Note 1 — Description of business and summary of significant accounting policies:
Description of Business
EuroSite Power Inc., or 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. Our 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. We call 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 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 Securities And Exchange Commission, or 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 fiscal year ended
December 31, 2013
. The Company’s operating results for the
six
month period ended
June 30, 2014
, may not be indicative of the results expected for any succeeding interim periods or for the entire year ending
December 31, 2014
.
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, 2014
, American DG Energy owns a
70.7%
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. Occasionally the company will sell equipment or services to interested parties. All of the Company's revenue is generated in the United Kingdom. All of the Company's long lived assets are located in the United Kingdom.
The Company has experienced total net losses since inception of
$6.2 million
. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as its management executes its current business plan. The Company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, its ability to control certain costs, including those related to general and administrative expenses, and the use of capital from its parent company, will be sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next 12 months; however, as the Company continues to grow its business by adding more energy systems, the cash requirements will increase. Beyond
June 30, 2015
, the Company may need to raise additional capital through debt financing or use capital provided by its parent to meet its operating and capital needs.There can be no assurance, however, that the Company will be successful in these fund-raising efforts or that additional funds will be available on acceptable terms, if at all.
Since its inception to
June 30, 2014
, the Company has raised a total of
$5,896,000
through various private placements of Common Stock and
$5,450,000
through various private placements of Convertible Debentures. 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 and subsidiary are the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in the Condensed Consolidated Statements of Operations. Such amounts were immaterial for all periods presented.
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 is recognized when electricity, heat, and chilled water is produced by the cogeneration systems on-site. The Company bills each month based on various meter readings installed at each site. The amount of energy produced by on-site energy systems is invoiced, as determined by a contractually defined formula. Under certain energy contracts, the customer directly acquires the fuel to power the systems and receives credit for that expense from the Company. The credit is recorded as reduction of revenue and as a reduction of fuel cost. Revenues from operation, including shared savings are recorded when provided and verified. Maintenance service revenue is recognized over the term of the agreement and is billed on a monthly basis in arrears.
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 is 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. The Company had no such arrangements at
June 30, 2014
and
December 31, 2013
, respectively.
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. The Company had no such arrangements at
June 30, 2014
and
December 31, 2013
, respectively.
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 at
June 30, 2014
and
December 31, 2013
, respectively.
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 federal deposit insurance limits. The financial stability of these institutions is continually reviewed by senior management. As of
June 30, 2014
, the Company had a balance of
$1,892,186
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 has receivable balances due from its customers. The Company reviews its customers’ credit history before extending credit and generally does not require collateral. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Bad debts are written off when identified by management. At
June 30, 2014
and
December 31, 2013
, there were
no
allowance for doubtful accounts.
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. As of
June 30, 2014
and
December 31, 2013
, there were no reserves or write-downs recorded against inventory.
Supply Concentrations
Historically, most of the Company’s cogeneration units purchased were from one related vendor (see “Note 6 - Related parties”). For the periods ending
June 30, 2014
, the Company began to purchase co-generation equipment from a new unrelated vendor. The Company believes there are other 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 the shorter of the estimated useful life or the contract term. Repairs and maintenance are expensed as incurred.
The Company evaluates 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 is 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 reviews for impairment 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 are no longer appropriate. If impairment is indicated, the asset is 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
4
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 Company uses the simplified method for awards of stock-based compensation since it does not have the necessary historical exercise and forfeiture data to determine an expected life for stock options. 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 4 – 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, 2014
and
2013
, 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
June 30, 2014
, the Company excluded
13,128,333
anti-dilutive shares resulting from the exercise of stock options, warrants and debentures.
Other Comprehensive Net Loss
The comprehensive net loss for the periods ending
June 30, 2014
and
2013
, 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.
