season” is in full swing. Our O&M service
revenue which has grown from year to year since 2005, with our New York City/New Jersey and New England and to some extent California territoriessystems experiencing the majority of the growth. This growth, was positively impacted by the Aegis maintenance agreement acquisition in 2023. Our installation service related revenue has decreased and is consistent with the salelikely to continue to remain low due to our strategy to focus on higher margin segments of new units into those territories.our business. Our service margins are generally predictable as we service hundreds of long-term contracts with relatively low dollar, high volume sales.
During the years ended December 31, 2023 and 2022, our revenues were negatively impacted due to customer order delays or deferrals; service delays due to customer facility closures, in some cases for extended periods; and a reduction in our energy production segment revenue due to business closures and increased remote work and learning environments.
Our product revenue is derived from the sale of the various cogeneration modules, such as the InVerde, 100,InVerde e+, the CM-75, the CM-60, Ilios heat pumps,Tecopower, and the three TECOCHILL chiller models, such as the smaller ST, the larger DT and the RT (roof-top) units.Tecochill products. In 2019, we also reintroduced our TecoFrost refrigeration line. The sales cycle for each module varies widely, and can range from as short as a monthbetween 6 months to as long as a year or more. Furthermore, since our products and their installation are costly, they are considered a major capital improvement and customers may be slow in making their buying decisions. Our products sales are high dollar value, low volume transactions. Therefore, our product revenue can be difficult to predict and the expected margin variable.can vary. In most cases we work with consulting engineers who specify our product in new and retrofit applications.
Our cogeneration, heat pump, and chiller modules are built to order and revenue is recognized upon shipment. The lead time to build and deliver a unit depends on its customized configuration and is approximately 12 to 14 weeks for a chiller and 6
to 8 weeks for a cogeneration system or heat pump, from time of purchase order. As revenue is recognized upon shipment, our work-in-process is an important factor in understanding our financial condition in any given quarter.
The Company'sOur operations are comprised of twothree business segments. Our segments, as follows:
•Products and Services segment - designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our systems;
•Services segment - provides maintenance services for Tecogen supplied products at customer sites; and,
•Energy Production segment - sells energy in the form of electricity, heat, hot water, and cooling to our customers under long-term sales agreements.
Recent Developments
Assumption of Aegis Energy Services Maintenance Agreements
On May 18, 2017, holders ofMarch 15, 2023, we entered into an agreement ("Agreement") with Aegis Energy Services, LLC (“Aegis”) pursuant to which Aegis agreed to assign to us and we agreed to assume certain Aegis maintenance agreements, we agreed to purchase certain assets, and related matters (“Acquisition”). On April 1, 2023, the Acquisition closed. Under the Agreement, we agreed to acquire from Aegis and assume Aegis' rights and obligations arising on or after April 1, 2023, under maintenance agreements pursuant to which Aegis provided maintenance services for approximately 71% of ADGE’s outstanding common stock approved the Merger200 cogeneration systems, and approximately 55% of the outstanding stock of Tecogen approved the issuance of Tecogen shares in the Merger. Consequently, that day Tecogen completed its acquisition,acquired certain vehicles and inventory used by means of a stock-for-stock merger, of 100% of the outstanding common shares of ADGE. As a result, ADGE became a wholly owned subsidiary of Tecogen. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of ADGE common stock, $.001 par value per share, was automatically converted into the right to receive 0.092 shares of common stock, $.001 par value per share, of Tecogen (the “Exchange Ratio”), with cash paid in lieu of any fractional shares. As a result of the Merger, Tecogen issued approximately 4,662,937 shares of Tecogen common stock at $4.02 per share. This price was based on the closing price of Tecogen's common stock on May 18, 2017, the closing date of the Merger. The aggregate value of the consideration to be paidAegis in connection with the Mergerperformance of such maintenance services, and, following closing hired eight (8) Aegis employees to former holders of ADGE common stock was approximately $18.9 million. Upon consummation of the Merger, ADGE stock options and other equity awards converted into stock options and equity awardsprovide services with respect to such maintenance agreements. At closing, we acquired eight (8) Aegis vehicles for consideration consisting of $170,000 in cash. Also, we issued credits against outstanding accounts receivable due from Aegis in the amount of $300,000 for the acquisition of inventory that Aegis used to provide maintenance services. On February 1, 2024, Tecogen common shares, after giving effectand Aegis amended the Agreement to the Exchange Ratio.add eighteen (18) additional maintenance contracts (the "Amendment"). The Amendment includes an undertaking by Aegis to use commercially reasonable efforts to support and assist our execution of maintenance service agreements for an additional thirty-six (36) cogeneration units sold to customers by Aegis. See Note 4."Acquisition of American DG Energy Inc." of5. "Aegis Contract and Related Asset Acquisition" in the Notes to Consolidated Financial StatementsStatements.
Tecochill Hybrid-Drive Air-Cooled Chiller Development
During the third quarter of 2021 we began development of the Tecochill Hybrid-Drive Air-Cooled Chiller. We recognized that there were many applications where the customer wanted an easy to install roof top chiller. Using the inverter design from our InVerde e+ cogeneration module, the system can simultaneously take two inputs, one from the grid or a renewable energy source and one from our natural gas engine. This allows a customer to seek the optimum blend of operational cost savings and greenhouse gas benefits while providing added resiliency from two power sources. We introduced the Tecochill Hybrid-Drive Air-Cooled Chiller at the AHR Expo in February 2023 and received an order on February 8, 2024 for further informationthree hybrid-drive air-cooled chillers for a utility in Florida. A patent application based on this concept has been filed with the US Patent and Item 3. Legal ProceedingsTrademark Office.
Controlled Environment Agriculture
On July 20, 2022, we announced our intention to focus on opportunities for information regarding litigation relatedlow carbon Controlled Environment Agriculture ("CEA"). We believe that CEA offers an exciting opportunity to apply our expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security. We propose to address this challenge by developing a highly efficient energy solution for CEA grown produce using our cogeneration products in conjunction with solar energy generation, energy storage, and other technologies.
CEA facilities enable multiple crop cycles (15 to 20 cycles) in one year compared to one or two crop cycles in conventional farming. In addition, growing produce close to the Merger.point of sale reduces food spoilage during transportation. Food crops grown in greenhouses typically have lower yields per square foot than in CEA facilities, and the push to situate facilities close to consumers in cities requires minimizing land area and maximizing yield per square foot. Yields are increased in CEA facilities by supplementing or replacing natural light with grow lights in a climate-controlled environment - which requires significant energy use.
In May 2016, Tecogen enteredrecent years our cogeneration equipment has been used in numerous cannabis cultivation facilities because our systems significantly reduce operating costs, reduce the facility GHG footprint and offer resiliency to grid outages. Our experience providing clean energy solutions to cannabis cultivation facilities has given us significant insight into a joint venture agreement, (the "JV Agreement") with Tedom a.s., a European combined heat and power product manufacturer incorporated in the Czech Republic ("Tedom") and Tedom’s subsidiary, Tedom USA, Inc., a Delaware corporation. Pursuantrequirements relating to the JV Agreement, the parties formed TTcogen LLC, a Delaware limited liability company (“TTcogen”), and entered into a limited liability company operating agreement (the "LLC Agreement"), through which the joint venture is operated. TTcogen offered Tedom's line of Combined Heat and Power ("CHP") productsenergy-intensive indoor agriculture applications that we expect to the United States via Tecogen's nationwide sales and service network consisting of 27 CHP modules ranging in size from 35 kW upbe transferable to 4 MW and fully capable of running on a variety of fuel feedstocks (including natural gas, propane, and biofuel). On September 22, 2017, the Company exercised its rights under the JV Agreement to terminate the joint venture and to begin the process of winding up TTcogen. Currently the Company and Tedom are amicably working together to wind-up TTcogen as providedCEA facilities for in the JV Agreement and the LLC Agreement, and the Company will continue to market, sell, and service the Tedom 35kW CHP equipment on an exclusive basis in certain territories.
On October 28, 2017, all the shareholders of the joint venture company organized by the Company and a group of European strategic investors, Ultra Emissions Technologies, Ltd. (“Ultratek”), including the Company, unanimously voted to terminate the joint venture. Ultratek was organized to develop and commercialize Tecogen’s patented technology, Ultera®, for the automotive market. The technology is designed to reduce harmful emissions generated by engines using fossil fuels. Tecogen contributed an exclusive license for use of Ultera in the automotive space to the joint venture, and the strategic partners have committed to financing the initial research, development and testing of a viable product. Upon termination of the joint venture, Ultratek was dissolved and the exclusive license for the use of Ultera that was granted to Ultratek automatically reverted back to the Company. The Company received its full $2,000,000 investment in Ultratek upon the completion of the liquidation process. Upon dissolution, the Company purchased all of the remaining assets of Ultratek, including new intellectual property that Ultratek developed and other assets, for a total purchase price of $400,000.
On December 14, 2017, Tecogen through principal payment of $3,150,000 to Michaelson Capital Special Finance Fund LP ("Michaelson") discharged the Senior Convertible Promissory Note (the "Note") with Michaelson. Through the Note, Michaelson was the Company's principal debt holder and a beneficial holder of approximately 5% of Tecogen's outstanding shares. There were no pre-payment penalties paid by the Company, as Michaelson provided a waiver of the pre-payment penalties that were contained in the Note. By completing the payment, we satisfied all our obligations under the Note and the Note was cancelled .
See Note 18. "Subsequent events" of the Notes to the Consolidated Financial Statements for a discussion regarding a Summary of Proposed Terms and Conditions with a bank for a senior revolving credit facility of up to $10 million.food production.
Critical Accounting PoliciesEstimates
The preparationOur discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, and related disclosureswhich have been prepared in conformityaccordance with accounting principles generally accepted in the United StatesStates. The preparation of Americathese financial statements requires managementus to make judgments, assumptions and estimates that affect the reported amounts reported.of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. These judgments, assumptions and estimates are made or applied within the context of accounting policies related to the nature of the transaction. Note 2. "Summary of Significant Accounting Policies" of the Notes to our Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Some
Certain aspects of these significantcertain accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of the Company’s financial statements and requiresrequire management to make difficult, subjective or complex judgments that could have a material effect on the Company’sour financial condition and results of operations. Specifically,These aspects of these accounting policies are considered critical accounting estimates have the following attributes: 1) the Company is requiredpolicies. These policies may require management to make assumptions about matters that are highly uncertain at the time of the estimate;estimate or employ an estimate where alternative estimates could have also been employed, and 2) differentmay involve estimates the Company could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect onchange with the Company’s financial condition or resultspassage of operations.time. Estimates and assumptions about future events and their effects cannot be determined with certainty. The Company bases itsWe base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as the Company’sour operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in Item"Item 1A," “Risk Factors" above. Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that the Company’s consolidated financial statements are fairly stated in accordance with generally accepted accounting principles, and present a meaningful presentation of the Company’s financial condition and results of operations.
Management believes that the following are critical accounting policies:estimates:
Revenue Recognition
Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied. This generally 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.
Determination of contract consideration allocatable to multiple performance obligations within a single contract requires employing stand-alone selling prices which may be based on observable selling prices, estimated selling prices or as a residual. We use an observable selling price to determine standalone selling prices where available and either a combination of an adjusted market assessment approach, an expected cost plus a margin approach, and/or a residual approach to determine the standalone selling prices for separate performance obligations as a basis for allocating contract consideration when an observable selling price is not available.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. AnThe allowance for doubtful accountscredit losses is provided for those accounts receivable considered to be uncollectibleestimated based uponon historical experience, aging of the receivable, the counterparty’s ability to pay, condition of general economy and management’sindustry, and combined with management's estimate of current conditions, reasonable and supportable forecasts of future losses to determine estimated credit losses in our evaluation of outstanding accounts receivable at the end of the year. Bad debtsThe allowance for credit losses reflects managements evaluation of our outstanding accounts receivable at the end of the year and our best estimate of probable losses inherent in the accounts receivable balance. Accounts receivable deemed uncollectible are written offcharged against the allowance for credit losses when identified.
Inventory
Raw materials, work in process, and finished goods inventories are stated at the lower of cost, as determined by the average cost method, or market. The Companynet realizable value. We periodically reviewsreview inventory quantities on hand for excess and/or obsolete inventory based primarily on historical usage, as well as based on estimated forecast of product demand. Any reserves that result from this review are charged to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is recognized when persuasive evidenceprovided using the straight-line method over the estimated useful life of an arrangement exists, delivery has occurredthe asset, which range from three to fifteen years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Generally, sales of cogeneration and chiller units and parts are recognized when shipped and services are recognized over the term of the service period. Payments received in advance of services being performed are recorded as deferred revenue.
The Company recognizes revenue in certain circumstances before delivery has occurred (commonly referred to as billrelated leases. Expenditures for maintenance and hold transactions). In such circumstances, among other things, risk of ownership has passed to the buyer, the buyer has made a written fixed commitment to purchase the finished goods, the buyer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by the Company. For these transactions, the finished goods are segregated from inventory and normal billing and credit terms granted.
For those arrangements that include multiple deliverables, the Company first determines whether each service or deliverable meets the separation criteria of FASB ASC 605-25, Revenue Recognition—Multiple-Element Arrangements. In general, a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has stand-alone value to the customer and, if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in control of the Company. Each deliverable that meets the separation criteria is considered a separate ‘‘unit of accounting”. The Company allocates the total arrangement consideration to each unit of accounting using the relative selling price method. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.
When vendor-specific objective evidence or third-party evidence is not available, adopting the relative fair value method of allocation permits the Company to recognize revenue on specific elements as completed based on the estimated selling price. The Company generally uses internal pricing lists that determine sales prices to external customers in determining its best estimate of the selling price of the various deliverables in multiple-element arrangements. Changes in judgments made in estimating the selling price of the various deliverables could significantly affect the timing or amount of revenue recognition. The Company enters into sales arrangements with customers to sell its cogeneration and chiller units and related service contracts and occasionally installation services. Based on the fact that the Company sells each deliverable to other customers on a stand-alone basis, the Company has determined that each deliverable has a stand-alone value. Additionally, there are no rights of return relative to the delivered items; therefore, each deliverable is considered a separate unit of accounting.
After the arrangement consideration has been allocated to each unit of accounting, the Company applies the appropriate revenue recognition method for each unit of accounting based on the nature of the arrangement and the services included in each unit of accounting. Cogeneration and chiller units are recognized when shipped and services are recognized over the term of the applicable agreement, or as provided when on a time and materials basis.
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. In this case, the Company accounts for revenue, or turnkey revenue, and costs using the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting, revenues are recognized by applying percentages of completion to the total estimated revenues for the respective contracts. Costs are recognized as incurred. The percentages of completion are determined by relating the actual cost of work performed to date to the current estimated total cost at completion of the respective contracts. When the estimate on a contract indicates a loss, the Company’s policy is to record the entire expected loss, as required by generally accepted accounting principles. The excess of contract costs and profit recognized to date on the percentage-of-completion accounting method in excess of billings is recorded as unbilled revenue. Billings in excess of related costs and estimated earnings are recorded as deferred revenue.
With the addition of ADGE, revenue from their energy contracts is recognized when electricity, heat, and chilled water is produced by the cogeneration systems on-site. The Company bills its customers each month based on energy consumption indicated on meters installed at each site. The amount of energy produced by on-site energy systems is invoiced according to a contractually defined formula. Under certain energy contracts, the customer directly acquires the fuel to power the systems and receives credit for that expense from the Company. The credit is recorded as a reduction of revenue and as a reduction of cost of fuel. Revenues from operation, including shared savings, are recorded when provided and verified. Maintenance service revenue is recognized over the term of the agreement and is billed on a monthly basis in arrears. Customers may buy out their long-term obligation under energy contracts and purchase the underlying equipment from the Company. Any resulting gain on these transactions is recognized over the payment period in the accompanying consolidated statements of operations.
ADGE's Property and Equipment and Depreciation
Upon the acquisition, property and equipment were recorded at fair value using a cost approach whereby replacement cost new ("RCN") was utilized as the starting point, with factors for inflation, physical obsolescence, functional obsolescence and economic obsolescence being considered and applied as required to arrive at an estimated fair value.
Depreciation is computed using the straight-line method at rates sufficient to write off the cost of the applicable assets over their estimated useful lives. Repairs and maintenancerepairs are expensed, as incurred.while renewals and betterments that materially extend the life of an asset are capitalized.
The Company reviews its energy systemsWe review our property, plant and equipment for potential impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable or that the useful lives of the assets are no longer appropriate. The Company evaluatesWe evaluate the recoverability of itsour long-lived assets when impairment is indicated by comparing the net book value of the asset group to the estimated future undiscounted cash flows attributable to such assets. The useful lifeIf the sum of the Company's energy systemsprojected undiscounted cash flows (excluding interest charges) is less than the lessercarrying value of the economic life ofassets, the asset orassets will be written down to the term ofestimated fair value and such loss is recognized in income from continuing operations in the underlying contract withperiod in which the customer, typically 12 to 15 years.determination is made. If impairment is indicated, the asset is written down to its estimated fair value.
Business Combinations
In accordance with applicable accounting standards, we estimate the fair value of assets acquired and liabilities assumed as of the acquisition date of each business combination. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. We may make certain estimates and assumptions when determining the fair values of assets acquired and liabilities assumed, including intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from energy production sites or customer maintenance contracts, estimated operating costs, as well as discount rates. At the acquisition date, we will also record acquisition related liabilities, if applicable, for any contingent consideration or deferred payments to the seller. Contingent consideration is recorded at fair value on the acquisition date based on our expectation of achieving the contractually defined revenue targets. The fair value of the contingent consideration liabilities is remeasured each reporting period after the acquisition date and any changes in the estimated fair value are reflected as gains or losses in general and administrative expense in the consolidated statement of operations. Contingent consideration liabilities and deferred payments to sellers are recorded as current liabilities and other long-term liabilities in the consolidated balance sheets based on the expected timing of settlement.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any changes to provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. Transaction costs associated with business combinations are expensed as incurred.
Contract Assets and Liabilities
The favorable contract asset and unfavorable contract liability included in the intangible assets and liabilities of the consolidated balance sheets represent the fair value of American DG Energy's customer energy production contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Company on May 18, 2017 (see Note 4. "Acquisition of American DG Energy Inc." of the Notes to the Consolidated Financial Statements). 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.
us.
The determination of fair value requiredrequires 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 marketoff-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 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 energy production contracts, the measure of market, and thus the baseline to measure the amount related to any of the off marketoff-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.
Recent Accounting Pronouncements
Goodwill
Goodwill is not amortized; however, it is reviewed for impairment annually in the fourth quarter and/or when circumstances or other events indicate that impairment may have occurred. ASC 350 “Intangibles—Goodwill and Other” (ASC 350) permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Circumstances that are considered as part of the qualitative assessment and could trigger the two-step impairment test include, but are not limited to: a significant adverse change in the business climate; a significant adverse legal judgment; adverse cash flow trends; an adverse action or assessment by a government agency; unanticipated competition; decline in our stock price; and a significant restructuring charge within a reporting unit. We define reporting units at the business segment level. For purposes of testing goodwill for impairment, goodwill has been allocated to our reporting units to the extent it relates to each reporting unit.
During 2018, we adopted the provisions of ASU 2017-04 which simplified goodwill impairment testing by eliminating the requirement to determine the implied value of goodwill where a quantitative analysis indicates that the carrying value of the reporting unit exceeds its fair value.
At a minimum, we perform a quantitative goodwill impairment test in the fourth quarter of the year. In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update relatedfourth quarter of 2023, we performed a quantitative goodwill impairment test for our energy production reporting unit acquired in 2017. We used a discounted cash flow approach to revenue from contractsdevelop the estimated fair value of that reporting unit. Management judgment is required in developing the assumptions for the discounted cash flow model. An impairment would be recorded if the carrying amount of a reporting unit including goodwill exceeded the estimated fair value. Based on the aforementioned analysis, the carrying amount of that reporting unit, including goodwill, exceeded the estimated fair value and there was no impairment at December 31, 2023. See Note 6. "Sale of Energy Producing Assets and Goodwill Impairment".
The impairment analysis recognizes the shortening of remaining contract terms with customers which, along with amendments issued in 2015without replacement and 2016, will supersede nearly all current U.S. GAAP guidancewithout further growth, as well as less than expected cost savings, offset by profitability from our initiatives to optimize the long-term profitability of our various site operations and a price peak of the Company's stock 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 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 business combination to which the goodwill relates (see also Note 6."Sale of Energy Producing Assets and Goodwill Impairment").
The Company expects to adopt this accounting standard update on a modified retrospective basisdiscount rate, profitability assumptions, and terminal growth rate of the Energy Production unit were the material assumptions utilized in the first quarterdiscounted cash flow model used to estimate its fair value. The discount rate reflects an estimate of 2018. Management has completed its assessmentour weighted-average cost of capital.
The discounted cash flow analysis requires estimates, assumptions and judgments about future events. Our analysis uses our internally generated long-range plan. The long-range plan reflects management's judgment and assumptions about future events.
We believe the assumptions used in our goodwill impairment analysis are appropriate and result in a reasonable estimate of the impactfair value of the new revenue recognition standardreporting unit. However, given the economic environment and concludedthe uncertainties regarding the impact on our business, there can be no assurance that no significant differences are expected to result upon adoption.
In January 2016, the FASB issued an accounting standard update related to investments in equity securities requiring unrealized holding gainsour estimates and lossesassumptions, made for purposes of our goodwill impairment testing, will prove to be included in net income. Prior to this update, unrealized holding gains and losses related to available-for-sale securities were included in accumulated other comprehensive income and not included in determining net income. This accounting standard update will be effective for the Company beginning in the first quarter of 2018 and is applied by means of a cumulative-effect adjustment to the balance sheet asan accurate prediction of the beginning of the fiscal year of adoption. The Company plansfuture. If our assumptions regarding future performance are not achieved, we may be required to adopt this accounting standard updaterecord additional goodwill impairment charges in the first quarter of 2018 which will result in reclassification of $165,317 of cumulative unrealized holding losses from accumulated other comprehensive loss to accumulated deficit. The future impact of recognizing unrealized holding gains or losses in net income is dependent on the movement in the stock prices related to such investments.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
Emerging Growth Company
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we chose to “opt out” of any extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
periods.
