AMERICAN DG ENERGY INC - FORM 10-Q - May 13, 2016

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EX-99.01 - EXHIBIT 99.01 - AMERICAN DG ENERGY INCadgeq116earningsrelease.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN DG ENERGY INCadge-2016331exx311.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN DG ENERGY INCadge-20160331exx312.htm
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EX-32.1 - EXHIBIT 32.1 - AMERICAN DG ENERGY INCadge-20160331exx321.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016

or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-34493
 
AMERICAN DG ENERGY INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
04-3569304
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
 
 
45 First Avenue
 
Waltham, Massachusetts
02451
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (781) 522-6000
____________________________________________________________________________
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non –accelerated filer o
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
Title of each class
 
Outstanding at May 12, 2016
Common Stock, $0.001 par value
 
50,684,095

    

Table of Contents                

AMERICAN DG ENERGY INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2016
 
TABLE OF CONTENTS
 
References in this Form 10-Q to “we”, “us”, “our”, the “Company” and “American DG Energy” refer to American DG Energy Inc. and its consolidated subsidiaries, unless otherwise noted.

2
Table of Contents                

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
4,002,799

 
$
5,587,528

Accounts receivable, net
1,239,758

 
937,706

Unbilled revenue
27,697

 
12,468

Due from related party
100,652

 
99,548

Inventory
1,068,021

 
1,112,853

Prepaid and other current assets
468,669

 
752,397

Total current assets
6,907,596

 
8,502,500

Property and equipment, net
25,643,794

 
25,467,049

Other assets, long-term
42,688

 
52,829

TOTAL ASSETS
$
32,594,078

 
$
34,022,378

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
629,473

 
$
575,248

Accrued expenses and other current liabilities
587,305

 
544,624

Due to related party
611,526

 
1,171,863

Total current liabilities
1,828,304

 
2,291,735

Long-term liabilities:
 

 
 

Convertible debentures
1,570,219

 
1,585,264

Convertible debentures due related parties
17,336,411

 
17,030,070

Note payable - related party
2,000,000

 
2,000,000

Total liabilities
22,734,934

 
22,907,069

Commitments and contingencies (Note 7)


 


Stockholders' Equity:
 

 
 

American DG Energy Inc. stockholders’ equity:
 

 
 

Common stock, $0.001 par value; 100,000,000 shares authorized; 50,684,095 issued and outstanding at March 31, 2016 and December 31, 2015, respectively.
50,684

 
50,684

Additional paid-in capital
49,692,739

 
49,641,620

Accumulated deficit
(41,723,969
)
 
(40,622,774
)
Total American DG Energy Inc. stockholders’ equity
8,019,454

 
9,069,530

Noncontrolling interest
1,839,690

 
2,045,779

Total stockholders' equity
9,859,144

 
11,115,309

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
32,594,078

 
$
34,022,378


See Notes to Unaudited Condensed Consolidated Financial Statements

3
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)  
 
Three Months Ended
 
March 31,
2016
 
March 31,
2015
Revenues
 
 
 
Energy revenues
$
2,050,001

 
$
2,390,347

Turnkey & other revenues
151,480

 
117,393

 
2,201,481

 
2,507,740

Cost of sales
 

 
 

Fuel, maintenance and installation
1,482,658

 
1,727,653

Depreciation expense
551,076

 
508,457

 
2,033,734

 
2,236,110

Gross profit
167,747

 
271,630

Operating expenses
 

 
 

General and administrative
677,730

 
861,062

Selling
153,453

 
340,693

Engineering
249,492

 
170,370

 
1,080,675

 
1,372,125

Loss from operations
(912,928
)
 
(1,100,495
)
 
 
 
 
Other income (expense), net
 

 
 

Interest and other income
12,841

 
18,266

Interest expense
(337,048
)
 
(312,456
)
    Change in fair value of warrant liability
—

 
6,398

 
(324,207
)
 
(287,792
)
 
 
 
 
Loss before provision for income taxes
(1,237,135
)
 
(1,388,287
)
Provision for income taxes
(66,427
)
 
(7,355
)
Consolidated net loss
(1,303,562
)
 
(1,395,642
)
Loss attributable to the noncontrolling interest
202,367

 
183,208

Net loss attributable to American DG Energy Inc.
$
(1,101,195
)
 
$
(1,212,434
)
 
 
 
 
Net loss per share - basic and diluted
$
(0.02
)
 
