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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 September 30, 2021

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

Commission file number 001-36103
tgen-20210930_g1.jpg
TECOGEN INC. (OTCQX:TGEN)
(Exact name of Registrant as specified in its charter)
Delaware04-3536131
(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 November 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 SEPTEMBER 30, 2021
TABLE OF CONTENTS
 
PART I - FINANCIAL INFORMATION

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)
 September 30, 2021December 31, 2020
ASSETS
Current assets:  
Cash and cash equivalents$3,351,231 $1,490,219 
Accounts receivable, net7,728,737 8,671,163 
Unbilled revenue3,842,282 4,267,249 
Employee retention credit1,276,021  
Inventories, net7,922,044 7,168,596 
Prepaid and other current assets572,783 597,144 
Total current assets24,693,098 22,194,371 
Long-term assets:
Property, plant and equipment, net1,917,483 2,283,846 
Right of use assets2,019,166 1,632,574 
Intangible assets, net1,234,047 1,360,319 
Goodwill2,406,156 2,406,156 
Other assets210,800 196,387 
TOTAL ASSETS$32,480,750 $30,073,653 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Note payable$ $837,861 
Accounts payable3,546,950 4,183,105 
Accrued expenses2,216,673 1,993,471 
Deferred revenue1,850,371 1,294,157 
Lease obligations, current628,950 506,514 
Total current liabilities8,242,944 8,815,108 
Long-term liabilities:  
Note payable, net of current portion 1,036,339 
Deferred revenue, net of current portion250,981 115,329 
Lease obligations, net of current portion1,479,495 1,222,492 
Deferred payroll tax liability, net of current portion131,224  
Unfavorable contract liability1,348,892 1,617,051 
Total liabilities11,453,536 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 September 30, 2021 and December 31, 2020, respectively
24,850 24,850 
Additional paid-in capital56,965,083 56,814,428 
Accumulated deficit(35,896,586)(39,529,621)
Total Tecogen Inc. stockholders’ equity21,093,347 17,309,657 
Non-controlling interest(66,133)(42,323)
Total stockholders’ equity21,027,214 17,267,334 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$32,480,750 $30,073,653 
 The accompanying notes are an integral part of these consolidated financial statements. 
1

TECOGEN INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
 September 30, 2021September 30, 2020
Revenues
Products$1,871,332 $2,705,422 
Services2,829,244 4,125,590 
Energy production315,292 368,695 
Total revenues5,015,868 7,199,707 
Cost of sales
Products1,036,396 1,617,626 
Services1,467,019 2,597,729 
Energy production170,518 197,608 
Total cost of sales2,673,933 4,412,963 
Gross profit2,341,935 2,786,744 
Operating expenses
General and administrative2,473,190 2,318,789 
Selling656,885 563,857 
Research and development122,031 111,253 
Total operating expenses3,252,106 2,993,899 
Loss from operations(910,171)(207,155)
Other income (expense)
Interest income and other income (expense), net(4,798)(12)
Interest expense(3,855)(4,845)
Gain on extinguishment of debt1,885,655  
Employee retention credit562,253  
Unrealized loss on investment securities(37,497) 
Total other income (expense), net2,401,758 (4,857)
Income (loss) before provision for state income taxes1,491,587 (212,012)
Provision for state income taxes3,000 9,397 
Consolidated net income (loss)1,488,587 (221,409)
Income attributable to the non-controlling interest(21,890)(10,511)
Net income (loss) attributable to Tecogen Inc.$1,466,697 $(231,920)
Net income (loss) per share - basic$0.06 $(0.01)
Net income (loss) per share - diluted$0.06 $(0.01)
Weighted average shares outstanding - basic24,850,261 24,850,261 
Weighted average shares outstanding - diluted25,154,905 24,850,261 
 
The accompanying notes are an integral part of these consolidated financial statements.

