AMERICAN DG ENERGY INC - FORM 10-Q - November 14, 2016

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EX-31.1 - EXHIBIT 31.1 - AMERICAN DG ENERGY INCadge-20160930exx311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 o No x
Title of each class
 
Outstanding at November 14, 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 SEPTEMBER 30, 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)

September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
3,187,634

 
$
4,999,709

Accounts receivable, net
748,080

 
633,924

Unbilled revenue
14,147

 
12,468

Due from related party
80,380

 
99,548

Inventory
850,535

 
975,760

Current assets of discontinued operations (Note 4)
—

 
1,450,034

Prepaid and other current assets
436,642

 
331,057

Total current assets
5,317,418

 
8,502,500

Property and equipment, net
17,677,724

 
17,950,787

Long-term assets of discontinued operations (Note 4)
—

 
7,527,266

Investment securities
645,539

 
—

Other assets, long-term
11,446

 
41,825

TOTAL ASSETS
$
23,652,127

 
$
34,022,378

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
171,525

 
$
162,976

Accrued expenses and other current liabilities
238,795

 
257,810

Due to related party
376,145

 
1,171,863

Current liabilities of discontinued operations (Note 4)
—

 
699,086

Total current liabilities
786,465

 
2,291,735

Long-term liabilities:
 

 
 

Convertible debentures due related parties
3,005,369

 
16,078,912

Long-term liabilities of discontinued operations (Note 4)
—

 
4,536,422

Total liabilities
3,791,834

 
22,907,069

Commitments and contingencies (Note 9)


 


Stockholders' equity:
 

 
 

American DG Energy Inc. stockholders’ equity:
 

 
 

Common stock, $0.001 par value; 100,000,000 shares authorized; 50,684,095 issued and outstanding at September 30, 2016 and December 31, 2015, respectively
50,684

 
50,684

Accumulated other comprehensive income-investment securities
21,040

 
—

Additional paid-in capital
58,782,893

 
49,641,620

Accumulated deficit
(39,063,160
)
 
(40,622,774
)
Total American DG Energy Inc. stockholders’ equity
19,791,457

 
9,069,530

Noncontrolling interest of discontinued operations
—

 
1,944,236

Noncontrolling interest
68,836

 
101,543

Total stockholders' equity
19,860,293

 
11,115,309

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
23,652,127

 
$
34,022,378

See Notes to Unaudited Condensed Consolidated Financial Statements

3
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)  
 
Three Months Ended
 
September 30,
2016
 
September 30,
2015
Revenues
 
 
 
Energy revenues
$
1,393,009

 
$
1,340,627

Turnkey & other revenues
187,854

 
193,926

 
1,580,863

 
1,534,553

Cost of sales
 

 
 

Fuel, maintenance and installation
774,161

 
837,192

Depreciation expense
454,465

 
418,791

 
1,228,626

 
1,255,983

Gross profit
352,237

 
278,570

Operating expenses
 

 
 

General and administrative
401,140

 
364,768

Selling
1,418

 
127,966

Engineering
164,528

 
239,859

 
567,086

 
732,593

Loss from operations
(214,849
)
 
(454,023
)
 
 
 
 
Other income (expense), net
 

 
 

Interest and other income
1,915

 
5,676

Interest expense
(177,756
)
 
(311,738
)
Gain on extinguishment of debt
182,887

 
—

    Change in fair value of warrant liability
—

 
299

 
7,046

 
(305,763
)
 
 
 
 
Loss from continuing operations before provision for income taxes
(207,803
)
 
(759,786
)
Provision for income taxes
—

 
(8,797
)
Loss from continuing operations
(207,803
)
 
(768,583
)
Income attributable to the noncontrolling interest
(36,602
)
 
(29,491
)
Loss attributable to American DG Energy Inc. from continuing operations
(244,405
)
 
(798,074
)
Loss from discontinued operations (Note 4)
(119,506
)
 
(220,559
)
Net loss attributable to American DG Energy Inc.
(363,911
)
 
(1,018,633
)
Other comprehensive income - Unrealized gain on securities
21,040

 
—

Comprehensive income (loss)
$
(342,871
)
 
$
(1,018,633
)
 
 
 
 
Net loss per share - basic and diluted
$
(0.01
)
 
$
(0.02
)
Weighted average shares outstanding - basic and diluted
50,684,095

 
50,684,095

 
See Notes to Unaudited Condensed Consolidated Financial Statements


4
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)  
 
Nine Months Ended
 
September 30,
2016
 
September 30,
2015
Revenues
 
 
 
