AMERICAN DG ENERGY INC - FORM 10-Q - November 16, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015

or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-34493
 
AMERICAN DG ENERGY INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
04-3569304
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
 
 
45 First Avenue
 
Waltham, Massachusetts
02451
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (781) 522-6000
____________________________________________________________________________
 
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 x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted 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 and post such files).
Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non –accelerated filer o
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Title of each class
 
Outstanding at November 12, 2015
Common Stock, $0.001 par value
 
50,684,095

    

Table of Contents                

AMERICAN DG ENERGY INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2015
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Form 10-Q to “we”, “us”, “our”, the “Company” and “American DG Energy” refer to American DG Energy Inc. and its consolidated subsidiaries, unless otherwise noted.

2
Table of Contents                

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
6,836,273

 
$
11,825,915

Accounts receivable, net
1,028,910

 
1,140,811

Unbilled revenue
13,652

 
12,533

Due from related party
53,159

 
39,682

Inventory finished goods
1,088,097

 
1,153,927

Prepaid and other current assets
571,441

 
852,069

Total current assets
9,591,532

 
15,024,937

Property, plant and equipment, net
26,187,009

 
24,885,155

Accounts receivable, long-term
—

 
3,600

Other assets, long-term
63,609

 
92,148

TOTAL ASSETS
$
35,842,150

 
$
40,005,840

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
757,666

 
$
605,530

Accrued expenses and other current liabilities
508,900

 
485,570

Due to related party
986,072

 
630,805

Note payable related party
2,000,000

 
—

Total current liabilities
4,252,638

 
1,721,905

Long-term liabilities:
 

 
 

Convertible debentures
1,600,309

 
1,645,444

Convertible debentures due related parties
16,729,795

 
15,864,215

Note payable related party
—

 
3,000,000

Warrant liability
2

 
6,780

Other long-term liabilities
—

 
2,227

Total liabilities
22,582,744

 
22,240,571

Commitments and contingencies (Note 8)


 


Stockholders' Equity:
 

 
 

American DG Energy Inc. stockholders’ equity:
 

 
 

Common stock, $0.001 par value; 100,000,000 shares authorized; 50,684,095 and 52,140,001 issued and outstanding at September 30, 2015 and December 31, 2014, respectively.
50,684

 
52,140

Additional paid-in capital
49,636,284

 
49,854,998

Accumulated deficit
(38,639,539
)
 
(35,232,411
)
Total American DG Energy Inc. stockholders’ equity
11,047,429

 
14,674,727

Noncontrolling interest
2,211,977

 
3,090,542

Total stockholders' equity
13,259,406

 
17,765,269

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
35,842,150

 
$
40,005,840


See Notes to Unaudited Condensed Consolidated Financial Statements

3
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  
 
Three Months Ended
 
September 30,
2015
 
September 30,
2014
Revenues
 
 
 
Energy revenues
$
1,750,682

 
$
1,697,723

Turnkey & other revenues
205,862

 
188,970

 
1,956,544

 
1,886,693

Cost of sales
 

 
 

Fuel, maintenance and installation
1,202,289

 
1,201,003

Depreciation expense
521,276

 
464,296

 
1,723,565

 
1,665,299

Gross profit
232,979

 
221,394

Operating expenses
 

 
 

General and administrative
558,821

 
780,744

Selling
250,792

 
291,984

Engineering
327,712

 
167,078

 
1,137,325

 
1,239,806

Loss from operations
(904,346
)
 
(1,018,412
)
 
 
 
 
Other income (expense), net
 

 
 

Interest and other income
6,641

 
35,592

Interest expense
(320,337
)
 
(350,892
)
    Change in fair value of warrant liability
299

 
110,897

 
(313,397
)
 
(204,403
)
 
 
 
 
Loss before benefit (provision) for income taxes
(1,217,743
)
 
(1,222,815
)
Provision for income taxes
(8,797
)
 
(22,814
)
Consolidated net loss
(1,226,540
)
 
(1,245,629
)
Loss attributable to noncontrolling interest
207,907

 
75,977

Net loss attributable to American DG Energy Inc.
$
(1,018,633
)
 
$
(1,169,652
)
 
 
 
 
Net loss per share - basic and diluted
$
(0.02
)
 
$
(0.02
)
Weighted average shares outstanding - basic and diluted
50,687,355

 
51,690,714

 
See Notes to Unaudited Condensed Consolidated Financial Statements


4
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
Revenues
 
 
 
Energy revenues
$
6,012,139

 
$
5,846,521

Turnkey & other revenues
539,272

 
639,194

 
6,551,411

 
6,485,715

Cost of sales
 

 
 

Fuel, maintenance and installation
4,297,426

 
4,394,238

Depreciation expense
1,549,591

 
1,358,173

 
5,847,017

 
5,752,411

Gross profit
704,394

 
733,304

Operating expenses
 

 
 

