American DG Energy (ADGE) Q4 2016 Results - Earnings Call Transcript

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American DG Energy, Inc. (NYSEMKT:ADGE) Q4 2016 Earnings Conference Call March 21, 2017 11:00 AM ET

Executives

Bonnie Brown - Chief Financial Officer

John Hatsopoulos - Co-Chief Executive Officer

Benjamin Locke - Co-Chief Executive Officer

Robert Panora - Director of Operations

Analysts

Michael Epstein - Northeast Securities, Inc.

Michael Zuk - Oppenheimer & Company

Operator

Good morning and welcome to the American DG Energy Full-Year 2016 Financial Earnings 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] As a reminder, this conference is being recorded. The recording of this conference call will be available for playback approximately one hour after the end of the call and will remain available until Tuesday, March 28, 2017.

Individuals may access the recording by dialing 877-344-7529 from inside the U.S. 855-669-9658 from Canada or 412-317-0088 from outside the U.S. Enter the replay conference number 10102545#.

Now, I would like to introduce Bonnie Brown, American D.G. Energy Chief Financial Officer.

Bonnie Brown

Thank you, Daniel, and thank you all for joining us on our year-end 2016 earnings call. On the call with me today are John Hatsopoulos and Ben Locke, our Co-CEO’s; and Robert Panora, our Director of Operations. Before we begin, I’d like to read our Safe Harbor statement.

Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

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 complete picture of our business, including the risks and uncertainties just mentioned.

Also during this call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in our press release and in the tables accompanying that release.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

I’ll now turn the call over to John Hatsopoulos for some opening remarks.

John Hatsopoulos

Good morning, ladies and gentlemen, and thank you for not only joining on the conference call, but for your patience. About last November, we decided to merge – we do recommend the merger of ADG with Tecogen. Just to remind you that when we started ADG, interest rates were quite high, and I’m trying to remember, but they were probably between 6% and 8%. And the units could not be bought by a lot of our customers, because they didn’t have the capital. So they wanted to get the discount of the energy, so they bought units from ADG.

Also, the Tecogen units did not have the technology that they have right now, which is our emission control. Anyway, we hired one of the largest law firms in Boston, Sullivan & Worcester, and we started the merger process. Unfortunately, we have taken something like already 14 months and part of the problem has been that the SEC has kept asking more and more questions from us.

The interesting thing is that we also got sued by a couple of people even though they didn’t know what they were suing us for, because the S-4 which is filed with the SEC had not been accepted by the SEC. So, first you wait to see what the terms are, then you sue, but anyway lawyers nowadays have nothing better to do but to sue companies. Anyway we are right now – we are in the process of making, I think the third or fourth filings of the S-4 and let me ask Mike, in-house lawyers, it’s the third or the fourth?

Unidentified Company Representative

I think this is third.

John Hatsopoulos

Third, the third filing. Hopefully, we’ll file sometime over the next few days, whether it’s one week or two weeks and again hopefully the SEC will stop these delays to us.

Now I would make an extra point that probably will never happen, but you never know. If this thing keeps getting delayed, it’s taking an awful lot of time not of our operating people, because our operating people are on their own and they are doing a fantastic job, headed by Ben Locke and Bob Panora, but it really takes a long time from our back office, our accountants, our lawyers and so forth and it’s also a lot of cost. And now that is, if we have to get to that point, there is still the possibility that we can terminate the transaction. Either Tecogen or ADG can terminate this transaction and then everything will be over and we can go back to where we were before.

With that, I’d like to ask Ben Locke to give you an update of our operations. Ben, are you on?

Benjamin Locke

Yes, okay, thanks John. Yes, I’m here and thank you again all of your for joining the call. So before I go into the review of the results, I’d like to provide a quick review of our business for those who may be new to the company.

ADG is in the business of selling energy in the form of electricity, heat and cooling and customers who wish to save money spent on traditional sources of energy. We own the assets to produce the energy on-site and earn revenue as the customer pays ADG a discounted rate for electricity and heat or cooling.

As I’ve stated in past calls, our main focus has been to improve the productivity of our existing fleet, optimize our margins and improve cash flow and work towards improving our balance sheet with the goal of stabilizing the company for the future. The 2016 year-end results announced today further reinforce that these efforts are resulting in significant improvements to our margins and cash flow. For the first time in the company’s history we achieved adjusted EBITDA cash flow positive operations for the year ended December 31, 2016.