Results of Operations
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table sets forth for the periods indicated, the percentages of the net sales represented by certain items reflected in the Company'sour statements of operations.
|
| | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Revenues | 100.0 | % | | 100.0 | % |
| Cost of Sales | 61.0 |
| | 62.0 |
|
| Gross Profit | 39.0 |
| | 38.0 |
|
| General and administrative | 28.7 |
| | 32.6 |
|
| Selling | 6.8 |
| | 6.7 |
|
| Research and development | 2.8 |
| | 2.7 |
|
| Income (loss) from operations | 0.7 |
| | (4.1 | ) |
| Total other expense, net | (0.4 | ) | | (0.7 | ) |
| Consolidated net income (loss) | 0.3 |
| | (4.7 | ) |
| (Income) loss attributable to the noncontrolling interest | (0.2 | ) | | 0.3 |
|
| Net income (loss) attributable to Tecogen Inc. | 0.1 | % | | (4.5 | )% |
Year Ended operations for the years ended December 31, 2017 Compared to Year Ended2023 and 2022:
| | | | | | | | | | | |
| Years ended December 31, |
| 2023 | | 2022 |
| Revenues | 100.0 | % | | 100.0 | % |
| Cost of Sales | 59.4 | | | 55.7 | |
| Gross Profit | 40.6 | | | 44.3 | |
| Operating expenses: | | | |
| General and administrative | 47.3 | | | 43.6 | |
| Selling | 7.7 | | | 7.2 | |
| Research and development | 3.3 | | | 2.9 | |
| Gain on sale of assets | (0.1) | | | (0.2) | |
| Long-lived asset impairment | — | | | — | |
| | | |
| Total operating expenses | 58.1 | | | 53.7 | |
| Loss from operations | (17.6) | | | (9.4) | |
| Total other expense, net | (0.3) | | | (0.1) | |
| Consolidated net loss | (18.0) | | | (9.6) | |
| Income attributable to the noncontrolling interest | (0.3) | | | (0.2) | |
| Net loss attributable to Tecogen Inc. | (18.3) | % | | (9.8) | % |
| | | |
The following table presents revenue by segment and the change from the prior year for the years ended December 31, 20162023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | | | |
| Revenues | | December 31, 2023 | | December 31, 2022 | | Increase (Decrease) $ | | Increase (Decrease) % |
| Product: | | | | | | | | |
| Cogeneration | | $ | 2,761,667 | | | $ | 5,279,569 | | | $ | (2,517,902) | | | (47.7) | % |
| Chillers | | 5,303,978 | | | 5,034,633 | | | 269,345 | | | 5.3 | % |
| Engineered Accessories | | 794,301 | | | 841,897 | | | (47,596) | | | (5.7) | % |
| Total product revenue | | 8,859,946 | | | 11,156,099 | | | (2,296,153) | | | (20.6) | % |
| Services | | 14,523,054 | | | 12,060,661 | | | 2,462,393 | | | 20.4 | % |
| Energy production | | 1,756,419 | | | 1,785,854 | | | (29,435) | | | (1.6) | % |
| Total Revenue | | $ | 25,139,419 | | | $ | 25,002,614 | | | $ | 136,805 | | | 0.5 | % |
Revenues
Revenues in 20172023 were $33,202,666$25,139,419 compared to $24,490,386$25,002,614 in 2016,2022, an increase of $8,712,280$136,805 or 35.6%. This increase is the result of the0.5% due to increased sales in both equipment and services as well as the new energy production revenue stream from ADGE. Services revenues which were offset by decreased Products revenues.
Products
Product revenues in 20172023 were $12,991,283$8,859,946 compared to $10,722,285$11,156,099 in 2016, an increase2022, a decrease of $2,268,998$2,296,153 or 21.2%20.6%. This increase from the year ended December 31, 2016The revenue decrease in 2023 compared to 2017 resulted from an increase2022 is due primarily to a decrease in cogeneration sales of $390,976$2,517,902, due to decreased unit volume and a $47,596 decrease in addition tosales of engineered accessories, which are partially offset by an increase in chiller sales of $1,878,022. The focus on chiller sales efforts in 2017 yielded this increase in sales.$269,345. Our product mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales in which revenue is recognized upon shipment.
Services
Revenues derived from our service centers, including installation activities, in 20172023 were $16,377,443$14,523,054 compared to $13,768,101$12,060,661 for the same period in 2016,2022, an increase of $2,609,342$2,462,393 or 19.0%20.4%. The increase in revenue in 2023 is due primarily to the addition of $1,884,891 in revenue from the acquired Aegis maintenance contracts and a $577,502 or 4.8%, increase in service contract revenues from existing contracts.
Our service operation growsrevenues grow with the sales of installed systems, since the majority of our product sales are accompanied by a service contract or time and materials agreements. As a result, our “fleet” of units being serviced by our service department grows with product sales. Our service department revenue has increased due to turnkey projects of $7,680,125 in 2017 compared to $5,227,054 in 2016.
Energy Production
Energy production revenues for the year endingended December 31, 20172023 were $3,833,940, which represents energy revenues earned through our wholly owned subsidiary ADGE from May 19, 2017, the date after the acquisition.$1,756,419 compared to $1,785,854 for 2022, a decrease of $29,435, or 1.6%.
Cost of Sales
Cost of sales in 20172023 was $20,248,262$14,937,801 compared to $15,189,708$13,935,803 in 2016,2022, an increase of $5,058,554$1,001,998 or 33.3%7.2%. The increase in cost of sales is due to increased Services revenue volume, the impact of inflation on our material costs, an increase in the provision for obsolete inventory and increased product warranty costs. Our overall gross margin was 39.0%40.6% in 20172023 compared to 38.0%44.3% in 2016,2022, a 2.6% improvement. Thedecrease of 3.7%.
Products
Costs of sales for products in 2023 was $5,923,096 compared to $7,413,320 in 2022, a decrease of $1,490,224, or 20.1%, due to decreased product revenue volume, partially offset by increased provisions for obsolete inventory, higher material costs and increased product warranty costs. Our products gross margin was 33.1% in 2023 compared to 33.5% in 2022, a decrease of 0.4%, due primarily to the impact of inflation on our material costs and an increase in the provision for obsolete inventory.
Services
Cost of sales for services in 2023 was $7,909,202 compared to $5,525,493 in 2022, an increase of $2,383,709, or 43.1%, due primarily to increased labor and material costs as a consequence of acquiring the Aegis customer maintenance contracts, increased material usage at existing sites and an increase in the provision for obsolete inventory. Our services gross margin is attributablewas 45.5% in 2023 compared to improved margins on product sales year over year54.2% in 2022, a decrease of 8.7%, due to production efficiencies in material,increased labor and factory utilization as well asmaterial costs incurred to replace engines at certain sites and an increase in the addition of the energy production segment. The factory continues to improve product service cycles, ease of maintenance, and component sourcing in order to continuously improve efficiencies in our processes.provision for obsolete inventory.
Energy Production
Cost of sales for energy production for the year endingended December 31, 20172023 was $2,034,518, which represents the cost associated with energy revenues earned from May 19, 2017, the date after the acquisition$1,105,503 compared to $996,990 in 2022, an increase of ADGE. Included in$108,513. Energy production costgross margin was 37.1% in 2023 compared to 44.2% in 2022, a decrease of sales is depreciation expense associated with the Sites, net of amortization of unfavorable contract liability of $304,340.
7.1%, primarily due to increased fuel and maintenance costs.
Operating Expenses
Operating expenses increased in 20172023 to $12,729,252$14,615,230 compared to $10,298,129$13,415,952 in 2016,2022, an increase of $2,431,123$1,199,278 or 23.6%8.9%. This increase was the combination of an increase in general and administrative expense of $1,526,136, an increase of $635,122 in selling expense and an increase in research and development expense of $269,865.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended | | Increase (Decrease) |
| | December 31, 2023 | | December 31, 2022 | | $ | | % |
| Operating Expenses | | | | | | | | |
| General and administrative | | 11,880,389 | | | $ | 10,909,251 | | | $ | 971,138 | | | 8.9 | % |
| Selling | | 1,931,037 | | | 1,811,085 | | | 119,952 | | | 6.6 | % |
| Research and development | | 840,011 | | | 732,873 | | | 107,138 | | | 14.6 | % |
| Gain on sale of assets | | (36,207) | | | (41,931) | | | 5,724 | | | (13.7) | % |
| Long-lived asset impairment | | — | | | 4,674 | | | (4,674) | | | (100.0) | % |
| Total | | $ | 14,615,230 | | | $ | 13,415,952 | | | $ | 1,199,278 | | | 8.9 | % |
General and administrative expenses increased $971,138 to $11,880,389 in the year ended December 31, 2023 compared to $10,909,251 in 2022 due primarily to a $974,420 increase wasin bad debt expense, due mainly to the write down of certain install receivables which were deemed uncollectible, a $139,364 increase in amortization and depreciation, due to the Aegis acquisition, of ADGEa $164,415 increase in business insurance, partially offset by a $83,758 decrease in stock-based compensation, a $68,470 decrease in franchise taxes and the additional costs associated with this business. $150,000 litigation provision recorded in 2022.
Selling expenses increased in 2017the year ended December 31, 2023 to $2,271,826$1,931,037 compared to $1,636,704$1,811,085 in 2016,2022, an increase of $635,122 or 38.8%. This$119,952 due primarily to a $101,826 increase in selling expenses was due to an increase in commissions and marketing expenses. trade show expense.
Research and development expenses increased in 2017the year ended December 31, 2023 to $936,929$840,011 compared to $667,064 in 2016,$732,873, an increase of $269,865 or 40.5%. The$107,138 due to costs incurred to develop the hybrid-drive air-cooled chiller, which included a $72,700 increase in researchpayroll cost and development expensesa $29,250 increase in consulting costs.
Gains on the sale of assets was due$36,207 in 2023 compared to developmenta gain on the sale of our fork truck emissions program, bringingassets of $41,931 in 2022.
Impairment of long-lived assets decreased $4,674 in the vehicle emissions program in-house and other product developments. There has not been a change in focus with research and development. Management continues its effortsyear ended December 31, 2023 compared to improve the product's performance and cost.2022.
Income (Loss)Loss from Operations
IncomeLoss from operations for the year ended December 31, 20172023 was $225,152$4,413,612 compared to a loss of $997,451$2,349,141 in 2016,2022, an increase in the loss from operations of $1,222,603 or 122.6%.$2,064,471. The increase in the net incomeloss from operations wasis primarily due to the continuing effortlower Products sales, a $865,193 decrease in gross margin due to reducehigher products material costs and controlthe increased provision for obsolete inventory and a $1,199,278 increase in operating expenses as well as to revenue growth, including the revenue recognized as a result of the acquisition of ADGE.expenses.
Other Income (Expense), net
Other expense, net, for the year ended December 31, 20172023 was $127,456$77,053 compared to $163,794income of $32,219 for the same period in 2016. Other income (expense) includes2022, a decrease of $44,834, due to an increase in interest and other expense of $61,003 compared to $34,713 in 2022, and by a decrease in unrealized income on marketable securities of $27,626,$18,749, which represents the market value fluctuation of marketable equity securities as discussed in Note 16. "Fair Value Measurements".
Provision for State Income Taxes
The provision for state income taxes for the years ended December 31, 2023 and 2022 was $32,491 and $16,352, respectively, and represents estimated income tax payments, net of interest expense on notes payable of $155,082 in 2017. For the same period in 2016, interest and other income was $11,988 and interest expense was $175,782.refunds, to various states.
Noncontrolling Interest
The noncontrolling interest share in theWe have income and losses of Ilios was $64,962 on December 31, 2016. The noncontrolling interest losses ended with the private placement exchange of the outstanding shares of Ilios. On April 11, 2016, this exchange was completed as Ilios merged into Tecogen through a statutory merger.
With the addition of ADGE, the Company has income attributable to the noncontrolling interest portion it haswe have in ADGE'sAmerican DG Energy's 51% owned subsidiary, ADGNY.ADGNY, LLC. The income attributable to the noncontrolling interest share of ADGNY profits and losses was $50,260 on December 31, 2017.
Net Income (Loss) Attributable to Tecogen, Inc
Net income of $74,952 for the year ended December 31, 2017 was $47,436 compared to a loss of $1,096,283 for the same period in 2016. The increase in2023 and income of $1,143,719 or 104.3% was the result of our growth$50,215 in product revenue and services revenue together with the Company's acquisition of ADGE.2022.
Other ComprehensiveNet Loss Attributable to Tecogen Inc
The unrealizedNet loss on securities of $165,317 for the year ended December 31, 2017 represents2023 was $4,598,108 compared to a net loss of $2,447,927 for the market fluctuation impactingcomparable period in 2022. The increase in net loss in 2023 is primarily due to lower Products sales, a $865,193 decrease in gross margin due to higher products material costs and the fair value of ADGE's remaining common stock ownershipincreased provision for obsolete inventory and a $1,199,278 increase in its former partially owed subsidiary, EuroSite Power Inc.operating expenses.
Net Income (Loss) Per Share
Net incomeloss per share for the year ended December 31, 20172023 was $0.00a loss of $0.19 compared to a loss of $0.06$0.10 per share for the same period in 2016.2022. The increase in income of $0.06 was due to the increase in gross profit offset partially by the increase in operating expenses as discussed above. The basic and diluted weighted average shares outstanding for the year ended December 31, 2017 was 23,171,033 compared to 19,295,922 for2023 were 24,850,261 and 24,850,261, respectively. For the same period in 2016.year ended December 31, 2022, basic and diluted shares were 24,850,261 and 24,850,261, respectively.
Liquidity and Capital Resources
The following table presents a summary of our net cash flows from operating, investing, and financing activities:
| | | | | | | | | | | | | | |
| | Years End |
| Cash Provided by (Used in) | | December 31, 2023 | | December 31, 2022 |
| Operating activities | | $ | (823,315) | | | $ | (1,351,929) | |
| Investing activities | | (244,889) | | | (348,365) | |
| Financing activities | | 505,505 | | | — | |
| Change in cash and cash equivalents | | $ | (562,699) | | | $ | (1,700,294) | |
Consolidated working capital at December 31, 20172023 was $12,952,537,$9,822,546, compared to $14,436,452$14,344,288 at December 31, 2016,2022, a decrease of $1,483,915$4,521,742 or 10.3%31.5%. Included in working capital were cash and cash equivalents of $1,673,072$1,351,270 at December 31, 2017,2023, compared to $3,721,765$1,913,969 at December 31, 2016. This2022, a decrease of $562,699 or 29.4%. The decrease in consolidated working capital and cash and cash equivalents is primarily due to the pay off of the Michaelson debt of $3.15 million partially offset by an increase in accounts payableour net loss and deferred revenue.increased liabilities recognized due to the Aegis contract acquisition.
Net cash used in operating activities forFor the yearsyear ended December 31, 2017 and 2016 were $591,256 and $2,717,856, respectively,2023 we used $823,315 in cash from operations compared to $1,351,929 in cash used from operations in 2022, a decrease of $2,126,600 or 78.2%. The Company's consolidated$528,614 in net incomecash used by operating activities. Our accounts receivable balance increased by $1,258,941. In addition, our accounts receivable from operations increased by $336,051$81,195 at December 31, 20172023 compared to December 31, 2016, due to timing of billing, shipments,2022 and collections. Unbilledour unbilled revenues also increaseddecreased by $1,676,409 in connection with turnkey projects as some revenues are recognized prior to contractual milestones for invoicing. Our inventory from operations increased by$56,994
$298,167in at December 31, 2023 compared to December 31, 2022. Our inventory increased by $82,525 as of December 31, 20172023 compared to December 31, 2016. Prepaid expenses2022 and other currentnon-current assets increaseddecreased by $47,498$265,725 as of December 31, 20172023 as compared to December 31, 2016.2022.
Accounts payable increased by $1,335,042$1,161,416 from December 31, 20162022 to December 31, 2017. The increase in accounts payable is related2023 due to increased activities in manufacturing.aging of our payables to conserve liquidity. Accrued expenses from operations decreasedincreased by $494,095$128,869 as of December 31, 20172023 compared to December 31, 2016.2022 due to higher operating expenses. Deferred revenues from operations increased by $375,499$543,842 as of December 31, 20172023 as compared to December 31, 2016. This increase2022, due to Aegis contract customer deposits collected in deferred revenues relates to an increase in prepaid service contracts and an increase in projects billed but not completed.2023 .
Our related party balance was a net receivable of $585,492 as ofFor the year ended December 31, 2017 and $260,988 as of December 31, 2016. This change is due to the intercompany transactions related to TTcogen LLC and Tedom.
During 2017 our2023 we used $244,889, in cash flows provided byfrom investing activities, were $1,512,645, and includedconsisting of $170,000 of cash to acquire certain assets as part of the Aegis acquisition, used $46,851 of cash for purchases of property and equipment, and distributed $62,693 to the 49% non-controlling interest holders of $580,044, expendituresAmerican DG New York LLC.
Cash flows from financing activities in 2023 were $505,505, consisting of borrowings under our related to intangible assets such as patents and product certifications of $453,598, a return of an investment of $2,000,000 in Ultratek and cash acquired in the acquisition of ADGE of $971,454.
party note with John N. Hatsopoulos (see Note 11."Related Party Notes"). During 2017 our2022, there were no cash flows used infrom financing activities were $2,970,082 resulting from the payoff of the Michaelson debt of $3,150,000 and proceeds from the exercise of stock options of $179,918.activities.
Tecogen’sOur total product and installation backlog as of December 31, 20172023 was $15.7 million$7,388,145 compared to $11.1 million$6,722,138 as of December 31, 2016. This backlog meets management's expectation of exceeding a backlog of $10 million.2022. Backlog does not include maintenance contract service revenues or energy contract revenues.
At December 31, 2017,2023 and 2022, we had cash and cash equivalents of $1,351,270 and $1,913,969, a decrease of $562,699 or 29.4%. During the year ended December 31, 2023, our commitments included various leasesrevenues were negatively impacted due to customer order delays or deferrals; service delays due to customer facility closures, in some cases for officeextended periods and warehouse facilities of $3,335,188a reduction in our energy production revenues, due to be paid over several years through 2024. The source of funds to fulfill these commitments are expected to be provided from operations.
See Note 18. "Subsequent events" in the Notes to Consolidated Financial Statements for discussion regarding a Summary of Proposed Termsbusiness closures and Conditions with a bank for a senior revolving credit facility of up to $10 million.increased remote work and learning environments.
Based on our current operating plan, we believe existing resources, including cash and cash flows from operations will be sufficient to meet our working capital requirements for the next twelve months. As we continueIn order to grow our business and fund the development of our hybrid-drive air-cooled chiller and the relocation of our primary facility, we expect that our cash requirements will increase. As a result,increase and we may need to raise additional capital through a debt financing or an equity offeringfinancing to meet our operatingneed for capital to fund operations and capital needs for future growth.
On October 9, 2023, we entered into an agreement with each of John N. Hatsopoulos, a director and principal shareholder of registrant, and Earl R. Lewis, III, a director, pursuant to which Mr. Hatsopoulos agreed to provide financing to us of up to $1 million, and Mr. Lewis agreed to provide financing to us of $500,000, and potentially an additional $500,000 at his discretion. On October 10, 2023, we issued a promissory note and borrowed $500,000 from Mr. Hatsopoulos. The note, as amended on March 21, 2024, is due and repayable two years from the date of issuance and bears interest at 5.12% per annum payable in full at maturity. The loan is required to be repaid in the event of a change of control of the company and upon the occurrence of an event of default under the note, including upon a failure to pay when due the principal and interest when due, or the commencement of voluntary or involuntary bankruptcy or insolvency proceeding.The proceeds of the loans are expected to be used for general working capital purposes.
Contractual Obligations and Commitments
We are obligated under operating leases for our Waltham, Massachusetts headquarters through March 31, 2024, our new Billerica, Massachusetts headquarters through December 31, 2029 and our eleven leased service centers through January 2031. Future minimum lease commitments under non-cancellable operating leases as of December 31, 2023, were $772,593. See "Leases". Effective as of January 1, 2024, the future minimum lease commitments for the Billerica, Massachusetts location were $1,325,614.
We are also obligated under finance leases for five vehicles through December 31, 2028. Future minimum finance lease payments as of December 31, 2023, were $200,187.
Seasonality
We expect that the majority of our heating systems sales will be operational for the winter and the majority of our chilling systems sales will be operational for the summer. Our cogeneration sales are not generally affected by the seasons. Our service team does experience higher demand in the warmer months when cooling is required. These chillerChiller units for space conditioning applications are generally shut down in the winter and started up again in the spring. This chiller “busy season” for the service team generally runs from May through the end of September. Chillers in indoor cultivation and other process cooling applications run year round.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.Disclosure in response to this item is not required of a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is incorporated from Item 15 and pages F-1 through F-26F-25 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
NoneNone.
Item 9A. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Co-ChiefChief Executive OfficersOfficer and Chief AccountingPrincipal Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of December 31, 2017, (the "Evaluation2023 ("Evaluation Date"), havehas concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective due to the material weakness in financial reporting relating to a small number of employees dealing with general controls over information technology. At the present time, ourOur management has decided that the expense associated with acontinued implementation of new systemsystems is justified and is in the process of implementing a system which willcontinues to implement systems to put the proper control procedures in place to remediate these weaknesses.
this weakness.
For these purposes, the term disclosure controls and procedures of an issuer means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting:
TheOur management of the Company is responsible for establishing and maintaining adequate internal controlcontrols over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended.
The Company’sOur internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. The Company’sOur internal controls over financial reporting include those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles;
•provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, the assessment of the effectiveness of internal control over financial reporting was made as of a specific date. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our Co-ChiefChief Executive OfficersOfficer and Chief AccountingPrincipal Financial Officer, conducted an evaluation of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion regarding this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2017.
At December 31, 2017, the Company employed 91 active full-time employees and 4 part-time employees. Considerable progress has been made during 2017 with the addition of competent staff, competent consultants and changes in processes, however, dueDue to the small number of employees dealing with general controls over information technology security and user access, management believes this constitutes a material weakness in financial
reporting. AtBased on this time,evaluation, management has decidedconcluded that the expense associated with a new system is justified and is in the processour internal control over financial reporting was not effective as of implementing a system which will put the proper control procedures in place to remediate these weaknesses.December 31, 2023.
Our management, including our Co-ChiefChief Executive OfficersOfficer and Chief AccountingPrincipal Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
This annual report does not include an attestation report of the Company’sour registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’sour registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Companyus to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
The Company instituted mitigating controls related to energy billing whereby multiple level reviews are performed prior to revenue recognition. Additionally, the Company is in the process of implementingWe implemented a company-wide ERP system which will put the proper control procedures in place2019. We continue to remediatemake progress in remediating internal control weaknesses. There has been no change to the Company’sour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the fourth quarter of the fiscal year ended December 31, 2017,2023 that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Item 9B. Other Information.
