DATED NOVEMBER 15, 2012
|
Filed Pursuant to Rule 424(b)(1)
|
PROSPECTUS
|
Registration No.
333-182620
|
15,000,000 Shares of Common Stock
Warrants to Purchase 15,000,000 Shares
of Common Stock
We are offering up to 15,000,000 shares
of our common stock and warrants to purchase up to 15,000,000 shares of our common stock (and the shares of common stock issuable
from time to time upon exercise of these warrants). The common stock and the warrants will be sold in units, 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.
Each unit will be sold at a price of $1.00 per unit. Units will not be issued or certificated. The shares of common stock and
warrants are immediately separable and will be issued separately. We refer to the shares of common stock issued or issuable hereunder
upon exercise of the warrants, and the warrants to purchase common stock issued hereunder, collectively, as the securities.
We have retained Scarsdale Equities
LLC as our placement agent in connection with this offering and Scarsdale Equities LLC is deemed an underwriter. The units are
being offered on a best efforts basis.
|
|
Per Unit
|
|
|
Total
|
|
Public offering price
|
|
$
|
1.000
|
|
|
$
|
15,000,000
|
|
Placement agent’s fee(1)
|
|
$
|
0.065
|
|
|
$
|
975,000
|
|
Proceeds to us before expenses
|
|
$
|
0.935
|
|
|
$
|
14,025,000
|
|
|
(1)
|
In addition, we have agreed to reimburse the expenses of the
placement agent and to issue a warrant to purchase shares of our
common stock. See “Plan of Distribution.”
|
The placement
agent is not purchasing or selling any units pursuant to this offering, nor are we requiring any minimum purchase or sale of any
specific number of units. The placement agent is not required to place any specific number or dollar amount of units offered in
this offering, but will use its best efforts to place the units. Because there is no minimum offering amount required as a condition
to the closing of this offering, the actual public offering amount, placement agent fees and proceeds to us are not presently
determinable and may be substantially less than the maximum amounts set forth above. We expect that delivery of the units being
offered pursuant to this prospectus will be made to purchasers on or about November 21, 2012.
We expect the total offering expenses
payable by us, excluding the placement agent’s fee and the registration fee, to be approximately $78,438. We will pay all
of the offering expenses. You should rely only on the information provided in this prospectus or any supplement to this prospectus.
We have not authorized anyone else to provide you with different information.
Our common stock is currently quoted
on the OTCQB tier of the OTC Markets under the ticker symbol “EUSP”.
We are an “emerging growth company”
under the federal securities laws and will therefore be subject to reduced public company reporting requirements.
Investing in our
securities involves a high degree of risk. See “Risk Factors” beginning on page 7 of this prospectus to
read about factors you should consider before buying our securities.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate
or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is November
15, 2012
SCARSDALE
EQUITIES LLC
TABLE OF CONTENTS
Prospectus Summary
|
3
|
|
|
About This Prospectus
|
4
|
|
|
The Offering
|
5
|
|
|
Summary Consolidated Financial Data
|
6
|
|
|
Risk Factors
|
7
|
|
|
Special Note Regarding Forward Looking Statements
|
13
|
|
|
Use of Proceeds
|
13
|
|
|
Determination of Offering Price
|
13
|
|
|
Dilution
|
14
|
|
|
Plan of Distribution
|
15
|
|
|
Description of Securities to be Registered
|
16
|
|
|
Experts
|
18
|
|
|
Legal Matters
|
18
|
|
|
Business
|
19
|
|
|
Market for Common Equity and Related Stockholder Matters
|
27
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
29
|
|
|
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
|
32
|
|
|
Management and Governance
|
33
|
|
|
Executive Officer and Director Compensation
|
37
|
|
|
Security Ownership of Certain Beneficial Owners and Management
|
43
|
|
|
Certain Relationships and Related Transactions
|
44
|
|
|
Where You Can Find More Information
|
45
|
|
|
Financial Statements
|
F-1
|
You should rely only on the information
contained in this Prospectus. We have not authorized any other person to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. No offers are being made hereby in any jurisdiction
where the offer or sale is not permitted.
Unless otherwise indicated, information
contained in this Prospectus concerning our industry, including our market opportunity, is based on information from independent
industry analysts, third-party sources and management estimates. Management estimates are derived from publicly-available information
released by independent industry analysts and third party sources, as well as data from our internal research, and is based on
assumptions made by us using data and our knowledge of such industry and market, which we believe to be reasonable. In addition,
while we believe the market opportunity information included in this Prospectus is generally reliable and is based on reasonable
assumptions, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed
under the heading “Risk Factors.”
PROSPECTUS SUMMARY
This summary highlights information
contained elsewhere in this prospectus or incorporated by reference herein. This summary does not contain all of the information
that you should consider before investing in our securities. Before making an investment decisions, you should carefully read
the entire prospectus, including the “Risk Factors” section, starting on page 7 of this prospectus, as well as
the financial statements and the other information incorporated by reference herein.
Overview
We distribute, own and operate clean, on-site
energy systems that produce electricity, hot water, heat and cooling in the United Kingdom and Europe. Our business model is to
own the equipment that we install 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. Because our systems
may operate at up to 90% efficiency, according to the Environmental and Energy Study Institute,
Energy Generation and Distribution
Efficiency,
(versus less than 33% for the existing power grid), we expect to be able to sell the energy produced by these
systems to our customers at prices below their existing cost of electricity (or air conditioning), heat and hot water.
We offer natural gas powered cogeneration
systems that are highly reliable and energy efficient. Our cogeneration systems produce electricity from an internal combustion
engine driving a generator, while the heat from the engine and exhaust is recovered and typically used to produce heat and hot
water for use at the site. We also distribute and operate water chiller systems for building cooling applications that operate
in a similar manner, except that the engine’s power drives a large air-conditioning compressor while recovering heat for
hot water. Cogeneration systems reduce the amount of electricity that the customer must purchase from the local utility and produce
valuable heat and hot water for the site to use as required. By simultaneously providing electricity, hot water and
heat, cogeneration systems also have a significant positive impact on the environment by reducing the carbon or CO
2
produced by offsetting the traditional energy supplied by the electric grid and conventional hot water boilers.
Distributed generation of electricity,
or DG, often referred to as cogeneration systems, or combined heat and power systems, or CHP, is an attractive option for reducing
energy costs and increasing the reliability of available energy. DG has been successfully implemented by others in large industrial
installations over 10 Megawatts, or MW, where the market has been growing for a number of years, and is increasingly being accepted
in smaller size units because of technology improvements, increased energy costs and better DG economics. We believe that our
target market (users of up to 1 MW) has been barely penetrated and that the reduced reliability of the utility grid, increasing
cost pressures experienced by energy users, advances in new, low-cost technologies and DG-favorable legislation and regulation
at the state and federal level will drive our near-term growth and penetration into our target market.
We believe that our primary near-term opportunity
for DG energy and equipment sales is where commercial electricity rates exceed $0.12 per kWh. Attractive DG economics in the United
Kingdom and Europe are currently attainable in applications that include hospitals, nursing homes, multi-tenant residential housing,
hotels, schools and colleges, recreational facilities, food processing plants, dairies and other light industrial facilities.
Early in 2010, American DG Energy Inc.,
or American DG Energy, which is the Company’s parent, performed a feasibility study of the European market to determine
the viability of expanding its On-Site Utility business into Europe. This study and business plan report reached the conclusions
that: (a) there is untapped customer demand to provide small-scale CHP packages in the commercial sector through a fully financed,
output-based electricity and hot water contract, (b) there is a lack of competition in this space in the target customer segments
(hotel, healthcare and multi-tenant residential) and (c) the underlying economic fundamentals are attainable, with a combination
of sufficient spark spreads and government fiscal support.
The study analyzed the entire European
market; however, it focused on the United Kingdom, Spain and Belgium as the primary markets to start operations. The study estimated
that there are over 13,700 sites in those three countries providing a $900 million annual electricity market plus a $600 million
heat and hot water energy market, for a combined market potential of $1.5 billion. The data used to calculate the Company’s
market potential is derived by Company estimates.
We purchase energy equipment from various
suppliers. The primary type of equipment used is a natural gas-powered, reciprocating engine provided by Tecogen Inc., or Tecogen,
an affiliate of the Company. Tecogen is a leading manufacturer of natural gas, engine-driven commercial and industrial cooling
and cogeneration systems suitable for a variety of applications, including hospitals, nursing homes and schools. The internal
combustion reciprocating engine is provided to Tecogen by General Motors Corporation.
Corporate Information
We were organized
as a Delaware corporation in
July 2010
. Our principal executive offices are located at
45 First Avenue, Waltham, Massachusetts 02451, and our telephone number is (781) 522-6000. Our website address is
www.eurositepower.co.uk
.
The information on, or that may be accessed through, our website is not incorporated by reference into this prospectus
and should not be considered a part of this prospectus.
ABOUT THIS PROSPECTUS
In this prospectus, the
“Company,” “we,” “us,” and “our” and similar terms refer to EuroSite Power
Inc. References to our “common stock” refer to the common stock of EuroSite Power Inc.
You should read this prospectus together
with additional information described under the headings “Where You Can Find More Information” and “Documents
Incorporated by Reference.” If there is any inconsistency between the information contained or incorporated by reference
in this prospectus, you should rely on the information in this prospectus. You should assume that the information appearing in
this prospectus is accurate as of the dates on the cover page, regardless of time of delivery of the prospectus or any sale of
securities. Our business, financial condition, results of operation and prospects may have changed since that date.
We have not authorized any other person
to provide you with different information. No offers are being made hereby in any jurisdiction where the offer or sale is not
permitted.
Unless otherwise indicated, information
contained in this prospectus concerning our industry, including our market opportunity, is based on information from independent
industry analysts, third-party sources and management estimates. Management estimates are derived from publicly-available information
released by independent industry analysts and third party sources, as well as data from our internal research, and is based on
assumptions made by us using data and our knowledge of such industry and market, which we believe to be reasonable. In addition,
while we believe the market opportunity information included in this prospectus is generally reliable and is based on reasonable
assumptions, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed
under the heading “Risk Factors.”
THE OFFERING
Common stock offered by us
|
|
15,000,000 shares
|
|
|
|
Common stock to be outstanding after this offering
|
|
69,362,100 shares
|
|
|
|
Warrants offered by us
|
|
Warrants to purchase 15,000,000 shares of common stock. The warrants
will be exercisable during the period commencing on the date of the closing of this offering and ending one year from the
date such warrants become exercisable at an exercise price of $1.00 per share. This prospectus also relates to the offering
of the shares of common stock exercisable upon the exercise of the warrants.
|
|
|
|
Use of proceeds
|
|
We intend to use the net proceeds of this offering for working capital
purposes in connection with the development and installation of new energy systems such as cogeneration systems and chillers.
The net proceeds will also be used for general corporate purposes, which may include, among other things, potential acquisitions
of companies, products and technologies that complement our business, although we have no present commitments or agreements
with respect to any such transactions.
|
|
|
|
Risk factors
|
|
See “Risk Factors” beginning on page 7 for a discussion of
factors you should consider carefully when making an investment decision.
|
|
|
|
OTCQB Symbol
|
|
“EUSP”
|
Unless we indicate otherwise, common
stock outstanding after this offering is based on 54,362,100 shares of our common stock outstanding as of October 16, 2012,
assumes the sale of the maximum number of shares of common stock and warrants offered hereby, does not include the 15,000,000
shares issuable upon the exercise of the warrants offered hereby, and excludes up to 975,000 shares issuable upon the exercise
of a warrant to be issued to the placement agent as further described in “Plan of Distribution” and excludes as of
October 16, 2012, the following:
|
·
|
3,590,000
shares of common
stock issuable
upon the exercise
of stock options
outstanding prior
to this offering
under our stock
incentive plans,
at a weighted average
exercise price
of $0.90 per share;
and
|
|
·
|
910,000
shares of common
stock available
for future grants
under our stock
incentive plans.
|
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated statements
of operations data for each of the years ended December 31, 2011 and 2010 have been derived from our audited consolidated financial
statements that are included elsewhere in this prospectus. The summary consolidated balance sheet data as of June 30, 2012 and
the summary consolidated statements of operations data for each of the six months ended June 30, 2012 and 2011 have been derived
from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated
balance sheet data as of June 30, 2011 has been derived from our unaudited condensed consolidated financial statements. You
should read this information together with the consolidated financial statements and related notes and other information under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in
this prospectus. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2012.
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
Consolidated Statement of Operations Data:
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,594
|
|
|
$
|
-
|
|
Cost of sales
|
|
|
-
|
|
|
|
-
|
|
|
|
20,104
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
7,490
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
854,502
|
|
|
|
39,805
|
|
|
|
575,807
|
|
|
|
320,116
|
|
Selling
|
|
|
527,253
|
|
|
|
-
|
|
|
|
294,995
|
|
|
|
-
|
|
Engineering
|
|
|
-
|
|
|
|
-
|
|
|
|
33,992
|
|
|
|
-
|
|
|
|
|
1,381,755
|
|
|
|
39,805
|
|
|
|
904,794
|
|
|
|
320,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,381,755
|
)
|
|
|
(39,805
|
)
|
|
|
(897,304
|
)
|
|
|
(320,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
333
|
|
|
|
-
|
|
|
|
9,141
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
333
|
|
|
|
-
|
|
|
|
9,141
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,381,422
|
)
|
|
|
(39,805
|
)
|
|
|
(888,163
|
)
|
|
|
(320,116
|
)
|
Provision for state income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(1,381,422
|
)
|
|
|
(39,805
|
)
|
|
|
(888,163
|
)
|
|
|
(320,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding -basic and diluted
|
|
|
54,078,401
|
|
|
|
52,046,867
|
|
|
|
54,362,100
|
|
|
|
53,790,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
Consolidated Balance Sheet Data:
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,338,783
|
|
|
$
|
2,234,551
|
|
|
$
|
1,202,543
|
|
|
$
|
3,225,862
|
|
Working capital
|
|
|
2,468,312
|
|
|
|
2,231,214
|
|
|
|
1,406,536
|
|
|
|
3,258,203
|
|
Total assets
|
|
|
2,578,253
|
|
|
|
2,362,957
|
|
|
|
2,006,109
|
|
|
|
3,399,740
|
|
Total liabilities
|
|
|
105,365
|
|
|
|
131,743
|
|
|
|
169,392
|
|
|
|
140,190
|
|
Shareholders' equity
|
|
$
|
2,472,888
|
|
|
$
|
2,231,214
|
|
|
$
|
1,836,717
|
|
|
$
|
3,259,550
|
|
RISK FACTORS
Investing in our securities involves risk.
You should carefully consider the risks described below as well as those risk factors incorporated by reference herein before
making an investment decision. The risks below relate to this offering. In addition, our Company is subject to a variety of risks
that may be found in the documents incorporated by reference herein, including those risk factors described in our Annual Report
on Form 10-K for our most recent fiscal year (together with any material changes thereto contained in subsequent filed reports
and other filings with the SEC). The risks and uncertainties described below and in the documents incorporated by reference are
not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any of the following risks, or those incorporated by reference actually
occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common
stock could decline, and you may lose all or part of your investment in the units. The risks discussed below and those incorporated
by reference also include forward-looking statements and our actual results may differ substantially from those discussed in these
forward-looking statements.
Risk Factors Relating to Our Business
Our business model is untested outside
the United States and may not be successful.
Our business
model is to
introduce the domestic “On-Site Utility” solution of our parent, American DG Energy, into
the United Kingdom and European markets. This business model is to distribute, own and operate clean energy systems that produce
electricity, hot water, heat and cooling generated by a natural gas engine and related equipment owned by us at a customer’s
site. This business model is untested in the United Kingdom and Europe; therefore it is extremely difficult to predict whether
we will achieve any success in developing our business. We face not only the risks inherent in American DG Energy’s business
in the United States, but there are potential negative factors affecting the United Kingdom and European markets that do not affect
American DG Energy in the United States, such as o
ur lack of full familiarity with those markets, local
laws, regulations and the like
. In addition, there may be additional potential negative factors in implementing our business
model outside the United States of which we are unaware. For these reasons and others, there can be no assurance that our business
model will achieve any level of success.
Our On-Site Utility concept is largely
unproven in the United Kingdom and Europe and may not be accepted by a sufficient number of customers in our target markets. We
have no historical operating results upon which to base projections of future financial performance, making it difficult for prospective
investors to assess the value of our stock.
The sale of cogeneration and cooling
equipment has been successfully carried out for more than a decade. However, our On-Site Utility concept (i.e., the sale of on-site
energy services, rather than equipment) is still in an early stage of implementation. Unresolved issues include the pricing of
energy services and the structuring of contracts to provide cost savings to customers and optimum financial returns to us. There
is no assurance that we will be successful in developing a profitable On-Site Utility business model in our target markets, and
failure to do so would have a material adverse effect on our business and financial performance.
We expect to incur significant losses
for at least the next several years, and we may never achieve or maintain profitability.
Based upon our current plans, we expect
to incur operating losses for at least the next several years as we incur significant expenses associated with the initial startup
of our business. There can be no assurance that we will generate revenues or that revenues will be sufficient to maintain our
business. Any such failure could result in the possible closure of our business or force us to seek additional capital on unfavorable
terms to continue business operations.
Unfavorable utility regulations make
the installation of our systems more difficult or less economical; any slowdown in the utility deregulation process would be an
impediment to the growth of our business.
In the past, many electric utility companies
in the United States have raised opposition to the distributed generation of electricity, a critical element of our On-Site Utility
business. We may experience similar opposition in the United Kingdom and Europe. Such resistance has generally taken the form
of what we consider to be unrealistic standards for interconnection, and the use of targeted rate structures as disincentives
to combined generation of on-site power and heating or cooling services. A distributed generation company’s ability to obtain
reliable and affordable back-up power through interconnection with the grid is essential to our business model. Utility policies
and regulations in most jurisdictions are often not prepared to accommodate widespread on-site generation. These barriers erected
by electric utility companies and unfavorable regulations, where applicable, may make the connection to the electric grid economically
unfavorable and may be an impediment to the growth of our business. Development of our business could be adversely affected by
any slowdown or reversal in the utility deregulation process or by difficulties in negotiating backup power supply agreements
with electric providers in the areas where we intend to do business.
The economic viability of our projects
depends on the price spread between fuel and electricity, and the variability of the prices of these components creates a risk
that our projects will not be economically viable.
The economic viability of distributed
generation projects is dependent upon the price spread between fuel and electricity prices. Volatility in one component of the
spread, the cost of natural gas and other fuels (e.g., propane or distillate oil) may be managed to a greater or lesser extent
by means of futures contracts. However, the regional rates charged for both base load and peak electricity services may decline
periodically due to excess capacity arising from over-building of utility power plants or recessions in economic activity. Any
sustained weakness in electricity prices could significantly limit the market for our cogeneration, cooling equipment and On-Site
Utility energy services.
We may fail to make sales to certain
prospective customers because of resistance to the outsourcing of their service function by facilities management personnel.
Any outsourcing of non-core activities
by institutional or commercial entities will generally lead to reductions in permanent on-site staff employment. As a result,
our proposals to implement On-Site Utility contracts are likely to encounter strong initial resistance from the facilities managers
whose jobs will be threatened by energy outsourcing. The growth of our business will depend upon our ability to overcome such
barriers among prospective customers.
Future government regulations, such
as increased emissions standards, safety standards and taxes, may adversely impact the economics of our business.
