Note 14. Subsequent Events
We have evaluated subsequent events through the date of this filing and determined that no material subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
TECOGEN INC.
Management's Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. For example, statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on our business and results of operations are forward-looking statements. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Such forward-looking statements include, among other things, statements regarding the impact of the coronavirus pandemic on demand for our products and services, the availability of incentives, rebates, and tax benefits relating to our products, changes in the regulatory environment relating to our products, competing technological developments, and the availability of financing to fund our operations and growth. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”), as supplemented, and Part II, Item 1A of this Form 10-Q, in each case under the heading “Risk Factors.” The following discussion should be read in conjunction with the 2021 Form 10-K filed with the Securities and Exchange Commission (“SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. Each of the terms “Tecogen,” “we,” “our,” and “us” as used herein refer collectively to Tecogen Inc. and our wholly owned subsidiaries, unless otherwise stated. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of the filing of this Form 10-Q.
Recent Developments
Controlled Environment Agriculture: NetZero Greens
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. Tecogen proposes to address this challenge by developing a highly efficient energy solution for CEA grown produce using Tecogen’s cogeneration products in conjunction with solar energy generation, energy storage, and other technologies.
CEA facilities enable multiple crop cycles (15 to 20 cycles) in one year compared to one or two crop cycles in conventional farming. In addition, growing produce close to the point of sale reduces food spoilage during transportation. Food crops grown in greenhouses typically have lower yields per square foot than in CEA facilities, and the push to situate facilities close to consumers in cities requires minimizing land area and maximizing yield per square foot. Yields are increased in CEA facilities by supplementing or replacing natural light with grow lights in a climate-controlled environment - which requires significant energy use.
In recent years our cogeneration equipment has been used in numerous cannabis cultivation facilities because our systems significantly reduce operating costs, reduce the facility GHG footprint and offer resiliency to grid outages. Tecogen’s experience providing clean energy solutions to cannabis cultivation facilities has given Tecogen significant insight into requirements relating to energy-intensive indoor agriculture applications that we expect to be transferable to CEA facilities for food production. Further information can be found in our CEA presentation on the investor relations section of our website.
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.
TECOGEN INC.
Management's Discussion and Analysis
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. Wages used towards PPP loan forgiveness cannot be used as qualified wages for purposes of the ERC
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 claim from the first and second quarters of 2021.
Air Cooled Chiller Development
During the third quarter of 2021 we began development of a hybrid air-cooled chiller. We recognized that there were many applications where the customer wanted an easy to install roof top chiller. Using the inverter design from our InVerde e+ cogeneration module, the system can simultaneously take two inputs, one from the grid or a renewable energy source and one from our natural gas engine. This allows a customer to seek the optimum blend of operational cost savings and greenhouse gas benefits while providing added resiliency from two power sources. We expect to have a prototype completed by the first quarter of 2023, and expect to see incremental revenue in 2024. A patent application based on this concept has been filed with the US Patent and Trademark Office.
COVID-19 Update
During the first quarter of fiscal 2020, a novel strain of coronavirus (“COVID-19”) began spreading rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures included restrictions on travel and business operations, temporary closures of businesses, and quarantines and shelter-in-place orders. The COVID-19 pandemic has significantly impacted supply chains, curtailed global economic activity, and caused significant volatility and disruption in global markets. The COVID-19 pandemic and the measures taken by U.S. Federal, state and local governments in response have materially adversely affected and could in the future materially impact our business, results of operations, financial condition and stock price. The impact of the pandemic remains uncertain and will depend on the growth in the number of infections, fatalities, the duration of the pandemic, steps taken to combat the pandemic, and the development and availability of effective treatments. We have made every effort to keep our employees who operate our business safe and minimize unnecessary risk of exposure to the virus.
