tgen-20220930

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, 2022


☐						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 September 30, 2022, 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, 2022

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited)
	September 30, 2022 and December 31, 2021	1

	Condensed Consolidated Statements of Operations (Unaudited)
	Three Months Ended September 30, 2022 and 2021	2

	Condensed Consolidated Statements of Operations (Unaudited)
	Nine Months Ended September 30, 2022 and 2021	3

	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
	Three and Nine Months Ended September 30, 2022 and 2021	4

	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Nine Months Ended September 30, 2022 and 2021	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults in Senior Securities	32

Item 4.	Mine Safety Disclosures	32

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)


	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	2,880,160	$	3,614,463
Accounts receivable, net	8,598,302		8,482,286
Unbilled revenue	1,956,002		3,258,189
Employee retention credit receivable	713,269		1,276,021
Inventories, net	8,712,021		7,764,989

Prepaid and other current assets	507,996		578,801
Total current assets	23,367,750		24,974,749
Long-term assets:
Property, plant and equipment, net	1,661,694		1,782,944
Right of use assets	1,404,034		1,869,210
Intangible assets, net	1,047,296		1,181,023

Goodwill	2,406,156		2,406,156
Other assets	184,393		148,140
TOTAL ASSETS	$	30,071,323	$	32,362,222

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:



Accounts payable	$	3,325,452	$	3,508,354
Accrued expenses	2,263,009		2,343,728
Deferred revenue	1,282,971		1,957,752
Lease obligations, current	676,974		641,002

Unfavorable contract liability, current	265,854		330,032
Total current liabilities	7,814,260		8,780,868
Long-term liabilities:

Deferred revenue, net of current portion	395,561		208,456
Lease obligations, net of current portion	796,696		1,315,275

Unfavorable contract liability, net of current portion	706,667		929,474
Total liabilities	9,713,184		11,234,073

Commitments and contingencies (Note 12)

Stockholders’ equity:
Tecogen Inc. stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 24,850,261 issued and outstanding at September 30, 2022 and December 31, 2021	24,850		24,850
Additional paid-in capital	57,271,577		57,016,859

Accumulated deficit	(36,857,142)		(35,833,621)
Total Tecogen Inc. stockholders’ equity	20,439,285		21,208,088
Non-controlling interest	(81,146)		(79,939)
Total stockholders’ equity	20,358,139		21,128,149
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	30,071,323	$	32,362,222

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

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended
	September 30, 2022		September 30, 2021
Revenues
Products	$	3,206,732	$	1,871,332
Services	3,078,604		2,829,244
Energy production	332,774		315,292
Total revenues	6,618,110		5,015,868
Cost of sales
Products	2,074,243		1,036,396
Services	1,482,355		1,467,019
Energy production	168,178		170,518
Total cost of sales	3,724,776		2,673,933
Gross profit	2,893,334		2,341,935
Operating expenses
General and administrative	2,343,449		2,473,190
Selling	567,529		656,885
Research and development	202,138		122,031
Gain on disposition of assets	(5,486)		—

Total operating expenses	3,107,630		3,252,106
Loss from operations	(214,296)		(910,171)
Other income (expense)
Other income (expense), net	(7,140)		(4,798)
Interest expense	(2,280)		(3,855)
Gain on extinguishment of debt	—		1,885,655
Employee retention credit	—		562,253

Unrealized loss on investment securities	—		(37,497)
Total other income (expense), net	(9,420)		2,401,758
Income (loss) before provision for state income taxes	(223,716)		1,491,587
Provision for state income taxes	5,922		3,000
Consolidated net income (loss)	(229,638)		1,488,587
Income attributable to the non-controlling interest	(27,074)		(21,890)
Net income (loss) attributable to Tecogen Inc.	$	(256,712)	$	1,466,697

Net income (loss) per share - basic	$	(0.01)	$	0.06
Net income (loss) per share - diluted	$	(0.01)	$	0.06
Weighted average shares outstanding - basic	24,850,261		24,850,261
Weighted average shares outstanding - diluted	24,850,261		25,154,905