None.Proposed Reverse Stock Split
On October 9, 2023, our board of directors authorized us to seek shareholder approval for an amendment to our Amended and Restated Certificate of Incorporation (“certificate of incorporation”) that would enable us to effect a combination of our outstanding shares of common stock into a lesser number of shares, or a reverse stock split. We intend to seek stockholder approval at our Annual Meeting of Stockholders on June 6, 2024, for three alternative amendments to our certificate of incorporation to effect the reverse stock split at the alternative ratios of 1 for 4, 1 for 5, or 1 for 6. The determination of the ratio, implementation, and timing of any reverse stock split will be subject to further approval by our board of directors following receipt of shareholder approval at the annual meeting of our shareholders.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2024 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2017.2023.
Item 11. Executive Compensation.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2024 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2017.2023.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2024 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2017.2023.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2024 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2017.2023.
Item 14. Principal Accountant Fees and Services.
The information required by this itemItem is incorporated herein by reference from the Company'sto our 2024 definitive proxy statement which willto be filed with the SEC no later thanwithin 120 days afterfollowing the registrant's fiscal year ended December 31, 2017.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following consolidated financial statements and the related notes thereto of Tecogen Inc. and the report of the Accounting Firm thereon are filed as part of this Annual Report on Form 10-K.
| |
(a) | Index to Financial Statements and Financial Statement Schedules |
(a) Index to Financial Statements and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 20172023 and 20162022
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 20172023 and 20162022
Consolidated Statements of Stockholders' Equity for the years ended December 31, 20172023 and 20162022
Consolidated Statements of Cash Flows for the years ended December 31, 20172023 and 20162022
Notes to Audited Consolidated Financial Statements
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(b) Exhibits
The exhibits to the Registration Statement are listed in the Exhibit Index attached hereto and incorporated by reference herein.
Item 16. Form 10K10-K Summary.
The Company has determined not to include a summary of the information permitted by this Item 16 of the Form 10-K.
EXHIBIT INDEX
| | | | | | | | |
| Exhibit Number | Description |
| | |
Exhibit Number | Description |
| 2.1 | |
| 2.2 | |
| 3.1 | |
| 3.2 | |
4.110.1 | |
4.3+10.2+ | |
4.510.3 | |
4.610.4 | |
10.1+*
10.5 | |
| 10.6 | |
| 10.7 | |
| 10.8+ | |
10.710.9 | |
10.810.10 | |
10.13#10.11# | |
10.2110.12 | |
10.24 | |
10.2610.13 | |
10.29 | |
10.30 | |
10.3110.14+ | |
10.32 | |
10.34 | |
|
| | |
10.35 | |
10.36 | |
10.37 | |
10.38 | |
10.39 | |
10.40+ | |
10.41 | |
10.42+ | |
10.4310.15 | |
| 10.16 | |
| | | | | | | | |
| 10.17 | |
| 10.18 | |
| 10.19 | |
| 10.20 | |
21.1*10.21+ | |
| 10.22 | |
| 10.23+ | |
| 10.24 | |
| 10.25 | |
| 10.26 | |
| 10.27 | |
| 10.28 | |
| 10.29* | |
| 10.30* | |
| 21.1 | |
| 23.1* | |
31.1*24.1* | Attorney (included on Signature pages of this Annual Report on Form 10-K) |
31.2*31.1* | |
31.3* | |
| 32.1* | |
| 101.INS* | XBRL Instance Document |
| 101.SCH* | XBRL Taxonomy Extension Schema |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
| |
| * | Filed herewith. |
| * | Filed herewith.
| # | Confidential Treatment has been granted for portions of this document. The confidential portions were omitted and filed separately, on a confidential basis, with the Securities and Exchange Commission. |
| + | Management contract or compensatory plan or agreement. |
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, thereunto duly authorized.
| | | | | | | | |
| TECOGEN INC. |
| | (Registrant) |
| TECOGEN INC. |
| Dated: March 22, 2024 | (Registrant)By: | /s/ Abinand Rangesh |
| Chief Executive and Financial Officer |
| Dated: March 21, 2018By: | /s/ John N. Hatsopoulos |
| Co-Chief Executive Officer |
| (Principal Executive Officer) |
| |
Dated: March 21, 2018 | By: | /s/ Benjamin M. Locke |
| Co-Chief Executive Officer |
| (Principal Executive Officer) |
| |
Dated: March 21, 2018 | By: | /s/ Bonnie J. Brown |
| Chief Accounting Officer, Treasurer and Secretary |
| (Chief AccountingFinancial Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Benjamin Locke and Bonnie J. Brown, or either of them, eachAbinand Rangesh, with the power of substitution and re-substitution, as his or her attorney-in-fact and agents,agent, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for the year ended December 31, 2017,2023, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-factattorney-in-fact and agents,agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-factattorney-in-fact and agents, or any of them or theiragent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacitycapacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
Signature | | Title | | Date |
| | | | |
| /s/ Angelina M. Galiteva | | ChairmanDirector, Chairperson of the Board | | March 21, 201825, 2024 |
| Angelina M. Galiteva | | | | |
| | | | |
| /s/ John N. Hatsopoulos | | Lead Director and Co-Chief Executive Officer | | March 21, 201825, 2024 |
| John N. Hatsopoulos | | | | |
| | | | |
| /s/ Abinand Rangesh | | Director and Chief Executive and Financial Officer | | March 25, 2024 |
| Abinand Rangesh | | (Principal Executive and Financial Officer) | | |
| | | | |
/s/ Benjamin M. Locke | | Co-Chief Executive Officer | | March 21, 2018 |
Benjamin M. Locke | | (Principal Executive Officer) | | |
| | | | |
/s/ Bonnie J. Brown | | Chief Accounting Officer, Treasurer and Secretary | | March 21, 2018 |
Bonnie J. Brown | | (Chief Accounting Officer) | | |
| | | | |
/s/ Charles T. Maxwell | | Director | | March 21, 2018 |
Charles T. Maxwell | | | | |
| | | | |
| /s/ Ahmed F. Ghoniem | | Director | | March 21, 201825, 2024 |
| Ahmed F. Ghoniem | | | | |
| | | | |
/s/ Keith DavidsonEarl R. Lewis III | | Director | | March 21, 201825, 2024 |
Keith DavidsonEarl R. Lewis III | | | | |
| | | | |
| /s/ Susan Hirsch | | Director | | | March 25, 2024 |
| Susan Hirsch | | | | |
| | | | |
/s/ Deanna PetersenJohn M. Albertine | | Director | | Director | March 21, 201825, 2024 |
Deanna PetersenJohn M. Albertine | | | | |
Contents
Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements:
Consolidated balance sheets F-4 Consolidated statements of operations and comprehensive loss F-5 Consolidated statements of stockholders' equity F-6 Consolidated statements of cash flows F-7 Notes to the consolidated financial statements F-9
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Tecogen Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tecogen Inc. (the “Company”) as of December 31, 20172023 and 2016,2022, the related consolidated statements of operations, stockholders' equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Contingent consideration and customer contracts
Description of the Matter
As discussed in Notes 5 and 8 to the financial statements, the Company entered into an agreement during the year ended December 31, 2023 to assume certain maintenance agreements and purchase certain assets. The Company’s acquisition accounting for the agreement as a business combination required management to estimate the fair value of contingent consideration and customer contracts. The valuation methodologies applied by management include significant unobservable inputs and assumptions based on management judgments.
How We Addressed the Matter in Our Audit
Our audit procedures relating to the valuation of the contingent consideration and customer contracts included, but were not limited to, reading the executed agreement to understand contractual terms and evaluating the methods and significant assumptions used by the Company in its valuation calculations. We obtained the valuation calculations, performed tests of mathematical accuracy and tests over the completeness and accuracy of underlying data supporting significant assumptions and inputs for consistency with contractual terms. We also engaged a valuation specialist to assist in our assessment of
methodologies applied by the Company as well as the significant inputs and assumptions critical to the conclusions in the valuations, such as existing contract run-out and renewals, forecasted revenues and cash flows and discount rates applied.
/s/ WOLF & COMPANY, P.C.
PCAOB ID 392
We have served as the Company's auditor since 2014.
Boston, Massachusetts
March 21, 201825, 2024
CONSOLIDATED BALANCE SHEETS
As of December 31, 20172023 and 2016
|
| | | | | | | |
| | 2017 | | 2016 |
| ASSETS | |
| | |
|
| Current assets: | |
| | |
|
| Cash and cash equivalents | $ | 1,673,072 |
| | $ | 3,721,765 |
|
| Accounts receivable, net | 9,536,673 |
| | 8,630,418 |
|
| Unbilled revenue | 3,963,133 |
| | 2,269,645 |
|
| Inventory, net | 5,130,805 |
| | 4,774,264 |
|
| Due from related party | 585,492 |
| | 260,988 |
|
| Prepaid and other current assets | 771,526 |
| | 401,876 |
|
| Total current assets | 21,660,701 |
| | 20,058,956 |
|
| Property, plant and equipment, net | 12,265,711 |
| | 517,143 |
|
| Intangible assets, net | 2,896,458 |
| | 1,065,967 |
|
| Goodwill | 13,365,655 |
| | 40,870 |
|
| Other assets | 482,551 |
| | 2,058,425 |
|
| TOTAL ASSETS | $ | 50,671,076 |
| | $ | 23,741,361 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
| Current liabilities: | |
| | |
|
| Accounts payable | $ | 5,095,285 |
| | $ | 3,367,481 |
|
| Accrued expenses | 1,416,976 |
| | 1,378,258 |
|
| Deferred revenue | 1,293,638 |
| | 876,765 |
|
| Loan due to related party | 850,000 |
| | — |
|
| Interest payable, related party | 52,265 |
| | — |
|
| Total current liabilities | 8,708,164 |
| | 5,622,504 |
|
| Long-term liabilities: | |
| | |
|
| Deferred revenue, net of current portion | 538,100 |
| | 459,275 |
|
| Senior convertible promissory note, related party | — |
| | 3,148,509 |
|
| Unfavorable contract liability, net | 7,729,667 |
| | — |
|
| Total liabilities | 16,975,931 |
| | 9,230,288 |
|
| | | | |
| Commitments and contingencies (Note 10) |
|
| |
|
|
| | | | |
| Stockholders’ equity: | |
| | |
|
| Tecogen Inc. stockholders’ equity: | |
| | |
|
| Common stock, $0.001 par value; 100,000,000 shares authorized; 24,766,892 and 19,981,912 issued and outstanding at December 31, 2017 and 2016, respectively | 24,767 |
| | 19,982 |
|
| Additional paid-in capital | 56,176,330 |
| | 37,334,773 |
|
| Accumulated other comprehensive loss-investment securities | (165,317 | ) | | — |
|
| Accumulated deficit | (22,796,246 | ) | | (22,843,682 | ) |
| Total Tecogen Inc. stockholders’ equity | 33,239,534 |
| | 14,511,073 |
|
| Noncontrolling interest | 455,611 |
| | — |
|
| Total stockholders’ equity | 33,695,145 |
| | 14,511,073 |
|
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 50,671,076 |
| | $ | 23,741,361 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2017 and 2016
|
| | | | | | | |
| | 2017 | | 2016 |
| Revenues | |
| | |
|
| Products | $ | 12,991,283 |
| | $ | 10,722,285 |
|
| Services | 16,377,443 |
| | 13,768,101 |
|
| Energy production | 3,833,940 |
| | — |
|
| Total revenues | 33,202,666 |
| | 24,490,386 |
|
| Cost of sales | |
| | |
|
| Products | 8,012,012 |
| | 7,189,225 |
|
| Services | 10,201,732 |
| | 8,000,483 |
|
| Energy production | 2,034,518 |
| | — |
|
| Total cost of sales | 20,248,262 |
| | 15,189,708 |
|
| Gross profit | 12,954,404 |
| | 9,300,678 |
|
| Operating expenses | |
| | |
|
| General and administrative | 9,520,497 |
| | 7,994,361 |
|
| Selling | 2,271,826 |
| | 1,636,704 |
|
| Research and development | 936,929 |
| | 667,064 |
|
| Total operating expenses | 12,729,252 |
| | 10,298,129 |
|
| Income (loss) from operations | 225,152 |
| | (997,451 | ) |
| Other income (expense) | |
| | |
|
| Interest and other income | 27,626 |
| | 11,988 |
|
| Interest expense | (155,082 | ) | | (175,782 | ) |
| Total other expense, net | (127,456 | ) | | (163,794 | ) |
| Income (loss) before income taxes | 97,696 |
| | (1,161,245 | ) |
| Income tax provision | — |
| | — |
|
| Consolidated net income (loss) | 97,696 |
| | (1,161,245 | ) |
| (Income) loss attributable to the noncontrolling interest | (50,260 | ) | | 64,962 |
|
| Net income (loss) attributable to Tecogen Inc. | 47,436 |
| | (1,096,283 | ) |
| Other comprehensive loss-unrealized loss on securities | (165,317 | ) | | — |
|
| Comprehensive loss | $ | (117,881 | ) | | $ | (1,096,283 | ) |
| | | | |
| Net income (loss) per share - basic | $ | 0.00 |
| | $ | (0.06 | ) |
| Net income (loss) per share - diluted | $ | 0.00 |
| | $ | (0.06 | ) |
| Weighted average shares outstanding - basic | 23,171,033 |
| | 19,295,922 |
|
| Weighted average shares outstanding - diluted | 23,342,627 |
| | 19,295,922 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2017 and 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Tecogen Inc. Stockholders | | | | |
| | | Common Stock Shares | | Common
Stock
$.001
Par Value | | Additional
Paid-In
Capital | | Accumulated Other Comprehensive Loss | | Accumulated
Deficit | | Noncontrolling
Interest | | Total |
| Balance at December 31, 2015 | | 18,478,990 |
| | $ | 18,479 |
| | $ | 34,501,640 |
| | $ | — |
| | $ | (21,682,437 | ) | | $ | (395,814 | ) | | $ | 12,441,868 |
|
| Exercise of warrants | | 675,000 |
| | 675 |
| | 2,699,325 |
| | | | — |
| | — |
| | 2,700,000 |
|
| Exercise of stock options | | 157,458 |
| | 158 |
| | 395,414 |
| | — |
| | — |
| | — |
| | 395,572 |
|
| Acquisition of non-controlling interest in Ilios | | 670,464 |
| | 670 |
| | (427,537 | ) | | — |
| | (64,962 | ) | | 460,776 |
| | (31,053 | ) |
| Stock-based compensation | | — |
| | — |
| | 165,931 |
| | — |
| | — |
| | — |
| | 165,931 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | (1,096,283 | ) | | (64,962 | ) | | (1,161,245 | ) |
| Balance at December 31, 2016 | | 19,981,912 |
| | $ | 19,982 |
| | $ | 37,334,773 |
| | $ | — |
| | $ | (22,843,682 | ) | | $ | — |
| | $ | 14,511,073 |
|
| Exercise of stock options | | 122,043 |
| | 122 |
| | 179,796 |
| | — |
| | — |
| | — |
| | 179,918 |
|
| Issuance of common stock in connection with ADGE acquisition, net of costs of $377,246 | | 4,662,937 |
| | 4,663 |
| | 18,477,993 |
| | — |
| | — |
| | — |
| | 18,482,656 |
|
| Consolidation of non-controlling interest in ADGNY | | — |
| | — |
| | — |
| | — |
| | — |
| | 453,272 |
| | 453,272 |
|
| Distributions to non-controlling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | (47,921 | ) | | (47,921 | ) |
| Stock-based compensation | | — |
| | — |
| | 183,768 |
| | — |
| | — |
| | — |
| | 183,768 |
|
| Comprehensive income (loss) | | — |
| | — |
| | — |
| | (165,317 | ) | | 47,436 |
| | 50,260 |
| | (67,621 | ) |
| Balance at December 31, 2017 | | 24,766,892 |
| | $ | 24,767 |
| | $ | 56,176,330 |
| | $ | (165,317 | ) | | $ | (22,796,246 | ) | | $ | 455,611 |
| | $ | 33,695,145 |
|
| | | | | | | | | | | |
| ASSETS | 2023 | | 2022 |
| | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,351,270 | | | $ | 1,913,969 | |
| Accounts receivable, net | 6,735,336 | | | 6,714,122 | |
| Employee retention credit receivable | 46,148 | | | 713,269 | |
| Unbilled revenue | 1,258,532 | | | 1,805,330 | |
| Inventory, net | 10,553,419 | | | 10,482,729 | |
| | | |
| | | |
| | | |
| Prepaid and other current assets | 360,639 | | | 401,189 | |
| Total current assets | 20,305,344 | | | 22,030,608 | |
| | | |
| Property, plant and equipment, net | 1,162,577 | | | 1,407,720 | |
| Right of use assets | 943,283 | | | 1,245,549 | |
| | | |
| Intangible assets, net | 2,436,230 | | | 997,594 | |
| | | |
| Goodwill | 2,743,424 | | | 2,406,156 | |
| Other assets | 201,771 | | | 165,230 | |
| TOTAL ASSETS | $ | 27,792,629 | | | $ | 28,252,857 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| | | |
| Related party notes | $ | 505,505 | | | $ | — | |
| Accounts payable | 4,514,415 | | | 3,261,952 | |
| Accrued expenses | 2,504,629 | | | 2,384,447 | |
| Deferred revenue, current | 1,647,206 | | | 1,115,627 | |
| | | |
| Lease obligations, current | 289,473 | | | 687,589 | |
| Acquisition liabilities, current | 845,363 | | | — | |
| Unfavorable contract liabilities, current | 176,207 | | | 236,705 | |
| Total current liabilities | 10,482,798 | | | 7,686,320 | |
| | | |
| Long-term liabilities: | | | |
| Deferred revenue, net of current portion | 369,611 | | | 371,823 | |
| | | |
| Lease obligations, net of current portion | 683,307 | | | 623,452 | |
| Acquisition liabilities, net of current portion | 1,181,779 | | | — | |
| Unfavorable contract liability, net of current portion | 422,839 | | | 583,512 | |
| | | |
| Total liabilities | 13,140,334 | | | 9,265,107 | |
| | | |
| Commitments and contingencies (Note 12) | | | |
| Stockholders’ equity: | | | |
| Tecogen Inc. shareholders’ equity: | | | |
| Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261 and 24,850,261 issued and outstanding at December 31, 2023 and 2022, respectively | 24,850 | | | 24,850 | |
| Additional paid-in capital | 57,601,402 | | | 57,351,008 | |
| | | |
| | | |
| Accumulated deficit | (42,879,656) | | | (38,281,548) | |
| Total Tecogen Inc. stockholders’ equity | 14,746,596 | | | 19,094,310 | |
| Noncontrolling interest | (94,301) | | | (106,560) | |
| Total stockholders’ equity | 14,652,295 | | | 18,987,750 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 27,792,629 | | | $ | 28,252,857 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS
For the Years Ended December 31, 20172023 and 20162022 |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | 2017 | | 2016 |
| |
| | |
|
| Consolidated net income (loss) | $ | 97,696 |
| | $ | (1,161,245 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | |
|
| Depreciation and amortization, net | 587,822 |
| | 264,005 |
|
| Loss on sale of assets | 2,909 |
| | 640 |
|
| Recovery for losses on accounts receivable | (16,600 | ) | | (19,245 | ) |
| Provision (recovery) of inventory reserve | 17,000 |
| | (27,000 | ) |
| Stock-based compensation | 183,768 |
| | 165,931 |
|
| Non-cash interest expense | 1,491 |
| | 49,532 |
|
| Changes in operating assets and liabilities, net of effects of acquisition: | |
| | |
|
| (Increase) decrease in: | | | |
| Short-term investments, restricted | — |
| | 294,802 |
|
| Accounts receivable | (336,051 | ) | | (3,324,310 | ) |
| Unbilled revenue | (1,676,409 | ) | | (1,197,254 | ) |
| Inventory, net | (298,167 | ) | | 935,779 |
|
| Due from related party | (325,651 | ) | | 916,273 |
|
| Prepaid expenses and other current assets | (47,498 | ) | | (48,771 | ) |
| Other non-current assets | (32,252 | ) | | — |
|
| Increase (decrease) in: | |
| | |
|
| Accounts payable | 1,335,042 |
| | 55,672 |
|
| Accrued expenses and other current liabilities | (494,095 | ) | | 311,398 |
|
| Deferred revenue | 375,499 |
| | 65,937 |
|
| Interest payable, related party | 34,240 |
| | — |
|
| Net cash used in operating activities | (591,256 | ) | | (2,717,856 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
|
| Purchases of property and equipment | (580,044 | ) | | (139,725 | ) |
| Purchases of intangible assets | (453,598 | ) | | (119,665 | ) |
| Cash acquired in acquisition | 971,454 |
| | — |
|
| Cash paid for investment in Ultra Emissions Technologies Ltd | — |
| | (2,000,000 | ) |
| Return of investment in Ultra Emissions Technologies Ltd | 2,000,000 |
| | — |
|
| Payment of stock issuance costs | (377,246 | ) | | — |
|
| Distributions to noncontrolling interest | (47,921 | ) | | — |
|
| Net cash provided by (used in) investing activities | 1,512,645 |
| | (2,259,390 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
|
| Payments for debt issuance costs | — |
| | (2,034 | ) |
| Proceeds on notes payable | — |
| | 150,000 |
|
| Payments for share issuance | — |
| | (31,053 | ) |
| Payments made on loan due to related party | (3,150,000 | ) | | — |
|
| Proceeds from exercise of stock options | 179,918 |
| | 395,572 |
|
| Proceeds from exercise of warrants | — |
| | 2,700,000 |
|
| Net cash provided by (used in) financing activities | (2,970,082 | ) | | 3,212,485 |
|
| Change in cash and cash equivalents | (2,048,693 | ) | | (1,764,761 | ) |
| Cash and cash equivalents, beginning of the year | 3,721,765 |
| | 5,486,526 |
|
| Cash and cash equivalents, end of the year | $ | 1,673,072 |
| | $ | 3,721,765 |
|
Supplemental disclosure of cash flow information:
|
| | | | | | | |
| Cash paid for interest | $ | 110,979 |
| | $ | 126,250 |
|
| Exchange of common stock for non-controlling interest in Ilios | $ | — |
| | $ | 330,852 |
|
| Issuance of stock to acquire American DG Energy, net | $ | 18,482,656 |
| | $ | — |
|
| Issuance of Tecogen stock options in exchange for American DG Energy options | $ | 114,896 |
| | $ | — |
|
| | | | | | | | | | | |
| | 2023 | | 2022 |
| Revenues | | | |
| Products | $ | 8,859,946 | | | $ | 11,156,099 | |
| Services | 14,523,054 | | | 12,060,661 | |
| Energy production | 1,756,419 | | | 1,785,854 | |
| Total revenues | 25,139,419 | | | 25,002,614 | |
| Cost of sales | | | |
| Products | 5,923,096 | | | 7,413,320 | |
| Services | 7,909,202 | | | 5,525,493 | |
| Energy production | 1,105,503 | | | 996,990 | |
| Total cost of sales | 14,937,801 | | | 13,935,803 | |
| | | |
| Gross profit | 10,201,618 | | | 11,066,811 | |
| | | |
| Operating expenses: | | | |
| General and administrative | 11,880,389 | | | 10,909,251 | |
| Selling | 1,931,037 | | | 1,811,085 | |
| Research and development | 840,011 | | | 732,873 | |
| Gain on sale of assets | (36,207) | | | (41,931) | |
| Long-lived asset impairment | — | | | 4,674 | |
| | | |
| | | |
| Total operating expenses | 14,615,230 | | | 13,415,952 | |
| | | |
| Loss from operations | (4,413,612) | | | (2,349,141) | |
| | | |
| Other income (expense) | | | |
| Interest and other income (expense) | (61,003) | | | (34,713) | |
| Interest expense | (16,050) | | | (16,255) | |
| | | |
| | | |
| | | |
| Unrealized gain on marketable securities | — | | | 18,749 | |
| Total other expense, net | (77,053) | | | (32,219) | |
| | | |
| Loss before income taxes | (4,490,665) | | | (2,381,360) | |
| | | |
| State income tax provision | 32,491 | | | 16,352 | |
| Consolidated net loss | (4,523,156) | | | (2,397,712) | |
| | | |
| Income attributable to the noncontrolling interest | (74,952) | | | (50,215) | |
| Net loss attributable to Tecogen Inc. | $ | (4,598,108) | | | $ | (2,447,927) | |
| | | |
| Net loss per share - basic | $ | (0.19) | | | $ | (0.10) | |
| Weighted average shares outstanding - basic | 24,850,261 | | 24,850,261 |
| Net loss per share - diluted | $ | (0.19) | | | $ | (0.10) | |
| Weighted average shares outstanding - diluted | 24,850,261 | | 24,850,261 |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | Common Stock Shares | | Common
Stock
$.001
Par Value | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Noncontrolling
Interest | | Total |
| Balance at December 31, 2021 | | 24,850,261 | | | $ | 24,850 | | | $ | 57,016,859 | | | $ | (35,833,621) | | | $ | (79,939) | | | $ | 21,128,149 | |
| | | | | | | | | | | | |
| Distributions to noncontrolling interest | | — | | | — | | | — | | | — | | | (76,836) | | | (76,836) | |
| Stock-based compensation | | — | | | — | | | 334,149 | | | — | | | — | | | 334,149 | |
| Net income (loss) | | — | | | — | | | — | | | (2,447,927) | | | 50,215 | | | (2,397,712) | |
| Balance at December 31, 2022 | | 24,850,261 | | | 24,850 | | | 57,351,008 | | | (38,281,548) | | | (106,560) | | | 18,987,750 | |
| | | | | | | | | | | | |
| Distributions to noncontrolling interest | | — | | | — | | | — | | | — | | | (62,693) | | | (62,693) | |
| Stock-based compensation | | — | | | — | | | 250,394 | | | — | | | — | | | 250,394 | |
| Net income (loss) | | — | | | — | | | — | | | (4,598,108) | | | 74,952 | | | (4,523,156) | |
| Balance at December 31, 2023 | | 24,850,261 | | | $ | 24,850 | | | $ | 57,601,402 | | | $ | (42,879,656) | | | $ | (94,301) | | | $ | 14,652,295 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2023 and 2022 | | | | | | | | | | | |
| 2023 | | 2022 |
|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Consolidated loss | $ | (4,523,156) | | | $ | (2,397,712) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation, accretion and amortization, net | 567,712 | | | 428,348 | |