We completed a series of transactions with our primary debt holder that eliminated our convertible debentures in exchange for the majority of our EuroSite Holdings. Bonnie will talk about this transaction in more detail later in the call.

And lastly and most significant, as John mentioned, the Board of Directors have agreed, subject to shareholder and SEC approval, to accept an offer to be acquired by Tecogen in a share-for-share exchange negotiated to be 0.092 shares of Tecogen for every one share of ADG. We’re working on the SEC on completing the Form S-4 as John mentioned in connection with this proposed transaction. There are several benefits to the merger that I think are compelling for our shareholders and Bonnie will discuss them in just a few minutes.

So now turning to our financials. Total revenues for the year ended December 31, 2016 were approximately $6.14 million, a slight decrease from the $6.36 million in revenues in the same period in 2015. While the energy production in 2016 increased mainly due to our increased energy system performance, revenues decreased primarily as a result of the loss of revenue from eight energy sites when we restructured with our LLC partner last year.

Net loss per share basic and diluted was $0.01 for the year 2016 versus $0.11 loss reported in the comparable prior year. Income per share in continued operations attributable to American DG Energy was also $0.01 for the year 2016 compared to a loss of $0.09 for 2015.

Adjusted gross margin excluding depreciation improved in 2016 to 31.7% versus 26.4% in the same period of 2015, representing a 20.5% growth in adjusted gross margin. This is result of our continued effort to improve site performance and profitability. We achieved non-GAAP EBITDA cash flow positive of approximately $118,000 for the year, as compared to outflows of approximately $823,000 for the previous year, an improvement of $941,000.

Overall, loss from operations was approximately $2.4 million for the year ended December 31, 2016, a substantial reduction from the $3.4 million loss reported in the year 2015. These results are a direct consequence of our efforts to improve site performance of our U.S. fleet and achieve expense reductions.

Lastly, on the expense side, for the year 2016, we materially reduced operating expenses to approximately $2.6 million versus approximately $3.4 million for the same period in 2015, a 24.1% improvement.

With that, I’d like to turn the call back over to Bonnie for more detail on our operations and financial transactions. Bonnie?

John Hatsopoulos

Bonnie before you get in, I forgot to mention that not only we have an option of terminating the transaction, but we have various other strategic alternatives that we can do with ADG. I just skip that thing. So thank you. Go ahead.

Bonnie Brown

Okay. Thank you, and thanks, Ben. Turning to the operations, we continue to make improvements to our fleet, which is maximizing productivity increasing profitability. Currently, our U.S. fleet is comprised of 80 fully owned systems and additional 12 that we share ownership with our LLC partner and a total of six systems in construction, which are completely owned by the company.

While our combined thermal and electrical energy production for the year decreased slightly by 4%, the more valuable electrical production increased by 1%. In the fourth quarter of 2016, our combined thermal and electrical energy production for all systems were up 36% due to additional heating and cooling delivered by the systems with electrical production increasing by 34% as compared to the fourth quarter 2015.

Electric rates increased on average 2.8%, while gas prices increased 3.9%. We feel the change in electric rates is statistically within variations we see from site-to-site, month-to-month. The increased gas price increases our cost to run the asset, but that increased cost is mostly offset by the increased amount we can bill the thermal revenue to the customer as a result of the higher gas price that customers boiler would have used.

Our initiative to improve existing fleet performance continues to produce positive results with a 4% reduction in fuel costs in the fourth quarter of 2016, as compared to the fourth quarter of 2015, showing a more efficient operation. This is the third straight quarter we have achieved efficiency improvements from prior year’s quarters.

Another area where we make – continue to make progress is in our peak electricity demand savings revenue. As discussed in our previous calls, we’ve taken a fleet-wide initiative to increase revenues from this largely unbilled savings benefit. Commercial tariffs in the U.S. typically include a significant charge associated with the facilities peak demand energy use, even if the peak period is only for a few minutes.

Through continued implementation of onsite instrumentation upgrades, we were able to increase revenue attributed to demand savings year-to-year more than 2.5 times from 105,000 in 2015 to 272,000 in 2016. We expect further increases in demand savings revenue in 2017.

We’re also continuing to get new sites online and reduce our backlog, the largest is a five unit site consisting of a larger [indiscernible] complex on Coney Island. The facility is comprised of five identical buildings each of which will be equipped with 100 kilowatt CHP unit. We are commissioning the first building and are expecting it to commence full operation in the second quarter of the year this year. The remaining four CHP plants will be construct – constructed simultaneously following the successful commissioning of the first.

