Item 1. Business
Overview
We are primarily a project integrator in the clean energy production and organics to energy markets. We aspire to become a key player in these global markets, working with enterprises with clean energy, organics to energy and related by-product potential to generate clean energy, soil amendments, compost and other by-products. We believe that these markets have tremendous potential insofar as there is a virtually endless supply of waste and organic material that can be used to generate power and valuable by-products. Not only is there a virtually endless supply of waste and organic material, but in most, if not all cases, disposing of such waste and material in most parts of the world today is a costly problem with an environmentally-damaging solution, such as landfilling. We seek to offer a cost-effective, environmentally-safe alternative.
We are currently focusing on (i) thirteen projects for which we have signed either agreements, letters of intent or memoranda of understanding to own and implement such projects and which are in various stages of development and (ii) a recently acquired fast charging battery technology.
Projects
United States
·Charlotte, NC Waste to Energy Anaerobic Digester 5.2 MW Plant
·Johnston, RI Waste to Energy Anaerobic Digester 3.2 MW Plant
·Marlborough, MA Waste to Energy Anaerobic Digester 5.0 MW Plant
Italy
·Soc. agr. AGRICERERE srl - Tromello (Pavia) 999 KW Plant
·Soc. agr. AGRIELEKTRA srl - Alagna (Pavia) 999 KW Plant
·Soc. agr. AGRISORSE srl - Garlasco (Pavia) 999 KW Plant
·Soc. agr. GEFA srl - Dorno (Pavia) 999 KW Plant
·Soc. agr. SAMMARTEIN srl - San Martino in Rio (Reggio Emilia) 999 KW Plant
·Soc. agr. ER srl - Aprilia (Latina) 999 KW Plant
·Soc. agr. BIOENERGIE SRL - Aprilia (Latina) 999 KW Plant
Israel
·Ramat Chovav Waste to Energy Anaerobic Digester 5.0 MW Plant
Ghana
·Oti Sanitary Landfill Waste to Energy 1 MW Plant
·Accra Transfer Station Waste to Energy Anaerobic Digester 6MW Plant
US Projects
North Carolina and Rhode Island Projects
On October 19, 2012, we signed definitive project agreements in respect of both the North Carolina and Rhode Island sites with Orbit Energy, Inc. (“Orbit”) pursuant to which we would be entitled to full ownership of each of the entities that owns the rights to implement the respective projects (Orbit Energy Charlotte, LLC in the case of the North Carolina project (“OEC”) and Orbit Energy Rhode Island, LLC in the case of the Rhode Island project (“OERI”) subject to the satisfaction of certain conditions.
On December 4, 2013, we signed purchase orders and made down-payments for a biosqueeze system for the pre-treatment of organic solid waste for the North Carolina project and a heat exchanger for the pre-heating of the organic feedstock entering into the anaerobic digester to ensure a constant temperature for the Rhode Island project. We continued work on this equipment until March 2014 when we were forced to suspend work due to lack of funding.
On November 19, 2014, we signed an amended and restated purchase agreement with Orbit for the North Carolina project (the “Amended OEC Purchase Agreement”). Subject to the terms of the Amended OEC Purchase Agreement, Orbit transferred ownership of OEC to us in exchange for a development fee of $900,000, reimbursement of $17,764 and an amount equal to 30% of the distributable cash flow from the North Carolina project after the project achieves a post-recoupment 30% internal rate of return computed on the basis of any and all benefits from tax credits, depreciation and other incentives of any nature. We also agreed to use high solid anaerobic digester units designed by Orbit and to retain Orbit to implement and operate the digester units for an annual management fee of $187,500 subject to certain conditions. The Amended OEC Purchase Agreement provides that we had until December 15, 2014 to pay Orbit the development fee and reimbursement amount, which was extended to January 15, 2014 upon payment of $75,000 (which we made). If we do not pay the development fee and reimbursement amount by January 15, 2014, then ownership of the OEC will automatically revert back to Orbit.
On January 7, 2015, we signed an amended and restated purchase agreement for the Rhode Island project (the “Amended OERI Purchase Agreement”). Subject to the terms of the Amended OERI Purchase Agreement, Orbit transferred full ownership of OERI to us in exchange for a development fee of $300,000, reimbursement of $86,432 and an amount equal to 30% of the distributable cash flow from the Rhode Island project after the project achieves a post-recoupment 30% internal rate of return computed on the basis of any and all benefits from tax credits, depreciation and other incentives of any nature. We also agreed to use high solid anaerobic digester units designed by Orbit and to retain Orbit to implement and operate the digester units for an annual management fee of $187,500 subject to certain conditions. The Amended OERI Purchase Agreement provides that we have until January 22, 2015 to pay Orbit the development fee and reimbursement amount, which may be extended to February 28, 2015 upon payment of $31,000. If we do not pay the development fee and reimbursement amount by January 22, 2015, or February 28, 2015 if extended, then ownership of OERI will automatically revert back to Orbit.
One of the conditions to our acquisition of the Rhode Island project is receipt of consent to change of control over OERI from Orbit to our designee from the Narragansett Electric Company d/b/a National Grid (“NG”). On December 22, 2014, NG consented to change of control to our designee (the “Consent”) and extended certain milestone dates in the PPA (defined below). The Consent has to be approved by the Rhode Island Public Utilities Commission (“RIPUC”). We expect the RIPUC to issue such approval in the first quarter of 2015, although there is no assurance it will do so. If it does not issue such approval for any reason, we will be unable to implement the Rhode Island project.
To date, OEC and OERI have signed and binding power purchase agreements and amendments thereto (“PPAs”) in respect of both the North Carolina and Rhode Island projects, respectively. The term of the PPA for the North Carolina project is until 2028 and the PPA requires, among other thing things, that OEC commence commercial operation by August 31, 2015. If OEC fails to meet this deadline, OEC will be required to pay liquidated damages of $200,000. OEC will then have the option to extend the commercial operation deadline until September 30, 2015 for a further payment of $200,000. The term of the PPA for the Rhode Island project is 15 years from the commencement of commercial operation with an option to extend (on the part of purchaser of the electricity) for 6 years. OERI is required, among other things, to meet certain milestones during 2014 and commence commercial operation by September 1, 2015. Certain of these milestones have not been met and OERI is currently in negotiations to extend the milestone deadlines but there can be no assurance that such deadlines will be extended on terms acceptable to OERI, or at all in which case the PPA may terminate. There is no assurance that OEC or OERI will be able to meet their respective commercial operation deadlines or that other conditions and terms of the PPAs will be met.
OEC has entered into a feedstock letter of intent in respect of the North Carolina project providing 100 tons a day of organic feedstock. The North Carolina project requires 400 tons of organic feedstock on a daily basis. OERI has entered into a feedstock supply letter of intent in respect of 100-200 tons a day of organic feedstock and one feedstock supply definitive agreement in respect of 50-100 tons a day for the Rhode Island project. The Rhode Island project requires 220 tons a day of organic feedstock. OEC and OERI are working with other suppliers of organic waste to locate other sources of organic feedstock for both the North Carolina and Rhode Island projects so that they have multiple suppliers for amounts of feedstock in excess of the requirements for each site. Certain feedstock supply agreements and letters of intent that were entered into previously either expired or cannot be relied on for various reasons.
On May 15, 2013, McGill Environmental Systems of NC, Inc., a market leader in the compost industry (“McGill”), signed a 10-year compost off-take agreement in respect of each of the Rhode Island and North Carolina projects. The compost to be purchased by McGill will comprise the digestate that is leftover from the anaerobic digestion process at each plant. The agreement in respect of the Rhode Island project expires if a production rate of at least 30 tons per day of compost is not generated by May 15, 2015.
On October 29, 2013, OEC, Tipping, LLC (“Tipping”) and Caterpillar Financial Services Corporation (“Caterpillar”) entered into a Construction Financing Agreement (the “Construction Financing Agreement”). Tipping, LLC is a wholly-owned subsidiary of the Company formed for the purpose of signing feedstock supply agreements for the North Carolina project.
The Construction Financing Agreement is the agreement pursuant to which Caterpillar Financial Service Corporation (“CAT”) has agreed, subject to the fulfillment of certain conditions, to provide up to $17,785,720 in debt financing (the “Debt Finance”) in respect of the North Carolina project. The Debt Finance is to be divided into two phases: (i) a construction loan and (ii) a term loan. The term of the Debt Finance shall be 10 years. Interest on the construction loan component of the Debt Finance based on LIBOR for deposits in dollars for a term of three months plus a variable-rate spread the minimum of which can be 5.32%. Interest on the term loan component of the Debt Finance will be fixed 60 days prior to the conversion of the construction loan into a term loan (based on CAT’s proprietary cost of funds). Prepayment of the construction loan is not permitted, but prepayment of the term loan is permitted subject to the payment of a fee the amount of which depends, in part, on the timing of the prepayment.
CAT’s obligation to provide the Debt Finance in respect of the project is subject to (among other things):
-satisfactory completion of due diligence on the proposed equipment, procurement and construction (“EPC”);
-contractor for the Project and approval of the EPC agreement;
-entry into further definitive documentation, including, but not limited to, security documents granting CAT liens over and rights in the project;
-receipt in cash of 100% of the amount of equity financing in respect of the Project, which is currently set at $6,000,000 plus a letter of credit in the amount of $1,500,000 to fund certain reserve obligations;
-transfer of $5,000,000 in renewable energy investment tax credit proceeds provided for under Section 48 of the Internal Revenue Code;
-receipt of all required permits for construction and operation of the plant;
-transfer of all project companies to the Company and its affiliates;
-delivery to CAT by the EPC contractor of a performance bond in the amount of $12,000,000;
-receipt of a performance guarantee by the EPC contractor ensuring that the Project will produce no less than 90% of the project’s nameplate capacity of electricity;
-delivery to CAT by the EPC contractor of an insurance policy covering such performance guarantee;
-payment of all labor or materials furnished by the EPC contractor’s laborers and sub-contractors;
-delivery to CAT of feedstock supply agreements in sufficient quantity to provide for the payment of 105% of all amounts to be paid to CAT under the Construction Financing Agreement;
-delivery to CAT of an compost off-take agreement;
-absence of any liens or claims in respect of the project;
-purchase of and clean title on the project site;
-satisfactory completion of environmental due diligence;
-satisfactory completion of due diligence on the party to operate the project;
-compliance with all legislation, rules and regulations applicable to the project;
-no litigation threatened or pending in respect of the project;
-payment of all taxes and claims in respect of the project;
-evidence of all required insurance policies being in full force and effect; and
-ongoing compliance with all representations and warranties under the Construction Financing Agreement.
Satisfaction of the foregoing conditions is subject to the full and absolute discretion of CAT.
On June 6, 2014, OEC and CAT entered into an Amended and Restated Construction Financing Agreement (“Amended Financing Agreement”) pursuant to which, CAT agreed as follows:
-increased the amount of equity investment required for the North Carolina project to $8,000,000 plus a reserve of $1,500,000;
-decreased the maximum loan amount to $13,800,000;
-increased interest on the construction loan component of the Debt Finance to LIBOR for deposits in dollars for a term of three months plus a margin of 6.06%; and
-CAT’s commitment to provide Debt Finance terminates upon the earlier of (i) January 1, 2015 if the conditions precedent for the initial advance have not been satisfied and CAT elects to terminate the Amended Financing Agreement, (ii) October 1, 2015, and (iii) the date that either CAT or OEC terminates the Amended Financing Agreement under its terms.