Impact of New Accounting Pronouncements
U.S. GAAP Accounting Guidance Issued But Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and the International Financial Reporting Standards. This guidance supersedes previously issued guidance on revenue recognition and gives a five step process an entity should follow so that the entity recognizes revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new guidance will be effective for our fiscal 2018 reporting period and must be applied either retrospectively during each prior reporting period presented or retrospectively with the cumulative effect of initially applying
this guidance recognized at the date of the initial application. Early adoption is not permitted. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements.
On July 2013, the FASB issued ASU 2013-11, “Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry
-
forward Exists” (a consensus of the FASB Emerging Issues Task Force), or ASU 2013-11. ASU 2013-11 requires the presentation of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward. This net presentation is required unless a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset to settle any additional income tax that would result from the disallowance of the unrecognized tax benefit. ASU 2013-11 is effective for fiscal years beginning after December 15, 2013, with early adoption permitted. We continue to evaluate the impact of this ASU on the Company's consolidated financial statements or financial statement disclosures.
Note 2 — Inventory:
As of
June 30, 2014
and
December 31, 2013
, the Company had
$18,916
and
$385,660
, respectively, in inventory which consisted of finished goods. As of
June 30, 2014
and
December 31, 2013
, there were
no
reserves or write downs recorded against inventory.
Note 3 — Convertible debentures:
On February 26, 2013, EuroSite Power issued a promissory note in the amount of
$1,100,000
to American DG Energy, its parent. Under the terms of the agreement Eurosite Power was to pay interest at a rate of
6%
per annum payable quarterly in arrears.
On June 14, 2013, the Company entered into subscription agreements with certain investors, including American DG Energy for a private placement of an aggregate principal amount of
$4,000,000
of
4.00%
Senior Unsecured Convertible Notes Due 2015, or the Notes. In connection with the private placement, American DG Energy exchanged a promissory note in the aggregate principal amount of
$1,100,000
, originally issued on February 26, 2013 (the "Old Note"), for a like principal amount of the Notes and cash paid for any accrued but unpaid interest on the Old Note.
The holders of the Notes are subject to and entitled to the benefits of the
4%
Senior Convertible Notes due 2015 Note-holders Agreement, dated June 14, 2013, or the Note-holders Agreement. The Notes will mature on June 14, 2015 and will accrue interest at the rate of
4.0%
per annum payable in cash on a semi-annual basis. At the Investor's option, the Notes may be converted into shares of the Company's common stock at an initial conversion rate of
1,000
shares of common stock per
$1,000
principal amount of Notes, subject to adjustment. At the scheduled maturity date, each of the Investors will have the following options: request payment of their principal amount and accrued interest in cash; extend the term of the Notes for an additional
3
years with an automatic decrease in interest rate to
3.0%
per annum; or exchange the Notes for a new non-convertible note with a
3
year maturity and a
6.0%
per annum interest rate; no accrued interest will be lost on such exchange. The Company evaluated the term-extending option and concluded that it was an embedded derivative with de minimis value. The Company has subsequently concluded that it is not considered a derivative under ASC 815-Derivatives and Hedging because the term extending feature is considered clearly and closely related to the Notes. Thus, this feature was not required to be bifurcated and no other initial accounting was required. The term-extending option has subsequently been eliminated pursuant to the note exchange agreements discussed herein.
The Notes are guaranteed on a subordinated basis by American DG Energy.
The Note-holder Agreement provides for customary events of default by the Company, including failure to pay interest within
ten
days of becoming due, failure to pay principal when due, failure to comply provisions of the Notes or the Note-holders Agreement, subject to cure, and certain events of bankruptcy or insolvency.
The holders of the Notes are entitled to the benefits of a registration rights agreement dated June 14, 2013 by and among the Company and the Note-holders named therein, or the Registration Rights Agreement. The Registration Rights Agreement provides for demand registration rights, such that upon the demand of
30.0%
of the holders of Registrable Securities, as defined in the Registration Rights Agreement and subject to certain conditions (including that the Company is eligible to use a Form S-3 registration statement and that such holders anticipate an aggregate offering price, net of selling expenses, of at least
$250,000
), the Company will file a Form S-3 registration statement covering the Registrable Securities
requested to be included in such registration, subject to adjustment, and use its commercially reasonable efforts to cause such registration statement to become effective. For additional disclosure see the Company's filings with the SEC.