When we commence operations, the operation
of distributed generation equipment at our customers’ sites may be subject to future changes in applicable laws and regulations
(e.g., emissions, safety, taxes, etc.). Any such new or substantially altered rules and standards may adversely affect our business
and financial condition.
If we cannot create a network of
skilled technical support personnel, we will be unable to grow our business.
Each additional customer site for our
services requires the initial installation and subsequent maintenance and service of equipment to be provided by a team of technicians
skilled in a broad range of technologies, including combustion, instrumentation, heat transfer, information processing, microprocessor
controls, fluid systems and other elements of distributed generation. If we are unable to recruit, train, motivate, sub-contract,
and retain such personnel in each of the regional markets where our business operates we will be unable to grow our business in
those markets.
The Company will operate in highly
competitive markets and may be unable to successfully compete against competitors having significantly greater resources and experience.
Our business may be limited by competition
from energy services companies arising from the breakup of conventional regulated electric utilities. Such competitors, both in
the equipment and energy services sectors, are likely to have far greater financial and other resources than us, and could possess
specialized market knowledge with existing channels of access to prospective customer locations. We may be unable to successfully
compete against those competitors.
Future technology changes may render
obsolete various elements of equipment comprising our On-Site Utility installations.
We must select equipment for our distributed
generation projects so as to achieve attractive operating efficiencies, while avoiding excessive downtimes from the failure of
unproven technologies. If we are unable to achieve a proper balance between the cost, efficiency and reliability of equipment
selected for our projects, our growth and profitability will be adversely impacted.
We will need to raise additional
capital for our business through equity financings, which may dilute existing shareholders.
Future equity financings may be required
to implement our overall business plan. We may need additional capital. Future equity financings will dilute the percentage ownership
of our existing shareholders. Our ability to raise an adequate amount of capital and the terms of any capital that we are able
to raise will be dependent upon our progress in implementing demonstration projects and related marketing service development
activities. If we do not make adequate progress, we may be unable to raise adequate funds, which will limit our ability to expand
our business. If the terms of any future equity financings are unfavorable, the dilutive impact on our shareholders might be severe.
We may make acquisitions that could
harm our financial performance.
In order to expedite development of
our corporate infrastructure, particularly with regard to equipment installation and service functions, we may make acquisitions
of complementary businesses. Risks associated with such acquisitions include the disruption of our existing operations, loss of
key personnel in the acquired companies, dilution through the issuance of additional equity, assumptions of existing liabilities
and commitment to further operating expenses. If any or all of these problems actually occur, acquisitions could negatively impact
our financial performance and future value of our common stock.
We are controlled by our parent,
American DG Energy, and our minority shareholders will be unable to effect changes in our governance structure or implement actions
that require shareholder approval, such as a sale of the Company.
American DG Energy owns 82.8% of our
outstanding common stock and will therefore have the ability to control various corporate decisions, including our direction and
policies, the election of directors, the content of our charter and bylaws and the outcome of any other matter requiring shareholder
approval, including a merger, consolidation or sale of substantially all of our assets or other change of control transaction.
The concurrence of our minority shareholders will not be required for any of these decisions.
We may be exposed to substantial
liability claims if we fail to fulfill our obligations to our customers.
We may enter into contracts with large
commercial and not-for-profit customers under which we will assume responsibility for meeting a portion of the customers’
building energy demand and equipment installation. We may be exposed to substantial liability claims if we fail to fulfill our
obligations to customers. There can be no assurance that we will not be vulnerable to claims by customers and by third parties
that are beyond any contractual protections that we are able to negotiate. We may be unable to obtain liability and other insurance
on terms and at prices that are commercially acceptable to us. As a result, liability claims could cause us significant financial
harm.
Our ability to access capital for
the repayment of debts and for future growth is limited as the financial markets are currently in a period of disruption and recession
and the Company does not expect these conditions to improve in the near future.
Our ability to access capital could
be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates,
the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans
to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us.
Our business is affected by general
economic conditions and related uncertainties affecting markets in which we operate. The current economic conditions could adversely
impact our business in 2012 and for the foreseeable future.
Current economic conditions could adversely
impact our business in 2012 and beyond, resulting in reduced demand for our products, increased rate of order cancellations or
delays, increased risk of excess and obsolete inventories, increased pressure on the prices for our products and services; and
greater difficulty in collecting accounts receivable.
Risks Relating to Our Common Stock
Our common Stock
is not currently traded at high volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate
a substantial number of shares at one time.
Our common stock is currently traded,
but with very low, if any, volume, based on quotations on the OTCQB tier of OTC Markets, meaning that the number of persons interested
in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors including the fact that we are a small company which is still unknown to investors and
others in the investment community that generate or influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our securities until such time as we became more seasoned and viable. In addition, many institutional investors,
which account for significant trading activity, are restricted from investing in stocks that trade below specified prices, have
less than specified market capitalizations, or have less than specified trading volume. As a consequence, there may be periods
of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop
or be sustained, or that trading levels will be sustained.
An active market for our common stock
may not develop.
A public trading market with depth,
liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common stock at any given
time. This presence depends on the individual decisions of investors and general economic and market conditions over which we
have no control. We cannot give any assurance that an active market for our common stock will develop or, if an active market
does develop, whether it will be sustained or at what prices our common stock will trade.
Our common stock price is likely to
vary significantly as a result of a number of factors, including the following:
|
·
|
the
price of electricity
and natural gas;
|
|
·
|
the
failure of securities
analysts to cover
our common stock
if a trading market
develops or changes
in financial estimates
by analysts;
|
|
·
|
failure
to meet the expected
financial results;
|
|
·
|
dilutive
issuances of securities;
|
|
·
|
a
substantial portion
of our total issued
and outstanding
shares may be sold
into the market
at any time;
|
|
·
|
investor
perception of our
Company and of
the industry in
which we compete;
and
|
|
·
|
general
economic, political
and market conditions.
|
If we fail to remain current on the
reporting requirements that apply to us, we could be removed from the OTCQB tier of the OTC Markets, which would limit the ability
of broker-dealers to sell our securities and the ability of stockholders to sell their securities.
Companies with securities quoted on
the OTCQB tier of the OTC Markets must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and must be current in their reports under Section 13 or Section 15(d) of the Exchange Act, in order to maintain
price quotation privileges on the OTCQB tier of the OTC Markets. If we fail to remain current on our reporting requirements, shares
of our common stock could be removed from quotation on the OTCQB tier of the OTC Markets. As a result of that removal, the market
liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities
and the ability of stockholders to sell their securities in the secondary market.
Investment in our common stock will
likely be subject to price fluctuations which have often been significant for early stage companies like us.
Historically, valuations of many early
stage companies have been highly volatile. The securities of many of these companies have experienced significant price and trading
volume fluctuations, unrelated to the operating performance or the prospects of such companies. If the conditions in the equity
markets further deteriorate, we may be unable to finance our additional funding needs in the private or the public markets. There
can be no assurance that any future offering will be consummated or, if consummated, will be at a share price equal or superior
to the price paid by our investors even if we meet our technological and marketing goals.
Future sales of common stock by our
existing stockholders may cause our stock price to fall.
The market price of our common stock
could decline as a result of sales by our existing stockholders of shares of common stock in the market or the perception that
these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that
we deem appropriate and thus inhibit our ability to raise additional capital when it is needed.
Because we do not intend to pay cash
dividends, our stockholders will receive no current income from holding our common stock.
On February 10, 2012, we announced that
our 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. We have retroactively applied this dividend to the
December 31, 2011, financial statements presented in this registration statement. Prior to that transaction, we had paid no cash
or stock dividends on our common stock. We currently expect to retain earnings for use in the operation and expansion of our business,
and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any future debt
or credit facility may preclude us from paying any cash dividends. As a result, capital appreciation, if any, of our common stock
will be the sole source of gain for our stockholders for the foreseeable future.
There has been a material weakness
in our disclosure controls and procedures and our internal control over financial reporting, which could harm our operating results
or cause us to fail to meet our reporting obligations.
As of December 31, 2011, our management,
including our principal executive officer and principal financial officer have performed evaluation of controls and procedures
and concluded that our controls were not effective to provide reasonable assurance that information required to be disclosed by
our Company in reports that we file under the Exchange Act, is recorded, processed, summarized and reported as when required.
Management, including our principal executive officer and principal financial officer, conducted an evaluation of our internal
control over financial reporting and based on this evaluation, management concluded that the Company’s internal control
over financial reporting was not effective as of December 31, 2011. The Company currently has material weaknesses in financial
reporting relating to lack of personnel with a sufficient level of accounting knowledge and a small number of employees dealing
with general controls over information technology. This constitutes a material weakness in financial reporting. Any failure to
implement effective internal controls could harm our operating results or cause us to fail to meet our reporting obligations.
Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our common stock, and may require us to incur additional costs to improve our internal
control system.
Trading of our common stock is restricted
by the Securities and Exchange Commission’s, or the SEC’s, “penny stock” regulations which may limit a
stockholder’s ability to buy and sell our common stock.
The SEC has adopted regulations, or
the penny stock rules, which generally define “penny stock” to be any equity security that has a market price less
than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our common stock is be
covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other
than established customers or accredited investors, as defined in SEC regulations. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document
in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid and other quotations for the penny stock, the compensation
of the broker-dealer and its salesperson in the transaction and monthly account statement showing the market value of each penny
stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information,
must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These
disclosure and suitability requirements may have the effect of reducing the level of trading activity in the secondary market
for a stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers
to trade our common stock. We believe that the penny stock rules may discourage investor interest in and limit the marketability
of our common stock. Trading of our common stock may be restricted by the SEC’s “penny stock” regulations which
may limit a stockholder’s ability to buy and sell our common stock.
The recently enacted JOBS Act will allow
us to postpone the date by which we must comply with certain laws and regulations and to reduce the amount of information provided
in reports filed with the SEC. We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies
will make our common stock less attractive to investors.
We are and we will remain an “emerging
growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, until the earliest to occur
of (i) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1 billion (subject to adjustment
for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the
date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the
date on which we are deemed a large accelerated filer under the Securities Exchange Act.
For so long as we remain an emerging growth
company as we will not be required to:
|
·
|
have an auditor
report on our internal
controls over financial
reporting pursuant
to Section 404(b)
of the Sarbanes-Oxley
Act;
|
|
·
|
comply with
any requirement
that may be adopted
by the Public Company
Accounting Oversight
Board regarding
mandatory audit
firm rotation or
a supplement to
the auditor’s
report providing
additional information
about the audit
and the financial
statements (i.e.,
an auditor discussion
and analysis);
|
|
·
|
submit certain
executive compensation
matters to shareholder
non-binding advisory
votes;
|
|
·
|
submit for
shareholder approval
golden parachute
payments not previously
approved; and
|
|
·
|
disclose certain
executive compensation
related items such
as the correlation
between executive
compensation and
financial performance
and comparisons
of the Chief Executive
Officer’s
compensation to
median employee
compensation, when
such disclosure
requirements are
adopted.
|
In addition, Section 107 of the JOBS
Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An emerging
growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to
private companies. However, we chose to “opt out” of such extended transition period, and as a result, we will comply
with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging
growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying
with new or revised accounting standards is irrevocable.
We cannot predict if investors will find
our common stock less attractive because we may rely on some of these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
If we avail ourselves of certain exemptions from various reporting requirements, our reduced disclosure may make it more difficult
for investors and securities analysts to evaluate us and may result in less investor confidence.
Risks Relating to this Offering
The warrants may not have any value.
In the event that our common stock price
does not exceed the exercise price of the warrants during the period when the warrants are exercisable, the warrants may not have
any value.
Holders of our warrants will have
no rights as a common stockholder until they acquire our common stock.
Until you acquire shares of our common
stock upon exercise of your warrants, you will have no rights with respect to our common stock. Upon exercise of your warrants,
you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after
the exercise date.
The concentration of our share capital
ownership among our largest shareholders, and their affiliates, will limit your ability to influence corporate matters.
After our offering, we anticipate that
American DG Energy will own a majority of our outstanding common stock and will therefore have the ability to control various
corporate decisions, including our direction and policies, the election of directors, the content of our charter and bylaws and
the outcome of any other matter requiring shareholder approval, including a merger, consolidation or sale of substantially all
of our assets or other change of control transaction. The concurrence of our minority shareholders will not be required for any
of these decisions and this concentration of ownership will limit your ability to influence corporate matters, and as a result,
actions may be taken that you may not view as beneficial.
We will have broad discretion over
the use of the proceeds of this offering and may not realize a return.
We will have considerable discretion
in the application of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant
return, if any, for our stockholders.
If you purchase our common stock
in this offering, you will suffer immediate and substantial dilution of your investment.
The public offering price in this offering
is substantially higher than our net tangible book value per common share. Therefore, if you purchase our common shares in this
offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price
per common share and the net tangible book value per common share after this offering. See “Dilution.”
We do not intend to pay dividends
on our common shares and, consequently, your only opportunity to achieve a return on your investment is if the price of our shares
appreciates.
We do not plan to declare dividends
on shares of our common stock in the foreseeable future. Consequently, your only opportunity to achieve a return on your investment
in us will be if the value of our common stock appreciates, which may not occur.
SPECIAL NOTE REGARDING FORWARD LOOKING
STATEMENTS
This prospectus contains forward-looking
statements within the meaning of other federal securities laws and such forward looking statements involve substantial risks and
uncertainties. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding
our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives
of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “may,” “plan,” “predict,” “project,”
“target,” “potential,” “will,” “would,” “could,” “should,”
“continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain these identifying words.
The forward-looking statements in this
prospectus include, among other things, statements about:
|
·
|
our
future financial
performance, including
our revenue, cost
of revenue, operating
expenses and ability
to achieve and
maintain profitability;
|
|
·
|
our
ability to market,
commercialize and
achieve market
acceptance for
our combined heat
and power systems
or any other product
candidates or products
that we may develop;
|
|
·
|
our
ability to innovate
and keep pace with
changes in technology;
|
|
·
|
the
success of our
marketing and business
development efforts;
|
|
·
|
our
ability to maintain,
protect and enhance
our intellectual
property;
|
|
·
|
the
effects of increased
competition in
our market;
|
|
·
|
our
ability to effectively
manage our growth
and successfully
enter new markets;
and
|
|
·
|
the
attraction and
retention of qualified
employees and key
personnel.
|
We may not actually achieve the plans,
intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking
statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly
in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the
forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions,
mergers, dispositions, joint ventures or investments we may make.
You should read this prospectus and the
documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus
is a part completely and with the understanding that our actual future results may be materially different from what we expect.
The forward-looking statements contained in this prospectus are made as of the date of this prospectus, and we do not assume any
obligation to update any forward-looking statements except as required by applicable law.
USE OF PROCEEDS
We intend to
use the net proceeds of this offering for working capital purposes
in connection with the development and installation
of new energy systems such as cogeneration systems and chillers and for general corporate purposes
which may include, among other things, potential acquisitions of companies, products and technologies that complement our business,
although we have no present commitments or agreements with respect to any such transactions.
DETERMINATION OF OFFERING PRICE
The offering price for the units in
this offering was determined by our management. In determining the public offering price of the units we considered several factors
including the following:
|
·
|
our status of
business development;
|
|
·
|
our new business
structure and operations;
|
|
·
|
prevailing market
conditions, including
the history and
prospects for our
industry;
|
|
·
|
our future prospects
and the experience
of our management;
and
|
Our common stock is traded since July
25, 2012, but with very low, if any, volume, based on quotations on the OTCQB tier of OTC Markets, meaning that the number of
persons interested in purchasing our common stock may be relatively small or non-existent. Therefore, management considered the
factors above to determine the offering price of the units.
DILUTION
Purchasers of the units offered by
this prospectus will suffer immediate and substantial dilution in the net tangible book value per share of common stock. Our
net tangible book value (unaudited) as of June 30, 2012, was approximately $1,836,717, or $0.03 per share. Net tangible
book value per share is calculated by subtracting our total liabilities from our total tangible assets, which is total assets
less intangible assets, and dividing this amount by the number of shares of common stock outstanding as of June 30, 2012.
Dilution in net tangible book value
per share represents the difference between the amount per share paid by purchasers in this offering and the as adjusted net tangible
book value per share of our common stock immediately after this offering. After giving effect to the sale by us of
all 15,000,000 units offered in this offering at a price of $1.00 per unit (and assuming a value per share of common stock offered
in each unit of $1.00 per share), and after deducting the placement agent’s fee and estimated offering expenses payable
by us, our as adjusted net tangible book value as of October 16, 2012, would have been approximately $15,783,279, or $0.23 per
share. This represents an immediate increase in the net tangible book value of $0.19 per share to our existing shareholders
and an immediate dilution in net tangible book value of $0.77 per share to investors in this offering. The following
table illustrates this per share dilution:
Price per share to investors
|
|
$
|
1.00
|
|
Net tangible book value per share as of June 30, 2012
|
|
$
|
0.03
|
|
Increase in net tangible book value per share attributable to this offering
|
|
$
|
0.19
|
|
As adjusted net tangible book value per share as of October 16, 2012, after giving effect
to this offering
|
|
$
|
0.23
|
|
Dilution in net tangible book value per share to investors
|
|
$
|
0.77
|
|
The above table is based on 54,362,100
shares of our common stock outstanding as of October 16, 2012 and excludes, as of that date:
|
·
|
3,590,000
shares of common
stock issuable
upon the exercise
of stock options
outstanding prior
to this offering
under our stock
option plans and
stock incentive
plans, at a weighted
average exercise
price of $0.90
per share; and
|
|
·
|
910,000
shares of common
stock available
for future grants
under our stock
option plans and
stock incentive
plans.
|
In addition, the above table excludes:
|
·
|
up
to 15,000,000 shares
of common stock
issuable upon the
exercise of the
warrants offered
pursuant to this
prospectus; and
|
|
·
|
up
to 975,000 shares
of common stock
issuable upon the
exercise of a warrant
to be issued to
the placement agent
as further described
in “Plan
of Distribution.”
|
To the extent that any options or warrants
are exercised, new options are issued under our stock option or stock incentive plans, or we otherwise issue additional shares
of common stock in the future, there will be further dilution to new investors.
PLAN OF DISTRIBUTION
We have entered
into a placement agency agreement, dated as of September 6, 2012 with Scarsdale Equities LLC, as placement agent and such placement
agency agreement was amended and restated on October 12, 2012. Subject to the terms and conditions contained in the placement agency
agreement, the placement agent has agreed to act though November 12, 2012, as the non-exclusive advisor and placement agent in
connection with the sale of the securities offered hereby, or the Securities. The placement agent may engage selected broker-dealers
to assist in the placement of the Securities. The placement agent is not purchasing or selling any securities by this prospectus
as principal, nor is it required to arrange the purchase or sale of any specific number or dollar amount of the Securities, but
it has agreed to use its best efforts to arrange for the sale of all of the Securities in this offering. There is no required
minimum number of Securities that must be sold as a condition to completion of the offering.
We will enter into purchase agreements
directly with purchasers in connection with this offering, and we will only sell to purchasers who will enter into purchase agreements.
We currently anticipate that the closing of the sale of the Securities will take place on or before November 15, 2012.
We
have
agreed to pay the placement agent an aggregate fee equal to 6.5% of the total capital we receive from this offering and expect
the net proceeds from this offering to be approximately $13,946,562 after deducting up to $975,000 in placement agent commissions
and $78,438 in our estimated offering expenses. In addition, the placement agent shall also be entitled to reimbursement for up
to $50,000 in additional out-of-pocket expenses in connection with the offering.