We anticipate this to be one of our top revenue-producing sites. Likewise, the CHP plant at Lutheran Crossings senior care facility has completed construction and is expected to be commissioned in the next few weeks. The site utilizes a single 75 kilowatt CHP unit and is located in Morristown, New Jersey.

Next with regard to the agreement to merge with Tecogen, we see three clear areas that will benefit ADG shareholders.

First, there are many areas for operating cost improvements, such as duplicative, audit and corporate expenses. The merger will also allow for more efficient service at the ADG fleet and having a consolidated inventory while improved purchasing economics and shipping costs. We expect to identify other areas for operational and administrative cost savings as we move forward with the integration.

Second, with the merged company, additional technical contributions and engineering guidance from Tecogen will further accelerate improvements to site operation and profitability. We anticipate even better cash flows in the ADG fleet and the already dramatically improve cash flow as we’ve seen over the past year.

And lastly, once the transaction is approved, ADG’s shareholders will become part of Tecogen shareholder base and benefit from the significant success of the Tecogen business, as well as the promise and potential value of the Ultra Emissions Technology being developed by Tecogen and with their joint venture partner, Ultratech. The end result will be a robust vertically integrated clean energy company that will offer significant value for shareholders and customers.

Turning to the financials, as we discussed in previous quarters earnings call in connection with the reduction of convertible debentures in June of 2016, ADG’s ownership of EuroSite Power was reduced to 20.5% and ADG’s consolidated EuroSite – consolidated financial statement at the end of Q2. The remaining shares of EuroSite were accounted for an equity method investment at that time. Convertible debentures were further reduced at the end of Q3 by transferring our ownership of 15.2 million shares of EuroSite and issuing a new note with a remaining balance of 3.4 million in the zero coupon.

As a result of these transactions, ADG’s ownership in EuroSite fell just over 2% and financial information of EuroSite Power prior to this transaction are presented as discontinued operations in our year-end consolidated financial statements of ADG, showing the major classifications collapsed into single categorical lines in each of the respective statements.

Our remaining investment in EuroSite Securities is accounted for as a mark-to-market investment in equity securities with fluctuations going through our other comprehensive income or loss. By years end, the company repaid its remaining balance on a 6% convertible debentures of approximately $3 million and borrowed $850,000 from the company’s CEO,, John Hatsopoulos to do this. This new debt carry 6% interest and matures in May of 2018.

We have worked hard to put the company on the path toward financial stability with the elimination of our substantial debt that we started the year with and the sale of the majority of our interest in our former U.K. subsidiary EuroSite Power. We have freed the company and focused its resources on improving the core U.S. business. This renewed focus is evident in the substantial improvement in our financial results.

Now, I’ll turn the call back to Ben to conclude our discussion.

Benjamin Locke

Thanks, Bonnie. So looking forward to 2017, I’m very confident about our efforts to improve performance of our existing fleet, reduce expenses wherever possible, increase our demand billing, and complete our backlog, which will result in a greatly improved financial performance for the company going forward. Also with the elimination of all of our convertible debt and reaching adjusted EBITDA cash flow positive, ADG will be an excellent financial condition for the future.

And lastly, once approved by the SEC and shareholders, merging with Tecogen will give ADG shareholder the value and significant upside of Tecogen shares.

Thanks for listening to our call, and I’ll turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Epstein with Northeast Securities. Please go ahead.

John Hatsopoulos

Good morning, Mike. This is John Hatsopoulos.

Michael Epstein

Good morning. Yes, John, and don’t forget the rest of your management team John. I’m impressed by what you have done in this past year. I don’t understand when you’re in such – what appears to be good stand in your balance sheet that you’re looking to dilute the shareholders with less than a tenth of a share of Tecogen stocks. It really, it appears that that when you turn this around now you’re diluting everybody out and you’re not giving us a chance that ADG is a service-oriented company, we’re going into a capital goods company, and I questioned that the whole transaction that and the motive behind the transaction?

John Hatsopoulos

Mike, let me try and answer this. There are two problems here. Number one, ADG does not have any money to expand. And if they start selling shares in the 30s, then the huge dilution was in our belief, Tecogen has a tremendous opportunity for the ADG shareholders, that’s number one.