Impact of the Russian Invasion of Ukraine
Presently the company has no operations or customers in Russia or the Ukraine. The higher energy prices for natural gas as a result of the war may affect the performance of our Energy Production Segment. However, we have also seen higher electricity prices as much of the electricity production in the United States is generated from fossil fuels. If the electricity prices continue to rise, the economic savings generated by our products are likely to increase. In addition to the direct result of changes in natural gas and electricity prices, the war in Ukraine may result in higher cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities.
Overview
Tecogen designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning using automotive engines that have been adapted to run on natural gas. In some cases, our customers may choose to have us engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because, in addition to supplying mechanical energy to power electric generators or compressors – displacing utility supplied electricity – they provide an opportunity for the facility to incorporate the engine’s waste heat into onsite processes, such as space and potable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and Engine driven chillers (cooling plus heat).
TECOGEN INC.
Management's Discussion and Analysis
Our products are sold directly to end-users by our in-house marketing team and by established sales agents and representatives. We have agreements in place with distributors and sales representatives. Our existing customers include hospitals and nursing homes, colleges and universities, health clubs and spas, hotels and motels, office and retail buildings, food and beverage processors, multi-unit residential buildings, laundries, ice rinks, swimming pools, factories, municipal buildings, military installations and indoor growing facilities. We have an installed base of more than 3,000 units. Our products have long useful lives with proper maintenance. Some of our units have been operating for over 35 years.
With the acquisition of American DG Energy Inc. ("ADGE") in May 2017, we added an additional source of revenue. Through ADGE, we install, own, operate and maintain complete distributed generation electricity systems, or DG systems or 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. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We use a contractually defined formula to multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from each customer's local energy utility, to derive the value of our monthly energy sale, which includes a negotiated discount. Our revenues per customer on a monthly basis vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customer's local energy utility that month.
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 for our products under long term service contracts. Our Energy Production segment sells energy in the form of electricity, heat, hot water and cooling to our customers under long-term sales agreements.
TECOGEN INC.
Management's Discussion and Analysis
Results of Operations
Third Quarter of 2022 Compared to Third Quarter of 2021
The following table sets forth for the periods indicated, the percentage of net sales represented by certain items reflected in our condensed consolidated statements of operations:
| | | | | | | | | | | |
| Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
Revenues | 100.0% | | 100.0% |
Cost of sales | 56.3% | | 53.3% |
Gross profit | 43.7% | | 46.7% |
Operating expenses | | | |
General and administrative | 35.4% | | 49.3% |
Selling | 8.6% | | 13.1% |
Research and development | 3.1% | | 2.4% |
Gain on disposition of assets | (0.1) | % | | —% |
| | | |
Total operating expenses | 47.0 | % | | 64.8 | % |
Loss from operations | (3.2) | % | | (18.1) | % |
Total other income (expense), net | (0.1) | % | | 47.9 | % |
Consolidated net income (loss) | (3.5) | % | | 29.7 | % |
Income attributable to the non-controlling interest | (0.4) | % | | (0.4) | % |
Net income (loss) attributable to Tecogen, Inc. | (3.9) | % | | 29.2 | % |
Revenues
Total revenues for the three months ended September 30, 2022 were $6,618,110 compared to $5,015,868 for the same period in 2021, an increase of $1,602,242 or 31.9% year over year.
The following table presents revenue for the periods indicated, by segment and the change from the prior year:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| September 30, 2022 | | September 30, 2021 | | Increase (Decrease) $ | | Increase (Decrease) % |
REVENUES: | | | | | | | |
Products | | | | | | | |
Cogeneration | $ | 1,547,761 | | | $ | 1,446,001 | | | $ | 101,760 | | 7.0 | % |
Chiller | 1,642,478 | | | 383,100 | | | 1,259,378 | | 328.7 | % |
Engineered accessories | 16,493 | | | 42,231 | | | (25,738) | | (60.9) | % |
Total Product revenues | 3,206,732 | | | 1,871,332 | | | 1,335,400 | | 71.4 | % |
Services | | | | | | | |
Maintenance services | 3,078,604 | | | 2,766,168 | | | 312,436 | | 11.3 | % |
Installation services | — | | | 63,076 | | | (63,076) | | (100.0) | % |
Total Service revenues | 3,078,604 | | | 2,829,244 | | | 249,360 | | 8.8 | % |
Products and Services | 6,285,336 | | | 4,700,576 | | | 1,584,760 | | 33.7 | % |
Energy Production revenues | 332,774 | | | 315,292 | | | 17,482 | | 5.5 | % |
Total revenues | $ | 6,618,110 | | | $ | 5,015,868 | | | $ | 1,602,242 | | 31.9 | % |
TECOGEN INC.