Energy revenues
$
4,090,657

 
$
4,538,832

Turnkey & other revenues
476,366

 
499,561

 
4,567,023

 
5,038,393

Cost of sales
 

 
 

Fuel, maintenance and installation
2,712,504

 
3,105,150

Depreciation expense
1,348,231

 
1,259,970

 
4,060,735

 
4,365,120

Gross profit
506,288

 
673,273

Operating expenses
 

 
 

General and administrative
1,170,205

 
1,437,452

Selling
39,184

 
540,615

Engineering
470,351

 
551,151

 
1,679,740

 
2,529,218

Loss from operations
(1,173,452
)
 
(1,855,945
)
 
 
 
 
Other income (expense), net
 

 
 

Interest and other income
19,702

 
187,797

Interest expense
(759,344
)
 
(917,818
)
Gain on extinguishment of debt
182,887

 
—

Gain on deconsolidation
3,887,098

 
—

Change in fair value of warrant liability
—

 
6,778

 
3,330,343

 
(723,243
)
 
 
 
 
Income (loss) from continuing operations before provision for income taxes
2,156,891

 
(2,579,188
)
Provision for income taxes
(60,288
)
 
(16,153
)
Income (loss) from continuing operations
2,096,603

 
(2,595,341
)
Income attributable to the noncontrolling interest
(51,581
)
 
(75,021
)
Net income (loss) attributable to American DG Energy Inc. from continuing operations
2,045,022

 
(2,670,362
)
Loss from discontinued operations (Note 4)
(485,408
)
 
(736,766
)
Net income (loss) attributable to American DG Energy Inc.
1,559,614

 
(3,407,128
)
Other comprehensive income - Unrealized gain on securities
21,040

 
—

Comprehensive income (loss)
$
1,580,654

 
$
(3,407,128
)
 
 
 
 
Net income (loss) per share - basic and diluted
$
0.03

 
$
(0.07
)
Weighted average shares outstanding - basic and diluted
50,684,095

 
50,687,355

 
See Notes to Unaudited Condensed Consolidated Financial Statements


5
Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income (loss) attributable to American DG Energy, Inc.
$
1,559,614

 
$
(3,407,128
)
Income attributable to noncontrolling interest
51,581

 
75,021

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 

 
 

Depreciation
1,378,134

 
1,294,945

Gain attributable to distribution of nonmonetary assets to noncontrolling interest
—

 
(157,870
)
Gain on deconsolidation of subsidiary
(3,887,098
)
 
—

Gain on extinguishment of debt
(182,887
)
 
—

Loss from discontinued operations
485,408

 
736,766

Amortization of deferred financing costs
30,379

 
40,096

Decrease in fair value of warrant liability
—

 
(6,778
)
Non-cash interest expense
703,333

 
230,668

Stock-based compensation
122,031

 
196,596

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in:
 

 
 

Accounts receivable and unbilled revenue
(115,835
)
 
162,962

Due from related party
19,168

 
(13,378
)
Inventory
125,225

 
75,888

Prepaid and other current assets
(105,585
)
 
294,920

Increase (decrease) in:
 

 
 

Accounts payable
8,549

 
(26,566
)
Accrued expenses and other current liabilities
(19,013
)
 
(83,690
)
Due to related party
(795,718
)
 
355,267

Other long-term liabilities
—

 
(2,227
)
Net cash used in operating activities
(622,714
)
 
(234,508
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(1,115,323
)
 
(1,740,919
)
Proceeds from sale of property and equipment
10,250

 
—

Partial purchase of non-controlling interest
—

 
(100,000
)
Net cash used in investing activities
(1,105,073
)
 
(1,840,919
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Purchases of common stock, net of costs
—

 
(152,377
)
Distributions to noncontrolling interest
(84,288
)
 
(186,856
)
Net cash used in financing activities
(84,288
)
 
(339,233
)
 
 
 
 
Net decrease in cash and cash equivalents
(1,812,075
)
 
(2,414,660
)
Cash and cash equivalents, beginning of the period
4,999,709

 
8,049,063

Cash and cash equivalents, end of the period
$
3,187,634

 
$
5,634,403

Supplemental disclosures of cash flows information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
—

 
$
—

Income taxes
$
77,441

 
$
42,644

Non-cash investing and financing activities:
 

 
 

Distribution of nonmonetary assets
$
—

 
$
340,069

Conversion of subsidiary convertible debentures to common stock of subsidiary
$
2,184,264

 
$
—

Settlement of convertible debentures with common stock of subsidiary
$
13,783,721

 
$
—


See Notes to Unaudited Condensed Consolidated Financial Statements

6
AMERICAN DG ENERGY INC.

Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
 
Description of Business
 
American DG Energy Inc., or the Company, we, our or us, distributes, owns, operates and maintains clean, on-site energy systems that produce electricity, hot water, heat and cooling. The Company's business model is to own the equipment that it installs at customers' facilities and to sell the energy produced by these systems to its customers on a long-term contractual basis at prices guaranteed to the customer to be below conventional utility rates. The Company calls this business the American DG Energy “On-Site Utility”.
 