$
(0.02
)
Weighted average shares outstanding - basic and diluted
50,684,095

 
50,735,381

 
See Notes to Unaudited Condensed Consolidated Financial Statements


4
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
March 31,
2016
 
March 31,
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net loss attributable to American DG Energy, Inc.
$(1,101,195)
 
$
(1,212,434
)
Loss attributable to noncontrolling interest
(202,367
)
 
(183,208
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation
563,959

 
519,501

Amortization of deferred financing costs
10,141

 
1,726

Amortization of convertible debt premium
(15,045
)
 
(24,072
)
Decrease in fair value of warrant liability
—

 
(6,398
)
Non-cash interest expense
273,045

 
299,910

Stock-based compensation
60,655

 
150,459

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in:
 

 
 

Accounts receivable and unbilled revenue
(317,281
)
 
(45,520
)
Due from related party
(1,104
)
 
(9,287
)
Inventory
44,832

 
99,050

Prepaid and other current assets
283,728

 
(295,912
)
Increase (decrease) in:
 

 
 

Accounts payable
54,225

 
326,998

Accrued expenses and other current liabilities
75,977

 
(180,128
)
Due to related party
(560,337
)
 
(322,419
)
Other long-term liabilities
—

 
(2,227
)
Net cash used in operating activities
(830,767
)
 
(883,961
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(750,954
)
 
(1,094,737
)
Proceeds from sale of property and equipment
10,250

 
—

Net cash used in investing activities
(740,704
)
 
(1,094,737
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Purchases of common stock, net of costs
—

 
(100,545
)
Payment on related party note payable
—

 
(1,000,000
)
Distributions to noncontrolling interest
(13,258
)
 
(71,728
)
Net cash used in financing activities
(13,258
)
 
(1,172,273
)
 
 
 
 
Net decrease in cash and cash equivalents
(1,584,729
)
 
(3,150,971
)
Cash and cash equivalents, beginning of the period
5,587,528

 
11,825,915

Cash and cash equivalents, end of the period
$
4,002,799

 
$
8,674,944

 
 
 
 
Supplemental disclosures of cash flows information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
—

 
$
—

Income taxes
$
—

 
$
20,430


See Notes to Unaudited Condensed Consolidated Financial Statements

5
AMERICAN DG ENERGY INC.


Note 1. Description of Business and Basis of Presentation
 
Description of Business
 
American DG Energy Inc., or the Company, we, our or us, distributes, owns, operates and maintains clean, on-site energy systems that produce electricity, hot water, heat and cooling. The Company's business model is to own the equipment that it installs at customers' facilities and to sell the energy produced by these systems to its customers on a long-term contractual basis at prices guaranteed to the customer to be below conventional utility rates. The Company calls this business the American DG Energy “On-Site Utility”.
 
The Company has experienced total net losses since inception of approximately $42 million. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as its management executes the current business plan. The Company believes that its existing resources, including cash and cash equivalents and future cash flow from operations, are sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next twelve months. However, as the Company continues to grow its business by adding more energy systems, cash requirements will increase, and the Company may need to raise additional capital through debt financings or equity offerings to meet its operating and capital needs. There can be no assurance, however, that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all.

In 2015, the Company began executing the Initiative. The Initiative is focused on effectively investing the Company’s capital by increasing the performance of its existing sites. The goal of the Initiative is to make strategic capital improvements aimed at increasing productivity of the existing portfolio while optimizing the Company’s margins and increasing cash flow. The Company expects that the Initiative will provide a strong foundation of high performing assets that may be used to fund future growth.

On May 4, 2016, the Company exchanged approximately 14.72 million of its shares in EuroSite Power, or 22% of its 48% ownership in its European subsidiary, for elimination of a portion of the outstanding 6% convertible debentures due May 2018. With this swap of EuroSite Power shares in exchange for partial extinguishment of the convertible debt, American DG Energy reduced the convertible debt outstanding to $8.6 million. The Company is pursuing a similar debt exchange transaction for the remaining convertible debt outstanding and expects to complete that subsequent transaction in the coming weeks.


Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in American DG Energy Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015.
There have been no significant changes in accounting principles, practices or methods for making estimates.    
The accompanying unaudited consolidated financial statements include the accounts of the Company and entities in which it has a controlling financial interest. Those entities include the Company's 51.0% owned joint venture, American DG New York, LLC, or ADGNY, and its 48.0% owned subsidiary EuroSite Power Inc., or EuroSite Power. The Company has determined EuroSite Power to be a Variable Interest Entity (VIE) and for which the Company has determined it is the primary beneficiary (Note 8. "Variable Interest Entity”).


