Note 1 – Description of business and summary of significant accounting policies
Description of business
Tecogen Inc., or the Company was organized, as a Delaware Corporation 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 condensed 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, 2015
in conjunction with our
2015
Annual Report on Form 10-K, or our Annual Report, filed with the Securities and Exchange Commission, or SEC, on
March 30, 2016
. This form 10-Q should be read in conjunction with our Annual Report.
The accompanying unaudited condensed 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
March 31, 2016
, and of operations and cash flows for the interim periods ended
March 31, 2016
and
2015
. The results of operations for the interim periods ended
March 31, 2016
are not necessarily indicative of the results to be expected for the year.
The accompanying condensed consolidated financial statements include the accounts of the Company and its
65.0%
owned subsidiary Ilios Inc. or Ilios, whose business focus is on advanced heating systems for commercial and industrial applications. With the inclusion of unvested restricted stock awards, the Company 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 or as a deposit on equipment 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
three months ended
March 31, 2016
, revenues of
$140,600
were recorded as bill and hold transactions. For the same period in
2015
, no revenues were recorded as bill and hold transactions.
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
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2016 and 2015
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
three months ended March 31, 2016
and
2015
, a loss of approximately
$155,200
and
$0
was recorded, respectively. 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 profit is recorded as deferred revenue.
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
March 31, 2016
and
December 31, 2015
the allowance for doubtful accounts was approximately
$44,000
and
$50,000
, 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 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
March 31, 2016
and
December 31, 2015
, inventory reserves were
$307,000
and
$293,000
, respectively.
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. For the
three months ended
March 31, 2016
and
2015
, depreciation expense was
$41,166
and
$43,956
, respectively.
Intangible Assets
Intangible assets 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 tests its recorded goodwill for impairment in the fourth quarter, 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. During the
first three months of 2016
, the Company determined that no interim impairment test was necessary.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2016 and 2015
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. The determination of the fair value of share-based payment awards is affected by the Company’s stock price. 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. (see Note 5)
Revenues by Product
The following table summarizes net revenue by product line and services for the
three months ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2016
|
|
2015
|
Products
|
|
|
|
Cogeneration
|
$
|
1,417,972
|
|
|
$
|
2,571,928
|
|
Chiller & Heat Pump
|
848,176
|
|
|
965,947
|
|
Total Product Revenue
|
2,266,148
|
|
|
3,537,875
|
|
Services
|
|
|
|
Service contracts
|
2,188,322
|
|
|
1,872,366
|
|
Installations
|
621,045
|
|
|
693,193
|
|
Total Service Revenue
|
2,809,367
|
|
|
2,565,559
|
|
Total Revenue
|
$
|
5,075,515
|
|
|
$
|
6,103,434
|
|
Reclassification
Certain prior period balances have been reclassified to conform with current period presentation. The interest expense includes the amortization of the deferred financing costs, and this has been adjusted in the comparable periods. The balance of deferred financing cost on the balance sheet under ASU 2015-03 is netted with the associated debt and is retrospectively shown for prior period balances.
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
three months ended March 31,
2016
and
2015
, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2016
|
|
2015
|
Net loss attributable to stockholders
|
$
|
(893,168
|
)
|
|
$
|
(617,464
|
)
|
Weighted average shares outstanding - Basic and diluted
|
18,478,990
|
|
|
16,224,642
|
|
Basic and diluted loss per share
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
Anti-dilutive shares underlying stock options outstanding
|
1,123,200
|
|
|
1,254,325
|
|
Anti-dilutive convertible debentures
|
890,207
|
|
|
555,556
|
|
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2016 and 2015
Note 3 – Demand notes payable, convertible debentures and line of credit agreement to related parties
On December 23, 2013, the Company entered into a Senior Convertible Promissory Note or the Note, with Michaelson Capital Special Finance Fund LP or 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. Effective April 1, 2016, the Note was amended increasing the principal amount by
$150,000
for a total of
$3,150,000
and extending the maturity date. The principal amount, if not converted, is now due on the fifth anniversary of the Note, December 28, 2018. 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
282.49
shares of the Company's common stock per
$1,000
principal amount of Note (equivalent to a conversion price of
$3.54
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
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
$3.54
per share. 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 FASB 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 consolidated financial statements. Debt issuance costs is being netted against the principal balance of the debt.