OEC did not satisfy the conditions precedent to the initial advance of the Debt Finance by January 1, 2015. As such, CAT has a right to terminate the Amended Financing Agreement by providing written notice thereof to us. As of the date hereof, we have not received any such notice. We are currently considering negotiating with CAT to extend its commitment to provide Debt Finance to a later date.
In 2013, we had entered into an operating agreement with an investor in respect of the equity portion of the North Carolina project’s financing requirements. In October 2014, such investor informed us that it was no longer able to invest any funds in the North Carolina project.
We are now conducting negotiations with other equity investors. There is no assurance that we will secure equity financing for the North Carolina project in a timely manner or at all. We are also conducting negotiations with investors for the Rhode Island project. There is no assurance that we will secure equity financing for the Rhode Island project in a timely manner or at all.
There is no assurance that we will consummate of the North Carolina or Rhode Island projects or that project financing will be available in a timely manner or at all. Accordingly, there is no assurance that we will implement these projects in a timely manner or at all.
Italian Projects
In September 2014, we entered into a letter of intent to acquire Kinexia S.p.A.’s right, interest and title in, to and under four biogas projects in the Vigevano area in Italy for a purchase price of 1,190,000 Euros per project (the “Purchase Price”). Kinexia owns 70% of each project. Our obligation to complete such acquisition is subject to the (i) satisfactory completion of due diligence, (ii) receipt of approval for the change of control from each project’s lender and (iii) entry into a definitive agreement in respect of each project. Each plant has an agreement in place with a local utility to sell its power production. We are currently conducting due diligence in respect of each project and, in parallel, are negotiating an EBITDA guarantee agreement from the projects’ proposed operator and have entered into a term sheet in respect of financing a portion of the purchase price for certain of these projects.
The letter of intent also provides for the purchase of three additional biogas projects in the Emillia-Romagna and Lazio regions upon the same principals set forth in the letter of intent and subject to agreement. We are also evaluating several other operating projects in Italy for acquisition.
There is no assurance that we will enter into a signed definitive agreement for the purchase of the Kinexia projects, that we will consummate the purchase of any of the Kinexia projects or that project financing will be available in a timely manner or at all. Accordingly, there is no assurance that we will implement these projects in a timely manner or at all.
Israel Project
In September 2014, we signed a memorandum of understanding (“MoU”) to develop a 5 MW biogas project together with an Israeli State-owned company in Israel. The MoU contemplates that the Israeli State-owned company will lease a suitable site for the project and will perform maintenance service for the project. The MoU further contemplates that after the project is in operation for three years, the Israeli State-owned company has the option to purchase up to a 50% ownership stake in the project at the then fair market value.
According to Israeli law, the Israel Electric Company is obligated to purchase the power produced from this project and, as such, a long-term power purchase agreement at a favorable rate is expected to be entered into over the coming mont
We are currently conducting development activities in respect of this project.
There is no assurance that we will enter into a signed definitive agreement for the purchase of the Israeli project, that we will consummate the purchase of the Israeli project or that project financing will be available in a timely manner or at all. Accordingly, there is no assurance that we will implement this project in a timely manner or at all.
Ghana Projects
Oti Project
In February 2011, we entered into a joint-venture agreement (the “Oti Agreement”) with the Kumasi Metropolitan Authority (“KMA”), the owner of the Oti Sanitary Landfill (the “Oti Landfill”), and J. Stanley Owusu Group of Companies, the operator of the Oti Landfill (“JSO”). Pursuant to the Oti Agreement, we obtained the right to implement a landfill gas carbon credit project at the Oti Landfill in Kumasi, Ghana under the auspices of the Kyoto Protocol and an option (subject to entering into separate definitive documentation) to implement a landfill gas to energy project. The net revenues from the project will be shared among us, the KMA and JSO in accordance with the allocation set forth in the Oti Agreement.
In August 2013, we entered into a memorandum of understanding with JSO pursuant to which we agreed to act as 50/50 partners in the project, sharing costs and revenues equally - subject to any interest of KMA in the project. KMA’s interest in the revenue to be produced from power production remains to be negotiated in the future.
There are no termination milestones in the relevant agreements and we have not received any notice or communication from any party in this project of any nature.
In March 2012, we entered into negotiations with General Electric in respect of the purchase, installation and operation of a generator-set at the Oti Landfill CDM Project for the purpose of electricity generation. In June 2012, we commenced negotiations with the Electricity Company of Ghana to enter into a long-term power purchase agreement for the sale of the electricity we intend to produce at the Oti site. These negotiations are ongoing as at the date hereof and will only be concluded if and when we enter into a binding power purchase agreement in respect of any project in Africa. Power purchase agreement negotiations are underway although there can be no assurance that we will sign the necessary agreements for this project in a timely manner or at all.
There is no assurance that we will enter into a signed definitive agreement for the purchase of the Oti project, that we will consummate the purchase of the Oti project or that project financing will be available in a timely manner or at all. Accordingly, there is no assurance that we will implement this project in a timely manner or at all.
Accra Project
In August 2013, we signed a memorandum of understanding with JSO in respect of a 700-ton per day anaerobic digester plant to be constructed and operated on the site of a Accra’s only transfer station, which is expected to commence operation in the first quarter of 2016. The transfer station operation will sort the waste, remove inorganic materials and deliver to the anaerobic digester plant the left-over organic waste. We are currently in negotiations with respect to a 25-year lease for the site, 25-year feedstock supply agreement and a 25-year power purchase agreement for the power to be produced from the project.
There is no assurance that we will enter into a signed definitive agreement for the purchase of the Accra project, that we will consummate the purchase of the Accr a project or that project financing will be available in a timely manner or at all. Accordingly, there is no assurance that we will implement this project in a timely manner or at all.
Fast Charging Battery Technology
We recently decided to enter into the fast-charging battery space and on October 31, 2014 entered into a license agreement with Nanyang Technological University based in Singapore (“NTU”) pursuant to which NTU granted us a perpetual, exclusive (even as to NTU), worldwide, royalty-bearing license, with rights to sublicense, to certain of its intellectual property and know-how (the “Licensed Technology”) relating to fast-charging lithium-ion batteries to develop, have developed, manufacture, have manufactured, import, export, use, market, offer for sale, sell, have sold and otherwise commercialize and exploit the same or any product to be produced based on the Licensed Technology in in the field of (i) consumer electronics including without limitation, wearable electronics, mobile phones, smart devices and electric batteries, including rechargeable and non-rechargeable batteries and (ii) electric vehicles and to use the Licensed Technology for such purpose.
In exchange for the grant of license, we are obligated, among other things, to (i) use our best efforts to make a commercial sale in consumer electronics and electric vehicles within four years (or five years upon payment of $25,000 to NTU) and (ii) make the following payments to NTU:
-10,000 Singapore dollars (“SD”) upon signing the license agreement;
-SD 50,000 upon production of a non-laboratory scale prototype;
-SD 50,000 upon the first commercial sale;
-a royalty of 3.5% of net sales of any product covered by the license agreement; and
-a royalty of 15% of all sub-license revenue except in the case of sub-license revenue from entities affiliated with BSC in which case the amount to be paid shall be the greater of 15% of all sublicense revenue or 3.5% of net sales, whichever is greater.
If we fail to meet our performance milestones, then NTU will have the right to convert the license from exclusive to non-exclusive in respect of the relevant field of use (i.e., consumer electronics and electric vehicles).
Ownership of the Licensed Technology belongs to NTU. Ownership of modifications, enhancements, improvements and derivatives of the Licensed Technology developed solely by us shall belong to us. Ownership of modifications, enhancements, improvements and derivatives of the Licensed Technology developed jointly by the Company and NTU shall jointly belong to the Company and NTU in equal and undivided shares.
We are required to reimburse NTU U.S. $20,000 for patent expenses in respect of the Licensed Technology incurred to-date and to cover the costs of all patents relating to the Licensed Technology going forward.
We are also responsible for any stamp fees payable in Singapore in connection with the signing of the license agreement.
Strategy
Our primary focus is providing tailored solutions internationally to produce clean energy out of waste. In this connection, we expect to generate revenue through sales of (i) thermal and electrical energy, (ii) energy efficiency technologies, (iii) project development services, (iv) by-products and/or (v) from the receipt of tipping fees for accepting waste. To date, we have not received any revenues from our projects.
We are currently focused on the United States, Italy, Israel and Ghana.
Another component of the clean energy and waste to energy business in the United States is renewable energy credits (“RECs”). A REC represents a MWh or KWh of clean energy. Many states, including North Carolina and Rhode Island, the sites of our two US projects, require that their utilities prove that a portion of the energy they sell is produced from clean or renewable sources. A REC is used to demonstrate that the relevant unit of energy has a clean/renewable source. As such, utilities purchase RECs from producers of clean/renewable energy.
From 2010 to the end of 2011, we were primarily focused on implementing carbon credit projects in the developing world under the auspices of the Kyoto Protocol. During this time we pursued landfill projects in Ghana (as described above). However despite starting what we hoped would be a promising set of landfill gas-to-energy projects in Africa, in the last quarter of 2011, we repositioned ourselves to pursue waste-to-energy projects which we believe has the potential for greater opportunity.
Our model in respect of waste-to-energy is to build, own and operate. We select projects with signed, long-term agreements with waste producers or waste haulers in respect of the feedstock, with national governments or electricity corporations in respect of the energy output and with private entities in respect of other project by-products (such as renewable energy credits, heat, compost and fertilizer), in each case, prior to initiation of such projects. We are currently focused on three types of projects: (i) anaerobic digestion to electricity, (ii) landfill gas to energy and (iii) anaerobic digestion to renewable natural gas.
Our plan is to integrate all activities and components that make up a project, providing a turnkey, one-stop shop solution and doing everything needed to make our projects successful. We intend to work with and outsource key components of such projects to the Engineering Procurement Construction (“EPC”)/technology providers and other project participants that provide the best and most economical solution for each individual project. We believe this will provide us the flexibility and freedom to tailor the best solution for each project. We expect that we will remain involved in managing and financing all aspects of the relevant project for its lifetime or until the project is sold, when that proves to be in our best interests. We believe this assures all of the involved parties - including waste producers, the financing parties, the EPC/technology providers and customers - that there is long-term overall continuity and responsibility for each project as a whole.
We are therefore now focusing most of our efforts and resources toward waste-to-energy projects. As described more fully below, we have signed agreements in respect of two projects in the United States (North Carolina and Rhode Island) and are in the process of developing a pipeline of more such projects in the United States, Israel, Africa and elsewhere. Presently, we believe that there is a virtually endless supply of waste suitable for such projects and the demand for energy in general and from such projects in particular is growing every year and exceeds the amount of energy available to satisfy such demand.
