10-Q 1 adge-20120930x10q.htm 10-Q ADGE-2012.09.30-10Q


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 September 30, 2012

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) 622-1120
____________________________________________________________________________
 
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 September 30, 2012
Common Stock, $0.001 par value
 
48,168,460


    



Table of Contents                

AMERICAN DG ENERGY INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDING SEPTEMBER 30, 2012
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
References in this Form 10-Q to “we”, “us”, “our”, the “Company” and “American DG Energy” refers 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
As of September 30, 2012 and December 31, 2011 (unaudited)
 
 
September 30,
2012
 
December 31,
2011
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
15,750,942

 
$
17,801,025

Accounts receivable, net
911,581

 
879,630

Unbilled revenue
14,379

 
18,825

Due from related party
164,578

 
21,140

Inventory
1,255,161

 
634,120

Prepaid and other current assets
383,342

 
322,276

Total current assets
18,479,983

 
19,677,016

Property, plant and equipment, net
16,451,474

 
14,690,117

Accounts receivable, long-term
66,464

 
82,664

Other assets, long-term
49,771

 
53,504

TOTAL ASSETS
$
35,047,692

 
$
34,503,301

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,390,796

 
$
520,608

Accrued expenses and other current liabilities
839,228

 
589,032

Due to related party
529,464

 
313,847

Capital lease obligations
3,365

 
3,365

Total current liabilities
2,762,853

 
1,426,852

Long-term liabilities:
 

 
 

Convertible debentures
19,400,000

 
19,400,000

Warrant liability
593,190

 
249,561

Capital lease obligations, long-term
841

 
3,365

Other long-term liabilities
32,846

 
43,052

Total liabilities
22,789,730

 
21,122,830

Stockholders’ equity:
 

 
 

American DG Energy Inc. stockholders’ equity:
 

 
 

Common stock, $0.001 par value; 100,000,000 shares authorized; 48,168,460 and 46,001,404 issued and outstanding at September 30, 2012 and December 31, 2011, respectively
48,168

 
46,001

Additional paid-in capital
34,580,997

 
30,399,370

Accumulated deficit
(23,009,206
)
 
(17,931,058
)
Total American DG Energy Inc. stockholders’ equity
11,619,959

 
12,514,313

Noncontrolling interest
638,003

 
866,158

Total stockholders’ equity
12,257,962

 
13,380,471

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
35,047,692

 
$
34,503,301

 
See Notes to unaudited Condensed Consolidated Financial Statements
 

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Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2012 and September 30, 2011
 
 
Three Months Ended
 
September 30,
2012
 
September 30,
2011
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

Energy revenues
$
1,337,831

 
$
1,389,159

Turnkey & other revenues
62,424

 
29,252

 
1,400,255

 
1,418,411

Cost of sales
 

 
 

Fuel, maintenance and installation
733,727

 
716,806

Depreciation expense
301,813

 
318,903

 
1,035,540

 
1,035,709

Gross profit
364,715

 
382,702

Operating expenses
 

 
 

General and administrative
481,707

 
593,558

Selling
512,885

 
699,898

Engineering
270,405

 
221,866

 
1,264,997

 
1,515,322

Loss from operations
(900,282
)
 
(1,132,620
)
Other income (expense), net
 

 
 

Interest and other income
17,547

 
11,433

Interest expense
(293,556
)
 
(142,772
)
Change in fair value of warrant liability
(82,293
)
 
125,668

 
(358,302
)
 
(5,671
)
Loss before provision for state income taxes
(1,258,584
)
 
(1,138,291
)
Benefit (provision) for state income taxes
(9,440
)
 
41

Consolidated net loss
(1,268,024
)
 
(1,138,250
)
Loss attributable to the noncontrolling interest
8,534

 
28,734

Net loss attributable to American DG Energy Inc.
$
(1,259,490
)
 
$
(1,109,516
)
Net loss per share - basic and diluted
$
(0.03
)
 
$
(0.02
)
Weighted average shares outstanding - basic and diluted
47,653,786

 
45,834,904

 
See Notes to unaudited Condensed Consolidated Financial Statements



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Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2012 and September 30, 2011
 
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

Energy revenues
$
3,925,665

 
$
4,270,336

Turnkey & other revenues
169,949

 
283,256

 
4,095,614

 
4,553,592

Cost of sales
 

 
 

Fuel, maintenance and installation
2,431,285

 
2,799,733

Depreciation expense
1,131,397

 
921,931

 
3,562,682

 
3,721,664

Gross profit
532,932

 
831,928

Operating expenses
 

 
 

General and administrative
1,927,030

 
1,618,181

Selling
1,557,220

 
933,848

Engineering
850,482

 
536,132

 
4,334,732

 
3,088,161

Loss from operations
(3,801,800
)
 
(2,256,233
)
Other income (expense)
 

 
 

Interest and other income
43,987

 
31,414

Interest expense
(1,034,589
)
 
(246,376
)
Change in fair value of warrant liability
(343,629
)
 
509,663

 
(1,334,231
)
 
294,701

Loss before provision for state income taxes
(5,136,031
)
 
(1,961,532
)
Provision for state income taxes
(21,402
)
 
(17,071
)
Consolidated net loss
(5,157,433
)
 
(1,978,603
)
(Income) loss attributable to the noncontrolling interest
79,285

 
(34,808
)
Net loss attributable to American DG Energy Inc.
$
(5,078,148
)
 
$
(2,013,411
)
Net loss per share - basic and diluted
$
(0.11
)
 
$
(0.04
)
Weighted average shares outstanding - basic and diluted
46,716,914

 
45,647,265

 
See Notes to unaudited Condensed Consolidated Financial Statements

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Table of Contents                

AMERICAN DG ENERGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012 and September 30, 2011
 
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
(unaudited)
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net loss
$
(5,078,148
)
 
$
(2,013,411
)
Income (loss) attributable to noncontrolling interest
(79,285
)
 
34,808

Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
1,175,210

 
954,751

Provision for losses on accounts receivable
89,649

 
22,568

Amortization of deferred financing costs
3,733

 
2,256

Increase (decrease) in fair value of warrant liability
343,629

 
(509,663
)
Noncash interest expense
712,921

 

Stock-based compensation
596,408

 
479,205

Changes in operating assets and liabilities:
 

 
 

(Increase) decrease in:
 

 
 

Restricted cash

 
65,790

Accounts receivable and unbilled revenue
(100,954
)
 
(546,238
)
Due from related party
(143,438
)
 
(25,128
)
Inventory
(621,041
)
 
(29,605
)
Prepaid and other current assets
(61,066
)
 
(130,283
)
Increase (decrease) in:
 

 
 

Accounts payable
870,188

 
3,994

Accrued expenses and other current liabilities
250,196

 
146,704

Due to related party
215,617

 
(35,702
)
Other long-term liabilities
(10,206
)
 
46,454

Net cash used in operating activities
(1,836,587
)
 
(1,533,500
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property and equipment
(2,936,567
)
 
(1,249,637
)
Net cash used in investing activities
(2,936,567
)
 
(1,249,637
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from issuance of convertible debentures

 
10,100,000

Proceeds from sale of common stock, net of costs
3,531,534

 

Proceeds from sale of subsidiary common stock, net of costs

 
1,148,401

Proceeds from exercise of stock options
149,882

 
26,798

Proceeds from issuance of common stock warrants
7,500

 