Management's Discussion and Analysis
Products
Product revenues in the three months ended September 30, 2022 were $3,206,732 compared to $1,871,332 for the same period in 2021, an increase of $1,335,400, or 71.4%. The increase in revenue during the three months ended September 30, 2022 is due to an increase in chiller sales of $1,259,378 and by an increase of $101,760 in cogeneration sales, offset partially by a decrease in sales of engineered accessories of $25,738. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales.
Services
Service revenues in the three months ended September 30, 2022 were $3,078,604, compared to $2,829,244 for the same period in 2021, an increase of $249,360, or 8.8%. The increase in revenue during the three months ended September 30, 2022 is due primarily due to an increase of $312,436, or 11.3%, in service contract revenues, offset partially by a decrease in installation revenues of $63,076. While service contract revenue generally remains relatively constant, installation activity is likely to remain low due to our strategy of focusing on higher margin segments of our business.
Energy Production
Energy production revenues in the three months ended September 30, 2022 were $332,774, compared to $315,292 for the same period in 2021, an increase of $17,482, or 5.5%. The increase in energy production revenue is due to increased runtimes
Cost of Sales
Cost of sales in the three months ended September 30, 2022 was $3,724,776 compared to $2,673,933 for the same period in 2021, an increase of $1,050,843, or 39.3%. The increase in cost of sales is due to increased product revenue volume and the impact of inflation on material costs. During the three months ended September 30, 2022 our gross margin decreased to 43.7% compared to 46.7% for the same period in 2021, a 3.0% percentage point decrease due to higher material costs.
Products
Cost of sales for products in the three months ended September 30, 2022 was $2,074,243 compared to $1,036,396 for the same period in 2021, an increase of $1,037,847, or 100.1% due to increased product revenue volume and higher material costs. During the three months ended September 30, 2022, our products gross margin was 35.3% compared to 44.6% for the same period in 2021, an 9.3% percentage point decrease. The decrease in margin is primarily a function of increased material costs.
Services
Cost of sales for services in the three months ended September 30, 2022 was $1,482,355 compared to $1,467,019 for the same period in 2021, an increase of $15,336, or 1.0%. During the three months ended September 30, 2022, our services gross margin increased to 51.8% compared to 48.1% for the same period in 2021, a 3.7% percentage point increase due to price increases on service contracts and lower installation revenues.
Energy Production
Cost of sales for energy production in the three months ended September 30, 2022 was $168,178 compared to $170,518 for the same period in 2021, a decrease of $2,340, or 1.4%. During the three months ended September 30, 2022 our energy production gross margin was 49.5% compared to 45.9% for the same period in 2021, a 3.6% percentage point increase.
Operating Expenses
Operating expenses decreased $144,476, or 4.4%, to $3,107,630 in the three months ended September 30, 2022 compared to $3,252,106 in the same period in 2021. The total operating expenses were lower primarily due to a $281,955 reduction in the bad debt expense and lower sales commissions, partially offset by an increase in R&D expense associated with the air-cooled chiller development.
TECOGEN INC.