The Company has experienced total net losses since inception of approximately $39 million. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as its management executes the current business plan. The Company believes that its existing resources, including cash and cash equivalents and future cash flow from operations, are sufficient to meet the working capital requirements of its existing business for the foreseeable future, including the next twelve months. However, as the Company continues to grow its business by adding more energy systems, cash requirements will increase, and the Company may need to raise additional capital through debt financings or equity offerings to meet its operating and capital needs. There can be no assurance, however, that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all.

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

On May 4, 2016, the Company exchanged approximately 14.72 million of its shares in EuroSite Power, or 46% of its 48% ownership in its former European subsidiary, for elimination of a portion of the outstanding 6% convertible debentures due May 2018 (see Note 5 "Convertible Debentures"). This partial extinguishment of debt reduced the Company's convertible debt outstanding to $8.6 million, net of the associated discount.

On September 30, 2016, the Company exchanged 15.2 million of its shares in EuroSite Power, or 90% of its 20.5% ownership in its former European subsidiary, for a further elimination of a portion of the outstanding 6% convertible debentures due May 2018 (see Note 5. "Convertible debentures"). This partial extinguishment of debt reduced the Company's convertible debt outstanding to $3.0 million, net of the associated discount.

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 nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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


7
AMERICAN DG ENERGY INC.

Investments in partnerships and companies in which the Company does not have a controlling financial interest but where we have significant influence are accounted for under the equity method.

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

Reclassification

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

Note 2. Income (Loss) Per Common Share            
    
The Company computes basic income (loss) per share by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. The Company computes diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the Company considers its shares issuable in connection with convertible debentures, stock options and warrants to be dilutive common stock equivalents when the exercise price is less than the average market price of its common stock for the period. For the nine months ended September 30, 2016, the Company excluded 7,029,498 potentially dilutive shares because such shares would be anti-dilutive. For the nine months ended September 30, 2015, the Company excluded 15,192,083 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 and nine months ended September 30, 2016 and 2015 differ from that which would be expected by applying the federal statutory tax rate primarily due to losses and nontaxable income for which no benefit is recognized.
               
Note 4. Investment in EuroSite Power and Discontinued Operations
During the second and third quarters of 2016, the Company settled approximately $16 million of the $19.4 million of its 6% convertible debentures due May 2018 (see Note 5 Convertible Debentures) by transferring ownership of shares it owned of EuroSite Power Inc to the holders of the debt. As a result, the Company's ownership in EuroSite decreased from 48.04% to 2.03%. Prior to the foregoing exchanges, the Company consolidated the results of EuroSite under the variable interest model as it was determined to be the primary beneficiary of EuroSite.
The exchanges were undertaken primarily as a plan to reduce future debt service requirements of the Company, however they also resulted in a disposition of all foreign operations of the Company, representing a strategic shift that will have a major effect on the Company's operations and financial results. Accordingly, amounts related to this component have been reported in discontinued operations in the accompanying condensed consolidated financial statements.
As of June 30, 2016, the Company owned a 20.5% interest in the common stock of EuroSite Power which it accounted for using the equity method. Prior to June 28, 2016, the Company accounted for its investment in EuroSite Power as a consolidated subsidiary as it determined it was the primary beneficiary of EuroSite under the variable interest model. That determination included consideration of an implicit variable interest held by the Company in the form of a guarantee of the long-term convertible indebtedness of EuroSite Power. On June 28, 2016, substantially all of that convertible indebtedness was converted by the holders into shares of EuroSite Power, rendering the Company’s guarantee inconsequential in the determination. As a result, the Company concluded it no longer held a variable interest in EuroSite Power. The Company deconsolidated EuroSite Power in its consolidated financial statements. This required recording the remaining shares held at fair value as an equity method investment, which resulted in a gain of approximately $3.9 million. The Company utilized a market approach in determining the fair value of the shares retained which incorporated the quoted market price of the shares at the date of deconsolidation and a blockage discount.
As of September 30, 2016, the Company owned a 2.03% interest in the common stock of EuroSite Power. As such, the equity method of accounting is no longer appropriate in that the ability to exercise significant influence over EuroSite no longer exists at this level of ownership. The investment, as of September 30, 2016 is accounted for as an available-for-sale security (see Note 8 Fair Value Measurements).