Purchases of common stock, net of costs
(750,000
)
 

Convertible debenture transaction costs

 
(47,423
)
Principal payments on capital lease obligations
(2,524
)
 
(2,524
)
Cancellation of restricted stock
(40
)
 
(20
)
Distributions to noncontrolling interest
(213,281
)
 
(251,964
)
Net cash provided by financing activities
2,723,071

 
10,973,268

Net (decrease) increase in cash and cash equivalents
(2,050,083
)
 
8,190,131

Cash and cash equivalents, beginning of the period
17,801,025

 
3,921,054

Cash and cash equivalents, end of the period
$
15,750,942

 
$
12,111,185

 
 
 
 
Supplemental disclosures of cash flows information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$

 
$

Income taxes
$
37,620

 
$
23,753

Non-cash investing and financing activities:
 

 
 

Interest on convertible debentures paid in stock
$
712,921

 
$

Conversion of related party revolving line of credit to convertible debentures
$

 
$
2,400,000

 
See Notes to unaudited Condensed Consolidated Financial Statements
 


 

6

AMERICAN DG ENERGY INC.

Notes to Interim Unaudited Condensed Consolidated Financial Statements for the period ending September 30, 2012

Note 1 – Description of business and summary of significant accounting policies:
 
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”.
 
Basis of Presentation
 
The unaudited condensed consolidated financial statements, or the Unaudited Financial Statements, presented herein have been prepared by the Company, without audit, and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods presented. The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, for reporting in this Quarterly Report on Form 10-Q, or the Quarterly Report. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is suggested that the Unaudited Financial Statements be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual report on Form 10-K for the year ended December 31, 2011, or the Annual report, filed with the SEC. The Company’s operating results for the three and nine month periods ended September 30, 2012, may not be indicative of the results expected for any succeeding interim periods or for the entire year ending December 31, 2012.     
 
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary American DG Energy, its 51.0% joint venture, American DG New York, LLC, or ADGNY, and its 82.8% owned subsidiary EuroSite Power Inc., or EuroSite Power.
 
The Company owns 51.0% of ADGNY, after elimination of all material intercompany accounts, transactions and profits. The interest in underlying energy system projects in the joint venture varies between the Company and its joint venture partner. As the controlling partner, all major decisions in ADGNY are made by the Company according to the joint venture agreement. Distributions, however, are made based on the economic ownership and profitability of the underlying energy projects. The economic ownership of the energy projects is calculated by the amount invested by the Company and the noncontrolling partner in each site. Each quarter the Company calculates a year-to-date profit/loss for each site that is part of ADGNY and the noncontrolling interest percent ownership in each site is applied to determine the noncontrolling interest share in the profit/loss. The Company follows the same calculation regarding available cash and a cash distribution is made to the noncontrolling interest partner, Peter Westerhoff, each quarter. On the Company’s consolidated balance sheets, noncontrolling interest represents the partner’s investment in the entity, plus its share of after tax profits less any cash distributions. The Company owned a controlling 51.0% legal interest and a 68.0% economic interest in ADGNY as of September 30, 2012.
 
In July 2010 the Company invested $45,000 in exchange for 45 million shares of EuroSite Power, a newly established corporation. The investment gave the Company a controlling financial interest in EuroSite Power, whose business focus is to introduce the On-Site Utility solution into the European market. Also in July 2010, Nettlestone Enterprises Limited, invested $5,000 in exchange for 5 million shares in EuroSite Power. During the year ended December 31, 2011, EuroSite Power raised approximately $1,250,000 in private placements by selling 1,250,000 shares of EuroSite Power common stock to accredited investors at $1.00 per share. As of September 30, 2012 the Company owns an 82.8% interest in EuroSite Power and has consolidated EuroSite Power into its financial statements in accordance with GAAP.
 
On February 10, 2012, EuroSite Power announced that its Board of Directors declared a stock dividend of 10.0% per share on the outstanding shares of EuroSite Power common stock. The dividend was payable on March 12, 2012 to common stockholders of record at the close of business on February 24, 2012. EuroSite Power has retroactively reflected this dividend to its December 31, 2011 financial statements. The Company has rejected the receipt of the dividend on the EuroSite Power shares it currently holds.
 

7

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.
 
The Company has experienced total net losses since inception of approximately $23.0 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 12 months; however, as the Company continues to grow its business by adding more energy systems, the cash requirements will increase. Beyond September 30, 2013, the Company may need to raise additional capital through a debt financing or an equity offering to meet its operating and capital needs. There can be no assurance, however, that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all.
 
For the nine month period ended September 30, 2012, the Company raised $3,531,534, net of issuance costs, from private placements of common stock, $7,500 from issuance of warrants and $149,882 from exercise of stock options. If the Company is unable to raise additional capital in 2013 it may need to terminate certain of its employees and adjust its current business plan. Financial considerations may cause the Company to modify planned deployment of new energy systems and may decide to suspend installations until it is able to secure additional working capital. The Company will evaluate possible acquisitions of, or investments in, businesses, technologies and products that are complementary to its business; however, the Company is not currently engaged in such discussions.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition
 
Revenue from energy contracts is recognized when electricity, heat, and chilled water is produced by the cogeneration systems on-site. The Company bills each month based on various meter readings installed at each site. The amount of energy produced by on-site energy systems is invoiced, as determined by a contractually defined formula. Under certain energy contracts, the customer directly acquires the fuel to power the systems and receives credit for that expense from the Company. The credit is recorded as a reduction of revenue and as reduction of cost of fuel. Revenues from operation, including shared savings are recorded when provided and verified. Maintenance service revenue is recognized over the term of the agreement and is billed on a monthly basis in arrears.
 
As a by-product of the energy business, in some cases, the customer may choose to have the Company construct the system for them rather than have it owned by American DG Energy. In this case, the Company accounts for revenue, or turnkey revenue, and costs using the percentage-of-completion method of accounting. Under the percentage-of-completion method of accounting, revenues are recognized by applying percentages of completion to the total estimated revenues for the respective contracts. Costs are recognized as incurred. The percentages of completion are determined by relating the actual cost of work performed to date to the current estimated total cost at completion of the respective contracts. When the estimate on a contract indicates a loss, the Company’s policy is to record the entire expected loss, regardless of the percentage of completion. The excess of contract costs and profit recognized to date on the percentage-of-completion accounting method in excess of billings is recorded as unbilled revenue. Billings in excess of related costs and estimated earnings is recorded as deferred revenue.
 
Customers may buy out their long-term obligation under energy contracts and purchase the underlying equipment from the Company. Any resulting gain on these transactions is recognized over the payment period in the accompanying consolidated statements of operations. The Company had no such arrangements at September 30, 2012 and 2011, respectively.
 
Occasionally, the Company will enter into a sales arrangement with a customer to construct and sell an energy system and provide energy and maintenance services over the term of the contract. Based on the fact that the Company sells each deliverable to other customers on a stand-alone basis, the Company has determined that each deliverable has a stand-alone value. Additionally, there are no rights of return relative to the delivered items; therefore, each deliverable is considered a separate unit of accounting. Revenue is allocated to each element based upon its relative fair value which is determined

8

AMERICAN DG ENERGY INC.

based on the estimated price of the deliverables when sold on a standalone basis. Revenue related to the construction of the energy system is recognized using the percentage-of-completion method as the unit is being constructed. Revenue from the sale of energy is recognized when electricity, heat, and chilled water is produced by the energy system, and revenue from maintenance services is recognized over the term of the maintenance agreement. The Company had no such arrangements at September 30, 2012 and 2011, respectively.
 