Management's Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
Operating Expenses | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) $ | | Increase (Decrease) % |
General and Administrative | $ | 2,343,449 | | | $ | 2,473,190 | | | $ | (129,741) | | | (5.2) | % |
Selling | 567,529 | | | 656,885 | | | (89,356) | | | (13.6) | % |
Research and Development | 202,138 | | | 122,031 | | | 80,107 | | | 65.6 | % |
Gain on disposition of assets | (5,486) | | | — | | | (5,486) | | | |
| | | | | | | |
Total | $ | 3,107,630 | | | $ | 3,252,106 | | | $ | (144,476) | | | (4.4) | % |
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the three months ended September 30, 2022 were $2,343,449 compared to $2,473,190 for the same period in 2021, a decrease of $129,741 or 5.2% due primarily to a $281,995 decrease in bad debt expense in the three months ended September 30, 2022, partially offset by an increase in payroll costs, stock compensation costs and franchise taxes.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the three months ended September 30, 2022 were $567,529 compared to $656,885 for the same period in 2021, a decrease of $89,356 or 13.6% due to lower payroll costs and reduced sales commissions.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the three months ended September 30, 2022 were $202,138 compared to $122,031 for the same period in 2021, an increase of $80,107 or 65.6% due to increased payroll costs and costs incurred in the development of a hybrid air-cooled chiller.
Loss from Operations
Loss from operations for the three months ended September 30, 2022 was $214,296 compared to a loss of $910,171 for the same period in 2021, a decrease of $695,875. The decrease in loss from operations is due primarily to higher revenues and a $144,476 decrease in operating expenses.
Other Income (Expense), net
Other expense, net for the three months ended September 30, 2022 was $9,420 compared to other income of $2,401,758 for the same period in 2021, a decrease of $2,411,178. The decrease in other income is due primarily to the gain on extinguishment of debt of $1,885,655 as a result of the Paycheck Protection Program Second Draw Loan forgiveness and the recognition of the Employee Retention Credit of $562,253 for the third calendar quarter of 2021 recognized in the three months ended September 30, 2021.
Provision for State Income Taxes
The provision for state income taxes for the three months ended September 30, 2022 and 2021 was $5,922 and $3,000, respectively, and represents estimated income tax payments, net of refunds, to various states.
Non-controlling Interest
Income attributable to the non-controlling interest was $27,074 for the three months ended September 30, 2022 which represents the non-controlling interest portion of American DG Energy's 51% owned subsidiary, American DG New York, LLC. For the same period in 2021, income attributable to the non-controlling interest was $21,890.
Net Income (Loss) Attributable to Tecogen Inc
The net loss attributable to Tecogen for the three months ended September 30, 2022 was $256,712 compared to a net income of $1,466,697 for the same period in 2021, a decrease of $1,723,409, or 117.5%. The decrease in other income is due primarily to the gain on extinguishment of debt of $1,885,655 as a result of the Paycheck Protection Program Second Draw Loan forgiveness and the recognition of the Employee Retention Credit of $562,253 for the third calendar quarter of 2021
TECOGEN INC.
Management's Discussion and Analysis
recognized in the three months ended September 30, 2021, offset partially by higher gross profit for our Products and Services Segments and decreased operating expenses.
Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
The following table sets forth for the periods indicated, the percentage of net sales represented by certain items reflected in our condensed consolidated statements of operations:
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
Revenues | 100.0% | | 100.0% |
Cost of sales | 57.6% | | 52.7% |
Gross profit | 42.4% | | 47.3% |
Operating expenses | | | |
General and administrative | 37.3% | | 42.8% |
Selling | 7.7% | | 10.2% |
Research and development | 2.6% | | 2.2% |
Gain on disposition of assets | (0.2) | % | | —% |
Gain on termination of unfavorable contract liability | (0.3) | % | | —% |
Total operating expenses | 47.1 | % | | 55.1 | % |
Loss from operations | (4.6) | % | | (7.9) | % |
Total other income (expense), net | — | % | | 29.3 | % |
Consolidated net income (loss) | (4.7) | % | | 21.3 | % |
Income attributable to the non-controlling interest | (0.3) | % | | (0.2) | % |
Net income (loss) attributable to Tecogen, Inc. | (5.0) | % | | 21.1 | % |
Revenues
Total revenues for the nine months ended September 30, 2022 were $20,471,026 compared to $17,218,131 for the same period in 2021, an increase of $3,252,895 or 18.9% year over year.
