UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K/A





Amendment
No. 2





x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
fiscal year ended December 31, 2009


or





 ̈
            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
      of incorporation or organization)
            (IRS
      Employer Identification No.)45
      First AvenueWaltham,
      Massachusetts
            02451(Address
      of Principal Executive Offices)
            (Zip
      Code)





Registrant’s
Telephone Number, Including Area Code: (781) 622-1120


Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act:





Title of each class
                Name of each exchange on which registeredCommon
      Stock, $0.001 par value
                NYSE
      Amex









Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Act. Yes  ̈ No x




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  ̈




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  ̈    No
 ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or an amendment to this
Form 10-K. x




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. (Check one):




Large
      accelerated filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                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 x




As of
June 30, 2009, the aggregate market value of the voting shares of the registrant
held by non-affiliates on the OTC Bulletin Board was approximately $41,397,788
based on a closing price per share of $2.75. For purposes of this calculation,
an aggregate of 20,717,659 shares of common stock held directly or by affiliates
of the directors and officers of the registrant have been included in the number
of shares held by affiliates.




As of
March 31, 2010 the registrant’s shares of common stock outstanding were:
44,088,964.








EXPLANATORY
NOTE





This
amendment to our Annual Report on Form 10-K for the fiscal year ended December
31, 2009, or our Annual Report, amends and restates our previously filed Annual
Report, together with subsequent amendments. Other than certain changes in the
first paragraph of Item 9A pursuant to a previous comment from the Securities
Exchange Commission, or the SEC, and updated certifications and consents, this
amendment does not contain any substantive changes from our previously filed
Annual Report and is being filed as a convenience to our investors.
 
 Unless
otherwise specifically stated, all financial data and other information
presented in this amendment is as of December 31, 2009 and has not been updated.
Accordingly, this amendment should be read in conjunction with our filings with
the SEC subsequent to the original filing of our Annual Report.


DOCUMENTS
INCORPORATED BY REFERENCE


Certain
information required by in Items 12, 13 and 14 of Part III of this Annual Report
is incorporated by reference to our definitive Proxy Statement for our 2010
Annual Meeting of Shareholders held on May 27, 2010, which was filed with the
SEC on April 30, 2010.


WARNING CONCERNING
FORWARD-LOOKING STATEMENTS


THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER
FEDERAL SECURITIES LAWS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR
PRESENT INTENT, BELIEFS OR EXPECTATIONS, AND ARE NOT GUARANTEED TO OCCUR AND MAY
NOT OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR
IMPLIED BY OUR FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS.
 
 WE
GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS “MAY,”
“WILL,” “SHOULD,” “EXPECTS,” “PLANS,” “ANTICIPATES,” “COULD,” “INTENDS,”
“TARGET,” “PROJECTS,” “CONTEMPLATES,” “BELIEVES,” “ESTIMATES,” “PREDICTS,”
“POTENTIAL” OR “CONTINUE” OR THE NEGATIVE OF THESE TERMS OR OTHER SIMILAR WORDS.
THESE STATEMENTS ARE ONLY PREDICTIONS. THE OUTCOME OF THE EVENTS DESCRIBED IN
THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR, OUR CUSTOMERS’ OR OUR
INDUSTRY’S ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, TO
DIFFER.
 
 THIS
REPORT ALSO CONTAINS MARKET DATA RELATED TO OUR BUSINESS AND INDUSTRY. THESE
MARKET DATA INCLUDE PROJECTIONS THAT ARE BASED ON A NUMBER OF ASSUMPTIONS. IF
THESE ASSUMPTIONS TURN OUT TO BE INCORRECT, ACTUAL RESULTS MAY DIFFER FROM THE
PROJECTIONS BASED ON THESE ASSUMPTIONS. AS A RESULT, OUR MARKETS MAY NOT GROW AT
THE RATES PROJECTED BY THESE DATA, OR AT ALL. THE FAILURE OF THESE MARKETS TO
GROW AT THESE PROJECTED RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION AND THE MARKET PRICE OF OUR
COMMON STOCK.
 
 SEE “ITEM
1A. RISK FACTORS,” “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS” AND “BUSINESS,” AS WELL AS OTHER SECTIONS IN THIS
REPORT, THAT DISCUSS SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THESE
DIFFERENCES. THE FORWARD-LOOKING STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM
10-K RELATE ONLY TO EVENTS AS OF THE DATE OF WHICH THE STATEMENTS ARE MADE.
EXCEPT AS REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR RELEASE ANY
FORWARD- LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.
  
 ii




AMERICAN
DG ENERGY INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009





TABLE
OF CONTENTS





PART
      IItem
      1.
                        Business.
                        2Item
      1A.
                        Risk
      Factors.
                        9Item
      1B.
                        Unresolved
      Staff Comments.
                        13Item
      2.
                        Properties.
                        13Item
      3.
                        Legal
      Proceedings.
                        13Item
      4.
                        Reserved.
                        13PART
      IIItem
      5.
                        Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                        14Item
      6.
                        Selected
      Financial Data.
                        16Item
      7.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                        16Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk.
                        25Item
      8.
                        Financial
      Statements and Supplementary Data.
                        25Item
      9.
                        Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                        25Item
      9A(T).
                        Controls
      and Procedures.
                        25Item
      9B.
                        Other
      Information.
                        26PART
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance.
                        27Item
      11.
                        Executive
      Compensation.
                        31Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                        36Item
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence.
                        36Item
      14.
                        Principal
      Accountant Fees and Services.
                        36PART
      IVItem
      15.
                        Exhibits
      and Financial Statement Schedules.
                        37




1


PART
I




Item
1.  Business.




General




American
DG Energy Inc., or the company, we, our or us, distributes, owns and operates
clean, on-site energy systems that produce electricity, hot water, heat and
cooling. Our business model is to own the equipment that we install at
customers’ facilities and to sell the energy produced by these systems to the
customers on a long-term contractual basis. We call this business the American
DG Energy “On-Site Utility”.




We offer
natural gas powered cogeneration systems that are highly reliable and energy
efficient. Our cogeneration systems produce electricity from an internal
combustion engine driving a generator, while the heat from the engine and
exhaust is recovered and typically used to produce heat and hot water for use at
the site. We also distribute and operate water chiller systems for building
cooling applications that operate in a similar manner, except that the engine’s
power drives a large air-conditioning compressor while recovering heat for hot
water. Cogeneration systems reduce the amount of electricity that the customer
must purchase from the local utility and produce valuable heat and hot water for
the site to use as required. By simultaneously providing electricity, hot water
and heat, cogeneration systems also have a significant, positive impact on the
environment by reducing the carbon or CO2 produced
by offsetting the traditional energy supplied by the electric grid and
conventional hot water boilers.




Distributed
Generation of electricity, or DG, often referred to as cogeneration systems, or
combined heat and power systems, or CHP, is an attractive option for reducing
energy costs and increasing the reliability of available energy. DG has been
successfully implemented by others in large industrial installations over 10
Megawatts, or MW, where the market has been growing for several years, and is
increasingly being accepted in smaller size units because of technology
improvements, increased energy costs and better DG economics. We believe that
our target market (users of up to 1 MW) has been barely penetrated and that the
reduced reliability of the utility grid, increasing cost pressures experienced
by energy users, advances in new, low cost technologies and DG-favorable
legislation and regulation at the state and federal level will drive our
near-term growth and penetration into our target market. The company maintains a
website at www.americandg.com, but our website address included in this Annual
Report is a textual reference only and the information in the website is not
incorporated by reference into this Annual Report.




The
company was incorporated as a Delaware corporation on July 24, 2001 to install,
own, operate and maintain complete DG systems, or energy systems, and other
complementary systems at customer sites and sell electricity, hot water, heat
and cooling energy under long-term contracts at prices guaranteed to the
customer to be below conventional utility rates. As of December 31, 2009, we had
installed energy systems, representing approximately 4,210 kilowatts, or kW,
33.5 million British thermal units, or MMBtu’s, of heat and hot water and 2,200
tons of cooling. kW is a measure of electricity generated, MMBtu is a measure of
heat generated and a ton is a measure of cooling generated. Due to the high
efficiency CHP systems, the Environmental Protection Agency, or EPA, has
recognized them as a means to improve the environment. We have estimated that
our currently installed energy systems running at 100% capacity have the
potential to produce approximately 23,000 metric tons of carbon equivalents,
less than typical separate heat and power systems, resulting in emissions
reductions equivalent to planting 4,710 acres of forest or removing the
emissions of 3,780 automobiles.




We
believe that our primary near-term opportunity for DG energy and equipment sales
is where commercial electricity rates exceed $0.12 per kW hour, or kWh, which is
predominantly in the Northeast and California. Attractive DG economics are
currently attainable in applications that include hospitals, nursing homes,
multi-tenant residential housing, hotels, schools and colleges, recreational
facilities, food processing plants, dairies and other light industrial
facilities. Two CHP market analysis reports sponsored by the Energy Information
Administration, or EIA, in 2000 detailed the prospective CHP market in the
commercial and institutional sectors1 and in
the industrial sectors2. These
data sets were used to estimate the CHP market potential in the 100 kW to 1 MW
size range for the hospitality, healthcare, institutional, recreational and
light industrial facilities in California, Connecticut, Massachusetts, New
Hampshire, New Jersey and New York, which are the states where commercial
electricity rates exceed $0.12 per kWh. Based on those rates, those states
define our market and comprise over 163,000 sites totaling 12.2 million kW of
prospective DG capacity. This is the equivalent of an $11.7 billion annual
electricity market plus a $7.3 billion heat and hot water energy market, for a
combined market potential of $19 billion. The data used to calculate the
company’s market potential are derived from the reports cited above, however the
calucation of the total market potential is estimated by the
company.





1 See
The Market and Technical
Potential for Combined Heat and Power in the Commercial/Institutional Sector;Prepared for the Energy Information Administration; Prepared by ONSITE
SYCOM Energy Corporation; January 2000.




2 See
The Market and Technical
Potential for Combined Heat and Power in the Industrial Sector;Prepared
for the Energy Information Administration; Prepared by ONSITE SYCOM Energy
Corporation; January 2000.




2


We
believe that the largest number of potential DG users in the U.S. require less
than 1 MW of electric power and less than 1,200 tons of cooling capacity. We are
able to design our systems to suit a particular customer’s needs because of our
ability to place multiple units at a site. This approach is part of what allows
our products and services to meet changing power and cooling demands throughout
the day (also from season-to-season) and greatly improves efficiency through a
customer’s varying high and low power requirements.




American
DG Energy purchases energy equipment from various suppliers. The primary type of
equipment used is a natural gas-powered, reciprocating engine provided by
Tecogen Inc., or Tecogen. Tecogen is a leading manufacturer of natural gas,
engine-driven commercial and industrial cooling and cogeneration systems
suitable for a variety of applications, including hospitals, nursing homes and
schools. A CHP system simultaneously produces two types of energy – heat and
electricity – from a single fuel source, often natural gas. The two key
components of a CHP system are an internal combustion reciprocating engine and
an electric generator. The internal combustion reciprocating engine is provided
to Tecogen by General Motors. The clean natural gas fired engine spins a
generator to produce electricity. The natural byproduct of the working engine is
heat. The heat is captured and used to supply space heating, heating domestic
hot water, laundry hot water or to provide heat for swimming pools and
spas.




As power
sources that use alternative energy technologies mature to the point that they
are both reliable and economical, we will consider employing them to supply
energy for our customers. We regularly assess the technical, economic, and
reliability issues associated with systems that use solar, micro-turbine or fuel
cell technologies to generate power.




Background
and Market




The
delivery of energy services to commercial and residential customers in the U.S.
has evolved over many decades into an inefficient and increasingly unreliable
structure. Power for lighting, air conditioning, refrigeration, communications
and computing demands comes almost exclusively from centralized power plants
serving users through a complex grid of transmission and distribution lines and
substations. Even with continuous improvements in central station generation and
transmission technologies, today’s power industry is only about 33%
efficient3, meaning
that it discharges to the environment roughly twice as much heat as the amount
of electrical energy delivered to end-users. Since coal accounts for more than
half of all electric power generation, these inefficiencies are a major
contributor to rising atmospheric CO2 emissions.
As countermeasures are sought to limit global warming, pressures against coal
will favor the deployment of alternative energy technologies.




On-site
boilers and furnaces burning either natural gas or petroleum distillate fuels
produce most thermal energy for space heating and hot water services. This
separation of thermal and electrical energy supply services has persisted
despite a general recognition that CHP can be significantly more energy
efficient than central generation of electricity by itself. Except in
large-scale industrial applications (e.g., paper and chemical manufacturing),
cogeneration has not attained general acceptance. This was due, in part, to the
long-established monopoly-like structure of the regulated utility industry.
Also, the technologies previously available for small on-site cogeneration
systems were incapable of delivering the reliability, cost and environmental
performance necessary to displace or even substantially modify the established
power industry structure.




The
competitive balance began to change with the passage of the Public Utility
Regulatory Policy Act of 1978, a federal statute that has opened the door to
gradual deregulation of the energy market by the individual states. In 1979, the
accident at Three Mile Island effectively halted the massive program of nuclear
power plant construction that had been a centerpiece of the electric generating
strategy among U.S. utilities for two decades. Several factors caused utilities’
capital spending to fall drastically, including well publicized cost overruns at
nuclear plants, an end to guaranteed financial returns on costly new facilities,
and growing uncertainty over which power plant technologies to pursue. Recently,
investors have become increasingly reluctant to support the risks of the
long-term construction projects required for new conventional generating and
distribution facilities.




Because
of these factors, electricity reserve margins have declined, and the reliability
of service has begun to deteriorate, particularly in regions of high economic
growth. Widespread acceptance of computing and communications technologies by
consumers and commercial users has further increased the demand for electricity,
while also creating new requirements for very high power quality and
reliability. At the same time, technological advances in emission control,
microprocessors and internet technologies have sharply altered the competitive
balance between centralized and DG. These fundamental shifts in economics and
requirements are key to the emerging opportunity for DG equipment and
services.





3 See
Energy Information
Administration, Voluntary Reporting of Greenhouse Gases, 2004, Section 2,
Reducing Emissions from Electric Power, Efficiency Projects: Definitions and
Terminology, page 20.




3


The
Role of DG




DG, or
cogeneration, is the production of two sources or two types of energy
(electricity or cooling and heat) from a single energy source (natural gas). We
use technology that utilizes a low-cost, mass-produced, internal combustion
engine from General Motors, used primarily in light trucks and sport utility
vehicles that is modified to run on natural gas. The engine spins either a
standard generator to produce electricity, or a conventional compressor to
produce cooling. For heating, since the working engine generates heat, we
capture the byproduct heat with a heat exchanger and utilize the heat for
facility applications in the form of space heating and hot water for buildings
or industrial facilities. This process is very similar to an automobile, where
the engine provides the motion to the automobile and the byproduct heat is used
to keep the passengers warm during the winter months. For refrigeration or
cooling, standard available equipment uses an electric motor to spin a
conventional compressor to make cooling. We replace the electric motor with the
same modified engine that runs on natural gas to spin the compressor to run a
refrigeration cycle and produce cooling.




DG refers
to the application of small-scale energy production systems, including
electricity generators, at locations in close proximity to the end-use loads
that they serve. Integrated energy systems, operating at user sites but
interconnected to existing electric distribution networks, can reduce demand on
the nation’s utility grid, increase energy efficiency, avoid the waste inherent
in long distance wire and cable transmission of electricity, reduce air
pollution and greenhouse gas emissions, and protect against power outages,
while,in most cases,
significantly lowering utility costs for power users and building
operators.




Until
recently, many DG technologies have not been a feasible alternative to
traditional energy sources because of economic, technological and regulatory
considerations. Even now, many “alternative energy” technologies (such as solar,
wind, fuel cells and micro-turbines) have not been sufficiently developed and
proven to economically meet the demands of commercial users or the ability to be
connected to the existing utility grid.




We supply
cogeneration systems that are capable of meeting the demands of commercial users
and that can be connected to the existing utility grid. Specific advantages of
the company’s on-site DG of multiple energy services, compared with traditional
centralized generation and distribution of electricity alone, include the
following:




·
            Greatly
      increased overall energy efficiency (typically over 80% versus less than
      33% for the existing power grid).




·
            Rapid
      adaptation to changing demand requirements (e.g., weeks, not years to add
      new generating capacity where and when it is
  needed).




·
            Ability
      to by-pass transmission line and substation bottlenecks in congested
      service areas.




·
            Avoidance
      of site and right-of-way issues affecting large-scale power generation and
      distribution projects.




·
            Clean
      operation, in the case of natural gas fired reciprocating engines using
      microprocessor combustion controls and low-cost exhaust catalyst
      technology developed for automobiles, producing exhaust emissions well
      below the world’s strictest regional environmental standards (e.g.,
      southern California).




·
            Rapid
      economic paybacks for equipment investments, often three to five years
      when compared to existing utility costs and
  technologies.




·
            Relative
      insensitivity to fuel prices due to high overall efficiencies achieved
      with cogeneration of electricity and thermal energy services, including
      the use of waste heat to operate absorption type air conditioning systems
      (displacing electric-powered cooling capacity at times of peak summer
      demand).




·
            Reduced
      vulnerability of multiple de-centralized small-scale generating units
      compared to the risk of major outages from natural disasters or terrorist
      attacks against large central-station power plants and long distance
      transmission lines.




·
            Ability
      to remotely monitor, control and dispatch energy services on a real-time
      basis using advanced switchgear, software, microprocessor and internet
      modalities. Through our on-site energy products and services, energy users
      are able to optimize, in real time, the mix of centralized and distributed
      electricity-generating resources.




4


The
disadvantages of the company’s on-site DG are:




·
            Cogeneration
      is a mechanical process and our equipment is susceptible to downtime or
      failure.




·
            The
      base-rate of an electric utility is determined by a certain number of
      subscribers. DG at a significant scale will reduce the number of
      subscribers and therefore it may increase the base-rate for the electric
      utility for its customer base.




·
            By
      committing to our long-term agreements, a customer may be forfeiting the
      opportunity to use more efficient technology that may become available in
      the future.




Also, DG systems possess significant
positive environmental impact. The EPA has created a Combined Heat and Power
Partnership to promote the benefits of DG systems. The company is a member of
this Partnership. The following statement is found on the EPA web
site.




“Combined
heat and power systems offer considerable environmental benefits when compared
with purchased electricity and onsite-generated heat. By capturing and utilizing
heat that would otherwise be wasted from the production of electricity, CHP
systems require less fuel than equivalent separate heat and power systems to
produce the same amount of energy. Because less fuel is combusted, greenhouse
gas emissions, such as carbon dioxide (CO2), as well
as criteria air pollutants like nitrogen oxides (NOx) and
sulfur dioxide (SO2), are
reduced.”




The
DG Market Opportunity




We
believe that our primary near-term opportunity for DG energy and equipment sales
is where commercial electricity rates exceed $0.12 per kW hour, or kWh, which is
predominantly in the Northeast and California. Attractive DG economics are
currently attainable in applications that include hospitals, nursing homes,
multi-tenant residential housing, hotels, schools and colleges, recreational
facilities, food processing plants, dairies and other light industrial
facilities. Two CHP market analysis reports sponsored by the Energy Information
Administration, or EIA, in 2000 detailed the prospective CHP market in the
commercial and institutional sectors4 and in
the industrial sectors5. These
data sets were used to estimate the CHP market potential in the 100 kW to 1 MW
size range for the hospitality, healthcare, institutional, recreational and
light industrial facilities in California, Connecticut, Massachusetts, New
Hampshire, New Jersey and New York, which are the states where commercial
electricity rates exceed $0.12 per kWh. Based on those rates, those states
define our market and comprise over 163,000 sites totaling 12.2 million kW of
prospective DG capacity. This is the equivalent of an $11.7 billion annual
electricity market plus a $7.3 billion heat and hot water energy market, for a
combined market potential of $19 billion. The data used to calculate the
company’s market potential are derived from the aforementioned reports, however
the calucation of the total market potential is estimated by the
company.




Business
Model




We are a
DG onsite energy company that sells energy in the form of electricity, heat, hot
water and air conditioning under long-term contracts with commercial,
institutional and light industrial customers. We install our systems at no cost
to our customers and retain ownership of the system. Because our systems operate
at over 80% efficiency (versus less than 33% for the existing power grid), we
are able to sell the energy produced by these systems to our customers at prices
below their existing cost of electricity (or air conditioning), heat and hot
water. Our cogeneration systems consist of natural gas-powered internal
combustion engines that drive an electrical generator to produce electricity and
that capture the engine heat to produce space heating and hot water. Our energy
systems also can be configured to drive a compressor that produces air
conditioning and that also captures the engine heat. As of December 31, 2009, we
had 62 energy systems operational.




To date,
each of our installations runs in conjunction with the electric utility grid and
requires standard interconnection approval from the local utility. Our customers
use both our energy system and the electric utility grid for their electricity
requirements. We typically supply the first 20% to 60% of the building’s
electricity requirements while the remaining electricity is supplied by the
electric utility grid. Our customers are contractually bound to use the energy
we supply.





4 See
The Market and Technical
Potential for Combined Heat and Power in the Commercial/Institutional Sector;Prepared for the Energy Information Administration; Prepared by ONSITE
SYCOM Energy Corporation; January 2000.




5 See
The Market and Technical
Potential for Combined Heat and Power in the Industrial Sector;Prepared
for the Energy Information Administration; Prepared by ONSITE SYCOM Energy
Corporation; January 2000.




5


To date,
the price that we have charged our customers is set in our customer contracts at
a discount to the price of the building’s local electric utility. For the 20% to
60% portion of the customer’s electricity that we supply, the customer realizes
immediate savings on its electric bill. In addition to electricity, we sell our
customers the heat and hot water at the same price they were previously paying
or at a discount equivalent to their discount from us on electricity. Our air
conditioning systems are also priced at a discount so that the customer realizes
overall cost savings from the installation.