| Long-lived asset impairment | — | | | 4,674 | |
| Gain on sale of assets | (36,207) | | | (41,931) | |
| Provision for doubtful accounts receivable | 902,432 | | | (70,987) | |
| Provision for litigation | — | | | 150,000 | |
| Provision for inventory reserve | 402,883 | | | 107,000 | |
| Unrealized gain on investment securities | — | | | (18,749) | |
| Stock-based compensation | 250,394 | | | 334,149 | |
| Changes in operating assets and liabilities: | | | |
| (Increase) decrease in: | | | |
| Accounts receivable | (81,195) | | | 2,401,904 | |
| Inventory, net | (82,525) | | | (2,824,740) | |
| Unbilled revenue | 56,994 | | | 1,452,860 | |
| Prepaid expenses and other current assets | 40,550 | | | 177,612 | |
| Other non-current assets | 265,725 | | | 625,320 | |
| Increase (decrease) in: | | | |
| Accounts payable | 1,161,416 | | | (246,401) | |
| Accrued expenses | 128,869 | | | (109,282) | |
| Deferred revenue | 543,842 | | | (678,758) | |
| Other current liabilities | (421,049) | | | (645,236) | |
| Net cash used in operating activities | (823,315) | | | (1,351,929) | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (46,851) | | | (314,879) | |
| Proceeds on sale of property and equipment | 34,655 | | | 72,655 | |
| Purchases of intangible assets | — | | | (29,505) | |
| Payment for business acquisition | (170,000) | | | — | |
| Distributions to noncontrolling interest | (62,693) | | | (76,836) | |
| Net used in investing activities | (244,889) | | | (348,565) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Proceeds from related party note | 505,505 | | | — | |
| Net cash provided by financing activities | 505,505 | | | — | |
| Change in cash and cash equivalents | (562,699) | | | (1,700,494) | |
| Cash and cash equivalents, beginning of the year | 1,913,969 | | | 3,614,463 | |
| Cash and cash equivalents, end of the year | $ | 1,351,270 | | | $ | 1,913,969 | |
Supplemental disclosure of cash flow information:
| | | | | | | | | | | |
| Cash paid for interest | $ | 10,926 | | | $ | 14,597 | |
| Cash paid for taxes | $ | 32,491 | | | $ | 16,352 | |
| Non-cash investing activities | | | |
| Vehicles acquired under finance lease | $ | 200,187 | | | $ | — | |
| Aegis acquisition: | | | — | |
| Accounts receivable credit | 300,000 | | | — | |
| Accounts payable assumed | 91,048 | | | — | |
| Contingent consideration | 1,256,656 | | | — | |
| Total fair value of non-cash consideration | 1,647,704 | | | — | |
The accompanying notes are an integral part of these consolidated financial statements.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20172023 and 20162022
Note 1 –1. Nature of businessBusiness and operationsOperations
Tecogen Inc. ("Tecogen"(together with its subsidiaries "we", "our", "us" or the “Company”"Tecogen"), a Delaware Corporation, was incorporated on September 15, 2000, and acquired the assets and liabilities of the Tecogen Products division of Thermo Power Corporation. The Company producesWe produce 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. Tecogen’sOur products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The majority of the Company’sour customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast.
On May 4, 2009, the Company invested in a new corporation called Ilios Inc., or Ilios. The investment gave the Company a controlling financial interest in Ilios, whose business focus is advanced heating systems for commercial and industrial applications. Beginning in April 2016, a series of private placements were completed resulting in Ilios merging into the Company and Ilios is consolidated into our financial statements.
On November 28, 2017 after the dissolution of Ultratek, the Company created Ultera Technologies Inc., a Delaware corporation that is wholly owned by the Company ("Ultera Technologies"). Ultera Technologies was organized to continue to develop and commercialize Tecogen's patented technology, Ultera®, for the automotive market.
The Company’sOur operations are comprised of twothree business segments. Our Products and Services segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Services segment provides operation and maintenance services to customers for our products. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
AcquisitionLiquidity, Going Concern and Management's Plans
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles assuming that we will continue as a going concern, which contemplates the realization of American DG Energy, Inc.assets and the settlement of obligations in the normal course of business. As of December 31, 2023, our cash and cash equivalents were $1,351,270, compared to $1,913,969 at December 31, 2022, a decrease of $562,699. For the year ended December 31, 2023 we used $823,315 in cash from operations and generated net operating losses of $4,413,612, due to due to lower Products sales, a decrease in gross margin due to higher products material costs and the increased provision for obsolete inventory and an increase in operating expenses due primarily to increased bad debt expense and a general increased in other administrative expenses. Working capital at December 31, 2023 was $9,822,546, compared to $14,344,288 at December 31, 2022, a decrease of $4,521,742 and our accumulated deficit was $42,879,656.
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. ("ADGE"), a company which installs, owns, operates and maintains completed distributed generation of electricity, 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.
Prior to the acquisition, ADGE was considered a related company because certain major stockholders had significant ownership positions in both companies. ADGE also had a sales representation agreement for Tecogen's products and service in New England and purchased the majority of its energy system from Tecogen.
Pursuant to the Merger Agreement, Tecogen acquired ADGE by means of a merger of one of our wholly owned subsidiaries (the "Merger Sub") with and into ADGE, so that ADGE became a wholly owned subsidiary of Tecogen. Pursuant to the Merger Agreement, at the effective time of the Merger, each outstanding share of ADGE common stock, $.001 par value per share, was automatically converted into the right to receive 0.092 shares of common stock, $.001 par value per share, of Tecogen (the “Exchange Ratio”), with cash paid in lieu of any fractional shares. As a result of the Merger, Tecogen issued approximately 4,662,937 shares of Tecogen common stock at $4.02 per share. This price wasabove factors, management has performed an analysis to evaluate the entity’s ability to continue as a going concern for one year after the financial statements issuance date. Management’s analysis includes forecasting future revenues, expenditures and cash flows, taking into consideration past performance as well as key initiatives recently undertaken. Our forecasts are dependent on our ability to maintain margins based on the closing priceCompany's ability to close on new and expanded business, leverage existing working capital, and effectively manage expenses. New and expanded business includes the sale and shipment of Tecogen's common stocknewly developed hybrid-drive air-cooled chillers and the acquisition of additional maintenance contracts in February 2024 (see Note 20. "Subsequent Events"). Our backlog at December 31, 2023 was $7,388,145, which is an increase of $666,007 from the December 31, 2022 backlog. We may also be required to borrow funds under note subscription agreements with related parties (see Note 11. "Related Party Notes").Based on May 18, 2017,management's analysis, we believe that cash flows from operations and the closing date ofnote agreements will be sufficient to fund operations over the Merger. The aggregate value ofnext twelve months. There can, however, be no assurance we will be able to do so. Based on our analysis, the consideration to be paid in connection with the Merger to former holders of ADGE common stock, net of costs, was approximately $18.5 million. Upon consummation of the Merger, ADGE stock options and other equity awards converted into stock options and equity awards with respect to Tecogen common shares, after giving effectconsolidated financial statements do not include any adjustments to the Exchange Ratio.carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if we were unable to continue as a going concern.
ADGE distributes, owns, and operates clean, on-site energy systems that produce electricity, hot water, heat and cooling. ADGE's business model is to own the equipment that it installs at customer's facilities and to sell the energy produced by these systems to the customer on a long-term contractual basis. We have assumed these customer contracts and ADGE's business model and have fully incorporated ADGE's business into ours.
Note 2 –2. Summary of significant accounting policiesSignificant Accounting Policies
Principles of Consolidation and Basis of Presentation
The financial statements have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board, or FASB. The FASB sets generally accepted accounting principles, or GAAP, to ensure financial condition, results of operations, and cash flows are consistently reported. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, or ASC. The CompanyWe adopted the presentation requirements for noncontrolling interests required by ASC 810 Consolidation.Consolidation. Under ASC 810, earnings or losses attributed to the noncontrolling interests are reported as part of the consolidated earnings and not a separate component of income or expense.
The accompanying consolidated financial statements include our accounts and the accounts of the Company and entities in which it haswe have a controlling financial interest. Those entities include the Company'sour wholly-owned subsidiaries, ADGE and Iliossubsidiary, American DG Energy Inc. ("ADGE"), Tecogen CHP Solutions, Inc., and a joint venture, American DG New York, LLC, or ADGNY, in which ADGE holds a 51.0% interest. As the controlling partner, all major
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
decisions in respect of ADGNY are made by the ADGE in accordance with the joint venture agreement. The interests in the individual underlying energy system projects in ADGNY vary between ADGE and its joint venture partner. The noncontrolling interest and distributions are determined based on economic ownership. The economic ownership is calculated by the amount invested by the Companyus and the noncontrolling partner in each site. Each quarter, the Company calculateswe calculate a year-to-date profit/loss for each site that is part of ADGNY and the noncontrolling interest percent of economic ownership in each site is applied to determine the noncontrolling interest share in the profit/loss. The same methodology is used to determine
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
quarterly distributions of available cash to the noncontrolling interest partner. On the Company’sour balance sheet, noncontrolling interest represents the joint venture partner’s investment in ADGNY, plus its share of after taxafter-tax profits less any cash distributions. ADGE owned a controlling 51.0% legal and economic interest in ADGNY as of December 31, 2017.2023.
Investments in partnerships and companies in which the Company doeswe do not have a controlling financial interest but where we have significant influence, if any, are accounted for under the equity method.
Noncontrolling interests in the net assets and operations of Ilios and ADGNY are reflected in the caption “Noncontrolling interest” in the accompanying consolidated financial statements. All intercompany transactions have been eliminated. In May 2016, the Company completed an exchange of common stock with the shareholders of Ilios and effected a statutory merger. Ilios is no longer a subsidiary.
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.
Employee Retention Credit
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
We qualified for the ERC in the first, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021, excluding the wages that were applied to the Paycheck Protection Loan Second Draw, were eligible for the ERC. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the ERC.
During the three months ended June 30, 2021, we recorded an ERC benefit for the first and second quarters of 2021 of $713,269 and, in the three months ended September 30, 2021 we recorded an ERC benefit for the third quarter of 2021 of $562,752, respectively, in other income (expense), net in the our condensed consolidated statements of operations. A current receivable in the amount of $46,148 is included in our condensed consolidated balance sheet as of December 31, 2023. We have collected all of the other ERC benefits.
Concentration of Credit Risk
The Company’s financialFinancial instruments that are exposedexpose us to concentrations of credit risk consist primarily of cash and cash equivalents short-term investments and accounts receivable. The Company maintains itsWe maintain our cash balances in bank accounts, which at times may exceed the Federal Deposit Insurance Corporation’s general deposit insurance limits. The amount on deposit at December 31, 20172023 and 20162022 which exceeded the $250,000 federally insured limit were approximately $1,172,911$1,009,094 and $3,471,765,$1,393,823, respectively. The Company hasWe have not experienced any losses in such accounts and thus believesbelieve that it iswe are not exposed to any significant credit risk on cash.
There was oneno customer who represented more than 10% of revenues for the yearyears ended December 31, 20172023 and no customersDecember 31, 2022. There was one customer who represented more than 10% of revenues for the year ended December 31, 2016. The Company has approximately four hundred seventy customers who represented 100% of the revenues for the year ended December 31, 2017. There were no customers who represented more than 10%14% of the accounts receivable balance as of December 31, 2017,2023, and one customercustomers who represented 15% of the accounts receivable balance as of December 31, 2016.2022.
Cash and Cash Equivalents
The Company considersWe consider all highly liquid instruments with an original maturity date of three months or less when purchased to be cash and cash equivalents. The Company hasWe have cash balances in certain financial institutions in amounts which occasionally exceed current federal deposit insurance limits. The financial stability of these institutions is continually reviewed by senior management. The Company believes it isWe believe that we are not exposed to any significant credit risk on cash and cash equivalents.
Accounts Receivable
On January 1, 2023, we adopted ASU 2016-13, Financial Instruments, Credit Losses (Topic 326). Accounts receivable are stated at the amount management expects to collect from outstanding balances. AnThe allowance for doubtful accountscredit losses is provided for those accounts receivable considered to be uncollectibleestimated based uponon historical experience, aging of the receivable, the counterparty’s ability to pay, condition of general economy and management’sindustry, and combined with management's estimate of current conditions, reasonable and supportable forecasts of future losses to determine estimated credit losses in our evaluation of outstanding accounts receivable at the end of the year. Bad debts. The allowance for credit losses reflects managements evaluation of our outstanding accounts receivable at the end of the year and our best estimate of probable losses inherent in the accounts receivable balance. Accounts receivable deemed uncollectible are written offcharged against the allowance for credit losses when identified. Our bad debt expense increased to $902,432 in the year ended December 31, 2023, compared to a benefit of $70,987 in the year ended December 31, 2022, due to the write down of certain
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
install receivables which were deemed uncollectible in the year ended December 31, 2023. At December 31, 20172023 and 2016,2022, the allowance for doubtful accountscredit losses was $22,400$149,922 and $29,665,$361,197, respectively.
Inventory
Raw materials, work in process, and finished goods inventories are stated at the lower of cost, as determined by the average cost method, or market. The Companynet realizable value. We periodically reviewsreview inventory quantities on hand for excess and/or obsolete inventory based primarily on historical usage, as well as based on estimated forecast of product demand.demand and anticipated usage. Any reserves that result from this review are charged to cost of sales.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful life of the asset, which range from three to fifteen years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the term of the related leases. Expenditures for maintenance and repairs are expensed, currently, while renewals and betterments that materially extend the life of an asset are capitalized.
The Company receives rebatesWe review our property, plant and incentives from various utility companies and governmental agencies whichequipment for potential impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable or that the useful lives of the assets are accounted for as a reduction inno longer appropriate. We evaluate the recoverability of our long-lived assets when impairment is indicated by comparing the net book value of the assets. The rebates are payable from the utilityasset group to the Company and are applied againstestimated future undiscounted cash flows attributable to such assets. If the costsum of construction, therefore reducing the bookprojected undiscounted cash flows (excluding interest charges) is less than the carrying value of the installation. As a reduction ofassets, the facility construction costs, these rebates are treated as an investing activityassets will be written down to the estimated fair value and such loss is recognized in income from continuing operations in the statements of cash flows. The rebates received byperiod in which the Company fromdetermination is made. If impairment is indicated, the utilities that applyasset is written down to the cost of construction are one time rebates based on the installed cost, capacity and thermal efficiency of the installed unit and are earned upon the installation and inspection by the utility and are not related to or subject to adjustment based on the future operating performance of the installed units. The rebate agreements with utilities are based on standard terms and conditions, the most significant being customer eligibility and post-installation work verification by a specific date. During 2017 the amount of rebates applied to the cost of construction was $64,395.its estimated fair value.
Intangible Assets
Intangible assets subject to amortization include costs incurred by the Companyus to acquire product certifications, certain patent costs, developed technologies, and developed technologies.customer contracts. These costs are amortized on a straight-line basis over the estimated economic life of the intangible asset. Indefinite life intangible assets such as trademarks are recorded at cost and not amortized. The Company reviews intangible assets for impairment when the circumstances warrant.
The favorable contract asset which relates to existing ADGE customer contracts is more fully described in Note 6.,8. "Intangible assetsAssets and liabilitiesLiabilities other than goodwill"Goodwill". Customer contracts are more fully described in Note 5. "Aegis Contract and Related Asset Acquisition".
Impairment of Long-lived Assets
Long-lived assets, including intangible assets and property, plant and equipment, are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. Management determined that noan impairment of $4,674 of long-lived assets existed as of December 31, 2017.2022, respectively.
GoodwillFor the year ended December 31, 2022, we recorded impairment of long-lived assets as follows:
The Company's goodwill was recorded as a result | | | | | | | | | | |
| | | | |
| Year Ended | | | | December 31, 2022 |
| Energy production asset impairment (1) | | | | $ | 156,655 | |
| Energy production reversal of unfavorable contract liability (2) | | | | (151,981) | |
| Long-lived asset impairment | | | | $ | 4,674 | |
| | | | |
| (1) - See Note 9 "Property, Plant and Equipment" |
| (2) - See Note 8 "Intangible Assets and Liabilities Other Than Goodwill" | | | | |
|
Business Combinations
In accordance with applicable accounting standards, we estimate the fair value of the Company's asset acquisition of the permanent magnet generator technology in 2013assets acquired and the acquisition of ADGE in 2017. The Company tests its recorded goodwill for impairmentliabilities assumed as of the last dayacquisition date of each business combination. Any excess purchase price over the year, or more often if indicators of potential impairment exist, by determining if the carryingfair value of the Company's reporting units exceed estimatednet tangible and intangible assets acquired is allocated to goodwill. We may make certain estimates and assumptions when determining the fair value. Factors that could trigger an interim impairment testvalues of assets acquired and liabilities assumed, including intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to underperformance relativefuture expected cash flows from energy production sites or customer maintenance contracts, estimated operating costs, as well as discount rates. At the acquisition date, we will also record
TECOGEN INC.
Notes to historicalAudited Consolidated Financial Statements for December 31, 2023 and 2022
acquisition related liabilities, if applicable, for any contingent consideration or projected future operating results, significantdeferred payments to the seller. Contingent consideration is recorded at fair value on the acquisition date based on our expectation of achieving the contractually defined revenue targets. The fair value of the contingent consideration liabilities is remeasured each reporting period after the acquisition date and any changes in the mannerestimated fair value are reflected as gains or losses in general and administrative expense in the consolidated statement of useoperations. Contingent consideration liabilities and deferred payments to sellers are recorded as current liabilities and other long-term liabilities in the consolidated balance sheets based on the expected timing of settlement.
Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any changes to provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined. Transaction costs associated with business combinations are expensed as incurred.
Goodwill
Goodwill is the excess of the acquired assets or the Company's overall business, significant negative industry or economic trends and a sustained period where market capitalization, plus an appropriate control premium is less than stockholders' equity.
The Company's impairment testing involves a step zero process. Step zero allowsfair value of consideration paid for management to first assess qualitative factors to determine whether it is more likely than not thatbusinesses over the fair value of the intangible assetidentifiable net assets acquired. Impairment testing for goodwill is less than its carrying value. Asperformed annually, generally in the fourth fiscal quarter, or more frequently if impairment indicators are present.
To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment. However, we may elect to bypass the qualitative assessment and perform an impairment test even if no indications of December 31, 2017,a potential impairment exist. The impairment test for goodwill is performed at the Company determined that it was more likely than not thatreporting unit level and compares the fair value of the reporting units exceededunit (calculated using a discounted cash flow method) to its carrying value, including goodwill. The discount rate represents our estimate of the weighted-average cost of capital, or expected return, that a marketplace participant would have required as of the valuation date. If the carrying value exceeds the fair value, an impairment charge is recorded for the excess carrying value over fair value, limited to the total amount of goodwill of that reporting unit. Our assessment in 2023 indicated that the carrying value of our energy production reporting unit and the Aegis maintenance contracts did not exceed their fair value and therefore nogoodwill was not impaired. (see Note 10."Goodwill").