6
AMERICAN DG ENERGY INC.

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

Reclassification

Certain prior year amounts have been reclassified to conform with current year presentation.

7
AMERICAN DG ENERGY INC.

Note 2. Loss Per Common Share            
    
The Company computes basic loss per share by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. The Company computes diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the Company considers its shares issuable in connection with convertible debentures, stock options and warrants to be dilutive common stock equivalents when the exercise price is less than the average market price of its common stock for the period. For the three months ended March 31, 2016, the Company excluded 14,428,583 potentially dilutive shares, and for the three months ended March 31, 2015, the Company excluded 15,763,083 potentially dilutive shares because such shares would be anti-dilutive as a result of the reported net loss.

Note 3. Income Taxes

The provision for income taxes in the accompanying unaudited consolidated statements of operations for the three months ended March 31, 2016 and 2015 differ from that which would be expected by applying the federal statutory tax rate primarily due to losses for which no benefit is recognized.
               
Note 4. Fair Value Measurements

The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
 
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
 
Level 2 - Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company considers its convertible debentures a level 2 liability and believes that its carrying value approximates fair value.
 
Level 3 - Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability.

In connection with recognizing the distribution of energy systems to the noncontrolling interest in ADGNY (see Note 5. "Stockholders' Equity"), the Company utilized Level 3 category fair value measurements. Those measurements employed the use of discounted cash flow analysis to determine the fair value of those energy systems. The estimated expected cash flows were discounted at a rate of 12% per annum.

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

On September 19, 2014, the Board of Directors of the Company approved a common stock repurchase program that shall not exceed 1,000,000 shares of common stock and shall not exceed $1,100,000 of cost. The approval allows for purchases over a 24-month period at prices not to exceed $1.30 per share. During the first three months of 2016, the Company did not repurchase any shares of its common stock. See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds", for further details.


8
AMERICAN DG ENERGY INC.

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

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

Note 6.  Related Parties
 
EuroSite Power, Tecogen, Ilios Inc., or Ilios are affiliated companies by virtue of common ownership and common leadership.
    
The Company purchases the majority of its cogeneration units from Tecogen, an affiliate company sharing similar ownership. In addition, Tecogen pays certain operating expenses, including benefits and payroll, on behalf of the Company, and the Company leases office space from Tecogen. The Company's lease with Tecogen expires on July 31, 2016 and renews automatically until cancelled by one of the parties. These costs were reimbursed by the Company. As of March 31, 2016, the Company owed Tecogen $611,526, and Tecogen owed the Company $84,389.

During the first quarter of 2015, Eurosite Power repaid $1,000,000 of a related party $3,000,000 note payable in accordance with the terms of the note.

On July 7, 2015, EuroSite Power, one of the Company's consolidated subsidiaries, entered into a Revolving Line of Credit Agreement, (or the "Agreement"), with Elias Samaras, EuroSite Power's Chief Executive Officer and President and a member of the Company's Board of Directors. Under the terms of the Agreement, Dr. Samaras has agreed to lend EuroSite Power up to an aggregate of $1,000,000, upon written request. Any amounts borrowed by EuroSite Power pursuant to the Agreement will bear interest at 6% per year. Interest is due and payable quarterly in arrears. Repayment of the principal amount borrowed pursuant to the Agreement will be due on June 30, 2017. Prepayment of any amounts due under the Agreement may be made at any time without penalty. As of March 31, 2016, no amounts have been drawn on this line.


9
AMERICAN DG ENERGY INC.

Note 7. Commitments and Contingencies
 
The Company has certain commitments under agreements with Tecogen, Ilios, and other related parties (see Note 6. "Related Parties").
The Company, in the ordinary course of business is involved in various legal matters, the outcomes of which are not expected to have a material impact on the Company's condensed consolidated financial statements.