Since we
own and operate the energy systems and since our customers have no investment in
the units, our customers benefit from no capital requirements and no operating
responsibilities. We operate the energy systems so our customers require no
staff and have no energy system responsibilities; they are bound, however, to
pay for the energy supplied by the energy systems over the term of the
agreement.




Energy
and Products Portfolio




We
provide a full range of CHP product and energy options. Our primary energy and
products are listed below:





·
            Energy
      Sales


o
            Electricity


o
            Thermal
      (Hot Water, Heat and Cooling)





·
            Energy
      Producing Products


o
            Cogeneration
      Packages


o
            Chillers


o
            Complementary
      Energy Equipment (e.g., boilers,
etc.)


o
            Alternative
      Energy Equipment (e.g., solar, fuel cells,
etc.)





·
            Turnkey
      Installation Energy Producing Products with
  Incentives


·
            Other
      Revenue Opportunities





Energy
Sales





For
customers seeking an alternative to the outright purchase of CHP equipment, we
will install, maintain, finance, own and operate complete on-site CHP systems
that supply, on a long-term, contractual basis, electricity and other energy
services. We sell the energy to customers at a guaranteed discount rate to the
rates charged by conventional utility suppliers. Customers are billed monthly.
Our customers benefit from a reduction in their current energy bills without the
capital costs and risks associated with owning and operating a cogeneration or
chiller system. Also, by outsourcing the management and financing of on-site
energy facilities to us, they can reap the economic advantages of DG without the
need for retaining specialized in-house staff with skills unrelated to their
core business. Customers benefit from our On-Site Utility in a number of
ways:





·
            Guaranteed
      lower price for energy


·
            Only
      pay for the energy they use


·
            No
      capital costs for equipment, engineering and
  installation


·
            No
      equipment operating costs for fuel and
  maintenance


·
            Immediate
      cash flow improvement


·
            Significant
      green impact by the reduction of carbon
produced


·
            No
      staffing, operations and equipment
  responsibility




Our
customers pay us for energy produced on site at a rate that is a certain
percentage below the rate at which the utility companies provide them electrical
and natural gas services. We measure the actual amount of electrical and thermal
energy produced, and charge our customers accordingly. We agree to install,
operate, maintain and repair our energy systems at our sole cost and expense. We
also agree to obtain any necessary permits or regulatory approvals at our sole
expense. Our agreements are generally for a term of 15 years, renewable for two
additional five years terms upon the mutual agreement of the
parties.




6


In
regions where high electricity rates prevail, such as the Northeast, monthly
payments for CHP energy services can yield attractive paybacks (e.g. often 3-5
years) on our investments in On-Site Utility projects. The price of natural gas
has a minor effect on the financial returns obtained from our energy service
contracts because the value of hot water and other thermal services produced
from the recovered heat generated by the internal combustion engine in our
on-site DG system will increase in proportion to higher fuel costs. This
recovered energy, which comprises up to 60 % of the total heating value of fuel
supplied to our CHP equipment, displaces fuel that would otherwise be burned in
conventional boilers. Each of our customer sites becomes a profit center. The
example below presents the energy supplied by two 75 kW cogeneration units and
the economics of a typical energy service contract where we supply 80% of the
site’s heat and hot water and 45% of the site’s electricity. Our customers range
from hotels to nursing homes and apartment buildings and they usually require
two energy systems or more. The savings calculations in the example are based on
many variables, such as the customer’s base electricity charge per kWh, the kW
used at the site, the operating time of the equipment, the customer’s base gas
price per 1 million BTU, or British Thermal Units, the net heat recovery of our
equipment, the efficiency of the customer’s boiler, the electric demand savings
rate and the discount to the customer, which may range from 0% to 10%. The
economics of a typical energy service contact assume the customer’s base
electric rate per kWh at $0.14 and the customer’s gas price per 1 million BTU at
$12.00. The example also reflects a 2% of expected annual increase in energy
costs that should occur over a 15-year period:




Annual
                      
                      
                      Term(15years)American
      DG Energy Revenue
                      
                      $
                      284,000
                      
                      
                      $
                      4,908,000American
      DG Energy Gross Margin
                      
                      $
                      84,000
                      
                      
                      $
                      1,456,000Customer
      Savings
                      
                      $
                      32,000
                      
                      
                      $
                      545,000





The
example reflects an American DG Energy investment of $345,000 with a payback in
4 years or a 25% internal rate of return. The example also reflects a 2% of
expected annual increase in energy costs that should occur over the 15-year
period.




Energy
Producing Products




We
typically offer cogeneration units sized to produce 75 kW to 100 kW of
electricity and water chillers sized to produce 200 to 400 tons of cooling. For
cogeneration, we prefer a modular design approach to allow us to group multiple
units together to serve customers with considerably larger power requirements.
Often, cogeneration units are conveniently dispersed within a large operation,
such as a hospital or campus, serving multiple process heating systems that
would otherwise be impractical to serve from a single large machine. The
equipment we select often yield overall energy efficiencies in excess of 80%
(from our equipment supplier’s specifications).




Many
other DG technologies are challenged by technical, economic and reliability
issues associated with systems that generate power using solar, micro-turbine or
fuel cell technologies, which have not yet proven to be economical for typical
customer needs. When alternative energy technologies mature to the point that
they are both reliable and economical, we will employ them for the best-fit
applications.




Service and Installation





Where appropriate, we utilize the best
local service infrastructure for the equipment we deploy. We require long-term
maintenance contracts and ongoing parts sales. Our centralized remote monitoring
capability allows us to keep track of our equipment in the field. Our
installations are performed by local contractors with experience in energy
cogeneration systems.




For the occasional customers that want
to own the CHP system themselves, we offer our “turn-key” option whereby we
provide equipment, systems engineering, installation, interconnect approvals,
on-site labor and startup services needed to bring the complete CHP system
on-line. For some customers, we are also paid a fee to operate the systems and
may receive a portion of the savings generated from the equipment.





Other Funding and Revenue
Opportunities





American DG Energy is able to
participate in the demand response market and receive payments due to the
availability of our 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. We have
also received grants and incentives from state organizations and natural gas
companies for our installed energy systems.





Sales
and Marketing





Our On-Site Utility services are sold
directly to end-users by our in-house marketing team and by established sales
agents and representatives. We offer standardized packages of energy, equipment
and services suited to the needs of property owners and operators in healthcare,
hospitality, large residential, athletic facilities and certain industrial
sites. This includes national accounts and other customer groups having a common
set of energy requirements at multiple locations.




7


Our energy offering is translated into
direct financial gain for our clients, and is best appreciated by senior
management. These clients recognize the gain in cash flow, the increase in net
income and the preservation of capital we offer. As such, our energy sales are
focused on reaching these decision makers. Additionally, we have benefited with
increased sales and maintenance support through our joint venture, called
American DG NY LLC, or ADGNY, with AES-NJ Cogen Co., or AES-NJ, an established
developer of small cogeneration systems.





The company is continually expanding
its sales efforts by developing joint marketing initiatives with key suppliers
to our target industries. Particularly important are our collaborative programs
with natural gas utility companies. Since the economic viability of any CHP
project is critically dependent upon effective utilization of recovered heat,
the insight of the gas supplier to the customer energy profile is particularly
effective in prospecting the most cost-effective DG sites in any
region.





DG is enjoying growing support among
state utility regulators seeking to increase the reliability of electricity
supply with cost effective environmentally responsible demand-side resources.
New York, New Jersey, Connecticut and Massachusetts are among the states that
encourage DG through inter-connecting standards, incentives and/or supply
planning. Unlike large central station power plants, DG investments can be made
in small increments and with lead-times as short as just a few
months.





The U.S. government has been developing
and refining various funding opportunities related to its economic recovery or
stimulus initiatives. While the final decision has not been determined as of the
date of this Annual Report, it appears that “shovel ready” projects related to
energy and the environment will hold great prominence. Also, there appears to be
interest in upgrading government buildings. The company’s CHP systems would fit
very well with any of these programs. Other than funding opportunities related
to the economic recovery or stimulus initiatives, there does not appear to be
any new government regulations that will affect the company.





Competition





We
believe that the main competition for our DG products is the established
electric utility infrastructure. DG is beginning to gain acceptance in regions
where energy customers are dissatisfied with the cost and reliability of
traditional electricity service. These end-users, together with growing support
from state legislatures and regulators, are creating a favorable climate for the
growth of DG that is overcoming the objections of established utility providers.
In our target markets, we compete with large utility companies such as
Consolidated Edison in New York City and Westchester County, Long Island Power
Authority in Long Island, New York, Public Service Gas and Electric in New
Jersey, and NSTAR and National Grid in Massachusetts. Those companies are much
larger than us in terms of revenues, assets and resources. We aim to compete
with large utility companies by selling electricity to the same commercial
building customers. We sell directly to each building customer, but typically
only supply 30%-50% of the electricity needs of the building. The remaining
portion is supplied by the electric utility. We aim to compete with electric
utilities by selling its electricity at a lower price. However, there is no
assurance we will be able to provide electricity at a lower price.





Engine
manufacturers sell DG units that range in size from a few kW’s to many MW’s in
size. Those manufacturers are predominantly greater than 1 MW and include
Caterpillar, Cummins, and Waukesha. In many cases, we view these companies as
potential suppliers of equipment and not as competitors. For example, we are
currently installing a Waukesha unit at a customer site.





The
alternative energy market is emerging rapidly. Many companies are developing
alternative and renewable energy sources including solar power, wind power, fuel
cells and micro-turbines. Some of the companies in this sector include General
Electric, BP, Shell, Sun Edison and Evergreen Solar (in the solar energy space);
Plug Power and Fuel Cell Energy (in the fuel cell space); and Capstone,
Ingersoll Rand and Elliott Turbomachinery (in the micro-turbine space). The
effect of these developing technologies on our business is difficult to predict;
however, when their technologies become more viable for our target markets, we
may be able to adopt their technologies into our business model.





There are
a number of energy service companies that offer related services. These
companies include Siemens, Honeywell and Johnson Controls. In general, these
companies seek large, diverse projects for electric demand reduction for
campuses that include building lighting and controls, and electricity (in rare
occasions) or cooling. Because of their overhead structures, these companies
often solicit large projects and stay away from individual properties. Since we
focus on smaller projects for energy supply, we are well suited to work in
tandem with these companies when the opportunity arises.





There are
also a few local emerging cogeneration developers and contractors that are
attempting to offer services similar to ours. To be successful, they will need
to have the proper experience in equipment and technology, installation
contracting, equipment maintenance and operation, site economic evaluation,
project financing and energy sales plus the capability to cover a broad
region.




8


Material
Contracts




In
January 2006, 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. The company also shares personnel support services
with Tecogen. The company is allocated its share of the cost of the personnel
support services based upon the amount of time spent by such support personnel
while working on the company’s behalf. To the extent Tecogen is able to do so
under its current plans and policies, Tecogen includes the company and its
employees in several of its insurance and benefit programs. The costs of these
programs are charged to the company on an actual cost basis. Under this
agreement, the company receives pricing based on a volume discount if it
purchases cogeneration and chiller products from Tecogen. For certain sites, the
company hires Tecogen to service its Tecogen chiller and cogeneration products.
Under the current Agreement, as amended, Tecogen provides the company with
office space and utilities at a monthly rate of $5,526.




We have
sales representation rights to Tecogen’s products and services. In New England,
we have exclusive sales representation rights to their cogeneration products. We
have granted Tecogen sales representation rights to our On-Site Utility energy
service in California.




Government
Regulation




We are not subject to extensive
government regulation. We are required to file for local construction permits
(electrical, mechanical and the like) and utility interconnects, and we must
make various local and state filings related to environmental
emissions.





The U.S. government has been developing
and refining various funding opportunities related to its economic recovery or
stimulus initiatives. While the final decision has not been determined as of the
date of this Annual Report, it appears that “shovel ready” projects related to
energy and the environment will hold great prominence. Also, there appears to be
interest in upgrading government buildings. The company’s CHP systems would fit
very well with any of these programs. Other than funding opportunities related
to the economic recovery or stimulus initiatives, there does not appear to be
any new government regulations that will affect the company.





Employees





As of December 31, 2009, we employed
thirteen active full-time employees and two part-time employees. We believe that
our relationship with our employees is satisfactory. None of our employees are
represented by a collective bargaining agreement.





Item
1A. Risk Factors.




Our
business faces many risks. The risks described below may not be the only risks
we face. Additional risks that we do not yet know of, or that we currently think
are immaterial, may also impair our business operations or financial results. If
any of the events or circumstances described in the following risks occurs, our
business, financial condition or results of operations could suffer and the
trading price of our common stock could decline. Investors and prospective
investors should consider the following risks and the information contained
under the heading ‘‘Warning Concerning Forward-Looking Statements’’ before
deciding whether to invest in our securities.




We
have incurred losses, and these losses may continue.




We have
incurred losses in each of our fiscal years since inception. Losses continued to
be incurred in 2009. There is no assurance that profitability will be achieved
in the near term, if at all.




Because
unfavorable utility regulations make the installation of our systems more
difficult or less economical, any slowdown in the utility deregulation process
would be an impediment to the growth of our business.




In the
past, many electric utility companies have raised opposition to DG, a critical
element of our On-Site Utility business. Such resistance has generally taken the
form of unrealistic standards for interconnection, and the use of targeted rate
structures as disincentives to combined generation of on-site power and heating
or cooling services. A DG company’s ability to obtain reliable and affordable
back-up power through interconnection with the grid is essential to our business
model. Utility policies and regulations in most states are often not prepared to
accommodate widespread on-site generation. These barriers erected by electric
utility companies and unfavorable regulations, where applicable, make more
difficult or uneconomic our ability to connect to the electric grid at customer
sites and are an impediment to the growth of our business. Development of our
business could be adversely affected by any slowdown or reversal in the utility
deregulation process or by difficulties in negotiating backup power supply
agreements with electric providers in the areas where we intend to do
business.




9


Our
onsite utility concept is largely unproven and may not be accepted by a
sufficient number of customers.




The sale of cogeneration and cooling
equipment has been successfully carried out for more than a decade. However, our
On-Site Utility concept (i.e., the sale of on-site energy services, rather than
equipment) is still in an early stage of implementation. Unresolved issues
include the pricing of energy services and the structuring of contracts to
provide cost savings to customers and optimum financial returns to us. There is
no assurance that we will be successful in developing a profitable On-Site
Utility business model, and failure to do so would have a material adverse
effect on our business and financial performance.




The
economic viability of our projects depends on the price spread between fuel and
electricity, and the variability of the prices of these components creates a
risk that our projects will be uneconomic.




The
economic viability of DG projects is dependent upon the price spread between
fuel and electricity prices. Volatility in one component of the spread, the cost
of natural gas and other fuels (e.g., propane or distillate oil) can be managed
to a greater or lesser extent by means of futures contracts. However, the
regional rates charged for both base load and peak electricity services may
decline periodically due to excess capacity arising from over-building of
utility power plants or recessions in economic activity. Any sustained weakness
in electricity prices could significantly limit the market for our cogeneration,
cooling equipment and On-Site Utility energy services.




We may fail to make sales to certain
prospective customers because of resistance from facilities management personnel
to the outsourcing of their service function.




Any
outsourcing of non-core activities by institutional or commercial entities will
generally lead to reductions in permanent on-site staff employment. As a result,
our proposals to implement On-Site Utility contracts are likely to encounter
strong initial resistance from the facilities managers whose jobs will be
threatened by energy outsourcing. The growth of our business will depend upon
our ability to overcome such barriers among prospective customers.




Future
government regulations, such as increased emissions standards, safety standards
and taxes, may adversely impact the economics of our business.




The
operation of DG equipment at our customers’ sites may be subject to future
changes in federal, state and local laws and regulations (e.g., emissions,
safety, taxes, etc.). Any such new or substantially altered rules and standards
may adversely affect our revenues, profits and general financial
condition.




If
we cannot expand our network of skilled technical support personnel, we will be
unable to grow our business.




Each
additional customer site for our services requires the initial installation and
subsequent maintenance and service of equipment to be provided by a team of
technicians skilled in a broad range of technologies, including combustion,
instrumentation, heat transfer, information processing, microprocessor controls,
fluid systems and other elements of DG. If we are unable to recruit, train,
motivate, sub-contract, and retain such personnel in each of the regional
markets where our business operates we will be unable to grow our business in
those markets.




The
company operates in highly competitive markets and may be unable to successfully
compete against competitors having significantly greater resources and
experience.




Our
business may be limited by competition from energy services companies arising
from the breakup of conventional regulated electric utilities. Such competitors,
both in the equipment and energy services sectors, are likely to have far
greater financial and other resources than us, and could possess specialized
market knowledge with existing channels of access to prospective customer
locations. We may be unable to successfully compete against those
competitors.




10


Future
technology changes may render obsolete various elements of equipment comprising
our On-Site Utility installations.




We must
select equipment for our DG projects so as to achieve attractive operating
efficiencies, while avoiding excessive downtimes from the failure of unproven
technologies. If we are unable to achieve a proper balance between the cost,
efficiency and reliability of equipment selected for our projects, our growth
and profitability will be adversely impacted.




We
have limited historical operating results upon which to base projections of
future financial performance, making it difficult for prospective investors to
assess the value of our stock.




Our
experience is primarily on-site energy services, and we have only a few years of
actual operating experience. These limitations make developing financial
projections more difficult. We will expand our business infrastructure based on
these projections. If these projections prove to be inaccurate, we will sustain
additional losses and will jeopardize the success of our business.




We
will need to raise additional capital for our business, which will dilute
existing shareholders.




Additional
financings will be required to implement our overall business plan. We will need
additional capital. Equity financings will dilute the percentage ownership of
our existing shareholders. Our ability to raise an adequate amount of capital
and the terms of any capital that we are able to raise will be dependent upon
our progress in implementing demonstration projects and related marketing
service development activities. If we do not make adequate progress, we may be
unable to raise adequate funds, which will limit our ability to expand our
business. If the terms of any equity financings are unfavorable, the dilutive
impact on our shareholders might be severe.




We
may make acquisitions that could harm our financial performance.




In order
to expedite development of our corporate infrastructure, particularly with
regard to equipment installation and service functions, we anticipate the future
acquisition of complementary businesses. Risks associated with such acquisitions
include the disruption of our existing operations, loss of key personnel in the
acquired companies, dilution through the issuance of additional securities,
assumptions of existing liabilities and commitment to further operating
expenses. If any or all of these problems actually occur, acquisitions could
negatively impact our financial performance and future stock value.




We
are controlled by a small group of majority shareholders, and our minority
shareholders will be unable to effect changes in our governance structure or
implement actions that require shareholder approval, such as a sale of the
company.




George
Hatsopoulos and John Hatsopoulos, who are brothers, beneficially own a majority
of our outstanding shares of common stock. These stockholders have the ability
to control various corporate decisions, including our direction and policies,
the election of directors, the content of our charter and bylaws and the outcome
of any other matter requiring shareholder approval, including a merger,
consolidation and sale of substantially all of our assets or other change of
control transaction. The concurrence of our minority shareholders will not be
required for any of these decisions.




We
may be exposed to substantial liability claims if we fail to fulfill our
obligations to our customers.




We enter
into contracts with large commercial and not-for-profit customers under which we
will assume responsibility for meeting a portion of the customers’ building
energy demand and equipment installation. We may be exposed to substantial
liability claims if we fail to fulfill our obligations to customers. There can
be no assurance that we will not be vulnerable to claims by customers and by
third parties that are beyond any contractual protections that we are able to
negotiate. We may be unable to obtain liability and other insurance on terms and
at prices that are commercially acceptable to us. As a result, liability claims
could cause us significant financial harm.




Investment
in our common stock is subject to price fluctuations which have been significant
for development stage companies like us.




Historically,
valuations of many companies in the development stage have been highly volatile.
The securities of many of these companies have experienced significant price and
trading volume fluctuations, unrelated to the operating performance or the
prospects of such companies. If the conditions in the equity markets further
deteriorate, we may be unable to finance our additional funding needs in the
private or the public markets. There can be no assurance that any future
offering will be consummated or, if consummated, will be at a share price equal
or superior to the price paid by our investors even if we meet our technological
and marketing goals.




11


Future sales of common stock by our
existing stockholders may cause our stock price to fall.





The
market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market or the perception
that these sales could occur. These sales might also make it more difficult for
us to sell equity securities at a time and price that we deem appropriate and
thus inhibit our ability to raise additional capital when it is
needed.





Because we do not intend to pay cash
dividends, our stockholders will receive no current income from holding our
stock.





We have
paid no cash dividends on our capital stock to date and we currently intend to
retain our future earnings, if any, to fund the development and growth of our
business. In addition, the terms of any future debt or credit facility may
preclude us from paying these dividends. As a result, capital appreciation, if
any, of our common stock will be your sole source of gain for the foreseeable
future. We currently expect to retain earnings for use in the operation and
expansion of our business, and therefore do not anticipate paying any cash
dividends for the foreseeable future.





Our
ability to access capital for the repayment of debts and for future growth is
limited as the financial markets are currently in a period of disruption and
recession and the company does not expect these conditions to improve in the
near future.





Our
ability to continue to access capital could be impacted by various factors
including general market conditions and the continuing slowdown in the economy,
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.





Our
business is affected by general economic conditions and related uncertainties
affecting markets in which we operate. The current economic conditions including
the global recession could adversely impact our business in 2010 and
beyond.





The
current economic conditions including the global recession could adversely
impact our business in 2010 and beyond, resulting in reduced demand for our
products, increased rate of order cancellations or delays, increased risk of
excess and obsolete inventories, increased pressure on the prices for our
products and services; and greater difficulty in collecting accounts
receivable.





Trading of our common stock is
restricted by the Securities and Exchange Commission’s, or the SEC’s, “penny
stock” regulations which may limit a stockholder’s ability to buy and sell our
stock.