General and administrative
2,065,250

 
2,330,702

Selling
899,913

 
800,458

Engineering
713,159

 
629,526

 
3,678,322

 
3,760,686

Loss from operations
(2,973,928
)
 
(3,027,382
)
 
 
 
 
Other income (expense), net
 

 
 

Interest and other income
193,074

 
57,940

Interest expense
(950,443
)
 
(1,084,215
)
Loss on extinguishment of debt
—

 
(533,177
)
Change in fair value of warrant liability
6,778

 
101,885

 
(750,591
)
 
(1,457,567
)
 
 
 
 
Loss before provision for income taxes
(3,724,519
)
 
(4,484,949
)
Provision for income taxes
(13,965
)
 
(32,694
)
Consolidated net loss
(3,738,484
)
 
(4,517,643
)
Loss attributable to noncontrolling interest
331,356

 
406,483

Net loss attributable to American DG Energy Inc.
$
(3,407,128
)
 
$
(4,111,160
)
 
 
 
 
Net loss per share - basic and diluted
$
(0.07
)
 
$
(0.08
)
Weighted average shares outstanding - basic and diluted
50,691,472

 
50,484,304

 
See Notes to Unaudited Condensed Consolidated Financial Statements


5
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net loss attributable to American DG Energy, Inc.
$(3,407,128)
 
$
(4,111,160
)
Loss attributable to noncontrolling interest
(331,356
)
 
(406,483
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization
1,586,410

 
1,394,201

Gain attributable to distribution of nonmonetary assets to noncontrolling interest
(157,870
)
 
—

Loss on extinguishment of debt
—

 
533,177

Provision for losses on accounts receivable
—

 
26,087

Amortization of deferred financing costs
40,096

 
2,567

Amortization of convertible debt premium
(72,216
)
 
9,997

Increase (decrease) in fair value of warrant liability
(6,778
)
 
(101,885
)
Non-cash interest expense
867,329

 
624,368

Stock-based compensation
253,813

 
338,790

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in:
 

 
 

Accounts receivable and unbilled revenue
114,382

 
(231,417
)
Due from related party
(13,378
)
 
283,356

Inventory
65,830

 
544,159

Prepaid and other current assets
269,071

 
(326,378
)
Increase (decrease) in:
 

 
 

Accounts payable
152,136

 
215,103

Accrued expenses and other current liabilities
48,662

 
348,066

Due to related party
355,267

 
(34,843
)
Other long-term liabilities
(2,227
)
 
(10,206
)
Net cash used in operating activities
(237,957
)
 
(902,501
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(3,312,452
)
 
(3,899,360
)
Partial purchase of noncontrolling interest
(100,000
)
 
—

Net cash used in investing activities
(3,412,452
)
 
(3,899,360
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from issuance of convertible debentures
—

 
1,450,000

Proceeds from sale of common stock, net of costs
—

 
3,242,957

Purchases of common stock, net of costs
(152,377
)
 
—

Proceeds (payment) on related party note payable
(1,000,000
)
 
3,000,000

Distributions to noncontrolling interest
(186,856
)
 
(168,546
)
Net cash provided by (used in) financing activities
(1,339,233
)
 
7,524,411

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(4,989,642
)
 
2,722,550

Cash and cash equivalents, beginning of the period
11,825,915

 
9,804,291

Cash and cash equivalents, end of the period
$
6,836,273

 
$
12,526,841

 
 
 
 
Supplemental disclosures of cash flows information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
90,871

 
$
80,000

Income taxes
$
35,838

 
$
54,974

Non-cash investing and financing activities:
 

 
 

Distribution of nonmonetary assets
$
340,069

 
$
—


See Notes to Unaudited Condensed Consolidated Financial Statements

6
AMERICAN DG ENERGY INC.


Note 1. Description of Business and Basis of Presentation
 
Description of Business
 
American DG Energy Inc., or the Company, we, our or us, distributes, owns, operates and maintains clean, on-site energy systems that produce electricity, hot water, heat and cooling. The Company's business model is to own the equipment that it installs at customers' facilities and to sell the energy produced by these systems to its customers on a long-term contractual basis at prices guaranteed to the customer to be below conventional utility rates. The Company calls this business the American DG Energy “On-Site Utility”.
 
The Company has experienced total net losses since inception of approximately $39 million. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as its management executes the current business plan. The Company believes that its existing resources, including cash and cash equivalents and future cash flow from operations, are sufficient to meet the working capital requirements of its existing business for the foreseeable future. However, as the Company continues to grow its business by adding more energy systems, cash requirements will increase, and the Company may need to raise additional capital through debt financings or equity offerings to meet its operating and capital needs. There can be no assurance, however, that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all. If the Company is unable to raise additional funds in the future it may need to terminate certain employees and adjust its business plans. Financial considerations may cause the Company to modify planned deployment of new energy systems and may decide to suspend installations until it is able to secure additional working capital. The Company will evaluate possible acquisitions of, or investments in, businesses, technologies and products that are complementary to its business; however, the Company is not currently engaged in such discussions.

