Item 1. Financial Statements
AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,164,151
|
|
|
$
|
5,587,528
|
|
Accounts receivable, net
|
819,621
|
|
|
937,706
|
|
Unbilled revenue
|
14,410
|
|
|
12,468
|
|
Due from related party
|
71,832
|
|
|
99,548
|
|
Inventory
|
857,050
|
|
|
1,112,853
|
|
Prepaid and other current assets
|
448,265
|
|
|
752,397
|
|
Total current assets
|
5,375,329
|
|
|
8,502,500
|
|
Property and equipment, net
|
17,924,686
|
|
|
25,467,049
|
|
Investment in EuroSite
|
6,434,676
|
|
|
—
|
|
Other assets, long-term
|
21,359
|
|
|
52,829
|
|
TOTAL ASSETS
|
$
|
29,756,050
|
|
|
$
|
34,022,378
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
265,816
|
|
|
$
|
575,248
|
|
Accrued expenses and other current liabilities
|
241,840
|
|
|
544,624
|
|
Due to related party
|
378,851
|
|
|
1,171,863
|
|
Total current liabilities
|
886,507
|
|
|
2,291,735
|
|
Long-term liabilities:
|
|
|
|
|
|
Convertible debentures
|
—
|
|
|
1,585,264
|
|
Convertible debentures due related parties
|
8,708,960
|
|
|
17,030,070
|
|
Note payable - related party
|
—
|
|
|
2,000,000
|
|
Total liabilities
|
9,595,467
|
|
|
22,907,069
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
American DG Energy Inc. stockholders’ equity:
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares authorized; 50,684,095 issued and outstanding at June 30, 2016 and December 31, 2015, respectively
|
50,684
|
|
|
50,684
|
|
Additional paid-in capital
|
58,745,113
|
|
|
49,641,620
|
|
Accumulated deficit
|
(38,699,249
|
)
|
|
(40,622,774
|
)
|
Total American DG Energy Inc. stockholders’ equity
|
20,096,548
|
|
|
9,069,530
|
|
Noncontrolling interest
|
64,035
|
|
|
2,045,779
|
|
Total stockholders' equity
|
20,160,583
|
|
|
11,115,309
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
29,756,050
|
|
|
$
|
34,022,378
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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|
June 30,
2016
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|
June 30,
2015
|
Revenues
|
|
|
|
Energy revenues
|
$
|
1,973,377
|
|
|
$
|
1,871,110
|
|
Turnkey & other revenues
|
138,771
|
|
|
216,017
|
|
|
2,112,148
|
|
|
2,087,127
|
|
Cost of sales
|
|
|
|
|
|
Fuel, maintenance and installation
|
1,307,448
|
|
|
1,367,484
|
|
Depreciation expense
|
572,411
|
|
|
519,858
|
|
|
1,879,859
|
|
|
1,887,342
|
|
Gross profit
|
232,289
|
|
|
199,785
|
|
Operating expenses
|
|
|
|
|
|
General and administrative
|
723,595
|
|
|
645,367
|
|
Selling
|
177,647
|
|
|
308,428
|
|
Engineering
|
234,827
|
|
|
215,077
|
|
|
1,136,069
|
|
|
1,168,872
|
|
Loss from operations
|
(903,780
|
)
|
|
(969,087
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
Interest and other income
|
8,385
|
|
|
168,167
|
|
Interest expense
|
(264,843
|
)
|
|
(317,650
|
)
|
Debt conversion expense
|
(224,782
|
)
|
|
—
|
|
Gain on deconsolidation
|
$3,887,098
|
|
—
|
|
Change in fair value of warrant liability
|
—
|
|
|
81
|
|
|
3,405,858
|
|
|
(149,402
|
)
|
|
|
|
|
Income (loss) before provision for income taxes
|
2,502,078
|
|
|
(1,118,489
|
)
|
Provision for income taxes
|
6,139
|
|
|
2,187
|
|
Consolidated net income (loss)
|
2,508,217
|
|
|
(1,116,302
|
)
|
(Income) loss attributable to the noncontrolling interest
|
516,503
|
|
|
(59,759
|
)
|
Net income (loss) attributable to American DG Energy Inc.