Note 8. Variable Interest Entity

The carrying amount and classification of assets and liabilities of the Company's consolidated subsidiary EuroSite Power, which is considered to be a variable interest entity, and for which the Company has determined it is the primary beneficiary, were as follows as March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
December 31, 2015
Current assets
$1,081,651
 
$1,450,034
Long-term assets
7,622,395

 
7,527,266

 
 
 
 
Current liabilities
823,013

 
699,086

Long-term liabilities
4,512,350

 
4,536,422


Note 9. Subsequent Events

On May 4, 2016, the Company exchanged approximately 14.72 million of its shares in EuroSite Power, or 22% of its 48% ownership in its European subsidiary, for elimination of a portion of the outstanding 6% convertible debentures due May 2018. With this swap of EuroSite Power shares in exchange for partial extinguishment of the convertible debt, American DG Energy reduced the convertible debt outstanding to $8.6 million. The Company is pursuing a similar debt exchange transaction for the remaining convertible debt outstanding and expects to complete that subsequent transaction in the coming weeks.

On May 12, 2016, in a private placement of its common stock, EuroSite Power raised $7.25 million at $0.575 per share from various accredited investors. EuroSite plans to use these funds to first pay off its debt to its Chairman, of $2,000,000, with the balance to be used to fund operations and growth. Closing has been set for June 8, 2016.

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

10
AMERICAN DG ENERGY INC.

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

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

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

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

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

There is an ongoing consideration of how to access and lower the cost of capital. The Company regularly assesses the cost and availability of debt capital, preferred stock, convertible debentures, private equity financing, and public common stock offerings. The effect these fundraising efforts have on the business will depend on the type of fundraising. Generally, debt and convertible debenture financing will increase interest expense. Generally, convertible debentures, private equity, and public equity have the potential to dilute shareholder’s earnings per share. To date, the Company has largely financed its growth through the private placements of convertible debt and equity. During the first quarter of 2016 the Company's subsidiary, EuroSite Power, signed two project financing agreements which will provide funding for projects going forward.

On May 4, 2016, the Company exchanged approximately 14.72 million of its shares in EuroSite Power, or 22% or its 48% ownership in its European subsidiary, for elimination of a portion of the outstanding 6% convertible debentures due May 2018. With this swap of EuroSite Power shares in exchange for partial extinguishment of the convertible debt, American DG Energy reduced the convertible debt outstanding to $8.6 million. The Company is pursuing a similar debt exchange transaction for the remaining convertible debt outstanding and expects to complete that subsequent transaction in the coming weeks.




Results of Operations

First Quarter 2016 Compared to First Quarter 2015.

Revenues
 
Revenues in the first quarter of 2016 were $2,201,481 compared to $2,507,740 for the same period in 2015, a decrease of $306,259 or 12.2%. The decrease is mainly due to the loss of revenue from eight energy sites under the

11
AMERICAN DG ENERGY INC.

restructuring of the Company's joint venture in the second quarter of 2015. On-Site Utility energy revenue in the first quarter of 2016 was $2,050,001 compared to $2,390,347 for the same period in 2015, a decrease of $340,346 or 14.2%, also due to the restructuring of the second quarter of 2015. During the first quarter of 2016, in addition to our On-Site Utility energy revenue, the Company performed billable services and recorded revenue primarily from the sale of energy equipment and energy feasibility studies. The revenue from our turnkey projects can vary substantially from period to period. While the Company accepts turnkey installation projects, they are not considered our core business. Our turnkey and other revenue in the first quarter of 2016 increased to $151,480 compared to $117,393 for the same period in 2015, an increase of $34,087 or 29.0%.
 
During the first quarter of 2016, the Company operated 122 energy systems, representing 8,523 kWh of installed electricity potential, compared to 126 energy systems, representing 8,511 kWh of installed electricity potential for the same period in 2015. The decrease in the number of energy systems operating is due to the restructuring of the Company's joint venture in the second quarter of 2015. The revenue per customer on a monthly basis is based on the sum of the amount of energy produced by the Company’s energy systems and a contractually negotiated formula, which takes into account the monthly published price of energy (electricity, natural gas or oil) from its customers’ local energy utility, less an applicable discount. The Company’s revenues commence as new energy systems become operational.
 
Cost of Sales
 
Cost of sales, including depreciation, in the first quarter of 2016 was $2,033,734 compared to $2,236,110 for the same period in 2015, a decrease of $202,376 or 9.1%. The decrease in cost of sales is principally due to a decrease in fuel costs, offset by an increase in depreciation and also the reduction in installed sites. The cost of fuel, maintenance and installation was $1,482,658 in the first quarter of 2016, compared to $1,727,653 for the same period in 2015, a decrease of $244,995 or 14.2%. Depreciation expense was $551,076 in the first quarter of 2016, compared to $508,457 for the same period in 2015, an increase of $42,619.
 