Basis of Presentation
The accompanying unaudited 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 of 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, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.

The consolidated balance sheet at December 31, 2014 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 American DG Energy Inc.’s annual report on Form 10-K for the year ended December 31, 2014.
There have been no significant changes in accounting principles, practices or methods for making estimates.    
The accompanying unaudited consolidated financial statements include the accounts of the Company and entities in which it has a controlling financial interest. Those entities include the Company's 51.0% owned joint venture, American DG New York, LLC, or ADGNY, and its 48.0% owned subsidiary EuroSite Power Inc., or EuroSite Power. The Company has determined EuroSite Power to be a Variable Interest Entity (VIE) and for which the Company has determined it is the primary beneficiary (see Note 9. "Variable Interest Entity”).

The Company’s operations are comprised of one business segment. The Company’s business is selling energy in the form of electricity, heat, hot water and cooling to its customers under long-term sales agreements.    

7
AMERICAN DG ENERGY INC.



Note 2. Loss Per Common Share            
    
The Company computes basic loss per share by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. The Company computes diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the Company considers its shares issuable in connection with convertible debentures, stock options and warrants to be dilutive common stock equivalents when the exercise price is less than the average market price of its common stock for the period. For the nine months ended September 30, 2015, the Company excluded 15,192,083 potentially dilutive shares, and for the nine months ended September 30, 2014, the Company excluded 15,069,083 potentially dilutive shares because such shares would be anti-dilutive as a result of the reported net loss.


Note 3. Income Taxes

The provision for income taxes in the accompanying unaudited consolidated statements of operations for the three months ended and nine months ended September 30, 2015 and 2014 differ from that which would be expected by applying the federal statutory tax rate primarily due to losses for which no benefit is recognized.
               

Note 4. Warrant Liability
 
In connection with a subscription agreement that the Company entered into on December 9, 2010, the Company issued warrants for the purchase of 500,000 shares of its common stock. The warrants have an exercise price of $3.25 and are exercisable for five years, commencing six months after the closing of the offering and expire on December 14, 2015.
 
The warrants contain both a right to obtain stock upon exercise, or a Call, and a right to settle the warrants for cash upon the occurrence of certain events, or a Put. Generally, the Put provisions allow the warrant holders liquidity protection; the right to receive cash equal to the value of the remaining unexercised portion of the warrants in certain situations where the holders would not have a means of readily selling the shares issuable upon exercise of the warrants (e.g., where there would no longer be a significant public market for the Company’s common stock). Specifically, the Put rights would be triggered upon the occurrence of a Fundamental Transaction as defined in the agreement. Pursuant to the agreement, in the case of a Fundamental Transaction the warrant holders would receive a cash settlement in an amount equal to the value obtained by using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (i) a price per share of Common Stock equal to the Volume-Weighted Average Price of the Common Stock for the Trading Day immediately preceding the date of consummation of the applicable Fundamental Transaction, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of this Warrant as of the date of consummation of the applicable Fundamental Transaction and (iii) an expected volatility equal to the lesser of (1) the thirty (30) day volatility obtained from the “HVT” function on Bloomberg L.P. determined as of the end of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction or (2) 70%. These warrants are classified as liabilities pursuant to the FASB guidance contained in ASC 480. Changes in the fair value of the warrant liabilities are recorded in the accompanying consolidated statements of operations (see Note 5. "Fair Value Measurements").


Note 5. Fair Value Measurements

The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
 
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
 
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than

8
AMERICAN DG ENERGY INC.

quoted prices that are observable for substantially the full term of the asset or liability. The Company considers its convertible debentures a level 2 liability and believes that its carrying value approximates fair value.
 
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability.

As of September 30, 2015, the Company has classified the warrants with Put and Call rights as Level 3 (see Note 4. "Warrant Liability”). The Company estimated the fair value of the warrants using a Black-Scholes option pricing model under various probability-weighted outcomes which take into consideration the protective, but limited, cash-settlement feature of the warrants. At issuance, the following average assumptions were assigned to the varying outcomes: expected volatility of 57.0%, risk free interest rate of 2.08%, expected life of five years and no dividends. The Company estimated the fair value of the warrants at September 30, 2015 using this same model with the following average assumptions assigned to the varying outcomes: expected volatility of 122.0%, risk free interest rates of 1.52%, expected lives of 0.21 years years and no dividends. As of September 30, 2015, the financial liabilities held by the Company in other current liabilities and measured at fair value on a recurring basis (which consist solely of the warrant liability) were $2. The following table summarizes the warrant liability activity for the period: 

 
Warrant Liability
Fair value at December 31, 2014
$
6,780

Fair value adjustment year-to-date
(6,778
)
Fair value at September 30, 2015
$
2


In connection with recognizing the distribution of energy systems to the noncontrolling interest in ADGNY (see Note 6. "Stockholders' Equity"), the Company utilized Level 3 category fair value measurements. Those measurements employed the use of discounted cash flow analysis to determine the fair value of those energy systems. The estimated expected cash flows were discounted at a rate of 12% per annum.