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

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Nine Months Ended
	September 30, 2022		September 30, 2021
Revenues
Products	$	10,156,328	$	6,439,981
Services	9,046,075		9,438,702
Energy production	1,268,623		1,339,448
Total revenues	20,471,026		17,218,131
Cost of sales
Products	6,734,465		3,601,408
Services	4,322,693		4,684,008
Energy production	726,297		796,933
Total cost of sales	11,783,455		9,082,349
Gross profit	8,687,571		8,135,782
Operating expenses
General and administrative	7,642,183		7,365,495
Selling	1,572,221		1,747,959
Research and development	537,126		381,064
Gain on disposition of assets	(41,931)		—
Gain on termination of unfavorable contract liability	(71,375)		—
Total operating expenses	9,638,224		9,494,518
Loss from operations	(950,653)		(1,358,736)
Other income (expense)
Interest and other income (expense), net	(22,556)		(7,127)
Interest expense	(15,841)		(13,583)
Gain on extinguishment of debt	—		3,773,014
Employee retention credit	—		1,276,021
Gain on sale of investment securities	—		6,046
Unrealized gain on investment securities	37,497		18,749
Total other income (expense), net	(900)		5,053,120
Income (loss) before provision for state income taxes	(951,553)		3,694,384
Provision for state income taxes	16,352		18,991
Consolidated net income (loss)	(967,905)		3,675,393
Income attributable to non-controlling interest	(55,616)		(42,358)
Net income (loss) attributable to Tecogen Inc.	$	(1,023,521)	$	3,633,035



Net income (loss) per share - basic	$	(0.04)	$	0.15
Net income (loss) per share - diluted	$	(0.04)	$	0.14
Weighted average shares outstanding - basic	24,850,261		24,850,261
Weighted average shares outstanding - diluted	24,850,261		25,131,165

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

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Three and Nine Months September 30, 2022 and 2021

(unaudited)


Three months ended September 30, 2022	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at June 30, 2022	24,850,261	$	24,850	$	57,202,459	$	(36,600,430)	$	(84,206)	$	20,542,673
Stock based compensation expense				69,118						69,118
Distributions to non-controlling interest								(24,014)		(24,014)
Net income (loss)						(256,712)		27,074		(229,638)
Balance at September 30, 2022	24,850,261	$	24,850	$	57,271,577	$	(36,857,142)	$	(81,146)	$	20,358,139

Nine months ended September 30, 2022	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at December 31, 2021	24,850,261	$	24,850	$	57,016,859	$	(35,833,621)	$	(79,939)	$	21,128,149
Stock based compensation expense				254,718						254,718
Distributions to non-controlling interest								(56,823)		(56,823)
Net income (loss)						(1,023,521)		55,616		(967,905)
Balance at September 30, 2022	24,850,261	$	24,850	$	57,271,577	$	(36,857,142)	$	(81,146)	$	20,358,139

Three months ended September 30, 2021	Common Stock Shares	Common Stock 0.001 Par Value		Additional Paid-In Capital		Accumulated Deficit		Non-controlling Interest		Total
Balance at June 30, 2021	24,850,261	$	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, 2021	24,850,261	24,850		56,965,083		$	(35,896,586)	$	(66,133)	$	21,027,214

Nine months ended September 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	—	—		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, 2021	24,850,261	$	24,850	$	56,965,083	$	(35,896,586)	$	(66,133)	$	21,027,214

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

TECOGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended
	September 30, 2022		September 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income (loss)	$	(967,905)	$	3,675,393
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization, net	324,968		357,636
Gain on extinguishment of debt	—		(3,773,014)

Employee retention credit	—		(1,276,021)
Stock-based compensation	254,718		150,655
Provision for doubtful accounts	(183,955)		52,000
Gain on disposition of assets	(41,931)		(9,787)
Gain on sale of investment securities	—		(6,046)
Unrealized gain on investment securities	(37,497)		(18,749)
Gain on termination of unfavorable contract liability	(71,375)		—
Impairment of intangible asset	—		7,400

Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable	67,940		890,374
Employee retention credit receivable	562,752		—
Unbilled revenue	1,302,187		424,967
Inventory	(947,031)		(753,447)
Prepaid expenses and other current assets	70,806		24,361
Other assets	466,420		(387,847)
Increase (decrease) in:
Accounts payable	(182,903)		(636,156)
Accrued expenses and other current liabilities	(80,720)		378,970
Deferred revenue	(487,676)		691,867
Other liabilities	(482,608)		379,440
Net cash (used in) provided by operating activities	(433,810)		171,996
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(286,820)		(84,160)
Proceeds from the sale of investment securities	—		11,637
Purchases of intangible assets	(29,505)		(56,349)
Proceeds from disposition of assets	72,655		9,787

Distributions to non-controlling interest	(56,823)		(66,168)
Net cash used in investing activities	(300,493)		(185,253)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable	—		1,874,269




Net cash provided by financing activities	—		1,874,269
Change in cash and cash equivalents	(734,303)		1,861,012
Cash and cash equivalents, beginning of the period	3,614,463		1,490,219
Cash and cash equivalents, end of the period	$	2,880,160	$	3,351,231

Supplemental disclosures of cash flows information:
Cash paid for interest	$	14,597	$	—
Cash paid for taxes	$	16,352	$	18,991

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

TECOGEN INC.

Notes to 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.

On July 20, 2022, Tecogen announced the establishment of NetZero Greens, a new business unit focused on low carbon Controlled Environment Agriculture (CEA). Tecogen believes that CEA offers an exciting opportunity to apply the company’s expertise in clean cooling, power generation, and greenhouse gas reduction to address critical issues affecting food and energy security.

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, we 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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The condensed consolidated balance sheet at December 31, 2021 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, 2021.

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 three business segments. Our Products segment designs, manufactures and sells industrial and commercial cogeneration systems as described above. Our Services segment provides operation and maintenance services to customers for our products. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.

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 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, excluding the wages that were applied to the Paycheck Protection Loan Second Draw, were eligible for the ERC. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the ERC.

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 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

A current receivable in the amount of $713,269 is included in our condensed consolidated balance sheet as of September 30, 2022. On April 14, 2022, we received $564,027 from the Internal Revenue Service representing the ERC claim for the third quarter of 2021 and $1,275 of accrued interest. We are still awaiting payment from the Internal Revenue Service for the ERC claims from the first and second quarters of 2021.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

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-added 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 nine months ended September 30, 2022 and 2021.


	Three Months Ended September 30, 2022
	Products		Services		Energy Production		Total
Products	$	3,206,732	$	—	$	—	$	3,206,732
Installation services	—		—		—		—
Maintenance services	—		3,078,604		—		3,078,604
Energy production	—		—		332,774		332,774
Total revenue	$	3,206,732	$	3,078,604	$	332,774	$	6,618,110


	Nine Months Ended September 30, 2022
	Products		Services		Energy Production		Total
Products	$	10,156,328	$	—	$	—	$	10,156,328
Installation services	—		20,109		—		20,109
Maintenance services	—		9,025,966		—		9,025,966
Energy production	—		—		1,268,623		1,268,623
Total revenue	$	10,156,328	$	9,046,075	$	1,268,623	$	20,471,026


	Three Months Ended September 30, 2021
	Products		Services		Energy Production		Total
Products	$	1,871,332	$	—	$	—	$	1,871,332
Installation services	—		63,076		—		63,076
Maintenance services	—		2,766,168		—		2,766,168
Energy production	—		—		315,292		315,292
Total revenue	$	1,871,332	$	2,829,244	$	315,292	$	5,015,868

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements


	Nine Months Ended September 30, 2021
	Products		Services		Energy Production		Total
Products	$	6,439,981	$	—	$	—	$	6,439,981
Installation services	—		825,325		—		825,325
Maintenance services	—		8,613,377		—		8,613,377
Energy production	—		—		1,339,448		1,339,448
Total revenue	$	6,439,981	$	9,438,702	$	1,339,448	$	17,218,131

Products Segment

Products. Our Product revenues include cogeneration systems that supply electricity and hot water, chillers that provide air-conditioning and hot water, and engineered accessories, which consist of ancillary products and parts necessary to install a cogeneration unit including integration into the customers’ existing electrical and mechanical systems. We refer to the package of engineered accessories and engineering and design services necessary for the customers' installation of a cogeneration unit as light installation services.