2

TECOGEN INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended
 September 30, 2021September 30, 2020
Revenues
Products$6,439,981 $9,543,316 
Services9,438,702 11,658,263 
     Energy production1,339,448 1,395,886 
Total revenues17,218,131 22,597,465 
Cost of sales
Products3,601,408 5,640,965 
Services4,684,008 7,583,710 
     Energy production796,933 887,888 
Total cost of sales9,082,349 14,112,563 
Gross profit8,135,782 8,484,902 
Operating expenses
General and administrative7,365,495 7,645,729 
Selling1,747,959 2,022,027 
Research and development381,064 641,616 
Total operating expenses9,494,518 10,309,372 
Loss from operations(1,358,736)(1,824,470)
Other income (expense)
Interest and other income (expense), net(7,127)11,953 
Interest expense(13,583)(121,084)
Gain on extinguishment of debt3,773,014  
Employee retention credit1,276,021  
Gain on sale of investment securities6,046  
Unrealized gain (loss) on investment securities18,749 (98,403)
Total other income (expense), net5,053,120 (207,534)
Income (loss) before provision for state income taxes3,694,384 (2,032,004)
Provision for state income taxes18,991 27,791 
Consolidated net income (loss)3,675,393 (2,059,795)
Income attributable to non-controlling interest(42,358)(28,400)
Net income (loss) attributable to Tecogen Inc.$3,633,035 $(2,088,195)
Net income (loss) per share - basic$0.15 $(0.08)
Net income (loss) per share - diluted$0.14 $(0.08)
Weighted average shares outstanding - basic 24,850,261 24,850,257 
Weighted average shares outstanding - diluted25,131,165 24,850,257 

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













3

TECOGEN INC.







CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three and Nine Months Ended September 30, 2021 and 2020
(unaudited)



Three months ended September 30, 2021Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at June 30, 202124,850,261 $24,850 $56,908,194 $(37,363,283)$(55,667)$19,514,094 
Stock based compensation expense— — 56,889 — — 56,889 
Distributions to non-controlling interest— — — — (32,356)(32,356)
Net income— — — 1,466,697 21,890 1,488,587 
Balance at September 30, 202124,850,261 $24,850 $56,965,083 $(35,896,586)$(66,133)$21,027,214 
 
Nine months ended September 30, 2021Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at December 31, 202024,850,261 $24,850 $56,814,428 $(39,529,621)$(42,323)$17,267,334 
Stock based compensation expense— — 150,655 — — 150,655 
Distributions to non-controlling interest— —  — (66,168)(66,168)
Net income— — — 3,633,035 42,358 3,675,393 
Balance at September 30, 202124,850,261 $24,850 $56,965,083 $(35,896,586)$(66,133)$21,027,214 
Three months ended September 30, 2020Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at June 30, 202024,850,261 $24,850 $56,704,412 $(35,235,389)$80,076 $21,573,949 
Stock issuance costs— — (1,149)— — (1,149)
Stock based compensation expense— — 50,582 — — 50,582 
Distributions to non-controlling interest— — — — (18,670)(18,670)
Net income (loss)— — — (231,920)10,511 (221,409)
Balance at September 30, 202024,850,261 $24,850 $56,753,845 $(35,467,309)$71,917 $21,383,303 
Nine months ended September 30, 2020Common Stock SharesCommon
Stock
0.001
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Non-controlling
Interest
Total
Balance at December 31, 201924,849,261 $24,849 $56,622,285 $(33,379,114)$85,257 $23,353,277 
Stock issuance costs1,000 1 1,199 — — 1,200 
Stock based compensation expense— — (1,951)— — (1,951)
Stock based compensation expense— — 132,312 — — 132,312 
Distributions to non-controlling interest— — — — (41,740)(41,740)
Net income (loss)— — — (2,088,195)28,400 (2,059,795)
Balance at September 30, 202024,850,261 $24,850 $56,753,845 $(35,467,309)$71,917 $21,383,303 

The accompanying notes are an integral part of these consolidated financial statements.
4