We adopted the provisions of ASU 2017-04, during 2018, which simplified the impairment was recognized.testing process by eliminating the requirement to determine the implied fair value of goodwill. We test goodwill for impairment on either a qualitative basis under certain conditions, or a quantitative basis. On a quantitative basis, fair value of the reporting units is primarily determined using a probability weighted discounted cash flow analysis.
Leases
On January 1, 2019, we adopted the guidance under ASU No. 2016-02, “Leases” ("ASC 842”). ASC 842 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 lease commencement date based on the present value of lease payments over the expected lease term. See Note 14."Leases".
Income (loss) per Common Share
The Company computesWe compute basic lossincome (loss) per share by dividing net income (loss) for the period by the weighted-average number of shares of common stock outstanding during the period. The Company computes itsWe compute our diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the Company considers itswe consider our shares issuable in connection with the convertible debentures, stock options and warrants to be dilutive common stock equivalents when the exercise/conversion price is less than the average market price of our common stock for the period. For the year ended December 31, 2017, the Company included 171,594 dilutive shares resulting from exercise of stock options. All shares issuable for December 31, 2016 were anti-dilutive because of the reported net loss.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
Segment Information
The Company'sOur operations are comprised of twothree business segments. Our Products and Services segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Services segment installs and maintains our cogeneration systems. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements. Prior to the acquisition of ADGE (see Note 4."Acquisition of American DG Energy Inc."), the Company's operations were comprised of a single segment (see Note 16. "Segments").
Income Taxes
The Company usesWe use the asset and liability method of accounting for income taxes. The current or deferred tax consequences of transactions are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable currently or in future years. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities and expected future tax consequences of events that have been included in the financial statements or tax returns using enacted tax rates in effect for the years in which the differences are expected to reverse. Under this method, a valuation allowance is used to offset deferred taxes if, based upon the available evidence, it is more likely than
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
not that some or all of the deferred tax assets may not be realized. Management evaluates the recoverability of deferred taxes and the adequacy of the valuation allowance annually.
The Company hasWe have adopted the provisions of the accounting standards relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognitionderecognition and measurement of potential tax benefits associated with tax positions. The CompanyWe elected to recognize interest and penalties related to income tax matters as a component of income tax expense in the statements of operations. The Company hasWe have analyzed itsour current tax return compliance positions and has determined that no uncertain tax positions have been taken that would require recognition.
With few exceptions, the Company iswe are no longer subject to possible income tax examinations by federal, state or local taxing authorities for tax years before 2014,2020, with the exception of loss carryforwards in the event they are utilized in future years. The Company'sOur tax returns are open to adjustment from 20012002 forward, as a result of the fact that the Company haswe have loss carryforwards from those years, which may be adjusted in the year those losses are utilized.
Fair Value of Financial Instruments
The Company’sOur financial instruments are cash and cash equivalents, certificates of deposit, accounts receivable, available-for-sale securities and accounts payable, demand notes, and loans and convertible debentures due to related parties.payable. The recorded values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values based on their short-term nature. At December 31, 2017, the recorded value on the consolidated balance sheet of the loan due to related party approximates fair value as the terms approximate those available for similar instruments. See Note 13.16. "Fair value measurements"Value Measurements".
Revenue Recognition
Product and service revenueRevenue is recognized when persuasive evidenceperformance obligations under the terms of an arrangement exists, delivery has occurreda 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 have been rendered, the price is fixed or determinableenergy to customers.
Shipping and collectability is reasonably assured. Generally,handling fees billed to customers in a sales of cogeneration and chiller units and parts are recognized when shipped and services are recognized over the term of the service period. Payments received in advance of services being performedtransaction are recorded as deferred revenue.
The Company recognizesin revenue and shipping and handling costs incurred are recorded in certain circumstances before delivery has occurred (commonly referred to as billgeneral and hold transactions). In such circumstances, among other things, risk of ownership has passed to the buyer, the buyer has made a written fixed commitment to purchase the finished goods, the buyer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations exist by the Company. For these transactions, the finished goods are segregated from inventory and normal billing and credit terms granted.administrative expenses. For the years ended December 31, 20172023 and 2016, bill2022, $427,880 and hold transactions in revenue$563,482 of shipping and handling costs were $1,141,684 and $2,588,458, respectively.
For those arrangements that include multiple deliverables, the Company first determines whether each service or deliverable meets the separation criteria of FASB ASC 605-25, Revenue Recognition—Multiple-Element Arrangements. In general, a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has stand-alone value to the customer and, if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in control of the Company. Each deliverable that meets the separation criteria is considered a separate ‘‘unit of accounting”. The Company allocates the total arrangement consideration to each unit of accounting using the relative selling price method. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another unit of accounting.
When vendor-specific objective evidence or third-party evidence is not available, adopting the relative fair value method of allocation permits the Company to recognize revenue on specific elements as completed based on the estimated selling price. The Company generally uses internal pricing lists that determine sales prices to external customers in determining its best estimate of the selling price of the various deliverables in multiple-element arrangements. Changes in judgments made in estimating the
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
selling price of the various deliverables could significantly affect the timing or amount of revenue recognition. The Company enters into sales arrangements with customers to sell its cogeneration and chiller units and related service contracts and occasionally installation services. Based on the fact that the Company sells each deliverable to other customers on a stand-alone basis, the Company has determined that each deliverable has a stand-alone value. Additionally, there are no rights of return relative to the delivered items; therefore, each deliverable is considered a separate unit of accounting.
After the arrangement consideration has been allocated to each unit of accounting, the Company applies the appropriate revenue recognition method for each unit of accounting based on the nature of the arrangement and the services included in each unit of accounting. Cogenerationgeneral and chiller units are recognized when shipped and services are recognized over the term of the applicable agreement, or as provided when on a time and materials basis.
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. In this case, the Company accounts for revenue, or turnkey revenue, and costs using the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting, revenues are recognized by applying percentages of completion to the total estimated revenues for the respective contracts. Costs are recognized as incurred. The percentages of completion are determined by relating the actual cost of work performed to date to the current estimated total cost at completion of the respective contracts. When the estimate on a contract indicates a loss, the Company’s policy is to record the entire expected loss, as required by generally accepted accounting principles. The excess of contract costs and profit recognized to date on the percentage-of-completion accounting method in excess of billings is recorded as unbilled revenue. Billings in excess of related costs and estimated earnings are recorded as deferred revenue.
Revenue from energy contracts is recognized when electricity, heat, and chilled water is produced by the cogeneration systems on-site. The Company bills each month based on various meter readings installed at each site. The amount of energy produced by on-site energy systems is invoiced, as determined by a contractually defined formula. Under certain energy contracts, the customer directly acquires the fuel to power the systems and receives credit for that expense from the Company. The credit is recorded as a cost of sale. Revenues from operations, including shared savings are recorded when provided and verified. Maintenance service revenue is recognized over the term of the agreement and is billed on a monthly basis in arrears.
As a byproduct of the energy business, in some cases, the customer may choose to own the energy system rather than have it owned by ADGE. In this case, the Company accounts for revenue, or turnkey revenue, and costs using the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting, revenues are recognized by applying percentages of completion to the total estimated revenues for the respective contracts. Costs are recognized as incurred. The percentages of completion are determined by relating the actual cost of work performed to date to the current estimated total cost at completion of the respective contracts. When the estimate on a contract indicates a loss, the Company records the entire expected loss, regardless of the percentage of completion. The excess of contract costs and profit recognized to date on the percentage-of-completion accounting method in excess of billings is recorded as unbilled revenue. Billings in excess of related costs and estimated earnings is recorded as deferred revenue.
Customers may buy out their long-term obligation under energy contracts and purchase the underlying equipment from the Company. Any resulting gain on these transactions is recognized over the payment periodadministrative expenses in the accompanying consolidated statements of operations.
The Company is ableoperations, respectively. We elected to participateexclude from revenue any value-add sales and other taxes which we collect concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in certain energy related programswhich we have historically recorded shipping and receive payments duehandling 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 availability of its energy systems. These programs provide incentive payments for either the reduction of electricity usage or the increase in electricity production during periods of peak usage throughout a utility territory.
Presentation of Sales Taxes
The Company reports revenues net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue-producing transactions.
Shipping and Handling Costs
The Company classifies freight billed to customers as salesrelated revenue and the related freight costs as cost of sales.recognized.
Advertising Costs
The Company expensesWe expense the costs of advertising as incurred. For the years ended December 31, 20172023 and 2016,2022, advertising expense was approximately $278,000$79,000 and $134,000,$51,000, respectively.
Research and Development Costs
Research and development expenditures are expensed as incurred. The Company’sOur total research and development expenditures ofwere approximately $937,000$840,000 and $677,100 were recognized$733,000 for each of the years ended December 31, 20172023 and 2016,2022, respectively.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense in the statements of operations over the requisite service period.
The determination of the fair value of share-based payment awards is affected by the Company’sour stock price. For the awards issued prior to the Companyour being publicly traded, the Companywe considered the sales price of the Common Stock in private placements to unrelated third parties as a measure of the fair value of its Common Stock.
The Company utilizesWe utilize actual forfeitures when calculating the expense for the period. Stock-based compensation expense recognized is based on awards that are ultimately expected to vest. The Company evaluatesWe evaluate the assumptions used to value awards regularly and if factors change and different assumptions are employed, stock-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Companywe may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
Pursuant to ASC 505-50, Equity Based Payments to Non-Employees, the fair value of restricted Common Stock and stock options issued to nonemployees is revalued at each reporting period until the ultimate measurement date, as defined by ASC 505-50. The Company records the value of the instruments at the time services are provided and the instruments vest. Accordingly, the ultimate expense is not fixed until such instruments are fully vested.
See Note 12.15."Stockholders' equity"Equity" for a summary of the restricted stock and stock option activity under the Company'sour stock-based employee compensation plan for the years ended December 31, 20172023 and 2016.2022.
Recent Accounting PronouncementsDisaggregated Revenue
In May 2014,general, our business segmentation are aligned according to the nature and economic characteristics of our products and customer relationships and provides meaningful disaggregation of each business segment's results of operations.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
The following table further disaggregates our revenue by major source by segment for the years ended December 31, 2023 and 2022.
| | | | | | | | | | | | | | |
| | Years Ended |
| | December 31, 2023 | | December 31, 2022 |
| Products: | | | | |
| Cogeneration | | $ | 2,761,667 | | | $ | 5,279,569 | |
| Chiller | | 5,303,978 | | | 5,034,633 | |
| Engineered Accessories | | 794,301 | | | 841,897 | |
| Total Products Revenue | | 8,859,946 | | | 11,156,099 | |
| | | | |
| Services | | 14,523,054 | | | 12,060,661 | |
| Energy production | | 1,756,419 | | | 1,785,854 | |
| Total revenue | | $ | 25,139,419 | | | $ | 25,002,614 | |
Products Segment
Products. Our Product revenues include cogeneration systems that supply electricity and hot water, chillers that provide air-conditioning and hot water and engineered accessories, which consist of ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. We refer to the package of engineered accessories and engineering and design services necessary for the customers' installation of a cogeneration unit as light installation services.
We transfer control and generally recognize a sale when we ship a product from our manufacturing facility at which point the customer takes ownership of the product. Payment terms on product sales are generally 30 days.
We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill and hold transactions). We recognize revenue related to such transactions once, among other things, the customer has made a written fixed commitment to purchase the product(s) under normal billing and credit terms, the customer has requested the product(s) be held for future delivery as scheduled and designated by them, risk of ownership has been assumed by the customer, and the product(s) are tagged as sold and segregated for storage awaiting further direction from the customer. Due to the infrequent nature and duration of bill and hold arrangements, the value associated with custodial storage services is deemed immaterial in the context of the contract and in total, and accordingly, none of the transaction price is allocated to such service.
Depending on the product and terms of the arrangement, we may defer the recognition of a portion of the transaction price received because we have to satisfy a future obligation (e.g., product start-up service). Amounts allocated to product start-up services are recognized as revenue when the start-up service has been completed. We use an observable selling price to determine standalone selling prices where available and either a combination of an adjusted market assessment approach, an expected cost plus a margin approach, and/or a residual approach to determine the standalone selling prices for separate performance obligations as a basis for allocating contract consideration when an observable selling price is not available. Amounts received but not recognized pending completion of performance are recognized as contract liabilities and are recorded as deferred revenue along with deposits by customers.
Services Segment
Maintenance Services. Maintenance services are provided under either long-term maintenance contracts or time and material maintenance contracts. Revenue under time and material maintenance contracts is recognized when the maintenance service is completed. Revenue under long-term maintenance contracts is recognized either ratably over the term of the contract where the contract price is fixed or when the periodic maintenance activities are completed and the invoiced cost to the customer is based on run hours or kilowatts produced in a given period. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to the amount we have the right to invoice the customer under the contract.
Our acquisition of the Aegis maintenance contracts and related business closed on March 15, 2023 and since April 1, 2023, revenues resulting from the Aegis acquisition have been included in our revenue from the Services segment.. Payment terms for maintenance services are generally 30 days.
Installation Services. Prior to January 1, 2023, we provided installation services which included all necessary engineering and design, labor, subcontract labor and service to install a cogeneration unit including integration into the
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
customers’ existing electrical and mechanical systems. Since January 1, 2023, we have not provided material installation services and do not expect to provide material installation services going forward.
Energy Production Segment
Energy Production. Revenue from energy contracts is recognized when electricity, heat, hot and/or chilled water is produced by our owned on-site cogeneration systems. Each month we bill the customer and recognize revenue for the various forms of energy delivered, based on meter readings which capture the quantity of the various forms of energy delivered in a given month, under a contractually defined formula which takes into account the current month's cost of energy from the local power utility.
As the various forms of energy delivered by us under energy production contracts are simultaneously delivered and consumed by the customer, our performance obligation under these contracts is considered to be satisfied over time. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to that amount to which we have the right to invoice the customer under the contract. Payment terms on invoices under these contracts are generally 30 days.
Contract Balances
The timing of revenue recognition, billings and cash collections result in billed accounts receivable, unbilled revenue (contract assets) and deferred revenue, consisting of customer deposits and billings in excess of revenue recognized (contract liabilities) on the consolidated balance sheets.
We did not recognize any revenue during the year ended December 31, 2023 that was included in unbilled revenue as of December 31, 2023. Approximately $16,428 of revenue was billed in this period that had been recognized in previous periods.
Revenue recognized during the year ended December 31, 2023 that was included in deferred revenue at the beginning of the period was $837,571.
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 December 31, 2023, the aggregate amount of the transaction price allocated to remaining unsatisfied performance obligations was approximately $2,016,817. We expect to recognize revenue of approximately 95% of the remaining performance obligations over the next 24 months, 13% recognized in the first 12 months and 82% recognized over the subsequent 12 months, and the remainder recognized thereafter.
Significant New Accounting Standards Adopted this Period
New accounting standards adopted in the year ended December 31, 2023.
Financial Instruments, Credit Losses (Topic 326). In June 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standard updateASU No. 2016-13, Financial Instruments, Credit Losses (Topic 326), which was subsequently amended by ASUs 2018-19, 2019-04, 2019-05, 2019-11, and 2020-03. Topic 326 replaces the existing incurred loss impairment model with a methodology that incorporates all expected credit loss estimates, resulting in more timely recognition of losses. Under Topic 326, we are required to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported financial assets. It also requires credit losses related to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede 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 expectedavailable-for-sale debt securities to be receivedrecorded through an allowance for those goods or services. This accounting standard update, as amended, will be effective for the Company beginning in the first quarter of 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 plans to adopt this accounting standard updatecredit losses. We adopted Topic 326 on January 1, 2023 on a modified retrospective basisbasis. The adoption did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. In November 2023, the Financial Accounting Standards Board issued ASU 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. The new standard requires enhanced disclosures about a public entity's reportable segments including more
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
detailed information about a reportable segment's expenses. The amendments in the first quarter of 2018. Management has completed its assessment of the impact of the new revenue recognition standard and concluded that no significant differences are expected to result upon adoption.
In January 2016, the FASB issued an accounting standard update related to investments in equity securities requiring unrealized holding gains and losses to be included in net income. Prior to this update unrealized holding gainsapply to all public entities that are required to report segment information, and losses related to available-for-sale securities were includedinclude those entities that have a single reportable segment. The amendments in accumulated other comprehensive income and not included in determining net income. This accounting standardthis update will beare effective for the Companyfiscal years beginning in the first quarter of 2018after December 15, 2023, and is applied by means of a cumulative-effect adjustment to the balance sheet as of theinterim periods within fiscal years beginning of the fiscal year of adoption. The Company plans to adopt this accounting standard update in the first quarter of 2018 which will result in reclassification of $165,317 of cumulative unrealized holding losses from accumulated other comprehensive loss to accumulated deficit. The future impact of recognizing unrealized holding gains or losses in net income is dependent on the movement in the stock prices related to such investments.
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 earlyafter December 15, 2024. Early adoption is permitted. We are currently evaluating the impact on our consolidated financial statements and related disclosures.
Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. ASU 2023-09 provides more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The Companyamendments in this update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. We are is currently evaluating the impact of this accounting standard update on itsour consolidated financial statements.statements and related disclosures.
Note 3 –3. Income (loss) per common share:Common Share:
Basic and diluted income (loss)loss per common share for the years endedDecember 31, 20172023 and 2016,2022, respectively, was as follows:
| | | | | | | | | | | |
| Years Ended |
| December 31, 2023 | | December 31, 2022 |
| Numerator: | | | |
| Net loss attributable to stockholders | $ | (4,598,108) | | | $ | (2,447,927) | |
| | | |
| Denominator: | | | |
| Weighted average shares outstanding - Basic | 24,850,261 | | 24,850,261 |
| Effect of dilutive securities: | | | |
| Stock options | — | | | — | |
| Weighted average shares outstanding - Diluted | 24,850,261 | | | 24,850,261 | |
| | | |
| Basic loss per share | $ | (0.19) | | | $ | (0.10) | |
| Diluted loss per share | $ | (0.19) | | | $ | (0.10) | |
| | | |
| Anti-dilutive shares underlying stock options outstanding | 1,757,676 | | | 915,201 | |
| | | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Net income (loss) attributable to stockholders | $ | 47,436 |
| | $ | (1,096,283 | ) |
| Weighted average shares outstanding - Basic | 23,171,033 |
| | 19,295,922 |
|
| Basic income (loss) per share | $ | 0.00 |
| | $ | (0.06 | ) |
| Weighted average shares outstanding - Diluted | 23,342,627 |
| | 19,295,922 |
|
| Diluted income (loss) per share | $ | 0.00 |
| | $ | (0.06 | ) |
| | | | |
| Anti-dilutive shares underlying stock options outstanding | 441,356 |
| | 1,117,918 |
|
| Anti-dilutive convertible debentures | — |
| | 889,831 |
|
Note 4 –4. Acquisition of American DG Energy Inc.
On May 18, 2017, we completed our acquisition, by means of a stock-for-stock merger, of 100% of the outstanding common shares of American DG Energy Inc. (“American DG Energy" or "ADGE”), a company which installs, owns, operatesinstalled, owned, operated and maintainsmaintained 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 Tecogenshares of our 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 year ended December 31, 2017, ADGE contributed $3,833,940 to our total revenues and $1,799,422 to our gross profit.
Acquisition related costs included in general and administrative expenses totaled $374,156 for the year ended December 31, 2017. Stock issuance related costs totaling $377,246 were netted against additional paid in capital during the year ended December 31, 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 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 outstanding stock options of ADGE 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 | | $ | 1,542,137 |
|
| Inventory | | 75,374 |
|
| Prepaid and other current assets | | 358,628 |
|
| Property, plant and equipment | | 12,186,664 |
|
| Investment securities | | 519,568 |
|
| Favorable contract asset | | 1,561,739 |
|
| Financial liabilities | | (1,912,859 | ) |
| Unfavorable contract liability | | (8,341,922 | ) |
| Other liabilities | | (939 | ) |
| Total identifiable net assets | | 5,988,390 |
|
| Noncontrolling interest in American DG New York, LLC | | (453,272 | ) |
| Goodwill | | 13,324,785 |
|
| | | $ | 18,859,903 |
|
Goodwill acquired of $13.3 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 goodwill recognized is expected to be deductible for income tax purposes.
The favorable contract asset and the unfavorable contract liability, both of which relate to existing customer contracts, and the estimated amortization are more fully described in Note 6.8. "Intangible assetsAssets and liabilitiesLiabilities other than goodwill"Goodwill".
Note 5. Aegis Contract and Related Asset Acquisition
On March 15, 2023, we entered into an agreement ("Agreement") with Aegis Energy Services, LLC (“Aegis”) pursuant to which Aegis agreed to assign to us and we agreed to assume certain Aegis maintenance agreements, we agreed to purchase certain assets from Aegis, and related matters (“Acquisition”). On April 1, 2023, the Acquisition closed. Under the Agreement, we agreed to acquire from Aegis and assume Aegis’ rights and obligations arising on or after April 1, 2023, under maintenance agreements pursuant to which Aegis provided maintenance services to third parties for approximately 200
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
cogeneration systems and we agreed to acquire from Aegis certain vehicles and inventory used by Aegis in connection with the performance of its maintenance services. At closing, we acquired eight (8) Aegis vehicles for consideration consisting of $170,000 in cash. Also, we issued credits against outstanding accounts receivable due from Aegis in the amount of $300,000 for the acquisition of inventory that Aegis used to provide maintenance services. At closing, we hired eight (8) Aegis employees who, following the closing, have agreed to continue to provide maintenance services relating to the cogeneration systems covered by the maintenance agreements assumed pursuant to the Agreement. Following the closing and for a period of up to seven (7) years, we agreed to pay Aegis a percentage of the revenue collected for maintenance services provided pursuant to the maintenance agreements acquired from Aegis. Further, prior to December 31, 2023, we have the right to acquire and assume additional Aegis’ maintenance agreements for cogeneration systems on substantially similar terms and conditions. The Agreement contained certain indemnification provisions and agreements on the part of Aegis and for each party to cooperate with each other and provide certain transitional assistance. We acquired the Aegis maintenance agreements to expand our Service portfolio and to benefit from the long-term contract revenue stream generated by these agreements.