The SEC has adopted regulations which
generally define “penny stock” to be any equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. Our securities are covered by the penny stock
rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and accredited investors. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC that provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and other
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statement showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure and suitability requirements may
have the effect of reducing the level of trading activity in the secondary
market for a stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our capital stock. Trading of our capital
stock is restricted by the SEC’s “penny stock” regulations which may limit a
stockholder’s ability to buy and sell our stock.




12


There has been a material weakness in
our financial controls and procedures, which could harm our operating results or
cause us to fail to meet our reporting obligations.





As of the
end of the period covered by this report, our Chief Executive Officer and Chief
Financial Officer have performed an evaluation of controls and procedures and
concluded that our controls were not effective to provide reasonable assurance
that information required to be disclosed by our company in reports that we file
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is
recorded, processed, summarized and reported as when required. Management
conducted an evaluation of our internal control over financial reporting and
based on this evaluation, management concluded that the company’s internal
control over financial reporting was not effective as of the end of the period
covered by this report. 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 information technology security and user access. This
constitutes a material weakness in financial reporting. Any failure to implement
effective internal controls could harm our operating results or cause us to fail
to meet our reporting obligations. Inadequate internal controls could also cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our common stock, and may require
us to incur additional costs to improve our internal control
system.





Item
1B. Unresolved Staff Comments.





None.




Item
2.  Properties.




Our
headquarters are located in Waltham, Massachusetts and consist of 3,339 square
feet of office and storage space that are leased from Tecogen. The lease expires
on March 31, 2014. We believe that our facilities are appropriate and adequate
for our current needs.




Item
3.  Legal Proceedings.




We are
not currently a party to any material litigation, and we are not aware of any
pending or threatened litigation against us that could have a material adverse
affect on our business, operating results or financial condition.




Item
4.  Reserved.




13


PART
II




Item 5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities.




Market




Our common stock started trading on
November 8, 2007, on the OTC Bulletin Board, or OTCBB, under the symbol “ADGE”.
OTCBB market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual
transactions.





During
the period from November 8, 2007 to December 31, 2007, the high price was $1.25
and the low price was $0.83 as reported by the OTCBB. The following table sets
forth the high and low per share sales prices for our common stock for each of
the quarters in the period beginning January 1, 2008, through December 31, 2009,
as reported by the OTCBB. On October 19, 2009, the company’s common stock began
trading on the NYSE Amex market.





2009
                    
                    
                    2008High
                    
                    
                    Low
                    
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    2.20
                    
                    
                    $
                    1.50
                    
                    
                    $
                    1.09
                    
                    
                    $
                    0.73Second
      Quarter
                    
                    
                    3.25
                    
                    
                    
                    2.45
                    
                    
                    
                    1.92
                    
                    
                    
                    1.01Third
      Quarter
                    
                    
                    3.08
                    
                    
                    
                    2.70
                    
                    
                    
                    2.05
                    
                    
                    
                    1.35Fourth
      Quarter
                    
                    
                    3.55
                    
                    
                    
                    2.52
                    
                    
                    
                    2.31
                    
                    
                    
                    1.65





The closing price of our common stock
as reported on the NYSE Amex on March 30, 2010, was $2.95 per
share.





Holders





As of
February 2, 2010, there were approximately 610 beneficial holders of our common
stock.




Dividends





We have
never declared or paid any cash dividends on shares of our common stock. We
currently intend to retain earnings, if any, to fund the development and growth
of our business and do not anticipate paying cash dividends in the foreseeable
future. Our payment of any future dividends will be at the discretion of our
board of directors after taking into account various factors, including our
financial condition, operating results, cash needs and growth
plans.





Recent
Sales of Unregistered Securities




Set forth
below is information regarding common stock issued, warrants issued and stock
options granted by the company during fiscal years 2007 through 2009. Also
included is the consideration, if any, we received and information relating to
the section of the Securities Act of 1933, as amended, or the Securities Act, or
rule of the SEC, under which exemption from registration was
claimed.




Common
Stock and Warrants





On March
8, 2007, the company raised $3,004,505 in a private placement of 4,292,150
shares of common stock at a price of $0.70 per share. The private placement was
done exclusively by 10 accredited investors, representing 16.5% of the total
shares then outstanding. All of such investors were accredited investors, and
such transactions were exempt from registration under the Securities Act under
Rule 506 of Regulation D.





On April
30, 2007, the company raised $1,120,000 in a private placement of 1,600,000
shares of common stock at a price of $0.70 per share. The private placement was
done exclusively by 4 accredited investors, representing 5.2% of the total
shares then outstanding. All of such investors were accredited investors, and
such transactions were exempt from registration under the Securities Act under
Rule 506 of Regulation D.





On June
30, 2007, the company issued to a consultant 100,000 shares of common stock
through an option exercise at $0.07 per share, representing 0.3% of the total
shares then outstanding. The consultant was an accredited investor, and such
transaction was exempt from registration under the Securities Act under Section
4(2).




14


On
October 2, 2007, a holder of the company’s 8% Convertible Debenture elected to
convert $50,000 of the outstanding principal amount of the debenture into 59,524
shares of common stock. The investor was an accredited investor, and such
transaction was exempt from registration under the Securities Act under Section
4(2).





From
December 2003 through December 2005, the company raised $2,236,500 through a
private placement of common stock and warrants by issuing 3,195,000 shares of
common stock and 3,195,000 warrants, at a price of $0.70 per share. Each warrant
represents the right to purchase one share of common stock for a period of three
years from the date the warrant was issued. The warrant holders started
exercising their warrants in 2006. From February 2008 through December 2008, the
company raised $707,000 through the exercise of 1,010,000 warrants at a price of
$0.70 per share; such warrants were exercised exclusively by 17 accredited
investors, representing 3.1% of the total shares then outstanding. All of such
investors were accredited investors, and such transactions were exempt from
registration under the Securities Act under Section 4(2).





In May
2008, two holders of the company’s 8% Convertible Debentures elected to convert
$150,000 of the outstanding principal amount of such debentures into 178,572
shares of common stock. All of such investors were accredited investors, and
such transactions were exempt from registration under the Securities Act under
Section 4(2).





On
February 24, 2009, the company sold a warrant to purchase shares of the
company’s common stock to an accredited investor, for a purchase price of
$10,500. The warrant, which expires on February 24, 2012, 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 investor was an accredited
investor, and such transaction was exempt from registration under the Securities
Act under Section 4(2).





On April
23, 2009, the company raised $2,260,000 in a private placement of 1,076,190
shares of common stock at a price of $2.10 per share. The private placement was
done exclusively by 5 accredited investors, representing 3.1% of the total
shares then outstanding. All of such investors were accredited investors, and
such transactions were exempt from registration under the Securities Act under
Rule 506 of Regulation D.





On July
24, 2009, the company raised $3,492,650 in a private placement of 1,663,167
shares of common stock at a price of $2.10 per share. The company also granted
the investors the right to purchase additional shares of common stock at a
purchase price of $3.10 per share by December 18, 2009, which as of December 31,
2009, have expired unexercised. The private placement was done exclusively by 22
accredited investors, representing 4.7% of the total shares then outstanding.
All of such investors were accredited investors, and such transactions were
exempt from registration under the Securities Act under Rule 506 of Regulation
D.





On
October 1, 2009, the company signed an investor relations consulting agreement
with Hayden IR for a period of twelve months. In connection with that agreement
the company granted Hayden IR a warrant to purchase 12,000 shares of the
company’s common stock at an exercise price per share of $2.98, with one-third
vesting on October 1, 2009, one-third vesting on February 1, 2010, and one-third
vesting on June 1, 2010, provided that at any such vesting date the agreement is
still in effect and Hayden IR has provided all required services to the company.
The warrants carry a cashless exercise provision and expire on May 30, 2013. The
company received no other consideration from the issuance of the warrants. The
investor was an accredited investor, and such transaction was exempt from
registration under the Securities Act under Section 4(2).





On
October 14, 2009, the company raised $525,000 in a private placement of 250,000
shares of common stock at a price of $2.10 per share. The company also granted
the investor the right to purchase additional shares of common stock at a
purchase price of $3.10 per share by December 18, 2009, which as of December 31,
2009, have expired unexercised. The private placement was done exclusively by an
accredited investor, representing 0.7% of the total shares then outstanding. The
investor was an accredited investor, and such transaction was exempt from
registration under the Securities Act under Section 4(2).





Restricted
Stock Grants




On
February 20, 2007, the company made restricted stock grants to employees,
directors and consultants by permitting them to purchase an aggregate of
737,000 shares of common stock, representing 2.4% of the total shares then
outstanding at a price of $0.001 per share. Prior to this transaction the
company had 30,309,400 shares of common stock outstanding. Such transaction was
exempt from registration under the Securities Act under
Section 4(2).





In
December 2008, the company made a restricted stock grant to one employee by
permitting him to purchase an aggregate of 40,000 shares of common stock,
representing 0.1% of the total shares then outstanding at a price of $0.001 per
share. Those shares have a vesting schedule of four years. Such transaction was
exempt from registration under the Securities Act under
Section 4(2).


15





Stock
Options





In 2007
the company granted nonqualified options to purchase 1,156,000 shares of the
common stock to 7 employees at $0.90 per share. Of those shares 1,130,000 have a
vesting schedule of 10 years and 26,000 shares have a vesting schedule of 4
years. The grant of such options was exempt from registration under Rule 701
under the Securities Act.





In
December 2008, the company granted nonqualified options to purchase 100,000
shares of the common stock to one employee at $1.95 per share. Those options
have a vesting schedule of 4 years and expire in 10 years. The grant of such
options was exempt from registration under Rule 701 under the Securities
Act.





In
February 2009, the company granted nonqualified options to purchase 13,000
shares of the common stock to three employees at $1.82 per share. Those options
have a vesting schedule of 4 years and expire in 5 years. The grant of such
options was exempt from registration under Rule 701 under the Securities
Act.





In July
2009, the company granted nonqualified options to purchase 6,000 shares of the
common stock to one employee at $2.95 per share. Those options have a vesting
schedule of 4 years and expire in 5 years. The grant of such options was exempt
from registration under Rule 701 under the Securities Act.





No
underwriters were involved in the foregoing sales of securities. All purchasers
of shares of our convertible debentures and warrants described above represented
to us in connection with their purchase that they were accredited investors and
made customary investment representations. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.





Rule
144





Under
Rule 144 under the Securities Act, in general, a person who is not deemed to
have been one of our affiliates at any time during the 90 days preceding a sale,
and who has beneficially owned shares of our common stock for more than six
months but less than one year would be entitled to sell an unlimited number of
shares. Sales under Rule 144 during this time period are still subject to the
requirement that current public information is available about us for at least
90 days prior to the sale. After such person beneficially owns shares of our
common stock for a period of one year or more, the person is entitled to sell an
unlimited number of shares without complying with the public information
requirement or any of the other provisions of Rule 144. As of March 31, 2010,
all of our outstanding shares of common stock held by non-affiliates were
registered for resale, or eligible for resale under Rule 144.




Item
6. Selected Financial Data.




Not applicable.




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




You
should read the following discussion and analysis of our financial condition and
results of operations together with our financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Annual
Report on Form 10-K, including information with respect to our plans and
strategy for our business, includes forward-looking statements that involve
risks and uncertainties. You should review “Item 1A. Risk Factors” beginning on
page 10 of this Annual Report on Form 10-K for a discussion of important factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following
discussion and analysis.




Recently, there has been a slowdown in
the economy, a decline in the availability of financing from the capital
markets, and a widening of credit spreads which has, or may in the future,
adversely affect us to varying degrees. Such conditions may impact our ability
to meet obligations to our suppliers and other third parties. These market
conditions could also adversely affect the amount of revenue we report, require
us to increase our allowances for losses, result in impairment charges and
valuation allowances that decrease our equity, increase our loss and reduce our
cash flows from operations. In addition, these conditions or events could impair
our credit rating and our ability to raise additional capital.


16


Overview





We derive
sales from selling energy in the form of electricity, heat, hot water and
cooling to our customers under long-term energy sales agreements (with a typical
term of 10 to 15 years). The energy systems are owned by us and are installed in
our customers’ buildings. Each month we obtain readings from our energy meters
to determine the amount of energy produced for each customer. We multiply these
readings by the appropriate published price of energy (electricity, natural gas
or oil) from our customers’ local energy utility, to derive the value of our
monthly energy sale, less the applicable negotiated discount. Our revenues per
customer on a monthly basis vary based on the amount of energy produced by our
energy systems and the published price of energy (electricity, natural gas or
oil) from our customers’ local energy utility that month. Our revenues commence
as new energy systems become operational. As of December 31, 2009, we had
62 energy systems operational. As a by-product of our energy business, in
some cases the customer may choose to have us construct the system for them
rather than have it owned by American DG Energy.





As a
by-product of our energy business, in some cases the customer may choose to have
us construct the system for them rather than have it owned by American DG
Energy. In this case, we account for 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. Revenues from
operation and maintenance services, including shared savings are recorded when
provided and verified.





We have
experienced total net losses since inception of approximately $12.2 million. For
the foreseeable future, we expect to experience continuing operating losses and
negative cash flows from operations as our management executes our current
business plan. The cash and cash equivalents available at December 31, 2009 will
provide sufficient working capital to meet our anticipated expenditures
including installations of new equipment for the next twelve months; however, as
we continue to grow our business by adding more energy systems, the cash
requirements will increase. We believe that our cash and cash equivalents
available at December 31, 2009 and our ability to control certain costs,
including those related to general and administrative expenses, will enable us
to meet our anticipated cash expenditures through January 1, 2011. Beyond
January 1, 2011, we may need to raise additional capital through a debt
financing or equity offering to meet our operating and capital needs. There can
be no assurance, however, that we will be successful in our fundraising efforts
or that additional funds will be available on acceptable terms, if at
all.





In 2009,
we raised $6,310,525 through various private placements of common stock, the
issuance of warrants and exercise of stock options. If we are unable to raise
additional capital in 2011 we may need to terminate certain of our employees and
adjust our current business plan. Financial considerations may cause us to
modify planned deployment of new energy systems and we may decide to suspend
installations until we are able to secure additional working capital. We will
evaluate possible acquisitions of, or investments in, businesses, technologies
and products that are complementary to our business; however, we are not
currently engaged in such discussions.




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




Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board, or FASB issued guidance
on changes in the accounting and reporting of business acquisitions. The
guidance requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in purchased entities, measured at
their fair values at the date of acquisition based upon the definition of fair
value. This guidance was effective for the company beginning January 1, 2009.
The guidance had no impact on the company’s consolidated financial statements
and any future effect will depend on the extent that the company makes business
acquisitions in the future.





In
December 2007, the FASB issued new rules on noncontrolling interests in
consolidated financial statements. The noncontrolling interest guidance changed
the accounting for minority interests, which are reclassified as noncontrolling
interests and classified as a component of equity. This guidance was
effective for the company beginning January 1, 2009, and resulted in a change in
presentation of minority interests in the consolidated financial statements
consistent with the new rules.


17





In September, 2006, the FASB issued
guidance which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. In February, 2008,
the FASB delayed the effective date of the fair value guidance for all
non-financial assets and non-financial liabilities, except those that are
measured on a recurring basis. Effective January 1, 2009, the Company adopted
fair value guidance with respect to non-financial assets and liabilities
measured on a non-recurring basis. The adoption of this guidance did not have an
impact on the Company’s financial position or results of
operations.





In March
2008, the FASB issued a pronouncement pertaining to disclosures about derivative
instruments and hedging activities. This guidance requires disclosures of how
and why an entity uses derivative instruments; how derivative instruments and
related hedged items are accounted for; and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance and cash flows. The rule was effective for the company beginning
January 1, 2009. The company does not expect the guidance to have a material
impact on its results of operations and financial condition.





In April
2009, the FASB issued guidance on providing interim disclosures about fair value
of financial instruments. This new guidance requires the fair value disclosures
that were previously disclosed only annually to be disclosed now on an interim
basis. This guidance was effective for the company in the second quarter of
2009, and has resulted in additional disclosures in our interim financial
statements, and therefore did not impact our financial position, results of
operations or cash flows.





In May
2009, the FASB issued a pronouncement on subsequent event accounting. The
guidance identifies the following: the period after the balance sheet date
during which management shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; the
circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements; and the
disclosures that an entity shall make about events or transactions that occurred
after the balance sheet date. The pronouncement was effective for the company’s
second quarter 2009, and did not have an impact on our financial position,
results of operations, or cash flows.





In June
2009, the FASB issued guidance on the FASB Accounting Standards Codification and
the hierarchy of generally accepted accounting principles. The FASB Accounting
Standards Codification, or the Codification, is the single source of
authoritative nongovernmental generally accepted accounting principles in the
U.S. The Codification was effective for interim and annual periods ending after
September 15, 2009. The adoption of the Codification had no impact on the
company’s financial position, results of operations or cash flows.





In June,
2009 the FASB updated existing guidance to improve financial reporting by
enterprises involved with variable interest entities. The new guidance requires
an enterprise to perform an analysis to determine whether the enterprise’s
variable interest(s) give it a controlling financial interest in a variable
interest entity. This guidance is effective for the company beginning in January
2010. The company does not believe adoption of this guidance will have a
material effect on its consolidated financial statements.





In
September 2009, the Emerging Issues Task Force issued new rules pertaining to
the accounting for revenue arrangements with multiple deliverables. The new
rules provide an alternative method for establishing fair value of a deliverable
when vendor specific objective evidence cannot be determined. The guidance
provides for the determination of the best estimate of selling price to separate
deliverables and allows the allocation of arrangement consideration using this
relative selling price model. The guidance supersedes the prior multiple element
revenue arrangement accounting rules that are currently used by the company.
This guidance is effective for us January 1, 2011 and is not expected to have a
material effect on our consolidated financial position or results of
operations.





Critical
Accounting Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, the reported amounts of revenues and expenses
during the reporting period, and the disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates. Management believes the following critical accounting
policies involve more significant judgments and estimates used in the
preparation of our consolidated financial statements.


18




Partnerships,
Joint Ventures and Entities under Common Control




Certain
contracts are executed jointly through partnerships and joint ventures with
unrelated third parties. The company consolidates all joint ventures and
partnerships in which it owns, directly or indirectly, 50% or more of the
membership interests. All significant intercompany accounts and transactions are
eliminated. Noncontrolling interest in net assets and earnings or losses of
consolidated entities are reflected in the caption “Noncontrolling interest” in
the accompanying consolidated financial statements. Noncontrolling interest
adjusts the consolidated results of operations to reflect only the company’s
share of the earnings or losses of the consolidated entities. Upon dilution of
ownership below 50%, the accounting method is adjusted to the equity or cost
method of accounting, as appropriate.





The
company evaluates the applicability of the FASB guidance on variable interest
entities to partnerships and joint ventures at the inception of its
participation to ensure its accounting is in accordance with the appropriate
standards. The company has contractual interests in Tecogen and determined that
Tecogen was a Variable Interest Entity, as defined by the applicable guidance;
however, the company was not considered the primary beneficiary and does not
have any exposure to loss as a result of its involvement with Tecogen.
Therefore, Tecogen was not consolidated in our consolidated financial statements
through December 31, 2009. See “Note 7 - Related Parties” for further
discussion.




The
company has a variable interest in Tecogen through its contractual interests in
that entity; however, the company is not the primary beneficiary and does not
have any exposure to loss as a result of its involvement with Tecogen. See “Note
7 - Related Parties” footnote to the company’s consolidated financial statement
for discussion of the company’s involvement with Tecogen.




Related
Party Transactions





The
company purchases the majority of its cogeneration units from Tecogen Inc., or
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
January 2006, 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 $5,526.




On February 15, 2007, the company
loaned Peter Westerhoff, the non controlling interest partner in ADGNY, $20,000
by signing a two year loan agreement earning interest at 12% per annum. On April
1, 2007, the company loaned an additional $75,000 to the same non controlling
partner by signing a two year note agreement earning interest at 12% per annum,
and on May 16, 2007, the company loaned an additional $55,000 to the same
partner by signing a two year note agreement under the same terms.  On
October 11, 2007, we extended to our non controlling interest partner a line of
credit of $500,000. At December 31, 2008, $265,012 was outstanding and due
to the company by the non-controlling interest partner in American DG New York,
LLC under the outstanding agreements. In addition there was $31,446 due from
GlenRose Instruments Inc., and $959 from Alexandros Partners LLC, for a total of
$297,417, which is the amount recorded on the balance sheet as of December 31,
2008. All notes were classified in the Due from related party account in the
December 31, 2008 balance sheet and were secured by the partner’s non
controlling interest. Effective April 1, 2009the company reached an
agreement with the noncontrolling interest partner in ADGNY to purchase its
interest in the Riverpoint location. As a result of this transaction, the
company owns 100% of that location and the noncontrolling interest partners’
share of that location was applied to his outstanding debt to the company
related to the above mentioned loan agreements and line of
credit. Additionally, in 2009 ADGNY financed capital improvements at
several projects, which per project agreements was the responsibility of the
noncontrolling interest partner. This further reduced the
noncontrolling interest partner’s noncontrolling interest in ADGNY. The result
of these transactions appears as “Ownership changes to noncontrolling interests”
in the amount of $405,714 in the accompanying consolidated statement of
stockholder’s equity for the year ended December 31,
2009.





On
October 22, 2009, the company signed a five-year exclusive distribution
agreement with Ilios Dynamics, a subsidiary of Tecogen. Under terms of the
agreement, the company has exclusive rights to incorporate Ilios Dynamics’ ultra
high-efficiency heating products in its energy systems throughout the European
Union and New England. The company also has non-exclusive rights to distribute
Ilios Dynamics’ 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.


19


During
the quarter ended September 30, 2009, the non-controlling interest partner in
ADGNY, a related party, purchased certain units and supporting equipment from
the company for $370,400. That amount, as of December 31, 2009, was classified as “Due from related party”
in the accompanying balance sheet. The cost of the units and supporting
equipment was $208,225 and the company booked a profit of $162,175.