|
$
|
3,024,720
|
|
|
$
|
(1,176,061
|
)
|
|
|
|
|
Net income (loss) per share - basic and diluted
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
Weighted average shares outstanding - basic and diluted
|
50,684,095
|
|
|
50,655,021
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
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|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
2016
|
|
June 30,
2015
|
Revenues
|
|
|
|
Energy revenues
|
$
|
4,023,378
|
|
|
$
|
4,261,457
|
|
Turnkey & other revenues
|
290,251
|
|
|
333,410
|
|
|
4,313,629
|
|
|
4,594,867
|
|
Cost of sales
|
|
|
|
|
|
Fuel, maintenance and installation
|
2,790,106
|
|
|
3,095,137
|
|
Depreciation expense
|
1,123,487
|
|
|
1,028,315
|
|
|
3,913,593
|
|
|
4,123,452
|
|
Gross profit
|
400,036
|
|
|
471,415
|
|
Operating expenses
|
|
|
|
|
|
General and administrative
|
1,401,325
|
|
|
1,506,429
|
|
Selling
|
331,100
|
|
|
649,121
|
|
Engineering
|
484,319
|
|
|
385,447
|
|
|
2,216,744
|
|
|
2,540,997
|
|
Loss from operations
|
(1,816,708
|
)
|
|
(2,069,582
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
Interest and other income
|
21,226
|
|
|
186,433
|
|
Interest expense
|
(601,891
|
)
|
|
(630,106
|
)
|
Debt conversion expense
|
(224,782
|
)
|
|
—
|
|
Gain on deconsolidation
|
3,887,098
|
|
|
—
|
|
Change in fair value of warrant liability
|
—
|
|
|
6,479
|
|
|
3,081,651
|
|
|
(437,194
|
)
|
|
|
|
|
Income (loss) before provision for income taxes
|
1,264,943
|
|
|
(2,506,776
|
)
|
Provision for income taxes
|
(60,288
|
)
|
|
(5,168
|
)
|
Consolidated net income (loss)
|
1,204,655
|
|
|
(2,511,944
|
)
|
(Income) loss attributable to the noncontrolling interest
|
718,870
|
|
|
123,449
|
|
Net income (loss) attributable to American DG Energy Inc.
|
$
|
1,923,525
|
|
|
$
|
(2,388,495
|
)
|
|
|
|
|
Net loss per share - basic and diluted
|
$
|
0.04
|
|
|
$
|
(0.05
|
)
|
Weighted average shares outstanding - basic and diluted
|
50,684,095
|
|
|
50,695,201
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
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|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2016
|
|
June 30, 2015
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income (loss) attributable to American DG Energy, Inc.
|
$1,923,525
|
|
$
|
(2,388,495
|
)
|
Loss attributable to noncontrolling interest
|
(718,870
|
)
|
|
(123,449
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation
|
1,146,186
|
|
|
1,052,173
|
|
Gain attributable to distribution of nonmonetary assets to noncontrolling interest
|
—
|
|
|
(157,870
|
)
|
Gain on deconsolidation of subsidiary
|
(3,887,098
|
)
|
|
—
|
|
Amortization of deferred financing costs
|
23,346
|
|
|
11,637
|
|
Amortization of convertible debt premium
|
(41,123
|
)
|
|
(48,144
|
)
|
Decrease in fair value of warrant liability
|
—
|
|
|
(6,479
|
)
|
Non-cash interest expense
|
522,044
|
|
|
582,348
|
|
Stock-based compensation
|
200,541
|
|
|
280,889
|
|
Non-cash debt conversion expense
|
224,782
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
Accounts receivable and unbilled revenue
|
(135,385
|
)
|
|
79,981
|
|
Due from related party
|
27,716
|
|
|
(2,485
|
)
|
Inventory
|
66,679
|
|
|
93,415
|
|
Prepaid and other current assets
|
276,079
|
|
|
322,700
|
|
Increase (decrease) in:
|
|
|
|
|
|
Accounts payable
|
(53,732
|
)
|
|
(54,250
|
)
|
Accrued expenses and other current liabilities
|
(49,658
|
)
|
|
13,537
|
|
Due to related party
|
(793,012
|
)
|
|
372,945
|
|
Other long-term liabilities
|
—
|
|
|
(2,227
|
)
|
Net cash provided by (used in) operating activities
|
(1,267,980
|
)
|
|
26,226
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchases of property and equipment