Note 6. Stockholders’ Equity
 
On January 29, 2015, the Company entered into an exchange agreement, (or the "Exchange Agreement"), with IN Holdings Corp., a holder of more than 5% percent of the Company’s common stock, (or "IN Holdings"). In connection with the Exchange Agreement, IN Holdings transferred to the Company 1,320,000 shares of the Company’s common stock that it owned, and in exchange, the Company transferred to IN Holdings 1,320,000 shares of the common stock of EuroSite Power Inc. that it owned. The exchange was accounted for as an acquisition and retirement of treasury shares and a disposal of partial ownership of a consolidated subsidiary. As the Company retained a controlling financial interest following the exchange, no gain or loss was recognized on the disposal in accordance with ASC 810-10-45-23. In accordance with ASC 845-10-05-4, nonmonetary transactions, the fair value of the shares surrendered by the Company in the exchange were used to value the exchange.

On September 19, 2014, the Board of Directors of the Company approved a common stock repurchase program that shall not exceed 1,000,000 shares of common stock and shall not exceed $1,100,000 of cost. The approval allows for purchases over a 24-month period at prices not to exceed $1.30 per share. During the first nine months of 2015, the Company repurchased 235,906 shares of common stock at an average price of $0.55. See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds", for further details.

During the second quarter of 2015, the Company entered into an agreement with the noncontrolling interest joint venture partner in ADGNY, whereby, in exchange for $100,000 cash and 100,000 shares of the Company’s common stock, the noncontrolling interest partner relinquished certain economic interests in certain energy system projects in the joint venture sites owned and operated by ADGNY; and ownership of certain energy system projects owned by ADGNY was transferred to the Company; and ownership of certain energy system projects owned by ADGNY was transferred to the noncontrolling interest joint venture partner. Additionally, the interests in underlying energy system projects remaining in the joint venture following the transfers of ownership of those energy system projects described in the preceding sentence, were adjusted to 51% and 49% for the Company and the noncontrolling interest joint venture partner in ADGNY, respectively.

9
AMERICAN DG ENERGY INC.

Following the foregoing series of transactions, the Company retained a controlling 51% legal interest and had a 51% economic interest in ADGNY.

The relinquishment by the noncontrolling interest partner of certain economic interests in certain energy system projects in the joint venture sites owned and operated by ADGNY for the benefit of the Company and the adjustment of the respective interests in underlying energy system projects remaining in the joint venture were treated as changes in the Company’s ownership interest in ADGNY while the Company retained a controlling financial interest, and accordingly, were accounted for as equity transactions in accordance with ASC 810-10-45-23.
The transfer of ownership of certain energy system projects owned by ADGNY to the noncontrolling interest joint venture partner was treated as a dividend of nonmonetary assets and was recognized at the fair value of the energy systems transferred in accordance with ASC 845-10-30-1, with a gain of $157,870 recognized in interest and other income, which is attributed entirely to the noncontrolling interest in the accompanying financial statements.


Note 7.  Related Parties
 
EuroSite Power, Tecogen, Ilios Inc., or Ilios are affiliated companies by virtue of common ownership and common leadership..
    
The Company purchases the majority of its cogeneration units from Tecogen, an affiliate company sharing similar ownership. In addition, Tecogen pays certain operating expenses, including benefits and payroll, on behalf of the Company and the Company leases office space from Tecogen. The Company's lease with Tecogen expires on July 31, 2016. These costs were reimbursed by the Company. As of September 30, 2015, the Company owed Tecogen $986,072 and Tecogen owed the Company $43,946 .

During the first quarter of 2015, Eurosite Power repaid $1,000,000 of a related party $3,000,000 note payable in accordance with the terms of the note as amended, or the Note. According to the terms of the Note, the Note becomes due on demand in the event EuroSite successfully completes a substantial capital raise. EuroSite successfully completed a substantial capital raise in November of 2014. As such, the Note is currently due and is now classified as a short-term liability.

On July 7, 2015, EuroSite Power, one of the Company's consolidated subsidiaries, entered into a Revolving Line of Credit Agreement, (or the "Agreement"), with Elias Samaras, EuroSite Power's Chief Executive Officer and President and a member of the Company's Board of Directors. Under the terms of the Agreement, Mr. Samaras has agreed to lend EuroSite Power up to an aggregate of $1 million, upon written request. Any amounts borrowed by EuroSite Power pursuant to the Agreement will bear interest at 6% per year. Interest is due and payable quarterly in arrears. Repayment of the principal amount borrowed pursuant to the Agreement will be due on June 30, 2017. Prepayment of any amounts due under the Agreement may be made at any time without penalty. As of September 30, 2015 no amounts have been drawn on this line.