8
AMERICAN DG ENERGY INC.

    
The following is a reconciliation of the major line items comprising loss from discontinued operations:
 
 
Nine months ended
 
Three months ended
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Revenue
 
$
1,327,469

 
$
1,513,018

 
$
—

 
$
421,991

Cost of sales
 
$
1,081,484

 
$
1,481,897

 
$
—

 
$
467,582

Operating expenses
 
$
1,104,090

 
$
1,149,104

 
$
—

 
$
404,732

Other expenses, net
 
$
361,151

 
$
27,348

 
$
—

 
$
7,634

Pretax loss from discontinued operations
 
$
1,219,256

 
$
1,145,331

 
$
—

 
$
457,957

Income tax benefit
 
$
—

 
$
2,188

 
$
—

 
$
—

Loss from discontinued operations
 
$
1,219,256

 
$
1,143,143

 
$
119,506

 
$
457,957

Loss from discontinued operations attributable to noncontrolling interest
 
$
733,848

 
$
406,377

 
$
—

 
$
237,398

Loss from discontinued operations attributable to American DG Energy Inc.
 
$
485,408

 
$
736,766

 
$
119,506

 
$
220,559

The total operating and investing cash flows of the discontinued operation for the nine months ended September 30, 2016 is as follows:
Net cash used in operating activities
 
$
(371,539
)
Net cash used in investing activities
 
$
(334,946
)

Note 5. Convertible Debentures
On May 4, 2016, the Company settled $9.3 million of its $19.4 million outstanding 6% convertible debentures due May 2018 (“convertible debentures” or “debt”) by transferring ownership of approximately 14.72 million shares it owned of EuroSite Power to the holders of the debt.
As the shares used to extinguish the debt are considered nonmonetary assets, the overall gain realized of approximately $7.2 million is composed of two elements: (1) the gain resulting from the difference between the carrying value and the fair value of the shares transferred, of approximately $7.7 million and (2) the loss from the debt extinguishment of approximately $500,000.
As the Company retained its controlling financial interest in EuroSite Power following the transaction, no gain was recognized on the transaction, rather the gain was credited to additional paid-in capital in accordance with ASC 810-10-45-23.
On September 30, 2016, the Company settled $6.7 million of its $10.1 million outstanding 6% convertible debentures due May 2018 by transferring ownership of 15.2 million shares it owned of EuroSite Power in exchange for the debt. A new note evidencing the remaining balance of the debt outstanding of $3,418,681 was issued, replacing the previous note. Interest on the debt was previously prepaid through maturity and the prepayment is reflected as a discount against the debt which is amortized to interest expense over the life of the debt. (see Note 4 Investment in EuroSite Power and Discontinued Operations)

As the shares used to extinguish the debt are considered nonmonetary assets, the overall gain realized of $182,887 is composed of two elements: (1) the gain resulting from the difference between the carrying value and the fair value of the shares transferred, of $107,688 and, (2) the gain from the debt extinguishment of $75,199. The total gain is recorded as a gain on extinguishment of debt in the consolidated statement of operations.


9
AMERICAN DG ENERGY INC.

Note 6. Stockholders’ Equity
 
On May 12, 2016, EuroSite Power completed a private placement with related parties of 12,608,696 shares of its common stock for aggregate proceeds of $7.25 million at $0.575 per share. The shares sold in this placement are subject to a registration rights agreement where EuroSite Power has agreed to use its best efforts to register the shares issued at the request of the holder. EuroSite Power used a portion of the proceeds to pay off its debt to its former Chairman, of $2,000,000, with the balance being retained to fund operations and growth.

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

On September 19, 2014, the Board of Directors of the Company approved a common stock repurchase program that shall not exceed 1,000,000 shares of common stock and shall not exceed $1,100,000 of cost. The approval allows for purchases over a 24-month period at prices not to exceed $1.30 per share. During the first nine months of 2016, the Company did not repurchase any shares of its common stock.

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

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

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AMERICAN DG ENERGY INC.