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 will lend to the company on a revolving
line of credit basis a principal amount up to $5,000,000. All sums advanced
pursuant to this agreement shall bear interest from the date each advance is
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 shall be due and payable
quarterly in arrears and prepayment of principal, together with accrued
interest, may be made at any time without penalty. Also, under the terms of the
agreement, the credit line from Mr. Hatsopoulos will be 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. As of December 31, 2009, the company has
not drawn funds on this line of credit.





The
company’s Chief Financial Officer devotes approximately half of his business
time to the affairs of GlenRose Instruments Inc., and 50% of his salary is
reimbursed by GlenRose Instruments Inc. Also, the company’s Chief Executive
Officer is the Chairman of the Board and a significant investor in GlenRose and
does not receive a salary, bonus or any other compensation from
GlenRose.





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. There have been
no revisions to the useful lives of the company’s assets at June 30, 2010 and
December 31, 2009, respectively, and the company has determined that its
long-lived assets for those periods are recoverable.





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 statement of cash flows. When the rebates are a
function of production of the DG unit, they are recorded as income over the
period of production and treated in the statement of cash flows as an operating
activity. The rebates the company receives 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 not related to or subject to adjustment based
on the future operating performance of the installed unit. 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. The only rebates that the company has recognized historically on the
income statement are related to the company’s participation in demand response
programs and are recognized only upon the occurrence of curtailed events of the
applicable units. The cumulative amount of rebates applied to the cost of
construction was $534,308 and $319,655 as of December 31, 2009 and 2008,
respectively. The revenue recognized from demand response activity was $17,830
and $11,176 for the years ended December 31, 2009 and 2008,
respectively.





The
company operates on-site energy systems that produce electricity, hot water,
heat and cooling. The energy systems are capable of meeting the demands of
commercial users and can be connected to the existing utility grid. There is not
always enough power generation available from the utilities to meet peak demand,
and existing transmission lines cannot carry all of the electricity needed by
consumers. The utility companies recognize that the energy systems we install
lessen the demand on the grid. Therefore, they offer a one-time rebate/incentive
payment to the company based on the kW size or the unit installed. That
rebate/incentive is payable from the utility to the company upon commencement of
operation at the facility and is applied against the cost of construction,
therefore reducing the book value of the installation. As a reduction of our
facility construction costs, this type of rebate is treated as an investing
activity in the statement of cash flows. When the rebate/incentive is a function
of production of the DG unit, it is recorded as income over the period of
production and treated in the statement of cash flows as an operating
activity.


20





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 statement 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 average volatility of 20
companies in the same industry as the company. The average expected life is
estimated using the simplified method for “plain vanilla” options. The expected
life in years is based on the “simplified” method. 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.





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 revenue and cost of fuel.





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. 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.





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
based on the 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 sales arrangements in fiscal year
2009.





Other
revenue represents various types of ancillary activities for which the company
engages from time to time such as demand response incentives, the sale of
equipment, and feasibility studies.





Income
Taxes




As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our 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 our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance.


21




Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our deferred tax assets. As of December 31, 2009, there was no deferred
income tax asset on our books. We recorded a valuation allowance of $4,224,000
against the entire gross deferred income tax asset due to uncertainties related
to our ability to utilize our net operating loss carry forwards before they
expire. The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations.




Reclassifications




All prior
period information presented in this Amendment has been restated to separately
present revenues of energy, and turnkey and other revenues. The reclassification
had no effect on previously reported net loss, stockholder’s equity or cash
flows.




Results
of Operations for the Years Ended December 31, 2009 and December 31,
2008





Fiscal
2009 Compared with Fiscal 2008





Revenues





Revenues
in 2009 were $5,763,827 compared to $6,579,437 for the same period in 2008, a
decrease of $815,610 or 12.4%. The decrease in revenue was due to a decrease in
our turn-key installation projects that in 2009 decreased to $1,130,839 compared
to $1,434,932, for the same period in 2008, and our On-Site Utility energy
revenues that in 2009 decreased to $4,632,988 compared to $5,144,505 for the
same period in 2008, a decrease of 9.9%. The decrease in our turn-key
installation projects revenue was caused by the construction of fewer projects.
The decrease in our core On-Site Utility energy revenues was primarily caused by
significantly lower natural gas prices in our existing markets which translated
into lower hot water revenue.





Our
energy revenue is impacted by, among other things: the number of energy systems
operating over the period, the amount energy of produced by the energy systems
(which are impacted by the energy needs of the customer, the local weather which
may require the customer to require more or less energy, the maintenance needs
of the energy systems, and the operating performance of the energy systems), and
the price of electricity, natural gas and oil paid by our customers to their
local utility that the company uses to then price our energy. Our energy
agreements are typically long-term contracts (typically 12 to 15 years) and are
billed monthly to our customers. Because of the foregoing factors, the revenue
from our turn-key projects can substantially vary per period. While the company
accepts turn-key installation projects, they are not considered our core
business.





During
2009, we were operating 62 energy systems at 36 locations in the Northeast,
representing 4,210 kW of installed electricity plus thermal energy, compared to
56 energy systems at 30 locations, representing 4,240 kW of installed
electricity plus thermal energy for the same period in 2008. Our revenues per
customer on a monthly basis is based on the sum of the amount of energy produced
by our energy systems and the published price of energy (electricity, natural
gas or oil) from our customers’ local energy utility that month less the
discounts we provide our customers. Our revenues commence as new energy systems
become operational.





Cost
of Sales





Cost of
sales, including depreciation, in 2009 were $4,677,323 compared to $5,733,175
for the same period in 2008, a decrease of $1,055,852 or 18.4%. Included in the
cost of sales was depreciation expense of $788,885 in 2009, compared to $596,915
for the same period in 2008. Our cost of sales for our core On-Site Utility
business consists primarily of fuel required to operate our energy systems that
decreased by 9% as a percentage of revenue in 2009, compared to the same period
in 2008. Our cost of sales also includes the cost of maintenance of our systems
which increased by 5% as a percentage of revenue in 2009, compared to the same
period in 2008. During 2009, our gross margins were 18.9% compared to 12.9% for
the same period in 2008, primarily due to lower cost of natural gas which is the
majority of our cost of goods. Our On-Site Utility energy margins excluding
depreciation were 31.4% in 2009 compared to 27.7% for the same period in
2008.


22


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 2009 were $1,546,743
compared to $1,504,968 for the same period in 2008, an increase of $41,775 or
2.8%. Those expenses include non-cash compensation expense related to the
issuance of restricted stock and option awards to our employees and an expense
of $76,875 for original listing fees to the NYSE Amex.





Our
selling expenses consist of sales staff, commissions, marketing, travel and
other selling related expenses including provisions for bad debt write-offs. We
sell energy using both direct sales and commissioned agents. Our marketing
efforts consisted of trade shows, print literature, media relations and event
driven direct mail. Our selling expenses in 2009 were $850,975 compared to
$533,874 for the same period in 2008, an increase of $317,101 or 59.4%. The
increase in our selling expenses was primarily due to the addition of a new
salesperson, the additional commission paid to our outside sales agents and an
increase in bad debt expense related to three of our On-Site Utility
sites.





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
2009 were $642,858 compared to $401,361 for the same period in 2008, an increase
of $241,497 or 60.2%. The increase in our engineering expenses was primarily due
to the addition of an engineer and travel expenses to our energy
sites.





Loss
from Operations





The loss
from operations in 2009 was $1,954,072 compared to $1,593,941for the same period
in 2008. The increase in the operating loss was affected by higher operating
expenses. Our non-cash compensation expense related to the issuance of
restricted stock and option awards to our employees was $286,844 in 2009,
compared to $364,231 for the same period in 2008.





Other
Income (Expense), Net





Our other
income (expense), net, in 2009 was $366,359 compared to $334,717 for the same
period in 2008. Other income (expense), net, includes interest income, interest
expense and other items. Interest and other income was $71,185 in 2009 compared
to $139,690 for the same period in 2008. The decrease was primarily due to lower
yields on our invested funds. Interest expense was $437,544 in 2009 compared to
$474,407 for the same period in 2008, due to less interest paid on our
convertible debenture issued in 2006 because of conversions.





Provision
for Income Taxes





Our
provision for state income taxes in 2009 was $7,450 compared to $34,087 for the
same period in 2008. No benefit for Federal taxes to the company’s losses has
been provided in either period.





Noncontrolling
Interest




The
noncontrolling interest share in the profits in ADGNY was $202,684 in 2009
compared to $305,336 for the same period in 2008. The decrease in
non-controlling interest is due to the overall decrease in joint venture volume
and profits and due to changes in the ownership structure of underlying sites.
In 2009, the company made a distribution of $333,704 to the noncontrolling
interest partner based on his interest percent ownership in each
site.





Liquidity
and Capital Resources





Consolidated
working capital at December 31, 2009 was $4,132,378, compared to $3,477,991 at
December 31, 2008. Included in working capital were cash, cash equivalents and
short-term investments of $3,828,143 at December 31, 2009, compared to
$2,445,112 at December 31, 2008. The increase in working capital was a result of
additional funds raised during the year, offset by cash needed to fund
operations.





Cash
used by operating activities was $648,816 in 2009 compared to $1,227,183 for the
same period in 2008. The company's short and long-term receivables balance,
including unbilled revenue, decreased to $665,319, in 2009 compared to
$1,046,319 at December 31, 2008, providing $381,000 of cash. The decrease was
due to reduced revenue during the year. Amount due to the company from related
parties, increased to $370,400 in 2009 compared to $297,417 at December 31,
2008, using $72,983 of cash. The increase was due to an increase in debt by our
noncontrolling interest partner as a result of purchased certain units and
supporting equipment from the company. Our inventory increased to $379,303 in
2009 compared to 355,852 at December 31, 2008, using $23,451 of cash. Our
prepaid and other current assets decreased to $104,119 in 2009 compared to
$163,121 at December 31, 2008, providing $59,002 of cash.


23





Accounts
payable increased to $740,474 in 2009, compared to $270,852 at December 31,
2008, providing $469,622 of cash. The increase in accounts payable was a result
of having five sites under construction representing 725 kW on December 31,
2009, compared to two sites at December 31, 2008 representing 150 kW. The
accounts payable amount of $740,474 includes $455,167 related to
construction-in-process that was higher in 2009 due to increase in construction
projects. Our accrued expenses and other current liabilities including accrued
interest expense increased to $453,536 in 2009 compared to $384,340 at December
31, 2008, providing $69,196 of cash, offset by an accrual of $106,400 for future
interest payments. Our due to related party decreased to $17,531 in 2009,
compared to $166,560 at December 31, 2008, using $149,029 of cash.





During
2009, the primary investing activities of the company’s operations were
expenditures for the purchase of property, plant and equipment for the company's
energy system installations. The company used $4,171,867 for purchases and
installation of energy systems and received $232,483 in rebates and incentives.
The company’s short-term investments provided $82,693 of cash as our funds
invested in certificates of deposits matured and converted into cash. The
company's financing activities provided $5,971,231 of cash in 2009 from the sale
of common stock, exercise of common stock warrants and stock options, offset by
distributions to our noncontrolling interest partner and payments on capital
lease obligations.





At
December 31, 2009, the company’s commitments included a lease for a plotter with
a remaining balance of $22,348 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
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 will lend to the company on a revolving
line of credit basis a principal amount up to $5,000,000. All sums advanced
pursuant to this agreement shall bear interest from the date each advance is
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 shall be due and payable
quarterly in arrears and prepayment of principal, together with accrued
interest, may be made at any time without penalty. Also, under the terms of the
agreement, the credit line from Mr. Hatsopoulos will be 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. As of December 31, 2009, the company has
not drawn funds on this line of credit.





The
company’s On-Site Utility energy program allows customers to reduce both their
energy costs and site carbon production by deploying CHP 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. We believe that our cash and cash
equivalents and our ability to control certain costs, including those related to
general and administrative expenses, will enable us to meet our anticipated cash
expenditures through the end of 2010. Beyond January 1, 2011, as we continue to
grow our business by adding more energy systems, our cash requirements will
increase. We may need to raise additional capital through a debt financing
or an equity offering to meet our operating and capital needs for future
growth.





Our ability to continue to access
capital could be impacted by various factors including general market conditions
and the continuing slowdown in the economy, 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.





Seasonality




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




24




Inflation


We install, maintain, finance, own and
operate complete on-site CHP systems that supply, on a long-term, contractual
basis, electricity and other energy services. We sell the energy to customers at
a guaranteed discount rate to the rates charged by conventional utility
suppliers. Our customers benefit from a reduction in their current energy bills
without the capital costs and risks associated with owning and operating a CHP
or chiller system. Inflation will cause an increase in the rates charged by
conventional utility suppliers, and since we bill our customers based on the
electric utility rates, our pricing will increase in tandem and positively
affect our revenue. However, inflation might cause both our investment and cost
of goods sold to increase, therefore lowering our return on investment and
depressing our gross margins.




Off
Balance Sheet Arrangements




The
company has no material off balance sheet arrangements.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk.





Not
applicable.





Item
8. Financial Statements and Supplementary Data.





The information required by this item
is included in Item 15 of this Annual Report on Form 10-K.





Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.





None.





Item
9A(T). 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 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
weakness 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
does 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 during the period
ended December 31, 2009. 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.





25




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 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 December 31, 2009.





The
company had thirteen active full-time employees and two part-time employees as
of December 31, 2009. 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 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.





ThisAnnual Report on Form 10-Kdoes not include
an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only
management’s report in thisAnnual Report on Form
10-K.





Item
9B.  Other Information.





None.


26


PART
III




Item
10. Directors, Executive Officers and Corporate Governance.




Executive
Officers and Directors




The
following table lists the current members of our board of directors and our
executive officers. The address for our directors and officers is c/o American
DG Energy Inc., 45 First Avenue, Waltham, Massachusetts 02451.





Name
              
              Age
              
              Position(s)George
      N. Hatsopoulos
              
              83
              
              Chairman
      of the BoardJohn
      N. Hatsopoulos
              
              76
              
              Chief
      Executive Officer and DirectorBarry
      J. Sanders
              
              49
              
              President
      and Chief Operating OfficerAnthony
      S. Loumidis
              
              45
              
              Chief
      Financial Officer, Secretary and TreasurerEarl
      R. Lewis
              
              66
              
              DirectorCharles
      T. Maxwell
              
              78
              
              DirectorDeanna
      M Petersen
              
              48
              
              Director





George N. Hatsopoulos,age
83, has been our Chairman of the Board since the organization of the company in
July 2001. He is the founder and CEO of Pharos, LLC, an organization devoted to
the creation of leading edge business ventures. He is the founder and chairman
emeritus of Thermo Electron Corporation, which is now Thermo Fisher Scientific
(NYSE: TMO), and served as Chairman and CEO since its founding in 1956 until his
retirement from those positions in 1999. Dr. Hatsopoulos has served on the board
of the Federal Reserve Bank of Boston, including a term as chairman. He was a
member of the Securities and Exchange Commission Advisory Committee on Capital
Formation and Regulatory Process, the Advisory Committee of the U.S.
Export-Import Bank, and the boards of various corporations and institutions. Dr.
Hatsopoulos is a fellow of the American Academy of Arts and Sciences, the
American Society of Mechanical Engineers and other scientific and technical
organizations. He is the recipient of numerous honors and awards in engineering,
science, industry and academics, has authored over 60 articles in professional
journals, and is the principal author of textbooks on thermodynamics and
thermionic energy conversion. Dr. Hatsopoulos has been a faculty member and
senior lecturer at Massachusetts Institute of Technology, or MIT, and continues
his association with the Institute as a Life Member of the Corporation. Dr.
Hatsopoulos holds bachelors, masters and doctorate degrees from MIT – all in
mechanical engineering.





Our board
of directors has determined that Mr. Hatsopoulos’s prior experience as founder,
chairman and CEO of Thermo Electron Corporation, where he demonstrated
leadership capability and garnered extensive expertise involving complex
financial matters, and his extensive knowledge of complex financial and
operational issues qualify him to be a member of the board of directors in light
of the company’s business and structure.





John N. Hatsopoulos,age 76,
has been the Chief Executive Officer of the company since the organization of
the company in July 2001. He is the Chief Executive Officer of Tecogen Inc., a
manufacturer of natural gas, engine-driven commercial and industrial cooling and
cogeneration systems. He is also a Partner and Managing Director of Alexandros
Partners LLC, a financial advisory firm providing consulting services to early
stage entrepreneurial ventures. Mr. Hatsopoulos is a co-founder of Thermo
Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO), and the
retired President and Vice Chairman of the board of directors of that company.
He is a member of the board of directors of Antigenics Inc. (NASDAQ: AGEN),
American CareSource Holdings, Inc. (NASDAQ: ANCI), TEI Biosciences Inc., Ilios
Inc., and is a former “Member of the Corporation” for Northeastern University.
Mr. Hatsopoulos graduated from Athens College in Greece, and holds a bachelor’s
degree in history and mathematics from Northeastern University as well as
honorary doctorates in business administration from Boston College and
Northeastern University.





Our board
of directors has determined that Mr. Hatsopoulos’s prior experience as
co-founder, president and CFO of Thermo Electron Corporation, where he
demonstrated leadership capability and garnered extensive expertise involving
complex financial matters, and his extensive knowledge of complex financial and
operational issues qualify him to be a member of the board of directors in light
of the company’s business and structure.




Barry J. Sanders has been our
President and Chief Operating Officer since 2001. He is also the Chairman of the
Board of Directors of Ilios Inc., a high-efficiency heating products company.
From 1992 to 2001, Mr. Sanders served as Executive Vice President of Micrologic,
Inc., an equipment asset management company where he directed the company’s
business-to-business group. From 1990 to 1992, he was the Marketing Manager at
Andover Controls Corp., a building automation systems company, and from 1988 to
1990 he was at Tecogen, an affiliate of the company, where he directed the
successful introduction of that company’s distributed generation chiller
products. Mr. Sanders has also managed research and development projects for the
New York State Energy Research and Development Authority in Albany, New York,
where he created the University-Industry Energy Research Program to accelerate
commercialization of new technologies. Mr. Sanders holds a bachelor’s degree in
chemical engineering from the University of Rochester and a master’s of business
administration degree in marketing from Rensselaer Polytechnic
Institute.


27





Anthony S. Loumidis has been
our Chief Financial Officer since 2004 and our Treasurer since 2001. Mr.
Loumidis devotes approximately half of his business time to the affairs of the
company. He has been the Chief Financial Officer of GlenRose Instruments Inc.,
since 2006; GlenRose Instruments provides analytical services to the federal
government and its prime contractors. He has also been the Vice President and
Treasurer of Tecogen Inc., an affiliate of the company, since 2001; Tecogen is a
manufacturer of natural gas, engine-driven commercial and industrial cooling and
cogeneration systems. He also has been a Partner and President of Alexandros
Partners LLC since 2000; Alexandros Partners is a financial advisory firm
providing consulting services to early stage entrepreneurial ventures, and he is
Treasurer of Ilios Inc., an affiliate of the company, a high-efficiency heating
products company. Mr. Loumidis was previously with Thermo Electron Corporation,
which is now Thermo Fisher Scientific (NYSE: TMO), where he held various
positions including National Sales Manager for Thermo Capital Financial
Services, Manager of Investor Relations and Manager of Business Development of
Tecomet, a subsidiary of Thermo Electron. Mr. Loumidis is a FINRA registered
representative, holds a bachelor’s degree in business administration from the
American College of Greece in Athens and a master’s degree in business
administration from Northeastern University.





Earl R. Lewis,age 66, became
a member of our Board in September 2005.  He is Chairman of the Board,
Chief Executive Officer and President of FLIR Systems Inc. (NASDAQ: FLIR), a
manufacturer of infrared cameras, night vision and thermal imaging systems.
Previously, Mr. Lewis was CEO and President of Thermo Instrument Systems Inc., a
publicly held subsidiary of Thermo Electron Corporation, which is now Thermo
Fisher Scientific (NYSE: TMO), from 1998 to 2000, and held various senior
management positions within Thermo Electron Corporation since 1984. Mr. Lewis is
a member of the board of directors of Harvard Bioscience Inc. (NASDAQ: HBIO),
Nxstage Medical, Inc. (NASDAQ:NXTM), and a trustee of Dean College and New
Hampton School. Mr. Lewis holds a Bachelor of Science degree from Clarkson
University and has attended post-graduate programs at the University of Buffalo,
Northeastern University and Harvard University.





Our board
of directors has determined that Mr. Lewis’s prior experience in senior
operating positions at Thermo Electron Corporation, where he demonstrated
leadership capability and garnered extensive expertise involving complex
financial matters and his extensive experience as a director of public companies
qualify him to be a member of the board of directors in light of the company’s
business and structure.





Charles T. Maxwell,age 78,
has been a member of our Board since 2001. He is a widely recognized expert in
the energy sector, with over 40 years of experience with major oil companies and
investment banking firms. He is currently Senior Energy Analyst with Weeden
& Co. of Greenwich, Connecticut, where he develops strategic data and
forecasts on oil, gas and power markets. Since the early 1980’s, he has been an
active member of an Oxford-based organization comprised of the Organization of
the Petroleum Exporting Countries (“OPEC”) and other industry executives from 30
countries who meet twice annually to analyze trends within the global energy
industries and markets. He is a member of the board of directors of Chesapeake
Energy Corp. (NYSE: CHK). Mr. Maxwell graduated cum laude in political sciences
from Princeton University as a Jadwin Scholar and holds a B.A. from Oxford
University as a Marshall Scholar in Middle East literature and
history.





Our board
of directors has determined that Mr. Maxwell’s prior experience in the energy
sector and his extensive experience as a director of public companies qualifies
him to be a member of the board of directors in light of the company’s business
and structure.