10
AMERICAN DG ENERGY INC.

Note 8. Commitments and Contingencies
 
The Company has certain commitments under agreements with Tecogen, Ilios, and other related parties (see Note 7. "Related Parties").
The Company, in the ordinary course of business is involved in various legal matters, the outcomes of which are not expected to have a material impact on the Company's condensed consolidated financial statements.

9. Variable Interest Entity

The carrying amount and classification of assets and liabilities of the Company's consolidated subsidiary EuroSite Power, which is considered to be a variable interest entity, and for which the Company has determined it is the primary beneficiary, were as follows as September 30, 2015 and December 31, 2014:

 
September 30, 2015
 
December 31, 2014
Current assets
$1,661,379
 
$4,784,215
Long-term assets
7,641,417

 
6,365,669

 
 
 
 
Current liabilities
2,759,373

 
401,116

Long-term liabilities
2,560,494

 
5,632,710



10. Subsequent Events

The Company has evaluated subsequent events through the date of this filing and determined that no subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.

11
AMERICAN DG ENERGY INC.



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements

Forward-looking statements are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company’s estimates change, and readers should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q, or this Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in this Quarterly Report.

Overview
 
The Company distributes and operates on-site cogeneration systems that produce both electricity and heat. The Company’s primary business is to own the equipment that it installs at customers’ facilities and to sell the energy produced by these systems to its customers on a long-term contractual basis. The Company calls this business the American DG Energy “On-Site Utility”.

The majority of our heating system sales are in the winter and the majority of our chilling systems sales are in the summer.

The profitability of our business model is highly dependent on the functionality of our energy equipment, the price of electricity, the demand for electricity, and to a lesser extent, the price of natural gas. Generally, increase in demand for electricity tends to cause prices to rise. Higher electricity prices increase the Company’s revenue and liquidity. Lower natural gas prices decrease operational cost. To mitigate the risk of low electrical rates, the Company pursues energy system projects in areas with higher electrical rates.


Result of Operation

Third Quarter 2015 Compared to Third Quarter 2014.

Revenues
 
Revenues in the third quarter of 2015 were $1,956,544 compared to $1,886,693 for the same period in 2014, a increase of $69,851 or 3.7%. The main reason for the increase is more revenue at EuroSite Power in the UK. On-Site Utility energy revenue in the third quarter of 2015 was $1,750,682 compared to $1,697,723 for the same period in 2014, an increase of $52,959 or 3.1%. During the third quarter of 2015, in addition to our On-Site Utility energy revenue, the Company performed billable services and recorded revenue primarily from the sale of energy equipment and energy feasibility studies. The revenue from our turnkey projects can vary substantially from period to period. While the Company accepts turnkey installation projects, they are not considered our core business. Our turnkey and other revenue in the third quarter of 2015 increased to $205,862 compared to $188,970 for the same period in 2014, a increase of $16,892 or 8.9%.
 
During the third quarter of 2015, the Company operated 120 energy systems, representing 8,198 kWh of installed electricity potential, compared to 121 energy systems, representing 7,918 kWh of installed electricity potential for the same period in 2014. The revenue per customer on a monthly basis is based on the sum of the amount of energy produced by the Company’s energy systems and the published price of energy (electricity, natural gas or oil) from its customers’ local energy utility that month, less the discounts the Company provides its customers. The Company’s revenues commence as new energy systems become operational.
 
Cost of Sales

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AMERICAN DG ENERGY INC.

 
Cost of sales, including depreciation, in the third quarter of 2015 was $1,723,565 compared to $1,665,299 for the same period in 2014, an increase of $58,266 or 3.5%. The increase in cost of sales is principally due to higher depreciation expense. The cost of fuel, maintenance and installation was $1,202,289 in the third quarter of 2015, compared to $1,201,003 for the same period in 2014, an increase of $1,286 or 0.1%. Depreciation expense was $521,276 in the third quarter of 2015, compared to $464,296 for the same period in 2014, an increase of $56,980.
 
During the third quarter of 2015, our gross margins were 11.9% compared to 11.7% for the same period in 2014, principally due to a decrease in fuel, maintenance and installation costs as a percentage of revenues. Our On-Site Utility energy margins, excluding depreciation, were 37.5% in the third quarter of 2015, compared to 35.3% for the same period in 2014.

Operating Expenses
 
Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the third quarter of 2015 were $558,821 compared to $780,744 for the same period in 2014, a decrease of $221,923 or 28.4%. The decrease was primarily due to lower salary and personnel costs.
 