|
(1,231,826
|
)
|
|
(2,295,568
|
)
|
Proceeds from sale of property and equipment
|
10,250
|
|
|
—
|
|
Partial purchase of non-controlling interest
|
—
|
|
|
(100,000
|
)
|
Cash balance lost through deconsolidation
|
(5,127,424
|
)
|
|
—
|
|
Net cash used in investing activities
|
(6,349,000
|
)
|
|
(2,395,568
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from sale of subsidiary common stock, net of cost
|
7,246,090
|
|
|
—
|
|
Purchases of common stock, net of costs
|
—
|
|
|
(148,510
|
)
|
Payment on related party note payable
|
(2,000,000
|
)
|
|
(1,000,000
|
)
|
Distributions to noncontrolling interest
|
(52,487
|
)
|
|
(135,582
|
)
|
Net cash provided by (used in) financing activities
|
5,193,603
|
|
|
(1,284,092
|
)
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(2,423,377
|
)
|
|
(3,653,434
|
)
|
Cash and cash equivalents, beginning of the period
|
5,587,528
|
|
|
11,825,915
|
|
Cash and cash equivalents, end of the period
|
$
|
3,164,151
|
|
|
$
|
8,172,481
|
|
Supplemental disclosures of cash flows information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
$
|
66,764
|
|
|
$
|
90,871
|
|
Income taxes
|
$
|
77,498
|
|
|
$
|
35,838
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Distribution of nonmonetary assets
|
$
|
—
|
|
|
$
|
340,069
|
|
Conversion of convertible debentures to common stock
|
$
|
2,184,264
|
|
|
$
|
—
|
|
Conversion of convertible debentures to subsidiary common stock
|
$
|
7,910,164
|
|
|
$
|
—
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
Notes to Unaudited Condensed Consolidated Financial Statements
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, including the next twelve months. 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.
In 2015, the Company began executing the "Initiative". The Initiative is focused on effectively investing the Company’s capital by increasing the performance of its existing sites. The goal of the Initiative is to make strategic capital improvements aimed at increasing productivity of the existing portfolio while optimizing the Company’s margins and increasing cash flow. The Company expects that the Initiative will provide a strong foundation of high performing assets that may be used to fund future growth.
On May 4, 2016, the Company exchanged approximately
14.72 million
of its shares in EuroSite Power, or
46%
of its
48%
ownership in its European subsidiary, for elimination of a portion of the outstanding
6%
convertible debentures due May 2018 (see Note 5. "Convertible debentures"). This partial extinguishment of debt reduced the Company's convertible debt outstanding to
$8.6 million
, net of the associated discount. The Company is pursuing a similar debt exchange transaction for additional convertible debt outstanding and expects to complete that subsequent transaction in the fourth quarter of 2016 (see Note 11. Subsequent events).
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
six months ended
June 30, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
.
The condensed consolidated balance sheet at
December 31, 2015
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, 2015
.
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 EuroSite Power Inc., or EuroSite Power through June 30, 2016 at which time it was deconsolidated (see Note 4. Investment in EuroSite Power).
Investments in partnerships and companies in which the Company does not have a controlling financial interest but where we have significant influence are accounted for under the equity method.
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.
Reclassification
Certain prior year amounts have been reclassified to conform with current year presentation.