Deanna M. Petersen,age 48,
has been nominated to join our Board at the Annual Meeting of stockholders to be
held on May 27, 2010. She is Vice President of Business Development for
Shire Human Genetic Therapies (NASDAQ: SHPGY), where she initiates and manages
partnering, licensing and merger and acquisition activities worldwide.
Previously, Mrs. Petersen was Vice President of Business Development for
Antigenics Inc. (NASDAQ: AGEN) and Coley Pharmaceutical Group, Inc. Mrs.
Petersen is Co-Chair of the Business Development Committee for the Massachusetts
Biotechnology Association and previously the Treasurer on the Board of Directors
for the Healthcare Businesswomen’s Association, Boston Chapter. Ms. Petersen
holds a Bachelor of Science in Biology from Iowa State University and a Master
of Business Administration from The University of Iowa.





Our board
of directors has determined that Mrs. Petersen’s prior experience in senior
operating positions at various companies, where she demonstrated leadership
capability and garnered extensive expertise involving complex financial matters
qualify her to be a member of the board of directors in light of the company’s
business and structure.





There are
no family relationships among members of our Board, other than Dr. George N.
Hatsopoulos and Mr. John N. Hatsopoulos, who are brothers. All members of our
Board attended via conference call our 2009 Annual Meeting.


28





There are
no family relationships among our executive officers. Each executive officer is
elected or appointed by, and serves at the discretion of, our Board. The elected
officers of the company will hold office until their successors are duly
elected and qualified, or until their earlier resignation or
removal.





Director Nomination
Process




The
Nominating and Governance Committee will consider recommendations for candidates
to the Board from stockholders holding no less than 2% of the outstanding shares
of the company’s voting securities continuously for at least 12 months
prior to the date of the submission of the recommendation for nomination. A
stockholder that desires to recommend a candidate for election to the Board
shall direct the recommendation in writing to American DG Energy Inc.,
attention: Corporate Secretary, 45 First Avenue, Waltham, Massachusetts, 02451,
and must include the candidate’s name, home and business contact information,
detailed biographical data and qualifications, information regarding any
relationships between the candidate and the company within the last three years
and evidence of the nominating person’s ownership of company stock, a statement
from the recommending stockholder in support of the candidate, references,
particularly within the context of the criteria for Board membership, including
issues of character, diversity, skills, judgment, age, independence, industry
experience, expertise, corporate experience, length of service, other
commitments and the like, and a written indication by the candidate of her/his
willingness to serve, if elected.





The
Nominating Committee seeks to nominate director candidates who bring diverse
experiences and perspectives to our Board.  In evaluating candidates,
the Nominating Committee’s practice is to consider, among other things,
diversity with respect to business experiences, the candidate’s range of
experiences with public companies, diversity of gender, race and national
origin, education and differences in viewpoints and skills. The Nominating
Committee has not formalized this practice into a written
policy.  Evaluations of potential candidates generally involve a
review of the candidate’s background and credentials by the Nominating
Committee, interviews with members of the Board/Nominating Committee, the
Board/Nominating Committee as a whole, or one or more other Board/Nominating
Committee members, and discussions of the Nominating Committee and the
Board.





The
Nominating and Governance Committees have assessed our practices with respect to
diversity to be effective, in that our practices encourage consideration of a
wide range of factors that are relevant to a candidate’s value to our Board,
while providing our Nominating Committee with flexibility in the director search
and nomination process.





The
Nominating and Governance Committee has not formally adopted any specific,
minimum qualifications that must be met by each candidate for the Board, nor are
there specific qualities or skills that are necessary for one or more of the
members of the Board to possess. The Nominating and Governance Committee
believes that candidates and nominees must reflect a Board that is comprised of
directors who (i) are predominantly independent, (ii) are of high
integrity, (iii) have or have had experience in positions with a high
degree of responsibility, (iv) are or were leaders in the companies or
institutions with which they are or were affiliated, (v) have
qualifications that will increase overall Board effectiveness and (vi) meet
other requirements as may be required by applicable rules, such as financial
literacy or financial expertise with respect to Audit Committee members. In
order to identify and evaluate nominees for director, the Nominating and
Governance Committee regularly reviews the current composition and size of the
Board, reviews qualifications of nominees, evaluates the performance of the
Board as a whole, evaluates the performance and qualifications of individual
members of the Board eligible for re-election at the annual meeting of
stockholders, considers such factors as: character; diversity; skills; judgment;
age; independence; industry experience; expertise; corporate experience; length
of service; other commitments and the like; and the general needs of the Board,
including applicable independence requirements. The Nominating and Governance
Committee considers each individual candidate in the context of the current
perceived needs of the Board as a whole. The Nominating and Governance Committee
uses the same process for evaluating all nominees, regardless of the original
source of the nomination. All of the members of the Board participate in the
consideration of director nominations.




Board
Leadership Structure





We
separate the roles of Chief Executive Officer and Chairman of the Board in
recognition of the differences between the two roles. The CEO is responsible for
setting the strategic direction for the company and the day to day leadership
and performance of the company, while the Chairman of the Board provides
guidance to the CEO and sets the agenda for Board meetings and presides over
meetings of the full Board.


29


Our
Chairman, Dr. George N. Hatsopoulos is the founder and chairman emeritus of
Thermo Electron Corporation, which is now Thermo Fisher Scientific (NYSE: TMO),
he has served on the board of the Federal Reserve Bank of Boston, including a
term as chairman. He was a member of the Securities and Exchange Commission
Advisory Committee on Capital Formation and Regulatory Process, the Advisory
Committee of the U.S. Export-Import Bank, and the boards of various corporations
and institutions. In 1996, Dr. Hatsopoulos won the John Fritz Medal, which is
the highest American award in the engineering profession and presented each year
for scientific or industrial achievement in any field of pure or applied
science. In 1997 he was awarded the 3rd Annual Heinz Award in Technology,
the Economy and Employment. Dr. Hatsopoulos provides “high-level” guidance to our
Chief Executive Officer, John N. Hatsopoulos, his brother, in the field of
engineering, science, thermodynamics and thermionic energy conversion, which is
the basis of our combined heat and power system. Our Chief Executive Officer,
John Hatsopoulos, has a background in operations and finance and is responsible
for setting the strategic direction for the company and the overall leadership
and performance of the company. The Chairman’s role includes high level
supervision over the strategic direction of the company, which is the primary
responsibility of the Chief Executive Officer. In our case, we have two highly
experienced and distinguished individuals performing distinct high level
supervisory and executive functions for the company.





Our Board’s Role in Risk
Oversight




Our Board
oversees our risk management processes directly and through its committees. Our
management is responsible for risk management on a day-to-day basis. The role of
our Board and its committees is to oversee the risk management activities of
management. The Audit Committee assists the board in fulfilling its oversight
responsibilities with respect to risk management in the areas of financial
reporting, internal controls and compliance with legal and regulatory
requirements, and, in accordance with NYSE Amex requirements, discusses policies
with respect to risk assessment and risk management, including guidelines and
policies to govern the process by which the company’s exposure to risk is
handled. The Compensation Committee assists the Board in fulfilling its
oversight responsibilities with respect to the management of risks arising from
our compensation policies and programs. The Nominating and Corporate Governance
Committee assists the Board in fulfilling its oversight responsibilities with
respect to the management of risks associated with board organization,
membership and structure, succession planning for our directors, and corporate
governance.





Meetings
and Committees of the Board





The Board currently has three
(3) committees: an Audit Committee established in accordance with section
3(a)(58)(A) of the Securities Exchange Act of 1934, or the Exchange Act, a
Compensation Committee and a Nominating and Governance Committee. The following
describes each committee, its current membership, the number of meetings held
during fiscal 2009, and its function. All members of these committees are
non-employee directors.





The Board held three (3) meetings
during the fiscal year ended December 31, 2009. Each director attended the
meetings of the Board during his term. The Board has determined that all of its
directors, other than Mr. George N. Hatsopoulos and Mr. John N.
Hatsopoulos, are “independent” for purposes of the rules and regulations of the
Securities and Exchange Commission, or the SEC, and NYSE Amex listing
standards.





The members of the Audit Committee are
Mr. Lewis, Mr. Maxwell and Mr. Weinstein. The Audit Committee held four
(4) meetings during the fiscal year ended December 31, 2009. The functions
of the Audit Committee include reviewing and supervising the financial controls
of the company, appointing, compensating and overseeing the work of the
independent auditors, reviewing the books and accounts of the company, meeting
with the officers of the company regarding the company's financial controls,
acting upon recommendations of the independent auditors and taking such further
actions as the Audit Committee deems necessary to complete an audit of the books
and accounts of the company. The Board has determined that the members of the
Audit Committee are “independent” under SEC and NASDAQ listing
standards.  The Board has determined that Earl R. Lewis qualifies as
an “audit committee financial expert” as defined in Item 407(d) of
Regulation S-K. The charter of the Audit Committee is available on the
company’s website at www.americandg.com





The members of the Compensation
Committee are Mr. Maxwell and Mr. Weinstein. The Compensation Committee
held one (1) meeting during the fiscal year ended December 31, 2009. The
Compensation Committee's functions include reviewing with management cash and
other compensation policies for employees, making recommendations to the Board
regarding compensation matters and determining compensation for the Chief
Executive Officer. The Board has adopted a written charter for the Compensation
Committee, which is posted on our website at www.americandg.com. The Board has
determined that the members of the Compensation Committee are “independent” for
purposes of SEC and NASDAQ rules. Our Chief Executive Officer has been
instrumental in the design and recommendation to the compensation committee of
compensation plans and awards for our directors and executive officers including
our President, Chief Operating Officer and Chief Financial Officer. All
compensation decisions for the Chief Executive Officer and all other executive
officers are reviewed and approved by the Compensation Committee, subject to
ratification by the Board. The charter of the Compensation Committee is
available on the company’s website at www.americandg.com





The
members of the Nominating and Governance Committee are Mr. Lewis, Mr.
Maxwell and Mr. Weinstein. The Nominating and Governance Committee did not hold
a meeting during the fiscal year ended December 31, 2009. The Nominating and
Governance Committee functions are to identify persons qualified to serve as
members of the Board, to recommend to the Board persons to be nominated by the
Board for election as directors at the annual meeting of stockholders and
persons to be elected by the Board to fill any vacancies, and recommend to the
Board the directors to be appointed to each of its committees. In addition, the
Nominating and Governance Committee is responsible for developing and
recommending to the Board a set of corporate governance
guidelines applicable to the company (as well as reviewing and reassessing
the adequacy of such guidelines as it deems appropriate from time to time) and
overseeing the annual self-evaluation of the Board. The charter of the
Nominating and Governance Committee is available on the company’s website at
www.americandg.com


30


The company encourages all incumbent
directors and nominees for election as director to attend the annual meeting of
stockholders. The company, however, does not have a formal policy in place
regarding Board members’ attendance at annual meetings of the stockholders of
the company.





Stockholder
Communications with the Board





A stockholder that desires to
communicate directly with the Board or one or more of its members concerning the
affairs of the company shall direct the communication in written correspondence
by letter to American DG Energy Inc., attention Corporate Secretary, 45 First
Avenue, Waltham, Massachusetts, 02451. If such communication is intended for
some but not all of the members of the Board, the mailing envelope must contain
a clear notation indicating that the enclosed letter is a “Shareholder-Board
Communication”. The Corporate Secretary has been authorized to screen commercial
solicitations and materials which pose security risks, are unrelated to the
business or governance of the company, or are otherwise inappropriate. All such
letters must identify the author as a shareholder and clearly state whether the
intended recipients are all or individual members of the Board. The Corporate
Secretary will make copies of all such letters and circulate them to the
appropriate director or directors.





Compensation
Committee Interlocks and Insider Participation




None of
our executive officers serves as a member of the board of directors or
compensation committee, or other committee serving an equivalent function, of
any other entity that has one or more of its executive officers serving as a
member of our board of directors or its compensation committee. None of the
current members of the compensation committee of our board of directors has ever
been one of our employees.





Item
11. Executive Compensation.




The following table sets forth the
compensation of our named executive officers, which consist of our chief
executive officer and by other executive officers during the fiscal year ended
December 31, 2009.





SUMMARY
COMPENSATION TABLE





Stock
                          
                          
                          Option
                          
                          
                          All otherName and principal position
                          
                          Year
                          
                          Salary ($)
                          
                          
                          Bonus ($)
                          
                          
                          awards ($)
                          
                          
                          awards ($)
                          
                          
                          compensation ($)
                          
                          
                          Total ($)John
      N. Hatsopoulos (1)
                          
                          2009
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Chief
      Executive Officer
                          
                          2008
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Barry
      J. Sanders
                          
                          2009
                          
                          
                          205,430
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          372
                          (2)
                          
                          
                          205,802President
      and Chief Operating Officer
                          
                          2008
                          
                          
                          175,430
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          372
                          (2)
                          
                          
                          175,802Anthony
      S. Loumidis (3)
                          
                          2009
                          
                          
                          175,680
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          372
                          (2)
                          
                          
                          176,052Chief
      Financial Officer and Treasurer
                          
                          2008
                          
                          
                          160,680
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          372
                          (2)
                          
                          
                          161,052





(1)
            John
      N. Hatsopoulos did not receive a salary, bonus or any other compensation
      in 2008 or 2009, and will not receive a salary, bonus or any other
      compensation in 2010.


(2)
            Includes
      group life insurance of $372.


(3)
            Anthony
      S. Loumidis devotes approximately half of his business time to the affairs
      of GlenRose Instruments Inc., and 50% of his salary is reimbursed by
      GlenRose Instruments Inc..





Outstanding
Equity Awards at Fiscal Year-End Table





The following table summarizes the
outstanding equity awards held by each named executive officer as of December
31, 2009. Our named executive officers did not exercise any options during the
fiscal year ended December 31, 2009.


31


OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END





Option awards
                
                
                Stock awardsNumber of
                
                
                Number ofsecurities
                
                
                securities
                
                
                
                
                
                
                
                
                Number of
                
                
                Market valueunderlying
                
                
                underlying
                
                
                
                
                
                
                
                
                shares
                
                
                of sharesunexercised
                
                
                unexercised
                
                
                Option
                
                
                Option
                
                
                of stock
                
                
                of stockoptions (#)
                
                
                options (#)
                
                
                exercise
                
                
                expiration
                
                
                that have
                
                
                that haveName
                
                exercisable
                
                
                unexercisable
                
                
                price ($)
                
                
                date
                
                
                not vested (#)
                
                
                not vested ($)(1)John
      N. Hatsopoulos
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Barry
      J. Sanders (2)(3)
                
                
                320,000
                
                
                
                -
                
                
                
                0.07
                
                
                12/10/2011
                
                
                
                117,500
                
                
                
                346,625Barry
      J. Sanders (4)
                
                
                50,000
                
                
                
                -
                
                
                
                0.70
                
                
                3/14/2015
                
                
                
                -
                
                
                
                -Barry
      J. Sanders (5)
                
                
                216,000
                
                
                
                504,000
                
                
                
                0.90
                
                
                12/18/2017
                
                
                
                -
                
                
                
                -Anthony
      S. Loumidis (6)(7)
                
                
                20,000
                
                
                
                -
                
                
                
                0.70
                
                
                2/24/2014
                
                
                
                27,500
                
                
                
                81,125Anthony
      S. Loumidis (8)
                
                
                100,000
                
                
                
                -
                
                
                
                0.70
                
                
                9/29/2015
                
                
                
                -
                
                
                
                -Anthony
      S. Loumidis (9)
                
                
                75,000
                
                
                
                175,000
                
                
                
                0.90
                
                
                12/18/2017
                
                
                
                -
                
                
                
                -





(1)
            Market
      value of shares of stock that have not vested is computed on the closing
      market price of the company’s common stock at December 31, 2009, which was
      $2.95 per share.


(2)
            Includes
      stock option award granted on December 10, 2001, with 25% of the shares
      vesting on December 10, 2002 and then an additional 25% of the shares on
      each of the subsequent four anniversaries thereafter, subject to Mr.
      Sander’s continued employment and subject to acceleration of vesting upon
      a change in control.


(3)
            Includes:
      (a) restricted stock to purchase 5,000 shares of common stock at a
      purchase price of $.001 per share granted on June 7, 2006, with 25%of the shares
      vesting on July 1, 2007 and then 25% of the shares on each subsequent
      anniversary of January 2, 2007, subject to acceleration of vesting upon a
      change in control prior to a termination event, (b) restricted stock to
      purchase 12,500 shares of common stock at a purchase price of $.001 per
      share granted on June 7, 2006, with 25%of the shares
      vesting on July 1, 2007 and then 25% of the shares on each subsequent
      anniversary of January 2, 2007, subject to acceleration of vesting upon a
      change in control prior to a termination event, and (c) restricted stock
      to purchase 100,000 shares of common stock at a purchase price of $.001
      per share granted on February 20, 2007, with 50,000 of the shares vesting
      on January 2, 2008 and 50,000 shares vesting on each subsequent
      anniversary thereafter, subject to acceleration of vesting upon a change
      in control prior to a termination
event.


(4)
            Includes
      stock option award granted on March 14, 2005, with 25% of the shares
      vesting on March 14, 2006 and then an additional 25% of the shares on each
      of the subsequent four anniversaries thereafter, subject to Mr. Sander’s
      continued employment and subject to acceleration of vesting upon a change
      in control.


(5)
            Includes
      stock option award granted on December 18, 2007, with 10% of the shares
      vesting on December 31, 2007 and then an additional 10% of the shares on
      each of the subsequent nine anniversaries thereafter, subject to Mr.
      Sander’s continued employment and subject to acceleration of vesting upon
      a change in control.


(6)
            Includes
      stock option award granted on February 24, 2004, with 25% of the shares
      vesting on February 24, 2005 and then an additional 25% of the shares on
      each of the subsequent four anniversaries thereafter, subject to Mr.
      Loumidis continued employment and subject to acceleration of vesting upon
      a change in control.


(7)
            Includes:
      (a) restricted stock to purchase 7,500 shares of common stock at a
      purchase price of $.001 per share granted on June 7, 2006, with 25%of the shares
      vesting on July 1, 2007 and then 25% of the shares on each subsequent
      anniversary of January 2, 2007, subject to acceleration of vesting upon a
      change in control prior to a termination event, and (b) restricted stock
      to purchase 20,000 shares of common stock at a purchase price of $.001 per
      share granted on February 20, 2007, with 10,000 of the shares vesting on
      January 2, 2008 and 10,000 shares vesting on each subsequent anniversary
      thereafter, subject to acceleration of vesting upon a change in control
      prior to a termination event.


(8)
            Includes
      stock option award granted on September 29, 2005, with 25% of the shares
      vesting on September 29, 2006 and then an additional 25% of the shares on
      each of the subsequent four anniversaries thereafter, subject to Mr.
      Loumidis continued employment and subject to acceleration of vesting upon
      a change in control.


(9)
            Includes
      stock option award granted on December 18, 2007, with 10% of the shares
      vesting on December 31, 2007 and then an additional 10% of the shares on
      each of the subsequent nine anniversaries thereafter, subject to Mr.
      Loumidis continued employment and subject to acceleration of vesting upon
      a change in control.





Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements





None of our executive officers has an
employment contract or change-in-control arrangement, other than stock and
option awards that contain certain change-in-control provisions such as
accelerated vesting due to acquisition. In the event an acquisition that is not
a private transaction occurs while the optionee maintains a business
relationship with the company and the option has not fully vested, the option
will become exercisable for 100% of the then number of shares as to which it has
not vested and such vesting to occur immediately prior to the closing of the
acquisition.


32


The stock
and option awards that would vest for each named executive if a change-in
control were to occur are disclosed under our Outstanding Equity Awards at Fiscal
Year-End Table. Specifically, as of December 31, 2009, Barry J. Sanders
had 504,000 stock options and 117,500 shares of restricted stock that had not
vested and Anthony S. Loumidis had 175,000 stock options and 27,500 shares of
restricted stock that had not vested.





Our stock and option awards contain
certain change-in-control provisions. Descriptions of those provisions are set
forth below:





Stock
Awards Change in Control Definition





Change in Control shall mean (a) the
acquisition in a transaction or series of transactions by any person (such term
to include anyone deemed a person under Section 13(d)(3) of the Exchange Act),
other than the company or any of its subsidiaries, or any employee benefit plan
or related trust of the company or any of its subsidiaries, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of fifty percent (50%) or more of the combined voting power of the then
outstanding voting securities of the company entitled to vote generally in the
election of directors; provided a Change in Control shall not occur solely as
the result of an Initial Public Offering or (b) the sale or other disposition of
all or substantially all of the assets of the company in one transaction or
series of related transactions.





Option
Awards Change in Control Definition





Accelerated vesting due to acquisition.
In the event an acquisition that is not a private transaction occurs while the
optionee maintains a business relationship with the company and this option has
not fully vested, this option shall become exercisable for 100% of the then
number of Shares as to which it has not vested, such vesting to occur
immediately prior to the closing of the Acquisition.





Definitions. The following definitions
shall apply: Acquisition means (i) the sale of the company by merger in which
the shareholders of the company in their capacity as such no longer own a
majority of the outstanding equity securities of the company (or its successor);
or (ii) any sale of all or substantially all of the assets or capital stock of
the company (other than in a spin-off or similar transaction) or (iii) any other
acquisition of the business of the company, as determined by the Board. Business
relationship means service to the company or its successor in the capacity of an
employee, officer, director or consultant. Private transaction” means any
acquisition where the consideration received or retained by the holders of the
then outstanding capital stock of the company does not consist of (i) cash or
cash equivalent consideration, (ii) securities which are registered under the
Securities the Securities Act of 1933, as amended, or any successor statute
and/or (iii) securities for which the company or any other issuer thereof has
agreed, including pursuant to a demand, to file a registration statement within
ninety (90) days of completion of the transaction for resale to the public
pursuant to the Securities Act of 1933, as amended.





Director
Compensation





Each director who is not also one of
our employees will receive a fee of $500 per day for service on our Board, or a
fee of $500 per day for serving on each of the Audit, Compensation, or
Nominating and Governance Committees. Non-employee directors also will be
eligible to receive stock or options awards under our equity incentive
plan.