Aiming to be distinctive in the “clean, green” market, our specific intentions are to:
-provide a one-stop, turn-key/build own and operate/transfer solution that is unique in the market today;
-identify and obtain the rights to lucrative projects without incurring material expense;
-deliver seamless and professional project implementation through a combination of its own expertise and the use of third-party experts with a track-record of success;
-be open to the use of any mature and well-known technology and, thus, be able to tailor make cost-efficient and effective solutions for each project;
-leverage our management’s more than 30 years of experience in successful implementation of large and complex projects in the developing world;
-build local and international teams to support each project;
-obtain political, property, non-performance and insolvency insurance for its projects; and
-receive almost all of our revenues in dollars or euros whether operating in the United States or other parts of the developing world.
Competition
There are a number of other companies operating in the clean energy and waste to energy space. Such companies range from other project developers to service or equipment providers, buyers and/or investors. In contrast to the standard market approach in this space (i.e., being solely a project developer, service or equipment provider or a buyer or investor), and as referred to above, we seek to provide a one-stop shop, turn-key solution to project owners. In short, our business model is to initiate, finance, develop, bring the most appropriate technology and EPC party and manage all aspects of project implementation and sales of the project’s clean energy and by-products starting from identifying the opportunity and ending with terminating the project’s operations if and when its revenue-earning life is over. We believe that this one-stop shop approach is attractive to project owners and will differentiate us in a positive manner from our competition. We are aware of three competitors in the United States that have a similar model to us - Harvest Power, Neo Energy and Himark Biogas - although, we have seen reports of other companies seeking to get into this business. We are not aware of any competitors with a similar business model in Italy, Israel or Ghana.
Government Approval
Permitting
Each of our projects in development requires the approval of the relevant governments. In the United States, the standard required environmental permits relate to solid waste composting and air quality. In particular, in respect of our North Carolina project, the following permits will be required:
(i) solid waste permit
(ii) zoning permit
(iii) air permit
(iv) industrial wastewater pretreatment permit
(v) NPDES no exposure stormwater permit
(vi) Stream and Wetland Delineation & Determination
(vii) erosion control
(viii) construction surface water
(ix) driveway
(x) water
(xi) sewer
(xi) site conceptual plan
(xii) building permits, including reception building, dryer building, office and storage building and equipment foundation and waste water lagoon
In respect of our Rhode Island project, the following permits will be required:
(i) Qualifying facility registration
(ii) Non-regulated Power Producer Registration
(iii) Air Permit - Air Distribution Model Protocol
(iv) Air Permit
(v) Solid Waste Permit
(vi) Zoning Permit
(vii) Planning Board Committee application (Building Permit):
·1st Phase -Grading Permit
·2nd Phase - Excavation and Civil Works
(viii) Industrial Pretreatment Permit
We have prepared and submitted applications for the foregoing permits. There are also construction and building permits for which we have submitted applications. In this connection, we have engaged engineering firms in both North Carolina and Rhode Island to prepare and submit all permit applications - construction and environmental.
In respect of our Israeli project, the following permits will be required:
(i) Construction permits (including civil engineering, power and waste-water)
(ii) Environmental permits (waste treatment, air emission and waste-water,)
(iii) Fire department permit
(iv) Electrical utility permit
(v) Local municipality permits
We have prepared and submitted applications for the foregoing permits.
In Italy, we understand that all permits for operation of the projects have been received.
In Ghana, a positive environmental impact assessment (“EIA”) is required for any project in the waste sphere. To generate energy, we will also need a license from the Ghanaian energy commission. We have completed an EIA for and received approval for our first Ghanaian project, the Oti Sanitary Landfill project in 2012. We intend to apply for government approvals in respect of all of our other Ghanaian projects when we start implementation of the relevant project.
Effect of Existing or Probable Government Regulations on Our Business
Our projects are located in jurisdictions in which there are no government regulations materially affecting our business. Other than the possibility that, in order to comply with air regulations in Rhode Island, we may be required to install NOx destruction equipment on the generators we expect to use in our Rhode Island project, we are not aware of any probable or proposed governmental regulations that, if enacted, will have a material impact on our business. If we are required to install such equipment, we believe the cost will not be material to the Rhode Island project’s economic performance. Whether or not we are required to install such equipment will depend on an assessment to be made as part of the permitting project to ascertain expected levels of NOx emissions from the operation of the generators at the Johnston site. We expect to know the outcome of this assessment in the first six months of 2015.
Employees
We have five persons providing us services on a full-time basis - our non-executive chairman, our chief executive officer, our executive vice-president, our chief technical officer and our general counsel and chief carbon officer. We have three part-time employees - our vice president of mergers and acquisition, chief financial officer and an office manager.
Corporate History
We were incorporated in Nevada in July 2007 under the name Jin Jie Corp. Prior to the second quarter of fiscal 2010 we were engaged in the business of developing and promoting automotive internet websites. That business generated no revenue and accumulated a deficit of approximately $64,000. At that time, Jin Jie Corp. became a shell company as that term is defined under Rule 405 under the Securities Act of 1933, as amended. During the second quarter of 2010, we changed our business model to our current business. In connection with such change, we took the following actions: (i) effective February 17, 2010, we changed our name to our current name by merging into our company a wholly-owned subsidiary formed for that purpose; (ii) effective February 17, 2010, we effected a 35-for-1 forward split of our authorized, issued, and outstanding common stock, increasing our authorized common stock from 50,000,000 shares to 1,750,000,000 shares and increasing our outstanding common stock from 16,814 shares to 588,496 shares; (iii) effective February 26, 2010, certain former shareholders of our company sold an aggregate of 307,965 shares of our common stock held by them, representing approximately 38% of our then outstanding stock, to new investors for an aggregate purchase price of $34,800; and, (iv) effective March 3, 2010, we entered into employment agreements with Shlomo Palas, our CEO, and Eliezer Weinberg, our now former non-executive chairman of the Board of Directors. Both Messrs. Weinberg and Palas became our directors. The foregoing share amounts give retroactive effect to our reverse stock split described below. In 2011, Mark Radom became our chief carbon officer and general counsel. In 2011, Roy Amitzur became an executive vice president and in 2012 Efim Monosov become our chief technical officer. In 2014, Gary Kuehl became our vice president of mergers and acquisitions on a part-time basis.
On November 26, 2013, we amended and restated our Articles of Incorporation to authorize the issuance of 500,000,000 shares of preferred stock, $0.001 par value, in one or more series and with such rights, preferences and privileges as our Board of Directors may determine and to effect a 1 for 113 reverse stock split of our outstanding common stock. In addition, the Amended and Restated Articles of Incorporation provide, among other things, for indemnification and limitations to the liability of the Company’s officers and directors.
As a result of the reverse stock split, which became effective on December 4, 2013, every 113 shares of our outstanding common stock prior to the effect of that amendment was combined and reclassified into one share of our common stock, and the number of outstanding shares of our common stock was reduced from 1,292,103,309 to 11,434,611 shares.
Item 1A.
Item 1A. Risk Factors
Set forth below are risks with respect to us. Readers should review these risks, together with the other information in this report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known by us or that we currently deem immaterial may become material and may also may impair our business operations. If any of the following risks actually occur, our business, financial conditions or results of operations could be harmed. See “Forward-Looking Statements” at the beginning of this report for additional risks.
Risks Relating to Financial Position and Need for Additional Capital
We have a limited operating history which makes it difficult to evaluate our business and prospects.
We are a company formed in 2007 and have a limited operating history upon which you can base an evaluation of our business and prospects. Though we have entered into certain agreements or term sheets, letters of intent or memoranda of understanding for acquisition of our projects, except for one project, we do not own any of our projects and none of our projects have generated any revenue since inception. As such, there are substantial risks, uncertainties, expenses and difficulties that we are subject to. Our ability to become and remain profitable will depend on, among other things:
-our ability to satisfy the conditions for obtaining ownership of our projects for those projects we have entered into definitive signed agreements for;
-our ability to enter into definitive signed agreements for the acquisition of our projects for which we have entered into term sheets, letter of intent or memoranda of understanding;
-our ability to obtain adequate financing for our projects on terms and upon timing consistent with our expectations;
-our ability to develop and construct our projects at our projected cost and within our projected timetables;
-our ability to effectively manage the operations at our projects;
-our ability to develop and maintain an effective internal corporate organization; and
-our ability to attract, hire and retain qualified and experienced management as well as technical and operations personnel.
There can be no assurance that at this time we will generate revenue or that we will have adequate working capital to meet our obligations as they become due. Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
We have a history of losses and can provide no assurance of our future operating results.
As of September 30, 2013 and 2014, we had working capital (deficit) of $(703,000) and $(55,000), respectively, and shareholders' (deficit) of $(482,000) and $310,000, respectively. For the years ended September 30, 2013 and 2014, we incurred net losses of $(1,970,000) and $(7,376,000). As of September 30, 2014, we had an aggregate accumulated deficit of $(35,942,000). We expect to incur additional substantial operating losses for the foreseeable future, and we may never achieve or maintain profitability. We anticipate that our expenses will increase substantially as we implement our project development and construction plan and expand our general and administrative operations. As a result, we will need to generate significant revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability in the future. Our failure to achieve or maintain profitability could negatively impact the value of our common stock and investors would in all likelihood lose their entire investment.
Any delay in, or failure to, accomplish our financing and development plans would adversely affect our ability to generate revenues and become profitable.
Assuming we obtain ownership of our projects, we estimate that project costs to bring each project into commercial operation will be approximately $25 million for the North Carolina project, $16 million for the Rhode Island project, $25 million for the Israeli project. We are unable at this time to estimate the project costs of bringing the Ghana and Italian projects into commercial operation. Because of the numerous uncertainties associated with the acquisition, financing, and development of our projects, we are unable to predict the timing of when we will become profitable, if ever. We may never enter into definitive signed agreements for the acquisition of our projects, satisfy the conditions for obtaining ownership of our projects, and construction may not be completed on the schedule or within the budget that we intend, or at all. Any delay in, or failure to, achieve one or more of the foregoing could adversely affect our ability to generate revenue and become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our independent auditors’ report states that there is a substantial doubt that we will be able to continue as a going concern.
Our independent registered public accounting firm, Brightman Almagor Zohar & Co., a member firm of Deloitte Touche Tohmatsu, state in their audit report, dated January 13, 2015, that our having incurred recurring losses from operations raise substantial doubt about our ability to continue as a going concern.
We will, in all likelihood, continue to incur expenses without generating significant revenues into the foreseeable future, at least until some of our projects become operational. Our only source of funds to date has been the sale of our common stock and debt financing. Because we cannot ensure that any of our projects will become operational or that we will be able to generate any significant revenues or income, the identification of new sources of equity or debt financing will be difficult. If we are successful in closing on any new equity financing, existing investors will experience substantial dilution. Our ability to obtain additional debt financing is also severely impacted by our financial condition given that we do not have revenues or profits to pay interest or repay principal.
We will require additional funding, and our future access to capital is uncertain. Insufficient funds may limit our ability to pursue our projects.
All of our current projects will require significant amounts of financing from us and/or our partners. Our estimates of the funds necessary to develop projects that become operational and revenue generating may be inaccurate, or we may undertake other business ventures or acquire other assets in the future, in each case, which could require additional funds. Furthermore, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed financing may be impaired by such factors as the capital markets and our history of losses, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
We have incurred substantial indebtedness.
