Note 1 — Description of business and summary of significant accounting policies:
Description of Business
EuroSite Power Inc., the Company, we, our or us, distributes, owns and operates clean, on-site energy systems that produce electricity, hot water, heat and cooling in the United Kingdom and Europe. The Company’s business model is to own the equipment it installs at customers’ facilities and to sell the energy produced by these systems to the 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 EuroSite Power “On-Site Utility.”
The Company was incorporated as a Delaware corporation on July 9, 2010 as a subsidiary of American DG Energy Inc., or American DG Energy, to introduce the American DG Energy’s On-Site Utility solution into the United Kingdom and the European market.
Principles of Consolidation and Basis of Presentation
The unaudited condensed consolidated financial statements, or the Unaudited Financial Statements, presented herein have been prepared by the Company, without audit, and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods presented. The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and pursuant to the rules and regulations of the SEC, for reporting in this Quarterly Report on Form 10-Q, or the Quarterly Report. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is suggested that the Unaudited Financial Statements be read in conjunction with the consolidated financial statements and notes included in the Company’s Form 10-K for the year ended
December 31, 2011
. The Company’s operating results for the three and
nine
month period ended
September 30, 2012
, may not be indicative of the results expected for any succeeding interim periods or for the entire year ending
December 31, 2012
.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary EuroSite Power Limited, a United Kingdom registered company.
On July 9, 2010, American DG Energy invested
$45,000
in exchange for
45 million
shares of the Company’s common stock, par value
$.001
per share, or Common Stock, and obtained controlling interest in the Company. Also on July 9, 2010, Nettlestone Enterprises Limited, invested
$5,000
in exchange for
5 million
shares of the Company’s Common Stock. As of
September 30, 2012
, American DG Energy owned an
82.8%
interest in the Company and consolidates the Company into its financial statements in accordance with GAAP.
The Company’s operations are comprised of one business segment. The Company’s business is to sell energy in the form of electricity, heat, hot water and cooling to its customers under long-term sales agreements.
The Company has experienced total net losses since inception of
$2.7 million
. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as its management executes its current business plan. The Company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, its ability to control certain costs, including those related to general and administrative expenses, and the use of capital from its parent company, will be sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next
12 months
; however, as the Company continues to grow its business by adding more energy systems, the cash requirements will increase. On July 11, 2012, the Company filed a Form S-1 registration statement with the SEC to offer up to 15,000,000 shares of common stock and warrants. The common stock and the warrants will be sold in units, at a price of $1.00 per unit, with each unit consisting of one share of common stock and a warrant to purchase one share of common stock at an exercise price of $1.00 per share; however, there is no assurance that the Company will be successful in its fundraising efforts. Beyond
September 30, 2013
, if the Company cannot raise capital by the existing equity fundraising effort, it may need to raise additional capital through a debt financing or use capital provided by its parent to meet its operating and capital needs. There can be no assurance, however, that the Company will be successful in these fund-raising efforts or that additional funds will be available on acceptable terms, if at all.
Since its inception to
September 30, 2012
, the Company has raised a total of
$3,511,000
through various private placements of Common Stock. If the Company is unable to raise additional capital, the Company may need to terminate
certain of its employees and adjust its current business plan. Financial considerations may cause the Company to modify planned deployment of new energy systems and the Company 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.
The following significant accounting policies are either currently in effect or are anticipated to become effective as the Company commences its normal business activities.
Foreign Currency Transactions
The functional currency and the reporting currency of the Company are the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in the Condensed Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from energy contracts will be recognized when electricity, heat, and chilled water is produced by the cogeneration systems on-site. The Company expects to bill each month based on various meter readings installed at each site. The amount of energy produced by on-site energy systems will be invoiced, as determined by a contractually defined formula. Under certain energy contracts, the customer will directly acquire the fuel to power the systems and will receive credit for that expense from the Company. The credit will be recorded as reduction of revenue.
As a by-product of the energy business, in some cases, the customer may choose to have the Company construct the system for them rather than have it owned by the Company. In this case, the Company will account for revenue, or turnkey revenue, and costs using the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting, revenues are recognized by applying percentages of completion to the total estimated revenues for the respective contracts. Costs will be recognized as incurred. The percentages of completion are determined by relating the actual cost of work performed to date to the current estimated total cost at completion of the respective contracts. When the estimate on a contract indicates a loss, the Company’s policy will be to record the entire expected loss, regardless of the percentage of completion. The excess of contract costs and profit recognized to date on the percentage-of-completion accounting method in excess of billings will be recorded as unbilled revenue. Billings in excess of related costs and estimated earnings will be recorded as deferred revenue.