On February 1, 2024, Tecogen and Aegis amended the Agreement to add eighteen (18) additional maintenance contracts (the "Amendment"). The Amendment includes an undertaking by Aegis to use commercially reasonable efforts to support and assist our execution of maintenance service agreements for an additional thirty-six (36) cogeneration units sold to customers by Aegis.
We have determined that the assignment and assumption of the Aegis maintenance agreements, in combination with the related asset acquisition and the retention of the former Aegis employees, constitutes a business and should be accounted for as a business combination under the acquisition method. As of the acquisition date, we recognized, separately from goodwill, the identifiable assets acquired and the liabilities assumed, at fair value.
We have included the financial results of the Aegis maintenance agreements in our consolidated financial statements from April 1, 2023, the closing or acquisition date.
The following table summarizes the consideration paid for the Aegis acquisition and the fair value of assets acquired and contract-related liabilities assumed as the acquisition date:
| | | | | |
| Consideration Paid: | |
| Cash | $ | 170,000 | |
| Accounts receivable credit issued | 300,000 | |
| Account payable due to Aegis | 91,048 | |
| Contingent consideration | 1,256,656 | |
| Total fair value of consideration transferred | 1,817,704 | |
| |
| Identifiable assets acquired and liabilities assumed: | |
| Assets acquired | |
| Property, plant and equipment | 170,000 | |
| Inventory | 391,048 | |
| Identifiable intangible asset - customer contracts | 1,772,659 | |
| 2,333,707 | |
| Acquired contract-related liabilities assumed | |
| Deferred maintenance reserve | (853,271) | |
| |
| Net identifiable assets acquired | 1,480,436 | |
| Excess of cost over fair value of net assets acquired (Goodwill) | $ | 337,268 | |
The amounts initially recognized for inventory, identifiable intangible assets, contingent consideration and deferred maintenance reserves we provisional pending completion of the necessary valuations and analysis. ASC 805 establishes a measurement period to provide companies with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. As of December 31, 2023, we have completed our analysis and valuation are have recorded the following adjustments to the initial valuations:
•decreased accounts payable assumed and inventory acquired by $20,130, which had no impact on goodwill balance;
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
•decreased contingent consideration by $185,805 due to assigned sites which had ceased operations, as of our prior to the acquisition date, and due to customers who declined the assignment of the maintenance contract. We also amended our discount rate assumption which reduced future cash flows;
•increased identifiable intangible assets by $181,333 due to the addition of contract run out periods; and,
•the excess of cost over fair value of net assets acquired decreased $385,723.
The fair value of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE,identifiable intangible asset was estimated using the income approach. This fairThe excess cash flow was discounted to present value measurement is basedusing an appropriate rate of return to estimate the market value of the customer identifiable intangible asset and the risks associated with the future revenue forecasts due to potential changes in customer energy requirements or changes in the economic viability of these CHP sites which depend on significant inputs thatthe spread between natural gas fuel and electricity prices, all of which are not observablewithin our control. Key assumptions to value the customer identifiable intangible asset included the discount rate of 15%, profitability assumptions, revenue assumptions, and anticipated existing contract run out were the material assumptions utilized in the market and thus represents adiscounted cash flow model used to estimate fair value measurement categorized within level 3value. The discount rate reflects an estimate of our weighted-average cost of capital.
On the date of acquisition, the fair value hierarchy described in ASC Section 820-10-35. Key assumptions include a discount rate of 5.61%the contingent consideration and the run outdeferred maintenance reserve were calculated under the income approach using a weighted average cost of existing contractscapital of 15%, discounting the future cash flows to present value and are subsequently remeasured to fair value at current levelseach reporting date until the fair value contingencies are resolved. Fair value adjustments which may be determined at subsequent reporting dates will be recorded in our consolidated statements of profitability.
Unaudited Pro Forma Financial Informationoperations and will not impact the goodwill balance. At December 31, 2023, we remeasured the contingent consideration and deferred maintenance reserves, however no adjustment was recorded given the probability of achieving the revenue estimates and deferred maintenance costs were consistent with our initial valuation.
The unauditedcontingent consideration is payable within forty-five (45) days following the end of each calendar quarter through the earlier of the expiration or termination of the relevant maintenance agreements, or the seventh (7th) anniversary of the acquisition date. The consideration is equal to the product of the revenues collected in a calendar quarter multiplied by an applicable percentage. The agreement stipulates quarterly aggregate revenue targets and an applicable percentage, and provides for a higher applicable percentage if revenues exceed the target revenues. The applicable percentage ranges from 5% to 10% over the agreement term. The deferred maintenance reserve represents costs, which are expected to be incurred over a three-year period from the date of acquisition, to repair customer equipment that had not been properly maintained prior to our acquisition of the maintenance service agreements.
Revenues and gross profit from the Aegis maintenance contracts since the acquisition date were $1,884,891 and $1,167,225, respectively, for the year December 31, 2023 and are included in our Services segment. For the year December 31, 2023, the contingent consideration payable to Aegis amounted to $94,245, of which $61,275 was paid in 2023 and the balance was paid in mid-February 2024. We unable to provide the pro forma financial information required under ASC 805-10-50-2(h) as the disclosure is impracticable since the required pre-acquisition historical information could not be obtained from the acquiree.
The purchase price of the acquisition was allocated to the tangible and intangible assets acquired and liabilities assumed and recognized at their fair value based on widely accepted valuation techniques in the table below summarizes the combined results of operations for Tecogen and ADGE as though the companies were combinedaccordance with ASC 820, "Fair Value Measurement," as of the beginningacquisition date. The process for estimating fair value requires the use of fiscal 2016.significant assumptions and estimates of future cash flows and developing appropriate discount rates. The pro forma financial information for all periods presented also includesexcess of the purchase price over fair value of the net identified assets acquired and liabilities assumed was recorded as goodwill. Goodwill is primarily attributable to the going concern element of the Aegis business, combination accounting effectsincluding its assembled workforce and the long-term nature of the customer maintenance agreements, as well as anticipated cost synergies due primarily to the elimination of administrative overhead. Goodwill resulting from the Aegis acquisition including amortization chargesis not expected to be deductible for income tax purposes.
Acquisition-related costs which consisted on recurring internal resources were de minimus and credits from acquired intangible assets andsuch costs were expensed as incurred (ASC 805-50-30-1).
The following table summarizes the contract-related liabilities (certain of which are preliminary), and depreciation adjustments related to fair value as though the aforementioned companies were combinedassumed as of December 31, 2023:
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
| | | | | |
| December 31, 2023 |
| Acquisition liabilities, current | |
| Contingent consideration | $ | 200,639 | |
| Deferred maintenance reserve | 644,724 | |
| 845,363 | |
| Acquisition liabilities, long-term | |
| Contingent consideration | 994,743 | |
| Deferred maintenance reserve | 187,036 | |
| $ | 1,181,779 | |
Note 6 . Sale of Energy Producing Assets and Goodwill Impairment
During the beginningfirst quarter of fiscal 2016. The pro forma financial information as presented below is2019, we sold certain energy producing assets, including the associated energy production contracts for informational purposes onlytotal consideration of $7 million.
In connection with the asset sales, we entered into agreements with the purchaser to maintain and is not indicativeoperate the assets over the remaining periods of the results of operations that wouldassociated 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 we have been achieved if the acquisition had taken place at the beginning of fiscal 2016.
|
| | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 |
| Total revenues | | $ | 36,232,650 |
| | $ | 29,674,375 |
|
| Net income (loss) | | 113,255 |
| | (253,132 | ) |
| Basic earnings (loss) per share | | $ | 0.01 |
| | $ | (0.01 | ) |
| Diluted earnings (loss) per share | | $ | 0.01 |
| | $ | (0.01 | ) |
One-time acquisition-related expenses relatedguaranteed to the merger incurred duringpurchaser a minimum level or threshold of cash flows from the periodassociated energy production contracts. Actual results are compared to the minimum threshold bi-annually and we reimburse any shortfall to the purchaser. To the extent actual results are in excess of the minimum threshold, we are entitled to fifty percent of such excess under the agreements. We received excess payments in both the years ended December 31, 2017 are not2023 and 2022. For the year ended December 31, 2023, we recognized $25,633 of revenue representing our share of the excess cash flows under the energy production contacts, the current receivable which is included in the unaudited pro forma financial informationour consolidated balance sheet as they are not expected to have a continuing impact on the consolidated results.of December 31, 2023.
The unaudited pro forma financial information does not includeforegoing agreements also contain provisions whereby we have agreed to make whole the revenues or results of operations of a subsidiary previously owned and consolidated by ADGE as that subsidiary was disposed ofpurchaser in 2016 priorthe event the counterparty to the acquisition by Tecogen and was considered to be a discontinued operation by ADGE. Additionally,energy production contract(s) defaults on or otherwise terminates before the unaudited pro forma financial information does not include a gain recognized on deconsolidation of that same subsidiary by ADGE and an amount of interest cost related to ADGE's long-term debt which was extinguished contemporaneously with the dispositionstated expiration of the subsidiary.energy production contract. Should we be required to make whole the purchaser under such provisions, we would be entitled to seek recovery from the counterparty to the energy production contract(s) under a similar provision contained in those contracts in respect of early termination. We did not recognize any counterparty contract default costs in the years ended December 31, 2023 and 2022.
We are 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. We did not recognize any site decommissioning costs in the years ended December 31, 2023 and 2022 .
Note 5 –7. Inventory, net
InventoriesInventory at December 31, 20172023 and 20162022 consisted of the following.
| | | | | | | | | | | |
| | 2023 | | 2022 |
| Raw materials, net | 8,803,054 | | | 9,001,491 | |
| Work-in-process | 798,522 | | | 498,139 | |
| Finished goods, net | 951,843 | | | 983,099 | |
| $ | 10,553,419 | | | $ | 10,482,729 | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Gross raw materials | $ | 5,270,732 |
| | $ | 4,658,872 |
|
| Less - reserves | (283,000 | ) | | (266,000 | ) |
| Net raw materials | 4,987,732 |
| | 4,392,872 |
|
| Work-in-process | 11,852 |
| | 144,528 |
|
| Finished goods | 131,221 |
| | 236,864 |
|
| | $ | 5,130,805 |
| | $ | 4,774,264 |
|
Note 6 –8. Intangible Assets and Liabilities Other Than Goodwill
The CompanyDuring the year ended December 31, 2022 we capitalized $61,053 and $30,035$11,615 of product certification costs during the years ended December 31, 2017 and 2016, respectively.$17,890 of patent-related costs. Also included in intangible assets are thelegal costs incurred by the Companyus to acquire certain patents.obtain patents for our intellectual property. These patents, once they are placed in service, will beare amortized on a straight-line basis over the estimated economic life of the associated product, which rangeranges from approximately 7-107-10 years. The Company capitalized $181,637 and $77,240 ofWe did not capitalize any cost incurred for product certification costs, patent-related costs or trademarks during the yearsyear ended December 31, 2017 and 2016, respectively. The Company capitalized $2,375 and $12,390 in trademarks during the years ended December 31, 2017 and 2016, respectively.2023.
TECOGEN INC.
Table of ContentsNotes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
Intangible assets and liabilities at December 31, 20172023 and 20162022 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| Intangible assets | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Product certifications | | $ | 777,465 | | | $ | (658,676) | | | $ | 118,789 | | | $ | 777,465 | | | $ | (584,863) | | | $ | 192,602 | |
| Patents | | 888,910 | | | (496,807) | | | 392,103 | | | 888,910 | | | (405,140) | | | 483,770 | |
| Developed technology | | 240,000 | | | (172,000) | | | 68,000 | | | 240,000 | | | (156,000) | | | 84,000 | |
| Trademarks | | 26,896 | | | — | | | 26,896 | | | 26,896 | | | — | | | 26,896 | |
| In process R&D | | 263,936 | | | (103,689) | | | 160,247 | | | 263,936 | | | (65,984) | | | 197,952 | |
| Favorable contract assets | | 384,465 | | | (376,139) | | | 8,326 | | | 384,465 | | | (372,091) | | | 12,374 | |
| Customer contract | | $ | 1,772,659 | | | $ | (110,791) | | | 1,661,868 | | | $ | — | | | $ | — | | | — | |
| | $ | 4,354,331 | | | $ | (1,918,102) | | | $ | 2,436,229 | | | $ | 2,581,672 | | | $ | (1,584,078) | | | $ | 997,594 | |
| | | | | | | | | | | | |
| Intangible liability | | | | | | | | | | | | |
| Unfavorable contract liability | | $ | 2,618,168 | | | $ | (2,019,122) | | | $ | 599,046 | | | $ | 2,618,168 | | | $ | (1,797,951) | | | $ | 820,217 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| Intangible assets | | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Product certifications | | $ | 605,704 |
| | $ | (285,341 | ) | | $ | 320,363 |
| | $ | 544,651 |
| | $ | (233,992 | ) | | $ | 310,659 |
|
| Patents | | 808,323 |
| | (154,972 | ) | | 653,351 |
| | 681,155 |
| | (123,012 | ) | | 558,143 |
|
| Developed technology | | 240,000 |
| | (76,000 | ) | | 164,000 |
| | 240,000 |
| | (60,000 | ) | | 180,000 |
|
| Trademarks | | 19,540 |
| | — |
| | 19,540 |
| | 17,165 |
| | — |
| | 17,165 |
|
| In Process R&D | | 263,001 |
| | — |
| | 263,001 |
| | — |
| | — |
| | — |
|
| Favorable contract asset | | 1,561,739 |
| | (85,536 | ) | | 1,476,203 |
| | — |
| | — |
| | — |
|
| | | $ | 3,498,307 |
| | $ | (601,849 | ) | | $ | 2,896,458 |
| | $ | 1,482,971 |
| | $ | (417,004 | ) | | $ | 1,065,967 |
|
| | | | | | | | | | | | | |
| Intangible liability | | | | | | | | | | | | |
| Unfavorable contract liability | | $ | 8,341,922 |
| | $ | (612,255 | ) | | $ | 7,729,667 |
| | $ | — |
| | $ | — |
| | $ | — |
|
The aggregate amortization expense related to intangible assets and liabilities exclusive of unfavorable contract related intangibles was $99,310$333,676 and $98,310$201,043 during the years ended December 31, 20172023 and 2016,2022, respectively. The net credit to cost of sales related to the amortization of the contract related intangible asset and liability for the years ended December 31, 20172023 and 20162022 was $526,719$220,823 and $0,$274,112, respectively.
Contract Asset and Liability
The favorable contract asset and unfavorable contract liability in the foregoing table represent the fair value of ADGE's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by the Companyus on May 18, 2017 (see Note 4. "Acquisition of American DG Energy Inc."). TheseThe customer contract asset includes the maintenance agreements contracts are long-term and provide customers with an alternative source of electrical power in addition to that providedacquired 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 advantageus on April 1, 2023 as part of the heat generated inAegis acquisition (See Note 5. "Aegis Contract and Related Asset Acquisition".
During 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 foryear ended December 31, 2022, we determined 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 valuecertain 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’sADGE 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 because in order to be entitled to the rights under the contract performance must occur for which a market rate of return is earnedterminated due to the at market terms. The fair value of a contract is primarily a measurement of its off market terms. The obligationcustomers failure to perform under a contract with terms that are unfavorable to market results in a liabilitytheir obligations pursuant to the extent its terms are off market. The resultingcontractual agreements and accordingly reversed $151,981 of unfavorable contract 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 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 market, and thus the baseline to measure the amount related to anythese contacts. The adjustments are included in the consolidated statement of operations for 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 profit margin, in this case 35% of revenue which is consistent with the average return on revenue of US investor owned public utilities.year ended December 31, 2022, as non-cash benefits within long-lived asset impairment.
Amortization of intangibles including contract related amounts is calculated using the straight line method over the remaining useful life or contract term, which range from approximately 1-11 years, and is charged against cost of sales in the accompanying consolidated statement of operations and comprehensive loss.operations. Aggregate future amortization over the next five years is estimated to be as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Non-contract related intangibles | | Contract related intangibles | | Total |
| 2024 | | $ | 194,675 | | | $ | (28,485) | | | $ | 166,190 | |
| 2025 | | 169,265 | | | 34,272 | | | 203,537 | |
| 2026 | | 163,383 | | | 82,490 | | | 245,873 | |
| 2027 | | 162,150 | | | 90,131 | | | 252,281 | |
| 2028 | | 17,720 | | | 96,140 | | | 113,860 | |
| Thereafter | | 40,272 | | | 788,274 | | | 828,546 | |
| | | $ | 747,465 | | | $ | 1,062,822 | | | $ | 1,810,287 | |
|
| | | | | | | | | | | | |
| | | Non-contract related intangibles | | Contract related intangibles | | Total |
| 2018 | | $ | 185,398 |
| | $ | (880,776 | ) | | (695,378 | ) |
| 2019 | | 168,748 |
| | (781,505 | ) | | (612,757 | ) |
| 2020 | | 162,591 |
| | (729,905 | ) | | (567,314 | ) |
| 2021 | | 149,160 |
| | (730,478 | ) | | (581,318 | ) |
| 2022 | | 142,083 |
| | (696,328 | ) | | (554,245 | ) |
| Thereafter | | 592,733 |
| | (2,434,472 | ) | | (1,841,739 | ) |
| | | $ | 1,400,713 |
| | $ | (6,253,464 | ) | | $ | (4,852,751 | ) |
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
Note 7 –9. Property, plantPlant and equipmentEquipment, net
Property, plant and equipment at December 31, 20172023 and 20162022 consisted of the following:
| | | | Estimated Useful Life (in Years) | | 2017 | | 2016 |
| Estimated Useful
Life (in Years) | | | Estimated Useful
Life (in Years) | | 2023 | | 2022 |
| Energy systems | 1 - 15 years | | $ | 12,466,642 |
| | $ | — |
|
| Machinery and equipment | 5 - 7 years | | 1,215,951 |
| | 1,009,893 |
|
| Furniture and fixtures | 5 years | | 205,320 |
| | 141,874 |
|
| Computer software | 3 - 5 years | | 115,253 |
| | 102,415 |
|
| Leasehold improvements | * | | 440,519 |
| | 437,341 |
|
| | | | 14,443,685 |
| | 1,691,523 |
|
| Less - accumulated depreciation and amortization | | | (2,177,974 | ) | | (1,174,380 | ) |
| Net property, plant and equipment | | | $ | 12,265,711 |
| | $ | 517,143 |
|
* Lesser of estimated useful life of asset or lease term
Depreciation and amortization expense on property and equipment for the years ended December 31, 20172023 and 20162022 was $1,114,540$454,859 and $165,695,$501,418, respectively. During the year ended December 31, 2023, we received proceeds of $34,655 from the disposition of certain assets and reversed $8,687 of accrued decomissioning costs from a former ADG energy site, realizing a gain of $36,207. During the year ended December 31, 2022 , we received proceeds of $72,655 from the disposition of certain assets, realizing a gain of $41,931.
During the year ended December 31, 2022, we determined that three of the ADGE customer contracts terminated due to the customers failure to perform their obligations pursuant to the contractual agreements and deemed the assets related to the contracts at these sites to be impaired. We recorded a non-cash impairment of $156,655 which is included in the consolidated statement of operations for the year ended December 31, 2022, within long-lived asset impairment.
During the year ended December 31, 2023 there were no ADGE contract terminations.
Note 8.10. Goodwill
Changes in the carrying amount of goodwill by reportable segment during the yearyears ended December 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Products | | Services | | Energy Production | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at December 31, 2021 | $ | 40,870 | | | $ | — | | | $ | 2,365,286 | | | $ | 2,406,156 | |
| Impairment | — | | | — | | | — | | | — | |
| Balance at December 31, 2022 | 40,870 | | | — | | | 2,365,286 | | | 2,406,156 | |
| Impairment | — | | | — | | | — | | | — | |
| Acquired | — | | | 337,268 | | | — | | | 337,268 | |
| Balance at December 31, 2023 | $ | 40,870 | | | $ | 337,268 | | | $ | 2,365,286 | | | $ | 2,743,424 | |
We performed a goodwill impairment test at December 31, 2023 and determined that the estimated fair value of the of the assets, based on a discounted cash flow analysis, exceeded the carrying value of the assets and did not record a goodwill impairment for the year 2023.
See Note 6. "Sale of Energy Producing Assets and Goodwill Impairment" and Note 5. "Aegis Contract and Related Asset Acquisition" for further discussion.
|
| | | | | | | | | | | |
| | Product and Service | | Energy Production | | Total Company |
| Balance at December 31, 2016 | $ | 40,870 |
| | $ | — |
| | $ | 40,870 |
|
| Acquisitions | — |
| | 13,324,785 |
| | 13,324,785 |
|
| Balance at December 31, 2017 | $ | 40,870 |
| | $ | 13,324,785 |
| | $ | 13,365,655 |
|
SeeNote 4."Acquisition of American DG Energy Inc." for discussion of acquisition of goodwill.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20172023 and 2016
2022
Note 9 – Convertible debentures and loan due to related party11. Related Party Notes
On December 23, 2013, the CompanyOctober 9, 2023, we entered into note subscription agreements with each of John N. Hatsopoulos, a Senior Convertible Promissory Note (the "Note")director and principal shareholder of registrant, and Earl R. Lewis, III, a director of registrant, pursuant to which Mr. Hatsopoulos agreed to provide financing to us of up to $1 million, and Mr. Lewis agreed to provide financing to us of $500,000, and potentially, an additional $500,000 at his discretion. We have the right to determine the amount of the loans at the time of a draw down, subject to the conditions in our agreements with Michaelson Capital Special Finance Fund LP, ("Michaelson"), foreach of Mr. Hatsopoulos and Mr. Lewis discussed below. The loans and terms of the loan agreements were unanimously approved by our board of directors.
The loans bear interest on the outstanding principal at the Internal Revenue Service’s Applicable Federal Rate to be determined at the time we issue a promissory note in connection with a loan drawdown. The principal amount and accrued interest of each loan is repayable one year from the date of issuance of the applicable promissory note. A note may be prepaid by us at any time. The principal amount of $3,000,000 witheach loan and accrued interest is subject to mandatory prepayment in the event of a change of control of the registrant. The promissory notes are subject to customary events of default and are transferable provided the conditions to transfer set forth in the promissory notes are satisfied by the noteholder. The proceeds of the loans are expected to be used for general working capital purposes.
