Note 1 – Description of business and summary of significant accounting policies
Description of business
Tecogen Inc. (the “Company”) (a Delaware Corporation) was organized on November 15, 2000, and acquired the assets and liabilities of the Tecogen Products division of Thermo Power Corporation. The Company produces commercial and industrial, natural-gas-fueled engine-driven, combined heat and power (CHP) products that reduce energy costs, decrease greenhouse gas emissions and alleviate congestion on the national power grid. The Company’s products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. The majority of the Company’s customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast. The Company's common stock is listed on the NASDAQ under the ticker symbol TGEN.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and notes necessary for a complete presentation of our financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. We filed audited financial statements which included all information and notes necessary for such presentation for the two years ended
December 31, 2013
in conjunction with our
2013
Annual Report on Form 10-K, or our Annual Report, filed with the Securities and Exchange Commission, or SEC, on March 31, 2014 and amended on April 1, 2014. This form 10-Q should be read in conjunction with our Annual Report.
The accompanying unaudited consolidated balance sheets, statements of operations and statements of cash flows reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of financial position at
June 30, 2014
, and of operations and cash flows for the interim periods ended
June 30, 2014
and
2013
. The results of operations for the interim periods ended
June 30, 2014
are not necessarily indicative of the results to be expected for the year.
The accompanying consolidated financial statements include the accounts of the Company and its
65.0%
owned subsidiary Ilios, whose business focus is on advanced heating systems for commercial and industrial applications. With the inclusion of unvested restricted stock awards, the Company's owns
63.7%
of Ilios. Non controlling interest in the accompanying consolidated balance sheets represents the ownership of minority investors of Ilios.
The Company’s operations are comprised of
one
business segment. Our business is to manufacture and support highly efficient CHP products based on engines fueled by natural gas.
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.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred 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.
Infrequently, the Company recognizes revenue in certain circumstances before delivery has occurred (commonly referred to as bill 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 are granted. For the
six months ended
June 30, 2014
and
2013
no revenues were recorded as bill and hold transactions.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
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 related to the delivered item and 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 fair value 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, regardless of the percentage of completion. During the
six months ended
June 30, 2014
and
2013
, a loss of approximately
$217,000
and
$300,000
was recorded, respectively. These losses were recorded during the period ended March 31, 2014 and 2013, and have not increased during the current period reported. 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.
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 sales revenue and the related freight costs as cost of sales.
Advertising Costs
The Company expenses the costs of advertising as incurred. For the
six months ended
June 30, 2014
and
2013
, advertising expense was approximately
$61,000
and
$42,000
, respectively. For the
three months ended
June 30, 2014
and
2013
, advertising expense was approximately
$13,000
for each period.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity date, at date of purchase, of three months or less to be cash and cash equivalents. The Company has 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 is not exposed to any significant credit risk on cash and cash equivalents.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. The Company's cash equivalents are placed with certain financial institutions and issuers. As of
June 30, 2014
, the Company had a balance of
$3,684,822
in cash and cash equivalents and short-term investments that exceeded the Federal Deposit Insurance Corporation’s (“FDIC”) general deposit insurance limit of
$250,000
.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
Short-Term Investments, restricted
Short-term investments consist of certificates of deposit with maturities of greater than three months but less than one year. Certificates of deposits are recorded at fair value and restricted as collateral to the Company's performance bonds.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experience and management’s evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off against the allowance when identified. At
June 30, 2014
and
December 31, 2013
the allowance for doubtful accounts was
$33,000
and
$103,800
, respectively. A reduction of
$70,800
in the allowance was offset by a reduction of $88,800 in the accounts receivable and an addition of $18,000 to the reserve.
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 net realizable value. The Company periodically reviews 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. At June 30, 2014 and December 31, 2013, inventory reserves were $300,000.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives 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.
Intangible Assets
Intangible assets subject to amortization include costs incurred by the Company to acquire developed technology in January of 2013, product certifications and certain patent costs. These costs are amortized on a straight-line basis over the estimated economic life of the intangible asset. The Company reviews intangible assets for impairment when the circumstances warrant.
Goodwill
The Company's goodwill was recorded as a result of the Company's asset acquisition in January of 2013. The Company has recorded this transaction using the acquisition method of accounting. The Company tests its recorded goodwill for impairment on an annual basis, or more often if indicators of potential impairment exist, by determining if the carrying value of the Company's single reporting unit exceeds its estimated fair value. Factors that could trigger an interim impairment test include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use 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. During the
first six months of 2014
the Company determined that no interim impairment test was necessary. Goodwill will be assessed for impairment at least annually or when there are indicators of potential impairment.
