tgen-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☑						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-36103

TECOGEN INC. (OTCQX:TGEN)

(Exact name of Registrant as specified in its charter)


Delaware			04-3536131
(State or Other Jurisdiction of Incorporation or Organization)			(IRS Employer Identification No.)


45 First Avenue
Waltham, Massachusetts 02451
(Address of Principal Executive Offices and Zip Code)


(781) 466-6402
(Registrant's telephone number, including area code)

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 every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:


Large accelerated filer o			Accelerated filer o
Non-accelerated filer ☒			Emerging Growth company ☐
Smaller reporting company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2021, 24,850,261 shares of common stock, $.001 par value per share, of the registrant were issued and outstanding.

TECOGEN INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2021

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited)
	June 30, 2021 and December 31, 2020	1

	Condensed Consolidated Statements of Operations (Unaudited)
	Three Months Ended June 30, 2021 and 2020	2

	Condensed Consolidated Statements of Operations (Unaudited)
	Six Months Ended June 30, 2021 and 2020	3

	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
	Three and Six Months Ended June 30 , 2021 and 2020	4

	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Six Months Ended June 30, 2021 and 2020	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults in Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	32

Item 6.	Exhibits	33

Signatures	Signature Page	34

References in this Form 10-Q to "we", "us", "our"', the "Company" and "Tecogen" refers to Tecogen Inc. and its consolidated subsidiaries, unless otherwise noted.

TECOGEN INC.

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	June 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	3,185,478	$	1,490,219
Accounts receivable, net	7,777,064		8,671,163
Unbilled revenue	3,899,499		4,267,249
Employee retention credit	713,268		—
Inventories, net	6,811,525		7,168,596

Prepaid and other current assets	839,732		597,144
Total current assets	23,226,566		22,194,371
Long-term assets:
Property, plant and equipment, net	2,025,334		2,283,846
Right of use assets	2,168,100		1,632,574
Intangible assets, net	1,244,373		1,360,319

Goodwill	2,406,156		2,406,156
Other assets	248,713		196,387
TOTAL ASSETS	$	31,319,242	$	30,073,653

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Note payable	$	—	$	837,861


Accounts payable	2,597,737		4,183,105
Accrued expenses	2,138,931		1,993,471
Deferred revenue	1,119,943		1,294,157
Lease obligations, current	617,540		506,514



Total current liabilities	6,474,151		8,815,108
Long-term liabilities:
Note payable, net of current portion	1,874,269		1,036,339
Deferred revenue, net of current portion	244,425		115,329
Lease obligations, net of current portion	1,642,801		1,222,492
Deferred payroll tax liability, net of current portion	131,224		—
Unfavorable contract liability	1,438,278		1,617,051
Total liabilities	11,805,148		12,806,319

Commitments and contingencies (Note 12)

Stockholders’ equity:
Tecogen Inc. stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261and 24,850,261 issued and outstanding at June 30, 2021 and December 31, 2020, respectively	24,850		24,850
Additional paid-in capital	56,908,194		56,814,428

Accumulated deficit	(37,363,283)		(39,529,621)
Total Tecogen Inc. stockholders’ equity	19,569,761		17,309,657
Non-controlling interest	(55,667)		(42,323)
Total stockholders’ equity	19,514,094		17,267,334
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	31,319,242	$	30,073,653

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended
	June 30, 2021		June 30, 2020
Revenues
Products	$	2,445,927	$	3,786,134
Services	3,328,314		3,372,583
Energy production	370,861		276,341
Total revenues	6,145,102		7,435,058
Cost of sales
Products	1,390,725		2,220,456
Services	1,679,386		2,102,735
Energy production	232,353		205,876
Total cost of sales	3,302,464		4,529,067
Gross profit	2,842,638		2,905,991
Operating expenses
General and administrative	2,438,452		2,637,479
Selling	580,871		602,383
Research and development	132,883		166,027