The following schedule discloses the effects of changes in the Company's ownership interest in its subsidiary EuroSite Power on the Company's equity for the nine months ended September 30, 2016:
Net income attributable to American DG Energy Inc.
$
1,559,614

 
Transfers (to) from the noncontrolling interest:
 
 
Increase in American DG Energy Inc.'s additional paid-in-capital for exchange of convertible debentures for common stock of subsidiary
7,903,292

 
Increase in American DG Energy Inc.'s additional paid-in-capital for sale by EuroSite Power of 12,608,696 common shares
7,233,482

 
Increase in American DG Energy Inc.'s additional paid-in-capital for conversion of EuroSite Power convertible debentures into 3,909,260 common shares of EuroSite Power
2,416,137

 
 
 
 
Noncontrolling interest share of transactions affecting subsidiary ownership
(8,525,668
)
Change from net income attributable to American DG Energy Inc. and transfers (to) from noncontrolling interest
$
10,586,857


Note 7.  Related Parties
 
EuroSite Power, Tecogen, Ilios Inc., or Ilios are affiliated companies by virtue of common ownership and common leadership.
    
The Company purchases the majority of its cogeneration units from Tecogen, an affiliate company sharing similar ownership. In addition, Tecogen pays certain operating expenses, including benefits and payroll, on behalf of the Company, and the Company leases office space from Tecogen. The Company's lease with Tecogen initially expired on July 31, 2016, however renews automatically until cancelled by one of the parties. These costs were reimbursed by the Company. As of September 30, 2016, the Company owed Tecogen $376,145, and Tecogen owed the Company $49,138.

On May 12, 2016, EuroSite Power completed a private placement with related parties of 12,608,696 shares of its common stock for aggregate proceeds of $7.25 million at $0.575 per share. The shares sold in this placement are subject to a registration rights agreement where the Company has agreed to use its best efforts to register the shares issued at the request of the holder. EuroSite used a portion of these proceeds to pay off its debt to its former Chairman, of $2,000,000, with the balance being retained to fund operations and growth.

On June 28, 2016, $2.1 million of Eurosite Power's $2.4 million of convertible debentures were converted into 3,909,260 shares of common stock of Eurosite Power at a price of $0.54 per share. Additionally, $11,000 of accrued interest was also converted at the same price. As the price used to convert the convertible debentures was less than the then contractual conversion price of $0.60 per share of common stock, the fair value of the incremental shares issued to the holders of the convertible debentures over and above the contractually required amount of $224,782 was expensed as debt conversion expense.

During the first quarter of 2015, EuroSite Power repaid $1,000,000 of a related party $3,000,000 note payable in accordance with the terms of the note. The balance of $2,000,000 was repaid in connection with a private placement.

On July 7, 2015, EuroSite Power, one of the Company's previously 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 September 30, 2016, no amounts have been drawn on this line.

As of September 30, 2016 and 2015, EuroSite Power owed the Company $22,059 and $13,638, respectively.


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AMERICAN DG ENERGY INC.

Note 8. Fair Value Measurements

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

In connection with recognizing the distribution of energy systems to the noncontrolling interest in ADGNY (see Note 5. "Stockholders' Equity"), the Company utilized Level 3 category fair value measurements. Those measurements employed the use of discounted cash flow analysis to determine the fair value of those energy systems. The estimated expected cash flows were discounted at a rate of 12% per annum.
    
The Company utilizes a Level 3 category fair value measurement to value its investment in EuroSite Power as an available-for-sale security at period end (see Note 4 Investment in EuroSite Power and Discontinued Operations). That measurement is determined by management based on the lowest quoted closing sales price in a 31 day trading period within quarter end, which is discounted by 10% in consideration of the significance of the shares held in relation to daily sales volume.

The following table summarizes changes in level 3 assets which are comprised of available-for-sale securities for the period:

Initial establishment of fair value at September 30, 2016
 
     Carryover basis from equity method investment
$
624,499

     Unrealized gain recognized in other comprehensive income
21,040

          Fair value at September 30, 2016
$
645,539


In connection with the valuation of the Company’s remaining investment in EuroSite Power following deconsolidation (see Note 4. "Investment in EuroSite Power and Discontinued Operations"), the Company utilized a Level 3 category fair value measurement. That measurement was determined by management based on a then proposed transaction which is disclosed as executed in Note 5 - Convertible debt, as it represents the best indication of fair value available.

Note 9. Commitments and Contingencies
 
The Company has certain commitments under agreements with certain related parties (see Note 7. "Related Parties").
The Company, in the ordinary course of business is involved in various legal matters, the outcomes of which are not expected to have a material impact on the Company's condensed consolidated financial statements.


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AMERICAN DG ENERGY INC.

Note 10. Subsequent Events

On November 1, 2016, the Company's Board of Directors approved a definitive agreement whereby Tecogen Inc would acquire all of the outstanding shares of American DG in a stock-for-stock merger. Under the agreement, each share of American DG common stock will be exchanged for 0.092 shares of Tecogen common stock, valuing American DG at an approximately 27% premium to the Company's closing share price on that day. This agreement is subject to a vote of security holders of both companies. The transaction is expected to close in the first half of 2017.
    