Common Stock
The Company's common stock was split one-for-four in a reverse stock split effective July 22, 2013. The effect of this reverse stock split has been retroactively applied to per share data and common stock information.
Impairment of long-lived assets
Long-lived assets 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 no impairment of long-lived assets existed as of
June 30, 2014
.
Off Balance Sheet Arrangements
On July 22, 2013, the Company’s Chief Executive Officer personally pledged to support a bank credit facility of $1,055,000 to support bank guarantees issued on certain construction contracts. This pledge was renewed on July 22, 2014 and will expire on July 22, 2015.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
Financial Instruments
The Company's financial instruments that are not recorded at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, related party demand notes payable and related party convertible debentures. The recorded values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values based on short-term nature. At June 30, 2014, the carrying value on the consolidated balance sheet of notes payable and convertible debentures approximates fair value based on current market rates for instruments with similar maturities adjusted for applicable credit risk.
Research and Development Costs/Grants
Internal research and development expenditures are expensed as incurred. Proceeds from certain grants and contracts with governmental agencies and their contractors to conduct research and development for new CHP technologies or to improve or enhance existing technology is recorded as an offset to the related research and development expenses. These grants and contracts are paid on a cost reimbursement basis provided in the agreed upon budget, with 10% retainage held to the end of the contract period. For the six months ended
June 30, 2013
, amounts received were approximately
$67,000
, which offset the Company’s total research and development expenditures of
$327,262
. For
the six months ended June 30,
2014
, no amounts were received from grants and contracts from governmental agencies to offset research and development costs.
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 consolidated statements of operations over the requisite service period. The fair value of stock options granted is estimated using the Black-Scholes option pricing valuation model. The Company recognizes compensation on a straight-line basis for each separately vesting portion of the option award. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The determination of the fair value of share-based payment awards is affected by the Company’s stock price. Prior to May 22, the Company had considered the sale price of common stock in the private placements to unrelated third parties as a measure of the fair value of its common stock. Effective May 22, the Company's common stock is traded on the NASDAQ Exchange, which is now considered the fair value of the Company's common stock. The average expected life is estimated using the simplified method for “plain vanilla” options. The simplified method determines the expected life in years based on the vesting period and contractual terms as set forth when the award is made. The Company uses the simplified method for awards of stock-based compensation since it does not have the necessary historical exercise and forfeiture data to determine an expected life for stock options. 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. When options are exercised the Company normally issues new shares (see “Note 4 – Stock-based compensation”.)
Loss per Common Share
The Company computes basic loss per share by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. The Company computes its diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the Company considers its 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. (See Note 2 - Loss per common share)
Other Comprehensive Net Loss
The comprehensive net loss for the
three and six month periods ended
June 30, 2014
and
2013
does not differ from the reported loss.
Segment Information
The Company reports segment data based on the management approach. The management approach designates the internal reporting that is used by management for making operating and investment decisions and evaluating performance as the source of the Company's reportable segments. The Company uses one measurement of profitability and does not disaggregate its business for internal reporting. The Company has determined that it operates in one business segment which manufactures and supports highly efficient CHP products based on engines fueled by natural gas.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
The following table summarizes net revenue by product line and services for the
three months ended
and
six months ended
June 30, 2014
and
2013
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Products
|
|
|
|
|
|
|
|
Cogeneration
|
$
|
1,419,581
|
|
|
$
|
457,486
|
|
|
$
|
2,573,850
|
|
|
$
|
1,735,642
|
|
Chiller
|
588,345
|
|
|
350,368
|
|
|
1,378,852
|
|
|
1,124,877
|
|
Total Product Revenue
|
2,007,926
|
|
|
807,854
|
|
|
3,952,702
|
|
|
2,860,519
|
|
Services
|
|
|
|
|
|
|
|
Service contracts
|
1,921,875
|
|
|
1,848,675
|
|
|
3,694,856
|
|
|
3,596,621
|
|
Installations
|
610,056
|
|
|
146,931
|
|
|
1,108,056
|
|
|
392,638
|
|
Total Service Revenue
|
2,531,931
|
|
|
1,995,606
|
|
|
4,802,912
|
|
|
3,989,259
|
|
Total Revenue
|
$
|
4,539,857
|
|
|
$
|
2,803,460
|
|
|
$
|
8,755,614
|
|
|
$
|
6,849,778
|
|
Income Taxes
The Company uses 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 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 follows the provisions of the accounting standards relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. The Company elected to recognize interest and penalties related to income tax matters as a component of income tax expense in the statements of operations. There was no impact on the financial statements as a result of this guidance.
Reclassification
Certain prior period balances have been reclassified to conform with current period presentation. As a result, installation revenue is broken out in the schedule of net revenue by product line and services above; in the prior period this revenue was included in services. Research and development expense is separated from general and administrative expense in this and prior periods.