Note 2. Income (Loss) Per Common Share
The Company computes basic income (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
six months ended
June 30, 2016
, the Company excluded
10,203,500
potentially dilutive shares, and for the
six months ended
June 30, 2015
, the Company excluded
15,613,083
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
six months ended
June 30, 2016
and
2015
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. Investment in EuroSite Power
As of June 30, 2016, the Company owned a
20.5%
interest in the common stock of EuroSite Power which it accounts for using the equity method. Prior to June 28, 2016, the Company accounted for its investment in EuroSite Power as a consolidated subsidiary as it determined it was the primary beneficiary of EuroSite under the variable interest model. That determination included consideration of an implicit variable interest held by the Company in the form of a guarantee of the long-term convertible indebtedness of EuroSite Power. On June 28, 2016, substantially all of that convertible indebtedness was converted by the holders into shares of EuroSite Power (see Note 5 Convertible debentures), rendering the Company’s guarantee inconsequential in the determination. As a result, the Company concluded it no longer held a variable interest in EuroSite Power. The Company deconsolidated EuroSite Power in its consolidated financial statements. This required recording the remaining shares held at fair value as an equity method investment, which resulted in a gain of approximately
$3.9 million
. The Company utilized a market approach in determining the fair value of the shares retained which incorporated the quoted market price of the shares at the date of deconsolidation and a blockage discount.
The overall initial basis difference between the fair value of the remaining shares held or carrying value at June 30, 2016 of approximately
$6.4 million
and the Company’s share of the underlying equity in the net assets of EuroSite Power of approximately
$2.5 million
is currently being evaluated and the relevant components will prospectively be amortized if appropriate and included in the determination of income.
The Company will continue to provide management oversight to EuroSite Power and assist EuroSite Power in various aspects of executing our respective business plans.
Note 5. Convertible debentures
On May 4, 2016, the Company settled
$9.3 million
of its
$19.4 million
outstanding
6%
convertible debentures due May 2018 (“convertible debentures” or “debt”) by transferring ownership of approximately
14.72 million
shares it owned of EuroSite Power to the holders of the debt.
As the shares used to extinguish the debt are considered nonmonetary assets, the overall gain realized of approximately
$7.2 million
is composed of two elements: (1) the gain resulting from the difference between the carrying
value and the fair value of the shares transferred, of approximately
$7.7 million
and (2) the loss from the debt extinguishment of approximately
$500,000
.
As the Company retained its controlling financial interest in EuroSite Power following the transaction,
no
gain was recognized on the transaction, rather the gain was credited to additional paid-in capital in accordance with ASC 810-10-45-23.
On June 28, 2016,
$2.1 million
of EuroSite Power’s
$2.4 million
outstanding convertible debentures were converted into common stock of EuroSite Power at a price of
$.54
per share. Additionally,
$11,000
of accrued interest was also converted at the same price. As the price used to convert the convertible debentures was less than the then contractual conversion price of
$.60
per share of common stock, the fair value of the incremental shares issued to the holders of the convertible debentures over and above the contractually required amount, or
$224,782
was expensed as debt conversion expense.
Note 6. Stockholders’ Equity
On May 12, 2016, EuroSite Power completed a private placement with related parties of
12,608,696
shares of its common stock for aggregate proceeds of
$7.25 million
at
$0.575
per share. The shares sold in this placement are subject to a registration rights agreement where EuroSite Power has agreed to use its best efforts to register the shares issued at the request of the holder. EuroSite Power used a portion of the proceeds to pay off its debt to its former Chairman, of
$2,000,000
, with the balance being retained to fund operations and growth.
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 six months of 2016
, the Company did not repurchase any shares of its common stock.
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. 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.
The following schedule discloses the effects of changes in the Company's ownership interest in its subsidiary EuroSite Power on the Company's equity for the six months ended June 30, 2016:
|
|
|
|
|
|
Net income attributable to American DG Energy Inc.