Total operating expenses	3,152,206		3,405,889
Loss from operations	(309,568)		(499,898)
Other income (expense)
Interest income and other expenses, net
Interest income and other income (expense), net	(1,125)		238
Interest expense	(5,088)		(56,253)

Employee retention credit	713,268		—
Unrealized gain (loss) on investment securities	18,749		(78,723)
Total other income (expense), net	725,804		(134,738)
Income (loss) before provision for state income taxes	416,236		(634,636)
Provision for state income taxes	7,933		13,171
Consolidated net income (loss)	408,303		(647,807)
(Income) loss attributable to the non-controlling interest	(8,672)		(6,081)
Net income (loss) attributable to Tecogen Inc.	$	399,631	$	(653,888)

Net income (loss) per share - basic	$	0.02	$	(0.03)
Net income (loss) per share - diluted	$	0.02	$	(0.03)
Weighted average shares outstanding - basic	24,850,261		24,850,261
Weighted average shares outstanding - diluted	25,125,210		24,850,261

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Six Months Ended
	June 30, 2021		June 30, 2020
Revenues
Products	$	4,568,649	$	6,837,894
Services	6,609,458		7,532,673
Energy production	1,024,156		1,027,191
Total revenues	12,202,263		15,397,758
Cost of sales
Products	2,565,012		4,023,339
Services	3,216,989		4,985,981
Energy production	626,416		690,280
Total cost of sales	6,408,417		9,699,600
Gross profit	5,793,846		5,698,158
Operating expenses
General and administrative	4,892,305		5,326,941
Selling	1,091,074		1,458,170
Research and development	259,033		530,363


Total operating expenses	6,242,412		7,315,474
Loss from operations	(448,566)		(1,617,316)
Other income (expense)
Interest and other income (expense), net	(2,328)		11,965
Interest expense	(9,728)		(116,238)
Gain on extinguishment of debt	1,887,859		—
Employee retention credit	713,268		—
Gain on sale of investment securities	6,046		—
Unrealized gain (loss) on investment securities	56,246		(98,404)
Total other income (expense), net	2,651,363		(202,677)
Income (loss) before provision for state income taxes	2,202,797		(1,819,993)
Provision for state income taxes	15,991		18,393
Consolidated net income (loss)	2,186,806		(1,838,386)
(Income) loss attributable to non-controlling interest	(20,468)		(17,889)
Net income (loss) attributable to Tecogen Inc.	$	2,166,338	$	(1,856,275)



Net income (loss) per share - basic	$	0.09	$	(0.07)
Net income (loss) per share - diluted	$	0.09	$	(0.07)
Weighted average shares outstanding - basic	24,850,261		24,850,256
Weighted average shares outstanding - diluted	25,102,470		24,850,256

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Three and Six Months Ended June 30, 2021 and 2020

(unaudited)


Three months ended June 30, 2021	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at March 31, 2021	24,850,261	$	24,850	$	56,853,513	$	(37,762,914)	$	(48,703)	$	19,066,746
Stock based compensation expense	—	—		54,681		—		—		54,681
Distributions to non-controlling interest	—	—		—		—		(15,636)		(15,636)
Net income	—	—		—		399,631		8,672		408,303
Balance at June 30, 2021	24,850,261	$	24,850	$	56,908,194	$	(37,363,283)	$	(55,667)	$	19,514,094

Six months ended June 30, 2021	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at December 31, 2020	24,850,261	$	24,850	$	56,814,428	$	(39,529,621)	$	(42,323)	$	17,267,334


Stock based compensation expense	—	—		93,766		—		—		93,766
Distributions to non-controlling interest	—	—		—		—		(33,812)		(33,812)
Net income	—	—		—		2,166,338		20,468		2,186,806
Balance at June 30, 2021	24,850,261	$	24,850	$	56,908,194	$	(37,363,283)	$	(55,667)	$	19,514,094

Three months ended June 30, 2020	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at March 31, 2020	24,850,261	$	24,850	$	56,665,319	$	(34,581,501)	$	73,995	$	22,182,663
Stock issuance costs	—	—		(401)		—		—		(401)
Stock based compensation expense	—	—		39,494		—		—		39,494