We also agreed to grant compensation
warrants to the placement agent to purchase up to 975,000 shares of our common stock, assuming all of the units offered pursuant
to this prospectus are subscribed for. The compensation warrants will have an exercise price equal to 100% of the public offering
price per share of common stock sold in this offering and carry “piggy-back” registration rights. The compensation
warrants will expire one year from the closing of the sale of Securities pursuant to this prospectus, and will otherwise comply
with Financial Institutions Regulatory Authority, or FINRA, Rule 5110(g)(1) in that neither the compensation warrants (which shall
not be issued earlier than the closing date of the offering pursuant to which the compensation warrants are being issued) nor
any warrant shares issued upon exercise of the compensation warrants shall be sold, transferred, assigned, pledged, or hypothecated,
or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic
disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement
of sales of the offering pursuant to which the compensation warrants are being issued, except to any FINRA member firm participating
in the offering and their bona fide officers or partners.
Assuming that all of the Securities
offered hereby are sold, the fee payable to the placement agent will be approximately $975,000, excluding any warrants that may
be issued. Because there is no minimum offering amount required as a condition to closing in this offering, however, the actual
total offering fees, if any, are not presently determinable and may be substantially less than such amount.
The following table shows the per unit
and total placement agent fees, excluding any warrants that may be issued to the placement agent, we will pay to the placement
agent in connection with the sale of the Securities offered pursuant to this prospectus assuming the purchase of all of the units
offered hereby:
|
|
Per Unit
|
|
|
Total
|
|
Public offering price
|
|
$
|
1.000
|
|
|
$
|
15,000,000
|
|
Placement agent’s fee
|
|
$
|
0.065
|
|
|
$
|
975,000
|
|
Proceeds to us before expenses
|
|
$
|
0.935
|
|
|
$
|
14,025,000
|
(1)
|
|
(1)
|
Offering expenses are estimated to be $78,438.
|
We have agreed to indemnify the placement
agent and certain other persons against certain liabilities, related to or arising out of any act, omission, transaction or event
under the placement agency agreement except to the extent determined to (i) have resulted primarily from actions taken or omitted
to be taken by the placement agent or such other person due to its gross negligence, frauds bad faith or willful misconduct, or
(ii) arisen out of, or been based upon an untrue statement or alleged untrue statement or omission or alleged omission made in
the registration statement, any placement document, marketing materials or amendment or supplement, in reliance on and in conformity
with written information furnished to us by the placement agent, and to contribute to payments that the placement agent may be
required to make in respect of those liabilities.
The placement agent is deemed to be
an underwriter within the meaning of Section 2(a)(11) of the Securities Act and any commissions received by it and any profit
realized on the sale of the securities by it while acting as principal are deemed to be underwriting discounts or commissions
under the Securities Act. The placement agent is required to comply with the requirements of the Securities Act and the Exchange
Act, including, without limitation, Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit
the timing of purchases and sales of shares of common stock and warrants to purchase shares of common stock by the placement agent.
Under these rules and regulations, the placement agent may not (i) engage in any stabilization activity in connection with our
securities; or (ii) bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities,
other than as permitted under the Exchange Act, until it has completed its participation in the distribution
Our common stock is currently quoted on
the OTCQB tier of the OTC Markets under the ticker symbol “EUSP”.
With respect to sales in the United
States, this offering must be registered, or be exempt from registration, in any state in which the Securities are to be offered
or sold. We may apply to register the Securities, or may seek to obtain an exemption from registration, only in certain states.
If you are not an “institutional investor,” you may purchase Securities in this offering only if you reside in the
jurisdictions where there is an effective registration or exemption, and, if required, meet any requisite suitability standards.
The definition of an “institutional investor” varies from state to state, but generally includes financial institutions,
broker-dealers, banks, insurance companies and other qualified entities.
The placement agent may distribute this
prospectus electronically.
The form of securities purchase agreement
with the purchasers and the placement agency agreement are exhibits to the registration statement of which this prospectus forms
a part that has been filed with the SEC.
From time to time in the ordinary course
of its business, the placement agent or its affiliates may in the future engage in investment banking, commercial banking and/or
other services with us and our affiliates for which it may in the future receive customary fees and expenses.
DESCRIPTION OF THE SECURITIES WE ARE
OFFERING
The common stock and warrants offered hereby
will be sold in units, with each unit consisting of one share of common stock and a warrant to purchase one share of common stock.
The units will be immediately separable. Each warrant will have an exercise price of $1.00 per share and will be exercisable immediately.
The shares of common stock issuable from time to time upon exercise of the warrants, if any, are also being offered pursuant to
this prospectus.
General
The following description of our capital
stock and provisions of our amended and restated certificate of incorporation and bylaws are summaries and are qualified by reference
to our charter and the bylaws. These documents are filed as exhibits hereto.
Our authorized capital stock consists
of 100,000,000 shares of common stock, par value $0.001 per share.
The following description summarizes
information about our capital stock. You can obtain more comprehensive information about our capital stock by reviewing our certificate
of incorporation and bylaws as well as the Delaware General Corporation Law.
Common stock
General.
As October 16, 2012, there were 54,362,100 shares of our common stock outstanding, held of record by 28 stockholders.
Voting Rights.
Each holder
of common stock is entitled to one vote per share on all matters properly submitted to a vote of the stockholders, including the
election of directors. Our charter does not provide for cumulative voting rights. Because of this, but subject to the rights of
any then outstanding shares of preferred stock, the holders of a majority of the shares of common stock entitled to vote in any
election of directors can elect all of the directors standing for election, if they should so choose. An election of directors
by our stockholders is determined by a plurality of the votes cast by stockholders entitled to vote on the election.
Dividends.
Subject to
preferences that may be applicable to any then outstanding preferred stock, the holders of our outstanding shares of common stock
are entitled to receive dividends, if any, as may be declared from time to time by our Board of Directors out of legally available
funds.
Liquidation.
In the event
of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally
available for distribution to stockholders after the payment of all of our debts and other liabilities, subject to the satisfaction
of any liquidation preference granted to the holders of any outstanding shares of preferred stock.
Rights and Preferences.
Holders
of our common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions
applicable to our common stock. The rights, preferences and privileges of holders of common stock are subject to and may be adversely
affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Stock Options
As of October 16, 2012, we had 3,590,000
options outstanding under our Stock Plan, each with a weighted average exercise price of $0.90 per share.
Warrants
The following summary of certain terms
and provisions of the warrants offered hereby is not complete and is subject to, and qualified in its entirety by the provisions
of the form of the warrant, which has been filed as an exhibit to the registration statement of which this prospectus is a part.
Prospective investors should carefully review the terms and provisions set forth in the form of warrant.
General.
As of October 16, 2012, there were no warrants outstanding to purchase shares of common stock. Warrants to purchase 15,000,000 shares of common
stock are being offered pursuant to this prospectus.
Exercisability
. The warrants are
exercisable upon issuance and at any time up to the date that is one year from the date of issuance. The warrants will be exercisable,
at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice accompanied by payment in
full for the number of shares of our common stock purchased upon such exercise.
Exercise Price
. The initial exercise
price per share of common stock purchasable upon exercise of the warrants is $1.00 per share. The exercise price is subject to
appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications
or similar events affecting our common stock.
Certain Adjustments
. The exercise
price and the number of shares of common stock purchasable upon the exercise of the warrants are subject to adjustment upon the
occurrence of specific events, including stock dividends, stock splits, combinations, reclassifications or similar events affecting
our of our common stock.
Transferability
. Subject to applicable
laws, the warrants may be transferred at the option of the holders upon surrender of the warrants to us together with the appropriate
instruments of transfer.
Listing.
The warrants are not currently
listed on any trading market. The warrants will be issued in certificated form and delivered directly to the purchasers.
Rights as a Stockholder
. Except
as otherwise provided in the warrants or by virtue of such holder's ownership of shares of our common stock, the holder of a warrant
does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises
the warrant.
Registration Rights
The Company is not a party to any registration
rights agreements except as referred to in “Plan of Distribution.”
Delaware Anti-Takeover Law and Charter and Bylaws Provisions
Delaware Anti-Takeover Law
.
We are subject to Section 203 of the Delaware General Corporation Law. Section 203 of that law generally prohibits a
public Delaware corporation from engaging in a “business combination” with an “interested stockholder”
for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of our Board of Directors, the business combination is approved
in a prescribed manner or the interested stockholder acquired at least 85% of our outstanding voting stock in the transaction
in which it became an interested stockholder. A “business combination” includes, among other things, a merger or consolidation
involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested
stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person
affiliated with or controlling or controlled by such entity or person.
Certificate of Incorporation and
Bylaws.
Provisions of our certificate of incorporation and bylaws may delay or discourage transactions involving
an actual or potential change of control or change in our management, including transactions in which stockholders might otherwise
receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.
Therefore, these provisions could adversely affect the price of our common stock if and when it becomes tradable. Among other
things, our charter and bylaws:
|
·
|
authorize
the issuance of
“blank check”
preferred stock,
the terms of which
may be established
and shares of which
may be issued without
stockholder approval;
|
|
·
|
eliminate
the ability of
stockholders to
call a special
meeting of stockholders;
and
|
|
·
|
establish
advance notice
requirements for
nominations for
election to the
Board of Directors
or for proposing
matters that can
be acted upon at
stockholder meetings.
|
The amendment of any provisions of our
charter by the stockholders would require the approval of the holders at least two-thirds of our then outstanding common stock.
Our by-laws may be amended or repealed by a majority vote of our Board of Directors or by the affirmative vote of the holders
of at least two-thirds of our then outstanding common stock.
Transfer Agent
The transfer agent for our common stock
will be Continental Stock Transfer & Trust Company.
EXPERTS
The consolidated financial statements as
of and for the periods ended December 31, 2011 and 2010, appearing in this registration statement and Prospectus have been audited
by McGladrey LLP (formerly McGladrey & Pullen, LLP), an independent registered public accounting firm, as stated in their
report appearing elsewhere herein, and are included in reliance upon such report and upon the authority of such firm as experts
in accounting and auditing.
No expert or counsel named in this prospectus
as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being
registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency
basis, or had, or is to receive, any interest, directly or indirectly, in our Company or any of our parents or subsidiaries. Nor
was any such person connected with us or any of our parents or subsidiaries, if any, as a promoter, managing or principal underwriter,
voting trustee, director, officer, or employee.
LEGAL MATTERS
The validity of our common stock offered
under this prospectus will be passed upon by Sullivan & Worcester LLP, Boston, Massachusetts.
BUSINESS
General
EuroSite Power Inc., or the Company,
we, our or us, has been organized to distribute, own and operate clean, on-site energy systems that produce electricity, hot water,
heat and cooling in the United Kingdom and Europe. Our business model is to own the equipment that we install 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. We call this business the EuroSite Power “On-Site Utility”.
The Company was incorporated as a Delaware
corporation on July 9, 2010, and is currently an 82.8% subsidiary of American DG Energy. American DG Energy is an onsite energy
company that sells energy in the form of electricity, heat, hot water and air conditioning under long-term contracts with commercial,
institutional and light industrial customers in the United States. EuroSite Power plans to introduce the American DG Energy business
model to the United Kingdom and Europe.
On September 17, 2010, the Company registered
as a wholly-owned subsidiary EuroSite Power Limited with the Registrar of Companies for England and Wales, to introduce the American
DG Energy business model to the United Kingdom only. As the Company grows beyond the United Kingdom into other parts of Europe,
it is expected that it will set up separate wholly-owned subsidiaries to do business in those countries. The Company’s website
is at www.eurositepower.co.uk, but our website address included in this registration statement is a textual reference only and
the information in the website is not incorporated by reference into this registration statement.
In addition to its parent, American
DG Energy, the Company has five affiliated companies, namely Tecogen, Ilios Inc., or Ilios, GlenRose Instruments Inc., or GlenRose
Instruments, Pharos LLC, or Pharos, and Levitronix Technologies LLC, or Levitronix. These companies are affiliates because several
of the major shareholders of American DG Energy, the Company’s corporate parent, have significant ownership positions in
Tecogen, Ilios, GlenRose Instruments, Pharos and Levitronix. Tecogen, Ilios, GlenRose Instruments, Pharos or Levitronix do not
own any shares of the Company, and the Company does not own any shares of Tecogen, Ilios, GlenRose Instruments, Pharos, or Levitronix.
The common shareholders include John N. Hatsopoulos, who is the Chairman of the Company and GlenRose Instruments, the Chief Executive
Officer and director of American DG Energy and Tecogen, and a director of Ilios. Also, Dr. George N. Hatsopoulos, who is John
N. Hatsopoulos’ brother, is a director of American DG Energy, a director of Tecogen and an investor in GlenRose Instruments,
Ilios, Pharos and Levitronix.
Tecogen is a leading manufacturer of
combined heat and power products, or CHP, including natural gas engine-driven cogeneration and air conditioning systems for industrial
and commercial use. Ilios is a subsidiary of Tecogen that was formed in April 2009 to develop and distribute a line of ultra-high-efficiency
heating products, such as a high efficiency water heater, that provide twice the efficiency of conventional boilers, based on
management estimates, for commercial and industrial applications utilizing advanced thermodynamic principles. American DG Energy
and EuroSite Power purchase energy equipment from various suppliers. The primary types of equipment used are natural gas engine-driven
cogeneration and air conditioning systems provided by Tecogen and Ilios. Both Tecogen and American DG Energy will distribute the
Ilios products. The business of GlenRose Instruments is not related to the business of American DG Energy, the Company and their
other corporate affiliates.
In July 2011, the Company hired a Managing
Director in the United Kingdom to put together a sales and marketing team in order to generate revenues from equipment installations.
The Company’s On-Site Utility
system supplies electricity, heat, hot water and cooling at a discounted price to properties such as healthcare facilities, hotels,
large, multi-family housing facilities, leisure centers, schools and colleges. The Company’s natural gas-powered cogeneration
systems produce electricity from an internal combustion engine that drives a generator, while the heat from the engine and exhaust
is recovered and typically used to produce heat and hot water for use at the site. The Company also distributes and operates water
chiller systems for building cooling applications that operate in a similar manner, except that the engine’s power drives
a large air-conditioning compressor while recovering heat for hot water. Cogeneration systems reduce the amount of electricity
that the customer must purchase from the local utility at a higher cost, and produce valuable heat and hot water for the site
to use as required. By simultaneously providing electricity, hot water and heat, cogeneration systems also have a significant,
positive impact on the environment by reducing the carbon or CO2 produced. Reliability is also enhanced because the customer remains
connected to the electric grid and the failure of either source of electricity does not result in a power outage.
Distributed Generation of electricity,
or DG, is often referred to as cogeneration, or combined heat and power systems, or CHP. DG is an attractive option for reducing
energy costs and increasing the reliability of available energy. DG has been successfully implemented by others in large industrial
installations over 10 Megawatts, or MW, where the market has been growing for several years, and is increasingly being accepted
in the smaller size installations that we target because of technology improvements, increased energy costs and better DG economics.
We believe that our target market (users of up to 1 MW) has barely been penetrated in the United Kingdom and Europe and that the
reduced reliability of the utility grid, increasing cost pressures experienced by energy users, advances in new, low-cost technologies
and DG-favorable legislation and regulation may drive the Company’s near-term growth and penetration into its target market.
The following is a summary of the reasons
why we believe that the United Kingdom and European markets are attractive:
|
·
|
Our
target countries
(beginning with
the United Kingdom,
to be followed
by Spain and Belgium)
have large, urban
markets with a
high local density
of target customers
with large buildings
in major cities
(including hotels,
healthcare facilities
and large multi-family
residential buildings).
|
|
·
|
Significant
incentives, rebates
and support are
available for the
installation and
operation of CHP
systems in Europe.
|
|
·
|
Government
policy in Europe
currently favors
energy-efficient
and environmentally
friendly technologies
and businesses.
|
|
·
|
Other
companies deploying
CHP systems have
generated revenue
from the environmental
and carbon benefits
of their systems.
|
|
·
|
Electricity
prices are expected
to increase significantly
in Europe in the
coming years.
|
|
·
|
The
competition is
focused on larger
systems (both in
footprint size
and in kilowatts,
or energy size).
Our inverter-based
InVerde 100-kW
is small enough
to fit into smaller
buildings and has
the proper energy
production to match
more buildings
based on hot water
needs. We expect
to offer the only
inverter-based
CHP on the market.
|
|
·
|
Our
potential customers
are aware of and
seeking energy-
and environmentally-
friendly solutions.
However, capital
budgets have shrunk
or disappeared.
The On-Site Utility
approach requiring
no customer capital
might fit the market
needs well.
|
|
·
|
Our
sales model targets
the top property
owners with suitable
operations for
our On-Site Utility.
Our direct sales
team, advisory
board and sales
partners are targeting
these customers.
|
|
·
|
Due
to the slowdown
in the economy,
we have many options
to select technical
partners to aid
in installing and
maintaining our
energy systems.
These range from
existing competitors
to mechanical contractors.
|
|
·
|
We
are currently using
our domestic systems
(in the United
States) to handle
items such as system
monitoring and
customer billing.
|
|
·
|
There
should be a special
opportunity and
advantage to sell
cogeneration equipment
running on natural
gas in central
London and in Europe
because these areas
already have electrical
capacity connection
constraints such
that a natural
gas chiller is
likely to provide
better economics
to the customer
and may reduce
dependence on the
electrical grid
for other usages
in the building.
|
|
·
|
With
the additional
introduction of
the Ilios high
efficiency water
heater in 2012,
and the introduction
of the Low Emissions
Technology in August
of 2011, developed
by Tecogen we expect
to market a full
array of highly
innovative, efficient,
and low emissions
technologies to
produce, electricity,
hot water, heat
and cooling.
|
CHP is already widely supported by governments
in the European Union with many forms of government assistance provided to promote its use. In the European Union countries, CHP
is widely viewed as a key measure to enable achievement of target reductions in greenhouse gas emissions. Legislation forcing
companies to reduce their carbon footprint is having a large impact on CHP sales; there are also planning laws which force new
building owners to provide at least 10% of their power supply from renewable sources (CHP is deemed renewable from a planning
perspective). For example, the London Energy plan specifically supports and promotes CHP as a technology. We believe that our
primary near-term opportunity for distributed generation energy and equipment sales is where commercial electricity rates exceed
$0.12 per kW hour, or kWh. Attractive DG economics are currently attainable in applications that include hospitals, nursing homes,
multi-tenant residential housing, hotels, schools and colleges, recreational facilities, food processing plants, dairies and other
light industrial facilities.
We may purchase energy equipment from
various suppliers. The primary type of equipment used is a natural gas-powered, reciprocating engine provided by Tecogen, a leading
manufacturer of natural gas engine-driven commercial and industrial cooling and cogeneration systems that are suitable for a variety
of applications. A CHP system simultaneously produces two types of energy – heat and electricity – from a single fuel
source, often natural gas. The two key components of a CHP system are an internal combustion reciprocating engine and an electric
generator. The internal combustion reciprocating engine is provided to Tecogen by General Motors Company modified to run on natural
gas and is a low-cost, mass-produced, internal combustion engine that is used primarily in light trucks and sport utility vehicles.
The clean natural gas fired engine spins a generator to produce electricity. The natural byproduct of the working engine is heat.
The heat is captured and used to supply space heating, heating domestic hot water, laundry hot water or to provide heat for swimming
pools and spas.