Note 2 – Loss per common share
All shares issuable for both periods were anti-dilutive because of the reported net loss. Basic and diluted loss per share for the
six months ended
June 30, 2014
and
2013
, respectively, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Loss available to stockholders
|
$
|
(1,229,707
|
)
|
|
$
|
(1,090,480
|
)
|
|
$
|
(2,267,752
|
)
|
|
$
|
(1,950,873
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
15,227,089
|
|
|
13,205,476
|
|
|
15,013,824
|
|
|
13,209,165
|
|
Basic and diluted loss per share
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
Anti-dilutive shares underlying stock options outstanding
|
1,233,125
|
|
|
1,095,250
|
|
|
1,233,125
|
|
|
1,095,250
|
|
Anti-dilutive convertible debentures
|
555,556
|
|
|
75,806
|
|
|
555,556
|
|
|
75,806
|
|
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
Note 3 – Demand notes payable, convertible debentures and line of credit agreement to related parties
At
December 31, 2013
, demand notes payable and line of credit to related parties consisted of various demand notes outstanding to stockholders totaling
$2,950,000
. As of December 31, 2013, John N. Hatsopoulos, the company’s Chief Executive Officer, held all of the demand notes. The demand notes accrued interest annually at rates ranging from
5%
to
6%
. Unpaid principal and interest on the demand notes was due upon demand. The outstanding principal balance of these notes, together with accrued interest was paid during the three month period ended March 31, 2014.
On September 24, 2001, the Company entered into subscription agreements with three investors for the sale of convertible debentures in the aggregate principal amount of
$330,000
. The primary investors were George N. Hatsopoulos, a member of the board of directors, who subscribed for
$200,000
of the debentures and John N. Hatsopoulos, the Company’s Chief Executive Officer, who subscribed for
$100,000
of the debentures. The debentures accrue interest at a rate of
6%
per annum and were initially due
six
years from issuance date, and then amended to extend maturity to 2011. The debentures are convertible, at the option of the holder, into a number of shares of Common Stock as determined by dividing the original principal amount plus accrued and unpaid interest by a conversion price of
$1.20
. On September 24, 2011 the remaining holders of the Company's convertible debentures agreed to amend the terms of the debentures and extend the due date from September 24, 2011 to September 24, 2013.
On May 11, 2009 the Company sold
1,400,000
shares in Ilios at
$0.50
per share to George Hatsopoulos and John Hatsopoulos in exchange for the extinguishment of
$427,432
in demand notes payable,
$109,033
in convertible debentures and
$163,535
in accrued interest. The difference between the Company’s purchase price of the Ilios shares and the amount of debt forgiveness was recorded as additional paid-in capital.
On September 30, 2009, Joseph J. Ritchie elected to convert
$30,000
of the outstanding principal amount of the debenture, plus accrued interest of
$14,433
, into
37,028
shares of Common Stock at a conversion price of
$1.20
per share.
On September 30, 2012, certain holders of the debentures converted the principal amount of
$100,000
and accrued interest in the amount of
$6,100
into
85,242
shares of the Company's Common Stock. At December 31, 2012 there were
75,806
shares of common stock issuable upon conversion of the Company’s outstanding convertible debentures. At December 31, 2012, the principal amount of the Company’s convertible debentures was
$90,967
which was due on September 24, 2013.
On October 18, 2013, the remaining holder of the debentures, George N. Hatsopoulos, converted the principal balance of
$90,967
into
75,806
shares of the Company's common stock at a conversion price of
$1.20
per share. In addition, Mr. Hatsopoulos requested that the accrued interest earned in 2012 in the amount of
$6,913
be converted into
2,161
shares of the Company's common stock at a conversion price of
$3.20
per share and that the accrued interest earned on or after January 1, 2013 in the amount of
$4,367
be converted into
970
shares of the Company's common stock at a conversion price of
$4.50
per share.
On March 25, 2013, the Company entered into a Revolving Line of Credit Agreement, or the Credit Agreement, with John N. Hatsopoulos, our Chief Executive Officer. Under the terms of the Credit Agreement, as amended on August 13, 2013, Mr. Hatsopoulos has agreed to lend the Company up to an aggregate of
$1,500,000
, from time to time, at the written request of the Company. Any amounts borrowed by the Company pursuant to the Credit Agreement will bear interest at the Bank Prime Rate as quoted from time to time in the Wall Street Journal plus
1.5%
per year. Repayment of the principal amount borrowed pursuant to the Credit Agreement was due on March 1, 2014. In addition, the company may prepay accrued interest, provided that prepayment may not be made prior to January 1, 2014. During the quarter ending March 31, 2014, the outstanding principal balance was fully paid.