Net income (loss)	—	—		—		(653,888)		6,081		(647,807)
Balance at June 30, 2020	24,850,261	$	24,850	$	56,704,412	$	(35,235,389)	$	80,076	$	21,573,949

Six months ended June 30, 2020	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at December 31, 2019	24,849,261	$	24,849	$	56,622,285	$	(33,379,114)	$	85,257	$	23,353,277
Exercise of stock options	1,000	1		1,199		—		—		1,200
Stock issuance costs	—	—		(802)		—		—		(802)
Stock based compensation expense	—	—		81,730		—		—		81,730
Distributions to non-controlling interest	—	—		—		—		(23,070)		(23,070)
Net income (loss)	—	—		—		(1,856,275)		17,889		(1,838,386)
Balance at June 30, 2020	24,850,261	$	24,850	$	56,704,412	$	(35,235,389)	$	80,076	$	21,573,949

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Six Months Ended
	June 30, 2021		June 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)	$	2,186,806	$	(1,838,386)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization, net	241,470		193,637
Gain on extinguishment of debt	(1,887,859)		—

Employee retention credit	(713,268)		—
Stock-based compensation	93,766		81,730

Gain on sale of investment securities	(6,046)		—
Unrealized (gain) loss on investment securities	(56,246)		98,404
Abandonment of intangible assets	7,400		179,944
Non-cash interest expense	—		50,775
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in:

Accounts receivable	894,100		6,405,936
Unbilled revenue	367,750		538,032
Inventory	357,072		(890,868)

Prepaid expenses and other current assets	(242,588)		(6,382)
Other assets	(537,197)		532,293
Increase (decrease) in:
Accounts payable	(1,585,368)		(1,197,576)
Accrued expenses and other current liabilities	290,342		284,506
Deferred revenue	(45,118)		(1,671,239)
Other liabilities	531,335		—

Net cash provided by (used in) operating activities	(103,649)		2,760,806
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(47,504)		(53,674)
Proceeds from the sale of investment securities	11,637		—
Purchases of intangible assets	(5,682)		(123,254)


Payment of stock issuance costs	—		(802)
Distributions to non-controlling interest	(33,812)		(23,070)
Net cash used in investing activities	(75,361)		(200,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable	1,874,269		1,874,200
Proceeds (payments) on revolving line of credit, net	—		(2,453,159)

Proceeds from the exercise of stock options	—		1,200

Net cash provided by (used in) financing activities	1,874,269		(577,759)
Change in cash and cash equivalents	1,695,259		1,982,247
Cash and cash equivalents, beginning of the period	1,490,219		877,676
Cash and cash equivalents, end of the period	$	3,185,478	$	2,859,923

Supplemental disclosures of cash flows information:
Cash paid for interest	$	—	$	36,326
Cash paid for taxes	$	15,991	$	5,222

The accompanying notes are an integral part of these consolidated financial statements.

TECOGEN INC.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation

Description of Business

Tecogen Inc., or we, our or us, produces commercial and industrial engine-driven, combined heat and power (CHP) products that reduce energy costs, decrease greenhouse gas emissions and alleviate congestion on the national power grid. Our products supply electric power or mechanical power for cooling, while heat from the engine is recovered and purposefully used at a facility. We also install, own, operate and maintain complete 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.

The majority of our customers are located in regions with the highest utility rates, typically California, the Midwest and the Northeast.

Our common stock is quoted on OTC Markets Group, Inc.'s OTCQX Best Market tier and trades under the symbol "TGEN."

On May 18, 2017, the Company acquired 100% of the outstanding common stock of American DG Energy Inc., formerly a related entity, in a stock-for-stock merger.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in Tecogen's Annual Report on Form 10-K for the year ended December 31, 2020.