On October 10, 2023, we issued a promissory note and borrowed $500,000 from Mr. Hatsopoulos. The loan bears interest at 4%5.12% per annum for a termannum. At December 31, 2023 our obligation to Mr. Hatsopoulos under the promissory note, inclusive of three years.$5,505 of accrued and unpaid interest, was $505,505. On April 1, 2016, the CompanyMarch 21, 2024, John H. Hatsopoulos amended the Note increasing the total principal amount to $3,150,000 increasing the conversion price to $3.54 from $3.37, and extending the term until December 23, 2018. The amended Note was a senior secured obligation which paid interest only on a monthly basis in arrears at a rate of 4% per annum, unless earlier converted in accordance with the terms of the agreement prior to such date. The Note was secured by an all asset lien and was senior in right of payment to any unsecured indebtedness that is expressly subordinated in right of payment to the Note.
On December 14, 2017, the Company, through principal payment of $3,150,000 to Michaelson (the "Payment"), terminated the Senior Convertible Promissory Note with Michaelson. Through the Note, Michaelson was the Company's principle debt holder and a beneficial holder of approximately 5% of the Company's shares outstanding. There were no pre-payment penalties paid by the Company, as Michaelson provided a waiver of the pre-payment penalties that were contained in the Note. By completing the Payment, the Company has satisfied all of its obligations under the Note and the Note was cancelled. Below is a summary of the terms of the Note, as amended.
The Company could prepay all of the outstanding principal and interest due and payable under this Note in full, at any time prior topromissory note, dated October 10, 2023, extending the maturity date for an amount equalby one year, making the maturity date October 10, 2025 and agreeing to 120% of the then outstanding principal and interest due and payable as of the date of such prepayment.accept payment in cash or Tecogen Inc. common stock.
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.
See Note 18. "Subsequent events" for discussion regarding a Summary of Proposed Terms and Conditions with a bank for a senior revolving credit facility of up to $10 million.
Note 10 –12. Commitments and contingenciesContingencies
Operating Lease Obligations
The Company leasesWe lease office space and warehouse facilities under various lease agreements which expire through March 2024. The Company subleases portions of its corporate offices and manufacturing facility to sub-tenants under annual sublease agreements, on a calendar year basis.January 2031. Total rent expense for the years ended December 31, 20172023 and 20162022 amounted to $700,335$812,515 and $691,769$811,664, respectively. See Note 14. "Leases" for further discussion.
Finance Lease Obligations
We lease motor vehicles under a master vehicle lease agreement, effective December 19, 2023, which expire through December 2028. See Note 14. "Leases" for further discussion.
Legal Matters
On November 23, 2022, we were served with a suit filed against us on August 24, 2022 in the Ontario Superior Court of Justice by The Corporation of the Town of Milton, Milton Energy Generation Solutions Inc. and Milton Hydro Distribution Inc (the "Plaintiffs"), offset by $34,995 and $63,842all of whom are municipal corporations incorporated in rent paid by sub-lessees, to both related and unrelated parties,the Province of Ontario. The plaintiffs sued for a netdamages in the amount of $665,340CDN $1,000,000, pre-judgment and $627,927, respectively.
The Company leased one passenger vehicle underpost-judgment interest, legal fees, and any further relief the court may deem, alleging breach of contract, breach of warranty, negligent misrepresentations and nuisance. Plaintiffs allege that on or about July 10, 2022, a lease agreement expiring in 2018. Vehicle rent expense amountedTecogen cogenerator installed by us at the plaintiffs facility caught fire, causing damage to $1,571the cogenerator and $6,918 duringthe plaintiff's facility. We have filed a response denying liability and are being represented by Canadian counsel. For the year ended December 31, 20172022, we reserved $150,000 for anticipated damages which may not be covered by our insurance and 2016, respectively.continue to maintain the reserve at December 31, 2023.
Future minimum lease payments under all non-cancelable operating leasesGuarantees
In connection with the sale of energy producing assets, we made certain guarantees to the purchaser as discussed in Note 5. "Sale of Energy Producing Assets and Goodwill Impairment." Based upon an analysis of these energy producing assets expected future performance, as of December 31, 2017 consist2023 we do not expect to make any material payments under the guarantee.
Change in Control Severance Benefit Plan
On July 9, 2020, our compensation committee of the following:board of directors adopted the Tecogen Inc. Change in Control Severance Benefit Plan ("Plan"). The Plan provides for up to 12 months of severance benefits for certain of our key management employees who are selected as plan participants by the plan administrator and who have executed a Change in Control Severance Benefit Plan Participation Notice. On July 9, 2020, Robert A. Panora, our President and Chief Operating Officer, and John K. Whiting, IV, our General Counsel and Secretary, were each designated as participants in the Plan.
Under the Plan, upon the occurrence of certain termination events following a change in control of the Company, the executive participants would receive cash severance payments equal to 12 months’ salary and bonus payments, continuation of certain health benefits, the acceleration of bonus awards, and immediate vesting of outstanding unvested options (including
|
| | | | |
| Years Ending December 31, | | Amount |
| 2018 | | $ | 588,021 |
|
| 2019 | | 511,382 |
|
| 2020 | | 513,742 |
|
| 2021 | | 521,375 |
|
| 2022 | | 529,115 |
|
| 2023 and thereafter | | 671,553 |
|
| Total | | $ | 3,335,188 |
|
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20172023 and 20162022
Guarantees
performance options) to acquire our common stock. The Company guarantees certain obligationsseverance payments are required to be paid in a single lump sum. The Plan has a term of three years and will automatically extend for successive additional one-year terms unless we provide written notice at least six months in advance of a former subsidiarythen current term.
An executive will be entitled to severance under the Plan only if there has been a “Change in Control” of ADGE, 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 December 31, 2017 of approximately $286,500 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 thereand the termination of employment or service occurs during the period that is three months prior to and 18 months following a change in control of the Company. Also, a participant's employment with the Company may be any amounts probable of paymentterminated by a participant for “Good Reason” or be an “Involuntary Termination Without Cause” by the Company, as those terms are defined in the Plan. In order to be eligible to receive severance benefits under anythe Plan, an executive must comply with the terms of the guarantees and has estimatedPlan, including the value associated with the non-contingent aspectrelease of claims in favor of the guarantees is approximately $10,000 which is recorded as a liability inCompany and certain confidentiality, non-compete, non-solicitation, and non-disparagement covenants during and following termination of employment. The Plan will be administered by the accompanying financial statements.
Legal Proceedings
The Company is a party to a pending action in the United States District Court for the District of Massachusetts, described below, related to the Merger.
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 behalfcompensation committee of the board of directors (or by the full board of directors or such other shareholders of ADGEcommittee 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.board may designate).
United States District Court Action
On or about February 15, 2017, a lawsuit was filed in the United States District Court for the District of Massachusetts by Lee Vardakas (“Vardakas”), individually and on behalf of other stockholders of ADGE, naming ADGE, John N. Hatsopoulos, George N. Hatsopoulos, Benjamin Locke, Charles T. Maxwell, Deanne M. Petersen, Christine M. Klaskin, John Rowe, Joan Giacinti, Elias Samaras, Tecogen., Merger Sub., and Cassel Salpeter and Co., LLC, as defendants. The action is captioned Vardakas v. American DG Energy, Inc., Case No. 17-CV-10247(LTS). At the time Vardakas commenced the action, his complaint challenged the proposed Merger between Tecogen and ADGE.
Following the consummation of the Merger (and the appointment of May, from the Massachusetts Superior Court Action, as lead plaintiff), Vardakas filed an Amended Class Action Complaint (the “Amended Complaint”). The Amended Complaint discontinued the claims against Cassel Salpeter & Co., LLC but asserted against the remaining defendants claims under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 14a-9; claims against certain defendants for control person liability under § 20(a) of the Exchange Act (collectively, the “Federal Securities Law Claims”); and common law claims for breach of fiduciary duty and aiding and abetting (the “State Law Claims”). The Federal Securities Law Claims allege, in substance, that defendants made material nondisclosure in the proxy statement about the process leading to the Merger and about the fairness opinion relied upon by ADGE’s Board of Directors in recommending the Merger to shareholders. The State Law Claims assert, in substance, that defendants breached their fiduciary duties in negotiating and approving the Merger, which, plaintiff claims, deprived ADGE’s non-affiliated shareholders of fair value for their shares.
On July 19, 2017, defendants moved to dismiss the Amended Complaint. In their motion filings, defendants contend that the Federal Securities Law Claims are not sufficiently pleaded and fail to state a viable claim. Defendants also assert that if the Federal Securities Law Claims are dismissed, the district court must also dismiss the State Law Claims because it would lack subject matter jurisdiction.
On February 28, 2018 the parties presented their oral arguments on the defendant's motion to dismiss. On March 2, 2018 the district court rendered its decision, dismissing the Federal Securities Law Claims, but retaining the State Law Claims. The district court exercised supplemental jurisdiction over the State Law Claims and ordered the Defendants to file an answer to the Amended Complaint addressing the State Law Claims. On March 12, 2018 the Defendants filed their answer.
The Company believes that the lawsuit is without merit and intends to defend vigorously. The Amended Complaint does not specify the amount of damages claimed and the likelihood of an unfavorable outcome is not reasonably estimable.
Note 11 –13. Product warrantyWarranty
The Company reservesWe reserve an estimate of itsour exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The majority of the Company’sour products carryare sold with a one-year warranty. The CompanyWe assesses the adequacy of itsour recorded warranty liability annuallyperiodically and adjustsadjust the amountreserve as necessary. The warranty liability is included in accrued expenses on the accompanying consolidated balance sheets.
Changes in the Company’sour warranty reserve were as follows:
| | | | | |
| Warranty reserve, December 31, 2021 | $ | 164,800 | |
| Warranty provision for units sold | 208,730 | |
| Costs of warranty incurred | (235,730) | |
| Warranty reserve, December 31, 2022 | 137,800 | |
| Warranty provision for units sold | 286,391 | |
| Costs of warranty incurred | (282,191) | |
| Warranty reserve, December 31, 2023 | $ | 142,000 | |
|
| | | |
| Warranty reserve, December 31, 2015 | $ | 110,000 |
|
| Warranty provision for units sold | 169,180 |
|
| Costs of warranty incurred | (131,180 | ) |
| Warranty reserve, December 31, 2016 | 148,000 |
|
| Warranty provision for units sold | 128,100 |
|
| Costs of warranty incurred | (142,600 | ) |
| Warranty reserve, December 31, 2017 | $ | 133,500 |
|
Note 14. Leases
Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing, and storage facilities. Effective December 19, 2023, we entered into a master finance lease agreement for motor vehicles.
At inception, we determine if an arrangement constitutes a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of our lease agreements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). We account for each component separately based on the estimated standalone price of each component.
Operating Leases
Operating leases are included in Right-of-use assets, Lease obligations, current and Long-term liabilities - Lease obligations, net of current portion, on the condensed consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term and using an incremental borrowing rate consistent with the lease terms or implicit rates, when readily determinable. For those leases where it is reasonably certain at the commencement date that we will exercise the option to extend the lease, then the lease term will include the lease extension term. Short-term operating leases, which have an initial term of 12 –months or less, are not recorded on the balance sheet.
Lease expense for operating leases, which principally consists of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Operating lease expense for the years ended December 31, 2023 and 2022 was $812,515 and $811,664, respectively. Lease expense for finance leases, consisting of fixed payments for base rent and initial costs for the year ended December 31, 2023 was $2,338.
Supplemental information related to operating leases for the years ended December 31, 2023 and 2022 was as follows:
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
| | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 743,849 | | | $ | 733,284 | |
| Right-of-use assets obtained in exchange for operating lease liabilities | | $ | 148,093 | | | $ | — | |
| Weighted-average remaining lease term - operating leases | | 4.6 Years | | 3.6 Years |
| Weighted-average discount rate - operating leases | | 6.4 | % | | 6.0 | % |
Finance Leases
Finance leases are included in Right-of-use assets, Lease obligations, current and Long-term liabilities - Lease obligations, net of current portion, on the condensed consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term and using an incremental borrowing rate consistent with the lease terms or implicit rates, when readily determinable. For those leases where it is reasonably certain at the commencement date that we will exercise the option to extend the lease, then the lease term will include the lease extension term. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Supplemental information for finance leases for the year ended December 31, 2023 is as follows:
| | | | | | | | |
| | December 31, 2023 |
| Right-of-use assets obtained in exchange for finance lease liabilities | $ | 200,187 | |
| Weighted-average remaining lease term - finance leases | 5.0 years |
| Weighted-average discount rate - finance leases | 10.4 | % |
Supplemental balance sheet information related to operating leases for the years ended December 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | |
| | December 31, 2023 | | December 31, 2022 |
| Operating leases | | | | |
| Right-of-use assets | | $ | 743,096 | | | $ | 1,245,549 | |
| | | | |
| Operating lease liability, current | | $ | 248,933 | | | $ | 687,589 | |
| Operating lease liability, long-term | | 523,660 | | | 623,452 | |
| Total operating lease liability | | $ | 772,593 | | | $ | 1,311,041 | |
Supplemental balance sheet information related to finance leases for the year ended December 31, 2023 is as follows:
| | | | | | | | |
| | December 31, 2023 |
| Finance leases | | |
| Right-of-use assets - motor vehicles | | $ | 200,187 | |
| | |
| Finance lease liability, current | | $ | 40,540 | |
| Finance lease liability, long-term | | 159,647 | |
| Total finance lease liability | | $ | 200,187 | |
Future minimum lease commitments under non-cancellable operating and finance leases as of December 31, 2023 were as follows:
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases | | Total |
| 2024 | | $ | 292,168 | | | $ | 58,931 | | | $ | 351,099 | |
| 2025 | | 158,593 | | | 48,931 | | | 207,524 | |
| 2026 | | 147,606 | | | 48,931 | | | 196,537 | |
| 2027 | | 88,825 | | | 48,931 | | | 137,756 | |
| 2028 | | 87,137 | | | 48,931 | | | 136,068 | |
| Thereafter | | 117,004 | | | — | | | 117,004 | |
| Total lease payments | | 891,333 | | | 254,655 | | | 1,145,988 | |
| Less: imputed interest | | 118,740 | | | 54,468 | | | 173,208 | |
| Total | | $ | 772,593 | | | $ | 200,187 | | | $ | 972,780 | |
Operating Lease - Commencement date January 1, 2024
On March 31, 2023, we entered into two lease agreements for two adjoining buildings, located in Billerica, Massachusetts, containing approximately 26,412 square feet of manufacturing, storage and office space to serve as our headquarters and manufacturing facilities. The lease agreements provide for initial lease terms of five (5) years with two successive options to renew for additional terms of five (5) years. Both leases commence on January 1, 2024 and require payment of the base rent, real estate taxes, common maintenance expenses and aggregate deposits of $38,200. Our costs for initial improvements required to the leased premises is estimated to range between $500,000 and $750,000. The estimated straight-line monthly rent expense for the initial term of the lease is approximately $26,962 per month. In accordance with ASC 842-20-30-1, we will record the lease liability and right-of-use asset using the discount rate for the lease upon the lease commencement date, January 1, 2024.
Future minimum lease commitments under the two lease agreements which commenced on January 1, 2024 were as follows:
| | | | | | | | |
| | Operating Leases |
| 2024 | | $ | 310,341 | |
| 2025 | | 316,944 | |
| 2026 | | 323,547 | |
| 2027 | | 330,150 | |
| 2028 | | 336,753 | |
| Total lease payments | | 1,617,735 | |
| | |
| | |
Note 15. Stockholders’ equityEquity
Common Stock
Beginning on April 11, 2016, through its conclusion on May 3, 2016, the Company entered into numerous private placement share exchange agreements ("Share Exchange Agreements") with shareholders of Ilios ("Exchanging Shareholders"), a majority owned subsidiary of the Company. Pursuant to the Share Exchange Agreements, the Exchanging Shareholders agreed to exchange every 7.86 of their restricted Ilios shares of common stock for 1 share of the Company's restricted common stock. In addition, the Company granted each Exchanging Shareholder registration rights of the Company's common stock they received in exchange for their Ilios shares. The Company issued a total of 670,464 shares of its common stock in exchange for Ilios shares of common stock. Pursuant to the Registration Rights Agreement, the Company filed a registration statement covering the resale of the shares.
Upon execution of the exchange agreements for 100% of the shares of Ilios, the Company no longer had a non-controlling interest in its subsidiary. On April 30, 2016, Ilios was merged into the Company, and accounting for the noncontrolling interest in the subsidiary ended.
As discussed in Note 4. "Acquisition of American DG Energy Inc.", on May 18, 2017, the Company completed the acquisition of ADGE, by means of a stock-for-stock merger, of 100% of the outstanding common shares of ADGE in exchange for 4,662,937 shares of the Company's newly issued common stock.
The holders of our Common Stock have the right to vote their interest on a per share basis. At December 31, 20172023 and 2016,2022, there were 24,766,892 and 19,981,91224,850,261 shares of our Common Stock outstanding, respectively.outstanding.
Preferred Stock
On February 13, 2013, the Companywe authorized 10 million shares of preferred stock. As of December 31, 2017,2023, no preferred shares were issued or outstanding.
Warrants
In December 2015, 900,000 warrants were issued in conjunction with a private placement executed with the Ultra Emissions Joint Venture described in Note 15. In July 2016, the warrant holders exercised a total of 675,000 warrants with a $4.00 exercise price, resulting in cash proceeds of $2.7 million to the Company. The remaining 225,000 warrants expired on July 31, 2016. In conjunction with the Ultratek Joint Venture, the Board of Directors granted 250,000 warrants to Dr. Elias Samaras at $4.00 a share with an expiration date of December 28, 2017. The warrants granted to Dr. Samaras expired unexercised.
Stock-Based Compensation
The CompanyWe adopted the 2006 Stock Option and Incentive Plan (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.our consultants. 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 December 31, 2017,2023, and in June 2017 stockholders approved an amendment to extend the termination date of the Plan to January 1, 2026 and to ratify all Companyof our option grants madeissued after January 1, 2016 (the “Amended Plan”).
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
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
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of December 31, 20172023 and 20162022 was 2,123,747243,818 and 1,607,357,146,393, respectively.
In 20172023, there were no option grants issued under the CompanyPlan.
In 2022, we granted nonqualified options to purchase an aggregate of 45,000761,650 shares of common stock in a range of $3.22at $1.10 per share and $3.72$1.20 per share to certain officers and employees. These options have a vesting schedule of four years and expire in ten years. The fair value of the options issued in 20172023 was $41,113.$321,910. The weighted-average grant date fair value of stock options granted during 20172022 was $0.91$0.42 per option.share.
In 2016,We adopted the Company2022 Stock Incentive Plan (the "2022 Plan"), under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. We have reserved 3,800,000 shares of our common stock for issuance pursuant to awards under the 2022 Plan. The adoption of the 2022 Plan was approved by our shareholders on June 9, 2022.
Under the 2022 Plan, stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the 2022 Plan. The options are not transferable except by will or domestic relations order. The option price per share under the 2022 Plan cannot be less than the fair market value of the underlying shares on the date of the grant.
During the year ended December 31, 2023, we granted nonqualified options under the 2022 Plan to purchase an aggregate of 207,701575,000 shares of common stock forat prices between $0.79$0.88 per share and $4.27$1.10 per share to certain directors, officers and employees These options have a vesting schedule of two or four years and a director. Of theseexpire in ten years. The fair value of the options 82,701 fully vested options were issued in conjunction with2023 was $244,625. The weighted-average grant date fair value of stock options granted during 2023 was $0.43 per share.
During the mergeryear ended December 31, 2022, we granted nonqualified options under the 2022 Plan to purchase an aggregate of Ilios as replacement options for those previously granted Ilios options in Ilios. The remaining 125,000275,000 shares of common stock at prices between $1.00 per share and $1.41 per share to certain directors. These options have a vesting schedule of four years and expire in ten years. The fair value of the options issued in 20162022 was $236,315.$145,600. The weighted-average grant date fair value of stock options granted during 20162022 was $1.14$0.53 per option.share
The number of shares remaining available for future issuance under the 2022 Plan as of December 31, 2023 was 3,068,750.
In 2023 and 2022, there were no options exercised.
Stock option activity for the year ended December 31, 20172023 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, 2022 | 3,204,297 | | | $ | 0.71 | | — | $ | 10.33 | | | $ | 1.61 | | | 7.30 years | | $ | 882,074 | |
| Granted | 575,000 | | | $ | 0.88 | | — | $ | 1.10 | | | $ | 0.93 | | | | | |
| | | | | | | | | | | |
| Exercised | — | | | — | | | | | | |
| Canceled and forfeited | (141,175) | | | $ | 0.71 | | — | $ | 4.50 | | $ | 1.81 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Outstanding, December 31, 2023 | 3,638,122 | | | $ | 0.71 | | — | $ | 10.33 | | | $ | 1.49 | | | 6.70 years | | $ | 127,811 | |
| Exercisable, December 31, 2023 | 1,953,197 | | | | | | | $ | 1.95 | | | | | $ | 77,961 | |
| Vested and expected to vest, December 31, 2023 | 3,385,353 | | | | | | | $ | 1.53 | | | | | $ | 120,333 | |
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
|
| | | | | | | | | | | | | | |
| 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 | (122,043 | ) | | $0.79-$2.00 | | 1.47 |
| | | | |
|
| Canceled and forfeited | (135,447 | ) | | $2.60-30.33 | | 9.28 |
| | | | |
|
| Outstanding, December 31, 2017 | 1,061,552 |
| | $0.79-$18.15 | | $ | 3.60 |
| | 4.95 years | | $ | 291,449 |
|
| Exercisable, December 31, 2017 | 874,202 |
| | | | $ | 3.46 |
| | | | $ | 291,449 |
|
| Vested and expected to vest, December 31, 2017 | 1,033,450 |
| | | | $ | 3.58 |
| | | | $ | 291,449 |
|
Using the Company's historicalWe used a forfeiture rate of 15%, the table above uses said rate in to calculate the expected to vest calculation. The Company usesshares in the table above. We use the Black-Scholes option pricing model to determine the fair value of stock options granted. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the average volatility of four comparable publicly traded companies. The average expected life was estimated using the simplified method to determine the expected life based on the vesting period and contractual terms, since it doeswe do not have the necessary historical exercise data to determine an expected life for stock options. The Company usesWe use a single weighted-average expected life to value option awards and recognizesrecognize compensation on a straight-line basis over the requisite service period for each separately vesting portion of the awards. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant.