Customers may buy out their long-term obligation under energy contracts and purchase the underlying equipment from the Company. Any resulting gain on these transactions will be recognized over the payment period in the consolidated statements of operations. Revenues from operations, including shared savings will be recorded when provided and verified. Maintenance service revenue will be recognized over the term of the agreement and will be billed on a monthly basis in arrears. The Company had no such arrangements to date.
Occasionally the Company will enter into a sales arrangement with a customer to construct and sell an energy system and provide energy and maintenance services over the term of the contract. Based on the fact that the Company will sell each deliverable to other customers on a stand-alone basis, the Company will determine that each deliverable has a stand-alone value. Additionally, there are no rights of return relative to the delivered items; therefore, each deliverable will be considered a separate unit of accounting. Revenue will be allocated to each element based upon its relative fair value which is determined based on the estimated price of the deliverables when sold on a standalone basis. Revenue related to the construction of the energy system will be recognized using the percentage-of-completion method as the unit is being constructed. Revenue from the sale of energy will be recognized when electricity, heat, and chilled water is produced by the energy system, and revenue from maintenance services is recognized over the term of the maintenance agreement. The Company had no such arrangements to date.
The Company may be able to participate in the demand response market and receive payments due to the availability of its energy systems. Demand response programs provide payments for either the reduction of electricity usage
or the increase in electricity production during periods of peak usage throughout a utility territory. The Company had not recognized revenue from demand response activity to date.
Other revenue represents various types of ancillary activities for which the Company expects to engage in from time to time such as the sale of equipment, construction work, engineering work and feasibility studies.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of highly liquid cash equivalents. The Company has cash balances in certain financial institutions in amounts which occasionally exceed current federal deposit insurance limits. The financial stability of these institutions is continually reviewed by senior management. As of
September 30, 2012
, the Company had a balance of
$771,087
in cash and cash equivalents. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Accounts Receivable
The Company maintains receivable balances with its customers. The Company reviews its customers’ credit history before extending credit and generally does not require collateral. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Bad debts are written off when identified by management. At
September 30, 2012
, and
December 31, 2011
, the allowance for doubtful accounts was
$0
and
$0
, respectively.
Inventory
Inventories are stated at the lower of cost or market, valued on a first-in, first-out basis. Inventory is reviewed periodically for slow-moving and obsolete items.
Supply Concentrations
All of the Company’s cogeneration unit purchases for the periods ending
September 30, 2012
and
2011
, respectively, were from one vendor (see “Note 5 - Related parties”). The Company believes there are sufficient alternative vendors available to ensure a constant supply of cogeneration units on comparable terms. However, in the event of a change in suppliers, there could be a delay in obtaining units which could result in a temporary slowdown of installing additional income producing sites. The Company believes there are sufficient alternative vendors available to ensure a constant supply of maintenance and installation services on comparable terms. However, in the event of a change of vendor, there could be a delay in installation or maintenance services.
Property Plant and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method at rates sufficient to write off the cost of the applicable assets over their estimated useful lives. Repairs and maintenance are expensed as incurred.
The Company will evaluate the recoverability of its long-lived assets by comparing the net book value of the assets to the estimated future undiscounted cash flows attributable to such assets. The useful life of the Company’s energy systems will be the lesser of the economic life of the asset or the term of the underlying contract with the customer, typically
12
to
15
years. The Company will review the useful life of its energy systems on a quarterly basis or whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable or that the useful lives of the assets will no longer be appropriate. If impairment is indicated, the asset will be written down to its estimated fair value based on a discounted cash flow analysis.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense in the consolidated statements of operations over the requisite service period. The fair value of stock options granted is estimated using the Black-Scholes option pricing valuation model. The Company recognizes compensation on a straight-line basis for each separately vesting portion of the option award. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the average volatility of 5 companies in the same industry as the Company. The average expected life is estimated using the simplified method for “plain vanilla” options. The simplified method determines the expected life in years based on the vesting period and contractual terms as set forth when the award is made. The risk-free interest rate is based on United States Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. When options are exercised the Company normally issues new shares.
See “Note 3 – Stockholders’ equity” for a summary of the stock option activity under our 2011 Stock Incentive Plan, as amended, and the UK Sub-Plan for the periods ending
September 30, 2012
and
2011
, respectively.
Loss per Common Share
The Company computes basic loss per share by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. The Company computes its 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 stock options and warrants to be dilutive Common Stock equivalents when the exercise price is less than the average fair market value of the Company’s Common Stock for the period.