As of January 13, 2015, we had convertible notes with outstanding principal and accrued but unpaid interest of approximately $1,399,000. All such debt is payable within the following twelve months and is convertible at a significant discount to our market price of stock. Our level of indebtedness increases the possibility that we may not have sufficient cash to pay, when due, the principal of, interest on or other amounts due in respect of the indebtedness. Our indebtedness, combined with other financial obligations and contractual commitments, could:
●in the case of convertible debt that is converted into equity, result in a reduction in the overall percentage holdings of our stockholders, put downward pressure on the market price of our common stock, result in adjustments to conversion and exercise prices of outstanding notes and warrants and obligate us to issue additional shares of common stock to certain of our stockholders;
●make it more difficult for us to satisfy our obligations with respect to the indebtedness and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in events of default under the loan agreements and instruments governing the indebtedness;
●require us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing funds available for working capital, capital expenditures, and other corporate purposes;
●increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to competitors that have relatively less indebtedness;
●limit our flexibility in planning for, or reacting to, changes in business and the industry in which we operate; and
●limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, and other corporate purposes.
We may incur significant additional indebtedness in the future. If we incur a substantial amount of additional indebtedness, the related risks that we face could become more significant. Additionally, the terms of any future debt that we may incur may impose requirements or restrictions that further affect our financial and operating flexibility or subject us to other events of default.
Risks Relating to Business and Industry
We anticipate that the Amended and Restated Finance Agreement for the North Carolina project between OEC and CAT will terminate and OERI’s PPA is at risk of termination.
On June 6, 2014, OEC and CAT entered into the Amended Financing Agreement which among other things provided that CAT’s commitment to provide Debt Finance for the North Carolina project terminates upon the earlier of (i) January 1, 2015 if the conditions precedent for the initial advance have not been satisfied and CAT elects to terminate the Amended Financing Agreement, (ii) October 1, 2015, and (iii) the date that either CAT or OEC terminates the Amended Financing Agreement under its terms. OEC did not satisfy the conditions precedent to the initial advance by January 1, 2015. As such, CAT has a right to terminate the Amended Financing Agreement by providing written notice thereof to us. As of the date hereof, we had not received any such notice. If the Amended Financing Agreement terminates, then we will be required to seek an alternate source for financing of the North Carolina project. There can be no assurance that an alternate source of funding will be available when needed or, if available, will be available on terms that are acceptable to us.
In addition, OERI has not met certain milestones under its PPA for the Rhode Island project. OERI is currently in negotiations to extend the milestone deadlines but there can be no assurance that such deadlines will be extended on terms acceptable to OERI, or at all in which case the PPA may terminate. If the PPA terminates, then we will likely cease pursuing the Rhode Island project.
Project development or construction activities may not be successful and proposed projects may not receive required permits or construction may not proceed as planned.
The development and construction of our projects involves numerous risks. We may be required to spend significant sums for preliminary engineering, permitting, legal, and other expenses before we can determine whether a project is feasible, economically attractive or capable of being built. Success in developing a particular project is contingent upon, among other things: (i) negotiation of satisfactory engineering, procurement and construction agreements; (ii) receipt of required governmental permits and approvals; (iii) obtaining construction financing; and (v) timely implementation and satisfactory completion of construction.
Successful completion of a particular project may be adversely affected by numerous factors, including: (i) delays in obtaining required government permits and approvals with acceptable conditions; (ii) uncertainties relating to land costs for projects; (iii) unforeseen engineering problems; (iv) construction delays and contractor performance shortfalls; (v) work stoppages; (vi) cost over-runs; (vii) equipment and materials supply; (viii) adverse weather conditions; and (ix) environmental and geological conditions.
We expect to generate any future revenue primarily under long-term contracts, such as power purchase agreements, and we must therefore avoid defaults under those contracts in order to avoid material liability to contract counterparties.
We or our project owners must satisfy performance and other obligations under any existing contracts governing any of our projects. These contracts typically require us or the project owner to meet certain milestones and other performance criteria as well as other standards including the requirement to commence operations by certain dates. Our failure or the failure of our project owners to satisfy these milestones, criteria or standards may result in the termination of those contracts. If such a termination were to occur, we would lose any future cash flow related to the projects and may become subject to material termination damage liability. In circumstances where the contract has been terminated due to our or our project owners’ default, we or our project owners may not have sufficient sources of cash to pay such damages. We cannot assure you that we or our project owners will be able to perform the obligations under such contracts in order to avoid such contract terminations, or damages related to any such contract termination, or that if we or our project owners could not avoid such terminations that we or our project owners would have the cash resources to pay amounts that may then become due.
Our business model depends on performance by third parties under contractual arrangements.
Our businesses depends on a limited number of third parties to, among other things, purchase energy produced by our projects, and supply and deliver the waste and other goods and services necessary for the operation of our projects. The viability of our projects depends significantly upon the performance by third parties in accordance with long-term contracts, such as power purchase agreements, and such performance depends on factors, which may be beyond our control. If those third parties do not perform their obligations, or are excused from performing their obligations because of nonperformance by us or other parties to the contracts, or due to force majeure events or changes in laws or regulations, our businesses may not be able to secure alternate arrangements on substantially the same terms, if at all, for the services provided under the contracts. In addition, the bankruptcy or insolvency of a participant or third party in our facilities could result in nonpayment or nonperformance of that party’s obligations to us. Many of these third parties are municipalities and public authorities.
We or our project owners may not be able to obtain feedstock or other inputs at acceptable prices, which could increase operating costs significantly and harm our profitability.
We and our project owners are vulnerable to the supply availability and price fluctuations of certain raw materials, including feedstock, and utilities such as electricity. We or our project owners may not have supply agreements in place, which may result in our inability to satisfy closing conditions for financings or for acquisition of our projects and which may also result in supply problems in the future. Moreover, economic and market conditions could negatively impact our feedstock prices. Our ability to operate our projects is dependent upon the availability of feedstock and utilities at reasonable prices for our projects. During periods of rising prices for such inputs, we may incur significant increases in our operating costs while not being able to increase our selling prices in a timely manner due to the fixed price nature of any off-take agreements. In addition, as a result of increased demand during such periods, our suppliers may be unable to supply us with our requirements or may otherwise fail to deliver products to us in the quantities required and at acceptable prices.
Our reliance on the owners and operators of our projects in various countries poses significant risks to our business and prospects.
We contract with the owners and operators of the projects that will be essential to our operations. If the owners or operators experience unanticipated changes in their businesses or in the business or operations of our projects, we may incur additional costs. For example:
-the owners or operators of our projects may face delays due to natural disasters or strikes, lock-outs or other such actions or other risks associated with force majeure ;
-the owners or operators of our projects could make strategic changes in the operations of our projects; and
-some of our owners or operators may be small companies which are more likely to experience financial and operational difficulties than larger, well-established companies, because of their limited financial and other resources.
As a result of any of these factors, we may be required to find alternative owners, operators or projects on which we rely. Accordingly, we may experience unanticipated interruptions or delays in the operations of our projects, which could adversely affect our revenues, financial condition, and results of operations, cash flow and liquidity.
Uncertainty in brokering or dealing in environmental commodities could have an adverse impact on our results of operations.
The recent worldwide recession and associated uncertainty surrounding a global approach to carbon emissions has had a negative effect on the price of carbon credits and transaction volume has declined as a result. We cannot make any predictions about (i) the timing or the pace of the worldwide economic recovery, (ii) whether the price of carbon credits or the transaction volume for such credits will continue to decline or when or whether they will increase, (iii) the extent to which countries will attempt to reduce their environmental emissions in order to achieve compliance with international and U.S.-based initiatives. Continuation of the recession, declines in the price or transaction volume for carbon credits and reductions in efforts by countries to reduce their environmental emissions will each have an adverse impact on our business, results of operations and prospects.
The first commitment period of the Kyoto Protocol upon which our carbon credit business is based was originally valid until the end 2012. At the 17th Conference of the Parties to the United Nations Convention on Climate Change held in Durban, South Africa in December 2011, the first commitment period of the Kyoto Protocol was provisionally extended until 2017. Also, a commitment was undertaken to begin negotiations for a new legally binding treaty to take effect in 2020. Therefore, although greenhouse gasses are recognized as a worldwide concern, the future revisions to the Kyoto Protocol and their effects of those provisions remain unclear. It is impossible to predict the provisions of the international agreement that will replace the Kyoto Protocol. Under such new agreement, it is possible that the projected income of the Company that is based on carbon emission reduction may be reduced significantly or even disappear.
Our operations in foreign markets could cause us to incur additional costs and risks associated with doing business internationally.
Our operations in geographic markets outside of the United States will subject us to a number of risks and potential costs, including:
-different regulatory requirements governing the environment and the energy marketplace;
-difficulty in establishing, staffing and managing international operations;
-United States, federal, state and local laws, including tax laws, related to foreign operations, including compliance with United States, federal, state and local foreign corrupt practices laws;
-differing intellectual property laws;
-differing contract laws that prevent the enforceability of agreements between energy suppliers and energy consumers;
-the imposition of special taxes, including local taxation of our fees or of transactions through our exchange;
-strong local competitors;
-currency fluctuations; and
-political and economic instability.
Our business is headquartered in Israel and our executive officers are based in Israel. Therefore, our results of operations could be adversely affected by political, economic and military instability in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations and could make it more difficult for us to raise capital.
Our failure to manage the risks associated with international operations could limit the future growth of our business and adversely affect our operating results. We may be required to make a substantial financial investment and expend significant management efforts in connection with our international operations.
Our operations in the developing world could cause us to incur additional risks associated with doing business in developing markets.
We are seeking to operate in the developing world (such as, e.g., countries in Africa), making us susceptible to changes in the economic, political, and social conditions therein. The developing world has experienced political, economic and social uncertainty in recent years, including an economic crisis characterized by increased inflation, high domestic interest rates, in some cases, negative economic growth, reduced consumer purchasing power and high unemployment. Currently, many of the countries in the developing world where we have projects have been pursuing economic stabilization policies, including the encouragement of foreign trade and investment and other reforms. Nevertheless, no assurance can be given that the countries in which we currently or will operate will continue to pursue these policies, that these policies will be successful if pursued or that these policies will not be significantly altered. In case of a decline in the world economy, increases in political or social problems or a reversal of foreign investment policies, it is likely that any such changes will have an adverse effect on our results of operations and financial condition.
Our reputation could be adversely affected if our businesses, or third parties with whom we have a relationship, were to fail to comply with United States or foreign anti-corruption laws or regulations.
Some of our projects and new business may be conducted in countries where corruption has historically penetrated the economy to a greater extent than in the United States. It is our policy to comply, and to require our local partners and those with whom we do business to comply, with all applicable anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, and with applicable local laws of the foreign countries in which we operate. Our reputation may be adversely affected if we were reported to be associated with corrupt practices or if we or our local partners failed to comply with such laws. Such damage to our reputation could adversely affect our ability to grow our business.
Acquisition, financing, development and construction of new projects and expansions may not commence as anticipated, or at all.