During the first quarter of 2016, our gross margins were 7.6% compared to 10.8% for the same period in 2015, principally due to the increase in depreciation expense. Our gross margins, excluding depreciation, were 32.7% in the first quarter of 2016, compared to 31.1% for the same period in 2015.

Operating Expenses
 
Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the first quarter of 2016 were $677,730 compared to $861,062 for the same period in 2015, a decrease of $183,332 or 21.3%. The decrease was primarily due to lower salary and personnel costs as a result of our initiative efforts.
 
Our selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses including provisions for bad debt write-offs. The Company sells energy using both direct sales and commissioned agents. Our marketing efforts consisted of internet marketing, print literature, media relations and event-driven direct mail. Our selling expenses in the first quarter of 2016 were $153,453 compared to $340,693 for the same period in 2015, a decrease of $187,240 or 55.0%. The decrease in expense was primarily due to lower salaries and commission expense as a result of our initiative efforts.
 
Our engineering expenses consisted of technical staff and other engineering related expenses. The role of engineering is to evaluate potential customer sites based on technical and economic feasibility, manage the installed base of energy systems and oversee each new installation project. Our engineering expenses in the first quarter of 2016 were $249,492 compared to $170,370 for the same period in 2015, an increase of $79,122 or 46.4%. The increase was primarily due to the costs associated with improving the installed base of energy systems.
 
Loss from Operations
 
The loss from operations in the first quarter of 2016 was $912,928 compared to a loss of $1,100,495 for the same period in 2015, an improvement of $187,567 or 17.0%. The improvement in the operating loss was primarily due to lower operating expenses by $291,450 in the first quarter of 2016 compared to the first quarter of 2015. Our non-cash compensation expense related to outstanding restricted stock and option awards to our employees was $60,655 in the first quarter of 2016, compared to $150,459 for the same period in 2015.
 

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AMERICAN DG ENERGY INC.

Other Income (Expense), Net
 
Our other expense, net, in the first quarter of 2016 was an expense of $324,207 compared to an expense of $287,792 for the same period in 2015, an increase of $36,415. Interest expense was $337,048 in the first quarter of 2016 compared to $312,456 for the same period in 2015, an increase of $24,592, which is primarily due to an increase in premiums from the exchange of convertible debt as a prepayment of interest in the first quarter of 2016 compared to the same period in 2015.
 
Provision for Income Taxes
 
Our provision for taxes in the first quarter of 2016 was $66,427 compared to $7,355 for the same period in 2015. The provision consists of various state income taxes accrued for the quarter.
 
Noncontrolling Interest
 
The noncontrolling interest in the profits or losses in American DG New York, LLC, or ADGNY, and EuroSite Power was a reduction in net loss of $202,367 in the first quarter of 2016 compared to a reduction in net loss of $183,208 for the same period in 2015. This difference of $19,159 is due to the reduction of sites as a result of the ADGNY reorganization in Q2 of 2015.



Liquidity and Capital Resources
 
Consolidated working capital at March 31, 2016 was $5,079,292, compared to $6,210,765 at December 31, 2015. Included in working capital were cash and cash equivalents of $4,002,799 at March 31, 2016, compared to $5,587,528 at December 31, 2015. The decrease in working capital was primarily the purchases and installation of energy systems in the amount of $750,954.
 
Cash used in operating activities was $830,767 in the first three months of 2016 compared to cash used of $883,961 in the same period in 2015. For the first three months of 2016, net loss was $1,101,195. This net loss was offset by $563,959 of depreciation, $273,045 of non-cash interest and $60,655 of stock-based compensation expense. In addition, our receivables balance, including unbilled revenue and allowances for bad debts, increased to $1,267,455 in the first three months of 2016 compared to $950,174 at December 31, 2015, using $317,281 of cash. Our inventory decreased to $1,068,021 in the first three months of 2016 compared to $1,112,853 at December 31, 2015, providing $44,832 of cash. A decrease in our prepaid and other current assets provided $283,728 in cash primarily due to the collection of UK energy tax incentives.
 
Accounts payable increased to $629,473 in the first three months of 2016, compared to $575,248 at December 31, 2015, providing $54,225 of cash. Our accrued expenses and other current liabilities increased to $587,305 at March 31, 2016 compared to $544,624 at December 31, 2015, providing $75,977 of cash. The amount due to related parties decreased to $611,526 in the first three months of 2016, compared to $1,171,863 at December 31, 2015, using $560,337 of cash.
 