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.

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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 46% of its 48% ownership in its European subsidiary, for elimination of a portion of the outstanding 6% convertible debentures due May 2018. With this swap of EuroSite Power shares in exchange for partial extinguishment of the convertible debt, American DG Energy reduced the convertible debt outstanding to $8.6 million. The Company is pursuing a similar debt exchange transaction for the remaining convertible debt outstanding and expects to complete that subsequent transaction in the fourth quarter of 2016.

Until June 28, 2016 the Company accounted for its investment in EuroSite Power as a consolidated subsidiary. On June 28, 2016 substantially all of the long-term convertible indebtedness of EuroSite Power guaranteed by the Company was converted into shares of EuroSite Power. As a result, the Company deconsolidated EuroSite Power in its consolidated financial statements and the remaining shares held by the Company were recorded at fair value which resulted in a $3.9 million gain. (see Note 4. Investment in EuroSite Power)

On September 30, 2016, the Company settled $6.7 million of its $10.1 million outstanding 6% convertible debentures due May 2018 by transferring ownership of 15.2 million shares it owned of EuroSite Power in exchange for the debt. A new note evidencing the remaining balance of the debt outstanding of $3,418,681, including prepaid interest was issued, replacing the previous note. The effective interest rate on the remaining debt is identical to the previous rate prior to

14
AMERICAN DG ENERGY INC.

the exchange. As a result, the Company has accounted for its ownership in EuroSite Power as discontinued operations as of September 30, 2016.

Results of Operations

Third Quarter 2016 Compared to Third Quarter 2015 from Continuing Operations

Revenues
 
Revenues in the third quarter of 2016 were $1,580,863 compared to $1,534,553 for the same period in 2015, an increase of $46,310 or 3.0%. The increase is due to the capture and billing of demand revenue. On-Site Utility energy revenue in the third quarter of 2016 was $1,393,009 compared to $1,340,627 for the same period in 2015, an increase of $52,382 or 3.9%, due to the increase in demand billing. During the third 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 third quarter of 2016 was $187,854 compared to $193,926 for the same period in 2015, a decrease of $6,072 or 3.1%.
 
During the third quarter of 2016, and 2015 the Company operated 92 energy systems, representing 5,445 kWh of installed electricity potential. 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 third quarter of 2016 was $1,228,626 compared to $1,255,983 for the same period in 2015, a slight decrease of $27,357 or 2.2%. The decrease in cost of sales is principally due to a decrease in fuel costs, offset by an increase in depreciation. The cost of fuel, maintenance and installation was $774,161 in the third quarter of 2016, compared to $837,192 for the same period in 2015, a decrease of $63,031 or 7.5%. Depreciation expense was $454,465 in the third quarter of 2016, compared to $418,791 for the same period in 2015, an increase of $35,674 or 8.5%.
 
During the third quarter of 2016, our gross margins were 22.3% compared to 18.2% for the same period in 2015, a 22.5% improvement, mostly due to a 3% reduction in fuel costs as a percentage of sales. Our gross margins, excluding depreciation, were 51.0% in the third quarter of 2016, compared to 45.4% for the same period in 2015, also a 12.3% improvement.

Operating Expenses
 
Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the third quarter of 2016 were $401,140 compared to $364,768 for the same period in 2015, an increase of $36,372 or 10.0%. The increase was primarily due to an increase of non-cash stock compensation.
 
Our selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. 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 third quarter of 2016 were $1,418 compared to $127,966 for the same period in 2015, a decrease of $126,548 or 98.9%. The decrease in expense was primarily due to lower salaries and travel expense as a result of our efforts to control operating costs.
 
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 third quarter of 2016 were $164,528 compared to $239,859 for the same period in 2015, a decrease of $75,331 or 31.4%. The decrease was primarily associated with a reduction in payroll, supplies and outside service costs.
 

15
AMERICAN DG ENERGY INC.

Loss from Operations
 
The loss from operations in the third quarter of 2016 was $214,849 compared to a loss of $454,023 for the same period in 2015, an improvement of $239,174 or 52.7%. The improvement in the operating loss was primarily due to lower operating expenses of $165,507 in the third quarter of 2016 compared to the third quarter of 2015 and an improvement in gross margin of 4.1%.
 
Other Income (Expense), Net
 
Our other expense, net, in the third quarter of 2016 was income of $7,046 compared to an expense of $305,763 for the same period in 2015, an improvement of $312,809. Interest expense was $177,756 in the third quarter of 2016 compared to $311,738 for the same period in 2015, a decrease of $133,982, which is primarily due to a decrease in principal balance of convertible debt in 2016 as compared to 2015. In addition, a gain of $182,887 was recognized in 2016 upon the exchange of the Company's EuroSite shares for settlement of convertible debentures. (see Note 4 Investment in Eurosite Power and Discontinued Operations).
 