Included among the investors subscribing for the Notes are: Bruno Meier, a director of the Company, in the amount of
$250,000
; Prime World Inc., a company controlled by Joan Giacinti, one of the Company's directors, in the amount of
$300,000
; Charles T. Maxwell, Chairman of the Board of Directors of American DG Energy, in the amount of
$250,000
; and Nettlestone Enterprises Limited, a shareholder of both the Company and American DG Energy, in the amount of
$300,000
.
The proceeds of the offering of the Notes will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
On February 20, 2014, the Company entered into a Note Exchange Agreement with American DG Energy, Inc. and other investors whereby the parties agreed to exchange the
$4,000,000
of
4.00%
Senior Unsecured Convertible Notes Due 2015 for New Notes.
The effect of the Note Exchange agreement (a) extended the maturity date from June 14, 2015 to June 14, 2017, (b) adjusted the conversion price of the notes which changed from 1,000 shares of the Company’s Common Stock for each
$1,000
of principal converted to
1,667
shares of the Company’s Common Stock for each
$1,000
of principal converted, and (c) eliminated the Holders’ options to extend the Notes. Management analyzed the impact of the Note Exchange Agreement and determined that the Notes and the New Notes were substantially different and, as a result, has recognized a loss on extinguishment of $
713,577
to recognize the excess of the fair value of the New Notes that were issued in the exchange over the carrying value of the Notes surrendered as well as debt issue costs. As a result of the application of extinguishment accounting, the Company has recorded the New Debt at fair value as of the date of the exchange. Because fair value of the debt is
$4,656,000
and the carrying value was
$4,000,000
, a premium of
$656,000
was established. The Company will apply the interest method of accounting to amortize the premium over the life of the New Note. The fair value of the New Notes was determined using a binomial lattice model. The following table provides quantitative information used in the valuation of the fair value measurement, including the assumptions for the significant unobservable inputs used in the
binomial lattice model valuation:
|
|
|
|
Notional amount
|
$4,000
|
Par amount
|
$1,000
|
Interest rate
|
4.0
|
%
|
Conversion ratio
|
1,667
|
|
Conversion price, per share
|
$0.60
|
Stock price as of the valuation date
|
$0.51
|
Historical realized weekly volatility
|
87
|
%
|
Risk free rate
|
0.9
|
%
|
Discrete dividend payment rate
|
—
|
%
|
Significant increases (decreases) in the significant unobservable inputs used in the fair value measurement of the New Notes would result in a significantly higher (lower) fair value measurement.