The Company is able to participate in the demand response market and receive payments due to the availability of its energy systems. Demand response programs provide payments for either the reduction of electricity usage or the increase in electricity production during periods of peak usage throughout a utility territory. At September 30, 2012 and 2011, the revenue recognized from demand response activity was $13,610 and $59,709, respectively. The Company treats demand response payments as an operating activity in the statements of cash flows.
 
Other revenue represents various types of ancillary activities for which the Company expects to engage in from time to time such as the sale of equipment, construction work, engineering work and feasibility studies.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company has cash balances in certain financial institutions in amounts which occasionally exceed current federal deposit insurance limits. The financial stability of these institutions is continually reviewed by senior management. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
 
Concentration of Credit Risk
 
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of highly liquid cash equivalents and trade receivables. The Company’s cash equivalents are placed with certain financial institutions and issuers. As of September 30, 2012, the Company had a balance of $13,706,971 in cash and cash equivalents that exceeded the Federal Deposit Insurance Corporation limit of $250,000 per institution.
 
Accounts Receivable
 
The Company maintains receivable balances primarily with customers located throughout New York and New Jersey. The Company reviews its customers’ credit history before extending credit and generally does not require collateral. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Generally, such losses have been within management’s expectations. Bad debt is written off when identified. At September 30, 2012 and December 31, 2011, the allowance for doubtful accounts was $114,000 and $172,000, respectively.
 
Inventory
 
Inventories are stated at the lower of cost or market, valued on a first-in, first-out basis. Inventory is reviewed periodically for slow-moving and obsolete items. As of September 30, 2012 and December 31, 2011, there were no reserves or write-downs recorded against inventory.
 
Supply Concentrations
 
All of the Company’s cogeneration unit purchases as of September 30, 2012 and December 31, 2011, were from one vendor (see “Note 8 - Related parties”). The Company believes there are sufficient alternative vendors available to ensure a constant supply of cogeneration units on comparable terms. However, in the event of a change in suppliers, there could be a delay in obtaining units which could result in a temporary slowdown of installing additional income producing sites. In addition, the majority of the Company’s units are installed and maintained by the noncontrolling interest holder or maintained by Tecogen Inc., or Tecogen. The Company believes there are sufficient alternative vendors available to ensure a constant supply of maintenance and installation services on comparable terms. However, in the event of a change of vendor, there could be a delay in installation or maintenance services.
 

9

AMERICAN DG ENERGY INC.

Property and Equipment and Depreciation and Amortization
 
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method at rates sufficient to write off the cost of the applicable assets over their estimated useful lives. Repairs and maintenance are expensed as incurred.
 
The Company evaluates the recoverability of its long-lived assets by comparing the net book value of the assets to the estimated future undiscounted cash flows attributable to such assets. The useful life of the Company’s energy systems is lesser of the economic life of the asset or the term of the underlying contract with the customer, typically 12 to 15 years. The Company reviews the useful life of its energy systems on a quarterly basis or whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable or that the useful lives of the assets are no longer appropriate. If impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis.
  
The Company receives rebates and incentives from various utility companies which are accounted for as a reduction in the book value of the assets. The rebates are payable from the utility to the Company and are applied against the cost of construction, therefore reducing the book value of the installation. As a reduction of the facility construction costs, these rebates are treated as an investing activity in the statements of cash flows. The rebates received by the Company from the utilities that apply to the cost of construction are one time rebates based on the installed cost, capacity and thermal efficiency of installed unit and are earned upon the installation and inspection by the utility and are not related to or subject to adjustment based on the future operating performance of the installed units. The rebate agreements with utilities are based on standard terms and conditions, the most significant being customer eligibility and post-installation work verification by a specific date. At September 30, 2012 and 2011, the amount of rebates applied to the cost of construction was $260,701 and $327,138, respectively.
 
Stock-Based Compensation
 
Stock based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense in the consolidated statements of operations over the requisite service period. The fair value of stock options granted is estimated using the Black-Scholes option pricing valuation model. The Company recognizes compensation on a straight-line basis for each separately vesting portion of the option award. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the Company’s historic volatility over the expected life of the option grant. The average expected life is estimated using the simplified method for “plain vanilla” options. The simplified method determines the expected life in years based on the vesting period and contractual terms as set forth when the award is made. The Company uses the simplified method for awards of stock-based compensation since it does not have the necessary historical exercise and forfeiture data to determine an expected life for stock options. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. When options are exercised the Company normally issues new shares.
 
See “Note 6 – Stock based compensation” for a summary of the restricted stock and stock option activity under the Company’s stock-based employee compensation plan for the periods ended September 30, 2012 and 2011, respectively.
 
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.
 
Other Comprehensive Net Loss
 
The comprehensive net loss for the period ended September 30, 2012 and December 31, 2011, does not differ from the reported loss.
 




10

AMERICAN DG ENERGY INC.

Income Taxes
 
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and certain accrued liabilities for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, the Company must establish a valuation allowance.
 
The Company is allowed to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalties (if applicable) on that excess. In addition, the Company is required to provide a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to the accrued interest and penalties for unrecognized tax benefits. Discussion is also required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months.
  
The tax years 2003 through 2005 and 2010 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carry forward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying consolidated financial statements. The Company would record any such interest and penalties as a component of interest expense. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date.
 
Impact of New Accounting Pronouncements
 
In June 2011, the Financial Accounting Standards Board, or FASB, issued an amendment to the accounting guidance for presentation of comprehensive income. Under the amended guidance, an entity may present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In either case, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. For public companies, the amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and shall be applied retrospectively. The Company currently has no elements of other comprehensive income therefore the implementation of this accounting pronouncement did not have an impact on the Company’s financial statements.
 
In May 2011, the FASB issued an amendment to the accounting guidance for fair value measurement and disclosure. Among other things, the guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for measurement of the fair value of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for interim and annual periods beginning after December 15, 2011. Other than additional disclosures, the adoption of this accounting pronouncement did not have a material impact on the Company’s financial statements.

Note 2 – Loss per common share:
 
The Company computes basic loss per share by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during the period. The Company computes its diluted earnings per common share using the treasury stock method. For purposes of calculating diluted loss 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/conversion price is less than the average market price of the common stock for the period. All shares issuable for both periods were anti-dilutive because of the reported net loss. Basic and diluted loss per share for the three and nine months ended September 30, 2012 and 2011 respectively was as follows:

11

AMERICAN DG ENERGY INC.