The accompanying unaudited condensed consolidated financial statements include our accounts and the accounts of entities in which we have a controlling financial interest. Those entities include our wholly-owned subsidiaries American DG Energy Inc., Tecogen CHP Solutions, Inc., and a joint venture, American DG New York, LLC, in which American DG Energy Inc. holds a 51% interest. Investments in partnerships and companies in which we do not have a controlling financial interest but where we have significant influence are accounted for under the equity method. Any intercompany transactions have been eliminated in consolidation.

Our operations are comprised of two business segments. Our Products and Services segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.

Reclassification

Certain prior period amounts have been reclassified to conform with current year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

The provisions for income taxes in the accompanying unaudited consolidated statements of operations differ from that which would be expected by applying the federal statutory tax rate primarily due to losses for which no benefit is recognized.

TECOGEN INC.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

Section 2301(c)(2)(B) of the CARES Act permits an employer to use an alternative quarter to calculate gross receipts and the employer may determine if the decline in gross receipt tests is met for a calendar quarter in 2021 by comparing its gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. Accordingly, for the first quarter of 2021, we elected to use our gross receipts for the fourth calendar quarter of 2020 compared to our gross receipts for the fourth calendar quarter of 2019. As a result of our election to use an alternative quarter, we qualified for the ERC in the first and second quarters of 2021 because our gross receipts decreased by more than 20% from the first and second quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first and second quarters of 2021 were eligible for the ERC.

Accounting Standards Codification 105, "Generally Accepted Accounting Principles," describes the decision-making framework when no guidance exists in US GAAP for a particular transaction. Specifically, ASC 105-10-05-2 instructs companies to look for guidance for a similar transaction within US GAAP and apply that guidance by analogy. As such, forms of government assistance, such as the ERC, provided to business entities would not be within the scope of ASC 958, but it may be applied by analogy under ASC 105-10-05-2. We accounted for the Employee Retention Credit as a government grant in accordance with Accounting Standards Update 2013-06, Not-for-Profit Entities (Topic 958) ("ASU 2013-06") by analogy under ASC 105-10-05-2. Under this standard, government grants are recognized when the conditions or conditions on which they depend are substantially met. The conditions for recognition of the ERC include, but are not limited to:

•An entity has been adversely affected by the COVID-19 pandemic

•We have not used qualifying payroll for both the Paycheck Protection Program and the ERC

•We incurred payroll costs to retain employees

•The process for filing for the credit is an administrative task and not a barrier to receiving the credits

During the six months ended June 30, 2021, we recorded an ERC benefit of $713,268 in other income (expense), net in the our condensed consolidated statements of operations and as a current receivable in our condensed consolidated balance sheets as of June 30, 2021.

Note 2. Revenue

Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products, services and energy production. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services or energy to customers.

Shipping and handling fees billed to customers in a sales transaction are recorded in revenue and shipping and handling costs incurred are recorded in cost of sales. We have elected to exclude 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 which we historically recorded shipping and handling fees and value-added taxes. Incremental costs incurred by us to obtain a contract with a customer are negligible, if any, and are expensed ratably in proportion to the related revenue recognized.

Disaggregated Revenue

In general, our business segmentation is 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.

The following table further disaggregates our revenue by major source by segment for the three and six months ended June 30, 2021 and 2020.


Three Months Ended	June 30, 2021
	Products and Services		Energy Production		Total
Products	$	2,445,927	$	—	$	2,445,927
Installation services	244,553		—		244,553
Maintenance services	3,083,761		—		3,083,761
Energy production	—		370,861		370,861
Total revenue	$	5,774,241	$	370,861	$	6,145,102


Six Months Ended	June 30, 2021
	Products and Services		Energy Production		Total
Products	$	4,568,649	$	—	$	4,568,649
Installation services	762,249		—		762,249
Maintenance services	5,847,209		—		5,847,209
Energy production	—		1,024,156		1,024,156
Total revenue	$	11,178,107	$	1,024,156	$	12,202,263