During the first three months of 2016, the investing activities of the Company's operations were expenditures of $750,954 for purchases and installation of energy systems. The Company's financing activities used $13,258 of cash in the first three months of 2016, from distributions to ADGNY noncontrolling interests.

Significant Accounting Policies and Critical Estimates
 
The Company’s significant accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are discussed in the Notes to the Unaudited Condensed Consolidated Financial Statements above and described in the Notes to Consolidated Financial Statements to the Annual Report on Form 10-K for the year ended December 31, 2015. The accounting policies are described in the above notes and the Financial Review in the Company’s Annual Report.
 
Off-Balance Sheet Arrangements

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

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AMERICAN DG ENERGY INC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.
Item 4. Controls and Procedures
 
Management’s evaluation of disclosure controls and procedures:
 
Based on our management’s evaluation (with the participation of our principal co-executive officers and acting principal financial officer), as of the end of the period covered by this report, our co-principal executive officers and acting principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) are ineffective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our co-principal executive officers and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting:

Remediation steps were taken in the first quarter of 2016 regarding the impairment assessment process providing a step by step approach in identifying events or changes in circumstances that would require an impairment test of its long-lived assets, estimating the future cash flows related to those long-lived assets and estimating the fair value of those long-lived assets, as required.

    
    

 


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AMERICAN DG ENERGY INC.

PART II – OTHER INFORMATION
 
Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.


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Item 6.    Exhibits
Exhibit Number
 
Description of Exhibit
3.1
–     
Certificate of Incorporation, as amended and restated on December 9, 2009 (incorporated by reference to Exhibit 3.1 to the Company's Form S-3, as amended, as filed with the SEC on December 23, 2009)
 
 
 
3.2
–     
Bylaws, as amended and restated August 31, 2009 (incorporated by reference to Exhibit 3.2 to the Company's Form S-3, as amended, as filed with the SEC on December 23, 2009)
 
 
 
4.1
–     
Form of 6% Senior Unsecured Convertible Debenture Due 2018, dated May 23, 2011 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on May, 24, 2011).
 
 
 
4.2
 
Form of 6% Senior Unsecured Convertible Debenture Due 2018, dated November 30, 2011 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K as filed with the SEC on December 2, 2011).
 
 
 
4.3
 
4% Senior Convertible Note Due 2017 issued by EuroSite Power Inc., dated as of February 20, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8‑K, as filed with the SEC on February 25, 2014).
 
 
 
4.4
 
Form of Common Stock Purchase Warrant pursuant to the Underwriting Agreement dated July 31, 2014 between the Company and Aegis Capital (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, as filed with the SEC on August 1, 2014).
 
 
 
4.5
 
Form of 6% Senior Unsecured Convertible Debenture Due 2018 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, as filed with the SEC on October 6, 2014).
 
 
 
4.6
 
Warrant Issued by American DG Energy Inc. to Purchase Shares of Common Stock of EuroSite Power Inc. Owned by It (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K, as filed with the SEC on October 6, 2014).
 
 
 
10.1
–     
Form of Convertible Note Exchange Agreement, dated May 4, 2016, (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K, as filed with the SEC on May 10, 2016).
 
 
 
10.2
 
EuroSite Power Societe Generale Debt Guarantee, dated March 7, 2016 (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K, as filed with the SEC on March 11, 2016)
 
 
 
31.1*
–     
Rule 13a-14(a) Certification of Co-Chief Executive Officer
 
 
 
31.2*
–
Rule 13a-14(a) Certification of Co-Chief Executive Officer
 
 
 
31.3*
–
Rule 13a-14(a) Certification of Chief Accounting Officer
 
 
 
32.1**
–
Section 1350 Certifications of Chief Executive Officer and Chief Accounting Officer
 
 
 
101.1*
–
The following materials from the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2016, are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail.

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* Filed herewith
** Furnished herewith


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AMERICAN DG ENERGY INC.




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
AMERICAN DG ENERGY INC.
 
 
 
By: /s/ JOHN N. HATSOPOULOS
 
 
Co-Chief Executive Officer
 
(Principal Executive Officer)
 
Date: May 13, 2016
 
 
 
 
By: /s/ BENJAMIN M. LOCKE
 
 
Co-Chief Executive Officer
 
(Principal Executive Officer)
 
Date: May 13, 2016
 
 
 
 
 
By: /s/ BONNIE J. BROWN
 
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
Date: May 13, 2016
 


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AMERICAN DG ENERGY INC Reports