On December 23, 2013, the company entered into a Senior Convertible Promissory Note (the "Note") with Michaelson Capital Special Finance Fund LP, ("Michaelson"), for the principal amount of
$3,000,000
with interest at
4%
per annum for a term of
three
years. In the event of default such interest rate shall accrue at
8%
after the occurrence of the event of default and during continuance plus
2%
after the occurrence and during the continuance of any other event of default. The Note is a senior unsecured obligation which pays 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 principal amount, if not converted, is due on the third anniversary of the Note, December 31, 2016. The Note is senior in right of payment to any unsecured indebtedness that is expressly subordinated in right of payment to the Note.
The principal balance of the Note, together with any unpaid interest, is convertible into shares of the Company's common stock at
185.19
shares of the Company's common stock per
$1,000
principal amount of Note (equivalent to a conversion price of
$5.40
per share) at the option of Michaelson. If at any time the common stock of the Company is (1) trading on a national securities exchange, (2) qualifies for unrestricted resale under federal securities laws and (3) the arithmetic average of the volume weighted average price of the Common Stock for the
twenty
consecutive trading days preceding the Company's notice of mandatory conversion exceeds
$150,000
, the Company shall have the right to require conversion of all of the then outstanding principal balance together with unpaid interest of this Note into the Company's common stock based on the conversion price of
$5.40
per share.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
The Company may prepay all of the outstanding principal and interest due and payable under this Note in full, at any time prior to the maturity date for an amount equal to
120%
of the then outstanding principal and interest due and payable as of the date of such prepayment.
Upon change of control, as defined by the Note, at Michaelson's option, the obligations may be assumed, on the terms and conditions in this Note, through an assignment and assumption agreement, or the Company may prepay all of the then outstanding principal and unpaid interest under this Note in full at the optional
120%
prepayment amount. This provision creates an embedded derivative in accordance with ASC 815, Derivatives and Hedging. As such it is required to be bifurcated and accounted for separately from the Note. However, the Company has determined that the fair value of the embedded derivative is immaterial to the financial statements.
Debt issuance costs of
$147,577
are being amortized to interest expense over the term of the Note using the effective interest method. At December 31, 2013 and June 30, 2014, there were
555,556
shares of common stock issuable upon conversion of the Company’s outstanding convertible debentures.
Michaelson has the option to call the Note upon an event of default at the optional
120%
prepayment amount discussed above. One event of default is defined as the Company’s failure to issue a registration statement covering the resale of the Company’s Common Stock that is declared effective within one year of the funding date of the Note. The Company has reclassified this Note as long term on the accompanying consolidated balance sheet as the event of default related to the registration statement, originally filed on February 6, 2014, became effective on July 2, 2014 and is no longer a risk for event of default.
While, prior to this transaction, Michaelson was an unrelated party, due to their beneficial ownership percentage of
6.4%
after this transaction, Michaelson is now considered a related party.
On March 26, 2014, the Company secured a working capital line of credit with John Hatsopoulos, the Company's Chief Executive Officer, in the amount of
$3,500,000
which may be used in the occurrence of an event of default as described in the Note.
Note 4 - Stock-based compensation
Stock-Based Compensation
In 2006, the Company 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. The Plan was most recently amended by the Board of Directors on January 24, 2014, and approved by written consent of majority of shareholders on June 30, 2014 to increase the reserved shares of common stock issuable under the Plan to
3,838,750
(the “Amended Plan”).
Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the Amended Plan. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of
June 30, 2014
was
1,968,558
.
Stock option activity for the
six months ended
June 30, 2014
was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
Number of
Options
|
|
Exercise
Price
Per
Share
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding, December 31, 2013
|
1,148,000
|
|
|
$1.20-$4.50
|
|
|
$
|
2.13
|
|
|
5.80 years
|
|
|
$
|
2,721,100
|
|
Granted
|
93,325
|
|
|
4.50
|
|
|
4.50
|
|
|
—
|
|
|
—
|
|
Exercised
|
(5,000
|
)
|
|
1.20
|
|
|
1.20
|
|
|
—
|
|
|
—
|
|
Canceled and forfeited
|
(3,200
|
)
|
|
$1.20-$4.50
|
|
|
1.92
|
|
|
—
|
|
|
—
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding, June 30, 2014
|
1,233,125
|
|
|
$1.20-$4.50
|
|
|
$
|
2.31
|
|
|
5.67 years
|
|
|
$
|
6,999,956
|
|
Exercisable, June 30, 2014
|
926,125
|
|
|
|
|
$
|
1.92
|
|
|
|
|
$
|
5,623,189
|
|
Vested and expected to vest, June 30, 2014
|
1,233,125
|
|
|
|
|
$
|
2.31
|
|
|
|
|
|
$
|
6,999,956
|
|
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
Restricted stock activity for the
six months ended
June 30, 2014
as follows:
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, December 31, 2013
|
361,570
|
|
|
$
|
1.31
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Unvested, June 30, 2014
|
361,570
|
|
|
$
|
1.31
|
|
Stock Based Compensation - Ilios
In 2009, Ilios adopted the 2009 Stock Incentive Plan (the “2009 Plan”) under which the board of directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants of the company. The maximum number of shares allowable for issuance under the 2009 Plan is
2,000,000
shares of common stock. 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 Plan. The options are not transferable except by will or domestic relations order. The option price per share under the 2009 Plan cannot be less than the fair market value of the underlying shares on the date of the grant.