We transfer control and generally recognize a sale when we ship a product from our manufacturing facility at which point the customer takes ownership of the product. Payment terms on product sales are generally 30 days.

We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill and hold transactions). We recognize revenue related to such transactions once, among other things, the customer has made a written fixed commitment to purchase the product(s) under normal billing and credit terms, the customer has requested the product(s) be held for future delivery as scheduled and designated by them, risk of ownership has been assumed by the customer, and the product(s) are tagged as sold and segregated for storage awaiting further direction from the customer. Due to the infrequent nature and duration of bill and hold arrangements, the value associated with custodial storage services is deemed immaterial in the context of the contract and in total, and accordingly, none of the transaction price is allocated to such service.

Depending on the product and terms of the arrangement, we may defer the recognition of a portion of the transaction price received because we have to satisfy a future obligation (e.g., product start-up service). Amounts allocated to product start-up services are recognized as revenue when the start-up service has been completed. We use an observable selling price to determine standalone selling prices where available and either a combination of an adjusted market assessment approach, an expected cost plus a margin approach, and/or a residual approach to determine the standalone selling prices for separate performance obligations as a basis for allocating contract consideration when an observable selling price is not available. Amounts received but not recognized pending completion of performance are recognized as contract liabilities and are recorded as deferred revenue along with deposits by customers.

Services Segment

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 a 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.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

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.

We did not recognize any revenue during the nine months ended September 30, 2022 that was included in unbilled revenue at the end of the period. Approximately $1,302,727 was billed in this period that had been recognized as revenue in previous periods.

Revenue recognized during the nine months ended September 30, 2022 that was included in deferred revenue at the beginning of the period was approximately $1,620,128.

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, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $0.8 million. We expect to recognize revenue of approximately 78.2% of the remaining performance obligations over the next 24 months, 53.0% recognized in the first 12 months and 25.2% recognized over the subsequent 12 months, and the remainder recognized thereafter.

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

Note 3. Income Per Common Share

Basic and diluted income (loss) per share for the three and nine months ended September 30, 2022 and 2021, respectively, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net income (loss) available to stockholders	$	(256,712)	$	1,466,697	$	(1,023,521)	$	3,633,035

Denominator:
Weighted average shares outstanding - Basic	24,850,261		24,850,261		24,850,261		24,850,261
Effect of dilutive securities:
Stock options	—		304,644		—		280,904
Weighted average shares outstanding - Diluted	24,850,261		25,154,905		24,850,261		25,131,165

Basic income (loss) per share	$	(0.01)	$	0.06	$	(0.04)	$	0.15
Diluted income (loss) per share	$	(0.01)	$	0.06	$	(0.04)	$	0.14

Anti-dilutive shares underlying stock options outstanding	971,001		777,296		836,001		777,296


Note 4.			Inventories, net

Inventories at September 30, 2022 and December 31, 2021 consisted of the following:


	September 30, 2022		December 31, 2021
Raw materials	$	8,118,001	$	7,072,991
Less: reserves	(335,121)		(381,000)
Raw materials, net	$	7,782,880	$	6,691,991
Work-in-process	341,485		549,802
Finished goods	587,656		523,196
Total inventories, net	$	8,712,021	$	7,764,989

Note 5. Property, Plant and Equipment, net

Property, plant and equipment at September 30, 2022 and December 31, 2021 consisted of the following:


	Estimated Useful Life (in Years)	September 30, 2022		December 31, 2021
Energy systems	1 - 15 years	$	3,478,824	$	3,556,488
Machinery and equipment	5 - 7 years	1,596,827		1,463,153
Furniture and fixtures	5 years	196,006		193,698
Computer software	3 - 5 years	192,865		192,865
Leasehold improvements	*	466,789		466,789
		5,931,311		5,872,993
Less - accumulated depreciation and amortization		(4,269,617)		(4,090,049)
		$	1,661,694	$	1,782,944