Effective April 15, 2014, the Company, entered into a subscription agreement with a European investor for the sale of a
$300,000
,
4%
Senior Convertible Note Due 2018. The Note will mature on April 15, 2018 and will accrue interest at the rate of
4%
per annum payable on a semi-annual basis. At the holder’s option, the Note may be converted into shares of the Company’s common stock at a conversion price of
$0.60
per share, subject to adjustment in certain circumstances. The proceeds of the Note will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
Effective April 24, 2014, the Company, entered into a subscription agreement with a European investor for the sale of a
$300,000
,
4%
Senior Convertible Note Due 2018. The Note will mature on April 24, 2018 and will accrue interest at the rate of
4%
per annum payable on a semi-annual basis. At the holder’s option, the Note may be converted into shares of the Company’s common stock at a conversion price of
$0.60
per share, subject to adjustment in certain circumstances. The proceeds of the Note will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
Effective April 24, 2014, the Company entered into a subscription agreement with John N. Hatsopoulos, a related party and the chairman of the Company's Board of Directors, for the sale of a
$300,000
,
4%
Senior Convertible Note Due
2018. The Note will mature on April 24, 2018 and will accrue interest at the rate of
4%
per annum payable on a semi-annual basis. At the holder’s option, the Note may be converted into shares of the Company’s common stock at a conversion price of
$0.60
per share, subject to adjustment in certain circumstances. The proceeds of the Note will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
Effective April 24, 2014, the Company, entered into a subscription agreement with a European investor for the sale of a
$250,000
,
4%
Senior Convertible Note Due 2018. The Note will mature on April 24, 2018 and will accrue interest at the rate of
4%
per annum payable on a semi-annual basis. At the holder’s option, the Note may be converted into shares of the Company’s common stock at a conversion price of
$0.6
0 per share, subject to adjustment in certain circumstances. The proceeds of the Note will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
Effective April 24, 2014, the Company, entered into a subscription agreement with a European investor for the sale of a
$300,000
,
4%
Senior Convertible Note Due 2018. The Note will mature on April 24, 2018 and will accrue interest at the rate of
4%
per annum payable on a semi-annual basis. At the holder’s option, the Note may be converted into shares of the Company’s common stock at a conversion price of
$0.60
per share, subject to adjustment in certain circumstances. The proceeds of the Note will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
American DG Energy guarantees (the “Guarantees”), the Notes on a subordinated basis. Among other things, the Guarantees provide that, in the event of the Company's failure to pay principal or interest on a Note, the holder of such Note, on the terms and conditions set forth in the Notes, may proceed directly against American DG Energy, as guarantor, to enforce the Guarantee. These securities were offered and sold to the Investors in private placement transactions made in reliance upon exemptions from registration pursuant to Section 4(a)(2) under the Securities Act of 1933 and Rule 506 promulgated thereunder. The Investors are accredited investor as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933.
Note 4 — Stockholders’ equity:
Common Stock
In 2011, the Company raised
$1,148,401
, net of costs, in a private placement by issuing
1,250,000
shares of Common Stock to
four
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.
On November 30, 2012, the Company entered into subscription agreements with selected investors for the purchase of units consisting, in the aggregate, of
1,510,000
shares of its Common Stock and warrants to purchase
1,510,000
shares of its Common Stock. The subscription agreements provided for the purchase of the units at a purchase price of
$1.00
per unit, and the warrants at an exercise price of
$1.00
per share of Common Stock and an expiration date of November 30, 2013. Scarsdale Equities LLC, or Scarsdale, acted as placement agent, on a reasonable efforts basis, for the offering and received a placement fee in cash equal to
6.5%
of the gross proceeds of the offering and
65,650
warrants with an exercise price of
$1.00
per share of Common Stock that expired on November 30, 2013. The fair value of the warrants granted was estimated to be
$7,738
using the Black-Scholes option pricing valuation model and 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. The Company also reimbursed certain expenses incurred by Scarsdale in the offering. The offering was made pursuant to our registration statement on Form S-1, which became effective on October 24, 2012.
Also, on November 30, 2012, the Company entered into subscription agreements with selected investors for a private placement of units consisting, in the aggregate, of
875,000
shares of its Common Stock and warrants to purchase
875,000
shares of its Common Stock. The subscription agreements provided for the purchase of the units at a purchase price of
$1.00
per unit, and the warrants at an exercise price of
$1.00
per share of Common Stock and an expiration date of November 30, 2013. Scarsdale acted as placement agent, on a reasonable efforts basis, for the offering and received a placement fee in cash equal to
6.5%
of the gross proceeds of the offering and
56,875
warrants with an exercise price of
$1.00
per share of Common Stock that expire on November 30, 2013. The fair value of the warrants granted was estimated to be
$6,703
using the Black-Scholes option pricing valuation model and was recorded in stockholders' equity in additional paid-in capital and as a cost of the financing as a deduction to the proceeds raised. The Company also reimbursed certain expenses incurred by Scarsdale in the offering.
