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American DG Energy Inc (NYSEMKT:ADGE)

Energy Update Call

April 9, 2013 10:00 am ET

Executives

Anthony Loumidis - Chief Financial Officer, Treasurer, Secretary

John Hatsopoulos - Chief Executive Officer, Director

Barry Sanders - President, Chief Operating Officer

Analysts

Operator

Hello and welcome to the American DG Energy conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). For your information, this conference is being recorded.

As a reminder, a recording of this conference call will be available approximately one hour after the conference call by phone as of April 17, 2013. Individuals can access recording by dialing 1-877-344-7529, toll-free or 1-412-317-0088 entering the replay conference number 10027582 followed by the pound sign.

Now I would like to introduce Anthony Loumidis, Chief Financial Officer and Treasurer.

Anthony Loumidis

Yes, good afternoon, everybody and welcome to our conference call. First, I would like to apologize to everybody for the technical difficulty we had earlier today. I am sorry for any inconvenience we caused by having you guys redial. We are back with our regular conference call provider. So we don’t think this will ever happen again. So with that, just want to let you know that we are having a call to update because we want to give you an update on our business and announce some recent milestones that we have had.

We have put out a press release via the wire and on our website at www.americandg.com in the investor section under the heading news releases. On the call today, we have John Hatsopoulos, our Chief Executive Officer and Barry Sanders, our President and Chief Operating Officer. But before we start, we need to briefly go over the safe harbor statement whereby various remarks as we may make are about our future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

I would like to remind you that we may make forward-looking statements about our future financial performance that involve risks and uncertainties. These risks and uncertainties could cause our results to differ materially from our current expectations. We encourage you to look at the company's filings with the SEC to get a more concrete picture of our business including the risks and uncertainties we just mentioned.

While we elect to update forward-looking statements at the same point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely to these forward-looking statements as we are presenting our views as of any date subsequent to today.

So with that, John will start the call.

John Hatsopoulos

Again, I want to apologize along with Anthony and Barry for the inconvenience we caused you this morning. We hope that this is a one-off at least. We have some 30 odd conference calls with no problems. So it was due that we will have problem one of these days. But anyway, I again apologize based on before what happened.

Especially since this is a very exciting period in our short history. Our energy increases were up 30%. I am not talking about revenues. I am talking about the energy sales for the quarter were up approximately 30% and we think that this kind of growth will continue for a while. Now to answer a question that I keep getting asked by some of our shareholders, the 30% energy sales were up not only over the year before last, but also over the fourth quarter of last year. Barry will give you further details on that.

The other thing is that we had this conference call because for the first time, we crossed over 100 units operating and it is delightful that we have reached that kind of a point in spite of the hurricane and the damage done by Sandy in the territories that we serve. You might say, well, was any of your equipment damaged. Actually the damage was minimal. Where we had the biggest problem, believe it or not, was the inspectors that give the approval for our construction of our equipment which whether you are building a new kitchen or you put in a combined heat and power piece of equipment, we were all busy for a long period of time trying to solve out what had happened with Sandy.

The other exciting event that happened to us is that all of a sudden combined heat and power and energy savings has come up to be the true answer, at least for the next few years, to the energy problem in the United States. As proof if it, it is that company groups starting with the President of the United States, which was a few months ago, I had put in a recommendation for combined hear and power but to have an organization like NYSERDA in New York giving us capital for installation of combined heat and power and again, Barry will give you further details of that.

Even on a heat pump which is now just starting we have companies like National Grid giving us incentives, for example in Massachusetts, National Grid is paying $1.50 per ton saved. In New York state the incentive is $1.84 for the same and same in Rhode Island which comes up with something like $22,000, $23,000 per unit that we sell. Now I realize this is too early in the game for American DG because we are just starting but in years to come, that should be very helpful to us.

Last, I wanted to tell you that we are very close to being cash flow positive for the company and our goal is, as I have said before, for the second half of the this year to be cash flow positive. So we are watching very carefully our spending because on a long-term basis, we would like to borrow money rather than to sell equity. When (inaudible) has taken place, that the SEC has issued directive that any announcements that affect our stock price, any disclosures on social media will be accepted in response to press releases.