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Earnings per share
 

 
 

 
 

 
 

Loss available to stockholders
$
(1,259,490
)
 
$
(1,109,516
)
 
$
(5,078,148
)
 
$
(2,013,411
)
Weighted average shares outstanding - Basic and diluted
47,653,786

 
45,834,904

 
46,716,914

 
45,647,265

Basic and diluted loss per share
$
(0.03
)
 
$
(0.02
)
 
$
(0.11
)
 
$
(0.04
)
Shares underlying warrants outstanding
565,500

 
588,000

 
565,500

 
588,000

Shares underlying stock options outstanding
2,101,986

 
2,053,375

 
2,101,986

 
2,053,375

Shares underlying convertible debentures outstanding
8,818,182

 
5,681,818

 
8,818,182

 
5,681,818

 
11,485,668

 
8,323,193

 
11,485,668

 
8,323,193

  
Note 3 – Convertible debentures:
 
On May 23, 2011, the Company issued $12,500,000 aggregate principal amount of debentures to a European investor and to John N. Hatsopoulos, the Company’s Chief Executive Officer. The debentures mature on May 25, 2018 and accrue interest at the rate of 6% per annum payable on a semi-annual basis. At the holder’s option, the debentures may be converted into shares of the Company’s common stock at a conversion price of $2.20 per share, subject to adjustment in certain circumstances. The Company has the option to redeem at 115% of Par Value any or all of the debentures after May 25, 2016. The proceeds of the debentures will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes. The debentures canceled the revolving line of credit agreement with John N. Hatsopoulos, which as of May 23, 2011, had a principal amount outstanding of $2,400,000.
 
On November 30, 2011, the Company issued an additional $6,900,000 aggregate principal amount of debentures to the European investor. The debentures mature on May 25, 2018 and accrue interest at the rate of 6% per annum payable on a semi-annual basis. At the holder’s option, the debentures may be converted into shares of the Company’s common stock at a conversion price of $2.20 per share, subject to adjustment in certain circumstances. The Company has the option to redeem at 115% of Par Value any or all of the debentures after May 25, 2016. The proceeds of the debentures will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
 
In March 2012, the debenture holders amended the terms on the debentures with respect to the interest payment and agreed to receive their interest payment in shares of the Company’s common stock instead of cash for 2012, 2013 and 2014, provided that the Company’s shares are listed on a National Securities Exchange. Under the terms of the agreement, for the May semi-annual interest payment, the Company used the April average daily closing price of the common stock in order to determine the conversion price. All other terms and conditions, including interest rate and maturity date remained the same. On May 25, 2012, the total interest due to the debenture holders was $559,000 and in connection with the amendment the Company issued to the debenture holders 251,917 shares of common stock at $2.22 per share which was the average price of the Company’s common stock during the month of April. In connection with this transaction, the Company recorded an additional $153,921 of non-cash interest expense, which was the difference between the average stock price and the fair market value on May 25, 2012.

In September 2012, the debenture holders amended the terms on the debentures with respect to the interest payment and agreed to receive their interest payment in shares of the Company’s common stock instead of cash for 2012, 2013 and 2014, provided that the Company’s shares are listed on a National Securities Exchange. Under the terms of the agreement, the Company will use the average daily closing price of the Common Stock 10 business days before the interest payment date (May 25th and November 25th) in order to determine the conversion price. All other terms and conditions, including interest rate and maturity date remain the same.

Note 4 – Common Stock:

On March 27, 2012, the Company entered into a definitive agreement to sell restricted common stock for aggregate proceeds of $1,600,000 to Dr. Phillip Frost through one of his trusts. Pursuant to the agreement, the Company sold to Dr. Frost 1,000,000 shares of restricted common stock at $1.60 per share at an aggregate purchase price of $1,600,000. The proceeds of the private placement were used to fund additional installations of the Company's On-Site Utility energy systems and for general corporate and working capital purposes.


12

AMERICAN DG ENERGY INC.

On August 7, 2012, the Company entered into a definitive agreement to sell restricted common stock for aggregate proceeds of $2,000,000 to Dr. Phillip Frost through one of his trusts. Pursuant to the agreement, the Company sold to Dr. Frost 1,250,000 shares of restricted common stock at $1.60 per share at an aggregate purchase price of $2,000,000. The proceeds of the private placement were used to fund additional installations of the Company's On-Site Utility energy systems and for general corporate and working capital purposes.

Note 5 – Warrants:
 
On January 15, 2011, the Company signed an investor relations consulting agreement with AIM Capital Corporation d/b/a Barry Kaplan Associates, or AIM Capital, for a period of twelve months. In connection with that agreement the Company granted AIM Capital a warrant to purchase 30,000 shares of American DG Energy Inc. common stock at an exercise price per share of $2.69, with a four year vesting period and an expiration date of January 15, 2016. The Company received no other consideration from the issuance of the warrants. The expense related to this warrant was de minimis for the nine months ended September 30, 2012.
 
On February 22, 2012, the Company sold a warrant to purchase shares of the Company’s common stock to an accredited investor, for a purchase price of $7,500. The warrant, which expires on February 22, 2013, gives the investor the right but not the obligation to purchase 50,000 shares of the Company’s common stock at an exercise price per share of $3.00. The expense related to this warrant was de minimis for the nine months ended September 30, 2012.
 
At September 30, 2012, the Company had 588,000 warrants outstanding including, 50,000 warrants at an exercise price of $3.00 per share that expire on February 22, 2013; 8,000 warrants at an exercise price of $2.98 per share that expire on May 30, 2013; 500,000 warrants at an exercise price of $3.25 per share that expire on December 14, 2015 (see “Note 7 – Warrant liability” and “Note 10 – Fair value measurements”); and 30,000 warrants at an exercise price of $2.69 per share that expire on January 15, 2016. Warrant activity for the nine month period ended September 30, 2012 was as follows:
 
 
Number of
Warrants
 
Weighted Average
Grant Date
Fair Value
Outstanding, December 31, 2011
588,000

 
$
3.12

Granted
50,000

 
0.15

Exercised

 

Expired
(72,500
)
 
0.58

Unvested, September 30, 2012
565,500

 
$
3.19

 
Note 6 – Stock-based compensation:
 
Stock-based compensation expense for the nine months ended September 30, 2012 and 2011 was $596,408 and $479,205 respectively. At September 30, 2012, the total compensation cost related to stock option awards not yet recognized is $1,108,687. This amount will be recognized over the weighted average period of 3.23 years. During the nine months ended September 30, 2012, the Company issued 300,000 stock options to two directors and 10,000 to two employees with a vesting schedule of 25% per year and expiration in five years. Stock option activity for the nine months ended September 30, 2012 was as follows: 
Common Stock Options
 
Number of Options
 
Exercise
Price
Per
Share
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Life
 
Aggregate
Intrinsic
Value
Outstanding, December 31, 2011
 
2,008,375

 
$0.07-$3.45

 
$
1.15

 
4.87 years
 
$
1,055,319

Granted
 
310,000

 
$1.60-$2.79

 
2.40

 
 
 
 

Exercised
 
(205,139
)
 
$0.70-$1.82

 
0.73

 
 
 
 

Canceled
 
(11,250
)
 
$1.82-$2.98

 
2.64

 
 
 
 

Expired
 

 

 

 
 
 
 

Outstanding, September 30, 2012
 
2,101,986

 
$0.07-$3.45

 
$
1.37

 
4.32 years
 
$
2,719,404

Exercisable, September 30, 2012
 
992,986

 
 

 
$
1.09

 
 
 
$
1,545,974

Vested and expected to vest, September 30, 2012
 
2,101,986

 
 

 
$
1.37

 
 
 
$
2,719,404

 

13

AMERICAN DG ENERGY INC.