Stock option activity relating to Ilios for the
six months ended
June 30, 2014
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, 2013
|
575,000
|
|
|
$0.10-$0.50
|
|
|
$
|
0.29
|
|
|
6.44 years
|
|
$
|
120,000
|
|
Granted
|
50,000
|
|
|
0.50
|
|
|
0.50
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Canceled and forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding, June 30, 2014
|
625,000
|
|
|
$0.10-$0.50
|
|
|
$
|
0.31
|
|
|
6.25 years
|
|
$
|
120,000
|
|
Exercisable, June 30, 2014
|
181,250
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
$
|
—
|
|
Vested and expected to vest, June 30, 2014
|
625,000
|
|
|
|
|
|
$
|
0.31
|
|
|
|
|
$
|
120,000
|
|
Restricted stock activity for the Ilios awards, for the
six months ended
June 30, 2014
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested, December 31, 2013
|
310,000
|
|
|
$
|
0.10
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Unvested, June 30, 2014
|
310,000
|
|
|
$
|
0.10
|
|
Consolidated stock-based compensation expense for the
six months ended
June 30, 2014
and
2013
was
$72,587
and
$(38,131)
, respectively. At
June 30, 2014
, the total compensation cost related to unvested restricted stock awards and stock option awards not yet recognized is
$242,435
. This amount will be recognized over a weighted average period of
1.24 years
. No tax benefit was recognized related to the stock-based compensation recorded during the periods.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
Note 5 – Commitments and contingencies
Future minimum lease payments under all non-cancelable operating leases as of
June 30, 2014
consist of the following:
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2014
|
$
|
286,868
|
|
2015
|
535,349
|
|
2016
|
485,040
|
|
2017
|
491,920
|
|
2018
|
499,122
|
|
2019 and thereafter
|
2,742,217
|
|
Total
|
$
|
5,040,516
|
|
For the
three months ended
June 30, 2014
and
2013
rent expense was
$106,178
and
$127,994
, respectively. The Company records rent expense on a straight line basis over the term of the lease. For the
six months ended
June 30, 2014
and
2013
rent expense was
$204,638
and
$244,153
, respectively.
Letters of Credit
A letter of credit of
$583,073
, the original value of the short term investment prior to an increase from interest income of
$1,302
, was outstanding under a revolving bank credit facility needed to collateralize a performance bond on a certain installation project. This revolving bank credit facility expired June 14, 2014. In addition, approximately
$1,055,000
in a letter of credit was required to collateralize performance bonds on several installation projects. This letter of credit is collateralized by an account owned by John N. Hatsopoulos and expires July 22, 2015. In each case, a performance bond has been furnished on projects, and would be drawn upon only in the event that Tecogen fails to complete the project in accordance with the contract.
Note 6 – Related party transactions
The Company has
two
affiliated companies, namely American DG Energy Inc., or American DG Energy, and EuroSite Power Inc. These companies are affiliates because several of the major stockholders of those companies, have a significant ownership position in the Company. Neither of American DG Energy or EuroSite Power own any shares of the Company, and the Company does not own any shares of American DG Energy or EuroSite Power.
American DG Energy and EuroSite Power are affiliated companies by virtue of common ownership. The common stockholders include:
|
|
•
|
John N. Hatsopoulos, the Company’s Chief Executive Officer, who is also: (a) the Chief Executive Officer and a director of American DG Energy and holds
19.8%
of American DG Energy’s common stock; (b) the Chairman of EuroSite Power; (c) a director of Ilios and holds
6.8%
of Ilios’s common stock.
|
|
|
•
|
Dr. George N. Hatsopoulos, who is John N. Hatsopoulos’ brother, and is also: (a) a director of American DG Energy and holds
13.5%
of American DG Energy’s common stock; (b) an investor in Ilios and holds
2.7%
of Ilios' common stock.