The following table presents revenue for the periods indicated, by segment and the change from the prior year:
TECOGEN INC.
Management's Discussion and Analysis
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| September 30, 2022 | | September 30, 2021 | | Increase (Decrease) $ | | Increase (Decrease) % |
REVENUES: | | | | | | | |
Products | | | | | | | |
Cogeneration | $ | 4,675,629 | | | $ | 2,542,962 | | | $ | 2,132,667 | | | 83.9 | % |
Chiller | 4,987,937 | | | 2,929,411 | | | 2,058,526 | | | 70.3 | % |
Engineered accessories | 492,762 | | | 967,608 | | | (474,846) | | | (49.1) | % |
Total Product revenues | 10,156,328 | | | 6,439,981 | | | 3,716,347 | | | 57.7 | % |
Services | | | | | | | |
Maintenance services | 9,025,966 | | | 8,613,377 | | | 412,589 | | | 4.8 | % |
Installation services | 20,109 | | | 825,325 | | | (805,216) | | | (97.6) | % |
Total Service revenues | 9,046,075 | | | 9,438,702 | | | (392,627) | | | (4.2) | % |
Products and Services | 19,202,403 | | | 15,878,683 | | | 3,323,720 | | | 20.9 | % |
Energy Production revenues | 1,268,623 | | | 1,339,448 | | | (70,825) | | | (5.3) | % |
Total revenues | $ | 20,471,026 | | | $ | 17,218,131 | | | $ | 3,252,895 | | | 18.9 | % |
Products
Product revenues in the nine months ended September 30, 2022 were $10,156,328 compared to $6,439,981 for the same period in 2021, an increase of $3,716,347, or 57.7%. The increase in revenue during the nine months ended September 30, 2022 is due to an increase in cogeneration sales of $2,132,667 and an increase in chiller sales of $2,058,526, offset partially by a $474,846 decrease in sales of engineered accessories. Our product sales mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales.
Services
Service revenues in the nine months ended September 30, 2022 were $9,046,075, compared to $9,438,702 for the same period in 2021, a decrease of $392,627, or 4.2%. The decrease in revenue during the nine months ended September 30, 2022 is due primarily to a decrease in installation revenues of $805,216, offset partially by an increase of $412,589, or 4.8%, in service contract revenues. While service contract revenue generally remains relatively constant, installation activity is likely to remain low due to our strategy of focusing on higher margin segments of our business.
Energy Production
Energy production revenues in the nine months ended September 30, 2022 were $1,268,623, compared to $1,339,448 for the same period in 2021, a decrease of $70,825, or 5.3%. The decrease in energy production revenue is a consequence of certain energy production sites that have permanently closed and seasonality.
Cost of Sales
Cost of sales in the nine months ended September 30, 2022 was $11,783,455 compared to $9,082,349 for the same period in 2021, an increase of $2,701,106, or 29.7%. The increase in cost of sales is due to increased product revenue volume and the impact of inflation on material costs. During the nine months ended September 30, 2022 our gross margin decreased to 42.4% compared to 47.3% for the same period in 2021, a 4.9% percentage point decrease due to higher material costs.
TECOGEN INC.
Management's Discussion and Analysis
Products
Cost of sales for products in the nine months ended September 30, 2022 was $6,734,465 compared to $3,601,408 for the same period in 2021, an increase of $3,133,057, or 87.0% due to increased product revenue volume and higher material costs. During the nine months ended September 30, 2022, our Products Segment gross margin was 33.7% compared to 44.1% for the same period in 2021, an 10.4% percentage point decrease. The decrease in margin is primarily a function of increased material costs.