Three Months Ended	June 30, 2020
	Products and Services		Energy Production		Total
Products	$	3,786,134	$	—	$	3,786,134
Installation services	917,363		—		917,363
Maintenance services	2,455,220		—		2,455,220
Energy production	—		276,341		276,341
Total revenue	$	7,158,717	$	276,341	$	7,435,058


Six Months Ended	June 30, 2020
	Products and Services		Energy Production		Total
Products	$	6,837,894	$	—	$	6,837,894
Installation services	2,611,505		—		2,611,505
Maintenance services	4,921,168		—		4,921,168
Energy production	—		1,027,191		1,027,191
Total revenue	$	14,370,567	$	1,027,191	$	15,397,758

Product and Services 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. Prior to January 1, 2021, engineered accessories revenue and cost of sales had been reported in our financial statements under Installation Services. Engineered accessories revenue and cost of sales from prior periods have been reclassified to conform with the current year presentation. 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.

Installation Services. We provide installation services typically including all necessary engineering and design, labor, subcontract labor and service to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems.

Under complete turnkey installation service contracts revenue is recognized over time using the percentage-of-completion method determined on a cost to cost basis. Our performance obligation under such contracts is satisfied progressively over time as enhancements are made to customer owned and controlled properties. We measure progress towards satisfaction of the performance obligation based on an cost-based input method which we believe appropriately measures and is the most accurate depiction of the transfer of products and services to the customer under these contracts. When the financial metrics of a contract indicate a loss, our policy is to record the entire expected loss as soon as it is known. Contract costs and profit recognized to date under the percentage-of-completion method in excess of billings are recognized as contract assets and are recorded as unbilled revenue. Billings in excess of contract costs and profit are recognized as contract liabilities and are recorded as deferred revenue. Generally billings under complete turnkey installation contracts are made when contractually determined milestones of progress have been achieved, with payment terms generally being 30 days.

Maintenance Services. Maintenance services are provided under either long-term maintenance contracts or 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 where the invoiced cost to the customer is based on run hours or kilowatts produced in a given period. We use an output method to measure progress towards completion of our performance obligation which results in the recognition of revenue on the basis of a direct measurement of the value to the customer of the services transferred to date relative to the remaining services promised under the contract. We use the practical expedient at ASC 606-10-55-18 of recognizing revenue in an amount equal to the amount we have the right to invoice the customer under the contract. Payment terms for maintenance services are generally 30 days.

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 invoice the customer and recognize revenue for the various forms of energy delivered, based on actual 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 the amount that 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 condensed consolidated balance sheets.

Revenue recognized during the six months ended June 30, 2021 that was included in unbilled revenue at the end of the period was approximately $0.9 million. Approximately $1.3 million was billed in this period that had been recognized as revenue in previous periods.

Revenue recognized during the six months ended June 30, 2021 that was included in deferred revenue at the beginning of the period was approximately $0.7 million.

Remaining Performance Obligations

Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term of 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 invoice customers. Remaining performance obligations therefore consist of unsatisfied or partially satisfied performance obligations related to fixed price maintenance contracts and installation contracts.

As of June 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $1.4 million. We expect to recognize revenue of approximately 86.8% of the remaining performance obligations over the next 24 months, 82.1% recognized in the first 12 months and 4.7% recognized over the subsequent 12 months, and the remainder recognized thereafter.

Note 3. Income (loss) Per Common Share

Basic and diluted income (loss) per share for the three and six months ended June 30, 2021 and 2020, respectively, were as follows:


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Numerator:
Net income (loss) available to stockholders	$	399,631	$	(653,888)	$	2,166,338	$	(1,856,275)

Denominator:
Weighted average shares outstanding - Basic	24,850,261		24,850,261		24,850,261		24,850,256
Effect of dilutive securities:
Stock options	274,949		—		252,209		—
Weighted average shares outstanding - Diluted	25,125,210		24,850,261		25,102,470		24,850,256

Basic income (loss) per share	$	0.02	$	(0.03)	$	0.09	$	(0.07)
Diluted income (loss) per share	$	0.02	$	(0.03)	$	0.09	$	(0.07)