On July 2, 2013, American DG Energy declared a special dividend of one share of EuroSite Power common stock for every ten shares of American DG Energy common stock. The special dividend was paid on August 15, 2013, to stockholders of record as of the close of business on July 25, 2013. In connection with this transaction American DG Energy issued to its stockholders an aggregate of
4,880,679
shares of EuroSite Power common stock that it owned. The EuroSite Power shares distributed pursuant to the special dividend are not restricted securities in the hands of shareholders who are not affiliates of American DG Energy or EuroSite Power. Affiliates may sell the securities only after a
6
month holding period pursuant to the provisions of the SEC's Rule 144.
The holders of Common Stock have the right to vote their interest on a per share basis. At
June 30, 2014
, there were
56,747,100
shares of Common Stock outstanding.
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
455,000
at
June 30, 2014
.
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 accordance with the plan in order to adjust the exercise price to
$0.90
.
On March 20, 2013, the Company granted to a director options to purchase
100,000
shares of Common Stock, plus an additional grant of
118,000
options to purchase shares of Common Stock at a purchase price of
$0.90
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
1.28%
and an expected volatility of
36.4%
. The fair value of the options issued was
$74,049
, with a grant date fair value of
$0.34
per option.
On September 30, 2013 the Company granted to employees options to purchase
20,000
shares of Common Stock at a purchase price of
$0.45
per share. Those options have a vesting schedule of
four years
and expire in
ten years
. The assumptions used in Black-Scholes option pricing model include an expected life of
6.25 years
, a risk-free interest rate of
2.02%
and an expected volatility of
36.44%
. The fair value of the options issued was
$3,534
.
On October 15, 2013 the Company granted to an officer of the Company options to purchase
200,000
shares of Common Stock at a purchase price of
$0.41
per share. Those options have a vesting schedule of
four years
and expire in
ten years
. The assumptions used in Black-Scholes option pricing model include an expected life of
6.25 years
, a risk-free interest rate of
2.11%
and an expected volatility of
36.44%
. The fair value of the options issued was
$32,353
. In the three months ended June 30, 2014, the options were canceled.
On May 7, 2014 the Company granted to an officer of the Company options to purchase
220,000
shares of Common Stock at a purchase price of
$0.89
per share. Those options have a vesting schedule of
four
years and expire in
ten
years. The assumptions used in Black-Scholes option pricing model include an expected life of
6.25
years, a risk-free interest rate of
2.18%
and an expected volatility of
35.11%
. The fair value of the options issued was
$75,358
.
During the
six
month period ending
June 30, 2014
, the Company had
4,045,000
options outstanding and recognized employee non-cash compensation expense of
$79,857
related to the issuance of those stock options. At
June 30, 2014
, the total compensation cost related to unvested stock option awards not yet recognized was
$184,544
. This amount will be recognized over the weighted average period of
1.5 years
. Stock option activity as of and for the
six
month period ending
June 30, 2014
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
Number of
Options
|
|
Exercise
Price
Per
Share
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding, December 31, 2013
|
4,025,000
|
|
|
$
|
0.87
|
|
|
$
|
0.87
|
|
|
7.6 years
|
|
74,000
|
|
Granted
|
220,000
|
|
|
0.89
|
|
|
—
|
|
|
|
|
|
|
Canceled
|
(200,000
|
)
|
|
0.41
|
|
|
—
|
|
|
|
|
|
|
Outstanding, June 30, 2014
|
4,045,000
|
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
7.12 years
|
|
$
|
3,400
|
|
Exercisable, June 30, 2014
|
2,446,250
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
$
|
—
|
|
Vested and expected to vest, June 30, 2014
|
4,045,000
|
|
|
|
|
|
$
|
0.90
|
|
|
|
|
$
|
3,400
|
|
The aggregate intrinsic value of options outstanding as of
June 30, 2014
, 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, 2014
there were
1,598,750
unvested stock options vesting over
1.57 years
.