|
$
|
1,923,525
|
|
|
Transfers (to) from the noncontrolling interest:
|
|
|
Increase in American DG Energy Inc.'s additional paid-in-capital for exchange of convertible debentures for common stock of subsidiary
|
7,903,292
|
|
|
Increase in American DG Energy Inc.'s additional paid-in-capital for sale by EuroSite Power of 12,608,696 common shares
|
7,233,482
|
|
|
Increase in American DG Energy Inc.'s additional paid-in-capital for conversion of EuroSite Power convertible debentures into 3,909,260 common shares of EuroSite Power
|
2,416,137
|
|
|
|
|
|
Noncontrolling interest share of transactions affecting subsidiary ownership
|
(8,525,668
|
)
|
Change from net income attributable to American DG Energy Inc. and transfers (to) from noncontrolling interest
|
$
|
10,950,768
|
|
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 initially expires on July 31, 2016 and renews automatically until cancelled by one of the parties. These costs were reimbursed by the Company. As of
June 30, 2016
, the Company owed Tecogen
$378,851
, and Tecogen owed the Company
$40,560
.
On May 12, 2016, EuroSite Power completed a private placement with related parties of
12,608,696
shares of its common stock for aggregate proceeds of
$7.25 million
at
$0.575
per share.
The shares sold in this placement are subject to a registration rights agreement where the Company has agreed to use its best efforts to register the shares issued at the request of the holder. EuroSite
used a portion of these proceeds to pay off its debt to its former Chairman, of
$2,000,000
, with the balance being retained to fund operations and growth.
On June 28, 2016,
$2.1 million
of Eurosite Power's
$2.4 million
of convertible debentures were converted into
3,909,260
shares of common stock of Eurosite Power at a price of
$0.54
per share. Additionally,
$11,000
of accrued interest was also converted at the same price. As the price used to convert the convertible debentures was less than the then contractual conversion price of
$0.60
per share of common stock, the fair value of the incremental shares issued to the holders of the convertible debentures over and above the contractually required amount of
$224,782
was expensed as debt conversion expense.
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. The balance of
$2,000,000
was repaid in connection with a private placement.
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, Dr. Samaras has agreed to lend EuroSite Power up to an aggregate of
$1,000,000
, 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
June 30, 2016
,
no
amounts have been drawn on this line.
As of
June 30, 2016
, EuroSite Power owed the Company
$22,059
.
Note 8. 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 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.
In connection with recognizing the distribution of energy systems to the noncontrolling interest in ADGNY (see Note 5. "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.
In connection with deconsolidation of and valuation of the Company’s remaining investment in EuroSite Power (see Note 5. "Investment in EuroSite Power"), the Company utilized a Level 3 category fair value measurement.
That measurement was determined by management based on the proposed transaction disclosed in Note 11. Subsequent events, as it represents the best indication of fair value available.
Note 9. Commitments and Contingencies
The Company has certain commitments under agreements with certain 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.
Note 10. Variable Interest Entity
The carrying amount and classification of assets and liabilities of the Company's consolidated subsidiary EuroSite Power, which until June 28, 2016 was considered to be a variable interest entity and for which the Company has determined it was the primary beneficiary, were as follows as of
December 31, 2015
:
|
|
|
|
|
|
|
December 31, 2015
|
Current assets
|
|
$1,450,034
|
Long-term assets
|
|
7,527,266
|
|
|
|
|
Current liabilities
|
|
699,086
|
|
Long-term liabilities
|
|
4,536,422
|
|
As of June 30, 2016, the Company has deconsolidated EuroSite, (see Note 4. Investment in EuroSite Power).
Note 11. Subsequent Events
On August 9, 2016, the Company executed binding agreements that will result in a reduction of convertible debt outstanding to approximately
$3.4 million
with zero coupon due May 2018. American DG Energy will exchange approximately
9.7 million
shares of EuroSite Power Inc, for the elimination of a portion of the outstanding
6%
convertible debentures due May 2018. A further
5.5 million
shares of EuroSite Power will be sold by the Company to affiliates for cash at
$0.40
per share, with the resulting cash used for pre-payment of additional convertible debt. In conjunction with these transactions,
1.02 million
warrants (expiring October 2017 at
$0.60
strike price) to purchase shares of Eurosite Power common stock from the Company will also be cancelled. These transaction are expected to be completed during the fourth quarter of 2016.
The Company has evaluated subsequent events through the date of this filing and determined that no other subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
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 electricity rates.