Event though we are not there yet, we would like to have it down the road a lot of our releases in Facebook, rather than putting in press releases out which cost us quite a bit of money every time we do. Obviously we will inform not only on Facebook and on social media, and Barry is going to tell you which social media we are in but we obviously will send all these releases as we are doing right now to all our shareholders.

With that, I am going to ask Barry to give you more details to all the things that I am talking about.

Barry Sanders

Thank you, John and again, I appreciate every on the call this afternoon in here from the state. First, I want to talk about is the number of systems. We tend to talk a lot about systems. As John mentioned, we are now at 101 systems operating, which means we have installed, as of today, additional 13 systems over the last few period. Our backlog means we have another 35 systems to install. We are anticipating another 10 by the end of this month.

Quite sensitive, as John indicated, is we are hoping that more systems are operating currently but because of issues in New York state related to the storm Sandy and building department is being delayed, we have been hampered by that. The good news is we have expended the cash to get our systems up and running. The systems for the most part are out there and are in place and we are just waiting for traditional approvals. So the good news is we are close but we are just waiting to get the rest of the systems up and running.

The second piece of the news and a news I want to spend a little more time on is we have gone into this discussions on systems and what are you going to begin in all our announcements and our releases going forward, as we slowly convert from systems into kilowatt-hours. As a reminder to some of you that may be new to the business, American DG Energy and our subsidiary EuroSite Power, in the U.K., we are in the business of selling energy.

We are not in the business of selling of equipment and systems. We sell electricity, heat, hot water and cooling. We sell energy on a monthly basis. We are a utility. In fact, we call our business On-Site Utility. The energy that is sold comes our of equipment, that’s true and equipment can include cogeneration or combined heat and power systems, chillers that make cooling your air-conditioners, boilers that make heat and hot water or cooling but instead of systems that are installed that ultimately produce the energy that we sell.

What we have done now is we are beginning to calculate the total energy output of these systems and converting it all into kilowatt-hours. So when we announce that there is nearly 27 million kWh of energy sold, the actual energy, that’s the combination of our electricity, heat, hot water and cooling that we have sold over whatever period. It helps analysts and other folks track us. We are going go to start announcing every time we have a new sale of we install equipment what we anticipate in kWh production on an annualized basis will be. So we are quite excited that systems aside, having achieved nearly 27 million kWh of energy sold. It is over 30% increase, as John mentioned, from the fourth quarter 2012 and from a year ago where we were up for a significant jump.

The reason is really primarily twofold. One, it is new systems added to our fleet. Second, the continued improvement of how we operate the existing fleet. We are constantly looking for ways to improve both. That has worked well. (inaudible) dollars are a direct reflection on utility rates. We will learn about them very shortly but the actual production has really met that goal.

Next piece is incentive. We talk frequently about the incentives we have brought in. During the first quarter 2013, we brought in almost $150,000 of incentives. For us, that’s a good quarter. As we begin getting all numbers in, and especially billings in March, we are quite excited about what the quarter looks like that. So that’s another real plus for the company so far this quarter.

The next piece is our sale. As John indicated, there is a lot of tailwinds to our business right now. The New York State Energy Research and Development Authority or NYSERDA has been very aggressive on the cogeneration or CHP front, especially in New York City, which is the biggest part of our marketplace. We spend the most time on the sales on effort. Its really, we see going into the rest of 2013, really (inaudible) in the various customers large and small that we are talking. There are also significant incentive in the various states we do business in, from Maryland to New Jersey, up to here in Massachusetts and even up in Maine, where we do business. So we are actually quite excited by that. Last but not least, in the U.K., there continues to be the carbon value and those carbon values continue to hold strong and we see that helping us as the year continues.

The last piece, as John indicated, is we are quite active on social media. Traditionally, we have been doing this on the marketing side and this recent ruling from the SEC allowing announcements on things like Twitter or Facebook or otherwise, we want to do our part. For the time being, we are going to continue to announce things like calls and new deals and old deals on traditional media but we are going to start adding it to our various accounts.