Number two, and that might surprise you. And I’m not sure if I’m going to get kicked by our lawyer. But as you said that, we’re paying too much and one of the governments of the SEC are that we have overpaid for ADG, which is one of the reasons for the delay.

So our – my belief is that the combination of this two will add a lot of value to the shareholders of ADG because of as we have mentioned capabilities that Tecogen has. But anyway, they don’t have any money to grow, as a matter of fact, to pay their debt that I had to loan them close to $1 million. And we now brought them whatever they want, I guess, but they don’t have money to grow.

Michael Epstein

We have 80 units with six more coming on, I mean, isn’t that – how much it is – are we getting any cash – positive cash flow from those operations to pay our expenses?

John Hatsopoulos

Sure, there we are. Sure, we are. As a matter of fact, as you see, we have a small positive cash flow from the company for the year. But the company, the profitable the company is that as these company units join in, the depreciation is going to kill us. And the accounting is that this company will take years before it’s– it might be cash flow positive, what they have done. But it will not be profitable.

On the other hand, we have a $ 1 million worth of cash and a $1 million worth of debt. So we’re close to zero. So we wouldn’t be doing you any favors while Tecogen has quite a bit of cash right now and has a tremendous prospect if you listen to the conference call of Tecogen tomorrow, you will see how great the prospects are of Tecogen for the next few years. But anyway, that’s the problem. Mike, I’m the largest shareholder probably of ADG. And as a matter of fact, that’s not true, it’s my children are the largest shareholders of ADG.

So I wouldn’t be doing it if I thought that it was not fair. We have had two groups spent close to a year negotiating two independent new investors from ADG and two independent investors from Tecogen negotiating what was the right price for this and we think we reach the right price.

Michael Epstein

Okay. Do the shareholders vote on this proposal?

John Hatsopoulos

Well, we have to take a vote on that and same to achieve that revenue of 30 days, I’m not sure, which one it is and do you have the large come out. If they don’t come out then will leaves ADG as it is, or we cancel the deal, or we then partner with somebody else.

There are a lot of options that we have, especially, since the company is cash flow positive right now. Now, I could demand by $ 1 million, which I think is due next May and Bonnie should correct me if I’m wrong.

Bonnie Brown

That’s right.

John Hatsopoulos

I’m usually wrong about these things. But we have a lot of options on this. And as far as I’m concerned and believe you may – I may, again, I’m repeating, I’m the biggest – my family is the biggest shareholder of ADG. We think it’s the best thing for the ADG shareholders.

Operator

Thank you.

John Hatsopoulos

You’re welcome.

Operator

Our next question comes from Michael Zuk with Oppenheimer & Company. Please go ahead.

John Hatsopoulos

Hey, Mike.

Michael Zuk

Good morning, everybody. On the balance sheet, there’s a line item, it says assets held for sale of 946,000, what are those assets?

Bonnie Brown

Those are assets that was previously in inventory that we sold to Tecogen subsequent to year end.

Michael Zuk

So actually then…

Bonnie Brown

It will be in a footnote – there will be in a footnote in the 10-K when you see that.

Michael Zuk

Okay. So basically then Tecogen is getting inventory and we got some cash?

Bonnie Brown

Exactly. We need to do that to pay the debt.

Michael Zuk

Okay. Well, all right. Well, that makes a lot of sense. That was a good move. Secondly, there was an entry, where we bought $150,000 worth of securities from an insider a related party again. What were those?

John Hatsopoulos

That is correct, Mike.

Michael Zuk

Yes, what were those?

John Hatsopoulos

Well, these are – we have about a 1.5 million. We had about a 1.5 million shares of EuroSite.

Michael Zuk

Okay.

John Hatsopoulos

EuroSite, even though we traded the EuroSite shares at much higher price than what we paid for, for our debt. We’ve shown this opportunity that since we had a 1.5 million shares, I think, that’s the number we had Bonnie…

Bonnie Brown

That’s right, yes.

John Hatsopoulos

We had 1.5 million shares. And we think that sometime over the next year, or two, or months, or whatever then we can sell these shares like we did before at $0.50 and $0.60. So we’ve made a reverse profit on it. We then really made the profit. But we think that now the management of EuroSite, which is actually three or four billionaires might give us an opportunity to make some money out of it.

Michael Zuk

Okay, that makes sense. Then on the line investment securities on that consolidated balance sheet, it says we have $637,000 in investment securities. Is that all EuroSite, or is there’s something else besides EuroSite in that number?

John Hatsopoulos

Bonnie?