The weighted average assumptions used in the Black-Scholes option pricing model for options granted in 20172023 and 20162022 are as follows:
|
| | | | |
| Stock option awards: | | 2017 | | 2016 |
| Expected life | | 6.25 years | | 6.25 years |
| Risk-free interest rate | | 1.86% | | 1.22% |
| Expected volatility | | 23.10% | | 32.80% |
The Company granted restricted stock awards to its employees and directors. The performance based awards have vesting schedules of 25% or 33% per year beginning one year after the Company's IPO in 2014.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
Restricted stock activity for the year ended December 31, 2017 was as follows:
|
| | | | | | |
| | Number of Restricted Stock | | Weighted Average Grant Date Fair Value |
| Unvested, December 31, 2016 | 77,508 |
| | $ | 1.31 |
|
| Granted | — |
| | — |
|
| Vested | (34,587 | ) | | 1.31 |
|
| Forfeited | — |
| | — |
|
| Unvested, December 31, 2017 | 42,921 |
| | $ | 1.31 |
|
| | | | | | | | | | | | | | |
| Stock option award assumptions: | | 2023 | | 2022 |
| Expected dividend yield | | —% | | —% |
| Expected life | | 6.25 years | | 6.25 years |
| Risk-free interest rate | | 4.70% | | 2.17% |
| Expected volatility | | 38.49% | | 36.24% |
During the years ended December 31, 20172023 and 2016, the Company2022, we recognized stock-based compensation expense of $183,768$250,394 and $165,931,$334,149, respectively, related to the issuance of stock options and restricted stock.options. No tax benefit was recognized related to the stock-based compensation expense recorded during either of the years. At December 31, 20172023 and 2016,2022, the total compensation cost related to unvested restricted stock awards and stock option awards not yet recognized is $281,554$451,298 and $444,939,$500,059, respectively. This amountThe unvested stock compensation at December 31, 2023 will be recognized over a weighted average period of 1.572.77 years.
Note 13 –16. Fair value measurementsValue Measurements
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The CompanyWe currently doesdo not have any Level 1 financial assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company currently does not 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 December 31, 20172023 and 2022 by level within the fair value hierarchy.hierarchy:
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
| | | | Quoted prices in active markets for identical assets | |
| Total | |
| Total | |
| Total | | | Level 1 | | Level 2 | | Level 3 | | Unrealized gain (loss) |
| December 31, 2023 | |
| Recurring fair value measurements | |
| Recurring fair value measurements | |
| Recurring fair value measurements | |
| Available-for-sale equity securities | |
| Available-for-sale equity securities | |
| Available-for-sale equity securities | |
| EuroSite Power Inc. | |
| EuroSite Power Inc. | |
| EuroSite Power Inc. | |
| Total recurring fair value measurements | |
| | | December 31, 2017 | | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | |
| December 31, 2022 | |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total gains (losses) |
| December 31, 2022 | |
| | December 31, 2022 | |
| Recurring fair value measurements | |
| Recurring fair value measurements | |
| Recurring fair value measurements | | | | | | | | | |
| Available-for-sale equity securities | | | | | | | | | |
| Available-for-sale equity securities | |
| Available-for-sale equity securities | |
| EuroSite Power Inc. | |
| EuroSite Power Inc. | |
| EuroSite Power Inc. | $ | 354,251 |
| | $ | — |
| | $ | 354,251 |
| | $ | — |
| | $ | (165,317 | ) |
| Total recurring fair value measurements | $ | 354,251 |
| | $ | — |
| | $ | 354,251 |
| | $ | — |
| | $ | (165,317 | ) |
The Company utilizesWe utilize a Level 2 category fair value measurement to value itsour investment in EuroSite Power Inc. as an available-for-sale security at period end. That measurement is equal to the quoted market closing price at period end. Since this security is not actively traded we are classifying as Level 2.
The following table summarizes changes in Level 2 assets which are comprised of marketable equity securities for the years ended December 31, 2023 and 2022:
| | | | | |
| Fair value at December 31, 2021 | $ | 74,995 | |
| Unrealized gain | 18,749 | |
| Fair value at December 31, 2022 | $ | 93,744 | |
| |
| Fair value at December 31, 2022 | $ | 93,744 | |
| Unrealized gain | — | |
| Fair value at December 31, 2023 | $ | 93,744 | |
The following table presents the liability reported in the consolidated balance sheet measured at its fair value on a recurring basis as of December 31, 2023 and 2022 by level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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) |
| December 31, 2023 | | | | | | | | | |
| Recurring fair value measurements | | | | | | | | | |
| Contingent contract consideration | | | | | | | | | |
| Current | $ | 200,639 | | | $ | — | | | $ | — | | | $ | 200,639 | | | $ | — | |
| Long-term | 994,743 | | | — | | | — | | | 994,743 | | | — | |
| Total recurring fair value measurements | $ | 1,195,382 | | | $ | — | | | $ | — | | | $ | 1,195,382 | | | $ | — | |
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2023 and 2022
We utilize a Level 3 category fair value measurement to value the contingent consideration liability at period end since there are no quoted prices for this liabilities in non-active markets, there are no quoted prices for similar liabilities in active markets and there are no inputs that are observable for substantially the full term of the the liability. The contingent consideration calculation requires management to make estimates and assumptions that affect the reported amount of the liability.The contingent consideration is payable each calendar quarter through the earlier of the expiration or termination of the relevant maintenance agreements, or the seventh (7th) anniversary of the acquisition date. The consideration is equal to the product of the revenues collected in a calendar quarter multiplied by an applicable percentage. The agreement stipulates quarterly aggregate revenue targets and an applicable percentage, and provides for a higher applicable percentage if revenues exceed the target revenues. The applicable percentage ranges from 5% to 10% over the agreement term. On the date of acquisition, the fair value of the contingent consideration was calculated using a weighted average cost of capital of 15%, discounting the future cash flows to present value.
Note 14 –17. Retirement plansPlans
The Company hasWe have a defined contribution retirement plan (the “Plan”), which qualifies under Section 401(k) of the Internal Revenue Code (IRC). Under the Plan, employees meeting certain requirements may elect to contribute a percentage of their salary up to the maximum allowed by the IRC. The Company matchesWe matched a variable amount based on participant contributions up to a maximum of 4.5% of each participant’s salary. The Companysalary until May 2020 when we discontinued the matching of employee contributions for those employees not covered under a collective bargaining agreement. Effective July 1, 2023, we reinstituted the employer match based on participant contributions which are capped at a maximum of $250 per quarter and $1,000 per fiscal year. We contributed approximately $231,945$65,705 and $96,641$39,664 in matching contributions to the Plan in 20172023 and 2016,2022, respectively.
Note 15 – Related party transactions
The Company has two affiliated companies, namely Ultra Emissions Technologies S.ar.L, 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 ADGE for approximately $985,000. Tecogen sold the majority of this equipment to specific customers during the year and plans to sell the remainder in the coming year.
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 S.ar.L
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 S.ar.L, formerly known as "Ultra Emissions Technologies Limited" ("Ultratek"), was originally 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 non US 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"), to purchase shares of 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 decreased to 43%.
By unanimous written consent on October 24, 2017, the shareholders of Ultratek voted to dissolve Ultratek, thus terminating the joint venture agreement dated December 28, 2015 and the license agreement between the Company and Ultratek. This joint venture agreement and license agreement is described in its entirety on the Company's Form 8-K that was filed with the Securities and Exchange Commission on December 31, 2015.
Pursuant to the unanimous shareholder consent dissolving Ultratek, the Company received its full $2,000,000 investment in Ultratek upon the completion of the liquidation process. Further, upon termination of the license agreement all intellectual property immediately reverted to the Company. Upon dissolution, the Company purchased all of the remaining assets of Ultratek, including new intellectual property that Ultratek developed and other assets, for a total purchase price of $400,000. The net amount due from Ultratek as of December 31, 2017 and 2016 was $0 and $65,631, respectively.
TTcogen LLC
On May 19, 2016, the Company along with Tedom a.s., an unrelated corporation incorporated in the Czech Republic and a European combined heat and power product manufacturer ("Tedom"), entered into a joint venture, pursuant to which 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 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
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 2017 and 2016
the MicroCHP of 35kW to large 4,000kW plants. Tecogen agreed to refer all appropriate sales leads to TTcogen regarding the products agreed to by the parties, and Tecogen had 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 Company will not recognize any portion of such losses because the Company did not guarantee the obligations of the joint venture nor commit to provide funding to the joint venture.
On September 22, 2017, the Company notified Tedom and Tedom USA Inc., a Delaware subsidiary of Tedom (“Tedom USA”) that it was exercising its rights under the Joint Venture Agreement dated May 19, 2016 ("JVA") and the TTcogen LLC Operating Agreement ("LLC Operating Agreement"), to terminate the JVA and LLC Operating Agreement. This notice began the dissolution process under the LLC Operating Agreement. The Company is working with Tedom to wind up TTcogen as provided for in the JV Agreement and LLC Operating Agreement.
Revenue from sales of cogeneration and chiller systems, parts, installations and service to TTcogen during the years ended December 31, 2017 and 2016 amounted to $347,275 and $93,143, respectively. The amounts due to Tecogen from TTcogen and Tedom USA as of December 31, 2017 was $585,492 and $10,259, respectively. The amounts due to Tecogen from TTcogen and Tedom USA as of December 31, 2016 was $107,377 and $692, respectively. These amounts are recorded in the accompanying consolidated balance sheets as due from related parties.
During the years ended December 31, 2017 and 2016, the Company had a loan with John N. Hatsopoulos, the Co-Chief Executive Officer of both companies. Details of these transactions can be found in Note 9. "Convertible debentures and loan due to related party".
On December 23, 2013, the Company entered into a Senior Convertible Promissory Note with Michaelson Capital Special Finance Fund LP. On April 1, 2016, this note was amended to extend the maturity date and revise the security and conversion price. On December 14, 2017 the note was discharged. Details of this payoff and discharge can be found in Note 9. "Convertible debentures and loan due to related party".
John N. Hatsopoulos’ salary is $1.00 per year. On average, Mr. Hatsopoulos spends approximately 50% of his business time on the affairs of the Company; however such amount varies widely depending on the needs of the business and is expected to increase as the business of the Company develops.
The Company subleases portions of its corporate offices and manufacturing facility to sub-tenants under annual sublease agreements. For the years ended December 31, 2017 and 2016, the Company received $34,995 and $48,092, respectively, from ADGE pre-merger and others.
Note 16 –18. Segments
As of December 31, 2017, the Company was2023, we were organized into twothree operating segments through which senior management evaluates the Company’sour business. These segments, as described in more detail in Note 1,1. "Nature of Business and Operations", are organized around the products and services provided to customers and represent the Company’sour reportable segments. Prior to the acquisition of ADGE (see Note 4. "Acquisition of American DG Energy Inc."), the Company’sour operations were comprisedconsisted of a single segment.Thesegment. The following table presents information by reportable segment for the years ended December 31, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Products | | Services | | Energy Production | | Corporate, other and elimination (1) | | Total |
| Year ended December 31, 2023 | | | | | | | | | | |
| Revenue - external customers | | $ | 8,859,946 | | | $ | 14,523,054 | | | $ | 1,756,419 | | | $ | — | | | $ | 25,139,419 | |
| Intersegment revenue | | — | | | 306,652 | | | — | | | (306,652) | | | — | |
| Total revenue | | $ | 8,859,946 | | | $ | 14,829,706 | | | $ | 1,756,419 | | | $ | (306,652) | | | $ | 25,139,419 | |
| Gross profit | | $ | 2,936,850 | | | $ | 6,613,852 | | | $ | 650,916 | | | $ | — | | | $ | 10,201,618 | |
| Identifiable assets | | $ | 8,990,275 | | | $ | 12,802,651 | | | $ | 3,269,013 | | | $ | 2,730,690 | | | $ | 27,792,629 | |
| | | | | | | | | | |
| Year ended December 31, 2022 | | | | | | | | | | |
| Revenue - external customers | | $ | 11,156,099 | | | $ | 12,060,661 | | | $ | 1,785,854 | | | $ | — | | | $ | 25,002,614 | |
| Intersegment revenue | | — | | | 310,816 | | | — | | | (310,816) | | | — | |
| Total revenue | | $ | 11,156,099 | | | $ | 12,371,477 | | | $ | 1,785,854 | | | $ | (310,816) | | | $ | 25,002,614 | |
| Gross profit | | $ | 3,742,779 | | | $ | 6,535,168 | | | $ | 788,864 | | | $ | — | | | $ | 11,066,811 | |
| Identifiable assets | | $ | 10,434,727 | | | $ | 9,854,279 | | | $ | 3,744,913 | | | $ | 4,218,938 | | | $ | 28,252,857 | |
| (1) Corporate, intersegment revenue, other and elimination includes various corporate assets. |
|
|
| | | | | | | | | | | | | | | | |
| | | Products and Services | | Energy Production | | Corporate, other and elimination (1) | | Total |
| Year ended December 31, 2017 | | | | | | | | |
| Revenue - external customers | | $ | 29,368,726 |
| | $ | 3,833,940 |
| | $ | — |
| | $ | 33,202,666 |
|
| Intersegment revenue | | 750,692 |
| | — |
| | (750,692 | ) | | — |
|
| Total revenue | | 30,119,418 |
| | 3,833,940 |
| | (750,692 | ) | | 33,202,666 |
|
| Gross profit | | 11,154,982 |
| | 1,799,422 |
| | — |
| | 12,954,404 |
|
| Identifiable assets | | 24,234,505 |
| | 26,436,571 |
| | — |
| | 50,671,076 |
|
| | | | | | | | | |
| Year ended December 31, 2016 | | | | | | | | |
| Revenue - external customers | | $ | 24,490,386 |
| | $ | — |
| | $ | — |
| | $ | 24,490,386 |
|
| Intersegment revenue | | — |
| | — |
| | — |
| | — |
|
| Total revenue | | 24,490,386 |
| | — |
| | — |
| | 24,490,386 |
|
| Gross profit | | 9,300,678 |
| | — |
| | — |
| | 9,300,678 |
|
| Identifiable assets | | 15,674,327 |
| | — |
| | 8,067,034 |
| | 23,741,361 |
|
F- 28
(1) Corporate, intersegment revenue, other and elimination includes various corporate assets.
TECOGEN INC.
Notes to Audited Consolidated Financial Statements for December 31, 20172023 and 20162022
Note 17 –19. Income taxesTaxes
A reconciliation of the federal statutory income tax provision to the Company'sour actual provision for the years ended December 31, 20172023 and 20162022 is as follows:
| | | | | | 2017 | | 2016 |
| Pre-tax book income (loss) | Pre-tax book income (loss) | | $ | 97,697 |
| | $ | (1,161,245 | ) |
| Expected tax at 34% | | 33,217 |
| | (394,823 | ) |
| Pre-tax book income (loss) | |
| Pre-tax book income (loss) | |
| Expected tax at 21% | |
| Expected tax at 21% | |
| Expected tax at 21% | |
| | | | | |
| Permanent differences: | Permanent differences: | | | | |
| | Machinery & equipment | | 10,888 |
| | 5,459 |
|
| Permanent differences: | |
| | Permanent differences: | |
| | Mark to market | |
| | Mark to market | |
| | Mark to market | |
| Intangible amortization | |
| Intangible amortization | |
| Intangible amortization | |
| | Other | |
| | Other | |
| | Other | |
| | State taxes: | |
| | State taxes: | |
| | State taxes: | |
| Current | |
| Current | |
| Current | |
| Deferred | |
| Deferred | |
| Deferred | |
| | Other items: | |
| | Other items: | |
| | Other items: | |
| Federal research and development credits | |
| Federal research and development credits | |
| Federal research and development credits | |
| Deferred tax past year true-up's | |
| Deferred tax past year true-up's | |
| Deferred tax past year true-up's | |
| Change in valuation allowance | |
| Change in valuation allowance | |
| Change in valuation allowance | |
| Capitalized research and development expenses | |
| Capitalized research and development expenses | |
| Capitalized research and development expenses | |
| | Stock compensation | | (179,084 | ) | | — |
|
| | Non-deductible interest | | 10,788 |
| | — |
|
| | Other | | 26 |
| | 754 |
|
| | | | | |
| State taxes: | | | | |
| Other | |
| | Current | | — |
| | — |
|
| | Deferred | | (24,960 | ) | | (96,754 | ) |
| | | | | |
| Other items: | | | | |
| Other | |
| | Federal research and development credits | | (33,406 | ) | | (15,996 | ) |
| | Change in valuation allowance | | 277,000 |
| | 96,754 |
|
| | Deferred tax past year true-up's | | 191,355 |
| | (8,584 | ) |
| | ADGE deferred tax assets and liabilities at purchase | | (3,702,013 | ) | | — |
|
| | ADGE other post-closing adjustments | | (1,330,665 | ) | | — |
|
| | Change in statutory tax rate for deferred tax assets-Federal | | 4,914,329 |
| | — |
|
| | Change in statutory tax rate for deferred tax assets-State | | (167,475 | ) | | — |
|
| Unbenefitted operating losses | | — |
| | 413,190 |
|
| Other | |
| Income tax provision | Income tax provision | | $ | — |
| | $ | — |
|
| Income tax provision | |
| Income tax provision | |
The components of net deferred tax assets recognized in the accompanying consolidated balance sheets at December 31, 20172023 and 20162022 are as follows:
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Net operating loss carryforwards | $ | 10,840,000 | | | $ | 9,812,000 | |
| R&D and ITC credit carryforwards | 403,000 | | | 310,000 | |
| Accrued expenses and other | 381,000 | | | 317,000 | |
| Intangibles | 486,000 | | | 342,000 | |
| Leases | 8,000 | | | 17,000 | |
| Accounts receivable | 39,000 | | | 96,000 | |
| Stock options | 450,000 | | | 386,000 | |
| Inventory | 427,000 | | | 366,000 | |
| Property, plant and equipment | 650,000 | | | 705,000 | |
| Other | 323,000 | | | 342,000 | |
| Deferred tax assets | 14,007,000 | | | 12,693,000 | |
| Valuation allowance | (14,007,000) | | | (12,693,000) | |
| Deferred tax assets, net | $ | — | | | $ | — | |
|
| | | | | | | |
| | 2017 | | 2016 |
| Net operating loss carryforwards | $ | 7,429,000 |
| | $ | 6,885,000 |
|
| R&D and ITC credit carryforwards | 203,000 |
| | 145,000 |
|
| Accrued expenses and other | 879,000 |
| | 1,740,000 |
|
| Accounts receivable | 6,000 |
| | 11,000 |
|
| Inventory | 73,000 |
| | 208,000 |
|
| Property, plant and equipment | 801,000 |
| | 125,000 |
|
| Deferred tax assets | 9,391,000 |
| | 9,114,000 |
|
| Valuation allowance | (9,391,000 | ) | | (9,114,000 | ) |
| Deferred tax assets, net | $ | — |
| | $ | — |
|
At December 31, 2017, the Company2023, we had approximately $30,982,000$38,710,000 of Federal Loss Carryforwards thatnet operating loss carryforwards ("NOL") of which $1,547,000 expired as of December 31, 2023, $22,393,000 expire beginning in the year 20212024 through 2037.2039 and $16,317,000 have an indefinite carryforward. In addition, the Company has varying amountswe have $27,190,000 of state net operating losses, expiring at various dates starting in 20182024 through 2037.2042.
The Tax Cuts and Jobs Act was enacted on December 22, 2017. A significant provision of the act was to reduce the statutory Federal tax rate from 34% to 21%. During 2017, the Company’s2023, our valuation allowance increased by $277,000.$1,314,000. This increase is net of a $4,747,000 decrease attributable
TECOGEN INC.
Notes to the reduction in tax rates,Audited Consolidated Financial Statements for December 31, 2023 and was otherwise significantly 2022
affected by the absorption of deferred tax attributes associated with its acquisition of American DG Energy, Inc.
TECOGEN INC.
Notes along with permanent book to Audited Consolidated Financial Statements for December 31, 2017tax differences and 2016
provision to return adjustments.
In accordance with the provisions of the Income Taxes topic of the Codification, the Company haswe have evaluated the positive and negative evidence bearing upon the realizability of itsour deferred tax assets, which are comprised principally of net operating losses. Management has determined that it is more likely than not that the Companywe will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance has been established for 20162022 and 20172023, respectively.
Utilization of the NOL and research and development credit carryforwards are subject to a substantial annual limitation due to ownership changes, as provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state provisions. Ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.
The Company We acquired a new subsidiary, American DG Energy, Inc. during 2017, by acquiring 100 percent of the company's stock. Accordingly, utilization of their consolidated and/or separately computed NOL and/or tax credit carryforwards will be subject to an annual limitation under Internal Revenue Code Section 382. Any such limitation may
result in expiration of a portion of the NOL or tax credit carryforwards before utilization. The extent of the limitation, and related allocation and impact upon the NOL and credit carryforwards has not been determined as ofto be $391,940 per year for a 20 year period at the financial statement reporting date.
ADGE level. However, we have sufficient pre-merger NOLs to offset anticipated taxable income for the taxable year ended December 31, 2023 and do not expected to be limited in NOL utilization for the period.
A full valuation allowance has been provided against the Company'sour loss carryforwards and, if an adjustment is required under Section 382, it would be offset by a corresponding adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations if an adjustment were required.
The Company hasWe have not recorded any amounts for unrecognized tax benefits as of December 31, 20172023 or 2016.2022.
The Company filesWe file tax returns as prescribed by the tax laws of the jurisdiction in which it operates.we operate. In the normal course of business, the Company iswe are subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company is thus still open to examinationOur tax returns from tax year 20142020 are still open for examination for both federal and state jurisdictions.
Note 18 –20. Subsequent eventsEvents
On February 26, 2018, the Company signed a Summary of Proposed Terms and Conditions ("Term Sheet") with a bank, which, upon successful due diligence and the successful execution of a loan agreement, is expected to provide a senior revolving credit facility of up to $10 million to provide working capital to the Company for a period of three years, with interest at LIBOR plus 3.0%.
The Company hasWe have evaluated subsequent events through the date of this reportfiling, and, except as described below, have determined that there are no additionalmaterial subsequent events that have occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.thereto for the period ended December 31, 2023.
On February 1, 2024, Tecogen and Aegis amended the March 15, 2023 agreement ("Agreement") with Aegis Energy Services, LLC (“Aegis”) to add eighteen (18) additional maintenance contracts (the "Amendment"). The Amendment includes an undertaking by Aegis to use commercially reasonable efforts to support and assist our execution of maintenance service agreements for an additional thirty-six (36) cogeneration units sold to customers by Aegis. See Note 5."Aegis Contract and Related Asset Acquisition" of the Notes to the Consolidated Financial Statements.
On March 21, 2024, John H. Hatsopoulos amended the terms of the Promissory Note, dated October 10, 2023, extending the maturity date by one year, making the maturity date October 10, 2025 and agreeing to accept payment in cash or Tecogen Inc. common stock.