Other Comprehensive Net Loss
The comprehensive net loss for the periods ending
September 30, 2012
and
2011
, respectively, does not differ from the reported loss.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which the Company operates. This process involves the Company estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and certain accrued liabilities for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance.
The Company uses a comprehensive model for the recognition, measurement and financial statement disclosure of uncertain tax positions. Unrecognized benefits are the differences between tax positions taken, or expected to be taken in tax returns and the benefits recognized for accounting purposes.
Note 2 — Inventory:
As of
September 30, 2012
and
2011
, the Company had
$198,439
and
$137,976
, respectively, in inventory which consisted of finished goods. As of
September 30, 2012
and
December 31, 2011
, there were no reserves or write downs recorded against inventory.
Note 3 — Stockholders’ equity:
Common Stock
On July 9, 2010, American DG Energy invested
$45,000
in exchange for
45 million
shares of the Company’s Common Stock and obtained controlling interest in the Company. Also on July 9, 2010, Nettlestone Enterprises Limited, invested
$5,000
in exchange for
5 million
shares of the Company’s Common Stock. During the period from July 9, 2010 to December 31, 2010, the Company raised an additional
$2,221,019
net of costs, in a private placement by selling
2,261,000
shares of Common Stock to
25
accredited investors at a price of
$1.00
per share.
During the period from January 1, 2011 to
December 31, 2011
, the Company raised an additional
$1,148,401
net of costs, in a private placement by issuing
1,250,000
shares of Common Stock to
4
accredited investors at a price of
$1.00
per share.
On February 10, 2012, the Company announced that its Board of Directors declared a stock dividend of
10%
per share on the outstanding shares of our Common Stock. The dividend was payable on March 12, 2012, to common stockholders of record at the close of business on
February 24, 2012
, except for shares held by American DG Energy, whose Board of Directors declined the dividend. The Company adjusted the price of its outstanding stock option awards and warrants to
$0.90
per share due to the payment of the dividend. The Company retroactively applied this dividend to the
December 31, 2011
, financial statements. Prior to that transaction, the Company had paid no cash or stock dividends on its Common Stock. The Company currently expects to retain earnings for use in the operation and expansion of its business, and therefore does not anticipate paying any cash dividends in the foreseeable future.
The holders of Common Stock have the right to vote their interest on a per share basis. At
September 30, 2012
, there were
54,362,100
shares of Common Stock outstanding.
Warrants
On July 12, 2010, the Company granted to Nettlestone Enterprises Limited a special purchase right, or warrant. The warrant grants the investor the non-assignable right but not the obligation, for a period of two years from July 12, 2010, to purchase
400,000
shares of the Common Stock at a per share purchase price of
$1.00
. On March 12, 2012, in connection with the 10% stock dividend declared on the Company’s common stock, the per share purchase price of the warrant was adjusted to
$0.90
. The fair value of the warrants granted was estimated using the Black-Scholes option pricing valuation model and the value of the warrant was recorded in stockholder’s equity in additional paid-in capital and as a cost of the financing as a deduction to the proceeds raised. Those warrants expired unexercised on
July 12, 2012
.
Stock-Based Compensation
In January 2011, the Company adopted the 2011 Stock Incentive Plan, or the Plan, under which the Board of Directors may grant up to
3,000,000
shares of incentive or non-qualified stock options and stock grants to key employees, directors, advisors and consultants of the Company. On June 13, 2011, the Board of Directors unanimously amended the Plan, to increase the reserved shares of Common Stock issuable under the Plan from
3,000,000 to 4,500,000
, or the Amended Plan.
Stock options vest based upon the terms within the individual option grants, usually over a
four
year period with an acceleration of the unvested portion of such options upon a liquidity event, as defined in the Company’s stock option agreement. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan is not less than the fair value of the shares on the date of the grant. The number of securities remaining available for future issuance under the Amended Plan was
910,000
at
September 30, 2012
.
On January 15, 2011, the Company granted nonqualified options to purchase
2,100,000
shares of Common Stock to five employees and two directors at a purchase price of
$1.00
per share. Those options have a vesting schedule of
four
years and expire in
ten
years. The assumptions used in the Black-Scholes option pricing model include an expected life of
6.25
years, a risk-free interest rate of
2.7%
and an expected volatility of
32.8%
. The fair value of the options issued was
$790,908
, with a grant date fair value of
$0.38
per option.