We may also purchase energy equipment
from Ilios. Based on management estimates, the equipment developed by Ilios, such as a high efficiency water heater, provides
twice the efficiency of conventional boilers for commercial and industrial applications utilizing advanced thermodynamic principles.
The Ilios products incorporate mechanical work to extract heat from the environment in order to supplement the chemical energy
available in the fuel. The result is a significant boost in efficiency and reduction in carbon emissions.
As other power sources that use alternative
energy technologies mature to the point that they are reliable and economical, we may consider employing them to supply energy
for our customers. We regularly assess the technical, economic, and reliability issues associated with systems that use solar,
micro-turbine or fuel cell technologies to generate power.
The Company and its Affiliates
American DG Energy, GlenRose Instruments,
Tecogen, Ilios Pharos and Levitronix 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, (d) an
investor of GlenRose Instruments and holds 15.7% of the company’s common stock, (e) an investor of Pharos and holds 24.4%
of the company’s common stock and (f) an investor of Levitronix and holds 21.4% of the company’s common stock.
Background and Market
The delivery of energy services to commercial
and residential customers has evolved over many decades into an inefficient and increasingly unreliable structure. Power for lighting,
air conditioning, refrigeration, communications and computing demands comes almost exclusively from centralized power plants serving
users through a complex grid of transmission and distribution lines and substations. Even with continuous improvements in central
station generation and transmission technologies, today’s power industry according to the Energy Information Administration
is only about 33% efficient, meaning that it discharges to the environment roughly twice as much heat as the amount of electrical
energy delivered to end-users. Since coal accounts for a large part of electric power generation, these inefficiencies are a major
contributor to rising atmospheric CO2 emissions. Countermeasures being sought to limit global warming are expected to favor the
deployment of alternative energy technologies.
Most thermal energy for space heating
and hot water services is produced by on-site boilers and furnaces that burn either natural gas or petroleum distillate fuels.
This separation of thermal and electrical energy supply services has persisted despite a general recognition that CHP can be significantly
more energy efficient than central generation of electricity only. Except in large-scale industrial applications (e.g., paper
and chemical manufacturing), cogeneration has not attained general acceptance. This has been due, in part, to the long-established
monopoly-like structure of the regulated utility industry. Also, the technologies previously available for small on-site cogeneration
systems were incapable of delivering the reliability, cost and environmental performance necessary to displace or even substantially
modify the established power industry structure.
The Role of Distributed Generation
Distributed Generation is the production
of two sources or two types of energy (electricity or cooling and heat) from a single energy source (natural gas). We use technology
that utilizes a low-cost, mass-produced, internal combustion engine from General Motors, used primarily in light trucks and sport
utility vehicles that is modified to run on natural gas. The engine spins either a standard generator to produce electricity,
or a conventional compressor to produce cooling. For heating, since the working engine generates heat, we capture the byproduct
heat with a heat exchanger and utilize the heat for facility applications in the form of space heating and hot water for buildings
or industrial facilities. This process is very similar to an automobile, where the engine provides the motion to the automobile
and the byproduct heat is used to keep the passengers warm during the winter months. For refrigeration or cooling, standard available
equipment uses an electric motor to spin a conventional compressor to make cooling. We replace the electric motor with the same
modified engine that runs on natural gas to spin the compressor to run a refrigeration cycle and produce cooling.
Distributed generation refers to the
application of small-scale energy production systems, including electricity generators, at locations in close proximity to the
end-use loads that they serve. Integrated energy systems, operating at user sites but interconnected to existing electric distribution
networks, can reduce demand on the nation’s utility grid, increase energy efficiency, avoid the waste inherent in long distance
wire and cable transmission of electricity, reduce air pollution and greenhouse gas emissions, and protect against power outages,
while, in most cases, significantly lowering utility costs for power users and building operators.
Until recently, many DG technologies
have not been a feasible alternative to traditional energy sources because of economic, technological and regulatory considerations.
Even now, many “alternative energy” technologies (such as solar, wind, fuel cells and micro-turbines) have not been
sufficiently developed or proven to economically meet the demands of commercial users or the ability to be connected to the existing
utility grid.
We supply cogeneration systems that
are capable of meeting the demands of commercial users and that can be connected to the existing utility grid. Specific advantages
of the Company’s On-Site Utility approach of multiple energy services, compared with traditional centralized generation
and distribution of electricity alone, include the following:
|
·
|
Greatly
increased overall
energy efficiency
(up to 90% versus
less than 33% for
the existing power
grid), according
to the Environmental
and Energy Study
Institute, or EESI.
|
|
·
|
Rapid
adaptation to changing
demand requirements
(e.g., weeks, not
years to add new
generating capacity
where and when
it is needed).
|
|
·
|
Ability
to by-pass transmission
line and substation
bottlenecks in
congested service
areas.
|
|
·
|
Avoidance
of site and right-of-way
issues affecting
large-scale power
generation and
distribution projects.
|
|
·
|
Clean
operation, from
using natural gas
fired reciprocating
engines using microprocessor
combustion controls
and low-cost exhaust
catalyst technology
developed for automobiles.
|
|
·
|
Rapid
economic paybacks
for equipment investments,
often three to
five years when
compared to existing
utility costs and
technologies.
|
|
·
|
Relative
insensitivity to
fuel prices due
to high overall
efficiencies achieved
with cogeneration
of electricity
and thermal energy
services, including
the use of waste
heat to operate
absorption type
air conditioning
systems (displacing
electric-powered
cooling capacity
at times of peak
summer demand).
|
|
·
|
Reduced
vulnerability of
multiple de-centralized
small-scale generating
units compared
to the risk of
major outages from
natural disasters
or terrorist attacks
against large central-station
power plants and
long distance transmission
lines.
|
|
·
|
Ability
to remotely monitor,
control and dispatch
energy services
on a real-time
basis using advanced
switchgear, software,
microprocessor
and internet modalities.
Through our on-site
energy products
and services, energy
users will be able
to optimize, in
real time, the
mix of centralized
and distributed
electricity-generating
resources.
|
Also, DG systems possess significant
positive environmental impact. The United States Environmental Protection Agency, or EPA, has created a Combined Heat and Power
Partnership to promote the benefits of DG systems. The Company is a member of this Partnership. The following statement is found
on the EPA web site.
“Combined heat and power systems
offer considerable environmental benefits when compared with purchased electricity and onsite-generated heat. By capturing and
utilizing heat that would otherwise be wasted from the production of electricity, CHP systems require less fuel than equivalent
separate heat and power systems to produce the same amount of energy. Because less fuel is combusted, greenhouse gas emissions,
such as carbon dioxide (CO2), as well as criteria air pollutants like nitrogen oxides (NOx) and sulfur dioxide (SO2), are reduced.”
The disadvantages of the Company’s
On-Site Utility are:
|
·
|
Cogeneration
is a mechanical
process and our
equipment is susceptible
to downtime or
failure.
|
|
·
|
The
base-rate of an
electric utility
is determined by
a certain number
of subscribers.
DG at a significant
scale may reduce
the number of subscribers
and therefore it
may increase the
base-rate for the
electric utility
for its customer
base.
|
|
·
|
By
committing to our
long-term agreements,
a customer may
be forfeiting the
opportunity to
use more efficient
technology that
may become available
in the future.
|
The DG Market Opportunity
We believe that our primary near-term
opportunity for DG energy and equipment sales is where commercial electricity rates exceed $0.12 per kWh. Attractive DG economics
in the United Kingdom and Europe are currently attainable in applications that include hospitals, nursing homes, multi-tenant
residential housing, hotels, schools and colleges, recreational facilities, food processing plants, dairies and other light industrial
facilities.
Early in 2010, American DG Energy performed
a feasibility study of the European market to determine the viability of expanding its On-Site Utility business into Europe. This
study and business plan report reached the conclusions that: (a) there is untapped customer demand to provide small-scale CHP
packages in the commercial sector through a fully financed, output-based electricity and hot water contract, (b) there is a lack
of competition in this space in the target customer segments (hotel, healthcare and multi-tenant residential) and (c) the underlying
economic fundamentals are attainable, with a combination of sufficient spark spreads and government fiscal support.
The study analyzed the entire European
market; however it focused on the United Kingdom, Spain and Belgium as the primary markets to start operations. The study estimated
that there are over 13,700 sites in those three countries providing a $900 million annual electricity market plus a $600 million
heat and hot water energy market, for a combined market potential of $1.5 billion. The data used to calculate the Company’s
market potential is derived by Company estimates.
However, it is extremely difficult to
predict whether we will achieve any success in developing our business. There can be no assurance that we will generate revenues
or that revenues will generate profits or be sufficient to maintain our business. American DG Energy, our parent, has experienced
total net losses since inception of approximately $21.7 million. For the foreseeable future, we expect to experience continuing
operating losses and negative cash flows from operations as our management attempts to execute our current business plan.
Business Model
Our parent, American DG Energy is an
onsite energy company that sells energy in the form of electricity, heat, hot water and air conditioning under long-term contracts
with commercial, institutional and light industrial customers. We are currently implementing our parent’s business strategy
in the United Kingdom and Europe by installing our systems at no cost to our customers and retaining ownership of the system.
Because our systems may operate at up to 90% efficiency, according to the EESI (versus less than 33% for the existing power grid),
we expect to be able to sell the energy produced by these systems to our customers at prices below their existing cost of electricity
(or air conditioning), heat and hot water. Our cogeneration systems consist of natural gas-powered internal combustion engines
that drive an electrical generator to produce electricity and that capture the engine heat to produce space heating and hot water.
Our energy systems are configured to drive a compressor that produces air conditioning and that also captures the engine heat.
To date, American DG Energy’s
installations all run in conjunction with the electric utility grid and require standard interconnection approval from the local
utility. Our customers use both our energy system and the electric utility grid for their electricity requirements. We typically
supply the first 20% to 60% of the building’s electricity requirements while the remaining electricity is supplied by the
electric utility grid. Our customers are contractually bound to use the energy we supply.
To date, the price that American DG
Energy has charged its customers is set forth in customer contracts at a discount to the price of the building’s local electric
utility. For the 20% to 60% portion of the customer’s electricity that is supplied, the customer realizes immediate savings
on its electric bill. In addition to electricity, it sells the heat and hot water at the same price the customer was previously
paying or at a discount equivalent to the customer’s discount on electricity. Air conditioning systems are also priced at
a discount so that the customer realizes overall cost savings from the installation.
Since we own and operate the energy
systems and since customers have no investment in the units, our customers benefit from no capital requirements and no operating
responsibilities. We operate the energy systems so our customers require no staff and have no energy system responsibilities;
they are bound, however, to pay for the energy supplied by the energy systems over the term of the agreement.
Energy and Products Portfolio
We provide the same full range of CHP
product and energy options that are provided by American DG Energy, including:
|
o
|
Thermal (Hot Water, Heat and Cooling)
|
|
·
|
Energy
Producing Products
|
|
o
|
Complementary Energy Equipment (e.g., boilers, etc.)
|
|
o
|
Alternative Energy Equipment (e.g., solar, fuel cells, etc.)
|
|
·
|
Turnkey
Installation Energy
Producing Products
with Incentives
|
Energy Sales
For customers seeking an alternative
to the outright purchase of CHP equipment, we install, maintain, finance, own and operate complete on-site CHP systems that supply,
on a long-term, contractual basis, electricity and other energy services. Our business model is to sell the energy to customers
at a guaranteed discount rate to the rates charged by conventional utility suppliers. Customers are billed monthly and benefit
from a reduction in their current energy bills without the capital costs and risks associated with owning and operating a cogeneration
or chiller system. Also, by outsourcing the management and financing of on-site energy facilities to us, they reap the economic
advantages of DG without the need for retaining specialized in-house staff with skills unrelated to their core business. Customers
benefit from our On-Site Utility in a number of ways:
|
·
|
Guaranteed
lower price for
energy
|
|
·
|
Only
pay for the energy
they use
|
|
·
|
No
capital costs for
equipment, engineering
and installation
|
|
·
|
No
equipment operating
costs for fuel
and maintenance
|
|
·
|
Immediate
cash flow improvement
|
|
·
|
Significant
green impact by
the reduction of
carbon produced
|
|
·
|
No
staffing, operations
and equipment responsibility
|
Our customers pay us for energy produced
on site at a rate that is a certain percentage below the rate at which the utility companies provide them electrical and natural
gas services. We measure the actual amount of electrical and thermal energy produced, and charge our customers accordingly. We
install, operate, maintain and repair our energy systems at our sole cost and expense. We also obtain any necessary permits or
regulatory approvals at our sole expense. Our agreements are generally for a term of 15 years, renewable for two additional five
years terms upon the mutual agreement of the parties.
In regions where high electricity rates
prevail, monthly payments for CHP energy services can yield attractive paybacks (e.g. often 3-5 years) on our investments in On-Site
Utility projects. We expect the price of natural gas to have a minor effect on the financial returns obtained from our energy
service contracts because the value of hot water and other thermal services produced from the recovered heat generated by the
internal combustion engine in our On-Site Utility system will increase in proportion to higher fuel costs. This recovered energy,
which comprises up to 60% of the total heating value of fuel supplied to the CHP equipment, displaces fuel that would otherwise
be burned in conventional boilers.
Energy Producing Products
We offer cogeneration units sized to
produce 100 kW of electricity, water chillers sized to produce 200 to 400 tons of cooling and high efficiency water heaters. For
cogeneration, we prefer a modular design approach to allow us to group multiple units together to serve customers with considerably
larger power requirements. Often, cogeneration units are conveniently dispersed within a large operation, such as a hospital or
campus, serving multiple process heating systems that would otherwise be impractical to serve from a single large machine. The
equipment we select often yield overall energy efficiencies in excess of 80% (from our equipment supplier’s specifications).
We also purchase energy equipment that
incorporates mechanical work to extract heat from the environment in order to supplement the chemical energy available in the
fuel. The result of that equipment is a significant boost in efficiency and carbon emissions benefit relative to conventional
heating systems.
Many other DG technologies are challenged
by technical, economic and reliability issues associated with systems that generate power using solar, micro-turbine or fuel cell
technologies, which have not yet proven to be economical for typical customer needs. As other power sources that use alternative
energy technologies mature to the point that they are reliable and economical, we may consider employing them to supply energy
for our customers.
Service and Installation
Where appropriate, we utilize the best
local service infrastructure for the equipment we deploy. We require long-term maintenance contracts and ongoing parts sales.
Our centralized remote monitoring capability allows us to keep track of our equipment in the field. Our installations are performed
by local contractors with experience in energy cogeneration systems.
For the occasional customers that want
to own the CHP system themselves, we offer our “turn-key” option whereby we sell equipment and provide systems engineering,
installation, interconnect approvals, on-site labor and startup services needed to bring the complete CHP system on-line. For
some customers, we also require a fee to operate the systems and may receive a portion of the savings generated from the equipment.
Other Funding and Revenue Opportunities
The Company may be able to participate
in the demand response market and receive payments due to the availability of its energy systems when operations commence. 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. Since our systems are highly efficient, when we commence operations, we
may be able to participate in various carbon reduction markets. We are currently not involved in any such activity as described
above.
Sales and Marketing
We offer cogeneration units sized to
produce 100 kW of electricity and water chillers sized to produce 200 to 400 tons of cooling. Our On-Site Utility services are
sold directly to end-users by our in-house marketing team and by established sales agents and representatives. In July 2011, we
hired a Managing Director in the United Kingdom to put together a sales and marketing team in order to generate revenues from
equipment installations. We have also hired service and support staff, but do not expect to expend significant funds in filling
those positions.
Our On-Site Utility services are sold
directly to end-users by our in-house marketing team and by established sales agents and representatives. We offer standardized
packages of energy, equipment and services suited to the needs of property owners and operators in healthcare, hospitality, large
residential, athletic facilities and certain industrial sites. This includes national accounts and other customer groups having
a common set of energy requirements at multiple locations.
Our energy offering is translated into
direct financial gain for our clients, and is best appreciated by senior management. These clients recognize the gain in cash
flow, the increase in net income and the preservation of capital we offer. As such, our energy sales are focused on reaching these
decision makers.
We also are expanding our sales efforts
by developing joint marketing initiatives with key industry suppliers. Particularly important are collaborative programs with
natural gas utility companies. Since the economic viability of any CHP project is critically dependent upon effective utilization
of recovered heat, the insight of the gas supplier to the customer energy profile is particularly effective in prospecting the
most cost-effective DG sites in any region.
DG is currently enjoying growing support
among utility regulators seeking to increase the reliability of electricity supply with cost effective environmentally responsible
demand-side resources. Many European countries encourage DG through inter-connecting standards, incentives and/or supply planning.
Unlike large central station power plants, DG investments can be made in small increments and with lead-times as short as just
a few months.
European governments are developing
and refining various funding opportunities related to economic incentives and programs for DG operators. Our CHP systems fit very
well with these programs. Other than funding opportunities related to incentives and programs, there does not appear to be any
new government regulations that may affect us.
Competition
We believe that the main competition
for DG products is the established electric utility infrastructure. DG is beginning to gain acceptance in regions where energy
customers are dissatisfied with the cost and reliability of traditional electricity service. These end-users, together with growing
support from regulators, are creating a favorable climate for the growth of DG that is overcoming the objections of established
utility providers. Those companies are much larger than us in terms of revenues, assets and resources. We are competing with large
utility companies by selling its electricity to the same commercial building customers at a lower price. We sell directly to each
building customer, but typically only supply 20%-60% of the electricity needs of the building. The remaining portion is supplied
by the electric utility.
In the United Kingdom, we primarily
compete with Cogenco Limited, a subsidiary of Dalkia PLC, an alternative energy company with customers in the 50-500 kW range,
ENER-G Holdings plc and Jenbacher, a subsidiary of General Electric Company. Other companies in the same market are Clarke Energy
Ltd, EC Power Systems and Baxi-SenerTec UK. In Belgium, most CHP equipment manufacturers are non-Belgian companies, including
CogenGreen S.A., Capstone Turbine Corporation and Cummins Power Generation Inc., which are our primary competitors in the 50-500
kW range. In Spain, we compete with Baxi-SenerTec UK, MicroPower Europe, Guascor Power, Cummins Power Generation Inc., Icogen
SA and Pasch y Cia SA. Icogen SA, based in Barcelona, is the leading Spanish supplier for systems below 500 kW.
Engine manufacturers sell DG units that
range in size from a few kWs to many MWs in size. Those manufacturers are predominantly greater than 1 MW and include Caterpillar
Inc., Cummins Power Generation Inc., and Waukesha, a subsidiary of General Electric Company. In many cases, we view these companies
as potential suppliers of equipment and not as competitors.
The alternative energy market is emerging
rapidly. Many companies are developing alternative and renewable energy sources including solar power, wind power, fuel cells
and micro-turbines. Some of the companies in this sector include General Electric Company, BP p.l.c, Royal Dutch Shell, SunEdison,
a division of MEMC Electronic Materials, Inc. and Evergreen Solar, Inc. (in the solar energy space); Plug Power, Inc. and FuelCell
Energy, Inc. (in the fuel cell space); and Capstone Turbine Corporation, Ingersoll Rand PLC and Elliott Turbomachinery, a division
of the Elliott Group, Inc. (in the micro-turbine space). The effect of these developing technologies on our business is difficult
to predict; however, when their technologies become more viable for our target markets, we may be able to adopt their technologies
into our business model.
There are a number of energy service
companies that offer related services. These companies include Siemens AG, Honeywell International Inc. and Johnson Controls Inc.