|
Additionally, the following related persons had or may have a direct or indirect material interest in our transactions with our affiliated companies:
|
|
•
|
Barry J. Sanders, who is: (a) the President and Chief Operating Officer of American DG Energy, (b) the Chief Executive Officer and a director of EuroSite Power and (c) the Chairman of the Board of Directors of Ilios.
|
|
|
•
|
Anthony S. Loumidis, the Company’s former Vice President and Treasurer, who is: (a) the former Chief Financial Officer Secretary and Treasurer of American DG Energy, (b) the former Chief Financial Officer Secretary and Treasurer of EuroSite Power, and (c) the former Treasurer of Ilios.
|
On October 20, 2009, American DG Energy, in the ordinary course of its business, signed a Sales Representative Agreement with Ilios to promote, sell and service the Ilios high-efficiency heating products, such as the high efficiency water heater, in the marketing territory of the New England States and all of the nations in the European Union. The initial term of this Agreement is for
five
years, after which it may be renewed for successive
one
-year terms upon mutual written agreement.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
On September 24, 2001, the Company entered into subscription agreements with investors for the sale of convertible debentures. The primary investors were George N. Hatsopoulos, who subscribed for debentures having an initial principal amount of
$200,000
; the John N. Hatsopoulos 1989 Family Trust for the benefit of Nia Marie Hatsopoulos, or the Nia Hatsopoulos Trust, which subscribed for debentures having an initial principal amount of
$50,000
; and John N. Hatsopoulos 1989 Family Trust for the benefit of Alexander John Hatsopoulos, or the Alexander Hatsopoulos Trust, which subscribed for debentures having an initial principal amount of
$50,000
. Nia Hatsopoulos and Alexander Hatsopoulos are John N. Hatsopoulos's adult children. John N. Hatsopoulos disclaims beneficial ownership of any shares held by these trusts. The debentures accrue interest at a rate of
6%
per annum and were due on September 24, 2007. The debentures are convertible, at the option of the holder, into shares of common stock at a conversion price of
$1.20
per share.
On September 24, 2007, George N. Hatsopoulos, the Nia Hatsopoulos Trust and the Alexander Hatsopoulos Trust, holding debentures representing a majority of the then-outstanding principal amount of the debentures, agreed to extend the debenture term to September 24, 2011. On May 11, 2009, George N. Hatsopoulos converted
$109,033
of the principal amount under the debentures held by him, together with accrued interest in the amount of
$90,967
into
400,000
shares of common stock of Ilios, the Company's then newly-formed subsidiary, at a conversion price of
$0.50
per share. The difference between the Company's purchase price of the Ilios shares and the amount of debt forgiveness was recorded as additional paid-in capital.
On September 30, 2009, Joseph J. Ritchie elected to convert the outstanding principal amount under the debenture held by him,
$30,000
, together with accrued interest of
$14,433
, into
$37,028
shares of the Company's common stock at a conversion price of
$1.20
per share.
On September 24, 2011, George N. Hatsopoulos, the Nia Hatsopoulos Trust and the Alexander Hatsopoulos Trust, holding debentures representing a majority of the then-outstanding principal amount of the debentures, agreed to extend the term of the debentures to September 24, 2013 and requested that accrued interest in the aggregate amount of approximately
$72,960
be converted into the Company's common stock at
$2.00
per share (which was the average price of the Company's stock between September 24, 2001 and September 24, 2011).
On September 30, 2012, the debentures, including accrued interest, were converted into
170,480
shares of Common Stock held in the JNH 1989 Family Trust for the benefit of Nia Marie Hatsopoulos and
170,480
shares of Common Stock held in the JNH 1989 Family Trust for the benefit of Alexander J. Hatsopoulos for whom Mr. and Mrs. Paris Nicolaidis are the trustees. Mr. John N. Hatsopoulos disclaims beneficial ownership of the shares held by this trust.
On October 18, 2013, the remaining holder of the debentures, George N. Hatsopoulos, converted the principal balance of
$90,967
into
75,806
shares of the Company's common stock at a conversion price of
$1.20
per share. In addition, Mr. Hatsopoulos requested that the accrued interest earned in 2012 in the amount of
$6,913
be converted into
2,161
shares of the Company's common stock at a conversion price of
$3.20
per share and that the accrued interest earned on or after January 1, 2013 in the amount of
$4,367
be converted into
970
shares of the Company's common stock at a conversion price of
$4.50
per share.
On September 10, 2008 the Company entered into a demand note agreement with John N. Hatsopoulos, in the principal amount of
$250,000
at an annual interest rate of
5%
. On September 7, 2011 the Company entered in to an additional demand note agreement with John N. Hatsopoulos, in the principal amount of
$750,000
at an annual interest rate of
6%
. On November 30, 2012 the Company entered into an additional demand note agreement with John N. Hatsopoulos, in the principal amount of
$300,000
at an annual interest rate of
6%
. Unpaid principal and interest on the demand notes are due upon demand. On October 3, 2013 the Company entered into an additional demand note agreement with John N. Hatsopoulos, in the principal amount of
$450,000
at an annual interest rate of
6%
. On January 6, 2014, the Company repaid the then outstanding principal balance of
$1,750,000
together with accrued interest of
$175,311
.