In January 2011, the Company’s subsidiary EuroSite Power, adopted the 2011 Stock Incentive Plan, or the Stock Plan. The aggregate number of shares of common stock which may be issued pursuant to this Stock Plan is 3,000,000 shares. On June 13, 2011, the board unanimously amended the Stock Plan, subject to shareholder approval, to increase the reserved shares of common stock issuable under the Stock Plan from 3,000,000 to 4,500,000, or the Amended Plan. Stock options vest based upon the terms within the individual option grants, usually over a two- or ten-year period with an acceleration of the unvested portion of such options upon a liquidity event, as defined in the Company’s stock option agreement. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan is not less than the fair market value of the shares on the date of the grant. At September 30, 2012 there were 3,590,000 unvested stock options outstanding of EuroSite Power with a vesting schedule of 25% per year and expiration in ten years.
 
Note 7 – Warrant liability:
 
On December 9, 2010, the Company entered into subscription agreements with selected investors for the purchase of units consisting, in the aggregate, of 500,000 shares of its common stock and warrants to purchase 500,000 shares of its common stock. The subscription agreements provided for the purchase of the units at a purchase price of $2.50 per unit, and the warrants had an exercise price of $3.25 per share of common stock and are exercisable for five years commencing six months after the closing of the offering and expire on December 14, 2015.
 
The warrants contain both a right to obtain stock upon exercise, or a Call, and a right to settle the warrants for cash upon the occurrence of certain events, or a Put. Generally, the Put provisions allow the warrant holders liquidity protection; the right to receive cash equal to the value of the remaining unexercised portion of the warrants in certain situations where the holders would not have a means of readily selling the shares issuable upon exercise of the warrants (e.g., where there would no longer be a significant public market for the Company’s common stock). Specifically, the Put rights would be triggered upon the occurrence of a Fundamental Transaction, as defined in the agreement. Pursuant to the agreement, in the case of a Fundamental Transaction the warrant holders would receive a cash settlement in an amount equal to the value of obtained by using the Black-Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (i) a price per share of common stock equal to the Volume-Weighted Average Price of the common stock for the Trading Day immediately preceding the date of consummation of the applicable Fundamental Transaction, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of this Warrant as of the date of consummation of the applicable Fundamental Transaction and (iii) an expected volatility equal to the lesser of (1) the thirty (30) day volatility obtained from the “HVT” function on Bloomberg L.P. determined as of the end of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction or (2) 70%.These warrants are classified as liabilities pursuant to the FASB guidance contained in ASC 480. Changes in the fair value of the warrant liabilities are recorded in the accompanying consolidated statements of operations (see “Note 10 – Fair value measurements”).
 
Note 8 – Related parties:
 
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. These costs were reimbursed by the Company. Tecogen has a sublease agreement for the office building, which expires on March 31, 2014.
 
In July 2012, the Company entered into the 2006 Facilities, Support Services and Business Agreement, or the Agreement, with Tecogen, to provide the Company with certain office and business support services for a period of one year, renewable annually by mutual agreement. Under the current amendment to the Agreement, Tecogen provides the Company with office space and utilities at a monthly rate of $5,053.
 
The Company has sales representation rights to Tecogen’s products and services. In New England, the Company has exclusive sales representation rights to Tecogen’s cogeneration products.
 
On October 22, 2009, the Company signed a five-year exclusive distribution agreement with Ilios Inc., or Ilios, a subsidiary of Tecogen. Under terms of the agreement, the Company has exclusive rights to incorporate Ilios’ ultra-high-efficiency heating products, such as a high efficiency water heater, in its energy systems throughout the European Union and New England. The Company also has non-exclusive rights to distribute Ilios’ product in the remaining parts of the United States and the world in cases where the Company retains ownership of the equipment for its On-Site Utility business.
 
On December 17, 2009, the Company entered into a revolving line of credit agreement, or the agreement, with John N. Hatsopoulos, the Company’s Chief Executive Officer. Under the terms of the agreement, during the period extending to December 31, 2012, Mr. Hatsopoulos agreed to lend to the Company on a revolving line of credit basis a principal amount up

14

AMERICAN DG ENERGY INC.

to $5,000,000. All sums advanced pursuant to this agreement bare interest from the date each advance was made until paid in full at the Bank Prime Rate as quoted from time to time in the Wall Street Journal plus 1.5% per year. Interest was due and payable quarterly in arrears and prepayment of principal, together with accrued interest, could be made at any time without penalty. Also, under the terms of the agreement, the credit line from Mr. Hatsopoulos was used solely in connection with the development and installation of current and new energy systems such as cogeneration systems and chillers and not for general corporate purposes including operational expenses such as payroll, maintenance, travel, entertainment, or sales and marketing.
 
On May 23, 2011, the Company issued $12,500,000 aggregate principal amount of debentures to a European investor and to John N. Hatsopoulos, the Company’s Chief Executive Officer. The debentures mature on May 25, 2018 and accrue interest at the rate of 6.0% per annum payable on a semi-annual basis. At the holder’s option, the debentures may be converted into shares of the Company’s common stock at a conversion price of $2.20 per share, subject to adjustment in certain circumstances. The Company has the option to redeem at 115.0% of Par Value any or all of the debentures after May 25, 2016. The proceeds of the debentures will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes. As of May 23, 2011, Mr. Hatsopoulos had a revolving line of credit agreement with the Company with an outstanding balance of $2,400,000. That balance was converted into the debentures and the revolving line of credit agreement was canceled.
 
On November 30, 2011, the Company issued an additional $6,900,000 aggregate principal amount of debentures to the European investor. The debentures mature on May 25, 2018 and accrue interest at the rate of 6.0% per annum payable on a semi-annual basis. At the holder’s option, the debentures may be converted into shares of the Company’s common stock at a conversion price of $2.20 per share, subject to adjustment in certain circumstances. The Company has the option to redeem at 115.0% of Par Value any or all of the debentures after May 25, 2016. The proceeds of the debentures will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
 
In March 2012, the debenture holders amended the terms on the debentures with respect to the interest payment and agreed to receive their interest payment in shares of the Company’s common stock instead of cash for 2012, 2013 and 2014, provided that the Company’s shares are listed on a National Securities Exchange. Under the terms of the agreement, for the May semi-annual interest payment, the Company used the April average daily closing price of the common stock in order to determine the conversion price. All other terms and conditions, including interest rate and maturity date remained the same. On May 25, 2012, the total interest due to the debenture holders was $559,000 and in connection with the amendment the Company issued to the debenture holders 251,917 shares of common stock at $2.22 per share which was the average price of the Company’s common stock during the month of April. In connection with this transaction, the Company recorded an additional $153,921 of non-cash interest expense, which was the difference between the average stock price and the fair market value on May 25, 2012.

In September 2012, the debenture holders amended the terms on the debentures with respect to the interest payment and agreed to receive their interest payment in shares of the Company’s common stock instead of cash for 2012, 2013 and 2014, provided that the Company’s shares are listed on a National Securities Exchange. Under the terms of the agreement, the Company will use the average daily closing price of the Common Stock 10 business days before the interest payment date (May 25th and November 25th) in order to determine the conversion price. All other terms and conditions, including interest rate and maturity date remain the same.
 
On January 6, 2012, the Company loaned Peter Westerhoff, the noncontrolling interest partner in ADGNY, $15,565 by signing a five month loan agreement earning interest at 12.0% per annum. As of the date of this report, the loan has been paid off and the noncontrolling interest partner has no amount outstanding with the Company.