In general, these companies seek large, diverse projects for electric demand reduction for campuses that include building lighting
and controls, and electricity (in rare occasions) or cooling. Because of their overhead structures, these companies often solicit
large projects and stay away from individual properties. Since we focus on smaller projects for energy supply, we are well suited
to work in tandem with these companies when the opportunity arises.
There are also a few local emerging
cogeneration developers and contractors that are attempting to offer services similar to ours. To be successful, they will need
to have the proper experience in equipment and technology, installation contracting, equipment maintenance and operation, site
economic evaluation, project financing and energy sales plus the capability to cover a broad region.
Government Regulation
We are not subject to extensive government
regulation. We are required to file for local construction permits (electrical, mechanical and the like) and utility interconnects
and we must make various filings in certain jurisdictions related to environmental emissions. Other than funding opportunities
related to incentives and programs, there does not appear to be any new government regulations that may affect us.
Employees
As of June 30, 2012, we had twelve employees,
including four full time employees and one part time employee in the United Kingdom and seven part time employees in the United
States. We believe that our relationship with our employees is satisfactory. None of our employees are represented by a collective
bargaining agreement.
Properties
Our headquarters are located in
Waltham, Massachusetts, and consist of 3,071 square feet of office and storage space that is leased from Tecogen to American
DG Energy and is part of a 43,000 square feet office and manufacturing building which is also the headquarters of American DG
Energy, Tecogen, Ilios, GlenRose Instruments, Pharos, Levitronix and other companies not affiliated with the Company. The
lease expires on March 31, 2014. American DG Energy is not currently charging us for utilizing our share of office space in
the United States since it believes it is insignificant. We believe that our facilities are appropriate and adequate for our
current needs.
Legal Proceedings.
We are not currently a party to any
material litigation, and we are not aware of any pending or threatened litigation against us that could have a material adverse
effect on our business, operating results or financial condition.
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market
Since July 25, 2012, our common stock
has been quoted on the OTCQB tier of the OTC Markets under the ticker symbol “EUSP”, but with very low, if any, volume,
meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively
small or non-existent. To date the high bid price has been $4.00 and low bid price has been $1.25. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
As of October 16, 2012, there were
approximately 28 beneficial holders of our common stock. See “Security Ownership of Certain Beneficial Owners and Management”
for information on the holders of our Common stock. Also see “Description of Securities” for a description of our
outstanding and issued capital stock.
Dividends
On February 10, 2012, we announced that
our 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. We have retroactively applied this dividend to the
December 31, 2011 financial statements presented in our Annual Report on Form 10-K. Prior to that transaction, we had paid no
cash or stock dividends on our common stock. We currently expect to retain earnings for use in the operation and expansion of
our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of any
future debt or credit facility may preclude us from paying any cash dividends. As a result, capital appreciation, if any, of our
common stock will be the sole source of gain for our stockholders for the foreseeable future.
Equity Compensation Plans
For disclosure of securities authorized
for issuance under equity compensation plans please see “Security Ownership of Certain Beneficial Owners and Management.”
Recent Sales of Unregistered Securities
Set forth below is information regarding
common stock issued, warrants issued and stock options granted by the Company within the past three years. Also included is the
consideration, if any, we received and information relating to the section of the Securities Act, or rule of the SEC, under which
exemption from registration was claimed.
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 such investment resulted in American DG Energy
receiving a 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 $2,261,000 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. The investors were accredited investors, and such transactions were exempt from registration under
the Securities Act under Section 4(a)(2).
During the period from January 1, 2011
to June 30, 2011, the Company raised an additional $1,250,000 in a private placement by selling 1,250,000 shares of common stock
to 4 accredited investors at a price of $1.00 per share. The investors were accredited investors, and such transactions were exempt
from registration under the Securities Act under Section 4(a)(2).
No underwriters were involved in the foregoing
sales of securities. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
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 on
July 12, 2012. Nettlestone Enterprises Limited is an accredited investor, and such transaction was exempt from registration under
the Securities Act under Section 4(a)(2).
Stock Options
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. 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 options was adjusted to $0.90. Those options have a vesting schedule of four years and expire in ten
years. The fair value of the options issued was $790,908, with a weighted average 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. 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 options was adjusted to $0.90. Those options have a vesting schedule of four years and expire in ten years. The fair
value of the options was $109,304, with a weighted average 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 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 options was adjusted to $0.90. 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 fair value of the options was $423,400, with
a weighted average 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.
The grant of all options was exempt
from registration under Rule 701 under the Securities Act.
No underwriters were involved in the
foregoing sales of securities. All purchasers represented to us in connection with their purchase that they were accredited investors
and made other customary investment representations. All of the foregoing securities were deemed restricted securities when granted
for purposes of the Securities Act.
MANAGEMENT’S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion
and analysis of our financial condition and results of operations together with our financial statements and related notes appearing
elsewhere in this registration statement. Some of the information contained in this discussion and analysis or set forth elsewhere
in this registration statement, including information with respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review the Risk Factors beginning on page
7
of this registration statement for a discussion of important factors that could cause actual results to differ materially
from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
The Company 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
derives sales from selling energy in the form of electricity, heat, hot water and cooling to its customers under long-term energy
sales agreements (with a typical term of 10 to 15 years). The energy systems are owned by the Company and are installed in our
customers’ buildings. Each month we obtain readings from our energy meters to determine the amount of energy produced for
each customer. We multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from
our customers’ local energy utility, to derive the value of our monthly energy sale, less the applicable negotiated discount.
Our revenues per customer on a monthly basis may vary based on the amount of energy produced by our energy systems and the published
price of energy (electricity, natural gas or oil) from our customers’ local energy utility that month. Our revenues commence
as new energy systems become operational.
The Company has experienced total net
losses since inception of $2.3 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 and future cash flow from operations and its ability to control certain costs,
including those related to general and administrative expenses, 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. Beyond June 30, 2013, the Company may need to raise
additional capital through a debt financing or equity offering 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.
Since its inception to June 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 Company’s operations are comprised
of one business segment. Our business is selling energy in the form of electricity, heat, hot water and cooling to our customers
under long-term sales agreements.
Critical Accounting Policies
For critical accounting policies see
our “Notes to Consolidated Financial Statements” on page F-1.
Results of Operations
First Six Months of 2012 Compared to First Six Months
of 2011
Revenues
Revenues in the first six months of
2012 were $27,594 compared to $0 for the same period in 2011. The revenues during the quarter were from the performance of billable
services related to construction and engineering for the site. Since the beginning of the year, the Company announced that it
has reached agreements to supply clean energy to Haverhill Leisure Centre in Suffolk, to four landmark hotels owned by The Ability
Group and managed by Hilton Worldwide, to the Doubletree by Hilton Dunblane Hydro hotel and to the Cedar Court Hotel Huddersfield
in Yorkshire.
Cost of Sales
Cost of sales in the first six months
of 2012 was $20,104 compared to $0 for the same period in 2011.
Operating Expenses
General and administrative expenses
were $575,807 in the first six months of 2012, compared to $320,116 for the same period in 2011, an increase of $255,691. The
general and administrative expenses increased due to additional legal fees, accounting and audit fees and non-cash compensation
expense related to the issuance of option awards to our employees.
Selling expenses were $294,995 in the
first six months of 2012, compared to $0 for the same period in 2011, due to selling expenses associated with establishing the
business, professional sales fees and commissions, advertising expenses and salaries and non-cash compensation expense related
to the issuance of stock option awards to employees and directors.
Engineering expenses were $33,992 in
the first six months of 2012, compared to $0 for the same period in 2011.
Other Income
Other income was $9,141 in the first
six months of 2012, compared to $0 for the same period in 2011, due to interest on our cash balance.
Net Loss
Net loss was $888,163 in the first six
months of 2012, compared to net loss of $320,116 for the same period in 2011.
Fiscal Year Ended December
31, 2011 Compared with Period
from Inception (July 9, 2010) to December 31, 2010
Revenues
The Company had no revenues in 2011
or 2010. However, we believe that our target market (users of up to 1 MW of electricity) has barely been penetrated in the United
Kingdom and Europe and that the reduced reliability of the utility grid, increasing cost pressures experienced by energy users,
advances in new, low cost technologies and distributed generation- favorable legislation and regulation will drive the Company’s
near-term growth and penetration into its target market.
Cost of Sales
The Company had no cost of sales in
2011 or 2010.
Operating Expenses
Our operating expenses include selling
and general and administrative expenses such as accounting and legal expenses, office space, general insurance and expenses associated
with establishing the business. Our operating expenses in 2011 were $1,381,755 compared to $39,805 in 2010. Those expenses include
non-cash compensation expense related to the issuance of stock option awards to our employees.
Other Income
Our other income was $333 in 2011, compared
to $0 in 2010.
Net Loss
The Company had a net loss of $1,381,422
in 2011 compared to net losses of $39,805 from inception (July 9, 2010) to December 31, 2010, due to expenses associated with
establishing the business and non-cash compensation expense related to the issuance of stock option awards to our employees.
Liquidity and Capital Resources
Consolidated working capital was $1,406,536
as of June 30, 2012, compared to $2,468,312 at December 31, 2011. Included in working capital were cash and cash equivalents of
$1,202,543 as of June 30, 2012, compared to $2,338,783 at December 31, 2011. The decrease in working capital was a result of cash
used to fund installations and business development for new energy projects.
Cash used in operating activities was
$709,925 in the first six months of 2012, compared to cash used of $155,743 for the same period in 2011. Our inventory balance
increased to $262,825 in the first six months of 2012, compared to $137,976 at December 31, 2011, resulting in a decrease of cash
of $124,849 due to the purchase of energy systems from American DG Energy for the United Kingdom. Our value added tax receivable
decreased to $39,138 in the first six months of 2012, compared to $77,197 at December 31, 2011, resulting in an increase of cash
of $38,059 due to the receipt of duties and taxes related to the shipment of energy systems to the United Kingdom. Our other current
assets increased to $38,652 in the first six months of 2012, compared to $19,721 at December 31, 2011, resulting in a decrease
of cash of $18,931.
Accounts payable balance increased to
$145,491 in the first six months of 2012, compared to $57,349 at December 31, 2011, resulting in an increase of cash of $88,142
due to normal account payable events. Our accrued expense and other current liabilities decreased to $23,901 in the first six
months of 2012, compared to $48,016 at December 31, 2011, resulting in a decrease of cash of $24,115.
The primary
investing activities of the Company’s operations included the purchase of equipment. In the first six months of 2012, the
Company used $426,315 for purchases of equipment
.
The Company owns the energy-producing
equipment at the customer’s site; therefore, the business is capital intensive. The Company believes that its existing resources,
including cash and cash equivalents and future cash flow from operations and its ability to control certain costs, including those
related to general and administrative expenses, 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. Beyond June 30, 2013, the Company may need to raise additional capital through
a debt financing or equity offering 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.
Our ability to continue to access capital
could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest
rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make
loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to
us. If these conditions continue and we cannot raise funds through a public or private debt financing, or an equity offering,
our ability to grow our business may be negatively affected and the Company may need to suspend any new installation of energy
systems and significantly reduce its operating costs until market conditions improve
Seasonality
The majority of our heating systems
sales are in the winter and the majority of our chilling systems sales are in the summer.
Inflation
We install, maintain, finance, own and
operate complete on-site CHP systems that supply, on a long-term, contractual basis, electricity and other energy services. We
sell the energy to customers at a guaranteed discount rate to the rates charged by conventional utility suppliers. Our customers
benefit from a reduction in their current energy bills without the capital costs and risks associated with owning and operating
a CHP or chiller system. Inflation will cause an increase in the rates charged by conventional utility suppliers, and since we
bill our customers based on the electric utility rates, our pricing will increase in tandem and positively affect our revenue.
However, inflation might cause both our investment and cost of goods sold to increase, therefore lowering our return on investment
and depressing our gross margins.
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.
Emerging Growth Company
Section 107 of the JOBS Act provides
that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities
Act for complying with new or revised accounting standards. However, we chose to “opt out” of any extended transition
period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such
standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of
the extended transition period for complying with new or revised accounting standards is irrevocable.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
MANAGEMENT AND GOVERNANCE
The following table lists the current
members of our board of directors, or Board of Directors, and our executive officers. The address for our directors and executive
officers is 45 First Avenue, Waltham, Massachusetts 02451. The following sets forth certain information regarding our current
executive officers and directors.
Name
|
|
Age
|
|
Position(s)
|
|
|
|
|
|
John N. Hatsopoulos
|
|
78
|
|
Director; Chairman of the Board
|
Barry J. Sanders
|
|
51
|
|
Chief Executive Officer, President and Director
|
Anthony S. Loumidis
|
|
48
|
|
Chief Financial Officer, Secretary and Treasurer
|
Paul J. Hamblyn
|
|
44
|
|
Managing Director
|
Dr. Ahmed F. Ghoniem (2)(3)
|
|
61
|
|
Director
|
James C. Devas (1)(2)(3)
|
|
57
|
|
Director
|
Bruno Meier (1)(3)
|
|
61
|
|
Director
|
|
(1)
|
Member
of Audit Committee
|
|
(2)
|
Member
of Compensation Committee
|
|
(3)
|
Member
of the Nominating and
Governance Committee
|
John N. Hatsopoulos
has been Chairman of the Board of Directors since the organization of the Company in July 2010. Since 2001, he has been
the Chief Executive Officer and director of American DG Energy, the Company’s parent, which offers clean onsite electricity,
heat, hot water and cooling to businesses in the Northeast United States. He is also the Chief Executive Officer and a director
of Tecogen, an affiliate of the Company, which is a manufacturer of natural gas engine-driven commercial and industrial cooling
and cogeneration systems. Since 2000, he has also been a Partner and Managing Director of Alexandros Partners LLC, a financial
advisory firm providing consulting services to early stage entrepreneurial ventures. Mr. Hatsopoulos is a co-founder of Thermo
Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), and the retired President and Vice Chairman of the Board
of Directors of that company. He is a member of the Board of Directors of Ilios, an affiliate of the Company, which is a high-efficiency
heating products company, American CareSource Holdings, Inc. (NASDAQ: ANCI) and TEI Biosciences Inc., and is a former Member of
the Corporation of Northeastern University and former member of the Board of Agenus Inc. (NASDAQ: AGEN). Mr. Hatsopoulos graduated
from Athens College in Greece, and holds a bachelor’s degree in history and mathematics from Northeastern University, as
well as honorary doctorates in business administration from Boston College and Northeastern University.
Our Board of Directors has determined
that Mr. Hatsopoulos’ prior experience as co-founder, Chairman and Chief Executive Officer of Thermo Electron Corporation,
where he demonstrated leadership capability and garnered extensive expertise involving complex financial matters, and his extensive
knowledge of complex financial and operational issues qualify him to be a member of the Board of Directors in light of the Company’s
business and structure.
Barry J. Sanders
has been
our Chief Executive Officer, President and a director since the organization of the Company in July 2010. Since 2001, he has been
the President and Chief Operating Officer of American DG Energy, the Company’s parent. Since 2009, he has also been the
Chairman of the Board of Directors of Ilios, an affiliate of the Company. From 1992 to 2001, Mr. Sanders served as Executive Vice
President of Micrologic, Inc., an equipment asset management company where he directed the company’s business-to-business
group. From 1990 to 1992, he was the Marketing Manager at Andover Controls Corp., a building automation systems company and from
1988 to 1990 he directed the successful introduction of chiller products at Tecogen, an affiliate of the Company. Mr. Sanders
has also managed research and development projects for the New York State Energy Research and Development Authority in Albany,
New York, where he created the University-Industry Energy Research Program to accelerate commercialization of new technologies.
Mr. Sanders holds a bachelor’s degree in chemical engineering from the University of Rochester and masters of business administration
degree in marketing from Rensselaer Polytechnic Institute.
Our Board of Directors has determined
that Mr. Sander’s prior experience as President and Chief Operating Officer of American DG Energy, the Company’s parent,
where he demonstrated leadership capability and his extensive knowledge of the distributed generation market and operational issues
qualify him to be a member of the Board of Directors in light of the Company’s business and structure.
Anthony S. Loumidis
has
been our Chief Financial Officer and Treasurer since the organization of the Company in July 2010. Since 2004, he has been Chief
Financial Officer and since 2001 he has been the Treasurer of American DG Energy, the Company’s parent. Mr. Loumidis devotes
a portion of his business time to several other organizations; namely, as the Chief Financial Officer of GlenRose Instruments,
a company that provides analytical services to the federal government and its prime contractors; as the Vice President and Treasurer
of Tecogen, an affiliate of the Company; as a Partner and President of Alexandros Partners LLC; and as the Treasurer of Ilios,
an affiliate of the Company. Mr. Loumidis was previously with Thermo Electron Corporation, which is now Thermo Fisher Scientific
(NYSE: TMO), where he held various positions including National Sales Manager for Thermo Capital Financial Services, Manager of
Investor Relations and Manager of Business Development of Tecomet, a subsidiary of Thermo Electron. Mr. Loumidis holds a bachelor’s
degree in business administration from the American College of Greece in Athens and a master’s degree in business administration
from Northeastern University.
Paul J. Hamblyn
has been
our Managing Director in the United Kingdom since July 2011. Mr. Hamblyn is a Council Member of the Energy Services and Technology
Association in the United Kingdom. Since 2008, he has been the Head of Energy Services for Corona Energy, an independent business
to business gas supplier. He was previously with the ENER-G Group since 2005, and held a series of positions with the company
including three years as the Managing Director of ENER-G Efficiency, a leading provider of energy management solutions based on
Building Energy Management Systems (BEMS) technology. Mr. Hamblyn is a Chartered Institution of Building Services Engineers (CIBSE)
accredited Low Carbon Consultant and Energy Assessor as well as principal author of the highly successful Carbon Reduction Commitment
(CRC) Toolkit developed for the London Energy Project. Mr. Hamblyn has an HNC in Electronic and Micro-electronic Engineering and
completed an award winning apprenticeship early in his career with Landis and Gyr (now part of Siemens).
Dr. Ahmed F. Ghoniem
has
been a member of our Board of Directors since January 2011. He is the Ronald C. Crane Professor of Mechanical Engineering at the
Massachusetts Institute of Technology, or MIT. He is also the director of the Center for 21st Century Energy, and the head of
Energy Science and Engineering at MIT, where he plays a leadership role in many energy-related activities, initiatives and programs.
Mr. Ghoniem joined MIT as an assistant professor in 1983. He is associate fellow of the American Institute of Aeronautics and
Astronautics, and Fellow of American Society of Mechanical Engineers. Recently, he was granted the KAUST Investigator Award. Mr.
Ghoniem holds a Ph.D. in Mechanical Engineering from the University of California, Berkeley, and an M.S. and B.S. in Mechanical
Engineering from Cairo University.
Our Board of Directors has determined
that Dr. Ghoniem’s prior experience as a Professor of Mechanical Engineering at the Massachusetts Institute of Technology
and his prior experience in the energy sector qualify him to be a member of our Board of Directors in light of our business and
structure.
James C. Devas
has been
a member of our Board of Directors since March 2011. He is currently Chairman of Vividas Ltd. since August 2009, director and
Trustee of Longleat Enterprises since December 2007, director at SM Investors International since May 2004, and Managing Director
of Convergent Group since January 2000. Previously, Mr. Devas held Managing Director and director positions at Lazard Brothers,
Capital Markets Division, and at E.F. Hutton in London, respectively.
Our Board of Directors has determined
that Mr. Devas’ prior experience insight and extensive knowledge of the United Kingdom and European markets qualify him
to be a member of the Board of Directors in light of the Company’s business and structure.