Also we tend to add additional information. It's not necessarily material information but it maybe interesting to some investors. A As an example, when we announce a deal, maybe a startup, we sometimes tweet a photo of the site or certain quotes or we are in a publication or an article. It’s a convenient place to just communicate that. For those of you who like to be on Twitter, you can follow us on @americandg. If you are a Facebook fan, come like us on Facebook at AmericanDGEnergy. If you are on LinkedIn, you might like to track organizations that way, American DG Energy can be found there.

The goal on the Twitter side is to try to get information out approximately once a week or sometimes it will be couple of weeks, sometimes maybe every few weeks: but we want to get that flow. Quite open, we have a small number of followers and all these various media today. But I am hoping even after today, or going forward, pass the word, lets get the name out there and get more followers.

With that John, that’s a quick summary.

John Hatsopoulos

Yes, I think Anthony, we should give it up to question period.

Anthony Loumidis

Keith, may we start the Q&A session please?

Question-and-Answer Session

Operator

The first question comes from Thomas (inaudible), a private investor.

Unidentified Analyst

A couple of questions. You mentioned that there were, Barry said that you were anticipating 10 more orders, I think, or 10 more, you used the term by the end of this month. Does that mean you have orders that you think you are close to 10 more orders booking by the end of this months?

Barry Sanders

Tom, I assume its still more.

Unidentified Analyst

Yes, good.

John Hatsopoulos

Hi, Tom, this is John Hatsopoulos. What Barry was is that we are in a completion of 10 more installations right now.

Unidentified Analyst

Okay, so how many are shipped. How many are out actually in the somewhere shipped being ready to install. Is that 10, is it 12, is that about the number 10?

Barry Sanders

Yes, if you look at, I will take the statistics now. So we have 101 systems operating and we have 35 systems in the backlog. Of the 35, all are out there somewhere, if you pardon the phrase, in the field, dock, somewhere at a customer site or wherever. I am getting but about a dozen, or 10 to 12, that are not actually on site. The rest are either being produced or soon to be shipped by that stage.

Unidentified Analyst

All right, one more question. I look at the 27 million kWh of energy generated or thereabouts for the first quarter, up 32% sequentially. How can it jump that much quarter-over-quarter with only really adding 5 systems during that interval of time. How could they have increased that greatly? Is it because the new orders are larger and generating more power? I am trying to understand how it could jump up that much on a percentage basis?

Barry Sanders

Two things. One, you are absolutely correct. That’s why, going forward, I want to get away from systems. Not to get on a soapbox but the systems analogy makes me crazy. I decided because of the shortness but we put in 75 KW systems, 100 KW system, 100 ton chillers, 200 ton chillers, 400 ton chillers. We do boilers of all kinds of sizes. We do heat pumps of a few different sizes. So you are absolutely correct. Especially down in these bigger New York deals, we have been putting in larger systems. To say, a system, almost is a disservice to investors. That’s why we are convert everyone slowly into the mechanism of thinking of kilowatt-hours of total energy sold. So that was a big part of it.

The second big part of it is, quite openly, the team did a really nice job of improving the operation of our existing fleet. We don’t talk about it because its not sexy but we do a continual improvement on all our sites. We don’t take if for granted by any means. We monitor the operation 24/7. If we can do some improvements onsite to be able to produce additional energy over time, things change at our customers. So a big part of it was larger systems like you said. We are doing more 100 KW systems than 75 KW where we even used to do some 60 KW systems. Again just general improvement on the sites.

John Hatsopoulos

Tom, this is again, John Hatsopoulos. Thanks to your question about how that it compare with the fourth quarter of 2012. We checked it because I wouldn’t have it checked it. We always check year-to-year and much to my surprise, not a surprise to Barry, but a surprise to me, we are up over 30% not only from the fourth quarter but from the year before. I think a lot of this improvement is going to continue throughout the year. one thing that has probably escaped an awful lot of people is that some of the new orders have chillers.

We make more money and more short term revenue on chillers than we do on electric and hot water. So this should be a very exciting year for us and I will repeat that our goal and I stress the word goal, is to be cash flow positive for the second half of this year and this is why, I know that we screwed up but we try to manage our expenses so that on a long term basis, we borrow money rather than sell equity. Again, long term basis, not tomorrow morning.