The Company’s Chief Financial Officer devotes approximately half of his business time to the affairs of GlenRose Instruments Inc., or GlenRose Instruments, and 50.0% of his salary is reimbursed by GlenRose Instruments. Also, the Company’s Chief Executive Officer is the Chairman of the Board and a significant investor in GlenRose Instruments and does not receive a salary, bonus or any other compensation from GlenRose Instruments. At September 30, 2012, the Company had a balance of $20,000 due to John N. Hatsopoulos related to interest payable on his outstanding convertible debentures.
 

15

AMERICAN DG ENERGY INC.

Note 9 – Commitments and contingencies:
 
In July 2011, the Company put on notice an On-Site Utility energy customer, River Point Towers Cooperative Inc., or RPT, over services provided pursuant to an Equipment Lease Agreement between the Company and RPT due to breach of contract for non-payment of receivables. The Company notified RPT’s management that the non-payment of receivables violated the terms of the agreement and that termination charges would apply. The Company stopped providing energy services at that site in August 2011. In October 2011, the Company filed a lawsuit at the United States District Court for the Southern District of New York to collect the receivables it was due and in May 2012, the Company and RPT settled their claims without admission of any liability. As a result of this settlement, the equipment was removed from the site at a cost of $100,500 and the movement of the equipment resulted in an additional charge of $237,968 (included in depreciation expense) in the second quarter of 2012.
 
Note 10 – Fair value measurements:
 
The fair value topic of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
 
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
 
Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company currently does not have any Level 2 financial assets or liabilities.
 
Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. As of September 30, 2012, the Company has classified 500,000 warrants with an exercise price of $3.25 per share that contain put and call rights as Level 3 (see “Note 7 – Warrant liability”). The Company records the fair value of the warrant liability on a recurring basis and estimates the fair value of the warrants using a Black-Scholes option pricing model under various probability-weighted outcomes which take into consideration the protective, but limited, cash-settlement feature of the warrants. At issuance, the following average assumptions were assigned to the varying outcomes: expected volatility of 60.7%, risk free interest rate of 2.08%, expected life of five years and no dividends. The Company estimated that the fair value of the warrants at September 30, 2012, using this same model with the following average assumptions assigned to the varying outcomes: expected volatility of 77.0%, risk free interest rates of 0.62%, expected lives of 3.21 years and no dividends. As of September 30, 2012, the financial liabilities held by the Company and measured at fair value on a recurring basis (which consist solely of the warrant liability) were $593,190.
 
The following table summarizes the activity for the period: 
 
Warrant Liabilities
Fair value at December 31, 2011
$
249,561

Fair value adjustment at September 30, 2012
(343,629
)
Fair value at September 30, 2012
$
593,190

 
The Company’s other financial instruments include cash and cash equivalents, accounts receivable, accounts payable, convertible debentures and amounts due to/from related parties. The recorded values of cash and cash equivalents, accounts receivable, accounts payable and amounts due to/from related parties approximate their fair values based on their short-term nature. The carrying value of the convertible debentures on the balance sheet at September 30, 2012 approximates fair value as the terms (Level 2 inputs) approximate those currently available for similar instruments.
 

16

AMERICAN DG ENERGY INC.

Note 11 – Subsequent events:
 
The Company has evaluated subsequent events through the filing date of this Quarterly Report and determined that no additional subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
 

17

AMERICAN DG ENERGY INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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. 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.
 
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”.

Third quarter 2012 Compared to Third quarter 2011.
 
Revenues
 
Revenues in the third quarter of 2012 were $1,400,255 compared to $1,418,411 for the same period in 2011, a decrease of $18,156 or 1.3%. The decrease in revenues was primarily due to the decrease in output due to milder temperatures and due to utility rates such as gas and electric that decreased during the third quarter of 2012 compared to the same period in 2011. Our On-Site Utility energy revenue in the third quarter of 2012 was $1,337,831 compared to $1,389,159 for the same period in 2011, a decrease of $51,328. Our turnkey and other revenue in the third quarter of 2012 increased to $62,424 compared to $29,252 for the same period in 2011. During the third quarter of 2012 the Company performed billable services and recorded revenue from the maintenance of energy systems and commissions 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.
 
During the third quarter of 2012, the Company operated 90 energy systems, at 50 locations representing 6,377 kW of installed electricity plus thermal energy, compared to 79 energy systems at 43 locations, representing 5,460 kW of installed electricity plus thermal energy for the same period in 2011. 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 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 third quarter of 2012 were $1,035,540 compared to $1,035,709 for the same period in 2011. Included in the cost of sales was depreciation expense of $301,813 in the third quarter of 2012, compared to $318,903 for the same period in 2011, due to systems taken out of service as a result of the May settlement with a former customer. The cost of fuel, maintenance and installation was $733,727 in the third quarter of 2012, compared to $716,806 for the same period in 2011, an increase of $16,921 due to the increase in the cost of sales at our EuroSite Power subsidiary.
 
Our cost of sales for our core On-Site Utility business consists primarily of fuel required to operate our energy systems that increased by 1.2% as a percentage of energy revenue in the third quarter of 2012, compared to the same period in 2011. Our cost of sales also includes the cost of maintenance of our systems which decreased by 1.4% as a percentage of energy revenue in the third quarter of 2012, compared to the same period in 2011.
 
During the third quarter of 2012, our gross margins were 26.0% compared to 27.0% for the same period in 2011, primarily due to the lower revenue base. Our On-Site Utility energy margins excluding depreciation were at 47.6% in the third quarter of 2012, compared to 47.8% for the same period in 2011.



18

AMERICAN DG ENERGY INC.

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 2012 were $481,707 compared to $593,558 for the same period in 2011, a decrease of $111,851 or 18.8%. The decrease was due to lower professional services fees.
 
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 third quarter of 2012 were $512,885 compared to $699,898 for the same period in 2011, a decrease of $187,013 or 26.7%. The decrease in our selling expenses was due to lower professional services fees.
 
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 2012 were $270,405 compared to $221,866 for the same period in 2011, an increase of $48,539. The increase in our engineering expenses was primarily due to the addition of new employees.
 
Loss from Operations
 
The loss from operations in the third quarter of 2012 was $900,282 compared to loss $1,132,620 for the same period in 2011. The decrease in the operating loss was due to better cost controls at the parent and subsidiary companies and due to lower professional services fees. Our non-cash compensation expense related to outstanding restricted stock and option awards to our employees was $216,551 in the third quarter of 2012, compared to $186,960 for the same period in 2011.
 
Other Income (Expense), Net
 
Our other expense, net, in the third quarter of 2012 was a loss of $358,302 compared to a loss of $5,671 for the same period in 2011. Other income, net, includes interest and other income, interest expense and change in fair value of warrant liability. Interest and other income was $17,547 in the third quarter of 2012 compared to $11,433 for the same period in 2011. The increase was due to higher yields on our invested funds. Interest expense was $293,556 in the third quarter of 2012 compared to $142,772 for the same period in 2011, due to interest accrued on our debentures issued in May 2011. In the third quarter of 2012, the change in fair value of warrant liability was an increase of $82,293 compared to a decrease of $125,668 for the same period in 2011 (see “Note 7 – Warrant liability”).
 