On June 13, 2011, the Company granted nonqualified options to purchase
300,000
shares of Common Stock to three directors at a purchase price of
$1.00
per share. Those options have a vesting schedule of
four
years and expire in
ten
years. The assumptions used in the Black-Scholes option pricing model include an expected life of
6.25
years, a risk-free interest rate of
2.3%
and an expected volatility of
32.4%
. The fair value of the options issued was
$109,304
, with a grant date fair value of
$0.36
per option.
On November 3, 2011, the Company granted its managing director options to purchase
900,000
shares of common stock at purchase price of
$1.00
per share and granted to the three members of its advisory board options to purchase
300,000
shares of common stock at purchase price of
$1.00
per share. Those options have a vesting schedule of
four
years and expire in
ten
years and were made under the UK Sub-Plan to the Company’s 2011 Stock Incentive Plan. The assumptions used in the Black-Scholes option pricing model include an expected life of
6.25
years, a risk-free interest rate of
1.5%
and an expected volatility of
33.1%
. The fair value of the options issued was
$423,400
, with a grant date fair value of
$0.35
per option.
On
March 12, 2012
, in connection with the
10%
stock dividend declared on the Company’s common stock, all outstanding stock option awards were modified in order to adjust the exercise price to
$0.90
. Based on the change in fair value of the modified awards, the Company will recognize incremental compensation cost of
$111,482
over the remaining vesting terms of the outstanding options.
During the
nine
month period ending
September 30, 2012
, the Company had
3,590,000
options outstanding and recognized employee non-cash compensation expense of
$374,014
related to the issuance of those stock options. At
September 30, 2012
, the total compensation cost related to unvested stock option awards not yet recognized was
$585,171
. This amount will be recognized over the weighted average period of
2.64
years.
Stock option activity as of and for the
nine
month period ending
September 30, 2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
Number of
Options
|
|
Exercise
Price
Per
Share
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding, December 31, 2011
|
3,600,000
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
9.34 years
|
|
—
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Canceled
|
(10,000
|
)
|
|
0.90
|
|
|
0.90
|
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding, September 30, 2012
|
3,590,000
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
8.59 years
|
|
$
|
11,129,000
|
|
Exercisable, September 30, 2012
|
597,500
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
$
|
1,852,250
|
|
Vested and expected to vest, September 30, 2012
|
3,590,000
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
$
|
11,129,000
|
|
The aggregate intrinsic value of options outstanding as of
September 30, 2012
, is calculated as the difference between the exercise price of the underlying options and the price of the Company’s Common Stock for options that were in-the-money as of that date. Options that were not in-the-money as of that date, and therefore have a negative intrinsic value, have been excluded from this amount. At
September 30, 2012
there were
2,992,500
unvested stock options outstanding with a vesting schedule of
25%
per year and expiration in ten years.
Note 4 — Earnings per share:
Basic and diluted earnings per share for the three and
nine
month periods ended
September 30, 2012
and
2011
, respectively was as follows:
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|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
September 30,
2012
|
|
September 30,
2011
|
|
September 30,
2012
|
|
September 30,
2011
|
Earnings per share
|
|
|
|
|
|
|
|
Loss available to stockholders
|
$
|
(383,253
|
)
|
|
$
|
(531,850
|
)
|
|
$
|
(1,271,416
|
)
|
|
$
|
(851,966
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
54,362,100
|
|
|
54,362,100
|
|
|
54,362,100
|
|
|
53,982,796
|
|
Basic and diluted loss per share
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
Anti-dilutive shares underlying warrants outstanding
|
—
|
|
|
400,000
|
|
|
—
|
|
|
400,000
|
|
Anti-dilutive shares underlying stock options outstanding
|
3,590,000
|
|
|
2,400,000
|
|
|
3,590,000
|
|
|
2,400,000
|
|
Note 5 — Related parties:
The Company expects to purchase the majority of its energy equipment from American DG Energy, its parent. American DG Energy owns an
82.8%
of the Common Stock of the Company. American DG Energy purchases energy equipment primarily from Tecogen, an affiliate of the Company, which manufactures natural gas, engine-driven commercial and industrial cooling and cogeneration systems, and from Ilios Inc., or Ilios, a majority owned subsidiary of Tecogen which
is developing a line of ultra-high-efficiency heating products, such as a high efficiency water heater, that provides twice the efficiency of conventional boilers, based on management estimates, for commercial and industrial applications utilizing advanced thermodynamic principles.