Services
Cost of sales for services in the nine months ended September 30, 2022 was $4,322,693 compared to $4,684,008 for the same period in 2021, a decrease of $361,315, or 7.7%. During the nine months ended September 30, 2022, our Services Segment gross margin increased to 52.2% compared to 50.4% for the same period in 2021, a 1.8% percentage point increase due to lower installation activity.
Energy Production
Cost of sales for energy production in the nine months ended September 30, 2022 was $726,297 compared to $796,933 for the same period in 2021, a decrease of $70,636, or 8.9%. During the nine months ended September 30, 2022 our energy production gross margin was 42.8% compared to 40.5% for the same period in 2021, a 2.3% percentage point increase.
Operating Expenses
Operating expenses increased $143,706, or 1.5%, to $9,638,224 in the nine months ended September 30, 2022 compared to $9,494,518 in the same period in 2021. The total operating expenses were higher primarily due to higher salary costs, taxes and costs related to the air-cooled chiller development, offset partially by a reduction in bad debt expense and lower sales commissions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
Operating Expenses | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) $ | | Increase (Decrease) % |
General and Administrative | $ | 7,642,183 | | | $ | 7,365,495 | | | $ | 276,688 | | | 3.8 | % |
Selling | 1,572,221 | | | 1,747,959 | | | (175,738) | | | (10.1) | % |
Research and Development | 537,126 | | | 381,064 | | | 156,062 | | | 41.0 | % |
Gain on disposition of assets | (41,931) | | | — | | | (41,931) | | | — | % |
Gain on termination of unfavorable contract liability | (71,375) | | | — | | | (71,375) | | | — | % |
Total | $ | 9,638,224 | | | $ | 9,494,518 | | | $ | 143,706 | | | 1.5 | % |
General and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. General and administrative expenses for the nine months ended September 30, 2022 were $7,642,183 compared to $7,365,495 for the same period in 2021, an increase of $276,688 or 3.8% due primarily to a $235,955 decrease in bad debt expense.
Selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Selling expenses for the nine months ended September 30, 2022 were $1,572,221 compared to $1,747,959 for the same period in 2021, a decrease of $175,738 or 10.1% due primarily to lower payroll costs and reduced sales commissions.
Research and development expenses consist of engineering and technical staff, materials, outside consulting and other related expenses. Research and development expenses for the nine months ended September 30, 2022 were $537,126 compared to $381,064 for the same period in 2021, an increase of $156,062 or 41.0% due to increased payroll costs and costs incurred in the development of a hybrid air-cooled chiller.
TECOGEN INC.
Management's Discussion and Analysis
Loss from Operations
Loss from operations for the nine months ended September 30, 2022 was $950,653 compared to a loss of $1,358,736 for the same period in 2021, a decrease of $408,083. The decrease in the loss from operations is due primarily to higher Products Segment gross profit and a $143,706 decrease in operating expenses.
Other Income (Expense), net
Other expense, net for the nine months ended September 30, 2022 was $900 compared to other income of $5,053,120 for the same period in 2021, a decrease of $5,054,020. The decrease in other income is due primarily to the gain on extinguishment of debt of $3,773,014 as a result of the Paycheck Protection Program Loan forgiveness and the recognition of the Employee Retention Credit of $1,276,021 for the three calendar quarters of 2021 recognized in the nine months ended September 30, 2021.
Provision for State Income Taxes
The provision for state income taxes for the nine months ended September 30, 2022 and 2021 was $16,352 and $18,991, respectively and represents estimated income tax payments, net of refunds, to various states.
Non-controlling Interest
Income attributable to the non-controlling interest was $55,616 for the nine months ended September 30, 2022 which represents the non-controlling interest portion of American DG Energy's 51% owned subsidiary, American DG New York, LLC. For the same period in 2021, income attributable to the non-controlling interest was $42,358.