We
reimburse all of our non-employee directors for reasonable travel and other
expenses incurred in attending Board and committee meetings. Any director who is
also one of our employees receives no additional compensation for serving as a
director.





The
following table sets forth information with respect to director compensation for
the fiscal year ended December 31, 2009.





DIRECTOR
COMPENSATION TABLE





Fees earned or
                
                
                Stock
                
                
                All otherName
                
                paid in cash ($)
                
                
                awards ($)
                
                
                compensation ($)
                
                
                Total ($)George
      N. Hatsopoulos
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -John
      N. Hatsopoulos
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Earl
      R. Lewis
                
                
                3,500
                
                
                
                -
                
                
                
                -
                
                
                
                3,500Charles
      T. Maxwell
                
                
                3,000
                
                
                
                -
                
                
                
                -
                
                
                
                3,000Alan
      D. Weinstein
                
                
                2,500
                
                
                
                -
                
                
                
                -
                
                
                
                2,500




33


OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END





The
following table summarizes the outstanding equity awards held by each director
as of December 31, 2009.





Option awards
                  
                  Stock awardsNumber of
                  
                  
                  Number ofsecurities
                  
                  
                  securities
                  
                  
                  
                  
                  
                  
                  Number of
                  
                  
                  Market valueunderlying
                  
                  
                  underlying
                  
                  
                  
                  
                  
                  
                  shares
                  
                  
                  of sharesunexercised
                  
                  
                  unexercised
                  
                  
                  Option
                  
                  Option
                  
                  of stock
                  
                  
                  of stockoptions (#)
                  
                  
                  options (#)
                  
                  
                  exercise
                  
                  expiration
                  
                  that have
                  
                  
                  that haveName
                  
                  exercisable
                  
                  
                  unexercisable
                  
                  
                  price ($)
                  
                  date
                  
                  not vested (#)
                  
                  
                  not vested ($)(1)Earl
      R. Lewis (2)(3)
                  
                  
                  100,000
                  
                  
                  
                  -
                  
                  
                  
                  0.70
                  
                  12/22/2015
                  
                  
                  50,000
                  
                  
                  
                  147,500Charles
      T. Maxwell (4)(5)
                  
                  
                  100,000
                  
                  
                  
                  -
                  
                  
                  
                  0.07
                  
                  12/10/2011
                  
                  
                  50,000
                  
                  
                  
                  147,500Alan
      D. Weinstein (6)(7)
                  
                  
                  100,000
                  
                  
                  
                  -
                  
                  
                  
                  0.07
                  
                  12/10/2011
                  
                  
                  50,000
                  
                  
                  
                  147,500





(1)
            Market
      value of shares of stock that have not vested is computed on the closing
      market price of the company’s common stock at December 31, 2009, which was
      $2.95 per share.


(2)
            Includes
      stock option award granted on December 22, 2005, with 25% of the shares
      vesting on December 22, 2006 and then an additional 25% of the shares on
      each of the subsequent four anniversaries thereafter, provided that Mr.
      Lewis serves as a director or consultant to the
  company.


(3)
            Includes
      restricted stock to purchase 50,000 shares of common stock at a purchase
      price of $.001 per share granted on February 20, 2007, with 25%of the shares
      vesting on January 2, 2008, and then 25% of the shares on each subsequent
      anniversary thereafter.


(4)
            Includes
      stock option award granted on December 10, 2001, with 25% of the shares
      vesting on December 10, 2002 and then an additional 25% of the shares on
      each of the subsequent four anniversaries thereafter, provided that Mr.
      Maxwell serves as a director or consultant to the
  company.


(5)
            Includes
      restricted stock to purchase 50,000 shares of common stock at a purchase
      price of $.001 per share granted on February 20, 2007, with 25%of the shares
      vesting on January 2, 2008, and then 25% of the shares on each subsequent
      anniversary thereafter.


(6)
            Includes
      stock option award granted on December 10, 2001, with 25% of the shares
      vesting on December 10, 2002 and then an additional 25% of the shares on
      each of the subsequent four anniversaries thereafter, provided that Mr.
      Weinstein serves as a director or consultant to the
    company.


(7)
            Includes
      restricted stock to purchase 50,000 shares of common stock at a purchase
      price of $.001 per share granted on February 20, 2007, with 25%of the shares
      vesting on January 2, 2008, and then 25% of the shares on each subsequent
      anniversary thereafter.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires the officers and directors of the company,
and persons who own 10% or more of any class of equity interests in the company,
to report their beneficial ownership of equity interests in the company to the
SEC. Their initial reports are required to be filed using the SEC’s Form 3, and
they are required to report subsequent purchases, sales and other changes using
the SEC’s Form 4, which must be filed within two days of most
transactions.  Officers, directors and shareholders owning more than
10% of any class of equity interests in the company are required by SEC
regulations to furnish us with copies of all reports they file pursuant to
Section 16(a). Based solely on our review of the copies of these reports
furnished to us or written representations that no such reports were required,
we believe that, during 2008, all filing requirements under 16(a) of the
Exchange Act applicable to our executive officers, directors and greater that
10% shareholders were timely met. Alan D. Weinstein, one of the directors of the
company, filed a late Form 4 in calendar year 2009.





EQUITY
COMPENSATION PLAN INFORMATION





The following table provides
information as of December 31, 2009, regarding common stock that may be issued
under the company’s equity compensation plans. Information is included for both
equity compensation plans approved by the company’s stockholders and not
approved by the company’s stockholders (which date back to before the company
became a reporting company under the Exchange Act).


34




Number of securities
                        
                        
                        
                        
                        
                        Number of securities remainingto be issued upon
                        
                        
                        Weighted-average
                        
                        
                        available for future issuanceexercise of
                        
                        
                        exercise price of
                        
                        
                        under equity compensation plansoutstanding options,
                        
                        
                        outstanding options,
                        
                        
                        (excluding securities reflected inPlan category
                        
                        warrants and rights
                        
                        
                        warrants and rights
                        
                        
                        second column)Equity
      compensation plansapproved
      by security holders
                        
                        
                        2,308,000
                        
                        
                        $
                        0.70
                        
                        
                        
                        1,051,250Equity
      compensation plansnot
      approved by security holders
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -Total
                        
                        
                        2,308,000
                        
                        
                        $
                        0.70
                        
                        
                        
                        1,051,250





In
December 2009, our management conducted an assessment of the risks associated
with our compensation policies and practices. This process included a review of
our compensation programs, a discussion of the types of practices that could be
reasonably likely to create material risks, and an analysis of the potential
effects on the company on related risks as a whole.





Although
we reviewed all of our compensation programs, we paid particular attention to
programs involving incentive-based payouts and programs that involve our
executive officers. During the course of our assessment, we consulted with the
Compensation Committee of our Board of Directors.





We
believe that our compensation programs are designed to create appropriate
incentives without encouraging excessive risk taking by our employees. In this
regard, our compensation structure contains various features intended to
mitigate risk. For example:





·
            None
      of our executive officers receives any performance-based compensation or
      incentive payments.





·
            A
      portion of the compensation package for our sales-based employees consists
      of commissions for units sold and installed, which package is designed to
      link an appropriate portion of compensation to long-term performance,
      while providing a balanced compensation model
  overall.





·
            The
      Compensation Committee oversees our compensation policies and practices
      and is responsible for reviewing and approving executive compensation,
      annual incentive compensation plans applicable to sales employees and
      other compensation plans.





Our
Compensation Committee, in its evaluation, determined that the company does not
employ any compensation plans or practices that create incentives for employees
to deliver short-term profits at the expense of generating systematic risks for
the company. Based on this and the assessment described above, we have concluded
that the risks associated with our compensation policies and practices are not
reasonably likely to have a material adverse effect on the
company.  In December 2009, we reviewed the assessment process and our
conclusions with the Compensation Committee.


35


Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.




The information required by Item 12 is
incorporated by reference to our definitive Proxy Statement, which was filed
with the SEC on April 30, 2010.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





The information required by Item 13 is
incorporated by reference to our definitive Proxy Statement, which was filed
with the SEC on April 30, 2010.




Item
14.  Principal Accountant Fees and Services.




The information required by Item 14 is
incorporated by reference to our definitive Proxy Statement, which was filed
with the SEC on April 30, 2010.


36


PART
IV




Item
15.  Exhibits and Financial Statement Schedules.




(a)
            Index To Financial
      Statements and Financial Statements
  Schedules:




Report
      of Independent Registered Public Accounting Firm Caturano and Company,
      INC. as of March 31, 2010
                      F-1Consolidated
      Balance Sheets as of December 31, 2009 and December 31,
    2008
                      F-2Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      December 31, 2008
                      F-3Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2009
      and December 31, 2008
                      F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      December 31, 2008
                      F-5Notes
      to Consolidated Financial Statements
                      F-6





All other
schedules for which provision is made in the applicable accounting regulations
of the SEC are not required under the related instructions, or are inapplicable,
and therefore have been omitted.


37


(b)
            Exhibits




ExhibitNumber
                      
                      Description3.1
                      
                      Certificate
      of Incorporation, as amended and restated December 9, 2009 (incorporated
      by reference to Exhibit 3.1 to the registrant’s Form S-3, as amended,
      originally filed with the SEC on December 23, 2009).3.2
                      
                      By-laws,
      as amended and restated August 31, 2009 (incorporated by reference to
      Exhibit 3.2 to the registrant’s Form S-3, as amended, originally filed
      with the SEC on December 23, 2009).4.1
                      
                      Form
      of Warrant (incorporated by reference to Exhibit 4.1 to the registrant’s
      Form 10-SB, as amended, originally filed with the SEC on November 2,
      2006).10.1
                      
                      American
      Distributed Generation Inc. 2001 Stock Incentive Plan (incorporated by
      reference to Exhibit 10.3 to the registrant’s Form 10-SB, as amended,
      originally filed with the SEC on November 2, 2006).10.2
                      
                      2005
      Stock Incentive Plan (incorporated by reference to Exhibit A to our
      definitive proxy statement for the 2008 Annual Meeting of shareholders
      originally filed with the SEC on April 29, 2008).10.3
                      
                      Facilities,
      Support Services and Business Agreement with Tecogen Inc. (incorporated by
      reference to Exhibit 10.5 to the registrant’s Form 10-SB, as amended,
      originally filed with the SEC on November 22, 2006. Confidential treatment
      has been granted for portions of this document. The confidential portions
      have been omitted and have been filed separately, on a confidential basis,
      with the SEC).10.4
                      
                      Amendment
      to Facilities, Support Services and Business Agreement with Tecogen Inc.
      dated April 1, 2008 (incorporated by reference to Exhibit 10.5 to the
      registrant’s Form 10-Q, filed with the SEC on May 14, 2008, for the
      quarter ended March 31, 2008).10.5
                      
                      Amendment
      No. 2 to Facilities, Support Services and Business Agreement with Tecogen
      Inc. dated May 15, 2008 (incorporated by reference to Exhibit 10.7 to the
      registrant’s Form 10-K, originally filed, filed with the SEC on March 20,
      2009).10.6
                      
                      Amendment
      No. 3 to Facilities, Support Services and Business Agreement with Tecogen
      Inc. dated January 2, 2009 (incorporated by reference to Exhibit 10.8 to
      the registrant’s Form 10-K, originally filed, filed with the SEC on March
      20, 2009).10.7
                      
                      Operating
      Agreement of American DG New York LLC (incorporated by reference to
      Exhibit 10.6 to the registrant’s Form 10-SB, as amended, originally filed
      with the SEC on November 22, 2006).10.8
                      
                      Form
      of Energy Purchase Agreement (incorporated by reference to Exhibit 10.6 to
      the registrant’s Form 10-SB, as amended, originally filed with the SEC on
      November 2, 2006).10.9
                      
                      Form
      of Subscription Agreement for private placement of common stock for
      American Distributed Generation Inc. (incorporated by reference to Exhibit
      10.12 to the registrant’s Amendment No. 1 to Form S-3, originally filed
      with the SEC on January 13, 2010).10.10
                      
                      Restricted
      Stock Purchase Agreement with Charles T. Maxwell dated February 20, 2007
      (incorporated by reference to Exhibit 10.13 to the registrant’s Form S-3,
      as amended, originally filed with the SEC on December 23,
      2009).10.11
                      
                      Form
      of 8% Senior Convertible Debenture Due 2011 (incorporated by reference to
      Exhibit 10.7 to the registrant’s Form 10-SB, as amended, originally filed
      with the SEC on November 2, 2006).10.12
                      
                      Form
      of Subscription Agreement for private placement of common stock, February
      2007 (incorporated by reference to Exhibit 10.15 to the registrant’s
      Amendment No. 1 to Form S-3, originally filed with the SEC on January 13,
      2010).10.13
                      
                      Form
      of Warrant to purchase shares of common stock, dated February 24, 2009,
      entered into between the company and Daniel Barnett (incorporated by
      reference to Exhibit 4.1 to the registrant’s current Form 8-K, originally
      filed with the SEC on February 26, 2009).10.14
                      
                      Form
      of Subscription Agreement for private placement of common stock, April
      2009 (incorporated by reference to Exhibit 10.1 to the registrant’s
      current Form 8-K, originally filed with the SEC on April 27,
      2009).


38




10.15
                    
                    Form
      of Subscription Agreement for private placement of common stock, July 2009
      (incorporated by reference to Exhibit 10.1 to the registrant’s current
      Form 8-K, originally filed with the SEC on July 27,
  2009).10.16
                    
                    Form
      of Subscription Agreement for private placement of common stock, October
      2009 (incorporated by reference to Exhibit 10.19 to the registrant’s
      Amendment No. 1 to Form S-3, originally filed with the SEC on January 13,
      2010).10.17
                    
                    Warrant
      Agreement with Hayden IR dated October 1, 2009 (incorporated by reference
      to Exhibit 10.20 to the registrant’s Amendment No. 1 to Form S-3,
      originally filed with the SEC on January 13, 2010).10.18
                    
                    Revolving
      Line of Credit Agreement with John N. Hatsopoulos (incorporated by
      reference to Exhibit 10.1 to the registrant’s current Form 8-K, originally
      filed with the SEC on December 17, 2009).10.19
                    
                    Amendment
      No. 4 to Facilities, Support Services and Business Agreement with Tecogen
      Inc. dated January 2, 2010 (incorporated by reference to Exhibit 10.23 to
      the registrant’s Annual Report on Form 10-K, originally filed with the SEC
      on March 31, 2010).10.20
                    
                    Letter
      to John N. Hatsopoulos dated February 22, 2010 (incorporated by reference
      to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K,
      originally filed with the SEC on March 31, 2010).14.1
                    
                    Code
      of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1
      to the registrant’s Form 10-SB, as amended, originally filed with the SEC
      on November 2, 2006).16.1
                    
                    Letter
      on change in certifying accountant (incorporated by reference to Exhibit
      16.1 to the registrant’s Form 10-SB, as amended, originally filed with the
      SEC on November 2, 2006).21.1
                    
                    List
      of subsidiaries (incorporated by reference to Exhibit 21.1 to the
      registrant’s Form 10-SB, as amended, originally filed with the SEC on
      November 2, 2006).23.1#
                    
                    Consent
      of Caturano and Company, INC.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.99.1
                    
                    Audit
      Committee Charter, as amended October 13, 2009 (incorporated by reference
      to Exhibit 10.1 to registrant’s Form S-3, as amended, originally filed
      with the SEC on December 23, 2009).99.2
                    
                    Compensation
      Committee Charter (incorporated by reference to Exhibit 10.2 to
      registrant’s Form 10-SB, as amended, originally filed with the SEC on
      November 2, 2006).99.3
                    
                    Nominating
      and Governance Committee Charter dated August 31, 2009 (incorporated by
      reference to Exhibit 10.3 to registrant’s Form S-3, as amended, originally
      filed with the SEC on December 23, 2009).99.4
                    
                    Slide
      show presentation (incorporated by reference to Exhibit 99.1 to
      registrant’s Current Report on Form 8-K, originally filed with the SEC on
      December 9,
2009).





#
            Filed
      herewith.


*
            Furnished
      herewith.




39


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




AMERICAN
      DG ENERGY INC.(Registrant)By:
                  /s/ JOHN N. HATSOPOULOSChief
      Executive Officer(Principal
      Executive Officer)By:
                  /s/ ANTHONY S. LOUMIDISChief
      Financial Officer(Principal
      Financial
Officer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.





Signature
              
              Title
              
              Date/s/ George N. Hatsopoulos
              
              Chairman
      of the Board
              
              November
      19, 2010George
      N. Hatsopoulos/s/ John N. Hatsopoulos
              
              Chief
      Executive Officer (Principal Executive Officer)
              
              November
      19, 2010John
      N. Hatsopoulos
              
              &
      Director/s/ Anthony S. Loumidis
              
              Chief
      Financial Officer (Principal Financial
              
              November
      19, 2010Anthony
      S. Loumidis
              
              and
      Accounting Officer)/s/ Earl R. Lewis
              
              Director
              
              November
      19, 2010Earl
      R. Lewis/s/ Charles T. Maxwell
              
              Director
              
              November
      19, 2010Charles
      T. Maxwell/s/ Deanna M. Petersen
              
              Director
              
              November
      19, 2010Deanna
      M. Petersen/s/ Francis A. Mlynarczyk
              
              Director
              
              November
      19, 2010Francis
      A. Mlynarczyk


40


Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders of


American
DG Energy Inc. and subsidiaries:




We have
audited the accompanying consolidated balance sheets of American DG Energy Inc.
and subsidiaries (collectively, the “Company”) as of December 31, 2009 and
December 31, 2008, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of the Company at
December 31, 2009, and December 31, 2008, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.




As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2009, the Company retrospectively adopted the presentation and disclosure
requirements of the Financial Accounting Standards Board Statement No. 160
“Non-Controlling Interests in Consolidated Financial Statements, an amendment of
ARB No.51” which is codified in Accounting Standards Codification
810.




/s/ CATURANO AND COMPANY,
    INC.Boston,
      MassachusettsMarch
      31, 2010




F-1


AMERICAN
DG ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,2009
                        
                        
                        2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        3,149,222
                        
                        
                        $
                        1,683,498Short-term
      investments
                        
                        
                        678,921
                        
                        
                        
                        761,614Accounts
      receivable, net
                        
                        
                        518,379
                        
                        
                        
                        835,922Unbilled
      revenue
                        
                        
                        146,940
                        
                        
                        
                        204,750Due
      from related party
                        
                        
                        370,400
                        
                        
                        
                        297,417Inventory
                        
                        
                        379,303
                        
                        
                        
                        355,852Prepaid
      and other current assets
                        
                        
                        104,119
                        
                        
                        
                        163,121Total
      current assets
                        
                        
                        5,347,284
                        
                        
                        
                        4,302,174Property,
      plant and equipment, net
                        
                        
                        9,502,346
                        
                        
                        
                        6,627,540Accounts
      receivable, long- term
                        
                        
                        -
                        
                        
                        
                        5,647TOTAL
      ASSETS
                        
                        
                        14,849,630
                        
                        
                        
                        10,935,361LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        
                        740,474
                        
                        
                        
                        270,852Accrued
      expenses and other current liabilities
                        
                        
                        453,536
                        
                        
                        
                        384,340Due
      to related party
                        
                        
                        17,531
                        
                        
                        
                        166,560Capital
      lease obligations
                        
                        
                        3,365
                        
                        
                        
                        2,431Total
      current liabilities
                        
                        
                        1,214,906
                        
                        
                        
                        824,183Long-term
      liabilities:Convertible
      debentures
                        
                        
                        5,320,000
                        
                        
                        
                        5,875,000Capital
      lease obligations, long-term
                        
                        
                        10,095
                        
                        
                        
                        14,394Total
      liabilities
                        
                        
                        6,545,001
                        
                        
                        
                        6,713,577Stockholders’
      equity:American
      DG Energy Inc. shareholders' equity:Common
      stock, $0.001 par value; 100,000,000 sharesauthorized;
      37,676,817 and 34,034,496 issued and outstandingat
      December 31, 2009 and December 31, 2008, respectively
                        
                        
                        37,677
                        
                        
                        
                        34,034Additional
      paid- in- capital
                        
                        
                        19,725,793
                        
                        
                        
                        12,614,332Common
      stock subscription
                        
                        
                        -
                        
                        
                        
                        (35,040
                        )Accumulated
      deficit
                        
                        
                        (12,239,110
                        )
                        
                        
                        (9,708,545
                        )Total
      American DG Energy Inc. stockholders' equity
                        
                        
                        7,524,360
                        
                        
                        
                        2,904,781Noncontrolling
      interest
                        
                        
                        780,269
                        
                        
                        
                        1,317,003Total
      stockholders' equity
                        
                        
                        8,304,629
                        
                        
                        
                        4,221,784TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                        
                        $
                        14,849,630
                        
                        
                        $
                        10,935,361





See
accompanying notes to consolidated financial statements


F-2


AMERICAN
DG ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS




December 31,2009
                      
                      
                      2008RevenuesEnergy
      revenues
                      
                      $
                      4,632,988
                      
                      
                      $
                      5,144,505Turnkey
      & other revenues
                      
                      
                      1,130,839
                      
                      
                      
                      1,434,9325,763,827
                      
                      
                      
                      6,579,437Cost
      of salesFuel,
      maintenance and installation
                      
                      
                      3,888,438
                      
                      
                      
                      5,136,260Depreciation
      expense
                      
                      
                      788,885
                      
                      
                      
                      596,9154,677,323
                      
                      
                      
                      5,733,175Gross
      profit
                      
                      
                      1,086,504
                      
                      
                      
                      846,262Operating
      expensesGeneral
      and administrative
                      
                      
                      1,546,743
                      
                      
                      
                      1,504,968Selling
                      
                      
                      850,975
                      
                      
                      
                      533,874Engineering
                      
                      
                      642,858
                      
                      
                      
                      401,3613,040,576
                      
                      
                      
                      2,440,203Loss
      from operations
                      
                      
                      (1,954,072
                      )
                      
                      
                      (1,593,941
                      )Other
      income (expense)Interest
      and other income
                      
                      
                      71,185
                      
                      
                      
                      139,690Interest
      expense
                      
                      
                      (437,544
                      )
                      
                      
                      (474,407
                      )(366,359
                      )
                      
                      
                      (334,717
                      )Loss,
      before income taxes
                      
                      
                      (2,320,431
                      )
                      
                      
                      (1,928,658
                      )Provision
      for state income taxes
                      
                      
                      (7,450
                      )
                      
                      
                      (34,087
                      )Consolidated
      net loss
                      
                      
                      (2,327,881
                      )
                      
                      
                      (1,962,745
                      )-Less:
      Income attributable to the noncontrolling interest
                      
                      
                      (202,684
                      )
                      
                      
                      (305,336
                      )Net
      loss attributable to American DG Energy Inc.
                      