There is an ongoing consideration of how to access and lower the cost of capital. The Company regularly assesses the cost and availability of debt capital, preferred stock, convertible debentures, private equity financing, and public common stock offerings. The effect these fundraising efforts have on the business will depend on the type of fundraising. Generally, debt and convertible debenture financing will increase interest expense. Generally, convertible debentures, private equity, and public equity have the potential to dilute shareholder’s earnings per share. To date, the Company has largely financed its growth through the private placements of convertible debt and equity. During the first quarter of 2016 the Company's subsidiary, EuroSite Power, signed two project financing agreements which will provide funding for projects going forward.
On May 4, 2016, the Company exchanged approximately 14.72 million of its shares in EuroSite Power, or 46% of its 48% ownership in its European subsidiary, for elimination of a portion of the outstanding 6% convertible debentures due May 2018. With this swap of EuroSite Power shares in exchange for partial extinguishment of the convertible debt, American DG Energy reduced the convertible debt outstanding to $8.6 million. The Company is pursuing a similar debt exchange transaction for the remaining convertible debt outstanding and expects to complete that subsequent transaction in the fourth quarter of 2016.
Until June 28, 2016 the Company accounted for its investment in EuroSite Power as a consolidated subsidiary. On June 28, 2016 substantially all of the long-term convertible indebtedness of EuroSite Power guaranteed by the Company was converted into shares of EuroSite Power. As a result, the Company deconsolidated EuroSite Power in its consolidated financial statements and the remaining shares held by the Company were recorded at fair value which resulted in a $3.9 million gain. (see Note 4. Investment in EuroSite Power)
Results of Operations
Second Quarter 2016
Compared to
Second Quarter 2015
Revenues
Revenues in the
second quarter of 2016
were
$2,112,148
compared to
$2,087,127
for the same period in
2015
, an increase of
$25,021
or
1.2%
. The increase is due to higher energy revenue. On-Site Utility energy revenue in the
second quarter of 2016
was
$1,973,377
compared to
$1,871,110
for the same period in
2015
, an increase of
$102,267
or
5.5%
, due to a 20.2% increase in EuroSite. During the
second quarter of 2016
, 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
second quarter of 2016
was
$138,771
compared to
$216,017
for the same period in
2015
, a decrease of
$77,246
or
35.8%
.
During the
second quarter of 2016
, the Company operated
123
energy systems, representing
8,623
kWh of installed electricity potential, compared to
119
energy systems, representing
8,096
kWh of installed electricity potential for the same period in
2015
. 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 a contractually negotiated formula, which takes into account the monthly published price of energy (electricity, natural gas or oil) from its customers’ local energy utility, less an applicable discount. The Company’s revenues commence as new energy systems become operational.
Cost of Sales
Cost of sales, including depreciation, in the
second quarter of 2016
was
$1,879,859
compared to
$1,887,342
for the same period in
2015
, a slight decrease of
$7,483
or
0.4%
. The decrease in cost of sales is principally due to a decrease in fuel costs, offset by an increase in depreciation. The cost of fuel, maintenance and installation was
$1,307,448
in the
second quarter of 2016
, compared to
$1,367,484
for the same period in
2015
, a decrease of
$60,036
or
4.4%
. Depreciation expense was
$572,411
in the
second quarter of 2016
, compared to
$519,858
for the same period in
2015
, an increase of
$52,553
.
During the
second quarter of 2016
, our gross margins were
11.0%
compared to
9.6%
for the same period in
2015
, a 15% improvement, due to a 6% reduction in fuel costs as a percentage of sales. Our gross margins, excluding depreciation, were
38.1%
in the
second quarter of 2016
, compared to
34.5%
for the same period in
2015
, also a
10.4%
improvement.
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
second quarter of 2016
were
$723,595
compared to
$645,367
for the same period in
2015
, an increase of
$78,228
or
12.1%
. The increase was primarily due to an increase of non-cash stock grants and an unfavorable currency adjustment for EuroSite Power.