Net Income (Loss) Attributable to Tecogen Inc
The net loss attributable to Tecogen for the nine months ended September 30, 2022 was $1,023,521 compared to a net income of $3,633,035 for the same period in 2021, a decrease of $4,656,556, or 128.2%. The decrease is due primarily to the gain on extinguishment of debt of as a result of the Paycheck Protection Program Loan forgiveness and the recognition of the Employee Retention Credit in the nine months ended September 30, 2021, offset partially by higher gross profit margins for our Products Segment and the decrease in operating expenses.
Liquidity and Capital Resources
The following table presents a summary of our net cash flows from operating, investing and financing activities:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | |
Cash Provided by (Used in) | | September 30, 2022 | | September 30, 2021 | | Increase (Decrease) |
Operating activities | | $ | (433,810) | | | $ | 171,996 | | | $ | (605,806) | |
Investing activities | | (300,493) | | | (185,253) | | | (115,240) | |
Financing activities | | — | | | 1,874,269 | | | (1,874,269) | |
Change in cash and cash equivalents | | $ | (734,303) | | | $ | 1,861,012 | | | $ | (2,595,315) | |
Consolidated working capital at September 30, 2022 was $15,553,490 compared to $16,193,881 at December 31, 2021, a decrease of $640,391. Included in working capital were cash and cash equivalents of $2,880,160 at September 30, 2022, compared to $3,614,463 at December 31, 2021, a decrease of $734,303, or 20.3%.
Cash Flows from Operating Activities
TECOGEN INC.
Management's Discussion and Analysis
Cash used by operating activities for the nine months ended September 30, 2022 was $433,810 compared to $171,996 of cash provided by operating activities for the same period in 2021, a decrease of $605,806, or 352.2%. Our accounts receivable and unbilled revenue balances were $8,598,302 and $1,956,002, respectively, at September 30, 2022 compared to $8,482,286 and $3,258,189 at December 31, 2021, providing $67,940 and $1,302,187 of cash respectively. Inventories increased $947,031 during the nine months ended September 30, 2022 due to increased safety stock.
Accounts payable decreased to $3,325,452 as of September 30, 2022 from $3,508,354 at December 31, 2021, using $182,903 in cash flow from operations. The decrease in accounts payable was due to vendor payment timing. Deferred revenue decreased as of September 30, 2022 compared to December 31, 2021, using $487,676 of cash from operations. We expect accounts payable and deferred revenue to fluctuate with routine changes in operations.
Cash Flows from Investing Activities
During the nine months ended September 30, 2022 we used $300,493 in cash from investing activities. We used $286,820 of cash to purchase property, plant and equipment, $29,505 to acquire intangible assets, and distributed $56,823 to the 49% non-controlling interest holders of American DG New York LLC, partially offset by the receipt of $72,655 in insurance and other proceeds from the disposition of assets.
For the nine months ended September 30, 2021 cash used in investing activities was $185,253. We used $84,160 of cash to purchase property, plant and equipment, $56,349 to acquire intangible assets and, distributed $66,168 to the non-controlling interest holders of American DG New York LLC, partially offset by receipt of $11,637 in proceeds from the sale of investment securities and proceeds of $9,787 from the disposition of assets.
Cash Flows from Financing Activities
During the nine months ended September 30, 2022 our financing activities provided $0 compared to $1,874,269 for the same period in 2021. Financing activities for the nine months ended September 30, 2021 included the proceeds of $1,874,269 received under the Paycheck Protection Program Second Draw Loan.
Backlog
As of September 30, 2022, our backlog of product and installation projects, excluding service contracts, was $6.9 million, consisting of $2.7 million of purchase orders received by us and $4.2 million of projects in which the customer's internal approval process is complete, financial resources have been allocated and the customer has made a firm verbal commitment that the order is in the process of execution. Backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.
Paycheck Protection Program Loan
On April 17, 2020, we obtained an unsecured loan in the principal amount of $1,874,200 from Webster Bank, NA ("Webster") under the Paycheck Protection Program adopted pursuant to the Coronavirus Aid, Relief and Economic Recovery Act, as amended ("CARES Act"). On January 19, 2021 we received confirmation from Webster that the Paycheck Protection Program Loan in the original principal amount of $1,874,200 together with accrued interest of $13,659 was forgiven in full effective as of January 11, 2021. The loan forgiveness of $1,887,859 was accounted for as a debt extinguishment and is reported as a separate component of other income (expense), net in the condensed consolidated statements of earnings for the nine months ended September 30, 2021.