* Lesser of estimated useful life of asset or lease term

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

Depreciation and amortization expense on property and equipment for the three and nine months ended September 30, 2022 and 2021 was $125,755 and $376,365, and $144,181 and $450,195, respectively. During the nine months ended September 30, 2022, we received proceeds of $72,655 from the disposition of certain assets, realizing a gain of $41,931 and disposed of machinery and equipment with a cost of $93,988 and no net book value.

Note 6. Intangible Assets and Liabilities Other Than Goodwill

As of September 30, 2022 and December 31, 2021 we had the following amounts related to intangible assets and liabilities other than goodwill:


	September 30, 2022						December 31, 2021
Intangible assets	Cost		Accumulated Amortization		Total		Cost		Accumulated Amortization		Total
Product certifications	$	777,465	$	(572,230)	$	205,235	$	765,850	$	(532,676)	$	233,174
Patents	888,911		(382,765)		506,146		871,021		(314,997)		556,024
Developed technology	240,000		(152,000)		88,000		240,000		(140,000)		100,000
Trademarks	26,896		—		26,896		26,896		—		26,896
In Process R&D	263,936		(56,558)		207,378		263,936		(28,279)		235,657
Favorable contract asset	384,465		(370,824)		13,641		384,465		(355,193)		29,272

	$	2,581,673	$	(1,534,377)	$	1,047,296	$	2,552,168	$	(1,371,145)	$	1,181,023

Intangible liability
Unfavorable contract liability	$	2,903,419	$	(1,930,898)	$	972,521	$	3,056,655	$	(1,797,149)	$	1,259,506

The aggregate amortization expense related to intangible assets and liabilities exclusive of contract related intangibles for the three and nine months ended September 30, 2022 and 2021 was $49,885 and $150,376, and $51,229 and $145,306, respectively. The net credit to cost of sales related to the amortization of the contract related intangible asset and liability for the three and nine months ended September 30, 2022 and 2021 was $69,370 and $202,753, and $79,570 and $238,192, respectively. During the nine months ended September 30, 2021 we abandoned certain patent applications amounting to $7,400 and recorded an impairment charge in general and administrative expenses in the 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, 2022 is estimated to be as follows:


	Non-contract Related Intangibles		Contract Related Intangibles		Total
Year 1	$	201,568	$	(265,854)	$	(64,286)
Year 2	187,551		(217,757)		(30,206)
Year 3	178,984		(120,464)		58,520
Year 4	174,968		(90,035)		84,933
Year 5	172,545		(78,261)		94,284
Thereafter	104,784		(200,150)		(95,366)
Total	$	1,020,400	(972,521)		$	47,879

TECOGEN INC.

Notes to Condensed Consolidated Financial Statements

We recognized a gain on termination of unfavorable contract liability of $71,375 in the nine months ended September 30, 2022 due to the closing of certain energy production sites.


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. In October 2021 the minimum guarantee with respect to one of the energy purchase agreements was modified by reducing the guaranteed minimum collections by $35,000 per year, the guaranteed minimum collection amount associated with one site that was sold by the customer. 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. Based upon an analysis of these energy producing assets expected future performance, as of September 30, 2022 we do not expect to make any material payments under the guarantee. At September 30, 2022, our obligation under the energy production contracts was $7,236.

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 nine months ended September 30, 2022 and 2021 was $201,578 and $608,652, and $197,651 and $591,867, respectively.

Supplemental information related to leases for the nine months ended September 30, 2022 was as follows:


	Nine Months Ended September 30,
	2022			2021
Cash paid for amounts included in the measurement of operating lease liabilities	$	549,402		$	534,073
Right-of-use assets obtained in exchange for operating lease liabilities	$	—		$	825,848
Weighted-average remaining lease term - operating leases	3.61 years			4.10 years
Weighted-average discount rate - operating leases	6		%	6		%