American DG Energy, GlenRose Instruments Inc., or GlenRose Instruments, Tecogen Inc., or Tecogen, and Ilios Inc., or Ilios, are affiliated companies by virtue of common ownership. Specifically, John N. Hatsopoulos who is the Chairman of the Company is: (a) the Chief Executive Officer and director of American DG Energy and holds
11.9%
of the company’s common stock, (b) the Chief Executive Officer and director of Tecogen and holds
27.4%
of the company’s common stock, (c) a director of Ilios and holds
7.3%
of the company’s common stock, and (d) the Chairman of GlenRose Instruments and holds
15.7%
of the company’s common stock. Dr. George N. Hatsopoulos, who is John N. Hatsopoulos’ brother, is: (a) a director of American DG Energy and holds
14.5%
of the company’s common stock, (b) a director of Tecogen and holds
26.0%
of the company’s common stock, (c) an investor in Ilios and holds
2.9%
of the company’s common stock and (d) an investor of GlenRose Instruments and holds
15.7%
of the company’s common stock.
American DG Energy signed a Facilities and Support Services Agreement with Tecogen on
July 1, 2012
. The term of the agreement commences as of the start of each year and certain portions of the agreement, including office space allocation, get renewed annually upon mutual written agreement.
On
October 20, 2009
, American DG Energy, in the ordinary course of its business, signed a Sales Representative Agreement with Ilios to promote, sell and service the Ilios high-efficiency heating products, such as the high efficiency water heater, in the marketing territory of the New England states, including Connecticut, Rhode Island, Massachusetts, New Hampshire, Vermont, and Maine. The marketing territory also includes all of the nations in the European Union. The initial term of this Agreement is for five years, after which it may be renewed for successive one-year terms upon mutual written agreement.
The Company purchases energy systems from American DG Energy and ships them to the United Kingdom. At
September 30, 2012
and
December 31, 2011
, the Company had an inventory balance of
$198,439
and
$137,976
, respectively, consisting of energy systems purchased from American DG Energy.
On
February 22, 2011
, John N. Hatsopoulos, the Company’s Chairman of the Board, purchased
25,000 share
s of the Company’s Common Stock from an accredited investor at a price of
$1.00
per share and George N. Hatsopoulos purchased
25,000 shares
of the Company’s Common Stock from the same accredited investor at a price of
$1.00
per share.
John N. Hatsopoulos is the Company’s Chairman of the Board and is also the Chief Executive Officer of American DG Energy and Tecogen, and the Chairman of GlenRose Instruments. His salary is
$1.00
per year. On average, Mr. Hatsopoulos spends approximately
20%
of his business time on the affairs of the Company, but such amount varies widely depending on the needs of the business and is expected to increase as the business of the Company develops.
Barry J. Sanders, the Company’s Chief Executive Officer, is also the President and Chief Operating Officer of American DG Energy and devotes part of his business time to the affairs of American DG Energy. His salary is paid by American DG Energy but a portion is reimbursed by the Company according to the requirements of the business in a given week at a fully burdened hourly rate of
$119
. On average, Mr. Sanders spends approximately
25%
of his business time on the affairs of the Company, but such amount varies widely depending on the needs of the business and is expected to increase as the business of the Company develops.
Anthony S. Loumidis, the Company’s Chief Financial Officer, devotes part of his business time to the affairs of American DG Energy, GlenRose Instruments, Tecogen and Ilios. His salary is paid by American DG Energy but a portion is reimbursed by GlenRose Instruments and by the Company according to the requirements of the business in a given week at a fully burdened hourly rate of
$108
. On average, Mr. Loumidis spends approximately
15%
of his business time on the affairs of the Company, but such amount varies widely depending on the needs of the business and is expected to increase as the business of the Company develops.
The Company’s headquarters are located in Waltham, Massachusetts and consist of
3,071
square feet of office and storage space that are leased from Tecogen and shared with American DG Energy. The lease expires on
March 31, 2014
. American DG Energy is currently charging the Company for utilizing its share of office space in the United States through an intercompany service charge. The Company also occupies a small office space in the United Kingdom. The Company believes that its facilities are appropriate and adequate for its current needs.
Note 6 — 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
— Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. The Company currently does not have any Level 1 financial assets or liabilities.
Level 2 —
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company currently does not have any Level 2 financial assets or liabilities.
Level 3
— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company currently does not have any Level 3 financial assets or liabilities.
At
September 30, 2012
, the Company has no financial instruments that are required to be recorded at fair value on a recurring basis. The Company’s financial instruments include cash and cash equivalents and accounts payable whose recorded values approximate fair value based on their short term nature.
Note 7
— 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.