Paycheck Protection Program Second Draw Loan
On February 5, 2021, we obtained a Paycheck Protection Program Second Draw unsecured loan through Webster in the amount of $1,874,269 in connection with the Paycheck Protection Program pursuant to the CARES Act. On September 20, 2021, we received a letter dated September 13, 2021 from Webster Bank, NA confirming that the Paycheck Protection Program Second Draw Loan issued to us pursuant to the CARES Act, as amended, in the original principal amount of $1,874,269 together with accrued interest of $11,386 was forgiven in full as of September 8, 2021. The loan forgiveness of $1,885,655 was accounted for as debt extinguishment and is reported as a separate component of other income (expense), net in the condensed consolidated statements of earnings for the nine months ended September 30, 2021.
TECOGEN INC.
Management's Discussion and Analysis
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.
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 applied to the Paycheck Protection Program Second Draw Loan, were eligible for the ERC.
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 claim from the first and second quarters of 2021.
Liquidity
At September 30, 2022, we had cash and cash equivalents of $2,880,160, a decrease of $734,303 or 20.3% from the cash and cash equivalents balance at December 31, 2021. During the nine months ended September 30, 2022, our revenues continued to be negatively impacted due to the aftermath of COVID-19, including supply chain disruption resulting in customer order delays or deferrals; service delays due to parts shortages, in some cases for extended periods, and a reduction in our energy production revenues due to business closures and increased remote work and learning environments. The extent to which the coronavirus will continue to impact our business, our financial results, and our cash flows will depend on future developments which are highly uncertain and cannot be predicted.
Based on our current operating plan, we believe existing resources, including cash and cash flows from operations, together with anticipated Employee Retention Credit will be sufficient to meet our working capital requirements for the next twelve months. The funds made available to us through the Paycheck Protection Program have provided liquidity for our business, and there can be no assurance that additional financing on such favorable terms will be available to us in the future. We will need to generate sufficient cash from operations to finance the company during the periods beyond twelve months in the future. If sufficient funds from operating activities are not available to finance our business, we may need to raise additional capital through debt financing or an equity offering to meet our operating and capital needs.
Significant Accounting Policies and Critical Estimates
Our significant accounting policies are discussed in the Notes to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021. The accounting policies and estimates that can have a significant impact upon our operating results, financial position and footnote disclosures are described in the above notes and in the Annual Report.
Significant New Accounting Standards or Updates Not Yet Effective
The Company's critical accounting policies have remained consistent as discussed in our Annual Report on
Form 10-K for the year ended December 31, 2021, filed with the SEC on March 10, 2022.
See Note 1, Description of Business and Basis of Presentation, to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
TECOGEN INC.
Management's Discussion and Analysis
Seasonality
The majority of our chilling systems sold will be operational for the summer. Demand for our service team is higher in the warmer months when cooling is required. Chiller units are generally shut down in the winter and started up again in the spring. The chiller 'busy season' for the service team generally runs from May through the end of September. Our cogeneration sales are not generally affected by seasonality.
Off-Balance Sheet Arrangements
Currently, we do not have any material off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer ("Certifying Officers") conducted evaluations of our disclosure controls and procedures. As defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), the term "disclosure controls and procedures" means controls and procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under the Section 13(a) or 15(d) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under Section 13(a) or 15(d) of the Securities Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officers, to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report, have concluded that our disclosure controls and procedures were not effective due to a material weakness with respect to a small number of individuals dealing with general controls over information technology. Management will continue to evaluate the above weaknesses and we are taking steps to remediate the weaknesses as resources become available.
Changes in Internal Control over Financial Reporting:
There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.