Benefit (Provision) for Income Taxes
 
Our provision for state income taxes in the third quarter of 2012 was $9,440 compared to a benefit of $41 for the same period in 2011.
 
Noncontrolling Interest
 
The noncontrolling interest share in the profits or losses in ADGNY and EuroSite Power was a loss of $8,534 in the third quarter of 2012 compared to a loss of $28,734 for the same period in 2011. The change was due expenses in the EuroSite Power subsidiary, offset by revenue in the joint venture.
 
First Nine Months of 2012 Compared to First Nine Months of 2011
 
Revenues
 
Revenues in the first nine months of 2012 were $4,095,614 compared to $4,553,592 for the same period in 2011, a decrease of $457,978 or 10.1%. The decrease in revenues was primarily due to lower electric rates that remained relatively stable compared to the same period a year ago and due to price of natural gas that decreased during the third quarter of 2012 compared to the same period in 2011. Our On-Site Utility energy revenue in the first nine months of 2012 was $3,925,665 compared to $4,270,336 for the same period in 2011, a decrease of $344,671. Our turnkey and other revenue in the first nine months of 2012 decreased to $169,949 compared to $283,256 for the same period in 2011. During the first nine months of 2012 the Company performed billable services and recorded revenue from maintenance of energy systems and commissions

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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.

During the first nine months of 2012, the Company operated 90 energy systems, at 50 locations representing 6,377 kW of installed electricity plus thermal energy, compared to 79 energy systems at 43 locations, representing 5,460 kW of installed electricity plus thermal energy for the same period in 2011. 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 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 2012 were $3,562,682 compared to $3,721,664 for the same period in 2011, a decrease of $158,982 or 4.3%. Included in the cost of sales was depreciation expense of $1,131,397 in the first nine months of 2012, compared to $921,931 for the same period in 2011, due to additional installations and due to the additional charge of $237,968 as a result of the May settlement with a former customer. The cost of fuel, maintenance and installation was $2,431,285 in the first nine months of 2012, compared to $2,799,733 for the same period in 2011, a decrease of $368,448 due to the decrease in our revenue during the quarter.
 
Our cost of sales for our core On-Site Utility business consists primarily of fuel required to operate our energy systems that increased by 0.1% as a percentage of energy revenue in the first nine months of 2012, compared to the same period in 2011. Our cost of sales also includes the cost of maintenance of our systems which decreased by 0.6% as a percentage of energy revenue in the first nine months of 2012, compared to the same period in 2011.
 
During the first nine months of 2012, our gross margins were 13.0% compared to 18.3% for the same period in 2011, primarily due to the lower revenue base and the increased depreciation expense during the quarter. Our On-Site Utility energy margins excluding depreciation were at 39.3% in the first nine months of 2012 compared to 38.8% for the same period in 2011.
 
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 2012 were $1,927,030 compared to $1,618,181 for the same period in 2011, an increase of $308,849 or 19.1%. The increase was due to additional expenses relating to our subsidiary EuroSite Power and increased non-cash compensation expense related to the issuance of stock option awards to EuroSite Power employees and directors.
 
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 2012 were $1,557,220 compared to $933,848 for the same period in 2011, an increase of $623,372. The increase in our selling expenses was due to the expansion of our domestic sales force, the addition of new employees at our EuroSite Power subsidiary and increased professional services fees.
 
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 2012 were $850,482 compared to $536,132 for the same period in 2011, an increase of $314,350. The increase in our engineering expenses was primarily due to the addition of new employees.
 
Loss from Operations
 
The loss from operations in the first nine months of 2012 was $3,801,800 compared to loss $2,256,233 for the same period in 2011. The increase in the operating loss was due to additional expenses relating to our EuroSite Power subsidiary, the increased non-cash compensation expense related to the issuance of stock option awards to EuroSite Power employees and directors and the additional expenses related to the settlement with a former customer (see “Note 9 – Commitments and contingencies”). Our non-cash compensation expense related to outstanding restricted stock and option awards to our employees was $596,408 in the first nine months of 2012, compared to $479,205 for the same period in 2011.
 

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AMERICAN DG ENERGY INC.

Other Income (Expense), Net
 
Our other expense, net, in the first nine months of 2012 was a loss of $1,334,231 compared to $294,701 for the same period in 2011. Other income, net, includes interest and other income, interest expense and change in fair value of warrant liability. Interest and other income was $43,987 in the first nine months of 2012 compared to $31,414 for the same period in 2011. The increase was due to higher yields on our invested funds. Interest expense was $1,034,589 in the first nine months of 2012 compared to $246,376 for the same period in 2011, due to interest accrued and interest paid in common stock on our debentures issued in May 2011. In the first nine months of 2012, the change in fair value of warrant liability was an increase of $343,629 compared to a decrease of $509,663 for the same period in 2011 (see “Note 7 – Warrant liability”).
 
Provision for Income Taxes
 
Our provision for state income taxes in the first nine months of 2012 was $21,402 compared to $17,071 for the same period in 2011.
 
Noncontrolling Interest
 
The noncontrolling interest share in the profits or losses in ADGNY and EuroSite Power was a loss of $79,285 in the first nine months of 2012 compared to a profit of $34,808 for the same period in 2011. The change in the noncontrolling interest was due expenses in the EuroSite Power subsidiary, offset by revenue in the joint venture.
 
Liquidity and Capital Resources
 
Consolidated working capital at September 30, 2012 was $15,717,130, compared to $18,250,164 at December 31, 2011. Included in working capital were cash and cash equivalents of $15,750,942 at September 30, 2012, compared to $17,801,025 at December 31, 2011. The decrease in working capital was a result of cash used in operation of new energy projects.
 
Cash used by operating activities was $1,836,587 in the first nine months of 2012 compared to $1,533,500 for the same period in 2011. The Company's short and long-term receivables balance, including unbilled revenue, increased to $992,424, in the first nine months of 2012 compared to $981,119 at December 31, 2011, using $11,305 of cash due to the timing of collections. Amount due to the Company from related parties increased to $164,578 in the first nine months of 2012 compared to $21,140 at December 31, 2011, using $143,438 of cash for services performed by the Company for related parties. Our inventory increased to $1,255,161 in the first nine months of 2012 compared to $634,120 at December 31, 2011, using $621,041 of cash due to the purchase of new energy systems for future installations. Our prepaid and other current assets increased to $383,342 in the first nine months of 2012 compared to $322,276 at December 31, 2011, using $61,066 of cash due to prepaid insurance and other fees.
 
Accounts payable increased to $1,390,796 in the first nine months of 2012, compared to $520,608 at December 31, 2011, providing $870,188 of cash. Our accrued expenses and other current liabilities increased to $839,228 at September 30, 2012 compared to $589,032 at December 31, 2011, providing $250,196 of cash. The amount due to related party increased to $529,464 in the first nine months of 2012, compared to $313,847 at December 31, 2011, providing $215,617 of cash primarily due to equipment purchased from Tecogen.
 
During the first nine months of 2012, the investing activities of the Company's operations were expenditures for the purchase of property, plant and equipment for energy system installations. The Company used $2,936,567 for purchases and installation of energy systems. The Company's financing activities provided $2,723,071 of cash in the first nine months of 2012 from the issuance of common stock and warrants and from the exercise of stock options, offset by purchases of common stock, payments on capital lease obligations and distributions to noncontrolling interest.
 