Provision for Income Taxes
 
Our provision for taxes in the third quarter of 2016 was $0 compared to $8,797 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, was a reduction to net income of $36,602 in the third quarter of 2016 compared to $29,491 for the same period in 2015. This difference of $7,111 is due to the improved performance of ADGNY sites.

Loss from Discontinued Operations

American DG's international operations, through our former subsidiary, EuroSite Power, is now being accounted for as discontinued operations. For the third quarter of 2016 and 2015, our share in its losses was $119,506 and $220,559, respectively.

Other Comprehensive Income

The unrealized gain on securities of $21,040 for the third quarter of 2016 represents a market fluctuation for the period in the fair value of our ownership in EuroSite Power stock.

First Nine Months of 2016 Compared to First Nine Months of 2015 from Continuing Operations
 
Revenues
 
Revenues in the first nine months of 2016 were $4,567,023 compared to $5,038,393 for the same period in 2015, a decrease of $471,370 or 9.4%. The decrease in revenues was primarily due to a lower number of sites operating in the first half of 2016 compared to the same period in 2015. The first half of 2015, which was prior to the asset transfer of seven of LLC sites, earned revenues from more sites than the same period in 2016. Our On-Site Utility energy revenue in the first nine months of 2016 was $4,090,657 compared to $4,538,832 for the same period in 2015, a decrease of $448,175, or 9.9%. During the first nine months of 2016, the Company performed billable services and recorded revenue from the maintenance of energy systems and from the sale of equipment. The revenue from our turnkey projects can vary substantially per period. While the Company accepts turnkey installation projects, they are not considered our core business. Our turnkey and other revenue in the first nine months of 2016 was $476,366 compared to $499,561 for the same period in 2015, a decrease of $23,195 or 4.6%.
 
During the first nine months of 2016, the Company operated 92 energy systems representing 5,445 kW of installed electricity plus thermal energy, compared to a range of 101 to 92 energy systems representing 6,105 kW to 5,445 kW of installed electricity plus thermal energy for the same period in 2015. This range in 2015 is due to the asset transfer of certain ADGNY sites which occurred in Q2 2015. The revenue per customer on a monthly basis is based on the sum of the amount of energy produced by the Company’s energy systems and the published price of energy (electricity, natural gas or oil) from

16
AMERICAN DG ENERGY INC.

its customers’ local energy utility that month, less the discounts the Company provides its customers. The Company’s revenues commence as new energy systems become operational.
 
Cost of Sales
 
Cost of sales, including depreciation, in the first nine months of 2016 was $4,060,735 compared to $4,365,120 for the same period in 2015. Included in the cost of sales was depreciation expense of $1,348,231 in the first nine months of 2016, compared to $1,259,970 for the same period in 2015, an increase of $88,261, or 7.0%. The cost of fuel, maintenance and installation was $2,712,504 in the first nine months of 2016, compared to $3,105,150 for the same period in 2015, a decrease of $392,646 or 12.6%, primarily due to lower fuel costs and lower sales.
 
During the first nine months of 2016, our gross margins were 11.1% compared to 13.4% for the same period in 2015, primarily due to an increase in our depreciation expense, partially offset by lower fuel and installation expenses. Our gross margins excluding depreciation were at 40.6% in the first nine months of 2016, compared to 38.4% 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 nine months of 2016 were $1,170,205 compared to $1,437,452 for the same period in 2015, a decrease of $267,247 or 18.6%. This decrease was primarily due to lower salary, stock compensation, legal, consulting and travel expenses.
 
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 nine months of 2016 were $39,184 compared to $540,615 for the same period in 2015, a decrease of $501,431 or 92.8%. The decrease was primarily due to a reduction in payroll and travel expense.

Our engineering expenses consisted of technical staff and other engineering related expenses. The role of engineering is to evaluate potential customer sites based on technical and economic feasibility, manage the installed base of energy systems and oversee each new installation project. Our engineering expenses in the first nine months of 2016 were $470,351 compared to $551,151 for the same period in 2015, a decrease of $80,800 or 14.7%. The decrease was primarily due to lower payroll, consulting and travel costs.
 
Loss from Operations
 
The loss from operations in the first nine months of 2016 was $1,173,452 compared to a loss of $1,855,945 for the same period in 2015, an improvement of $682,493, or 36.8%. The decrease in the operating loss was primarily due to lower selling, general and administrative expenses.
 