Our selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses including provisions for bad debt write-offs. The Company sells energy using both direct sales and commissioned agents. Our marketing efforts consisted of internet marketing, print literature, media relations and event-driven direct mail. Our selling expenses in the third quarter of 2015 were $250,792 compared to $291,984 for the same period in 2014, a decrease of $41,192 or 14.1%. The decrease in expense was primarily due to lower bad debt and commission expense.
 
Our engineering expenses consisted of technical staff and other engineering related expenses. The role of engineering is to evaluate potential customer sites based on technical and economic feasibility, manage the installed base of energy systems and oversee each new installation project. Our engineering expenses in the third quarter of 2015 were $327,712 compared to $167,078 for the same period in 2014, an increase of $160,634 or 96.1%. The increase was primarily due to higher payroll, consulting and travel expense.
 

Loss from Operations
 
The loss from operations in the third quarter of 2015 was $904,346 compared to a loss of $1,018,412 for the same period in 2014, a decrease of $114,066 or 11.2%. The decrease in the operating loss was primarily due to higher gross profit of $11,585 and lower operating expenses by $102,481. Our non-cash compensation expense related to outstanding restricted stock and option awards to our employees was a recovery of $27,076 in the third quarter of 2015, compared to an expense of$130,313 for the same period in 2014. This net recovery is due to the forfeiture of options granted to the former CFO.
 
Other Income (Expense), Net
 
Our other expense, net, in the third quarter of 2015 was an expense of $313,397 compared to an expense of $204,403 for the same period in 2014, an increase of $108,994. Other expense, net, includes interest and other income, gain attributable to the distribution of nonmonetary assets to noncontrolling interest, interest expense and the change in fair value of warrant liability. Interest expense was $320,337 in the third quarter of 2015 compared to $350,892 for the same period in 2014, a decrease of $30,555, which is primarily due to more premiums from the exchange of convertible debt that offset interest expense in the third quarter of 2015 compared to the same period in 2014. The change in fair value of warrant liability for the period ending September 30, 2015 resulted in a reduction of fair value of $299 compared to $110,897 for the same period in 2014. The fair value is small due to the relatively short time remaining in the life of the warrants.
 
Provision for Income Taxes
 
Our benefit for taxes in the third quarter of 2015 was an expense of $8,797 compared to $22,814 for the same period in 2014.
 
Noncontrolling Interest
 

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AMERICAN DG ENERGY INC.

The noncontrolling interest in the profits or losses in American DG New York, LLC, or ADGNY, and EuroSite Power was a reduction in net loss of $207,907 in the third quarter of 2015 compared to a reduction in net loss of $75,977 for the same period in 2014. This difference is primarily due to the assignment of the full $157,870 gain attributable to the distribution of nonmonetary assets of ADGNY to noncontrolling interest.
 

First Nine Months of 2015 Compared to First Nine Months of 2014
 
Revenues
 
Revenues in the first nine months of 2015 were $6,551,411 compared to $6,485,715 for the same period in 2014, an increase of $65,696 or 1.0%. The increase in revenues was primarily due to higher EuroSite Power revenue in the UK for the first nine months of 2015 compared to the same period in 2014 offset by decreased turnkey revenues. Our On-Site Utility energy revenue in the first nine months of 2015 was $6,012,139 compared to $5,846,521 for the same period in 2014, an increase of $165,618. During the first nine months of 2015, the Company performed billable services and recorded revenue from the maintenance of energy systems and from the sale of equipment. The revenue from our turnkey projects can vary substantially per period. While the Company accepts turnkey installation projects, they are not considered our core business. Our turnkey and other revenue in the first nine months of 2015 decreased to $539,272 compared to $639,194 for the same period in 2014, a decrease of $99,922 or 15.6%.
 
During the first nine months of 2015, the Company operated 120 energy systems representing 8,198 kW of installed electricity plus thermal energy, compared to 121 energy systems representing 7,918 kW of installed electricity plus thermal energy for the same period in 2014. The revenue per customer on a monthly basis is based on the sum of the amount of energy produced by the Company’s energy systems and the published price of energy (electricity, natural gas or oil) from its customers’ local energy utility that month, less the discounts the Company provides its customers. The Company’s revenues commence as new energy systems become operational.
 
Cost of Sales
 
Cost of sales, including depreciation, in the first nine months of 2015 were $5,847,017 compared to $5,752,411 for the same period in 2014. Included in the cost of sales was depreciation expense of $1,549,591 in the first nine months of 2015, compared to $1,358,173 for the same period in 2014, an increase of $191,418, or 14.1%. The cost of fuel, maintenance and installation was $4,297,426 in the first nine months of 2015, compared to $4,394,238 for the same period in 2014, a decrease of $96,812 or 2.2%, primarily due to lower project management and installation costs.
 