Our strategy is to continue to expand in the future, including through acquisition of additional projects. The acquisition, financing, development and construction of new projects involves many risks including:
-difficulties in identifying, obtaining and permitting suitable sites for new projects;
-the inaccuracy of our assumptions with respect to the cost of and schedule for completing construction;
-difficulty, delays or inability to obtain financing for a project on acceptable terms;
-delays in deliveries of, or increases in the prices of, equipment sourced from other countries;
-the unavailability of sufficient quantities of waste or other fuels for startup;
-permitting and other regulatory issues, license revocation and changes in legal requirements;
-labor disputes and work stoppages;
-unforeseen engineering and environmental problems;
-unanticipated cost overruns; and
-weather interferences and catastrophic events including fires, explosions, earthquakes, droughts, pandemics and acts of terrorism.
In addition, new projects have no operating history and may employ recently developed technology and equipment. A new project may be unable to fund principal and interest payments under its debt service obligations or may operate at a loss. In certain situations, if a project fails to achieve commercial operation, at certain levels or at all, termination rights in the agreements governing the project financing may be triggered, rendering all of the project’s debt immediately due and payable. As a result, the project may be rendered insolvent and we may lose our interest in the project.
Changes in climate conditions could materially affect our business and prospects.
Significant changes in weather patterns and volatility could have a positive or negative influence on our existing business and our prospects for growing our business. Such changes may cause episodic events (such as floods or storms) that are difficult to predict or prepare for, or longer-term trends (such as droughts or sea-level rise). These or other meteorological changes could lead to increased operating costs, capital expenses, disruptions in facility operations or supply chains, changes in waste generation and interruptions in waste deliveries, and changes in energy pricing, among other effects.
We may face intense competition and may not be able to successfully compete.
There are a number of other companies operating in the renewable energy space. Such companies range from service or equipment providers, to consultants and managers and to buyers and/or investors. In contrast to the standard market approach in this space (i.e., being a service or equipment provider, a consultant or manager or a buyer or investor), we seek to provide a one-stop shop, turn-key solution to project owners.
We may not have the resources to compete with our existing competitors or with any new competitors. We intend to compete with the various participants in the renewable energy market, almost all of which have significantly greater personnel, financial and managerial resources than we have. This competition from other environmental companies with greater resources may result in our failure to maintain or expand our business. Moreover, as the demand for renewable energy increases, new companies may enter the market, and the influx of added competition will pose an increased risk to us. Increased competition may lead to price wars, which would harm us since we would be unable to compete with companies with greater resources.
We rely on key personnel, and if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively.
The development of our business will continue to place a significant strain on our limited personnel, management, and other resources. Our future success depends upon the continued services of our executive officers and the engagement of key employees and contractors who have critical industry experience and relationships that we will rely on to implement our business plan. The loss of the services of any of our officers or the lack of availability of other skilled personnel would negatively impact our ability to develop, which could adversely affect our financial results and impair our growth. In order to support our projected growth, we will be required to effectively recruit, hire, train and retain additional qualified management personnel. Our inability to attract and retain the necessary personnel could have a material adverse effect on us. We have no “key man” insurance on any of our key employees.
Volatility in foreign exchange currency rates could adversely affect our financial condition, results of operations and trading prices of our stock.
Any currency exchange rate movements between the U.S. dollar and the various currencies of the jurisdictions in which we operate or receive payment (including the Euro) that make doing business more expensive or revenue in foreign currencies less valuable may have a material, adverse impact on our earnings, cash flow and/or financial position and, as a result, could adversely impact the trading prices of our stock.
If our strategy is unsuccessful, we will not be profitable and our stockholders could lose their investment.
We do not believe there are track records for companies pursuing our specific strategy, and there is no guarantee that our strategy will be successful or profitable. If our strategy is unsuccessful, we will fail to meet our objectives and not realize the revenues or profits from the business we pursue, which would cause the value of the Company to decrease, thereby potentially causing in all likelihood, our stockholders to lose their investment.
Risk Factors related to Regulation
We may be unable to obtain, modify, or maintain the regulatory permits, approvals and consents required to construct and operate our projects.
In order to construct and operate our projects, we must obtain and modify numerous environmental and other regulatory permits and certifications from federal, state and local agencies and authorities, including air permits and wastewater discharge permits. A number of these permits and certifications must be obtained prior to the start of construction of a project, while other permits are required to be obtained at or prior to the time of first commercial operation, and still other permits must be obtained within prescribed time frames following commencement of initial operations. Any failure to obtain or modify the necessary environmental permits and certifications on a timely basis could delay the construction or commercial operation of our projects. In addition, once a permit or certification has been issued for a project, we must take steps to comply with each permit’s conditions, which can include conditions as to timely commencement and completion of the project; otherwise, the permit could be subject to revocation or suspension, or we could be exposed to potentially significant penalties or other consequences. We also may need to modify existing permits to reflect changes in design or in project requirements, which could trigger a legal or regulatory review under a standard that may be more stringent than when the permits were originally granted.
We also may not always be able to obtain any required modifications to existing regulatory approvals, and we may not always be able to maintain all required regulatory approvals. Obtaining necessary approvals and permits could be a time-consuming and expensive process, and we may not be able to obtain them on a timely basis or at all. In the event that we ultimately fail to obtain or modify all necessary permits, we may be forced to delay operations of the facility and the receipt of related revenues or abandon the project altogether and lose the benefit of any development costs already incurred, which would have an adverse effect on our results of operations. In addition, governmental regulatory requirements may substantially increase our construction costs, which could have a material adverse effect on our business, results of operations and financial condition. If there is a delay in obtaining any required regulatory approvals or if we fail to obtain and comply with any required regulatory approvals, the operation of our projects could be delayed. In addition, we may be required to make capital expenditures on an ongoing basis to comply with increasingly stringent federal, state, provincial and local environmental, health and safety laws, regulations and permits.
We are subject to environmental laws and potential exposure to environmental liabilities.
Because of the nature of our projects, we are subject to various federal, state and local environmental laws and regulations that govern our operations, including the import, handling and disposal of non-hazardous and hazardous wastes, and emissions and discharges into the environment. Failure to comply with these laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating the release or spill of hazardous substances or petroleum products on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, and such owner or operator may incur liability to third parties impacted by such contamination. The presence of, or failure to remediate properly the release or spill of, these substances could adversely affect the value of, and our ability to transfer or encumber, our real property.
Changes in laws and regulations over which we have no control can significantly affect our business and results of operations.
Any governmental entity that regulates our operations or projects in the country in which they are located may enact new legislation or adopt new laws and regulations or policies at any time, and new judicial decisions may change the interpretation of existing legislation or regulations at any time in any of the countries in which our operations or projects are located. We have no control over any such changes. Any new laws or regulations governing our operations or projects could have an adverse impact on our business, results of operations and prospects.
Risk Factors related to our Common Stock
Future sales of our common stock by existing stockholders could cause our stock price to decline.
If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. We cannot predict the effect, if any, the future public sales of these securities or the availability of these securities for sale will have on the market price of our securities. Conversion of our outstanding convertible notes and the perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. The balance of our shares is held by affiliates and contains certain resale restrictions. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.
If we fail to establish and maintain an effective system of internal control or disclosure controls and procedures are not effective, we may not be able to report our financial results accurately and timely or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. Due to lack of segregation of duties, limited resources, and lack of a formal audit committee and financial expert on the Board, we lack the board oversight role within the financial reporting process, we concluded that our internal controls over financial reporting were not effective as of September 30, 2014. In addition, our management concluded that our disclosure controls and procedures were not effective as of September 30, 2014 due to our limited internal resources and lack of ability to have multiple levels of transaction review. We are in the process of determining how best to change our current system and implement a more effective system however there can be no assurance that implementation of any change will be completed in a timely manner or that it will be adequate once implemented.
There may be a limited public market for our securities.
Trading in our common stock continues to be conducted on the electronic bulletin board in the over-the-counter market. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and our common stock may be less attractive for margin loans, for investment by financial institutions, as consideration in future capital raising transactions or other purposes.
Our shares of common stock are thinly traded, the price may not reflect our value, and there can be no assurance that there will be an active market for our shares of common stock either now or in the future.
Our shares of common stock are thinly traded and the price may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other things. We may take certain steps including utilizing investor awareness campaigns and firms, press releases, road shows and conferences to increase awareness of our business, and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business, and trading may be at an inflated price relative to the performance of the Company due to, among other things, availability of sellers of our shares.
If an active market should develop, the price may be highly volatile. Because there is currently a low price for our shares of common stock, many brokerage firms or clearing firms are not willing to effect transactions in the securities or accept our shares for deposit in an account. Many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.
Investors may incur dilution.
We may issue additional shares of our equity securities or incur additional debt convertible into equity securities in order to raise additional cash to fund acquisitions or for working capital. If we issue additional shares of our capital stock or incur additional debt that is converted into shares of capital stock, investors could experience dilution in their respective percentage ownership in us.
The market price of our common stock is likely to be highly volatile and subject to wide fluctuations.
Dramatic fluctuations in the price of our common stock may make it difficult to sell our common stock. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control.
Our stock is a “penny stock”. Trading of our stock may be restricted by the SEC's penny stock regulations, which may limit a stockholder's ability to buy and sell our stock.
Our common stock is subject to the regulations of the SEC promulgated under the Exchange Act that require additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The SEC regulations define penny stocks to be any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Unless an exception is available, those regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a standardized risk disclosure schedule prepared by the SEC, to provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the purchaser’s account, to 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 requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a stock that becomes subject to the 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 market investor interest in and limit the marketability of our common stock.
As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward looking statements does not apply to the Company.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could adversely affect our financial condition.
We used to be a shell company, which means that there are additional restrictions on the resale of shares of our common stock
Effective February 15, 2008, Rule 144 under the Securities was amended to make it unavailable for securities of former shell companies until, among other things, twelve months have elapsed since the former “shell company” has filed “Form 10 information” with the Securities and Exchange Commission. The Company was a “shell company” until February 2010, when it changed its business model from developing and promoting automotive internet websites to its current model. In 2011, the Company filed a Form 8-K report that satisfied the “Form 10 information” requirement, which restored the Company’s eligibility for resales under Rule 144. Notwithstanding the Company’s restoration to eligibility to use Rule 144 for resales, the Company’s transfer agent may impose additional requirements on resales of shares of our common stock pursuant to Rule 144.
Such additional restrictions may adversely affect (i) our ability to raise additional financing on a private placement basis and (ii) the ability of our private placees and affiliates to resell their securities into the public market, all of which could have a material adverse effect on us and our shareholders.
There is no intention to pay dividends at the present time.
We have never paid dividends or made other cash distributions on the common stock, and do not expect to declare or pay any dividends in the foreseeable future. We intend to retain future earnings, if any, for working capital and to finance current operations and expansion of its business. Investors should not count on dividends in evaluating an investment in our common stock.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
Our principal executive office is located at 35 Asuta St. Even Yehuda, Israel 40500, for which we pay the operating expenses but do not pay any rent. We have an office in North Carolina located at 301 McCullough Drive, 4 th Floor Charlotte, NC 28262. We pay rent for this site of $179 per month. We intend to obtain additional working space for and to be located near our projects as and when the level of activity of such projects warrants such action. Until such time, we believe that our property is adequate for our current and immediately foreseeable operating needs.
Item 3.
Item 3. Legal Proceedings
From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Recent Sales of Unregistered Securities
The following are sales of our unregistered securities during the fiscal year ended September 30, 2014 and the period ended at the date hereof that have not otherwise been reported in our periodic or current reports.