                      
                      (2,530,565
                      )
                      
                      
                      (2,268,081
                      )Net
      loss per share - basic and diluted
                      
                      $
                      (0.07
                      )
                      
                      $
                      (0.07
                      )Weighted
      average shares outstanding -basic
      and diluted
                      
                      
                      35,554,303
                      
                      
                      
                      32,872,006





See
accompanying notes to consolidated financial statements


F-3


AMERICAN
DG ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY




American
      DG Energy Inc. ShareholdersCommonStock
                      
                      
                      Common
                      
                      
                      AdditionalAccumulated
                      
                      
                      $0.001
                      
                      
                      Stock
                      
                      
                      Paid-In
                      
                      
                      NoncontrollingTotal
                      
                      
                      Deficit
                      
                      
                      Par
      Value
                      
                      
                      Subscription
                      
                      
                      Capital
                      
                      
                      InterestBalance
      at December 31, 2007
                      
                      $
                      5,045,417
                      
                      
                      $
                      (7,440,464
                      )
                      
                      $
                      32,806
                      
                      
                      $
                      -
                      
                      
                      $
                      11,394,289
                      
                      
                      $
                      1,058,786Distributions
      to noncontrolling interest
                      
                      
                      (47,119
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (47,119
                      )Conversion
      of convertible debenture to common stock
                      
                      
                      150,000
                      
                      
                      
                      -
                      
                      
                      
                      178
                      
                      
                      
                      -
                      
                      
                      
                      149,822
                      
                      
                      
                      -Issuance
      of restricted stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      40
                      
                      
                      
                      (40
                      )
                      
                      
                      -
                      
                      
                      
                      -Stock
      based compensation expense
                      
                      
                      364,231
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      364,231
                      
                      
                      
                      -Exercise
      of warrants
                      
                      
                      672,000
                      
                      
                      
                      -
                      
                      
                      
                      1,010
                      
                      
                      
                      (35,000
                      )
                      
                      
                      705,990
                      
                      
                      
                      -Net
      loss
                      
                      
                      (1,962,745
                      )
                      
                      
                      (2,268,081
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      305,336Balance
      at December 31, 2008
                      
                      
                      4,221,784
                      
                      
                      
                      (9,708,545
                      )
                      
                      
                      34,034
                      
                      
                      
                      (35,040
                      )
                      
                      
                      12,614,332
                      
                      
                      
                      1,317,003Distributions
      to noncontrolling interest
                      
                      
                      (333,704
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (333,704
                      )Ownership
      changes to noncontrolling interest, Note 7
                      
                      
                      (405,714
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (405,714
                      )Conversion
      of convertible debenture to common stock
                      
                      
                      555,000
                      
                      
                      
                      -
                      
                      
                      
                      661
                      
                      
                      
                      -
                      
                      
                      
                      554,339
                      
                      
                      
                      -Issuance
      of restricted stock
                      
                      
                      40
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      40
                      
                      
                      
                      -
                      
                      
                      
                      -Cancellation
      of restricted stock
                      
                      
                      (40
                      )
                      
                      
                      -
                      
                      
                      
                      (40
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Sale
      of common stock, net of costs
                      
                      
                      5,878,079
                      
                      
                      
                      -
                      
                      
                      
                      2,991
                      
                      
                      
                      -
                      
                      
                      
                      5,875,088
                      
                      
                      
                      -Issuance
      of common stock warrants
                      
                      
                      372,815
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      372,815
                      
                      
                      
                      -Stock
      based compensation expense
                      
                      
                      286,844
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      286,844
                      
                      
                      
                      -Exercise
      of stock options
                      
                      
                      22,406
                      
                      
                      
                      -
                      
                      
                      
                      31
                      
                      
                      
                      -
                      
                      
                      
                      22,375
                      
                      
                      
                      -Exercise
      of warrants
                      
                      
                      35,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      35,000
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      (loss) income
                      
                      
                      (2,327,881
                      )
                      
                      
                      (2,530,565
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      202,684Balance
      at December 31, 2009
                      
                      $
                      8,304,629
                      
                      
                      $
                      (12,239,110
                      )
                      
                      $
                      37,677
                      
                      
                      $
                      -
                      
                      
                      $
                      19,725,793
                      
                      
                      $
                      780,269





See
accompanying notes to consolidated financial statements


F-4


AMERICAN
DG ENERGY INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS




2009
                        
                        
                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                        
                        $
                        (2,530,565
                        )
                        
                        $
                        (2,268,081
                        )Income
      attributable to noncontrolling interest
                        
                        
                        202,684
                        
                        
                        
                        305,336Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                        
                        
                        806,776
                        
                        
                        
                        604,525Provision
      for losses on accounts receivable
                        
                        
                        299,994
                        
                        
                        
                        51,759Amortization
      of deferred financing costs
                        
                        
                        8,526
                        
                        
                        
                        8,526Stock-based
      compensation
                        
                        
                        286,844
                        
                        
                        
                        364,231Changes
      in operating assets and liabilities(Increase)
      decrease in:Accounts
      receivable
                        
                        
                        168,294
                        
                        
                        
                        (330,849
                        )Due
      from related party
                        
                        
                        (308,183
                        )
                        
                        
                        272,957Inventory
                        
                        
                        (23,451
                        )
                        
                        
                        (269,714
                        )Prepaid
      assets
                        
                        
                        50,476
                        
                        
                        
                        (93,794
                        )Increase
      (decrease) in:Accounts
      payable
                        
                        
                        469,622
                        
                        
                        
                        (83,239
                        )Accrued
      expenses and other current liabilities
                        
                        
                        69,196
                        
                        
                        
                        44,600Due
      to related party
                        
                        
                        (149,029
                        )
                        
                        
                        166,560Net
      cash used in operating activities
                        
                        
                        (648,816
                        )
                        
                        
                        (1,227,183
                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                        
                        
                        (4,171,867
                        )
                        
                        
                        (2,165,899
                        )Sale
      (purchases) of short-term investments
                        
                        
                        82,693
                        
                        
                        
                        (761,614
                        )Rebates
      and incentives
                        
                        
                        232,483
                        
                        
                        
                        155,831Net
      cash used in investing activities
                        
                        
                        (3,856,691
                        )
                        
                        
                        (2,771,682
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of warrants
                        
                        
                        372,815
                        
                        
                        
                        -Proceeds
      from exercise of warrants
                        
                        
                        35,000
                        
                        
                        
                        672,000Proceeds
      from sale of common stock, net of costs
                        
                        
                        5,878,079
                        
                        
                        
                        -Proceeds
      from issuance of stock options
                        
                        
                        22,406
                        
                        
                        
                        -Principal
      payments on capital lease obligations
                        
                        
                        (3,365
                        )
                        
                        
                        -Distributions
      to noncontrolling interest
                        
                        
                        (333,704
                        )
                        
                        
                        (47,119
                        )Net
      cash provided by financing activities
                        
                        
                        5,971,231
                        
                        
                        
                        624,881Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        1,465,724
                        
                        
                        
                        (3,373,984
                        )Cash
      and cash equivalents, beginning of the year
                        
                        
                        1,683,498
                        
                        
                        
                        5,057,482Cash
      and cash equivalents, ending of the year
                        
                        $
                        3,149,222
                        
                        
                        $
                        1,683,498Supplemental
      disclosures of cash flows information:Cash
      paid during the year for:Interest
                        
                        $
                        448,645
                        
                        
                        $
                        477,422Income
      taxes
                        
                        $
                        35,460
                        
                        
                        $
                        86,130Non-cash
      investing and financing activities:Conversion
      of convertible debenture to common stock
                        
                        $
                        555,000
                        
                        
                        $
                        150,000Acquisition
      of equipment under capital lease
                        
                        $
                        -
                        
                        
                        $
                        16,825





See
accompanying notes to consolidated financial statements


F-5


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Note
1 — The company:




American
DG Energy Inc. (“American DG Energy”, the “company”, “us” or “we”) distributes
and operates on-site cogeneration systems that produce both electricity and
heat. Our business is to own the equipment that we install at customers’
facilities and to sell the energy produced by these systems to the customers on
a long-term contractual basis. We call this business the American DG Energy
“On-Site Utility”.




The
company was incorporated as a Delaware corporation on July 24, 2001 to install,
own, operate and maintain complete distributed generation systems and other
complementary systems at customer sites and sell electricity, hot water, heat
and cooling energy under long-term contracts at prices guaranteed to the
customer to be below conventional utility rates. As of December 31, 2009, we had
installed energy systems, representing approximately 4,210 kilowatts, or kW,
33.5 million British thermal units, or MMBtu’s, of heat and hot water and 2,200
tons of cooling. Kilowatt is a measure of electricity generated, MMBtu is a
measure of heat generated and a ton is a measure of cooling
generated.




We derive
sales from selling energy in the form of electricity, heat, hot water and
cooling to our customers under long-term energy sales agreements (with a typical
term of 10 to 15 years). The energy systems are owned by us and are installed in
our customers’ buildings. Each month we obtain readings from our energy meters
to determine the amount of energy produced for each customer. We multiply these
readings by the appropriate published price of energy (electricity, natural gas
or oil) from our customers’ local energy utility, to derive the value of our
monthly energy sale, less the applicable negotiated discount. Our revenues per
customer on a monthly basis vary based on the amount of energy produced by our
energy systems and the published price of energy (electricity, natural gas or
oil) from our customers’ local energy utility that month. Our revenues commence
as new energy systems become operational. As of December 31, 2009, we had
62 energy systems operational. As a by-product of our energy business, in
some cases the customer may choose to have us construct the system for them
rather than have it owned by American DG Energy.





Note
2 — Summary of significant accounting policies:





Principles
of Consolidation and Basis of Presentation:





The
accompanying consolidated financial statements include the accounts of the
company, its wholly-owned subsidiary American DG Energy and its 51% joint
venture, American DG New York, LLC, or ADGNY. The company’s owns 51% 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 joint venture and underlying energy projects.
The economic ownership 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 balance sheet, 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% legal interest and a 57%
economic interest in ADGNY as of December 31, 2009.





The
company evaluates the applicability of the Financial Accounting Standards Board,
or FASB, guidance on variable interest entities to partnerships and joint
ventures at the inception of its participation to ensure its accounting is in
accordance with the appropriate standards. The company has contractual interests
in Tecogen and determined that Tecogen was a Variable Interest Entity, as
defined by the applicable guidance; however, the company was not considered the
primary beneficiary and does not have any exposure to loss as a result of its
involvement with Tecogen. Therefore, Tecogen was not consolidated in our
consolidated financial statements through December 31, 2009. See “Note 7 -
Related Parties” for further discussion.





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


F-6


We have
experienced total net losses since inception of approximately $12.2 million. For
the foreseeable future, we expect to experience continuing operating losses and
negative cash flows from operations as our management executes our current
business plan. The cash and cash equivalents available at December 31, 2009 will
provide sufficient working capital to meet our anticipated expenditures
including installations of new equipment for the next twelve months; however, as
we continue to grow our business by adding more energy systems, the cash
requirements will increase. We believe that our cash and cash equivalents
available at December 31, 2009 and our ability to control certain costs,
including those related to general and administrative expenses, will enable us
to meet our anticipated cash expenditures through January 1, 2011. Beyond
January 1, 2011, we may need to raise additional capital through a debt
financing or equity offering to meet our operating and capital needs. There can
be no assurance, however, that we will be successful in our fundraising efforts
or that additional funds will be available on acceptable terms, if at
all.
 
 In 2009,
we raised $6,310,525 through various private placements of common stock, the
issuance of warrants and exercise of stock options. If we are unable to raise
additional capital in 2011 we may need to terminate certain of our employees and
adjust our current business plan. Financial considerations may cause us to
modify planned deployment of new energy systems and we may decide to suspend
installations until we are able to secure additional working capital. We will
evaluate possible acquisitions of, or investments in, businesses, technologies
and products that are complementary to our business; however, we are 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 revenue and cost of fuel.
 
 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. 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.
 
 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
based on the 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 sales arrangements in fiscal year
2009.
  F-7
  Other
revenue represents various types of ancillary activities for which the company
engages from time to time such as demand response incentives, the sale of
equipment, 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.
  Short-Term
Investments
  Short-term investments consist of
certificates of deposit with maturities of greater than three months but less
than one year. Certificates of deposits are recorded at fair value.
  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 December 31, 2009, the company had a balance of $3,578,143 in
cash and cash equivalents and short-term investments that exceeded the Federal
Deposit Insurance Corporation limit of $250,000.
 
 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.
  Accounts
receivable are presented net of an allowance for doubtful collections of $51,821
and $51,759 at December 31, 2009 and December 31, 2008 respectively. Included in
accounts receivable are amounts from four major customers accounting for
approximately 22% and 45% of total accounts receivable for the years ended
December 31, 2009 and December 31, 2008, respectively. There were sales to three
customers accounting for approximately 26% and 27% of total sales for the years
ended December 31, 2009 and December 31, 2008, 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 December 31, 2009 and December 31, 2008, there were no reserves or
write-downs recorded against inventory.
 
 Accounts
Payable
  Included
in accounts payable are amounts due to five major vendors accounting for
approximately 66% and 51% of total accounts payable for the years ended December
31, 2009 and December 31, 2008, respectively. Purchases from four vendors
accounted for approximately 67% and 50% of total purchases for the years ended
December 31, 2009, and December 31, 2008, respectively.
  Supply
Concentrations
  All of
the company’s cogeneration unit purchases for the years ended December 31, 2009
and 2008 were from one vendor (see “Note 7 - Related Parties”). We believe 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. 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.
  F-8
  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. There have been
no revisions to the useful lives of the company’s assets at June 30, 2010 and
December 31, 2009, respectively, and the company has determined that its
long-lived assets for those periods are recoverable.
  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 statement of cash flows. When the rebates are a
function of production of the DG unit, they are recorded as income over the
period of production and treated in the statement of cash flows as an operating
activity. The rebates the company receives 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 not related to or subject to adjustment based
on the future operating performance of the installed unit. 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. The only rebates that the company has recognized historically on the
income statement are related to the company’s participation in demand response
programs and are recognized only upon the occurrence of curtailed events of the
applicable units. The cumulative amount of rebates applied to the cost of
construction was $534,308 and $319,655 as of December 31, 2009 and 2008,
respectively. The revenue recognized from demand response activity was $17,830
and $11,176 for the years ended December 31, 2009 and 2008,
respectively.
  The
company operates on-site energy systems that produce electricity, hot water,
heat and cooling. The energy systems are capable of meeting the demands of
commercial users and can be connected to the existing utility grid. There is not
always enough power generation available from the utilities to meet peak demand,
and existing transmission lines cannot carry all of the electricity needed by
consumers. The utility companies recognize that the energy systems we install
lessen the demand on the grid. Therefore, they offer a one-time rebate/incentive
payment to the company based on the kW size or the unit installed. That
rebate/incentive is payable from the utility to the company upon commencement of
operation at the facility and is applied against the cost of construction,
therefore reducing the book value of the installation. As a reduction of our
facility construction costs, this type of rebate is treated as an investing
activity in the statement of cash flows. When the rebate/incentive is a function
of production of the DG unit, it is recorded as income over the period of
production and treated in the statement of cash flows as an operating
activity.
  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
statement 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 average volatility
of 20 companies in the same industry as the company. The average expected life
is estimated using the simplified method for “plain vanilla” options. The
expected life in years is based on the “simplified” method. 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
5 – Stockholders’ Equity” for a summary of the restricted stock and stock option
activity under our stock-based employee compensation plan for the years ended
December 31, 2009 and December 31, 2008.
  F-9
  Loss
per Common Share
 
 We
compute 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.
We compute our diluted earnings per common share using the treasury stock
method. For purposes of calculating diluted earnings per share, we consider our
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 our common stock for the period. As of the year
ended December 31, 2009, we excluded 9,643,460 anti-dilutive shares resulting
from conversion of debentures and exercise of stock options, warrants and
unvested restricted stock, and as of the year ended December 31, 2008, we
excluded 10,543,049 anti-dilutive shares resulting from conversion of debentures
and exercise of stock options, warrants and unvested restricted stock. All
shares issuable for both years were anti-dilutive because of the reported net
loss.
 
 Other
Comprehensive Net Loss
 
 The
comprehensive net loss for the years ended December 31, 2009 and 2008 does not
differ from the reported loss.
 
 Income
Taxes
  As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our 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 our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance.
 
 The tax
years 2005 through 2008 remain open to examination by major taxing jurisdictions
to which we are 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. We are currently not under examination by
the Internal Revenue Service or any other jurisdiction for any tax years. We did
not recognize any interest and penalties associated with unrecognized tax
benefits in the accompanying financial statements. We would record any such
interest and penalties as a component of interest expense. We do not expect any
material changes to the unrecognized benefits within 12 months of the
reporting date.
 
 Fair
Value of Financial Instruments
 
 The
company’s financial instruments are cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, convertible debentures and
notes due from related parties. The recorded values of cash and cash
equivalents, accounts receivable, accounts payable and notes due from related
parties approximate their fair values based on their short-term nature.
Short-term investments are recorded at fair value. The carrying value of the
convertible debentures on the balance sheet at December 31, 2009
approximates fair value as the terms approximate those currently available for
similar instruments. See Note 8 for discussion of fair value
measurements.
 
 Recent
Accounting Pronouncements
  In December 2007, the FASB issued
guidance on changes in the accounting and reporting of business acquisitions.
The guidance requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in purchased entities,
measured at their fair values at the date of acquisition based upon the
definition of fair value. This guidance was effective for the company beginning
January 1, 2009. The guidance had no impact on the company’s consolidated
financial statements and any future effect will depend on the extent that the
company makes business acquisitions in the future.
 
 As noted
in Note 2, in December 2007, the FASB issued new rules on noncontrolling
interests in consolidated financial statements. The noncontrolling interest
guidance changed the accounting for minority interests, which are reclassified
as noncontrolling interests and classified as a component of equity. This
guidance was effective for the company beginning January 1, 2009, and resulted
in a change in presentation of minority interests in the consolidated financial
statements consistent with the new rules.
  F-10
  In September, 2006, the FASB issued
guidance which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. In February, 2008,
the FASB delayed the effective date of the fair value guidance for all
non-financial assets and non-financial liabilities, except those that are
measured on a recurring basis. Effective January 1, 2009, the company adopted
fair value guidance with respect to non-financial assets and liabilities
measured on a non-recurring basis. The adoption of this guidance did not have an
impact on the Company’s financial position or results of
operations.
 
 In March
2008, the FASB issued a pronouncement pertaining to disclosures about derivative
instruments and hedging activities. This guidance requires disclosures of how
and why an entity uses derivative instruments; how derivative instruments and
related hedged items are accounted for; and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows. The rule was effective for the company beginning
January 1, 2009. The guidance did not have a material impact on its results of
operations and financial condition.
 
 In April
2009, the FASB issued guidance on providing interim disclosures about fair value
of financial instruments. This new guidance requires the fair value disclosures
that were previously disclosed only annually to be disclosed now on an interim
basis. This guidance was effective for the company in the second quarter of
2009, and has resulted in additional disclosures in our interim financial
statements, and therefore did not impact our financial position, results of
operations or cash flows.
 
 In May
2009, the FASB issued a pronouncement on subsequent event accounting. The
guidance identifies the following: the period after the balance sheet date
during which management shall evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; the
circumstances under which an entity shall recognize events or transactions
occurring after the balance sheet date in its financial statements; and the
disclosures that an entity shall make about events or transactions that occurred
after the balance sheet date. The pronouncement was effective for the company’s
second quarter 2009, and did not have an impact on our financial position,
results of operations, or cash flows.
 
 In June
2009, the FASB issued guidance on the FASB Accounting Standards Codification and
the hierarchy of generally accepted accounting principles. The FASB Accounting
Standards Codification, or the Codification, is the single source of
authoritative nongovernmental generally accepted accounting principles in the
U.S. The Codification was effective for interim and annual periods ending after
September 15, 2009. The adoption of the Codification had no impact on the
company’s financial position, results of operations or cash flows.
 
 In June,
2009 the FASB updated existing guidance to improve financial reporting by
enterprises involved with variable interest entities. The new guidance requires
an enterprise to perform an analysis to determine whether the enterprise’s
variable interest(s) give it a controlling financial interest in a variable
interest entity. This guidance is effective for the company beginning in January
2010. The company does not believe adoption of this guidance will have a
material effect on its consolidated financial statements.
 
 In
September 2009, the Emerging Issues Task Force issued new rules pertaining to
the accounting for revenue arrangements with multiple deliverables. The new
rules provide an alternative method for establishing fair value of a deliverable
when vendor specific objective evidence cannot be determined. The guidance
provides for the determination of the best estimate of selling price to separate
deliverables and allows the allocation of arrangement consideration using this
relative selling price model. The guidance supersedes the prior multiple element
revenue arrangement accounting rules that are currently used by the company.
This guidance is effective for us January 1, 2011 and is not expected to have a
material effect on our consolidated financial position or results of
operations.
 