During the first nine months of 2015, our gross margins were 10.8% compared to 11.3% for the same period in 2014, primarily due to an increase in our depreciation expense, partially offset by lower fuel, maintenance and installation expenses. Our On-Site Utility energy margins excluding depreciation were at 32.9% in the first nine months of 2015, compared to 31.9% for the same period in 2014. During the third quarter of 2014, management initiated a formal optimization program to increase site operating hours and to increase overall site efficiency.

Operating Expenses
 
Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the first nine months of 2015 were $2,065,250 compared to $2,330,702 for the same period in 2014, a decrease of $265,452 or 11.4%. This decrease was primarily due to lower salary and lower stock compensation expense.
 
Our selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses including provisions for bad debt write-offs. The Company sells energy using both direct sales and commissioned agents. Our marketing efforts consisted of internet marketing, print literature, media relations and event driven direct mail. Our selling expenses in the first nine months of 2015 were $899,913 compared to $800,458 for the same period in 2014, an increase of $99,455 or 12.4%. The increase was primarily due to 2015 severance expense.
 
Our engineering expenses consisted of technical staff and other engineering related expenses. The role of engineering is to evaluate potential customer sites based on technical and economic feasibility, manage the installed base of energy systems and oversee each new installation project. Our engineering expenses in the first nine months of 2015 were $713,159 compared to $629,526 for the same period in 2014, an increase of $83,633. The increase was primarily due to higher payroll, consulting and travel costs.

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AMERICAN DG ENERGY INC.

 
Loss from Operations
 
The loss from operations in the first nine months of 2015 was $2,973,928 compared to loss $3,027,382 for the same period in 2014, a decrease of $53,454, or 1.8%. The decrease in the operating loss was primarily due to lower general and administrative expenses. Our non-cash compensation expense related to outstanding restricted stock and option awards to our employees was $253,813 in the first nine months of 2015, compared to $338,790 for the same period in 2014.
 
Other Income (Expense), Net
 
Our other expense, net, in the first nine months of 2015 was a loss of $750,591 compared to $1,457,567 for the same period in 2014, a decrease of $706,976. Other expense, net, includes interest and other income, gain attributable to the distribution of nonmonetary assets to noncontrolling interest, interest expense, loss on extinguishment of debt and change in fair value of warrant liability. Interest and other income was $193,074 in the first nine months of 2015 compared to $57,940 for the same period in 2014, an increase of $135,134. The increase was primarily due to a $157,870 gain attributable to the distribution of nonmonetary assets to noncontrolling interest recognized in the second quarter of 2015. Interest expense was $950,443 in the first nine months of 2015 compared to $1,084,215 for the same period in 2014, a decrease of $133,772, or 12.3%. The lower interest expense is due to less convertible debentures paying interest in the first nine months of 2015 as compared to the same period of 2014. We also took a non-cash charge of $533,177 in the first nine months of 2014 for the extinguishment of old EuroSite Power convertible debt exchanged for new EuroSite Power convertible debt. In the first nine months of 2015, the change in fair value of warrant liability resulted in a gain of $6,778 compared to a gain of $101,885 for the same period in 2014 (see “Note 4 – Warrant liability”).
 
Benefit (Provision) for Income Taxes
 
Our provision for state income taxes in the first nine months of 2015 was $13,965 compared to $32,694 for the same period in 2014.
 
Noncontrolling Interest
 
The noncontrolling interest share in the profits or losses in ADGNY and EuroSite Power was a reduction of net loss of $331,356 in the first nine months of 2015 compared to a reduction of net loss of $406,483 for the same period in 2014. This difference is primarily due to changes in percentage of ownership.


Liquidity and Capital Resources
 
Consolidated working capital at September 30, 2015 was $5,338,894, compared to $13,303,032 at December 31, 2014. Included in working capital were cash and cash equivalents of $6,836,273 at September 30, 2015, compared to $11,825,915 at December 31, 2014. The decrease in working capital was primarily the result of the change of the classification of $2,000,000 of a note payable to a related party from long-term to current liabilities and the purchases and installation of energy systems in the amount of $3,312,452.
 
Cash used in operating activities was $237,957 in the first nine months of 2015 compared to cash used of $902,501 in the same period in 2014. For the first nine months of 2015, net loss was $3,407,128. This net loss was offset by $1,586,410 of depreciation and amortization, $867,329 of non-cash interest and $253,813 of stock-based compensation expense. In addition, our short and long-term receivables balance, including unbilled revenue and allowances for bad debts, decreased to $1,042,562 in the first nine months of 2015 compared to $1,156,944 at December 31, 2014, providing $114,382 of cash. Our inventory decreased to $1,088,097 in the first nine months of 2015 compared to $1,153,927 at December 31, 2014, providing $65,830 of cash. A decrease in our prepaid and other current assets provided $269,071 in cash primarily due to the collection of UK energy tax incentives.
 