Note 5 — Earnings per share:
Basic and diluted earnings per share for the three and
six
month periods ended
June 30, 2014
and
2013
, respectively was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Six Months
|
|
|
June 30, 2014
|
|
June 30, 2013
|
|
June 30, 2014
|
|
June 30, 2013
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
Loss available to stockholders
|
$
|
(353,471
|
)
|
|
$
|
(557,225
|
)
|
|
$
|
(1,388,140
|
)
|
|
$
|
(961,967
|
)
|
|
Weighted average shares outstanding - Basic and diluted
|
56,747,100
|
|
|
56,747,100
|
|
|
56,747,100
|
|
|
56,747,100
|
|
|
Basic and diluted loss per share
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares underlying warrants outstanding
|
—
|
|
|
2,507,525
|
|
|
—
|
|
|
2,507,525
|
|
|
Shares underlying stock options outstanding
|
4,045,000
|
|
|
3,805,000
|
|
|
4,045,000
|
|
|
3,805,000
|
|
|
Shares underlying convertible debentures outstanding
|
9,083,332
|
|
|
4,000,000
|
|
|
9,083,332
|
|
|
4,000,000
|
|
|
Note 6 — Related parties:
American DG Energy, the Company's parent, Tecogen, Ilios Inc., or Ilios are affiliated companies by virtue of common ownership. The common stockholders include:
|
|
•
|
John N. Hatsopoulos who is the Chairman of the Company who holds
0.1%
of its common stock is also: (a) the Chief Executive Officer and director of American DG Energy and holds
19.8%
of that company’s common stock; (b) the Chief Executive Officer and director of Tecogen and holds
23.5%
of that company’s common stock; and (c) a director of Ilios and holds
7.2%
of that company’s common stock.
|
|
|
•
|
Dr. George N. Hatsopoulos, who is John N. Hatsopoulos’ brother, who holds
0.2%
of the Company's common stock is also: (a) holds
13.5%
of of American DG Energy’s common stock; (b) a director of Tecogen and holds
22.5%
of that company’s common stock; and (c) an investor in Ilios and holds
3.1%
of that company’s common stock.
|
The Company expects to purchase the majority of its energy equipment from American DG Energy, its parent. American DG Energy owns
70.7%
of the Common Stock of the Company. American DG Energy purchases energy
equipment primarily from Tecogen which manufactures natural gas, engine-driven commercial and industrial cooling and cogeneration systems, and from Ilios 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.
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 August 12, 2013, under mutual consent, the agreement was modified to exclude the marketing territory of the nations in the European Union. The other terms of the agreement remained the same.
American DG Energy signed a Facilities and Support Services Agreement with Tecogen on July 1, 2013. 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.
The Company purchases most of its energy systems from American DG Energy and ships them to the United Kingdom. At
June 30, 2014
and
December 31, 2013
, the Company had an inventory balance of
$18,916
and
$385,660
, respectively.
On February 26, 2013, the Company received financing in the amount of
$1,100,000
from American DG Energy, its parent. Under the terms of the agreement the Company has agreed to interest at a rate of
6.0%
per annum payable quarterly in arrears.
On June 14, 2013, the Company entered into subscription agreements with certain investors, including American DG Energy for a private placement of an aggregate principal amount of
$4,000,000
of
4.00%
Senior Unsecured Convertible Notes Due 2015. In connection with the private placement, American DG Energy exchanged a promissory note in the aggregate principal amount of
$1,100,000
, originally issued on February 26, 2013, for a like principal amount of the Notes and cash paid for any accrued but unpaid interest on the Old Note. Included among the investors subscribing for the Notes are: Bruno Meier, a director of the Company, in the amount of
$250,000
; Prime World Inc., a company controlled by Joan Giacinti, one of the Company's directors, in the amount of
$300,000
; Charles T. Maxwell, Chairman of the Board of Directors of American DG Energy, in the amount of
$250,000
; and Nettlestone Enterprises Limited, a shareholder of both the Company and American DG Energy, in the amount of
$300,000
. The proceeds of the offering of the Notes will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
On February 20, 2014, the Company entered into a Note Exchange Agreement with American DG Energy, Inc. and other investors whereby both parties agreed to exchange the
$4,000,000
of
4.00%
Senior Unsecured Convertible Notes Due 2015 for New Notes. The "Stated Maturity" of the Notes as set forth therein changed from June 14, 2014 to June 14, 2017; the "Initial Conversion Rate" of the Notes as set forth therein changed from
1,000
shares of the Company's Common Stock for each
$1,000
of principal converted to
1,667
shares of the Company's Common Stock for each
$1,000
of principal converted; and the Holders' of options to extend the Notes were eliminated.