On March 25, 2013, the Company entered into a Revolving Line of Credit Agreement, or the Credit Agreement, with John N. Hatsopoulos, our Chief Executive Officer. Under the terms of the Credit Agreement, as amended on August 13, 2013, Mr. Hatsopoulos has agreed to lend the Company up to an aggregate of
$1,500,000
from time to time, at the written request of the Company. Any amounts borrowed by the Company pursuant to the Credit Agreement will bear interest at the Bank Prime Rate as quoted from time to time in the Wall Street Journal plus
1.5%
per year. Repayment of the principal amount borrowed pursuant to the Credit Agreement will be due on March 1, 2014. In addition, the company may prepay accrued interest, provided that prepayment may not be made prior to January 1, 2014. The Credit Agreement terminates on March 1, 2014. As of December 31, 2013 the Company has borrowed
$1,200,000
pursuant to the Credit Agreement. On January 6, 2014, the Company repaid the then outstanding principal balance of
$1,200,000
together with accrued interest of
$25,347
.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014 and 2013
On December 23, 2013, the company entered into a Senior Convertible Promissory Note (the "Note") with Michaelson Capital Special Finance Fund LP, ("Michaelson"), for the principal amount of
$3,000,000
with interest at
4%
per annum for a term of
three
years. The Note is a senior unsecured obligation which pays 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 principal amount, if not converted, is due on the third anniversary of the date of the Note. The Note is senior in right of payment to any unsecured indebtedness that is expressly subordinated in right of payment to the Note. The Note is convertible into shares of the Company's common stock at
185.19
shares of our common stock per
$1,000
principal amount of Note (equivalent to a conversion price of
$5.40
per share). Debt issuance costs of
$147,577
are being amortized to expense over the term of the Note using the effective interest method. At December 31, 2013, there were
555,556
shares of common stock issuable upon conversion of the Company’s outstanding convertible debentures.
In addition, on December 23, 2013, Michaelson participated in our private placement, investing
$2,000,000
to purchase
444,445
shares of common stock at
$4.50
per share. As of the purchase date and December 31, 2013, Michaelson, on a fully diluted basis, owns
6.4%
of the Company. As Michaelson's beneficial ownership is
6.4%
after this transaction, it is now considered a 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.
On January 1, 2006, the Company entered into a Facilities and Support Services Agreement with American DG Energy for a period of one year, renewable annually, on January 1st, by mutual agreement. That agreement was replaced by the Facilities, Support Services and Business Agreement between the Company and American DG Energy, effective July 1, 2013. On July 1, 2013 the Company entered into an Amendment to the Facilities, Support Services and Business Agreement, or the Amendment, with American DG Energy. Under this agreement, the Company provides American DG Energy with certain office and business support services and also provides pricing based on a volume discount depending on the level of American DG Energy purchases of cogeneration and chiller products. For certain sites, American DG Energy hires the Company to service its chiller and cogeneration products. The Company also provides office space and certain utilities to American DG Energy based on a monthly rate set at the beginning of each year. Also, under this agreement, American DG Energy has sales representation rights to the Company's products and services in New England.
On August 8, 2014 the Company entered into a new agreement with American DG Energy. The agreement is similar to the previous Facilities, Support Services and Business Agreement between the Company and American DG Energy. It was signed for a one year period, beginning on July 1, 2014.
The Company subleases portions of its corporate offices and manufacturing facility to sub-tenants under annual sublease agreements. For the
six months ended
June 30, 2014
and
2013
, the Company received
$104,938
and
$107,276
, respectively, from American DG Energy and other sub-tenants.
The Company’s headquarters are located in Waltham, Massachusetts and consist of approximately
43,000
square feet of office and storage space that are shared with American DG Energy and other tenants. The lease expires on
March 31, 2024
. We believe that our facilities are appropriate and adequate for our current needs.
Revenue from sales of cogeneration and chiller systems, parts and service to American DG Energy during the
six months ended
June 30, 2014
and
2013
amounted to
$637,059
and
$384,415
, respectively. In addition, Tecogen pays certain operating expenses, including benefits and insurance, on behalf of American DG Energy. Tecogen was reimbursed for these costs. As of
June 30, 2014
the total amount due from American DG Energy was
$148,830
, which is included in due from related party on the accompanying condensed consolidated balance sheet. As of
December 31, 2013
the total amount due to American DG Energy was
$119,667
.