Bruno Meier
has been a
member of our Board of Directors since June 2011. Mr. Meier retired in 2011 from Rolex SA. He joined Rolex in January 2005 where
he was the Chief Executive Officer of the group since 2008 as well as being a member of the Board of Directors of Rolex Holding
SA; previously, he held the position of Chief Financial Officer of the group. He also represented Rolex at the Swiss Watch Makers
Association. Since 2002, he was the Chief Executive Officer of Deutsche Bank Suisse, and Global Chief Operating Officer of Private
Wealth Management of Deutsche Bank Group. Previously, he was the Chief Operating Officer of Deutsche Bank's International Private
Banking activities world-wide. Mr. Meier was also a member of the Board of Directors of SWX, the Swiss Stock Exchange. Prior to
joining Deutsche Bank, Mr. Meier held senior positions at Republic National Bank of New York, BNP Paribas and J.P. Morgan, in
Geneva and in New York.
Our Board of Directors has determined
that Mr. Meier’s prior experience insight and extensive knowledge of the United Kingdom and European markets qualify him
to be a member of the Board of Directors in light of the Company’s business and structure.
Each executive officer is elected or
appointed by, and serves at the discretion of, our Board of Directors. Our officers will hold office until their successors are
duly elected and qualified, or until their earlier resignation or removal.
Family Relationships
There are no family relationships among
members of our Board of Directors or executive officers.
Board Composition
The number of directors of the Company
is established by the Board of Directors in accordance with our bylaws. The exact number of directors is currently set at five
(5) by resolution of the Board of Directors. The directors are elected to serve for one (1) year terms, with the term of
directors expiring each year at the annual meeting of stockholders, or Annual Meeting; provided further, that the term of each
director shall continue until the election and qualification of a successor and be subject to such director’s earlier death,
resignation or removal.
Our certificate of incorporation and
bylaws provide that the authorized number of directors may be changed only by resolution of the Board of Directors, and also provide
that our directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the votes that all
our stockholders would be entitled to cast in an annual election of directors, and that any vacancy on our Board of Directors,
including a vacancy resulting from an enlargement of our Board of Directors, may be filled only by vote of a majority of our directors
then in office.
We have no formal policy regarding board
diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders
through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative
culture among board members, knowledge of our business and understanding of the competitive landscape.
Board Committees
Our Board of Directors directs the management
of our business and affairs and conducts its business through meetings of the Board of Directors and our committees: the Audit
Committee, the Compensation Committee and the Nominating and Governance Committee.
The members of the Audit Committee are
Mr. Meier and Mr. Devas. The Board of Directors has determined that the members of the Audit Committee are independent in accordance
with the NYSE MKT rules. The Board of Directors has also determined that Mr. Meier qualifies as an audit committee financial expert.
The members of the Compensation Committee are Mr. Devas and Dr. Ghoniem. The Board of Directors has determined that the members
of the Compensation Committee are independent in accordance with the NYSE MKT rules. The members of our Nominating and Governance
Committee are Mr. Meier, Mr. Devas and Dr. Ghoniem who have been determined to be independent by our Board of Directors in accordance
with the NYSE MKT rules. In addition, from time to time, other committees may be established under the direction of the Board
of Directors when necessary to address specific issues.
The functions of the Audit Committee
include reviewing and supervising the financial controls of the Company, appointing, compensating and overseeing the work of the
independent auditors, reviewing the books and accounts of the Company, meeting with the officers of the Company regarding the
Company's financial controls, acting upon recommendations of the independent auditors and taking such further actions as the Audit
Committee deems necessary to complete an audit of the books and accounts of the Company. The Board of Directors has determined
that the members of the Audit Committee are independent in accordance with the NYSE MKT rules. The charter of the Audit Committee
will be available on the Company’s website at www.eurositepower.co.uk.
The
Compensation
Committee's
functions
include
reviewing
with
management
cash
and
other
compensation
policies
for
employees,
making
recommendations
to
the
Board
of
Directors
regarding
compensation
matters
and
determining
compensation
for
the
Chief
Executive
Officer.
The
Board
of
Directors
has
determined
that
the
members
of
the
Compensation
Committee
are
independent
in
accordance
with
the
NYSE
MKT
rules.
Our
Chief
Executive
Officer
has
been
instrumental
in
the
design
and
recommendation
to
the
compensation
committee
of
compensation
plans
and
awards
for
our
directors
and
executive
officers
including
our
President,
Chief
Operating
Officer
and
Chief
Financial
Officer.
All
compensation
decisions
for
the
Chief
Executive
Officer
and
all
other
executive
officers
are
reviewed
and
approved
by
the
Compensation
Committee,
subject
to
ratification
by
the
Board
of
Directors.
The
charter
of
the
Compensation
Committee
will
be
available
on
the
Company’s
website
at
www.eurositepower.co.uk.
The Nominating and Governance Committee
functions are to identify persons qualified to serve as members of the Board of Directors, to recommend to the Board of Directors
persons to be nominated by the board for election as directors at the annual meeting of stockholders and persons to be elected
by the board to fill any vacancies, and recommend to the Board the Directors to be appointed to each of its committees. In addition,
the Nominating and Governance Committee is responsible for developing and recommending to the Board of Directors a set of corporate
governance guidelines applicable to the Company (as well as reviewing and reassessing the adequacy of such guidelines as it deems
appropriate from time to time) and overseeing the annual self-evaluation of the Board of Directors. The charter of the Nominating
and Governance Committee will be available on the Company’s website at www.eurositepower.co.uk.
Director Compensation
Each director who is not also one of
our employees will receive a fee of $500 per day for service on those days that our Board of Directors and or each of the Audit,
Compensation or Nominating and Governance Committees hold meetings, or otherwise conduct business. Non-employee directors also
will be eligible to receive stock or options awards under our 2011 Stock Incentive Plan, as amended, or the Stock Plan. We reimburse
all of our non-employee directors for reasonable travel and other expenses incurred in attending Board of Directors and committee
meetings. Any director who is also one of our employees receives no additional compensation for serving as a director. Our non-employee
directors were first elected in 2011, and so did not receive any compensation for serving as directors during 2010.
Board Leadership Structure
We separate the roles of Chief Executive
Officer and Chairman in recognition of the differences between the two roles. Our Chief Executive Officer is responsible for setting
the strategic direction for the Company and the overall leadership and performance of the Company. Our Chairman provides guidance
to the Chief Executive Officer, sets the agenda for Board of Director meetings, presides over meetings of the full Board of Directors
and leads all executive meetings of the independent directors. We are a small Company with a small management team, and we feel
the separation of these roles enhances high-level attention to our business.
Our Board of Directors Role in Risk Oversight
Our Board of Directors oversees our
risk management processes directly and through its committees. Our management is responsible for risk management on a day-to-day
basis. The role of our Board of Directors and its committees is to oversee the risk management activities of management. The Audit
Committee assists the Board of Directors in fulfilling its oversight responsibilities with respect to risk management in the areas
of financial reporting, internal controls and compliance with legal and regulatory requirements, and, discusses policies with
respect to risk assessment and risk management, including guidelines and policies to govern the process by which the Company’s
exposure to risk is handled. The Compensation Committee assists the Board of Directors in fulfilling its oversight responsibilities
with respect to the management of risks arising from our compensation policies and programs. The Nominating and Governance Committee
assists the Board of Directors in fulfilling its oversight responsibilities with respect to the management of risks associated
with board organization, membership and structure, succession planning for our directors, and corporate governance.
Code of Business Conduct and Ethics
The Company
has adopted a code of business conduct and ethics that applies to the Company’s Chief Executive Officer and Chief Financial
Officer. The Company’s code of business conduct and ethics promotes honest and ethical conduct, including the ethical handling
of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and
understandable disclosure in reports and documents that the Company files with, or submits to, the SEC and in other public communications
made by the Company; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of violations
of the code of business conduct and ethics to an appropriate person or persons identified in the code of business conduct and
ethics; and accountability for adherence to the code of business conduct and ethics. The Company’s code of business conduct
and ethics will be available on the Company’s website at
www.eurositepower.co.uk
.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act
requires our executive officers, directors and persons who own more than 10 percent of our common stock to file initial reports
of their ownership and changes in ownership of our common stock with the SEC. To the best of our knowledge, based solely on a
review of reports furnished to us and written representations from reporting persons, each person who was required to file such
reports complied with the applicable filing requirements during 2011, except for the following: (a) Forms 3 filed with the SEC
on December 21, 2011, for American DG Energy, Nettlestone Enterprises Limited, Mr. Hatsopoulos, Mr. Sanders and Mr. Loumidis;
(b) Form 3 filed with the SEC on December 23, 2011, for Mr. Meier; (c) Form 3 filed with the SEC on December 28, 2011, for Mr.
Ghoniem; (d) Form 3 filed with the SEC on January 5, 2012, for Mr. Hamblyn; and (e) Form 4 filed with the SEC on January 5, 2012,
for Mr. Hamblyn, reporting the November 3, 2011 grant of a stock option award for 900,000 shares.
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
Since we did not conduct substantial
operations in 2010, we did not pay any salary to our officers in 2010. The compensation of the Company’s Chief Executive
Officer and Chief Financial Officer is paid by American DG Energy. The Company reimburses American DG Energy based on the time
those executives spend on EuroSite Power. The compensation of the Company’s Managing Director is paid by the Company. The
following table sets forth information with respect to the compensation of our named executive officers as of December 31, 2011:
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All other
|
|
|
|
|
Name and principal position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
awards ($)
|
|
|
awards ($)(1)
|
|
|
compensation ($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry J. Sanders (2)(3)
|
|
|
2011
|
|
|
|
56,428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
564,935
|
|
|
|
-
|
|
|
|
621,363
|
|
Chief Executive Officer
and President
|
|
|
2010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony S. Loumidis (4)(5)
|
|
|
2011
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103,571
|
|
|
|
-
|
|
|
|
130,571
|
|
Chief Financial Officer
and Treasurer
|
|
|
2010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Principal Financial
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul J. Hamblyn (6)(7)
|
|
|
2011
|
|
|
|
71,558
|
|
|
|
-
|
|
|
|
-
|
|
|
|
317,550
|
|
|
|
-
|
|
|
|
389,108
|
|
Managing Director
|
|
|
2010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
See “Note 3 – Stockholders’ equity”
in our consolidated financial statements for a summary and assumptions
made in the valuation of our option awards for the period ending
December 31, 2011.
|
|
(2)
|
Mr. 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. In 2011, the Company reimbursed American DG Energy $56,428
for time Mr. Sanders spent on the affairs of the Company. 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.
|
|
(3)
|
Mr. Sanders was granted a stock option award for 1,500,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
|
(4)
|
Mr. 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. In 2011, the Company reimbursed American DG Energy $27,000
for time Mr. Loumidis spent on the affairs of the Company. On
average, Mr. Loumidis spends approximately 15% of his business
time on the affairs of the Company, but such amount varies widely
depending on the needs of the business and is expected to increase
as the business of the Company develops.
|
|
(5)
|
Mr. Loumidis was granted a stock option award for 275,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
|
(6)
|
Mr. Hamblyn entered into a Service Agreement with EuroSite
Power Limited on July 18, 2011. His compensation is paid in British
Pounds sterling and is converted into United States Dollars in
the Executive Compensation table and is for the period from July
18, 2011 through December 31, 2011.
|
|
(7)
|
Mr. Hambyn was granted a stock option award for 900,000
shares of common stock on November 3, 2011, with 25% of the shares
vesting on November 3, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information
with respect to outstanding equity awards held by our named executive officers as of December 31, 2011:
|
|
Option awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
underlying
|
|
|
|
|
|
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
options (#)
|
|
|
options (#)
|
|
|
exercise
|
|
|
expiration
|
|
Name
|
|
exercisable
|
|
|
unexercisable
|
|
|
price ($)
|
|
|
date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barry J. Sanders (1)
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
0.90
|
|
|
|
1/15/2021
|
|
Paul J. Hamblyn (2)
|
|
|
-
|
|
|
|
900,000
|
|
|
|
0.90
|
|
|
|
11/3/2021
|
|
Anthony S. Loumidis (3)
|
|
|
-
|
|
|
|
275,000
|
|
|
|
0.90
|
|
|
|
1/15/2021
|
|
|
(1)
|
Mr. Sanders was granted a stock option award for 1,500,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
|
(2)
|
Mr. Hamblyn was granted a stock option award for 900,000
shares of common stock on November 3, 2011, with 25% of the shares
vesting on November 3, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
|
(3)
|
Mr. Loumidis was granted a stock option award for 275,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
There have been no other stock awards
granted to date and none of such options have been exercised.
Director Compensation
The following table sets forth information
with respect to director compensation as of December 31, 2011:
|
|
Fees earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or paid
|
|
|
Stock
|
|
|
Option
|
|
|
All other
|
|
|
|
|
Name
|
|
in cash ($)
|
|
|
awards ($)
|
|
|
awards ($)(1)
|
|
|
compensation ($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John N. Hatsopoulos (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
37,662
|
|
|
|
-
|
|
|
|
37,662
|
|
Barry J. Sanders (3)
|
|
|
-
|
|
|
|
|
|
|
|
564,935
|
|
|
|
|
|
|
|
564,935
|
|
Dr. Ahmed F. Ghoniem (4)
|
|
|
-
|
|
|
|
-
|
|
|
|
36,435
|
|
|
|
-
|
|
|
|
36,435
|
|
James C. Devas (5)
|
|
|
-
|
|
|
|
-
|
|
|
|
36,435
|
|
|
|
-
|
|
|
|
36,435
|
|
Bruno Meier (6)
|
|
|
-
|
|
|
|
-
|
|
|
|
36,435
|
|
|
|
-
|
|
|
|
36,435
|
|
|
(1)
|
See “Note 3 – Stockholders’ equity”
in our consolidated financial statements for a summary and assumptions
made in the valuation of our option awards for the period ending
December 31, 2011.
|
|
(2)
|
Mr. Hatsopoulos was granted a stock option award for 100,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
provided that Mr. Hatsopoulos serves as a director or consultant
to the Company and subject to acceleration of vesting upon a
change in control.
|
|
(3)
|
Mr. Sanders was granted a stock option award for 1,500,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
|
(4)
|
Dr. Ghoniem was granted a stock option award for 100,000
shares of common stock on June 13, 2011, with 25% of the shares
vesting on June 13, 2012 and then an additional 25% of the shares
on each of the subsequent three anniversaries thereafter, provided
that Dr. Ghoniem serves as a director or consultant to the Company
and subject to acceleration of vesting upon a change in control.
|
|
(5)
|
Mr. Devas was granted a stock option award for 100,000
shares of common stock on June 13, 2011, with 25% of the shares
vesting on June 13, 2012 and then an additional 25% of the shares
on each of the subsequent three anniversaries thereafter, provided
that Mr. Devas serves as a director or consultant to the Company
and subject to acceleration of vesting upon a change in control.
|
|
(6)
|
Mr. Meier was granted a stock option award for 100,000
shares of common stock on June 13, 2011, with 25% of the shares
vesting on June 13, 2012 and then an additional 25% of the shares
on each of the subsequent three anniversaries thereafter, provided
that Mr. Meier serves as a director or consultant to the Company
and subject to acceleration of vesting upon a change in control.
|
Outstanding Equity Awards for Directors at Fiscal Year-End
The following table sets forth information
with respect to outstanding equity awards to directors as of December 31, 2011:
|
|
Option awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
underlying
|
|
|
underlying
|
|
|
|
|
|
|
|
|
|
unexercised
|
|
|
unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
options (#)
|
|
|
options (#)
|
|
|
exercise
|
|
|
expiration
|
|
Name
|
|
exercisable
|
|
|
unexercisable
|
|
|
price ($)
|
|
|
date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John N. Hatsopoulos (1)
|
|
|
-
|
|
|
|
100,000
|
|
|
|
0.90
|
|
|
|
1/15/2021
|
|
Barry J. Sanders (2)
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
0.90
|
|
|
|
1/15/2021
|
|
Dr. Ahmed F. Ghoniem (3)
|
|
|
-
|
|
|
|
100,000
|
|
|
|
0.90
|
|
|
|
6/13/2021
|
|
James C. Devas (4)
|
|
|
-
|
|
|
|
100,000
|
|
|
|
0.90
|
|
|
|
6/13/2021
|
|
Bruno Meier (5)
|
|
|
-
|
|
|
|
100,000
|
|
|
|
0.90
|
|
|
|
6/13/2021
|
|
|
(1)
|
Mr. Hatsopoulos was granted a stock option award for 100,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
provided that Mr. Hatsopoulos serves as a director or consultant
to the Company and subject to acceleration of vesting upon a
change in control.
|
|
(2)
|
Mr. Sanders was granted a stock option award for 1,500,000
shares of common stock on January 15, 2011, with 25% of the shares
vesting on January 15, 2012 and then an additional 25% of the
shares on each of the subsequent three anniversaries thereafter,
subject to his continued employment and subject to acceleration
of vesting upon a change in control.
|
|
(3)
|
Dr. Ghoniem was granted a stock option award for 100,000
shares of common stock on June 13, 2011, with 25% of the shares
vesting on June 13, 2012 and then an additional 25% of the shares
on each of the subsequent three anniversaries thereafter, provided
that Dr. Ghoniem serves as a director or consultant to the Company
and subject to acceleration of vesting upon a change in control.
|
|
(4)
|
Mr. Devas was granted a stock option award for 100,000
shares of common stock on June 13, 2011, with 25% of the shares
vesting on June 13, 2012 and then an additional 25% of the shares
on each of the subsequent three anniversaries thereafter, provided
that Mr. Devas serves as a director or consultant to the Company
and subject to acceleration of vesting upon a change in control.
|
|
(5)
|
Mr. Meier was granted a stock option award for 100,000
shares of common stock on June 13, 2011, with 25% of the shares
vesting on June 13, 2012 and then an additional 25% of the shares
on each of the subsequent three anniversaries thereafter, provided
that Mr. Meier serves as a director or consultant to the Company
and subject to acceleration of vesting upon a change in control.
|
There have been no other stock awards
granted to date and none of such options have been exercised.
2011 Stock Option and Incentive Plan
The Company’s Stock Plan provides
for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to, the Company and its
subsidiaries. The Company also adopted a sub-plan, as authorized by the Stock Plan, or the UK Sub-Plan, in order to grant equity
awards to United Kingdom persons in compliance with United Kingdom law. The terms of the UK Sub-Plan are not materially different
from the terms of the Stock Plan.
Under the Stock Plan, the Company may
grant stock options, restricted stock and other stock-based awards. A total of 4,500,000 shares of common stock may be issued
upon the exercise of options or other awards granted under the Stock Plan.
The Stock Plan is administered by the
Board of Directors and the Compensation Committee. Subject to the provisions of the Stock Plan, the Board of Directors and the
Compensation Committee each has the authority to select the persons to whom awards are granted and determine the terms of each
award, including the number of shares of common stock subject to the award. Payment of the exercise price of an award may be made
in cash, in a “cashless exercise” through a broker, or if the applicable stock option agreement permits, shares of
common stock or by any other method approved by the Board of Directors or Compensation Committee. Unless otherwise permitted by
the Company, awards are not assignable or transferable except by will or the laws of descent and distribution.