On August 28, 2014, we issued 1,061,762 shares of common stock to a non-US investor.
On September 15, 2014, we issued 2,866,194 shares of common stock to a non-US investor pursuant to a subscription agreement signed with such investor in January 2014.
On September 17, 2014, we issued a convertible promissory note to an accredited investor in an aggregate principal amount of $75,000 for an aggregate purchase price of $75,000. This note matures one-year from the date of issuance and accrues interest at a rate of 8% per annum and, in an event of default, will bear interest at a rate of 24% per annum. This note may generally be converted into shares of our common stock at a conversion price of 42% discount to our lowest trade or closing prices during periods in proximity to the time of conversion subject to further discounts in the case of certain events of default.
The note includes customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In addition, it shall constitute an event of default under the note if we are delinquent in our filings with the Securities and Exchange Commission, cease to be quoted on the OTCQB, or our common stock is not DWAC or DTC eligible. If our shares are not DTC eligible, then the conversion price shall be reduced from a discount of 42% to a discount of 52%. In the event of an event of default the notes may become immediately due and payable at a premium to the outstanding principal. The note also provides that if shares issuable upon conversion of the note are not timely delivered in accordance with the terms of the note then we shall be subject to certain cash penalties that increase proportionally to the duration of the delinquency.
On September 21, 2014, we issued 2,484,000, 280,592 and 114,650 shares of common stock to three separate non-US investors.
On September 22, 2014, we issued a convertible promissory note to an accredited investor in an aggregate principal amount of $250,000 for an aggregate purchase price of $225,000, including original issue discount of $25,000. This note matures one-year from the date of issuance at the full principal amount of $250,000. This note may generally be converted into shares of our common stock at a conversion price of 37% discount to our lowest trade or closing prices during periods in proximity to the time of conversion subject to further discounts in the case of certain events of default.
The note includes customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In addition, it shall constitute an event of default under the note if we are delinquent in our filings with the Securities and Exchange Commission, cease to be quoted on the OTCQB, or our common stock is not DWAC or DTC eligible. In the event of an event of default the notes may become immediately due and payable at a premium to the outstanding principal. The note also provides that if shares issuable upon conversion of the note are not timely delivered in accordance with the terms of the note then we shall be subject to certain cash penalties that increase proportionally to the duration of the delinquency.
On December 8, 2014, we issued 209,041 shares of common stock to a registered broker-dealer in the United States as compensation for entering arranging a private placement of our securities.
All of the above-mentioned securities were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act since, among other things, the transactions did not involve a public offering.
Market Information
Our common stock is quoted on the OTCQB under the symbol “BLSP”. The following quotations, which were obtained from siliconinvestor.com, reflect the high and low bids for our common stock for the periods indicated, based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The first day on which our common stock traded under BLSP was March 16, 2010.The prices set forth below give retroactive effect to our 1 for 113 reverse split which became effective on December 4, 2013.
The high and low bid prices of our common stock for the periods indicated below are as follows:
The market price of our common stock is highly volatile and is subject to fluctuations in response to variations in operating results, announcements of technological innovations or new products, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.
Holders
As of January 12, 2015, we had 129 holders of record of our common stock. This number does not include beneficial owners whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividends
We have never paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
Equity Compensation Plan Information
On March 23, 2010, we instituted the Global Share Incentive Plan (2010) (the “Share Incentive Plan”), after approval by the Board of Directors. The purpose of the Share Incentive Plan is to attract and retain the best available personnel and to provide incentives to employees, officers, directors and consultants, all in an effort to promote the success of the Company. We may determine the number of shares reserved under the Share Incentive Plan from time to time. The plan is administered by our Board of Directors and may be administered by a Committee consisting of no less than two members of the Board appointed by the Board. In connection with the Share Incentive Plan, the Company adopted an Israeli taxpayers appendix, a template notice of grant and a template option award agreement. The Share Incentive Plan is not subject to any provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). The duration of the Share Incentive Plan is for a period of ten (10) years from the date of its adoption by the Board of Directors.
The following table summarizes information as of the close of business on September 30, 2014 about the Share Incentive Plan:
Item 6.
Item 6. Selected Financial Data
As a small reporting company, we are not required to provide the information required by this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary of Current Operations
We are primarily a project integrator in the clean energy production and organics to energy markets. We aspire to become a key player in these global markets, working with enterprises with clean energy, organics to energy and related by-product potential to generate clean energy, soil amendments, compost and other by-products. We believe that these markets have tremendous potential insofar as there is a virtually endless supply of waste and organic material that can be used to generate power and valuable by-products. Not only is there a virtually endless supply of waste and organic material, but in most, if not all cases, disposing of such waste and material in most parts of the world today is a costly problem with an environmentally-damaging solution, such as landfilling. We seek to offer a cost-effective, environmentally-safe alternative.
We are currently focusing on (i) thirteen projects for which we have signed either agreements, letters of intent or memoranda of understanding to own and implement such projects and which are in various stages of development and (ii) a recently acquired fast charging battery technology.
Projects
United States
·Charlotte, NC Waste to Energy Anaerobic Digester 5.2 MW Plant
·Johnston, RI Waste to Energy Anaerobic Digester 3.2 MW Plant
·Marlborough, MA Waste to Energy Anaerobic Digester 5.0 MW Plant
Italy
·Soc. agr. AGRICERERE srl - Tromello (Pavia) 999 KW Plant
·Soc. agr. AGRIELEKTRA srl - Alagna (Pavia) 999 KW Plant
·Soc. agr. AGRISORSE srl - Garlasco (Pavia) 999 KW Plant
·Soc. agr. GEFA srl - Dorno (Pavia) 999 KW Plant
·Soc. agr. SAMMARTEIN srl - San Martino in Rio (Reggio Emilia) 999 KW Plant
·Soc. agr. ER srl - Aprilia (Latina) 999 KW Plant
·Soc. agr. BIOENERGIE SRL - Aprilia (Latina) 999 KW Plant
Israel
·Ramat Chovav Waste to Energy Anaerobic Digester 5.0 MW Plant
Ghana
·Oti Sanitary Landfill Waste to Energy 1 MW Plant
·Accra Transfer Station Waste to Energy Anaerobic Digester 6MW Plant
Results of Operations
Revenue
We have recorded no revenue since inception.
General and administrative expenses
General and administrative expenses for the year ended September 30, 2014 were approximately $7,120,000 as compared to approximately $1,831,000 for the year ended September 30, 2013. The increase is primarily attributable to the increase in the expenses related to share based compensation.
Net Loss
As a result of the above, we incurred a net loss of approximately $7,376,000 for the year ended September 30, 2014, as compared to a net loss of approximately $1,970,000 for the year ended September 30, 2013. We anticipate losses in future periods.
Inflation
Our results of operations have not been affected by inflation and management does not expect that inflation risk would cause material impact on its operations in the future.
Seasonality
Our results of operations are not materially affected by seasonality and we do not expect seasonality to cause any material impact on our operations in the near future.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We base our estimates on historical experience, where applicable, and other relevant factors that we believe are reasonable under the circumstances.
Liquidity
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
As of September 30, 2014, we had cash of approximately $298,000 compared to approximately $46,000 as of September 30, 2013. As of September 30, 2014, we had working capital deficit of approximately $55,000 compared to approximately $703,000 as of September 30, 2013.
Net cash used in operating activities was approximately $1,802,000 for the year ended September 30, 2014, compared to approximately $1,042,000 for the prior period September 30, 2013. The increase of $760,000 in cash used in operating activities was primarily due to development expenses incurred in connection with our North Carolina and Rhode Island projects not recorded as assets. We have not generated any revenue to-date.
Net cash flows used in investing activities was approximately $198,000 for the year ended September 30, 2014 as compared to approximately $278,000 for the prior period September 30, 2013. The decrease in cash used in investing activities was due to payments made for our operations in our US projects as detailed above that were not recorded as assets.
Net cash flows provided by financing activities was approximately $2,252,000 for the year ended September 30, 2014 as compared to approximately $1,344,000 for the prior period September 30, 2013. The increase in cash provided by financing activities was due to a increase in equity financing such as convertible debentures received containing a beneficial conversion feature and other loans received. To date we have principally financed our operations through the sale of our common stock and the issuance of convertible debt.
The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended September 30, 2014 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future sales.
Management anticipates that existing cash resources, including the proceeds of the equity placements subsequent to September 30, 2014 described below will not be sufficient to fund our planned operations during the next 12 months. We estimate that, in order to fund our continued existence, we will require $1,000,000 in cash over the next 12 months. This does not include amounts we will have to invest in the implementation of our projects. Assuming we finance each project with 25% equity and 75% debt, we will require approximately $20,000,000 in additional capital to make equity investments in US, Italian and Israeli projects. We are unable to estimate the amount we will be required to invest in our Ghanaian projects. There is no assurance that we will be successful in financing our projects with 25% equity and 75% debt (such amounts could be more or less) and, even if successful, there is no assurance that we will raise such capital at all or in a timely manner.
In addition to requiring capital to fund our corporate activities, the capital needs of our project development activities will be significant and will likely require equity investment on our part. As a result, we are seeking to raise additional funds and any meaningful equity financing will likely result in significant dilution to our existing shareholders. There can be no assurance that additional funds will be available on terms acceptable to us, or at all.
Off-Balance Sheet Arrangements
As at September 30, 2014, we had no off-balance sheet arrangements of any nature.
Market Risk and Contingent Liabilities
We are seeking to operate in part in the developing world, making us susceptible to changes in the economic, political, and social conditions therein. The developing world has experienced political, economic and social uncertainty in recent years, including an economic crisis characterized by increased inflation, high domestic interest rates, in some cases, negative economic growth, reduced consumer purchasing power and high unemployment. Currently, many of the countries in the developing world have been pursuing economic stabilization policies, including the encouragement of foreign trade and investment and other reforms. In the last year, there was an overall improvement in the world (and, consequently, developing world) economic environment. Nevertheless, no assurance can be given that the countries in which we currently or will operate will continue to pursue these policies, that these policies will be successful if pursued or that these policies will not be significantly altered. In case of a decline in the world economy, political or social problems or a reversal of foreign investment policies, it is likely that any such change will have an adverse effect on our results of operations and financial condition. Additionally, inflation may lead to higher wages and salaries for local employees and increases in the cost of materials, which would adversely affect the Company's profitability.
Risks inherent in foreign operations include nationalization, war, terrorism, and other political risks and risks of increases in foreign taxes or changes in U.S. tax treatment of foreign taxes paid and the imposition of foreign government royalties and fees.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
BLUE SPHERE CORP.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2014
BLUE SPHERE CORP.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2014
IN U.S. DOLLARS
REPORT OF REGISTERED INDEPENDENT AUDITORS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING F IRM
To the Board of Directors and Stockholders of
Blue Sphere Corp.
We have audited the accompanying consolidated balance sheets of Blue Sphere Corp. and its subsidiaries as of September 30, 2014 and 2013, the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2014. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on the 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. Our audits included 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, based on our audit, such consolidated financial statements present fairly, in all material respects, the financial position of Blue Sphere Corp. and its subsidiaries as of September 30, 2014 and 2013 and the results of their operations, stockholders' equity and their cash flows for each of the three years in the period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1a to the financial statements, the Company has incurred recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1a. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Brightman Almagor Zohar & Co.
