Annual report pursuant to Section 13 and 15(d)

Stockholders' equity

Stockholders' equity

12 Months Ended

Dec. 31, 2017

Stockholders’ equity

Common Stock

Beginning on April 11, 2016, through its conclusion on May 3, 2016, the Company entered into numerous private placement share exchange agreements ("Share Exchange Agreements") with shareholders of Ilios ("Exchanging Shareholders"), a majority owned subsidiary of the Company. Pursuant to the Share Exchange Agreements, the Exchanging Shareholders agreed to exchange every 7.86 of their restricted Ilios shares of common stock for 1 share of the Company's restricted common stock. In addition, the Company granted each Exchanging Shareholder registration rights of the Company's common stock they received in exchange for their Ilios shares. The Company issued a total of 670,464 shares of its common stock in exchange for Ilios shares of common stock. Pursuant to the Registration Rights Agreement, the Company filed a registration statement covering the resale of the shares.

Upon execution of the exchange agreements for 100% of the shares of Ilios, the Company no longer had a non-controlling interest in its subsidiary. On April 30, 2016, Ilios was merged into the Company, and accounting for the noncontrolling interest in the subsidiary ended.

As discussed in Note 4. "Acquisition of American DG Energy Inc.", on May 18, 2017, the Company completed the acquisition of ADGE, by means of a stock-for-stock merger, of 100% of the outstanding common shares of ADGE in exchange for 4,662,937 shares of the Company's newly issued common stock.

The holders of Common Stock have the right to vote their interest on a per share basis. At December 31, 2017 and 2016, there were 24,766,892 and 19,981,912 shares of Common Stock outstanding, respectively.

Preferred Stock

On February 13, 2013, the Company authorized 10 million shares of preferred stock. As of December 31, 2017, no preferred shares were issued or outstanding.

Warrants

In December 2015, 900,000 warrants were issued in conjunction with a private placement executed with the Ultra Emissions Joint Venture described in Note 15. In July 2016, the warrant holders exercised a total of 675,000 warrants with a $4.00 exercise price, resulting in cash proceeds of $2.7 million to the Company. The remaining 225,000 warrants expired on July 31, 2016. In conjunction with the Ultratek Joint Venture, the Board of Directors granted 250,000 warrants to Dr. Elias Samaras at $4.00 a share with an expiration date of December 28, 2017. The warrants granted to Dr. Samaras expired unexercised.

Stock-Based Compensation

The Company adopted the 2006 Stock Option and Incentive Plan (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. The Plan was amended at various dates by the Board of Directors to increase the reserved shares of common stock issuable under the Plan to 3,838,750 as of December 31, 2017, and in June 2017 stockholders approved an amendment to extend the termination date of the Plan to January 1, 2026 and to ratify all Company option grants made after January 1, 2016 (the “Amended Plan”).

Stock options vest based upon the terms within the individual option grants, with an acceleration of the unvested portion of such options upon a change in control event, as defined in the Amended Plan. The options are not transferable except by will or domestic relations order. The option price per share under the Amended Plan cannot be less than the fair market value of the underlying shares on the date of the grant. The number of shares remaining available for future issuance under the Amended Plan as of December 31, 2017 and 2016 was 2,123,747 and 1,607,357, respectively.

In 2017 the Company granted nonqualified options to purchase an aggregate of 45,000 shares of common stock in a range of $3.22 and $3.72 per share to certain employees. These options have a vesting schedule of four years and expire in ten years. The fair value of the options issued in 2017 was $41,113. The weighted-average grant date fair value of stock options granted during 2017 was $0.91 per option.

In 2016, the Company granted nonqualified options to purchase an aggregate of 207,701 shares of common stock for between $0.79 and $4.27 per share to certain employees and a director. Of these options, 82,701 fully vested options were issued in conjunction with the merger of Ilios as replacement options for those previously granted Ilios options in Ilios. The remaining 125,000 options have a vesting schedule of four years and expire in ten years. The fair value of the options issued in 2016 was $236,315. The weighted-average grant date fair value of stock options granted during 2016 was $1.14 per option.

Stock option activity for the year ended December 31, 2017 was as follows:



Common Stock Options	Number of Options		Exercise Price Per Share	Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Outstanding, December 31, 2016	1,117,918		$0.79-$5.39	$	3.10	5.00 years	$	1,415,150
Granted	45,000		$3.22-$3.72	3.35
Assumed in merger	156,124		$3.15-$30.33	10.35
Exercised	(122,043	)	$0.79-$2.00	1.47
Canceled and forfeited	(135,447	)	$2.60-30.33	9.28
Outstanding, December 31, 2017	1,061,552		$0.79-$18.15	$	3.60	4.95 years	$	291,449
Exercisable, December 31, 2017	874,202			$	3.46		$	291,449
Vested and expected to vest, December 31, 2017	1,033,450			$	3.58		$	291,449

Using the Company's historical forfeiture rate of 15%, the table above uses said rate in the expected to vest calculation. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the average volatility of four comparable publicly traded companies. The average expected life was estimated using the simplified method to determine the expected life based on the vesting period and contractual terms, since it does not have the necessary historical exercise data to determine an expected life for stock options. The Company uses a single weighted-average expected life to value option awards and recognizes compensation on a straight-line basis over the requisite service period for each separately vesting portion of the awards. 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.

The weighted average assumptions used in the Black-Scholes option pricing model for options granted in 2017 and 2016 are as follows:



Stock option awards:	2017	2016
Expected life	6.25 years	6.25 years
Risk-free interest rate	1.86%	1.22%
Expected volatility	23.10%	32.80%

The Company granted restricted stock awards to its employees and directors. The performance based awards have vesting schedules of 25% or 33% per year beginning one year after the Company's IPO in 2014.

Restricted stock activity for the year ended December 31, 2017 was as follows:



	Number of Restricted Stock		Weighted Average Grant Date Fair Value
Unvested, December 31, 2016	77,508		$	1.31
Granted	—		—
Vested	(34,587	)	1.31
Forfeited	—		—
Unvested, December 31, 2017	42,921		$	1.31

During the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation of $183,768 and $165,931, respectively, related to the issuance of stock options and restricted stock. No tax benefit was recognized related to the stock-based compensation recorded during the years. At December 31, 2017 and 2016, the total compensation cost related to unvested restricted stock awards and stock option awards not yet recognized is $281,554 and $444,939, respectively. This amount will be recognized over a weighted average period of 1.57 years.