As per an amendment to the Note dated April 1, 2016, the conversion price was increased from
$3.37
to
$3.54
and the number of shares issuable upon conversion decreased from
890,207
at December 31,2015 to
889,830
at April 1, 2016. The Company is evaluating the impact, if any, resulting from this modification.
On June 15, 2015, the Company entered into a Non-Revolving Line of Credit Agreement, or the Agreement, with John N. Hatsopoulos, the Company's Co-Chief Executive Officer and a Company Director. Under the terms of the Agreement, Mr. Hatsopoulos has agreed to lend the Company up to an aggregate of
$2,000,000
, with a withdrawal limit of
$250,000
per financial calendar quarter, at the written request of the Company. Any amounts borrowed by the Company pursuant to the Agreement will bear interest at
6%
per year. Interest is due and payable quarterly in arrears. The term of the Agreement is from July 1, 2015 to July 1, 2017. Repayment of the principal amount borrowed pursuant to the Agreement will be due on July 1, 2017, or the Maturity Date. Prepayment of any amounts due under the Agreement may be made at any time without penalty. The Agreement terminates on the Maturity Date. The Company has not yet borrowed any amounts pursuant to the Agreement.
Note 4 - Stockholders' Equity
On April 11, 2016 and April 13, 2016, the Company entered into numerous private placement share exchange agreements ("Share Exchange Agreements") with shareholders of Ilios Inc. ("Exchanging Shareholders"), a majority owned subsidiary of the Company ("Ilios"). 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. On April 11, 2016 and April 13, 2016, the Company issued
559,783
and
16,538
shares of its common stock, respectively, in exchange for Ilios shares of common stock. Pursuant to the Registration Rights Agreement, the Company shall as soon as practicable file with the U.S. Securities And Exchange Commission a registration statement on an appropriate form (the “Registration Statement”) covering the resale of the shares and shall use its commercially reasonable best efforts to cause the Registration Statement to be declared effective as soon as practicable. The Company is determining the accounting impact of these transactions.
Note 5 - Stock-based compensation
Stock-Based Compensation
In 2006, the Company adopted the 2006 Stock Option and Incentive Plan or the Plan, under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants of the
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2016 and 2015
Company. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Plan to
3,838,750
as of
March 31, 2016
, or the Amended Plan.
Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the Amended Plan. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of
March 31, 2016
was
1,759,533
.
Stock option activity for the
three months ended
March 31, 2016
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, 2015
|
1,268,200
|
|
|
$1.20-$5.39
|
|
$
|
3.06
|
|
|
6.01 years
|
|
$
|
985,578
|
|
Granted
|
5,000
|
|
|
3.93
|
|
3.93
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
Canceled and forfeited
|
(150,000
|
)
|
|
3.39
|
|
3.39
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
Outstanding, March 31, 2016
|
1,123,200
|
|
|
$1.20-$5.39
|
|
$
|
3.02
|
|
|
5.46 years
|
|
$
|
1,300,361
|
|
Exercisable, March 31, 2016
|
849,558
|
|
|
|
|
$
|
2.50
|
|
|
|
|
$
|
1,286,161
|
|
Vested and expected to vest, March 31, 2016
|
1,123,200
|
|
|
|
|
$
|
3.02
|
|
|
|
|
$
|
1,300,361
|
|
Stock-Based Compensation - Ilios
In 2009, Ilios adopted the 2009 Stock Incentive Plan, or 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. The 2009 Plan has
1,325,000
available for grant as of March 31, 2016. There were
5,000
option grants during the first quarter of 2016. 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.
Consolidated stock-based compensation expense for the
three months ended
March 31, 2016
and
2015
was
$27,243
and
$93,254
, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the periods.
Note 6 – Commitments and contingencies
Letters of Credit
On January 28, 2016, the letter of credit from Enterprise Bank and Trust Company required for collateral with an outstanding performance bond was closed as the Company had met the performance obligations of the bond.
Note 7 – Related party transactions
The Company has
two
affiliated companies, namely American DG Energy Inc., or American DG Energy, and EuroSite Power Inc. or EuroSite Power. These companies are affiliates because several of the major stockholders of those companies, have a significant ownership position in the Company. Neither American DG Energy nor EuroSite Power own any shares of the Company, and the Company does not own any shares of American DG Energy or EuroSite Power.
On December 23, 2013, the Company entered into a Senior Convertible Promissory Note with Michaelson Capital Special Finance Fund LP (see Note 3). This agreement came with board observation rights causing the related party status.