Anti-dilutive shares underlying stock options outstanding	985,296		1,270,666		777,296		1,269,662


Note 4.			Inventories, net

Inventories at June 30, 2021 and December 31, 2020 consisted of the following:


	June 30, 2021		December 31, 2020
Raw materials	$	6,414,152	$	6,227,591
Less: reserves	(381,000)		(381,000)
Raw materials, net	$	6,033,152	$	5,846,591
Work-in-process	345,228		329,702
Finished goods	433,145		992,303
Total inventories, net	$	6,811,525	$	7,168,596

Note 5. Property, Plant and Equipment, net

Property, plant and equipment at June 30, 2021 and December 31, 2020 consisted of the following:


	Estimated Useful Life (in Years)	June 30, 2021		December 31, 2020
Energy systems	1 - 15 years	$	3,556,488	$	3,526,514
Machinery and equipment	5 - 7 years	1,495,528		1,448,024
Furniture and fixtures	5 years	193,698		193,698
Computer software	3 - 5 years	192,865		192,865
Leasehold improvements	*	450,792		450,792
		5,889,371		5,811,893
Less - accumulated depreciation and amortization		(3,864,037)		(3,528,047)
		$	2,025,334	$	2,283,846

* Lesser of estimated useful life of asset or lease term

Depreciation and amortization expense on property and equipment for the three and six months ended June 30, 2021 and 2020 was $145,458 and $306,014 and $176,357 and $352,017, respectively.

Note 6. Intangible Assets and Liabilities Other Than Goodwill

As of June 30, 2021 and December 31, 2020 the Company had the following amounts related to intangible assets and liabilities other than goodwill:


	June 30, 2021						December 31, 2020
Intangible assets	Cost		Accumulated Amortization		Total		Cost		Accumulated Amortization		Total
Product certifications	$	726,159	$	(505,542)	$	220,617	$	726,159	$	(478,357)	$	247,802
Patents	853,296		(268,379)		584,917		855,014		(220,764)		634,250
Developed technology	240,000		(132,000)		108,000		240,000		(124,000)		116,000
Trademarks	26,896		—		26,896		26,896		—		26,896
In Process R&D	263,936		(9,426)		254,510		263,936		—		263,936
Favorable contract asset	384,465		(335,032)		49,433		384,465		(313,030)		71,435

	$	2,494,752	$	(1,250,379)	$	1,244,373	$	2,496,470	$	(1,136,151)	$	1,360,319

Intangible liability
Unfavorable contract liability	$	2,534,818	$	(1,096,540)	$	1,438,278	$	2,534,818	$	(917,767)	$	1,617,051

The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the three and six months ended June 30, 2021 and 2020 was $51,187 and $94,077 and $20,312 and $43,128 respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the six months ended June 30, 2021 and 2020 was $79,569 and $158,622 and $95,364 and $203,361, respectively. During the six months

ended June 30, 2021 and 2020, we abandoned certain patent applications amounting to $7,400 and $179,944, respectively, and recorded an abandonment charge in general and administrative expenses in each respective period.

Favorable/Unfavorable Contract Assets and Liabilities

The favorable contract asset and unfavorable contract liability in the foregoing table represent the estimated fair value of American DG Energy's customer contracts (both positive for favorable contracts and negative for unfavorable contracts) which were acquired by us in May 2017.

Amortization of intangibles including contract related amounts is calculated using the straight-line method over the remaining useful life or contract term. Aggregate future amortization over the next five years and thereafter is estimated to be as follows:


Year 1	$	(127,451)
Year 2	(94,816)
Year 3	(52,826)
Year 4	(7,080)
Year 5	60,360
Thereafter	1,012
Total	$	(220,801)


Note 7.			Sale of Energy Producing Assets and Goodwill Impairment

During the first quarter of 2019 we recognized two individual sales of energy producing assets, for a total of eight power purchase agreements, including the associated energy production contracts for total consideration of $7 million.