Upon the consummation of an acquisition
of the business of the Company, by merger or otherwise, the Board of Directors shall, as to outstanding awards (on the same basis
or on different bases as the Board of Directors shall specify), make appropriate provision for the continuation of such awards
by the Company or the assumption of such awards by the surviving or acquiring entity and by substituting on an equitable basis
for the shares then subject to such awards either (a) the consideration payable with respect to the outstanding shares of
common stock in connection with the acquisition, (b) shares of stock of the surviving or acquiring corporation or (c) such
other securities or other consideration as the Board of Directors deems appropriate, the fair market value of which (as determined
by the Board of Directors in its sole discretion) shall not materially differ from the fair market value of the shares of common
stock subject to such awards immediately preceding the acquisition. In addition to or in lieu of the foregoing, with respect to
outstanding stock options, the Board of Directors may, on the same basis or on different bases as the Board of Directors shall
specify, upon written notice to the affected optionees, provide that one or more options then outstanding must be exercised, in
whole or in part, within a specified number of days of the date of such notice, at the end of which period such options shall
terminate, or provide that one or more options then outstanding, in whole or in part, shall be terminated in exchange for a cash
payment equal to the excess of the fair market value (as determined by the Board of Directors in its sole discretion) for the
shares subject to such Options over the exercise price thereof. Unless otherwise determined by the Board of Directors (on the
same basis or on different bases as the Board of Directors shall specify), any repurchase rights or other rights of the Company
that relate to a stock option or other award shall continue to apply to consideration, including cash, that has been substituted,
assumed or amended for a stock option or other award pursuant to these provisions. The Company may hold in escrow all or any portion
of any such consideration in order to effectuate any continuing restrictions.
The Board of Directors may at any time
provide that any stock options shall become immediately exercisable in full or in part, that any restricted stock awards shall
be free of some or all restrictions, or that any other stock-based awards may become exercisable in full or in part or free of
some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.
The Board of Directors or Compensation
Committee may, in its sole discretion, amend, modify or terminate any award granted or made under the Stock Plan, so long as such
amendment, modification or termination would not materially and adversely affect the participant.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table provides information
as of December 31, 2011, regarding common stock that may be issued under the Company’s equity compensation plans. Information
is included for both equity compensation plans approved by the Company’s stockholders and not approved by the Company’s
stockholders (which date back to before the Company became a reporting company under the Exchange Act).
|
|
Number of securities
|
|
|
|
|
|
Number of securities remaining
|
|
|
|
to be issued upon
|
|
|
Weighted-average
|
|
|
available for future issuance
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
under equity compensation plans
|
|
|
|
outstanding options,
|
|
|
outstanding options,
|
|
|
(excluding securities reflected in
|
|
Plan category
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
second column)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
3,590,000
|
|
|
$
|
0.90
|
|
|
|
910,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
3,590,000
|
|
|
$
|
0.90
|
|
|
|
910,000
|
|
In December 2011, our management conducted
an assessment of the risks associated with our compensation policies and practices. This process included a review of our compensation
programs, a discussion of the types of practices that could be reasonably likely to create material risks, and an analysis of
the potential effects on the Company on related risks as a whole.
Although we reviewed all of our compensation
programs, we paid particular attention to programs involving incentive-based payouts and programs that involve our executive officers.
During the course of our assessment, we consulted with the Compensation Committee of our Board of Directors.
We believe that our compensation programs
are designed to create appropriate incentives without encouraging excessive risk taking by our employees. In this regard, our
compensation structure contains various features intended to mitigate risk. For example:
|
·
|
A
portion of the
compensation package
for our sales-based
employees consists
of commissions
for units sold
and installed,
which package is
designed to link
an appropriate
portion of compensation
to long-term performance,
while providing
a balanced compensation
model overall.
|
|
·
|
The
Compensation Committee
oversees our compensation
policies and practices
and is responsible
for reviewing and
approving executive
compensation, annual
incentive compensation
plans applicable
to sales employees
and other compensation
plans.
|
Our Compensation Committee, in its evaluation,
determined that the Company does not employ any compensation plans or practices that create incentives for employees to deliver
short-term profits at the expense of generating systematic risks for the Company. Based on this and the assessment described above,
we have concluded that the risks associated with our compensation policies and practices are not reasonably likely to have a material
adverse effect on the Company.
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
Mr. Hamblyn has a service agreement governed
by and construed in accordance with the laws of England and Wales. Mr. Hamblyn’s service agreement includes a basic salary
of one hundred and one thousand, five hundred British Pounds sterling (£101,500) per annum for the performance of his duties
and a first year bonus equal up to 12% of the first year basic salary for goals met. In addition Mr. Hamblyn shall be entitled
to receive five hundred and fifty British Pounds sterling (£550) per month to purchase benefits such as medical, pension
and vehicle of his choosing, of which he shall provide appropriate evidence to the Company in respect of such benefits obtained.
The Company, or Mr. Hamblyn, may terminate the employment by giving to the other six month notice in writing.
Other than Mr. Hamblyn, none of our officers
has an employment or service contract or change-in-control arrangement, other than stock and option awards that contain certain
change-in-control provisions such as accelerated vesting due to acquisition. In the event an acquisition that is not a private
transaction occurs while the optionee maintains a business relationship with the Company and the option has not fully vested,
the option will become exercisable for 100% of the then number of shares as to which it has not vested and such vesting to occur
immediately prior to the closing of the acquisition.
Our option awards contain certain accelerated
vesting due to acquisition provisions, which are described below:
Accelerated Vesting Due to Acquisition
Our option award agreements provide
for accelerated vesting due to acquisition. In the event an acquisition that is not a private transaction occurs while the optionee
maintains a business relationship with the Company and his option has not fully vested, this option shall become exercisable for
100% of the then number of shares as to which it has not vested, such vesting to occur immediately prior to the closing of the
acquisition.
Option Awards Change in Control Definition
Definitions. The following definitions
shall apply:
Acquisition means (1) the sale of the
Company by merger in which the shareholders of the Company in their capacity as such no longer own a majority of the outstanding
equity securities of the Company (or its successor); or (2) any sale of all or substantially all of the assets or capital stock
of the Company (other than in a spin-off or similar transaction) or (3) any other acquisition of the business of the Company,
as determined by the Board.
Business relationship means service
to the Company or its successor in the capacity of an employee, officer, director or consultant.
Private transaction means any acquisition
where the consideration received or retained by the holders of the then outstanding capital stock of the Company does not consist
of (1) cash or cash equivalent consideration, (2) securities which are registered under the Securities Act or any successor statute
and/or (3) securities for which the Company or any other issuer thereof has agreed, including pursuant to a demand, to file a
registration statement within ninety (90) days of completion of the transaction for resale to the public pursuant to the Securities
Act.
Director Independence
The Company’s policy is that a
majority of our Board of Directors shall be “independent” in accordance with NYSE MKT rules (even though the Company
is not currently subject to those requirements) including, in the judgment of the Board of Directors, the requirement that such
directors have no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization
that has a relationship with the Company). The following is a non-exclusive list of persons who shall not be considered independent:
|
a)
|
a director who is, or during the past three years was,
employed by the Company, other than prior employment as an interim
executive officer (provided the interim employment did not last
longer than one year);
|
|
b)
|
a director who accepted or has an immediate family member
who accepted any compensation from the Company in excess of $120,000
during any period of twelve consecutive months within the three
years preceding the determination of independence, other than
the following:
|
|
(i)
|
compensation for board or board committee service;
|
|
(ii)
|
compensation paid to an immediate family member who is
an employee (other than an executive officer) of the Company;
|
|
(iii)
|
compensation received for former service as an interim
executive officer (provided the interim employment did not
last longer than one year); or
|
|
(iv)
|
benefits under a tax-qualified retirement plan, or non-discretionary
compensation;
|
|
(c)
|
a director who is an immediate family member of an individual
who is, or at any time during the past three years was, employed
by the Company as an executive officer;
|
|
(d)
|
a director who is, or has an immediate family member who
is, a partner in, or a controlling shareholder or an executive
officer of, any organization to which the Company made, or from
which the Company received, payments (other than those arising
solely from investments in the Company's securities or payments
under non-discretionary charitable contribution matching programs)
that exceed 5% of the organization's consolidated gross revenues
for that year, or $200,000, whichever is more, in any of the
most recent three fiscal years;
|
|
(e)
|
a director who is, or has an immediate family member who
is, employed as an executive officer of another entity where
at any time during the most recent three fiscal years any of
the issuer's executive officers serve on the compensation committee
of such other entity; or
|
|
(f)
|
a director who is, or has an immediate family member who
is, a current partner of the Company's outside auditor, or was
a partner or employee of the Company's outside auditor who worked
on the Company's audit at any time during any of the past three
years.
|
Ownership of a significant amount of
the Company’s stock, by itself, does not constitute a material relationship. For relationships not covered by these standards,
the determination of whether a material relationship exists shall be made by the other members of the Board of Directors who are
independent (as defined above).
Under the Company’s independence
standards, the following directors are independent: Mr. Bruno Meier, Mr. Ahmed F. Ghoniem and Mr. James Devas.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as
of October 16, 2012, certain information with respect to the beneficial ownership of the Company's common stock by
(1) any person (including any “group” as set forth in Section 13(d)(3) of the Exchange Act, known
by us to be the beneficial owner of more than 5% of any class of our common stock, (2) each director, (3) each of
the named executive officers and (4) all of our current directors and executive officers as a group. The percentages in
the following table are based on 54,362,100 shares of common stock issued and outstanding as of October 16,
2012.
|
|
Number of
|
|
|
%
|
|
|
|
Shares
|
|
|
of Shares
|
|
Name and address of
|
|
Beneficially
|
|
|
Beneficially
|
|
beneficial owner
|
|
Owned
|
|
|
Owned
|
|
|
|
|
|
|
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
American DG Energy Inc. (1)
|
|
|
45,000,000
|
|
|
|
82.8
|
%
|
Nettlestone Enterprises Limited (2)
|
|
|
5,300,000
|
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
Directors & Officers:
(3)
|
|
|
|
|
|
|
|
|
John N. Hatsopoulos (4)
|
|
|
50,000
|
|
|
|
0.1
|
%
|
Barry J. Sanders (5)
|
|
|
375,000
|
|
|
|
0.7
|
%
|
Anthony S. Loumidis (6)
|
|
|
68,750
|
|
|
|
0.1
|
%
|
Paul J. Hamblyn
|
|
|
-
|
|
|
|
0.0
|
%
|
Dr. Ahmed F. Ghoniem (7)
|
|
|
25,000
|
|
|
|
0.0
|
%
|
James C. Devas (8)
|
|
|
25,000
|
|
|
|
0.0
|
%
|
Bruno Meier (9)
|
|
|
25,000
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (7 persons)
|
|
|
568,750
|
|
|
|
1.0
|
%
|
|
(1)
|
The address of American DG Energy Inc. is 45 First Avenue,
Waltham, Massachusetts 02451.
|
|
(2)
|
The address of Nettlestone Enterprises Limited is: P.O.
Box 665 Roseneath, The Grange, St. Peter Port, Guernsey GY1-3SJ,
Channel Islands. Messrs. M.T.R Betley, M.S. Heyworth and J.R.
Plimley are the directors of the company and may be deemed to
exercise voting and/or dispositive power with respect to these
shares.
|
|
(3)
|
The address of the directors and officers listed in the
table above is: c/o EuroSite Power Inc., 45 First Avenue, Waltham,
Massachusetts 02451.
|
|
(4)
|
Includes: (a) 25,000 shares of common stock, par value
$0.001 per share, held by John N. Hatsopoulos and (b) options
to purchase 25,000 shares of common stock exercisable within
60 days of the date of this prospectus.
|
|
(5)
|
Includes options to purchase 375,000 shares of common
stock exercisable within 60 days of the date of this prospectus.
|
|
(6)
|
Includes options to purchase 68,750 shares of common stock
exercisable within 60 days of the date of this prospectus.
|
|
(7)
|
Includes options to purchase 25,000 shares of common stock
exercisable within 60 days of the date of this prospectus.
|
|
(8)
|
Includes options to purchase 25,000 shares of common stock
exercisable within 60 days of the date of this prospectus.
|
|
(9)
|
Includes options to purchase 25,000 shares of common stock
exercisable within 60 days of the date of this prospectus.
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
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, 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,
Tecogen, Ilios Pharos and Levitronix 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 (d) an
investor of GlenRose Instruments and holds 15.7% of the company’s common stock, (e) an investor of Pharos and holds 24.4%
of the company’s common stock and (f) an investor of Levitronix and holds 21.4% 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 June 30, 2012 and December 31, 2011, the Company had an inventory
balance of $262,825 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 shares 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. Mr. Loumidis was a FINRA registered representative with Scarsdale
Equities LLC from August 2005 until September 2011.
Francis A. Mlynarczyk, Jr. is a
director of American DG Energy, which is the Company’s parent, and is the Registered Principal and Managing Partner of
Scarsdale Equities LLC, which is the placement agent in connection with this offering. More information in connection with
the sale of the securities offered hereby and the placement agency agreement can be found under “Plan of
Distribution” beginning on page 15.
The Company’s headquarters are located
in Waltham, Massachusetts, and consist of 3,071 square feet of office and storage space that is leased from Tecogen to American
DG Energy and is part of a 43,000 square feet office and manufacturing building which is also the headquarters of American DG
Energy, Tecogen, Ilios, GlenRose Instruments, Pharos, Levitronix and other companies not affiliated with the Company. The lease
expires on March 31, 2014. American DG Energy is not currently charging us for utilizing our share of office space in the United
States since it believes it is insignificant. We believe that our facilities are appropriate and adequate for our current needs
Where
You Can Find More Information
We file annual, quarterly and current
reports, proxy statements and other information with the SEC. The SEC maintains a web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC, such as us, at http://www.sec.gov. You
can also inspect and copy these reports, proxy statements and other information at the SEC’s Public Reference Room at 100
F Street, N.E., Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 for further information on the Public Reference
Room.
Our web site is located at http://www.eurositepower.co.uk.
The information contained on our web site is not part of this prospectus.
FINANCIAL STATEMENTS
The Financial
Statements included below are stated in U.S. dollars and are prepared in accordance with U.S. Generally Accepted Accounting Principles.
The following table summarizes the relevant financial data for our business and should be read with our financial
statements, which are included in this registration statement.
Unaudited Interim Financial Statements
|
|
|
|
Condensed Consolidated Balance Sheets –
June 30, 2012 and December 31, 2011 (unaudited)
|
F-2
|
|
|
Condensed Consolidated Statements of Operations –
Three Months Ended June 30, 2012 and June 30, 2011 (unaudited)
|
F-3
|
|
|
Condensed Consolidated Statements of Operations –
Six Months Ended June 30, 2012 and June 30, 2011 (unaudited)
|
F-4
|
|
|
Condensed Consolidated Statements of Changes in Stockholders’ Equity –
Six Months Ended June 30, 2012 and December 31, 2011 (unaudited)
|
F-5
|
|
|
Condensed Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2012 and June 30, 2011 (unaudited)
|
F-6
|
|
|
Notes to Condensed Consolidated Financial Statements
|
F-7
|
|
|
Audited Financial Statements
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-15
|
|
|
Consolidated Balance Sheets –
December 31, 2011 and December 31, 2010
|
F-16
|
|
|
Consolidated Statements of Operations –
December 31, 2011 and for the period from inception (July 9, 2010) to December 31, 2010
|
F-17
|
|
|
Consolidated Statements of Stockholders’ Equity –
December 31, 2011 and for the period from inception (July 9, 2010) to December 31, 2010
|
F-18
|
|
|
Consolidated Statements of Cash Flows –
December 31, 2011 and for the period from inception (July 9, 2010) to December 31, 2010
|
F-19
|
|
|
Notes to Consolidated Financial Statements
|
F-20
|
All other schedules for which provision
is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable,
and therefore have been omitted.
EUROSITE POWER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2012 and December 31,
2011 (unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,202,543
|
|
|
$
|
2,338,783
|
|
Accounts receivable
|
|
|
32,770
|
|
|
|
-
|
|
Value added tax receivable
|
|
|
39,138
|
|
|
|
77,197
|
|
Inventory
|
|
|
262,825
|
|
|
|
137,976
|
|
Other current assets
|
|
|
38,652
|
|
|
|
19,721
|
|
Total current assets
|
|
|
1,575,928
|
|
|
|
2,573,677
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net
|
|
|
430,181
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
2,006,109
|
|
|
$
|
2,578,253
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
145,491
|
|
|
$
|
57,349
|
|
Accrued expenses and other
current liabilities
|
|
|
23,901
|
|
|
|
48,016
|
|
Total current liabilities
|
|
|
169,392
|
|
|
|
105,365
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
169,392
|
|
|
|
105,365
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized; 54,362,100 issued and outstanding at June 30, 2012 and December 31, 2011, respectively
|
|
|
54,362
|
|
|
|
54,362
|
|
Additional paid-in capital
|
|
|
4,091,745
|
|
|
|
3,839,753
|
|
Accumulated deficit
|
|
|
(2,309,390
|
)
|
|
|
(1,421,227
|
)
|
Total stockholders’
equity
|
|
|
1,836,717
|
|
|
|
2,472,888
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,006,109
|
|
|
$
|
2,578,253
|
|
See Notes to unaudited Condensed Consolidated
Financial Statements
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
For the Three Months Ended June 30,
2012 and June 30, 2011
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Energy revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Turnkey & other revenues
|
|
|
27,594
|
|
|
|
-
|
|
|
|
|
27,594
|
|
|
|
-
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Fuel, maintenance and installation
|
|
|
20,104
|
|
|
|
-
|
|
Depreciation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
20,104
|
|
|
|
-
|
|
Gross profit
|
|
|
7,490
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
196,645
|
|
|
|
182,081
|
|
Selling
|
|
|
282,445
|
|
|
|
-
|
|
Engineering
|
|
|
33,992
|
|
|
|
-
|
|
|
|
|
513,082
|
|
|
|
182,081
|
|
Loss from operations
|
|
|
(505,592
|
)
|
|
|
(182,081
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
4,173
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,173
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(501,419
|
)
|
|
|
(182,081
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(501,419
|
)
|
|
$
|
(182,081
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic and diluted
|
|
|
54,362,100
|
|
|
|
54,316,496
|
|
See Notes to unaudited Condensed Consolidated
Financial Statements
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
For the Six Months Ended June 30, 2012
and June 30, 2011
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Energy revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Turnkey & other revenues
|
|
|
27,594
|
|
|
|
-
|
|
|
|
|
27,594
|
|
|
|
-
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Fuel, maintenance and installation
|
|
|
20,104
|
|
|
|
-
|
|
Depreciation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
20,104
|
|
|
|
-
|
|
Gross profit
|
|
|
7,490
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
575,807
|
|
|
|
320,116
|
|
Selling
|
|
|
294,995
|
|
|
|
-
|
|
Engineering
|
|
|
33,992
|
|
|
|
-
|
|
|
|
|
904,794
|
|
|
|
320,116
|
|
Loss from operations
|
|
|
(897,304
|
)
|
|
|
(320,116
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
9,141
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
9,141
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(888,163
|
)
|
|
|
(320,116
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(888,163
|
)
|
|
$
|
(320,116
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic and diluted
|
|
|
54,362,100
|
|
|
|
53,790,001
|
|
See Notes to unaudited Condensed Consolidated
Financial Statements
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2012
and December 31, 2011 (unaudited)
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001 Par Value
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
54,362,100
|
|
|
$
|
54,362
|
|
|
$
|
3,839,753
|
|
|
$
|
(1,421,227
|
)
|
|
$
|
2,472,888
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
251,992
|
|
|
|
-
|
|
|
|
251,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(888,163
|
)
|
|
|
(888,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2012
|
|
|
54,362,100
|
|
|
$
|
54,362
|
|
|
$
|
4,091,745
|
|
|
$
|
(2,309,390
|
)
|
|
$
|
1,836,717
|
|
See
Notes to unaudited Condensed Consolidated Financial Statements
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
For the Six Months Ended June 30, 2012
and June 30, 2011
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(888,163
|
)
|
|
$
|
(320,116
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
710
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
251,992
|
|
|
|
200,051
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(32,770
|
)
|
|
|
-
|
|
Value added tax receivable
|
|
|
38,059
|
|
|
|
-
|
|
Inventory
|
|
|
(124,849
|
)
|
|
|
(44,125
|
)
|
Prepaid and other current assets
|
|
|
(18,931
|
)
|
|
|
-
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
88,142
|
|
|
|
42,501
|
|
Due to related party
|
|
|
-
|
|
|
|
(122,720
|
)
|
Accrued expenses and other current liabilities
|
|
|
(24,115
|
)
|
|
|
88,666
|
|
Net cash used in operating activities
|
|
|
(709,925
|
)
|
|
|
(155,743
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(426,315
|
)
|
|
|
(1,347
|
)
|
Net cash used in investing activities
|
|
|
(426,315
|
)
|
|
|
(1,347
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net of costs
|
|
|
-
|
|
|
|
1,148,401
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
1,148,401
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,136,240
|
)
|
|
|
991,311
|
|
Cash and cash equivalents, beginning of the period
|
|
|
2,338,783
|
|
|
|
2,234,551
|
|
Cash and cash equivalents, end of the period
|
|
$
|
1,202,543
|
|
|
$
|
3,225,862
|
|
See
Notes to unaudited Condensed Consolidated Financial Statements
Notes to Interim Unaudited Condensed Consolidated Financial
Statements for the period ending June 30, 2012
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 six month period ended June 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 June 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 $2.3 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 and future cash flow from operations and its ability to control certain costs,
including those related to general and administrative expenses, 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. Beyond June 30, 2013, the Company may need to raise
additional capital through a debt financing or equity offering 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.