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
second quarter of 2016
were
$177,647
compared to
$308,428
for the same period in
2015
, a decrease of
$130,781
or
42.4%
. The decrease in expense was primarily due to lower salaries and travel expense as a result of our Initiative efforts.
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
second quarter of 2016
were
$234,827
compared to
$215,077
for the same period in
2015
, an increase of
$19,750
or
9.2%
. The increase was primarily due to the costs associated with improving the installed base of energy systems as well as the addition of a field engineer in the UK.
Loss from Operations
The loss from operations in the
second quarter of 2016
was
$903,780
compared to a loss of
$969,087
for the same period in
2015
, an improvement of
$65,307
or
6.7%
. The improvement in the operating loss was primarily due to lower operating expenses by
$32,803
in the
second quarter of 2016
compared to the
second quarter of 2015
and an increase in gross profit of
1.4%
.
Other Income (Expense), Net
Our other expense, net, in the
second quarter of 2016
was income of
$3,405,858
compared to an expense of
$149,402
for the same period in
2015
, an increase of
$3,555,260
. Interest expense was
$264,843
in the
second quarter of 2016
compared to
$317,650
for the same period in
2015
, a decrease of
$52,807
, which is primarily due to a decrease in principal balance of convertible debt in the
second quarter of 2016
. In addition, an expense of
$224,782
was recognized in 2016 upon EuroSite's convertible debentures being converted to common stock. Also, a gain on deconsolidation of
$3,887,098
was recognized upon deconsolidation of EuroSite Power (see Note 4. Investment in Eurosite).
Provision for Income Taxes
Our provision for taxes in the
second quarter of 2016
was
$6,139
compared to
$2,187
for the same period in
2015
. The provision consists of various state income taxes accrued for the quarter.
Noncontrolling Interest
The noncontrolling interest in the profits or losses in American DG New York, LLC, or ADGNY, and EuroSite Power was an addition to net income of
$516,503
in the
second quarter of 2016
compared to an increase in net loss attributable to American DG Energy of
$59,759
for the same period in
2015
. This difference of
$576,262
is due to a combination of the prior year's restructuring of ADGNY as well as a larger net loss attributable to EuroSite for
second quarter of 2016
as compared to the same period in
2015
.
First Six Months of 2016
Compared to
First Six Months of 2015
Revenues
Revenues in the
first six months of 2016
were
$4,313,629
compared to
$4,594,867
for the same period in
2015
, a decrease of
$281,238
or
6.1%
. The decrease in revenues was primarily due to lower revenue in the US for the
first six months of 2016
compared to the same period in
2015
offset by increased revenues in the UK. Our On-Site Utility energy revenue in the
first six months of 2016
was
$4,023,378
compared to
$4,261,457
for the same period in
2015
, a decrease of
$238,079
. During the
first six months of 2016
, 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 six months of 2016
was
$290,251
compared to
$333,410
for the same period in
2015
, a decrease of
$43,159
or
12.9%
.
During the
first six months of 2016
, the Company operated
123
energy systems representing
8,623
kW of installed electricity plus thermal energy, compared to
119
energy systems representing
8,096
kW of installed electricity plus thermal energy for the same period in
2015
. 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 six months of 2016
were
$3,913,593
compared to
$4,123,452
for the same period in
2015
. Included in the cost of sales was depreciation expense of
$1,123,487
in the
first six months of 2016
, compared to
$1,028,315
for the same period in
2015
, an increase of
$95,172
, or
9.3%
. The cost of fuel, maintenance and installation was
$2,790,106
in the
first six months of 2016
, compared to
$3,095,137
for the same period in
2015
, a decrease of
$305,031
or
9.9%
, primarily due to lower fuel costs and lower sales.
During the
first six months of 2016
, our gross margins were
9.3%
compared to
10.3%
for the same period in
2015
, 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
35.3%
in the
first six months of 2016
, compared to
32.6%
for the same period in
2015
.