In connection with these assets sales, we entered into agreements with the purchaser to maintain and operate the assets over the remaining periods of the associated energy production contracts (through August 2033 and January 2034, respectively) in exchange for monthly maintenance and operating fees. These agreements contain provisions whereby we have guaranteed to the purchaser a minimum level or threshold of cash flows from the associated energy production contracts. Actual results are compared to the minimum threshold bi-annually and we are contractually obligated to reimburse any shortfall to the purchaser. To the extent actual cash flow results exceed the minimum threshold, we are entitled to fifty percent of such excess under the agreements. As of June 30, 2021, we had a $21,051 receivable representing our share of the excess bi-annual cash flows for the period ended June 30, 2021.

The foregoing agreements also contain provisions whereby we have agreed to make whole the purchaser in the event the counterparty to the energy production contract(s) defaults on or otherwise terminates before the stated expiration of the energy production contract. Should 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 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.


Note 8.			Leases

Our leases principally consist of operating leases related to our corporate office, field offices, and our research, manufacturing and storage facilities.

At inception, we determine if an arrangement contains 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 are included in Right-of-use assets, Lease obligations, current and Lease obligations, long term on the condensed consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term 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 consist of fixed payments for base rent, is recognized on a straight-line basis over the lease term. Lease expense for the three and six months ended June 30, 2021 and 2020 was $198,943 and $394,216 and $196,103 and $386,138, respectively.

Supplemental information related to leases for the six months ended June 30, 2021 was as follows:


Cash paid for amounts included in the measurement of operating lease liabilities	$	352,579
Weighted-average remaining lease term - operating leases	4.3 years
Weighted-average discount rate - operating leases	6		%

Future minimum lease commitments under non-cancellable operating leases as of June 30, 2021 were as follows:


	Operating Leases
Year 1	$	363,163
Year 2	734,110
Year 3	745,417
Year 4	299,424
Year 5	108,799
Thereafter	331,128
Total lease payments	2,582,041
Less: imputed interest	321,700
Total	$	2,260,341

Note 9. Stock-Based Compensation

Stock-Based Compensation

We adopted a 2006 Stock Option and Incentive Plan, or the Plan, under which the Board of Directors may grant incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Amended Plan to 3,838,750 as of June 30, 2021, and in June 2017 stockholders approved an amendment to extend the termination date of the Plan to January 1, 2026 and ratified 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 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, 2021 was 807,312.

Stock option activity for the six months ended June 30, 2021 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, 2020	2,496,242	$0.71-$10.33	$	1.94	7.37 years	$	731,744
Granted	208,000	$1.75	$	1.75

Exercised	—
Canceled and forfeited	(253,500)	$2.60	$	2.60

Outstanding, June 30, 2021	2,450,742	$0.71-$10.33	$	1.86	7.88 years	$	1,709,243
Exercisable, June 30, 2021	666,408		$	4.00		$	27,583
Vested and expected to vest, June 30, 2021	2,183,092		$	1.96		$	1,456,994

Consolidated stock-based compensation expense for the three and six months ended June 30, 2021 and 2020 was $54,681 and $93,766 and $39,494 and $81,730, respectively. No tax benefit was recognized related to the stock-based compensation recorded during the period.

At June 30, 2021 the total compensation cost related to unvested stock option awards not yet recognized is $563,847 and this amount will be recognized over a weighted average period of 2.12 years.

Note 10. Fair Value Measurements

The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. We currently do 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. We have Level 2 financial assets and liabilities as provided below.

Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. We do not currently have any Level 3 financial assets or liabilities.

The following tables presents the asset reported in "other assets" in the consolidated balance sheet measured at its fair value on a recurring basis as of June 30, 2021 and 2020 by level within the fair value hierarchy.


June 30, 2021			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Total		Level 1		Level 2		Level 3
Recurring fair value measurements
Marketable equity securities
EuroSite Power Inc.	$	168,739	$	—	$	168,739	$	—
Total recurring fair value measurements	$	168,739	$	—	$	168,739	$	—