John N. Hatsopoulos is the Company’s Chairman of the Board and is also the Chief Executive Officer of American DG Energy and Tecogen. 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
$123
. 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.
Jesse T. Herrick, who was the Company’s Chief Financial Officer, devoted part of his business time to the affairs of American DG Energy. His salary was 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
$80
. On average, Mr. Herrick spent approximately
15%
of his business time on the affairs of the Company, but such amount varied widely depending on the needs of the business. On February 18, 2014, Jesse T. Herrick resigned, effective March 31, 2014, from his positions as Chief Financial Officer, Secretary and Treasurer of American DG Energy Inc. and EuroSite Power Inc. On March 31, 2014, Jesse T. Herrick amended and restated the terms of his February 18, 2014 resignation letter to the Company. Pursuant to such amended and restated resignation letter, Mr. Herrick’s resignation from his positions as Chief Financial Officer, Secretary and Treasurer of the Company, and any other positions he may have had with the Company and became effective April 11, 2014.
Gabriel J. Parmese, who is the Company’s Chief Financial Officer, devotes part of his business time to the affairs of American DG Energy. His salary was 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
$80
. On average, Mr. Parmese 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.
The Company’s headquarters are located in Waltham, Massachusetts and consist of
3,282
square feet of office and storage space that are leased from Tecogen and shared with American DG Energy. The lease expired on
July 31, 2014
and is a month to month lease thereafter. American DG Energy is currently charging the Company for utilizing its share of office space in the United States through an intercompany service charge. The Company also occupies a small office space in the United Kingdom. The Company believes that its facilities are appropriate and adequate for its current needs.
Effective April 24, 2014, the Company entered into a subscription agreement with John N. Hatsopoulos, the chairman of the Company's Board of Directors. See "Note 3 - Convertible Debentures" for further detail.
Note 7 — 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, 2014
, 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.
The carrying value of the convertible debentures are at fair value based upon an estimate performed for the February 20, 2014 exchange of debentures. See "Note 3 - Convertible debentures" for further detail.
Note 8 – Commitments and contingencies:
The company has certain commitments through its agreements with Tecogen, Ilios, and other related parties. Please see "Note 6-Related parties" for more detail.
The Company, in the ordinary course of business is involved in various legal matters, the outcomes of which are not expected to have a material impact on the financial statements.
Note 9
— Subsequent events:
On August 6, 2014, the parent company of the Company, American DG Energy, closed its previously announced underwritten public offering of
2,650,000
shares of common stock at a per share price of
$1.51
and warrants to purchase up to the same number of shares of common stock at a per warrant price of
$.0001
. The exercise price of the warrants is
$1.8875
. In connection with this offering, the underwriter partially exercised its option to purchase up to an additional
15%
of the shares and/or warrants offered. The underwriter exercised this option with respect to warrants to purchase
179,732
shares of common stock. Total gross proceeds from the offering were
$4,001,783
, before deducting underwriting discounts and commissions and other offering expenses payable by the company. Aegis Capital Corp acted as sole book-running manager for the offering. A final prospectus supplement and accompanying base prospectus relating to this offering was filed on August 1, 2014. This offering was made solely by means of a final prospectus supplement and accompanying base prospectus forming part of the effective registration statement relating to these securities.