TECOGEN INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
 September 30, 2021September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)$3,675,393 $(2,059,795)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, net357,636 293,941 
Gain on extinguishment of debt(3,773,014) 
Employee retention credit(1,276,021) 
Stock-based compensation150,655 132,312 
Provision for doubtful accounts52,000  
Gain on disposal of assets(9,787) 
Gain on sale of investment securities(6,046) 
Unrealized (gain) loss on investment securities(18,749)98,403 
Abandonment of intangible assets7,400 179,944 
Non-cash interest expense 51,190 
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in:
Accounts receivable890,374 5,683,941 
Unbilled revenue424,967 51,389 
Inventory(753,447)(737,570)
Prepaid expenses and other current assets24,361 117,109 
Other assets(387,847)532,293 
Increase (decrease) in:
Accounts payable(636,156)(1,455,881)
Accrued expenses and other current liabilities378,970 145,848 
Deferred revenue 691,867 (1,619,696)
Other liabilities379,440  
Net cash provided by operating activities171,996 1,413,428 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment(84,160)(59,952)
Proceeds from the sale of investment securities11,637  
Purchases of intangible assets(56,349)(123,252)
Proceeds from sale of assets9,787  
Payment of stock issuance costs (1,951)
Distributions to non-controlling interest(66,168)(41,740)
Net cash used in investing activities(185,253)(226,895)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable1,874,269 1,874,200 
Payments on revolving line of credit, net (2,452,329)
Proceeds from the exercise of stock options 1,200 
Net cash provided by (used in) financing activities1,874,269 (576,929)
Change in cash and cash equivalents1,861,012 609,604 
Cash and cash equivalents, beginning of the period1,490,219 877,676 
Cash and cash equivalents, end of the period$3,351,231 $1,487,280 
Supplemental disclosures of cash flows information:  
Cash paid for interest$ $62,007 
Cash paid for taxes$18,991 $27,791 

The accompanying notes are an integral part of these consolidated financial statements. 
5

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 nine months ended September 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.



6

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, second and third quarters of 2021 because our gross receipts decreased by more than 20% from the first, second and third quarters of 2019. As a result of averaging 100 or fewer full-time employees in 2019, all wages paid to employees in the first, second and third quarters of 2021 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 three and nine months ended September 30, 2021, we recorded ERC benefits of $562,253 and $1,276,021, respectively in other income (expense), net in our condensed consolidated statements of operations. A current receivable in the amount of $1,276,021 is included in our condensed consolidated balance sheet as of September 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.
7

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

The following table further disaggregates our revenue by major source by segment for the three and nine months ended September 30, 2021 and 2020.
Three Months Ended September 30, 2021
Products and ServicesEnergy ProductionTotal
Products$1,871,332 $ $1,871,332 
Installation services63,076  63,076 
Maintenance services2,766,168  2,766,168 
Energy production 315,292 315,292 
    Total revenue$4,700,576 $315,292 $5,015,868 

Nine Months Ended September 30, 2021
Products and ServicesEnergy ProductionTotal
Products$6,439,981 $ $6,439,981 
Installation services825,325  825,325 
Maintenance services8,613,377  8,613,377 
Energy production 1,339,448 1,339,448 
    Total revenue$15,878,683 $1,339,448 $17,218,131 

Three Months Ended September 30, 2020
Products and ServicesEnergy ProductionTotal
Products$2,705,422 $ $2,705,422 
Installation services1,513,686  1,513,686 
Maintenance services2,611,904  2,611,904 
Energy production 368,695 368,695 
    Total revenue$6,831,012 $368,695 $7,199,707 


Nine Months Ended September 30, 2020
Products and ServicesEnergy ProductionTotal
Products$9,543,316 $ $9,543,316 
Installation services4,125,191  4,125,191 
Maintenance services7,533,072  7,533,072 
Energy production 1,395,886 1,395,886 
    Total revenue$21,201,579 $1,395,886 $22,597,465 

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.
8

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

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.

9

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

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 nine months ended September 30, 2021 that was included in unbilled revenue at the end of the period was approximately $1.0 million. Approximately $0.7 million was billed in this period that had been recognized as revenue in previous periods.

    Revenue recognized during the nine months ended September 30, 2021 that was included in deferred revenue at the beginning of the period was approximately $1.2 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 September 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $2.1 million. We expect to recognize revenue of approximately 92.4% of the remaining performance obligations over the next 24 months, 88.1% recognized in the first 12 months and 4.3% 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 nine months ended September 30, 2021 and 2020, respectively, were as follows: 
Three Months Ended September 30, Nine Months Ended September 30,
2021202020212020
Numerator:
Net income (loss) available to stockholders$1,466,697 $(231,920)$3,633,035 $(2,088,195)
Denominator:
Weighted average shares outstanding - Basic24,850,261 24,850,261 24,850,261 24,850,257 
Effect of dilutive securities:
Stock options304,644  280,904  
Weighted average shares outstanding - Diluted25,154,905 24,850,261 25,131,165 24,850,257 
Basic income (loss) per share$0.06 $(0.01)$0.15 $(0.08)
Diluted income (loss) per share$0.06 $(0.01)$0.14 $(0.08)
Anti-dilutive shares underlying stock options outstanding777,296 2,536,664 777,296 2,555,097 