On March 14, 2013 the Company received a prepayment for purchases of modules, parts and service to be made by American DG Energy in the amount of $
827,747
. The Company will provide a discount on these prepaid purchases equal to
6%
per annum on deposit balances. As of
June 30, 2014
the principal balance on this prepayment had a balance of
$0
.
Note 7 - Asset acquisition
On January 9, 2013 the Company purchased certain assets, both tangible and intangible, required to manufacture the generator used in its InVerde product from Danotek Motion Technologies. The aggregate consideration paid by the Company was
$497,800
, of which
$17,400
represents the fair value of inventory and
$199,530
represents the estimated fair value of property, plant and equipment which is depreciated over useful lives ranging from
5
to
8.5 years
. The fair value of the property, plant and equipment was estimated utilizing a replacement cost method. In addition,
$240,000
of the purchase consideration represents the fair value of identified intangible assets using a relief from royalty method with a useful life of
fifteen
years. The balance of
$40,870
is included in goodwill in the accompanying condensed consolidated balance sheet, which consists largely of economies of scale expected from combining the manufacturing of the generator into Tecogen's operations. Acquisition related costs were not material to the financial statements and were expensed as incurred to general and administrative expenses.
This transaction was accounted for under the purchase method of accounting in accordance with FASB ASC Topic 805, Business Combinations. Under the purchase method of accounting, the total purchase price has been allocated to the net tangible and intangible assets acquired based on estimates of their values by the Company's management. There is one reporting unit within the Company.
Under the purchase method of accounting, an acquisition is recorded as of the closing date, reflecting the purchased assets, at their acquisition date fair values. Intangible assets that are identifiable are recognized separately from goodwill which is measured and recognized as the excess of the fair value, as a whole, over the net amount of the recognized identifiable assets acquired.
The purchase price has been allocated as follows:
|
|
|
|
|
|
Inventory
|
|
$
|
17,400
|
|
Machinery and equipment
|
|
171,910
|
|
Computer equipment
|
|
22,070
|
|
Tooling
|
|
5,550
|
|
Developed technology
|
|
240,000
|
|
Goodwill
|
|
40,870
|
|
|
|
$
|
497,800
|
|
Note 8 - Intangible assets other than goodwill
As of
June 30, 2014
the Company has the following amounts related to intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Certifications
|
|
Patents
|
|
Developed Technology
|
|
Total
|
Balance at December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
$
|
406,705
|
|
|
$
|
441,610
|
|
|
240,000
|
|
|
$
|
1,088,315
|
|
Less - accumulated amortization
|
(83,405
|
)
|
|
(39,583
|
)
|
|
(12,000
|
)
|
|
(134,988
|
)
|
|
$
|
323,300
|
|
|
$
|
402,027
|
|
|
$
|
228,000
|
|
|
$
|
953,327
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
$
|
469,343
|
|
|
$
|
492,669
|
|
|
240,000
|
|
|
$
|
1,202,012
|
|
Less - accumulated amortization
|
(103,785
|
)
|
|
(52,028
|
)
|
|
(20,000
|
)
|
|
$
|
(175,813
|
)
|
|
$
|
365,558
|
|
|
$
|
440,641
|
|
|
$
|
220,000
|
|
|
$
|
1,026,199
|
|
The aggregate amortization expense of the Company's intangible assets for the
three months ended
June 30, 2014
and
2013
was
$20,853
and
$14,487
, respectively. The aggregate amortization expense of the Company's intangible assets for the
six months ended
June 30, 2014
and
2013
was
$40,825
and
$24,247
, respectively.
Estimated future annual amortization expense related to the intangible assets is as follows:
|
|
|
|
|
|
2014
|
|
$
|
43,055
|
|
2015
|
|
133,744
|
|
2016
|
|
133,744
|
|
2017
|
|
133,744
|
|
2018
|
|
127,547
|
|
Thereafter
|
|
454,365
|
|
Total amortization expense
|
|
$
|
1,026,199
|
|
The Company expects to receive foreign patents for the patents granted in the United States by year end. The expense in the estimated future amortization schedule is based on this assumption.
Note 9 – Subsequent events
On August 8, 2014, the Company entered into a new agreement with American DG Energy. The agreement is similar to the previous Facilities, Support Services and Business Agreement between the Company and American DG Energy. It was signed for a one year period, beginning on July 1, 2014.
On August 12, 2014, the Company entered into a three year lease with Kavenor Big & Tall King of Valley Stream LLC for the Company's new service center in Valley Stream, New York to better serve the growing installation base in Brooklyn, Queens, and Long Island, New York.
The Company has evaluated subsequent events through the date of this report and determined that no additional subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.