 Reclassifications
 
 All prior
period information presented in this Amendment has been restated to separately
present revenues of energy, and turnkey and other revenues. The reclassification
had no effect on previously reported net loss, stockholder’s equity or cash
flows.
  F-11
  Note
3 — Property, plant and equipment:
 
 Property,
plant and equipment consist of the following as of December 31, 2009 and
December 31, 2008:
  December 31,2009
                      
                      
                      2008Co-generation
      units
                      
                      $
                      8,559,132
                      
                      
                      $
                      7,187,382Computer
      equipment and software
                      
                      
                      42,531
                      
                      
                      
                      20,199Furniture
      and fixtures
                      
                      
                      28,087
                      
                      
                      
                      26,846Vehicles
                      
                      
                      37,193
                      
                      
                      
                      37,1938,666,943
                      
                      
                      
                      7,271,620Less —
      accumulated depreciation
                      
                      
                      (2,168,063
                      )
                      
                      
                      (1,506,511
                      )6,498,880
                      
                      
                      
                      5,765,109Construction
      in progress
                      
                      
                      3,003,466
                      
                      
                      
                      862,431$
                      9,502,346
                      
                      
                      $
                      6,627,540
 
 Depreciation
expense of property, plant and equipment totaled $806,776 and $604,525 for the
years ended December 31, 2009 and December 31, 2008.
  Note
4 — Convertible debentures:
  In April
and June of 2006, the company issued convertible debentures totaling $6,075,000
to existing investors (the “debentures”). The debentures accrue interest at a
rate of 8% per annum and are due five years from the issuance date. The
debentures are convertible, at the option of the holder, into a number of shares
of common stock as determined by dividing the original outstanding amount of the
respective debenture by the conversion price in effect at the time. The initial
conversion price of the debenture is $0.84 and is subject to adjustment in
accordance with the agreement. As of December 31, 2009 the conversion price of
the debenture has not been adjusted.
  In 2008, two holders of the company’s
8% Convertible Debenture elected to convert $150,000 of the outstanding
principal amount of the debentures into 178,572 shares of common stock. In 2009,
three holders of the company’s 8% Convertible Debenture elected to convert
$555,000 of the outstanding principal amount of the debentures into 660,714
shares of common stock.At December 31, 2009, there were 6,333,335 shares
of common stock issuable upon conversion of our outstanding convertible
debentures.
  On
February 9, 2010, all holders of the convertible debentures elected to convert
their principal amount outstanding into shares of common stock at a conversion
price of $0.84. See “Note 11 – Subsequent events.”
 
 Note
5 — Stockholders’ equity:
  Common
Stock
 
 On April
23, 2009, the company raised $2,260,000 in a private placement of 1,076,190
shares of common stock at a price of $2.10 per share. The private placement was
done exclusively with 5 accredited investors.
 
 On July
24, 2009, the company raised $3,492,650 in a private placement of 1,663,167
shares of common stock at a price of $2.10 per share. The company also granted
the investors the right to purchase additional shares of common stock at a
purchase price of $3.10 per share by December 18, 2009, which as of December 31,
2009, have expired unexercised. The private placement was done exclusively with
22 accredited investors.
 
 On
October 14, 2009, the company raised $525,000 in a private placement of 250,000
shares of common stock at a price of $2.10 per share. The company also granted
the investor the right to purchase additional shares of common stock at a
purchase price of $3.10 per share by December 18, 2009, which as of December 31,
2009, had expired unexercised. The private placement was done exclusively by an
accredited investor.
 
 The
holders of common stock have the right to vote their interest on a per share
basis. At December 31, 2009, there were 37,676,817 shares of common stock
outstanding.
  F-12
  Warrants
 
 From
December 1, 2003 to December 31, 2005, the company raised funds through a
private placement of shares of common stock to a limited number of accredited
investors. In connection with the private placement, the company issued warrants
to purchase an aggregate of 3,895,000 shares of common stock at a price of
$0.70. The company issued 1,030,000, 775,000 and 2,090,000 warrants in 2003,
2004 and 2005 respectively. Each warrant represents the right to purchase one
share of common stock for a period of three or five years from the date the
warrant was issued.
 
 During
the year ended December 31, 2007, investors exercised 200,000 warrants with
expiration dates in 2007, for gross proceeds to the company of $140,000 and
during the year 575,000 warrants expired. During the year ended December 31,
2008, investors exercised 1,010,000 warrants with expiration dates in 2008, for
gross proceeds to the company of $707,000. Of these warrants, 50,000 were
exercised towards the end of the year, therefore, the company established a
receivable shown as common stock subscription on the balance sheet and that
amount was collected early in 2009.
 
 On February 24, 2009, the company sold
a warrant to purchase shares of the company’s common stock to an accredited
investor, for a purchase price of $10,500. The warrant, which expires on
February 24, 2012, 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.
 
 Stock
Based Compensation
  The
company has adopted the 2005 Stock Incentive Plan, or the Plan, under which the
board of directors may grant incentive or non-qualified stock options and stock
grants to key employees, directors, advisors and consultants of the company. On
April 17, 2008 the board unanimously amended the Plan, subject to shareholder
approval, to increase the reserved shares of common stock issuable under the
Plan from 4,000,000 to 5,000,000, or the Amended Plan. On May 30, 2008, at the
company’s annual meeting, the shareholders voted in favor of an amendment to
increase the number of shares of common stock of the company available for
issuance under the Plan from 4,000,000 to 5,000,000 shares.
  The
maximum number of shares of stock allowable for issuance under the Amended Plan
is 5,000,000 shares of common stock, including 1,190,500 shares of restricted
stock outstanding as of December 31, 2009. 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. The number of securities remaining
available for future issuance under the Amended Plan was 1,051,250 at December
31, 2009.
  During
the years ended December 31, 2009 and December 31, 2008, the company recognized
employee non-cash compensation expense of $286,844 and $364,231, respectively,
related to the issuance of stock options and restricted stock. At December 31,
2009 there were 440,125 unvested shares of restricted stock outstanding. At
December 31, 2009 the total compensation cost related to unvested restricted
stock awards and stock option awards not yet recognized is $423,607. This amount
will be recognized over the weighted average period of 5.46 years.
 
 In 2008,
the company granted to one of its employees nonqualified options to purchase
100,000 shares of the common stock at $1.95 per share. Those options have a
vesting schedule of four years and expire in ten years. The fair value of the
options issued in 2008 was $93,977, with a weighted average grant date fair
value of $0.94 per option.
 
 In 2009,
the company granted to three of its employees nonqualified options to purchase
13,000 shares of the common stock at $1.82 per share. Those options have a
vesting schedule of four years and expire in five years. During 2009, the
company also granted to one of its employees nonqualified options to purchase
6,000 shares of the common stock at $2.95 per share. Those options have a
vesting schedule of four years and expire in five years. The fair value of all
options issued in 2009 was $16,161, with a weighted average grant date fair
value of $0.85 per option.
 
 The
weighted average assumptions used in the Black-Scholes option pricing model are
as follows:
  2009
                    
                    
                    2008Stock
      options and restricted stock awardsExpected
      life
                    
                    5.94
      years
                    
                    
                    6.95
      yearsRisk-free
      interest rate
                    
                    
                    0.37
                    %
                    
                    
                    1.62
                    %Expected
      volatility
                    
                    
                    48.4
                    %
                    
                    
                    48.4
                    %
  F-13
  Stock
option activity for the years ended December 31, 2009 and 2008 was as
follows:
 
 Exercise
                              
                              
                              Weighted
                              
                              WeightedNumber
                              
                              
                              Price
                              
                              
                              Average
                              
                              Average
                              
                              AggregateOf
                              
                              
                              Per
                              
                              
                              Exercise
                              
                              Remaining
                              
                              IntrinsicCommon
      Stock Options
                              
                              Options
                              
                              
                              Share
                              
                              
                              Price
                              
                              Life
                              
                              ValueOutstanding,
      December 31, 2007
                              
                              
                              2,241,000
                              
                              
                              $
                              0.07-$0.90
                              
                              
                              $
                              0.63
                              
                              7.71
      years
                              
                              $
                              607,600Granted
                              
                              
                              100,000
                              
                              
                              $
                              1.95
                              
                              
                              
                              1.95Exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              -Canceled
                              
                              
                              (12,000
                              )
                              
                              $
                              0.90
                              
                              
                              
                              0.90Expired
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Outstanding,
      December 31, 2008
                              
                              
                              2,329,000
                              
                              
                              $
                              0.07-$1.95
                              
                              
                              $
                              0.68
                              
                              6.95 years
                              
                              $
                              3,017,920Exercisable,
      December 31, 2008
                              
                              
                              1,244,500
                              
                              
                              
                              
                              
                              
                              $
                              0.42
                              
                              
                              
                              $
                              1,937,660Vested
      or expected to vest, December 31, 2008
                              
                              
                              2,329,000
                              
                              
                              
                              
                              
                              
                              $
                              0.68
                              
                              
                              
                              $
                              3,017,920Outstanding,
      December 31, 2008
                              
                              
                              2,329,000
                              
                              
                              $
                              0.07-$1.95
                              
                              
                              $
                              0.68
                              
                              6.95
      years
                              
                              $
                              3,017,920Granted
                              
                              
                              19,000
                              
                              
                              $
                              1.82-$2.95
                              
                              
                              
                              2.18Exercised
                              
                              
                              (31,250
                              )
                              
                              $
                              0.70-$0.90
                              
                              
                              
                              0.72Canceled
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Expired
                              
                              
                              (8,750
                              )
                              
                              $
                              0.70-$0.90
                              
                              
                              
                              0.87Outstanding,
      December 31, 2009
                              
                              
                              2,308,000
                              
                              
                              $
                              0.07-$2.95
                              
                              
                              $
                              0.70
                              
                              5.94 years
                              
                              $
                              5,203,740Exercisable,
      December 31, 2009
                              
                              
                              1,421,000
                              
                              
                              
                              
                              
                              
                              $
                              0.50
                              
                              
                              
                              $
                              3,488,400Vested
      or expected to vest, December 31, 2009
                              
                              
                              2,308,000
                              
                              
                              
                              
                              
                              
                              $
                              0.70
                              
                              
                              
                              $
                              5,203,740
 
 The
aggregate intrinsic value of options outstanding as of December 31, 2009 is
calculated as the difference between the exercise price of the underlying
options and the price of the company’s common stock for options that were
in-the-money as of that date. Options that were not in-the-money as of that
date, and therefore have a negative intrinsic value, have been excluded from
this amount.
  In 2008,
the company made a restricted stock grant to one employee by permitting him to
purchase an aggregate of 40,000 shares of common stock, at a price of
$0.001 per share. The fair value of the restricted stock issued in 2008 was
$77,960 and vests in four years. There were no restricted stock grants to
employees in 2009.
  Restricted
stock activity for the years ended December 31, 2009 and 2008 was as
follows:
  Number
      of
                    
                    
                    Grant
      DateRestricted Stock
                    
                    
                    Fair ValueUnvested,
      December 31, 2007
                    
                    
                    948,875
                    
                    
                    
                    0.70Granted
                    
                    
                    40,000
                    
                    
                    
                    1.95Vested
                    
                    
                    (268,875
                    )
                    
                    
                    0.70Forfeited
                    
                    
                    -
                    
                    
                    
                    -Unvested,
      December 31, 2008
                    
                    
                    720,000
                    
                    
                    $
                    0.77Granted
                    
                    
                    -
                    
                    
                    
                    -Vested
                    
                    
                    (240,875
                    )
                    
                    
                    0.75Forfeited
                    
                    
                    (39,000
                    )
                    
                    
                    0.70Unvested,
      December 31, 2009
                    
                    
                    440,125
                    
                    
                    $
                    0.79
 
 Note
6 — Employee benefit plan:
 
 The
company has a defined contribution retirement plan, or the Retirement Plan,
which qualifies under Section 401(k) of the Internal Revenue Code, or the IRC.
Under the Retirement Plan, employees meeting certain requirements may elect to
contribute a percentage of their salary up to the maximum allowed by the IRC.
The company matches a variable amount based on participant contributions up to a
maximum of 4.5% of each participant’s salary. The company contributed $39,075
and $31,717 to the Retirement Plan for the years ended December 31, 2009 and
2008, respectively.
  F-14
  Note
7 — Related parties
 
 The
company purchases the majority of its cogeneration units from Tecogen Inc., or
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
January 2006, 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 $5,526.
  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. The company has granted Tecogen sales representation
rights to its On-Site Utility energy service in California.
 
 On February 15, 2007, the company
loaned Peter Westerhoff, the non controlling interest partner in ADGNY, $20,000
by signing a two year loan agreement earning interest at 12% per annum. On April
1, 2007, the company loaned an additional $75,000 to the same non controlling
partner by signing a two year note agreement earning interest at 12% per annum,
and on May 16, 2007, the company loaned an additional $55,000 to the same
partner by signing a two year note agreement under the same terms. On October
11, 2007, the company extended to its non controlling interest partner a line of
credit of $500,000. At December 31, 2008, $265,012 was outstanding and due to
the companyunder the
combination of the above agreements. All notes were classified in the Due from
related party account in the December 31, 2008 balance sheet and were secured by
the partner’s non controlling interest. Effective April 1, 2009the
company reached an agreement with the noncontrolling interest partner in ADGNY
to purchase its interest in the Riverpoint location. As a result of this
transaction, the company owns 100% of that location and the noncontrolling
interest partners’ share of that location was applied to his outstanding debt to
the company related to the above mentioned loan agreements and line of credit.
Additionally, in 2009, ADGNY financed capital improvements at several projects,
which per project agreements was the responsibility of the noncontrolling
interest partner. This further
reduced the noncontrolling interest partner’s noncontrolling interest in ADGNY.
The result of these transactions appears as “Ownership changes to noncontrolling
interests” in the amount of $405,714 in the accompanying consolidated statement
of stockholder’s equity for the year ended December 31, 2009.
 
 On
October 22, 2009, the company signed a five-year exclusive distribution
agreement with Ilios Dynamics, a subsidiary of Tecogen. Under terms of the
agreement, the company has exclusive rights to incorporate Ilios Dynamics’ ultra
high-efficiency heating products in its energy systems throughout the European
Union and New England. The company also has non-exclusive rights to distribute
Ilios Dynamics’ 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.
 
 During
the quarter ended September 30, 2009, the non-controlling interest partner in
ADGNY, a related party, purchased certain units and supporting equipment from
the company for $370,400. That amount, as of December 31, 2009, was classified as “Due from related party”
in the accompanying balance sheet. The cost of the units and supporting
equipment was $208,225 and the company recorded a profit of
$162,175.
 
 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 will lend to the company on a revolving
line of credit basis a principal amount up to $5,000,000. All sums advanced
pursuant to this agreement shall bear interest from the date each advance is
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 shall be due and payable
quarterly in arrears and prepayment of principal, together with accrued
interest, may be made at any time without penalty. Also, under the terms of the
agreement, the credit line from Mr. Hatsopoulos will be 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. As of December 31, 2009, the company has
not drawn funds on this line of credit.
  F-15
  The
company’s Chief Financial Officer devotes approximately half of his business
time to the affairs of GlenRose Instruments Inc., and 50% of his salary is
reimbursed by GlenRose Instruments Inc. Also, the company’s Chief Executive
Officer is the Chairman of the Board and a significant investor in GlenRose and
does not receive a salary, bonus or any other compensation from
GlenRose.
 
 Note 8 — Fair value
measurements:
 
 The fair
value topic of the FASB Accounting Standards Codification defines fair value as
the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. The accounting guidance also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs,
where available, and minimize the use of unobservable inputs when measuring fair
value. There are three levels of inputs that may be used to measure fair
value:
 
 Level 1— Unadjusted quoted
prices in active markets for identical assets or liabilities. We currently do
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.
 
 Level 3— Unobservable inputs
reflecting management’s own assumptions about the input used in pricing the
asset or liability. We currently do not have any Level 3 financial assets or
liabilities.
 
 At
December 31, 2009, the company had $678,921 in short-term investments that are
comprised of certificates of deposits which are categorized as Level 2. The
company determines the fair value of certificates of deposits using information
provided by the issuing bank which includes discounted expected cash flow
estimates using current market rates offered for deposits with similar remaining
maturities.
 
 Note
9 — Income taxes:
 
 A
reconciliation of federal statutory income tax provision to the company’s actual
provision for the years ended December 31, 2009 and December 31, 2008,
respectively, are as follows:
  2009
                    
                    
                    2008Benefit
      at federal statutory tax rate
                    
                    $
                    (860,000
                    )
                    
                    $
                    (760,000
                    )Unbenefited
      operating losses
                    
                    
                    860,000
                    
                    
                    
                    760,000Provision
      for state income taxes
                    
                    
                    7,450
                    
                    
                    
                    34,087Income
      tax provision
                    
                    $
                    7,450
                    
                    
                    $
                    34,087
 
 The
components of net deferred tax assets recognized in the accompanying balance
sheets at December 31, 2009 and December 31, 2008, respectively, are as
follows:
 
 2009
                    
                    
                    2008Net
      operating loss carryforwards
                    
                    $
                    4,676,000
                    
                    
                    $
                    3,149,000Accrued
      expenses and other
                    
                    
                    312,000
                    
                    
                    
                    178,000Depreciation
                    
                    
                    (764,000
                    )
                    
                    
                    (271,000
                    )4,224,000
                    
                    
                    
                    3,056,000Valuation
      allowance
                    
                    
                    (4,224,000
                    )
                    
                    
                    (3,056,000
                    )Net
      deferred tax asset
                    
                    $
                    -
                    
                    
                    $
                    -
 
 As of
December 2009, the company has federal and state loss carryforwards of
approximately $12,400,000 and $8,300,000, respectively, which may be used to
offset future federal and state taxable income, expiring at various dates
through 2029. Under IRC Section 382, certain substantial changes in the
company’s ownership may limit the amount of net operating loss carryforwards
that can be utilized in any one year to offset future taxable income. As a
result of the company’s various private placements of common stock, it is
possible that, net operating loss carryforwards and other tax attributes may
have been limited by these rules. The change-in-control provisions of IRC
section 382 have not been fully investigated in relation to these
transactions.
  F-16
  Management
has determined that it is more likely than not that the company will not
recognize the benefits of the federal and state deferred tax assets and as a
result has recorded a valuation allowance against the entire net deferred tax
asset. If the company should generate sustained future taxable income, against
which these tax attributes may be recognized, some portion or all of the
valuation allowance would be reversed.
 
 The
company adopted accounting for uncertain tax positions effective January 1,
2007. The adoption of this statement had no effect on the company’s financial
position. The company has no uncertain tax positions as of either the date of
the adoption, or as of December 31, 2009.
  Note
10 — Commitments and contingencies:
  In
January 2006, the company entered into 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. The company also shares personnel
support services with Tecogen. The company is allocated its share of the cost of
the personnel support services based upon the amount of time spent by such
support personnel while working on the company’s behalf. To the extent Tecogen
is able to do so under its current plans and policies, Tecogen includes the
company and its employees in several of its insurance and benefit programs. The
costs of these programs are charged to the company on an actual cost basis.
Under this agreement, the company receives pricing based on a volume discount if
it purchases cogeneration and chiller products from Tecogen. For certain sites,
the company hires Tecogen to service its Tecogen chiller and cogeneration
products. Under the current amendment to the Agreement, Tecogen provides the
company with office space and utilities at a monthly rate of
$5,526.
  In
November 2008, the company received from Georgia King Village, an On-Site
Utility energy customer, a notice to terminate operations at their location. The
company notified the management of Georgia King Village that the termination
notice violated the terms of the agreement between the company and Georgia King
Village and that termination charges would apply. The company proceeded to
remove five energy systems and other supporting equipment from the Georgia King
Village site and placed them in inventory. The customer has recently proposed a
settlement regarding the aforementioned dispute and as a result the company has
postponed the arbitration hearing. The company does not expect the outcome to
have a material impact on its results of operations and financial
condition.
 
 The
company is the lessee of certain equipment under capital lease expiring in 2013.
The following is a schedule of future minimum lease payments, together with the
present value of the net minimum lease payments under capital leases as of
December 31, 2009.
  Payments2010
                    
                    $
                    5,2212011
                    
                    
                    5,2212012
                    
                    
                    5,2212013
                    
                    
                    5,221Total
      lease payments
                    
                    
                    20,884Less:
      Amount representing interest
                    
                    
                    (7,424
                    )Present
      value of minimum lease payments
                    
                    $
                    13,460
 
 At
December 31, 2009, the company’s commitments included a lease for a plotter with
a remaining balance of $22,348 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.
 
 Note
11 — Subsequent events:
 
 On
January 4, 2010, the company entered into an agreement with Codale Ltd., whereby
Codale will provide the company an amount up to two hundred fifty thousand
British Pounds sterling (£250,000) to cover expenses incurred in connection with
an investigation and research effort for the development of the company’s
business in European markets. Expenses relating to this investigation will be
incurred over a period of up to one year, and in consideration for the funds
provided to the company, if the company forms a new subsidiary within two years
from the signing of the agreement, Codale will be entitled to an equity interest
in such subsidiary equal to 10% of the equity thereof.
  F-17
  On
February 9, 2010, the company issued a Notice of Redemption to all holders of
its outstanding 8% Convertible Debentures to announce redemption as of February
26, 2010, of all of its outstanding convertible debentures that had not been
converted into common stock. The aggregate principal amount of convertible
debentures outstanding on February 26, 2010 was $5,320,000 and accrued interest
was $66,204. All holders of the convertible debentures elected to convert their
principal amount outstanding into shares of common stock at a conversion price
of $0.84. In connection with this transaction, the company issued to the holders
of the convertible debentures an aggregate of 6,402,962 shares of common stock
and paid $7,716 of accrued interest in cash. The closing price of the company’s
common stock on the NYSE Amex on February 8, 2010 was $2.82.
 
 In March
2010, certain investors including George N. Hatsopoulos and John N. Hatsopoulos,
exercised 500,000 warrants with an expiration date of April 5, 2010, for gross
proceeds to the company of $350,000.
  F-18