Accounts payable increased to $757,666 in the first nine months of 2015, compared to $605,530 at December 31, 2014, providing $152,136 of cash. Our accrued expenses and other current liabilities increased to $508,900 at September 30, 2015 compared to $485,570 at December 31, 2014, providing $48,662 of cash. The amount due to related parties increased to $986,072 in the first nine months of 2015, compared to $630,805 at December 31, 2014, providing $355,267 of cash.
 
During the first nine months of 2015, the investing activities of the Company's operations were expenditures for the purchase of property, plant and equipment for energy system installations and the partial purchase of noncontrolling interest.

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AMERICAN DG ENERGY INC.

The Company used $3,312,452 for purchases and installation of energy systems and $100,000 for the partial purchase of noncontrolling interest. The Company's financing activities used $1,339,233 of cash in the first nine months of 2015, primarily due to the repayment of $1,000,000 of a related party loan.
 

Significant Accounting Policies and Critical Estimates
 
The Company’s significant accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are discussed in the Notes to the Unaudited Condensed Consolidated Financial Statements above and described in the Notes to Consolidated Financial Statements to the Annual Report. The accounting policies are described in the above notes and the Financial Review in the Company’s Annual Report.
 
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any outstanding derivative financial statements, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts. 

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AMERICAN DG ENERGY INC.


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.


Item 4. Controls and Procedures
 
Management’s evaluation of disclosure controls and procedures:
 
Based on our management’s evaluation (with the participation of our principal co-executive officers and acting principal financial officer), as of the end of the period covered by this report, our co-principal executive officers and acting principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) are ineffective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our co-principal executive officers and acting principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting:
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

    

 


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AMERICAN DG ENERGY INC.



PART II – OTHER INFORMATION
 
Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2014. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.


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Table of Contents                

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

Issuer Purchases of Equity Securities

On September 19, 2014, the Board of Directors of the Company approved a common stock repurchase program that shall not exceed 1,000,000 shares of common stock and shall not exceed $1,100,000 of cost. The approval allows for purchases over a 24 month period at prices not to exceed $1.30 per share. Purchases to date are listed below.


Beginning and End Date
Total Number of Shares Repurchased
Average Price Paid per Share
Total Number of Shares Repurchased To Date
Maximum Number of Shares That May Yet Be Purchased
September 22th - 30th, 2014
37,100
$0.99
37,100
962,900
October 8th - 28th, 2014
156,797
$0.93
193,897
806,103
November 3rd - 28th, 2014
157,579
$0.83
351,476
648,524
December 1st - 31st, 2014
236,597
$0.62
588,073
411,927
January 8th - 28th, 2015
59,737
$0.57
647,810
352,190
February 12th - 27th, 2015
38,724
$0.48
686,534
313,466
March 2nd - 31st, 2015
53,976
$0.47
740,510
259,490
April 1st - 30th, 2015
36,731
$0.66
777,241
222,759
May 1st - 31st, 2015
5,957
$0.77
783,198
216,802
June 1st - 30th, 2015
31,106
$0.49
814,304
185,696
August 6th - 21st, 2015
9,675
$0.38
823,979
176,021



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Item 6.    Exhibits
Exhibit Number
 
Description of Exhibit
3.1
–     
Certificate of Incorporation, as amended and restated on December 9, 2009 (incorporated by reference to Exhibit 3.1 to the Company's Form S-3, as amended, as filed with the SEC on December 23, 2009)
 
 
 
3.2
–     
Bylaws, as amended and restated August 31, 2009 (incorporated by reference to Exhibit 3.2 to the Company's Form S-3, as amended, as filed with the SEC on December 23, 2009)
 
 
 
10.1
–     
First amendment to the Facilities and Support Services Agreement between American DG Energy Inc. and Tecogen Inc., dated Aug 7, 2015 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed with the SEC on August 13, 2015)
 
 
 
31.1*
–     
Rule 13a-14(a) Certification of Co-Chief Executive Officer
 
 
 
31.2*
–
Rule 13a-14(a) Certification of Co-Chief Executive Officer
 
 
 
31.3*
–
Rule 13a-14(a) Certification of Chief Accounting Officer
 
 
 
32.1**
–
Section 1350 Certifications of Chief Executive Officer and Chief Accounting Officer
 
 
 
101.1*
–
The following materials from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015, are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail.

* Filed herewith
** Furnished herewith


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AMERICAN DG ENERGY INC.




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
AMERICAN DG ENERGY INC.
 
 
 
By: /s/ JOHN N. HATSOPOULOS
 
 
Co-Chief Executive Officer
 
(Principal Executive Officer)
 
Date: November 16, 2015
 
 
 
 
By: /s/ BENJAMIN M. LOCKE
 
 
Co-Chief Executive Officer
 
(Principal Executive Officer)
 
Date: November 16, 2015
 
 
 
 
 
By: /s/ BONNIE J. BROWN
 
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
Date: November 16, 2015
 


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AMERICAN DG ENERGY INC Reports