Brightman Almagor Zohar & Co.
Certified Public Accountants
A Member Firm of Deloitte Touche Tohmatsu
Tel Aviv, Israel
January 13, 2015
TEL Aviv - Main Office
Trigger Foresight
Ramat-Gan
Jerusalem
Haifa
Beer-Sheva
EILAT
1 Azrieli Center
3 Azrieli Center
6 Ha-rakun
12 Sarei Israel
5 Ma'aleh Hashichrur
Omer Industrial Park
The City Center
Tel Aviv, 6701101
Tel Aviv, 6701101
Ramat Gan, 5252183
Jerusalem, 9439024
P.O.B. 5648
Building No. 10
P.O.B 583
P.O.B. 16593
Haifa, 31055
P.O.B. 1369
Eilat, 8810402
Tel Aviv, 6116402
Omer, 8496500
Tel: +972 (3) 608 5555
Tel: +972 (3) 607 0500
Tel: +972 (3)755 1500
Tel: +972 (2) 501 8888
Tel: +972 (4) 860 7333
Tel: +972 (8) 690 9500
Tel: +972 (8) 637 5676
Fax: +972 (3) 609 4022
Fax: +972 (3) 607 0501
Fax: +972 (3) 575 9955
Fax: +972 (2) 537 4173
Fax: +972 (4) 867 2528
Fax: +972 (8) 690 9600
Fax: +972 (8) 637 1628
Info@deloitte.co.il
Info@tfco.co.il
Info-ramatgan@deloitte.co.il
Info-jer@deloitte.co.il
Info-haifa@deloitte.co.il
Info-beersheva@deloitte.co.il
Info-eilat@deloitte.co.il
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
BLUE SPHERE CORP.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands except share and per share data)
The accompanying notes are an integral part of the consolidated financial statements.
BLUE SPHERE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands except share and per share data)
*In the years ended September 30, 2014, 2013 and 2012 - includes $1,711, $203 thousand and $2,956 thousand, respectively of share-based compensation.
The accompanying notes are an integral part of the consolidated financial statements.
BLUE SPHERE CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(U.S. dollars in thousands, except share and per share data)
The accompanying notes are an integral part of the consolidated financial statements.
BLUE SPHERE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
The accompanying notes are an integral part of the consolidated financial statement
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
a. Going concern consideration:
Blue Sphere Corp. (the “Company”) together with its wholly owned subsidiaries, Eastern Sphere Ltd. (“Eastern”), Binosphere Inc ("Binosphere"), Charlottesphere LLC ("Charlotteshpere”), Johnstonsphere LLC (“Johnstonsphere”), Orbit Energy Charlotte, LLC (“OEC”), Orbit Energy Rhode Island, LLC (“OERI”), Sustainable Energy Ltd. (“SEL”) and Tipping LLC (“Tipping”) is focused on project integration in the clean energy production and waste to energy markets.
As at September 30, 2014, Tipping, Johnstonsphere and Charlottesphere had not commenced their respective operations.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2014, the Company had approximately $298 thousand in cash, a negative working capital of approximately $55 thousand, a stockholders’ equity of approximately $310 thousand and an accumulated deficit of approximately $35,942 thousand. Management anticipates their business will require substantial additional investments that have not yet been secured. The Company anticipates that the existing cash will not be sufficient to continue its operations through the next 12 months. Management is continuing in the process of fund raising in the private equity markets as the Company will need to finance future activities and general and administrative expenses. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
These financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to obtain additional financing as may be required and ultimately to attain profitability.
b. General:
The Company was incorporated in the state of Nevada on July 17, 2007 and was originally in the business of developing and promoting automotive internet sites. During the second quarter of 2010 the management of the Company decided to change its business focus to that of project integrator in the clean energy production and waste to energy markets.
The Company is currently focusing on (i) 13 projects in the United States, Italy, Israel and Ghana, for which it has either signed agreements, letters of intent, or memoranda of understanding to own and implement such projects and which are in various stages of development and (ii) a recently licensed fast charging battery technology (as detailed below).
On November 26, 2013, the Company amended and restated its Articles of Incorporation to authorize the issuance of 500,000,000 shares of preferred stock, $0.001 par value, in one or more series and with such rights, preferences and privileges as its Board of Directors may determine and to effect a 1 for 113 reverse stock split of the Company’s outstanding common stock. In addition, the Amended and Restated Articles of Incorporation provide, among other things, for indemnification and limitations to the liability of the Company’s officers and directors.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - GENERAL (continue)
As a result of the reverse stock split, which became effective on December 4, 2013, every 113 shares of the Company’s outstanding common stock prior to the effect of that amendment was combined and reclassified into one share of the Company’s common stock, and the number of outstanding shares of the Company’s common stock was reduced from 1,292,103,309 to 11,434,611 shares.
All share, stock option and per share information in these condensed consolidated financial statements have been restated to reflect the stock split on a retroactive basis.
Payment on account of project
On October 19, 2012, the Company signed definitive project agreements in respect of both the North Carolina and Rhode Island sites with Orbit Energy, Inc. (“Orbit”) pursuant to which the Company would be entitled to full ownership of each of the entities that owns the rights to implement the respective projects (Orbit Energy Charlotte, LLC in the case of the North Carolina project (“OEC”) and Orbit Energy Rhode Island, LLC in the case of the Rhode Island project (“OERI”) subject to the satisfaction of certain conditions.
On November 19, 2014, the Company signed an amended and restated purchase agreement with Orbit for the North Carolina project (the “Amended OEC Purchase Agreement”). Subject to the terms of the Amended OEC Purchase Agreement, Orbit transferred ownership of OEC to us in exchange for a development fee of $900,000, reimbursement of $17,764 and an amount equal to 30% of the distributable cash flow from the North Carolina project after the project achieves a post-recoupment 30% internal rate of return computed on the basis of any and all benefits from tax credits, depreciation and other incentives of any nature. The Company also agreed to use high solid anaerobic digester units designed by Orbit and to retain Orbit to implement and operate the digester units for an annual management fee of $187,500 subject to certain conditions. The Amended OEC Purchase Agreement provides that the Company had until December 15, 2014 to pay Orbit the development fee and reimbursement amount, which was extended to January 15, 2014 upon payment of $75,000 (which we made). If the Company do not pay the development fee and reimbursement amount by January 15, 2014, then ownership of the OEC will automatically revert back to Orbit.
On January 7, 2015, the Company signed an amended and restated purchase agreement for the Rhode Island project (the “Amended OERI Purchase Agreement”). Subject to the terms of the Amended OERI Purchase Agreement, Orbit transferred full ownership of OERI to us in exchange for a development fee of $300,000, reimbursement of $86,432 and an amount equal to 30% of the distributable cash flow from the Rhode Island project after the project achieves a post-recoupment 30% internal rate of return computed on the basis of any and all benefits from tax credits, depreciation and other incentives of any nature. The Company also agreed to use high solid anaerobic digester units designed by Orbit and to retain Orbit to implement and operate the digester units for an annual management fee of $187,500 subject to certain conditions. The Amended OERI Purchase Agreement provides that the Company have until January 22, 2015 to pay Orbit the development fee and reimbursement amount, which may be extended to February 28, 2015 upon payment of $31,000. If the Company do not pay the development fee and reimbursement amount by January 22, 2015, or February 28, 2015 if extended, then ownership of OERI will automatically revert back to Orbit.
Payments on account of land permits related to this projects on the amount of $469 thousand are presented as long term assets in the balance sheet as of September 30, 2014.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b. Functional currency:
The currency of the primary economic environment in which the operations of the Company are conducted is the U.S dollar (“$” or “dollar").
Most of the Company’s expenses are incurred in dollars. Most of the Company’s external financing is in dollars. The Company holds most of its cash and cash equivalents in dollars. Thus, the functional currency of the Company is the dollar.
Since the dollar is the primary currency in the economic environment in which the Company operates, monetary accounts maintained in currencies other than the dollar are re-measured using the representative foreign exchange rate at the balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of transaction. The effects of foreign currency re-measurement are reported in current operations (as “financial expenses - net) and have not been material to date.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
Inter-company balances and transactions have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments which include short term bank deposit (up to three months from date of deposit), that are not restricted as to withdrawals or use that are readily convertible to cash with maturities of three months or less as of the date acquired.
e. Property, plant and equipment:
Property, plant and equipment are stated at cost, less accumulated depreciation. Assets are depreciated using the straight-line method over their estimated useful lives.
Computers, software and electronic equipment are depreciated over three years. Tools and equipment are depreciated over five years. Furniture is depreciated over fourteen years.
f. Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 expenses during the reporting period. Actual results may differ from those estimates
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
g. Share-base payments:
Share-based payments to employees are measured at the fair value of the options issued and amortized over the vesting periods. Share-based payments to non-employees are measured at the fair value of the goods or services received or the fair value of the equity instruments issued if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The amount recognized as an expense is adjusted to reflect the number of awards expected to vest. The offset to the recorded cost is to share-based payments reserve. Consideration received on the exercise of stock options is recorded as capital stock and the related share-based payments reserve is transferred to share capital.
h. Loss per share:
Net loss per share, basic and diluted, is computed on the basis of the net loss for the period divided by the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares and of common shares equivalents outstanding when dilutive. Common share equivalents include: (i) outstanding stock options under the Company’s share incentive plan and warrants which are included under the treasury share method when dilutive, and (ii) common shares to be issued under the assumed conversion of the Company’s outstanding convertible notes, which are included under the if-converted method when dilutive. The computation of diluted net loss per share for the years ended September 30, 2014, 2013, and 2012, does not include common share equivalents, since such inclusion would be anti-dilutive.
i. Deferred income taxes:
Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect when those differences reverse. A valuation allowance in respect of deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has provided a full valuation allowance with respect to its deferred tax assets.
j. Comprehensive loss:
The Company has no component of comprehensive income loss other than net loss.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
k. Newly issued accounting pronouncements:
In June 2014, the FASB issued ASU 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. ASU 2014-10 eliminates the distinction of a development stage entity and certain related disclosure requirements, including the elimination of inception-to-date information on the statements of operations, cash flows and stockholders' equity. The amendments in ASU 2014-10 will be effective prospectively for annual reporting periods beginning after December 15, 2014, and interim periods within those annual periods, however early adoption is permitted. The Company adopted ASU 2014-10 in the annual financial statements as of September 30, 2014.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and is to be applied retrospectively. We do not currently have any revenue. As such, ASU 2014-09 will not have any effect on our results of operations and financial position. If we begin generating revenue prior to the effective date of ASU 2014-09, we will evaluate the effect that ASU 2014-09 will have on our results of operations and financial position.
NOTE 2 - DEBENTURES, NOTES AND LOANS
Asher Notes
On September 16, 2011, the Company signed a securities purchase agreement with Asher Enterprises Inc., a Delaware corporation with a head office in New York (“Asher”), pursuant to which Asher purchased an aggregate amount of U.S. $45,000 of the Company’s 8% convertible notes. The notes were convertible into shares of common stock of the Company at a discount to the applicable market price on the date of conversion from time to time, and at any time, beginning March 14, 2012 and ending, absent any condition of default, on June 14, 2012, subject to the limitations and conditions set forth in the notes. The Company has the right to prepay the notes under the certain conditions for 180 days following the issue date. On each of November 11, 2011 and January 26, 2012, Asher purchased an additional U.S. $32,500 of the Company’s 8% convertible notes (for an aggregate total of U.S. $65,000).