Unidentified Analyst

Just one more question. This is a little outside of what we are trying to talk about today. But as I look back for the last couple of years, I see that the second quarter of most of the years seems like kind of down quarter. Is that you are seasonally down quarter coming out of winter. You don’t have a lot of heating. You don’t have a lot of cooling yet. Can we expect as we continue to look out barring some really odd weather that that’s going to be a seasonally down quarter for the company in general?

John Hatsopoulos

Tom, you are absolutely right but that down quarter from the first because obviously in the spring, we sell less hot water. But hopefully, and I stress the word hopefully, we will be up year-to-year just as much as we are right now. Fourth quarter and first quarter are equal. The winter is still on. But it depends, the global warming, we can't project at this point. Still there is a lot cold going around but I am hoping as a gardener that we are going to have a little warmer second quarter. So the answer is yes. Our best quarters are by far the third quarter by a big factor and the second best quarter is the first quarter of the year.

Unidentified Analyst

Okay, all right. Thank you very much.

John Hatsopoulos

You are welcome.

Operator

Thank you. The next question comes from Michael (inaudible), also a private investor.

John Hatsopoulos

Hi, Mike.

Unidentified Analyst

Yes, hi, John.

John Hatsopoulos

Mike, I really apologize. I know we had to chase you all over the place and cause you a little bit of grief in making the call.

Unidentified Analyst

No, that’s slings and arrows of outrageous fortune start from all around. Question, John. You have the CHP business going. You have the chillers going. It would be great if I could get some backlog numbers like we have on CHP units on that. The other thing that will be, it looks like the big thrust is going to be with the heat pump and the boiler business basically. I was just wondering that’s the one that’s right now shrouded in shadows.

You should be getting to the point where there has been plenty of experience with the hear pump units that have been put out there, hopefully. When does that get to the point where you have start being careful about the buildup for potential demand and how does that look. Where do you stand on that? When do you get to the point where you could begin producing it? In a sense, I guess its something competing with boilers is when do you get to be the heat pump boiler manufacturer and have that begin to show up in the numbers?

John Hatsopoulos

Mike, thank you for bringing up the heat pump. We have been taking it easy on the heat pump. Barry installed the heat pump in upstate New York and we waited to have a year's worth of data which seems to be quite positive for us even though the original engine we used. We are not allowed right now to talk about the manufacture, once an engine that was replaced with a super duper new engine and again, we are not permitted by the manufacturer of the engine of the new engine to allow us talk about it.

As a matter of fact, we have a test run in California at ABL to demonstrate the greening and the lack of emissions of the fuel cells of the heat pump. So we have been downplaying it. National Grid has almost called our bet by giving us such incentives and over the nest year or so you are going to see hopefully some good revenues coming in from (inaudible). We have benefits that they give us, the National Grid. It went from five year payback to a three year payback just for New England.

But again, we are not there yet. We are trying to complete all our requirements not only to demonstrate the efficiency of the machine but also the emissions. We need a certificate for the engine manufacturer that what we say is correct and hopefully we will have it shown and that’s why w have been taking it easy and the rest.

In the meanwhile, we will produce some units. So when that is ready to start selling, energy, not selling hot water rather than equipment because that not his business which should happen over the next year or so. We will be there and I think its going to be another home run but the fact that he is starting to describe his revenues on KW of energy rather than units will make life a lot easier for you investors.

I don’t know if I answered your question. I have rambled on a little bit, Mike.

Unidentified Analyst

Okay, yes but the other issue I am wondering is that given that the introduction of a super improved new engine then pushed the whole development period out a little bit from where you are doing the design to getting into the marketing. Has that also enabled significant improvements from a cost production point of view in the manufacture of these or in the assembly of these units?

Unidentified Company Representative

Yes, the efficiency.

Unidentified Analyst

Or is it still going on?

Unidentified Company Representative

The cost did not but the efficiency improved dramatically. But again, we delayed it a little bit but on a long term basis, this is going to be a big advantage. But anyway, I doubt very much it would not be manufacturing these units in Massachusetts on a long term basis. Maybe we will go down south or something like this. But this is going to be American DG's new home run, hopefully, unless we be conservative and change second half 2013, beginning of 2014 and Barry should correct me if I am wrong. He is making faces and seems we don’t have a TV. You can't see his face.

