Annual report pursuant to Section 13 and 15(d)

Acquisition of American DG Energy Inc. (Notes)

Acquisition of American DG Energy Inc. (Notes)

12 Months Ended

Dec. 31, 2018

On May 18, 2017, we completed our acquisition, by means of a stock-for-stock merger, of 100% of the outstanding common shares of American DG Energy Inc. (“American DG Energy" or "ADGE”), a company which installs, owns, operates and maintains complete distributed generation of electricity systems, or DG systems or energy systems, and other complementary systems at customer sites and sells electricity, hot water, heat and cooling energy under long-term contracts at prices guaranteed to the customer to be below conventional utility rates, by means of a merger of one of our wholly owned subsidiaries with and into ADGE such that ADGE became a wholly owned subsidiary of Tecogen. We acquired ADGE to, among other reasons, expand our product offerings and benefit directly from the long-term contracted revenue streams generated by these installations. We gained control of ADGE on May 18, 2017 by issuing Tecogen Common Stock to the prior stockholders of ADGE.

We have included the financial results of ADGE in our condensed consolidated financial statements from the date of acquisition. For the year ended December 31, 2018, ADGE contributed $6,399,526 to our total revenues and $2,598,372 to our gross profit.

Acquisition related costs included in general and administrative expenses totaled $322,566 for the year ended December 31, 2018. Stock issuance related costs totaling $377,246 were netted against additional paid in capital during the year ended December 31, 2018.

The merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986. Subject to the terms and conditions of the merger agreement, at the closing of the merger, each outstanding share of ADGE common stock was converted into the right to receive approximately 0.092 shares of common stock of Tecogen (the "Exchange Ratio").

Also in connection with the merger, Tecogen, at the effective time of the merger, assumed the outstanding stock options of ADGE as adjusted pursuant to the Exchange Ratio and subject to the terms of the merger agreement.

The fair value of the 4,662,937 shares of common stock issued as part of the consideration for the acquisition was determined based on the closing market price of Tecogen’s stock on the date of acquisition. Additionally, as there is no required service condition in the assumed equity-based awards, 100% of the estimated fair value of the replacement equity-based awards at the date of the merger is considered attributable to pre-combination service and accordingly is included in the consideration.

The following table summarizes the consideration paid for ADGE and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE.



Consideration
Tecogen common stock - 4,662,937 shares	$	18,745,007
Assumed fully vested equity awards	114,896
	$	18,859,903

Recognized amounts of identifiable assets acquired and liabilities assumed
Financial assets	$	1,542,137
Inventory	75,374
Prepaid and other current assets	358,628
Property, plant and equipment	12,186,664
Investment securities	519,568
Favorable contract asset	1,561,739
Financial liabilities	(1,912,859		)
Unfavorable contract liability	(8,341,922		)
Other liabilities	(939		)
Total identifiable net assets	5,988,390
Noncontrolling interest in American DG New York, LLC	(453,272		)
Goodwill	13,324,785
	$	18,859,903

Goodwill acquired of $13.3 million arising from the acquisition is primarily attributable to the going concern element of ADGE’s business, including its assembled workforce and the long-term contractual nature of its business, as well as expected cost synergies from the merger related primarily to the elimination of administrative overhead and duplicative personnel. None of the goodwill recognized is expected to be deductible for income tax purposes.

The favorable contract asset and the unfavorable contract liability, both of which relate to existing customer contracts, and the estimated amortization are more fully described in Note 6. "Intangible assets and liabilities other than goodwill".

The fair value of the noncontrolling interest in American DG New York, LLC, a consolidated subsidiary of ADGE, was estimated using the income approach. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within level 3 of the fair value hierarchy described in ASC Section 820-10-35. Key assumptions include a discount rate of 5.61% and the run out of existing contracts at current levels of profitability.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Tecogen and ADGE as though the companies were combined as of the beginning of fiscal 2016. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from the acquisition including amortization charges and credits from acquired intangible assets and liabilities, and depreciation adjustments related to fair value as though the aforementioned companies were combined as of the beginning of fiscal 2016. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2016.



	Year ended
	December 31, 2017
Total revenues	$	36,232,650
Net income (loss)	113,255
Basic earnings (loss) per share	$	0.01
Diluted earnings (loss) per share	$	0.01

One-time acquisition-related expenses related to the merger incurred during the year ended December 31, 2017 are not included in the unaudited pro forma financial information as they are not expected to have a continuing impact on the consolidated results.

The unaudited pro forma financial information does not include the revenues or results of operations of a subsidiary previously owned and consolidated by ADGE as that subsidiary was disposed of in 2016 prior to the acquisition by Tecogen and was considered to be a discontinued operation by ADGE. Additionally, the unaudited pro forma financial information does not include a gain recognized on deconsolidation of that same subsidiary by ADGE and an amount of interest cost related to ADGE's long-term debt which was extinguished contemporaneously with the disposition of the subsidiary.