Note 4.Inventories, net
Inventories at September 30, 2021 and December 31, 2020 consisted of the following:

10

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2021December 31, 2020
Raw materials$6,587,524 $6,227,591 
Less: reserves(381,000)(381,000)
Raw materials, net$6,206,524 $5,846,591 
Work-in-process716,026 329,702 
Finished goods999,494 992,303 
Total inventories, net$7,922,044 $7,168,596 


Note 5. Property, Plant and Equipment, net

Property, plant and equipment at September 30, 2021 and December 31, 2020 consisted of the following:
Estimated Useful
Life (in Years)
September 30, 2021December 31, 2020
Energy systems
1 - 15 years
$3,556,488 $3,526,514 
Machinery and equipment
5 - 7 years
1,484,790 1,448,024 
Furniture and fixtures
5 years
193,698 193,698 
Computer software
3 - 5 years
192,865 192,865 
Leasehold improvements*450,791 450,792 
  5,878,632 5,811,893 
Less - accumulated depreciation and amortization (3,961,149)(3,528,047)
 $1,917,483 $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 nine months ended September 30, 2021 and 2020 was $144,181 and $450,195 and $175,869 and $527,886, respectively.


Note 6. Intangible Assets and Liabilities Other Than Goodwill

As of September 30, 2021 and December 31, 2020 we had the following amounts related to intangible assets and liabilities other than goodwill:
September 30, 2021December 31, 2020
Intangible assetsCostAccumulated AmortizationTotalCostAccumulated AmortizationTotal
Product certifications$765,850 $(519,083)$246,767 $726,159 $(478,357)$247,802 
Patents864,273 (291,664)572,609 855,014 (220,764)634,250 
Developed technology240,000 (136,000)104,000 240,000 (124,000)116,000 
Trademarks26,896  26,896 26,896  26,896 
In Process R&D263,936 (18,853)245,083 263,936  263,936 
Favorable contract asset384,465 (345,773)38,692 384,465 (313,030)71,435 
$2,545,420 $(1,311,373)$1,234,047 $2,496,470 $(1,136,151)$1,360,319 
Intangible liability
Unfavorable contract liability$2,534,818 $(1,185,926)$1,348,892 $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 nine months ended September 30, 2021 and 2020 was $51,229 and $145,306 and $21,564 and $64,692 respectively. The net credit to cost of sales related to the amortization of contract related intangible assets and liabilities for the nine months ended September 30, 2021 and 2020 was $79,570 and $238,192 and $98,053 and $301,414, respectively. During
11

TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

the nine months ended September 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 as of September 30, 2021 is estimated to be as follows:
Non-contract Related IntangiblesContract Related IntangiblesTotal
Year 1$204,679 $(323,761)$(119,082)
Year 2199,576 (269,825)(70,249)
Year 3182,373 (217,757)(35,384)
Year 4173,803 (151,920)21,883 
Year 5 169,787 (90,035)79,752 
Thereafter254,896 (273,557)(18,661)
Total$1,185,114 (1,326,855)$(141,741)

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.
    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
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TECOGEN INC.
Notes to Unaudited Condensed Consolidated Financial Statements

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 nine months ended September 30, 2021 and 2020 was $197,651 and $591,867 and $179,042 and $565,180, respectively.
    Supplemental information related to leases for the nine months ended September 30, 2021 was as follows:
Cash paid for amounts included in the measurement of operating lease liabilities$534,073 
Weighted-average remaining lease term - operating leases4.1 years
Weighted-average discount rate - operating leases6 %
    Future minimum lease commitments under non-cancellable operating leases as of September 30, 2021 were as follows:
 Operating Leases
Year 1$181,566 
Year 2733,693 
Year 3744,981 
Year 4298,980 
Year 5108,762 
Thereafter331,128 
Total lease payments2,399,110 
Less: imputed interest290,665 
Total$2,108,445 

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 September 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 September 30, 2021 was 710,068.
Stock option activity for the nine months ended September 30, 2021 was as follows: 
Common Stock OptionsNumber of
Options
Exercise
Price
Per
Share
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life
Aggregate
Intrinsic
Value
Outstanding, December 31, 20202,496,242 
$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, September 30, 20212,450,742 
 $0.71-$10.33
$1.86 7.62 years$1,608,837 
Exercisable, September 30, 2021794,533 $3.48 $163,557 
Vested and expected to vest, September 30, 2021