Barry Sanders

You can go and see it on YouTube. We will see. When the unit comes out and its new efficiency, we will see how the market but we like selling hot water. We think hot water is the right thing for us to sell.

Unidentified Analyst

Okay, the other question is, the numbers you have given us with 10 units to be put in. Those are all CHP units. Do you have order numbers given there, in terms of actual power usage the numbers are bigger in terms of chillers but we don’t have any numbers. Are there backlogs on chillers and what does that look like in terms of the way you have put out the numbers in the CHP units. We don’t know any of it.

Barry Sanders

The bulk of the systems are all CHP units. The bulk of those, about two-thirds, obviously are the 100 KW InVerde machines. The rest is 75. We do have a 200 KW from a European manufacturer that we are putting into U.K. as well. In the U.S., we just installed the one chiller in the U.S. and we have three or four more to go.

Again, not trying to make excuses but with the spring coming we don’t want to get chillers running in February. We don’t make money, as when its cold out.

Unidentified Analyst

So they are third with the coming up right no.

Barry Sanders

Exactly. We are timing the chillers to run for the summertime because that’s when we can sell. So we can get proper cash flow from installation. Like a chiller starting before you need it. We have a bulk of chillers we are working on as well.

Unidentified Analyst

Okay, now with this one more little thing here. In terms of your number, you are talking 101 units. That’s for ABPE. How much of that is EuroSite? How much of it is ADGE? How does the pattern look for EuroSite?

Barry Sanders

11 systems are in the U.K., the remaining are all U.S. The U.K. units are all CHP except one is a cooling, heat pump from a European manufacturer. The bulk of the U.K. units, we should be up and running over the next few months.

Unidentified Analyst

The backlog is?

Barry Sanders

I am sorry. What is it, Mike?

Unidentified Analyst

The backlog there now?

Barry Sanders

We have a total 18 systems on the contract. So we have 11 operating. So obviously seven more.

Unidentified Analyst

Okay, and how does it look in terms of orders?

Barry Sanders

And all those units are, back to Tom's Question, all those remaining seven are onsite or at contractors' dock. So have spent that money and its out there.

Unidentified Analyst

Okay, should we be just looking at the rate the orders have been coming in from over there, say over the last six to eight months and just project that out or tack on a little bit to it over the three or four months or what?

Barry Sanders

Yes, we have worked it there doing like I said, you will start seeing going forward. We don’t want to go backwards but every deal with whoever we present we will always give people an estimate of total kilowatt-hours. So very quickly you will be able to normalize what that is.

Unidentified Analyst

No, I am just trying to figure out the rate that orders are coming in as what we should assume for the foreseeable future? Or is there an exposure factor by having stuff out there operating that could accelerate the utility?

Barry Sanders

Absolutely, and in fact, I guess I should get a little bit of marking on the call since you brought it up. One of our sites in the U.K. is a facility called Syon Park. It’s the only Waldorf Astoria in the U.K. Since it’s a little west of London and next Wednesday, the date being. I don’t have a calendar open, so someone will give me the day, I apologize, but its Wednesday, April 17.

We are having a lunch seminar there. Anyone on the call, or if you know someone in the U.K., who would like to join us, we have actually here is a large group visiting us. its primarily designed for customers but we have invited investors and the media and so forth and it’s an open house where we are going to provide lunch. We are going to tours of our installation. The system is up and running. It’s a 100 KW installation. Its running great.

The customer has been very generous and they are going to be speaking as well. We will have a lot of folks there. So if anyone happens to be in London on the 17th of this month, you are cordially invited to join us at a beautiful facility and a great installation of our energy system.

Unidentified Analyst

Okay, thank you.

Operator

(Operator Instructions)

Anthony Loumidis

It seems like there is no more questions. Am I right?

Operator

Yes, you are correct. There are none.

Anthony Loumidis

Okay, so then we should thank everybody about the call and we apologize again for the miscommunication this morning of the technical difficulties and we will talk to you very soon. Thank you, everybody.

Operator

Thank you for participating. This concludes today's teleconference. You can now disconnect your phone lines. Have a nice day.

Anthony Loumidis

Thank you. Bye-bye.

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