Other Income (Expense), Net
 
Our other income (expense), net, in the first nine months of 2016 was income of $3,330,343 compared to expense of $723,243 for the same period in 2015, an increase of $4,053,586. Other income (expense), net, includes interest and other income, gain attributable to deconsolidation of EuroSite and interest expense. Interest and other income was $19,702 in the first nine months of 2016 compared to $187,797 for the same period in 2015, a decrease of $168,095. The decrease was primarily due to a $157,870 gain attributable to the redistribution of ADGNY assets in the second quarter of 2015. Interest expense was $759,344 in the first nine months of 2016 compared to $917,818 for the same period in 2015, a decrease of $158,474, or 17.3%. The lower interest expense is due to less convertible debentures paying interest in the first nine months of 2016 as compared to the same period of 2015. We also recognized a non-cash gain on deconsolidation with EuroSite of $3,887,098 (see Note 4 Investment in EuroSite Power and Discontinued Operations). 

Benefit (Provision) for Income Taxes
 
Our provision for state income taxes in the first nine months of 2016 was $60,288 compared to $16,153 for the same period in 2015. The provision consists of various state income taxes accrued for the period.
 

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AMERICAN DG ENERGY INC.

Noncontrolling Interest
 
The noncontrolling interest share in the profits or losses in ADGNY was a decrease in net income of $51,581 in the first nine months of 2016 compared to an increase in net loss of $75,021 for the same period in 2015. This difference of $23,440 is due to prior year's restructuring of ADGNY that occurred in the second quarter of 2015.

Loss from Discontinued Operations

Our former subsidiary, EuroSite Power is now being accounted for as discontinued operations. For the first nine months of 2016 and 2015 our share in its losses were $485,408 and $736,766, respectively.

Other Comprehensive Income

The unrealized gain on securities of $21,040 in 2016 represents a market fluctuation for the period in the fair value of our ownership in EuroSite Power stock.
 

Liquidity and Capital Resources
 
Consolidated working capital at September 30, 2016 was $4,530,953, compared to $6,210,765 at December 31, 2015. Included in working capital were cash and cash equivalents of $3,187,634 at September 30, 2016, compared to $4,999,709 at December 31, 2015. The decrease in working capital was primarily due to purchases and installation of energy systems in the amount of $1,115,323.
 
Cash used in operating activities was $622,714 in the first nine months of 2016 compared to $234,508 for the same period in 2015. For the first nine months of 2016, net income attributable to American DG was $1,559,614. This net income was adjusted by a gain on deconsolidation of EuroSite of $3,887,098, depreciation of $1,378,134, $703,333 of non-cash interest expense, $122,031 of stock-based compensation expense and gain on extinguishment of debt of $182,887. In addition, our receivables balance, including unbilled revenue and allowances for bad debts, used $115,835 in the first nine months of 2016, our decrease in inventory provided $125,225 of cash and an increase in prepaid and other current assets used $105,585 in cash.
 
Our accounts payable increased providing $8,549 of cash. Our accrued expenses and other current liabilities decreased using $19,013 of cash. The amounts due to related parties decreased using $795,718 of cash.
 
During the first nine months of 2016, the investing activities of the Company's operations were expenditures of $1,115,323 for purchases and installation of energy systems. The Company's financing activities used $84,288 of cash in the first nine months of 2016, from distributions to ADGNY.

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 principal financial officer), as of the end of the period covered by this report, our co-principal executive officers and 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 nine months 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.


20
Table of Contents                

Item 6.    Exhibits
Exhibit Number
 
Description of Exhibit
 
 
 
2.1
_
Agreement and Plan of Merger, dated November 1, 2016, among the Company, Tecogen, Inc. and Tecogen.ADGE Acquisition Corp. (incorporated by reference from Exhibit 2.1 to the Company's SEC Form 8-K filed with the SEC on November 2, 2016).
 
 
 
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 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, as filed with the SEC on October 5, 2016).
 
 
 
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
–     
Form of Convertible Note Exchange Agreement dated August 9, 2016 between the Company and Trifon Natsis and Despina Pantopoulou (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K, as filed with the SEC on August 10, 2016).
 
 
 
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 September 30, 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.

* 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: November 14, 2016
 
 
 
 
By: /s/ BENJAMIN M. LOCKE
 
 
Co-Chief Executive Officer
 
(Principal Executive Officer)
 
Date: November 14, 2016
 
 
 
 
 
By: /s/ BONNIE J. BROWN
 
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
Date: November 14, 2016
 


22

AMERICAN DG ENERGY INC Reports

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