On June 15, 2015, the Company entered into a Non-Revolving Line of Credit Agreement with John N. Hatsopoulos, the Company's Co-Chief Executive Officer and a Company Director (see Note 3).
The Company provides office space and certain utilities to American DG Energy based on a monthly rate set at the beginning of each year. This sublease was signed on July 1, 2014 and subsequently amended. The lease will expire on July 1, 2017. The agreement contains an automatic monthly renewal at expiration. In addition, the Company pays certain operating expenses, including benefits and insurance, on behalf of American DG Energy. The Company is reimbursed for these costs.
TECOGEN INC.
Notes to Interim Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2016 and 2015
Note 8 - Intangible assets other than goodwill
As of
December 31, 2015
and
March 31, 2016
the Company has the following amounts related to intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Certifications
|
|
Patents
|
|
Developed Technology
|
|
Trademarks
|
|
Total
|
Balance at December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
$
|
514,616
|
|
|
$
|
603,915
|
|
|
$
|
240,000
|
|
|
$
|
4,775
|
|
|
$
|
1,363,306
|
|
Less - accumulated amortization
|
(182,931
|
)
|
|
(91,764
|
)
|
|
(44,000
|
)
|
|
—
|
|
|
(318,695
|
)
|
|
$
|
331,685
|
|
|
$
|
512,151
|
|
|
$
|
196,000
|
|
|
$
|
4,775
|
|
|
$
|
1,044,611
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
$
|
514,616
|
|
|
$
|
631,024
|
|
|
240,000
|
|
|
$
|
5,625
|
|
|
$
|
1,391,265
|
|
Less - accumulated amortization
|
(195,681
|
)
|
|
(99,304
|
)
|
|
(48,000
|
)
|
|
—
|
|
|
(342,985
|
)
|
|
$
|
318,935
|
|
|
$
|
531,720
|
|
|
$
|
192,000
|
|
|
$
|
5,625
|
|
|
$
|
1,048,280
|
|
The aggregate amortization expense of the Company's intangible assets for the
three
months ended
March 31, 2016
and
2015
was
$24,290
and
$23,283
, respectively.
Note 9 - Joint Venture
On December 28, 2015, Tecogen 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 Ltd., was organized under the laws of the Island of Jersey, Channel Islands.
Tecogen received a
50%
equity interest in the JV in exchange for a fully paid-up worldwide license to use Tecogen’s Ultera emissions control technology in the field of mobile vehicles burning fossil fuels. The other half of the joint venture equity interests were purchased for
$3,000,000
by a small group of offshore investors. Warrants to purchase additional equity securities in the JV were granted to all parties pro rata. If the venture is not successful, all licensed intellectual property rights will revert to Tecogen.
The JV is expected to have losses as it performs the necessary research and development with the Ultera technology. Using equity method accounting, these losses will not be included in Tecogen's financial statements since Tecogen does not guarantee obligations of the JV and is not otherwise obligated to provide further financial support of the JV, although it may choose to in the future.
Expenses incurred by Ultra Emissions Technologies Ltd. for three months ended
March 31, 2016
were
$368,500
, leaving a funds available for future expenditures of
$2,631,500
.
Note 10 - Subsequent Events
On April 1, 2016, the senior convertible note was amended including modification of conversion price from
$3.37
to
$3.54
, and the number of shares issuable upon conversion decreased from
890,207
at December 31, 2015 to
889,830
. The Company is evaluating the impact, if any, resulting from this modification (See Note 3).
On April 11, 2016 and April 13, 2016, the Company entered into numerous private placement share exchange agreements with shareholders of Ilios Inc., a majority owned subsidiary of the Company. These transactions are detailed in Note 4. Effective May 3, 2016, Tecogen, Inc. (the "Company") entered into an Agreement and Plan of Merger (the "Agreement"), with its majority owned private subsidiary, Ilios Inc. ("Ilios"). Pursuant to the Agreement, Ilios will merge with and into Tecogen with Tecogen as the surviving Company. Tecogen will assume ownership of all of Ilios' assets, debts, contracts, liabilities, obligations, and duties. Pursuant to the Agreement, any stockholders or options holders of Ilios may turn in their stock or options for stock or options of Tecogen at the agreed upon exchange rate. Pursuant to the agreement, Ilios will merged with and into Tecogen in short-form merger under Delaware General Corporate Law Section 253.