Bonnie Brown

Yes, that’s all EuroSite.

Michael Zuk

And so when we mark EuroSite to market then that accounts for the $136,000 unrealized other comprehensive loss.

Bonnie Brown

Exactly.

Michael Zuk

That’s from the adjustment on the price of EuroSite, correct?

Bonnie Brown

Correct.

Michael Zuk

And we’re just at what quarterly?

Bonnie Brown

Yes.

Michael Zuk

So if EuroSite would return say to $0.50, that will be a positive number versus a negative number?

John Hatsopoulos

Absolutely.

Michael Zuk

Okay.

John Hatsopoulos

And as a matter of fact, you might remember since you’ve been such a good follower that we paid something like $40 million of debt made and $2 million to me using EuroSite shares. And I don’t remember the exact price, but they were higher than what we pay to buy these on for 2,000 shares.

Michael Zuk

Gotcha. Then on the expense line in the statement of operations, we have engineering expense of $649,000. Do we anticipate that that engineering expense will begin to drop off once we have finished the addition of the systems that are still being built and installed, will that be a declining number, or do we expect that to be a declining number?

John Hatsopoulos

Mike, I would like Bob Panora who has done a lot of the work to improve the units to answer that.

Robert Panora

Hi, Mike, nice to talk to you again. That’s correct. If we’re spending time getting these sites back, the backlog cleared on these sites. Once that’s down, that number will decline. It will be more of a engineering expense that has to do with maybe picking up some loans at sites, or making some improvements, but certainly a smaller number. And I don’t know exactly what it will be, but it will be smaller.

Michael Zuk

So that that actually will be working in our favor then, because we’ll be reducing expenses.?

Robert Panora

That’s right.

Michael Zuk

And then on the item of site impairments, what exactly do we mean by a site impairment?

John Hatsopoulos

Bonnie?

Bonnie Brown

That’s a calculation that accountants have to make.

John Hatsopoulos

That’s right.

Bonnie Brown

Besides that – it’s a calculation that’s based on the returns – the cash flow returns on each site. So we analyze each site, site by site and decide whether or not it can actually pay for itself by the end of the contract that we have on that site. So that it’s simply a mathematical calculation.

Michael Zuk

So theoretically then if we improve the operating margin of the site, then that site impairment charge will go down?

Bonnie Brown

Right. Well, this is something, Mike, you write it down. You write the site down and you can’t write it back up. So, we may be more profitable than we had expected, or projected, because of course, their numbers are all projected estimates.

Michael Zuk

Sure.

Bonnie Brown

But yes, the idea is that that number should go down to close to zero, if not zero.

Michael Zuk

So it really, but who has been who constantly be monitoring and upgrade the systems, because that will be an absolute incremental increase in our profitability and that’s a real positive?

Bonnie Brown

Right. Yes, I would agree with that.

Michael Zuk

Okay, this is good. All right. And just out of lot of curiosity, is the book value right now just taking the shareholders’ equity and divided by the number of shares about $0.34, or $0.35, is that close?

John Hatsopoulos

Bonnie is looking it up.

Bonnie Brown

I did this math, yesterday.

John Hatsopoulos

She is still rolling now and she is getting who knows.

Bonnie Brown

They’re asking me to do this math in my head.

Michael Zuk

You’ve got, right?

Bonnie Brown

I do.

Michael Zuk

Okay.

Bonnie Brown

Yes, I think you’re very close to that, I think it is $0.34.

Michael Zuk

Yes, I kind of thought, I just eyeballed it just while I’m flipping the pages here.

John Hatsopoulos

Yes, you got related and that’s what she’s doing right now.

Michael Zuk

Yes, so we’re relatively close.

Bonnie Brown

Yes.

Michael Zuk

With the number. Well, very good, well.

Bonnie Brown

Yes, thanks, Mike.

Michael Zuk

Anyway congratulations to everyone on the staff for a tremendous improvement in the fourth quarter and the year going forward. And it sounds like, we are really getting the backlog in a position to be installed and producing revenue, and should we say the second and the third quarter of this year. So, again, congratulations on the improvement. That’s all I have.

John Hatsopoulos

Thank you, Mike.

Bonnie Brown

Thanks, Mike.

Operator

[Operator Instructions] It appears that at this time we have no further questions. I would like to bring the question-and-answer session to an end, and in turn, this concludes today’s event. Thank you for participating. You may now disconnect.

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