Since its inception to June 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 Statement 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 June 30, 2012, the Company had a balance of
$1,202,543 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.
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 June 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 June 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. There were no dilutive common shares during the three and six month period ended June 30, 2012 and 2011, respectively,
because of the reported net loss.
Other Comprehensive Net Loss
The comprehensive net loss for the periods
ending June 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 June 30, 2012, the Company had
$262,825, in inventory which consisted of finished goods. As of June 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 June 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 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
June 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 six month period ending June
30, 2012, the Company had 3,590,000 options outstanding and recognized employee non-cash compensation expense of $251,992 related
to the issuance of those stock options. At June 30, 2012, the total compensation cost related to unvested stock option awards
not yet recognized was $707,193. This amount will be recognized over the weighted average period of 2.89 years.
Stock option activity as of and for
the six month period ending June 30, 2012 was as follows:
|
|
|
|
|
Exercise
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Per
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Common stock Options
|
|
Options
|
|
|
Share
|
|
|
Price
|
|
|
Life
|
|
|
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, June 30, 2012
|
|
|
3,590,000
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
|
8.84
years
|
|
|
$
|
-
|
|
Exercisable, June 30, 2012
|
|
|
597,500
|
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
|
|
$
|
-
|
|
Vested and expected to vest, June 30, 2012
|
|
|
3,590,000
|
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
|
|
$
|
-
|
|
The aggregate intrinsic value of options
outstanding as of June 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 June 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 six month periods ended June 30, 2012 and 2011, respectively was as follows:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to stockholders
|
|
$
|
(501,419
|
)
|
|
$
|
(182,081
|
)
|
|
$
|
(888,163
|
)
|
|
$
|
(320,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
|
|
54,362,100
|
|
|
|
54,316,496
|
|
|
|
54,362,100
|
|
|
|
53,790,001
|
|
Basic and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares underlying warrants outstanding*
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
400,000
|
|
Anti-dilutive shares underlying stock options outstanding
|
|
|
3,590,000
|
|
|
|
2,400,000
|
|
|
|
3,590,000
|
|
|
|
2,400,000
|
|
*Note: The warrants expired on July 12, 2012.
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 Inc., or 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, Ilios, Pharos LLC, or Pharos and Levitronix Technologies LLC, or Levitronix, 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 , (e) an investor of Pharos and holds 24.4% of the company’s common stock and (f) an investor
of Levitronix and holds 21.4% 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 June 30, 2012 and December 31, 2011, the Company had an inventory
balance of $262,825 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 shares 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. Mr. Loumidis was a FINRA registered representative with Scarsdale
Equities LLC from August 2005 until September 2011.
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 not currently charging the Company
for utilizing its share of office space in the United States since it believes it is insignificant. The Company currently does
not occupy any office space in the United Kingdom or Europe but intends to do so in the future. 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 June 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:
On July 25,
2012, the Company announced that
its Common stock was being quoted on the OTCQB tier of the OTC Markets under the
ticker symbol “EUSP”.
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.
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of
EuroSite Power Inc.
We have audited the
accompanying consolidated balance sheets of EuroSite Power Inc. (the “Company”) as of December 31, 2011 and 2010 and
the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31,
2011 and for the period from inception (July 9, 2010) to December 31, 2010. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based
on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above, present fairly, in all material respects, the financial position of the Company
at December 31, 2011 and 2010 and the results of their operations and their cash flows for the periods then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ MCGLADREY & PULLEN, LLP
|
|
|
|
Boston, Massachusetts
|
|
March 23, 2012
|
|
EUROSITE POWER INC.
CONSOLIDATED BALANCE SHEETS
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,338,783
|
|
|
$
|
2,234,551
|
|
Value added tax receivable
|
|
|
77,197
|
|
|
|
-
|
|
Inventory
|
|
|
137,976
|
|
|
|
128,406
|
|
Other current assets
|
|
|
19,721
|
|
|
|
-
|
|
Total current assets
|
|
|
2,573,677
|
|
|
|
2,362,957
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
4,576
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,578,253
|
|
|
$
|
2,362,957
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
57,349
|
|
|
$
|
7,689
|
|
Due to related party
|
|
|
-
|
|
|
|
122,720
|
|
Accrued expenses and other current liabilities
|
|
|
48,016
|
|
|
|
1,334
|
|
Total current liabilities
|
|
|
105,365
|
|
|
|
131,743
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
105,365
|
|
|
|
131,743
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized; 54,362,100 and 52,261,000 issued and outstanding
at December 31, 2011 and 2010, respectively
|
|
|
54,362
|
|
|
|
52,261
|
|
Additional paid-in capital
|
|
|
3,839,753
|
|
|
|
2,218,758
|
|
Accumulated deficit
|
|
|
(1,421,227
|
)
|
|
|
(39,805
|
)
|
Total stockholders’ equity
|
|
|
2,472,888
|
|
|
|
2,231,214
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,578,253
|
|
|
$
|
2,362,957
|
|
The accompanying notes are an integral
part of these consolidated financial statements
EUROSITE POWER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Energy revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Turnkey & other revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Fuel, maintenance and installation
|
|
|
-
|
|
|
|
-
|
|
Depreciation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
854,502
|
|
|
|
39,805
|
|
Selling
|
|
|
527,253
|
|
|
|
-
|
|
Engineering
|
|
|
-
|
|
|
|
-
|
|
|
|
|
1,381,755
|
|
|
|
39,805
|
|
Loss from operations
|
|
|
(1,381,755
|
)
|
|
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
333
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
333
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,381,422
|
)
|
|
|
(39,805
|
)
|
Provision for state income taxes
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(1,381,422
|
)
|
|
$
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic and diluted
|
|
|
54,078,401
|
|
|
|
52,046,867
|
|
The accompanying notes are an integral
part of these consolidated financial statements
EUROSITE POWER INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.001 Par Value
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at inception, July 9, 2010
|
|
|
50,000,000
|
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
50,000
|
|
Sale of common stock, net of costs
|
|
|
2,261,000
|
|
|
|
2,261
|
|
|
|
2,218,758
|
|
|
|
-
|
|
|
|
2,221,019
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,805
|
)
|
|
|
(39,805
|
)
|
Balance at December 31, 2010
|
|
|
52,261,000
|
|
|
$
|
52,261
|
|
|
$
|
2,218,758
|
|
|
$
|
(39,805
|
)
|
|
$
|
2,231,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock, net of costs
|
|
|
1,250,000
|
|
|
|
1,250
|
|
|
|
1,147,151
|
|
|
|
-
|
|
|
|
1,148,401
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
474,695
|
|
|
|
-
|
|
|
|
474,695
|
|
Common stock dividend declared, Note 8
|
|
|
851,100
|
|
|
|
851
|
|
|
|
(851
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,381,422
|
)
|
|
|
(1,381,422
|
)
|
Balance at December 31, 2011
|
|
|
54,362,100
|
|
|
$
|
54,362
|
|
|
$
|
3,839,753
|
|
|
$
|
(1,421,227
|
)
|
|
$
|
2,472,888
|
|
The accompanying notes are an integral
part of these consolidated financial statements
EUROSITE POWER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,381,422
|
)
|
|
$
|
(39,805
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
474,695
|
|
|
|
-
|
|
Changes in operating assets and liabilities
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Value added tax receivable
|
|
|
(77,197
|
)
|
|
|
|
|
Inventory
|
|
|
(9,570
|
)
|
|
|
(128,406
|
)
|
Prepaid and other current assets
|
|
|
(19,721
|
)
|
|
|
-
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
49,660
|
|
|
|
7,689
|
|
Due to related party
|
|
|
(122,720
|
)
|
|
|
122,720
|
|
Accrued expenses and other current liabilities
|
|
|
46,682
|
|
|
|
1,334
|
|
Net cash used in operating activities
|
|
|
(1,039,593
|
)
|
|
|
(36,468
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,576
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(4,576
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net of costs
|
|
|
1,148,401
|
|
|
|
2,271,019
|
|
Net cash provided by financing activities
|
|
|
1,148,401
|
|
|
|
2,271,019
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
104,232
|
|
|
|
2,234,551
|
|
Cash and cash equivalents, beginning of the year
|
|
|
2,234,551
|
|
|
|
-
|
|
Cash and cash equivalents, end of the year
|
|
$
|
2,338,783
|
|
|
$
|
2,234,551
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Stock dividend declared
|
|
$
|
(851
|
)
|
|
$
|
-
|
|
The accompanying notes are an integral
part of these consolidated financial statements
Notes to Condensed Consolidated Financial Statements
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. The Company estimates that its first revenues from equipment
installations in the United Kingdom and the European market will be generated by the fourth quarter of 2012.
Principles of Consolidation and Basis of Presentation
The following
significant accounting policies are either currently in effect or are anticipated to become effective as the Company commences
its normal business activities.
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 December 31, 2011 American DG Energy owned an 82.8% interest in
the Company and consolidates the Company into its financial statements in accordance with Generally Accepted Accounting Principles,
or 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 $1.4 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 cash
and cash equivalents available at December 31, 2011 and its ability to control certain costs, including those related to general
and administrative expenses, will enable it to meet its anticipated cash expenditures through March 31, 2013. Beyond March 31,
2013, the Company may need to raise additional capital through a debt financing or equity offering 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.
Since its inception to December 31,
2011, 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 in 2012 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.
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
Consolidated Statement of Operations. Such amounts were immaterial for all periods presented.
Reclassifications
Certain prior period balances have been
reclassified to conform with current period presentation.
Use of Estimates in Preparation of Statements
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 accompanying consolidated statements of operations. Revenues from operation,
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, 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 deposit insurance limits. The financial stability
of these institutions is continually reviewed by senior management. As of December 31, 2011, the Company had a balance of $2,338,783
in cash and cash equivalents and short-term investments. The Company believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Accounts Receivable
The Company will maintain 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 will be established based upon factors surrounding the credit risk
of specific customers, historical trends and other information. Bad debt will be written off when identified by management.
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
The Company’s entire cogeneration
unit purchases for the periods ending December 31, 2011 and 2010, 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 December 31, 2011 and 2010, 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. For the
period ending December 31, 2011, the Company excluded 4,000,000 anti-dilutive shares resulting from exercise of stock options
and warrants, and for the period ended December 31, 2010, the Company excluded 400,000 anti-dilutive shares resulting from the
exercise of warrants. All shares issuable for both periods were anti-dilutive because of the reported net loss.
Other Comprehensive Net Loss
The comprehensive net loss for the periods
ending December 31, 2011 and 2010, 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.
Fair Value of Financial Instruments
The Company’s financial instruments
are cash and cash equivalents and accounts payable. The recorded values of cash and cash equivalents and accounts payable approximate
their fair values based on their short-term nature.
Impact of New Accounting Pronouncements
The Company does not expect the impact
of recently issued accounting pronouncements to have a material impact on the Company’s results of operations, financial
position or cash flows.
Note 2 — Inventory:
As of December 31, 2011 and 2010, the
Company had $137,976 and $128,406, respectively, in inventory which consisted of finished goods. As of December 31, 2011 and 2010,
there were no reserves 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 will also adjust the price of its outstanding
stock option awards and warrants to $0.90 per share due to the payment of the dividend. The Company has 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 December 31, 2011, 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. 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. 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.
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 900,000 at
December 31, 2011.
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 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.
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 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.
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, the per share purchase price of the warrant was adjusted
to $0.90.
At December 31, 2011, the Company had
3,600,000 options outstanding and recognized employee non-cash compensation expense of $474,695 related to the issuance of those
stock options. At December 31, 2011, the total compensation cost related to unvested stock option awards not yet recognized was
$848,917. This amount will be recognized over the weighted average period of 3.34 years.
Stock option activity for the years
ended December 31, 2011 and 2010 was as follows:
|
|
|
|
|
Exercise
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Per
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Common stock Options
|
|
Options
|
|
|
Share
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
3,600,000
|
|
|
$
|
1.00
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
3,600,000
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
9.34
years
|
|
|
$
|
-
|
|
Exercisable, December 31, 2011
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Vested and expected to vest, December 31, 2011
|
|
|
3,600,000
|
|
|
|
|
|
|
$
|
1.00
|
|
|
|
|
|
|
$
|
-
|
|
The aggregate intrinsic value of options
outstanding as of December 31, 2011 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.
Note 4 — Earnings per share:
Basic and diluted earnings per share
for the years ended December 31, 2011 and 2010 was as follows:
|
|
2011
|
|
|
2010
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Loss available to stockholders
|
|
$
|
(1,381,422
|
)
|
|
$
|
(39,805
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - Basic and diluted
|
|
|
54,078,401
|
|
|
|
52,046,867
|
|
Basic and diluted loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares underlying warrants outstanding
|
|
|
400,000
|
|
|
|
400,000
|
|
Anti-dilutive shares underlying stock options outstanding
|
|
|
3,600,000
|
|
|
|
-
|
|
The common stock dividend has been retroactively
applied to each of the periods ended December 31, 2011 and 2010, respectively. See Note 8 – Subsequent events.
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 Inc., or Tecogen, an affiliate of the Company,
which manufactures natural gas, engine-driven commercial and industrial cooling and cogeneration systems, and from 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, Ilios, Pharos LLC, or Pharos and Levitronix Technologies LLC, or Levitronix, 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 12.2% of the company’s common stock, (b) the Chief Executive
Officer and director of Tecogen and holds 27.6% 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 14.7%
of the company’s common stock, (b) a director of Tecogen and holds 26.2% of the company’s common stock, (c) an investor
in Ilios and holds 2.9% of the company’s common stock and (d) a director of GlenRose Instruments and holds 15.7% of the
company’s common stock, (e) an investor of Pharos and holds 24.4% of the company’s common stock and (f) an investor
of Levitronix and holds 21.4% of the company’s common stock.
American DG Energy signed a Facilities
and Support Services Agreement with Tecogen on January 1, 2006, as amended
.
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.
On January 4, 2010, American DG Energy
entered into an agreement with Nettlestone Enterprises Limited (formerly known as Codale Ltd.), whereby Nettlestone Enterprises
Limited provided American DG Energy an amount up to two hundred fifty thousand British Pounds sterling (£250,000) to cover
expenses incurred in connection with an investigation and research effort for the development of the Company’s business
in European markets. Upon the Company’s formation in July 2010, the Company sold to Nettlestone Enterprises Limited 5,000,000
shares of Common stock for $5,000.
On December 13, 2010, the Company purchased
an energy system from American DG Energy for demonstration purposes and shipped it to the United Kingdom. The Company bought the
energy system at cost, without markup, for $128,406, and it was put into inventory. As of December 31, 2011, the Company’s
inventory balance increased to $137,976 as compared to $128,406 at December 31, 2010, resulting in a decrease of cash by $9,570
due to additional costs for shipping the energy system to the United Kingdom and costs for payment of appropriate duties and taxes.
There were no enhancements or alterations done to the energy system between the two periods.
On February 22, 2011, John N. Hatsopoulos,
the Company’s Chairman of the Board, purchased 25,000 shares 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 and George Hatsopoulos are brothers.
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. Mr. Loumidis was a FINRA registered representative with Scarsdale
Equities LLC from August 2005 until September 2011.
The Company’s headquarters are
located in Waltham, Massachusetts and consist of 2,971 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 not currently charging the Company
for utilizing its share of office space in the United States since it believes it is insignificant. The Company currently does
not occupy any office space in the United Kingdom or Europe but intends to do so in the future. 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
— 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 currently does not have any Level 2 financial
assets or liabilities.
Level 3
— Unobservable
inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company currently
does not have any Level 3 financial assets or liabilities.
Note 7 — Income taxes:
The Company did not record any income
tax benefit or tax provision at December 31, 2011 and 2010, respectively. A reconciliation of federal statutory income tax provision
to the Company’s actual provision for the years ended December 31, 2011 and 2010, respectively, is as follows:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Benefit at federal statutory tax rate
|
|
$
|
(469,000
|
)
|
|
$
|
(14,000
|
)
|
Unbenefited operating losses
|
|
|
469,000
|
|
|
|
14,000
|
|
Tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
The component
of net deferred tax assets recognized in the accompanying consolidated balance sheets at December 31, 2011 and 2010,
respectively, is as follows:
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
396,000
|
|
|
$
|
16,000
|
|
Accrued expenses and other
|
|
|
186,000
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(582,000
|
)
|
|
|
(16,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December
31, 2011, the Company has federal and state loss carryforwards of approximately $915,000 and $1,063,000, respectively, which may
be used to offset future federal and state taxable income, expiring at various dates through 2031.
Management has
determined that it is more likely than not that the Company will not recognize the benefits of the federal and state deferred
tax assets and as a result has recorded a valuation allowance against the entire deferred tax asset. If the Company should generate
sustained future taxable income, against which these tax attributes may be recognized, some portion or all of the valuation allowance
would be reversed.
The Company adopted FIN 48 at inception.
The adoption of this statement had no effect on the Company’s financial position. The Company has no uncertain tax positions
as of either the date of adoption, or as of December 31, 2011. The Company joins in the filing of a federal consolidated return
with its parent company, American DG Energy.
Note 8 — Subsequent events:
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 will also adjust the price of its outstanding
stock option awards and warrants to $0.90 per share due to the payment of the dividend. The Company has 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 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.
Eurosite Power (PK) (USOTC:EUSP)
Historical Stock Chart
From May 2024 to Jun 2024
Eurosite Power (PK) (USOTC:EUSP)
Historical Stock Chart
From Jun 2023 to Jun 2024