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 six months of 2016
were
$1,401,325
compared to
$1,506,429
for the same period in
2015
, a decrease of
$105,104
or
7.0%
. 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 six months of 2016
were
$331,100
compared to
$649,121
for the same period in
2015
, a decrease of
$318,021
or
49.0%
. The decrease was primarily due to a reduction in payroll and travel 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 six months of 2016
were
$484,319
compared to
$385,447
for the same period in
2015
, an increase of
$98,872
or
25.7%
. The increase was primarily due to higher payroll, consulting and travel costs, and costs associated with improving the installed base of energy systems.
Loss from Operations
The loss from operations in the
first six months of 2016
was
$1,816,708
compared to a loss of
$2,069,582
for the same period in
2015
, a decrease of
$252,874
, or
12.2%
. The decrease in the operating loss was primarily due to lower selling and general and administrative expenses.
Other Income (Expense), Net
Our other expense, net, in the
first six months of 2016
was income of
$3,081,651
compared to expense of
$437,194
for the same period in
2015
, an increase of
$3,518,845
. Other expense, net, includes interest and other income, gain attributable to deconsolidation of EuroSite and interest expense. Interest and other income was
$21,226
in the
first six months of 2016
compared to
$186,433
for the same period in
2015
, a decrease of
$165,207
. The decrease was primarily due to a $157,870 gain attributable to the redistribution of ADGNY assets in the second quarter of 2015. Interest expense was
$601,891
in the
first six months of 2016
compared to
$630,106
for the same period in
2015
, a decrease of
$28,215
, or
4.5%
. The lower interest expense is due to less convertible debentures paying interest in the
first six months of 2016
as compared to the same period of
2015
. We also recognized a non-cash gain on deconsolidation with EuroSite of
$3,887,098
(see Note 4 - Investment in EuroSite Power).
Benefit (Provision) for Income Taxes
Our benefit for state income taxes in the
first six months of 2016
was
$60,288
compared to
$5,168
for the same period in
2015
.
Noncontrolling Interest
The noncontrolling interest share in the profits or losses in ADGNY and EuroSite Power was an increase in net income of
$718,870
in the
first six months of 2016
compared to a reduction of net loss of
$123,449
for the same period in
2015
. This difference of
$595,421
is due to a combination of the prior year's restructuring of ADGNY as well as a larger net loss attributable to EuroSite for
second quarter of 2016
as compared to the same period in
2015
.
Liquidity and Capital Resources
Consolidated working capital at
June 30, 2016
was
$4,488,822
, compared to
$6,210,765
at
December 31, 2015
. Included in working capital were cash and cash equivalents of
$3,164,151
at
June 30, 2016
, compared to
$5,587,528
at
December 31, 2015
. The decrease in working capital was primarily due to the cash lost through deconsolidation of
$5,127,424
and purchases and installation of energy systems in the amount of
$1,231,826
.
Cash used in operating activities was
$1,267,980
in the
first six months of 2016
compared to cash provided by operations of
$26,226
in the same period in
2015
. For the
first six months of 2016
, net income was
$1,923,525
. This net income was offset by a gain on deconsolidation of EuroSite of
$3,887,098
, depreciation of
$1,146,186
,
$522,044
of non-cash interest expense,
$200,541
of stock-based compensation expense and
$224,782
of non-cash debt conversion expense. In addition, our receivables balance, including unbilled revenue and allowances for bad debts, used
$135,385
in the
first six months of 2016
, our decrease in inventory provided
$66,679
of cash and our decrease in prepaid and other current assets provided
$276,079
in cash primarily due to the collection of UK energy tax incentives.
Our accounts payable decreased using
$53,732
of cash. Our accrued expenses and other current liabilities decreased using
$49,658
of cash. The amounts due to related parties decreased using
$793,012
of cash.
During the
first six months of 2016
, the investing activities of the Company's operations were expenditures of
$1,231,826
for purchases and installation of energy systems and cash lost due to deconsolidation with EuroSite was
$5,127,424
. The Company's financing activities provided
$5,193,603
of cash in the
first six months of 2016
, from the private placement of
$7,246,090
, reduced by the loan repayment of
$2,000,000
.
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 on Form 10-K for the year ended
December 31, 2015
. 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.