At September 30, 2012, the Company’s commitments included a lease for a plotter with a remaining balance of $6,091 and a rental commitment. The source of funds to fulfill those commitments will be provided from either the Company’s existing line of credit agreement or through debt or equity financings.
 
On May 23, 2011, the Company issued $12,500,000 aggregate principal amount of debentures to a European investor and to John N. Hatsopoulos, the Company’s Chief Executive Officer. The debentures will mature on May 25, 2018 and will accrue interest at the rate of 6% per annum payable on a semi-annual basis. At the holder’s option, the debentures may be converted into shares of the Company’s common stock at a conversion price of $2.20 per share, subject to adjustment in certain circumstances. The Company has the option to redeem at 115% of Par Value any or all of the debentures after May

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25, 2016. The proceeds of the debentures will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes. The debentures canceled the revolving line of credit agreement with John N. Hatsopoulos, which as of May 23, 2011, had a principal amount outstanding of $2,400,000.
 
On November 30, 2011, the Company issued an additional $6,900,000 aggregate principal amount of debentures to the European investor. The debentures mature on May 25, 2018 and accrue interest at the rate of 6% per annum payable on a semi-annual basis. At the holder’s option, the debentures may be converted into shares of the Company’s common stock at a conversion price of $2.20 per share, subject to adjustment in certain circumstances. The Company has the option to redeem at 115% of Par Value any or all of the debentures after May 25, 2016. The proceeds of the debentures will be used in connection with the development and installation of current and new energy systems, business development and for general corporate purposes.
 
In March 2012, the debenture holders amended the terms on the debentures with respect to the interest payment and agreed to receive their interest payment in shares of the Company’s common stock instead of cash for 2012, 2013 and 2014, provided that the Company’s shares are listed on a National Securities Exchange. Under the terms of the agreement, for the May semi-annual interest payment, the Company used the April average daily closing price of the common stock in order to determine the conversion price. All other terms and conditions, including interest rate and maturity date remained the same. On May 25, 2012, the total interest due to the debenture holders was $559,000 and in connection with the amendment the Company issued to the debenture holders 251,917 shares of common stock at $2.22 per share which was the average price of the Company’s common stock during the month of April. In connection with this transaction, the Company recorded an additional $153,921 of non-cash interest expense, which was the difference between the average stock price and the fair market value on May 25, 2012.

In September 2012, the debenture holders amended the terms on the debentures with respect to the interest payment and agreed to receive their interest payment in shares of the Company’s common stock instead of cash for 2012, 2013 and 2014, provided that the Company’s shares are listed on a National Securities Exchange. Under the terms of the agreement, the Company will use the average daily closing price of the Common Stock 10 business days before the interest payment date (May 25th and November 25th) in order to determine the conversion price. All other terms and conditions, including interest rate and maturity date remain the same.
 
The Company’s On-Site Utility energy program allows customers to reduce both their energy costs and site carbon production by deploying combined heat and power technology on its customers’ premises at no cost. Therefore the Company is capital intensive. 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 12 months; however, as the Company continues to grow its business by adding more energy systems, the cash requirements will increase. Beyond September 30, 2013, the Company may need to raise additional capital through a debt financing or an equity offering to meet its operating and capital needs for future growth. There can be no assurance, however, that the Company will be successful in its fundraising efforts or that additional funds will be available on acceptable terms, if at all.
 
Our ability to continue to access capital could be impacted by various factors including general market conditions, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us. If these conditions continue and we cannot raise funds through a public or private debt financing, or an equity offering, our ability to grow our business may be negatively affected. In such case, the Company may need to suspend any new installation of energy systems and significantly reduce its operating costs until market conditions improve.
 
Significant Accounting Policies and Critical Estimates
 
The Company’s significant accounting policies are discussed in the Notes to the Consolidated Financial Statements above and are those that are incorporated in the Annual Report. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in the above notes and the Financial Review in the Company’s Annual Report.
 

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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.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable
 
Item 4. Controls and Procedures
 
Management’s evaluation of disclosure controls and procedures:
 
Our disclosure controls and procedures are designed to provide reasonable assurance that the control system’s objectives will be met. Our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, or the Evaluation Date, have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective due to material weaknesses in financial reporting relating to lack of personnel with a sufficient level of accounting knowledge and a small number of employees dealing with general controls over information technology. At the present time, our management has decided that, considering the employees involved and the control procedures in place, there are risks associated with the above, but the potential benefits of adding additional employees to mitigate these weaknesses do not justify the expenses associated with such increases. Management will continue to evaluate the above weaknesses, and as the Company grows and resources become available, the Company plans to take the necessary steps in the future to remediate the weaknesses.
 
For these purposes, the term disclosure controls and procedures of an issuer means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting:
 
In connection with the evaluation referred to in the foregoing paragraph, we have made changes in our internal controls over financial reporting. We hired a consultant to review existing controls and review recent updates and changes to the Company’s documentation to ensure that any process or control changes are properly identified and documented, including updating the Company’s existing risk matrix. The engagement included the creation of testing plans based upon the current state of processes and key controls and the identification of areas for process improvements and documentation updates. The Company has already implemented many of the recommended processes.
 
Report of Management on Internal Control over Financial Reporting:
 
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with the Exchange Act. Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion of this evaluation. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2012.
 
The Company had 25 active employees, including 2 part time employees as of September 30, 2012. The Company currently does not have personnel with a sufficient level of accounting knowledge, experience and training in the selection, application and implementation of generally acceptable accounting principles as it relates to complex transactions and financial reporting requirements. The Company also has a small number of employees dealing with general controls over

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AMERICAN DG ENERGY INC.

information technology security and user access. This constitutes a material weakness in financial reporting. At this time, management has decided that considering the employees involved and the control procedures in place, there are risks associated with the above, but the potential benefits of adding additional employees to mitigate these weaknesses, does not justify the expenses associated with such increases. Management will continue to evaluate the above weaknesses.
 
The Company reported in previous periods the lack of segregation of duties as a material weakness in financial reporting. The Company hired a consultant to review its existing controls and propose changes to the Company’s procedures to proper segregation of duties. Based on the consultant’s recommendation, the Company has put procedures in place and has trained additional personnel to mitigate the risk. Management believes the previous weakness in financial reporting due to the lack of segregation of duties has been remediated.
 
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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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. The risks discussed in our Annual Report could materially affect our business, financial condition and future results. The risks described in our Annual Report 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.
 
Item 6.    Exhibits
 
Exhibit
 
 
Number
 
Description of Exhibit
 
 
 
31.1*
Rule 13a-14(a) Certification of Chief Executive Officer
 
 
 
31.2*
Rule 13a-14(a) Certification of Chief Financial Officer
 
 
 
32.1**
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
 
 
 
101.INS**
XBRL Instance Document
 
 
 
101.SCH**
XBRL Taxonomy Extension Schema
 
 
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase
 
____________________________________________________________________________
 
* Filed herewith
** Furnished herewith


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AMERICAN DG ENERGY INC.

SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 14, 2012.
 
 
AMERICAN DG ENERGY INC.
 
(Registrant)
 
 
 
By: /s/ JOHN N. HATSOPOULOS
 
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
 
By: /s/ ANTHONY S. LOUMIDIS
 
 
Chief Financial Officer
 
(Principal Financial Officer)


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