On March 19, 2012, Asher transferred 100% of the Asher notes to third parties. During April 2012, such third parties converted $110,000 (i.e., 100% of the principal amount) of the principal amount of the Asher notes into 255,691 shares of the Company.
On March 26, 2012, May 7, 2012, and September 13, 2012 Asher purchased an additional U.S. $53,000, $32,500, and $32,500 respectively of the Company’s 8% convertible notes.
On October 4, 2012, Asher converted $53,000 of principal amount of the March 26, 2012 note into 259,994 shares of the Company.
On November 1, 2012, the Company paid to Asher $50,000 in repayment of the May 7, 2012 note.
On November 6, 2012 and March 20, 2013, Asher purchased an additional $32,500 and $47,500 of the Company’s 8% convertible promissory notes, respectively.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DEBENTURES, NOTES AND LOANS (continue)
On February 2, 2013, the Company paid to Asher $50,000 in repayment of the September 13, 2012 Asher note.
On March 20, 2013, Asher purchased an additional $47,500 of the Company's 8% convertible notes.
On October 7, 2013 the Company repaid $18,248 principal amount of such notes and the remaining $29,252 principal amount of the notes was converted into 250,580 shares of the Company's common stock.
On May 9, 2013, Asher purchased an additional $42,500 of the Company’s 8% convertible notes. On November 15, 2013 the Company repaid $29,630 principal amount of such notes and the remaining $12,870 principal amount of the notes was converted into 151,696 shares of the Company's common stock.
On September 3, 2013, October 24, 2013, February 18, 2014 and March 25, 2014 Asher purchased an additional $42,500, $32,500, $63,000 and $32,500 of the Company’s 8% convertible notes.
During March and April 2014, Asher converted $32,500 principal amount out of the September 3, 2013 notes for 844,663 shares of the Company’s common stock.
On April 11, 2014, Asher purchased an additional $42,500 of the Company’s 8% convertible notes.
During April and May 2014, Asher and a non-US investor converted Asher's $32,500 principal amount out of the October 24, 2013 notes for 578,057 shares of the Company’s common stock.
During August 2014, Asher converted $63,000 principal amount out of the February 18, 2014 notes for 572,990 shares of the Company’s common stock.
During September 2014, Asher converted $32,500 principal amount out of the March 3, 2014 notes for 308,910 shares of the Company’s common stock.
Fidelity
On July 1, 2012, the Company signed a placement agreement with Fidelity Venture Capital Limited (“Fidelity”) pursuant to which Fidelity undertook to raise U.S. $1,000,000 in notes convertible into shares of common stock or more senior equity securities of the Company (if any) for a period of three and one half years at prices ranging from USD 2.26 cents to USD 11.3 cents per share or a discount of 20% of the then market price of the Company’s shares depending on when any such conversion is consummated (the “Fidelity Notes”). The Fidelity Notes bore annual interest of 6.5% to be paid semi-annually in arrears. The Company committed to pay off the outstanding principal of the Fidelity Notes by paying to the holders of such Fidelity Notes 7% of gross income and making certain pre-payments of the principal during the term of the notes. Each holder of Fidelity Notes received shares of common stock of the Company worth USD 79.1 cents for each dollar it invested in the Fidelity Notes (the “Incentive Shares”). The Company has pledged the income from its projects to such holders as security to pay the Fidelity Notes in full. See subsequent events below for additional information.
Fidelity was entitled to 9% of the gross proceeds it raised for the Company. To date, the Company has received an aggregate amount of U.S. $50,000 (less commissions) from sales of Fidelity Notes to Fidelity itself.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DEBENTURES, NOTES AND LOANS (continue)
On December 25, 2012 and following the failure of Fidelity to raise U.S $1,000,000 in notes based on the placement agreement above, the Company notified Fidelity on the termination of the placement agreement.
On April 4, 2013, the Company signed an investment agreement with Fidelity, and Dalia Aztmon (“DA”), an Israeli investor, which amends in part the investment agreement signed on July 1, 2012 between the Company and Fidelity, pursuant to which Dalia Atzmon agreed to purchase an additional amount of U.S. $50,000 of the Company’s 6.5% notes (the “DA Notes”). The DA Notes bear annual interest of 6.5% and are payable in full in three and one half years. DA elected to convert the outstanding principal and interest into shares of common stock of the Company. In this connection, on May 10, 2013 the Company issued Dalia 266,553 shares at a conversion price of U.S. $0.2034 per share. Fidelity has also elected to convert the outstanding principal and interest of its July 1, 2012 $50,000 investment into shares of common stock of the Company and, in this connection, received 245,904 shares of the Company’s common stock. Since both investors have converted 100% of the outstanding principal and interest of their loans into shares of common stock of the Company, the investment agreement has no further force or effect.
Other Notes
On September 4, 2012, September 25, 2012, October 14, 2012 and November 29, 2012, the Company signed Convertible Promissory Notes with Jelton Finance Corp., a Belize corporation, with offices in Lichtenstein (“Jelton”), pursuant to which Jelton agreed to purchase an aggregate of $132,500 of the Company’s 7% convertible notes due in each case three months after their respective issue dates (the “Jelton Notes”). The Jelton Notes were convertible into shares of the Company’s common stock at a discount to the applicable market price on the date of conversion. The Company has the right to prepay the Jelton Notes under certain conditions for 90 days following their issue date. In January, February and March 2013 the Jelton Notes were converted into 1,443,363 shares for total investment of $130,500.
On March 21, 2013, the Company's subsidiary, Eastern Sphere Ltd., signed a loan agreement with a non-US investor pursuant to which such investor loaned the Company $150,000 with an interest rate of 5%. Payment of 100% of the outstanding principal and accrued, but unpaid, interest was due on December 31, 2013. The Company was required to pay a penalty of $100 for every day after December 31, 2013, which it has not paid the outstanding principal and accrued, but unpaid, interest in full. As an inducement to make the loan, in April 2013, the Company issued the lender 26,549 shares of common stock. This loan was guaranteed by two of the Company’s shareholders. As an inducement to make the guarantee, the Company issued the lender 88,496 shares of common stock. From January 2014 through June 2014 the Company repaid the loan in full in addition to a payment of $7,000 penalty.
On April 28, 2013, the Company signed a loan agreement with a non-US investor pursuant to which such investor loaned the Company $87,000 with an interest rate of 3%. Payment of 100% of the outstanding principal and accrued, but unpaid, interest was due on September 30, 2013. According to the agreement, the investor has the right to convert the loan in whole or in part into Company's common stock at an exercise price of $0.565 per share. In addition, per the agreement, as an inducement to make the loan, in April 2013, the Company issued the lender 88,496 shares of common stock. The non-US investor converted the loan and on October 13, 2013 the Company issued to the non-US investor 384,956 shares of common stock.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DEBENTURES, NOTES AND LOANS (continue)
On June 14, 2013 Company's subsidiary, Eastern Sphere Ltd., signed a loan agreement with a non-US investor pursuant to which such investor loaned the Company $120,000 with an interest rate of 5%. Payment of 100% of the outstanding principal and accrued, but unpaid, interest was due on December 31, 2013. The Company is required to pay a penalty of $100 for every day after December 31, 2013, which it has not paid the outstanding principal and accrued, but unpaid, interest in full. As an inducement to make the loan, in June 2013, the Company issued the lender 26,549 shares of common stock. This loan was guaranteed by two of the Company's shareholders. As an inducement to make the guarantee, the Company issued the lender 88,496 shares of common stock.
Between August 4, 2014 and September 22, 2014, the Company issued convertible promissory notes (the “Notes”) to accredited investors in an aggregate principal amount of $1,207,750 for an aggregate purchase price of $1,040,919, net of expenses incurred in connection of such notes.
The Notes generally mature one-year from the date of issuance and accrue interest at rates ranging from 8% to 18% per annum and in an event of default, the Notes bear interest at rates ranging from 12% to 24% per annum. The Notes may generally be converted into shares of the Company’s common stock at conversion prices ranging from 37% to 45% discounts to lowest trade or closing prices during periods in proximity to the time of conversion subject to further discounts in the case of certain events of default.
In accordance with ASC 470-20, the company allocated a portion of the proceeds equal to the intrinsic value of beneficial conversion feature embedded in the debentures in the amount of $1,040,919 to additional paid-in capital, and recorded a corresponding discount on such debentures.
The Notes include customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In addition, it shall constitute an event of default under certain of the Notes if the Company is delinquent in its filings with the Securities and Exchange Commission, ceases to be quoted on the OTCQB, its common stock is not DWAC eligible or if it has to restate its financial statements in any material respect. In the event of an event of default the Notes may become immediately due and payable at premiums to the outstanding principal. The Notes also provide that if shares issuable upon conversion of the Notes are not timely delivered in accordance with the terms of the Notes then the Company shall be subject to certain cash or share penalties that increase proportionally to the duration of the delinquency up to certain maximums.
The Company paid aggregate commissions of $7,500 to MD Global Partners, LLC and $46,000 to Carter Terry & Company (“Carter Terry”), registered broker-dealers, in connection with the issuance of some of Notes in the aggregate principal of up to $480,000. In addition, Carter Terry is entitled to receive 100,000 shares of the Company’s common stock and a further amount of shares of our common stock equal to 4% of capital raised by them divided by the closing price of our common stock on the date of close. On December 8, 2014 the Company issued 209,041 shares of the Company’s common stock, see note 9 below.
Additional covenants, representations, and warranties between the parties are included in the Notes and accompanying Securities Purchase Agreements that were entered into.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTY TRANSACTIONS:
On July 25, 2011, the Company, JLS and Roy Amitzur entered into a Management Services Agreement according to which JLS, a corporation owned by Mr. Amitzur, and Mr. Amitzur are engaged to provide management services to the Company devoting at least 75% of this time to the Company, with Mr. Amitzur serving as Executive Vice President. The term of the agreement was originally for two years and in July 2013, was extended for a further eight months. Since the agreement expired in May 2014, Mr. Amitzur’s agreement was further extended on the same terms on an oral basis. For services rendered under the agreement, JLS is entitled to a monthly fee of US$10,000 + VAT subject to the Company raising an aggregate amount of at least $450,000. Subsequently, such fee increases to a monthly fee of $15,000 + VAT after the Company raises an aggregate equity investment of $2,000,000. Notwithstanding the raise of more than an aggregate of $2,000,000, payment of Mr. Amitzur monthly fee of US $10,000 + VAT has continued to-date. In addition, the Company issued to JLS 110,620 shares of common stock vesting in equal amounts quarterly over 24 months, all of which have fully vested. JLS and Mr. Amitzur are entitled to participate on similar terms as the other executives of the Company in bonus plans or incentive compensation plans for its employees.
On February 29, 2012, the Company entered into an employment agreement with Mr. Palas to serve as the Company’s Chief Executive Officer for an indefinite term. This agreement was intended to extend the term of a previously entered into employment agreement with Mr. Palas whose term was expiring. Under the agreement, Mr. Palas receives monthly remuneration at a gross rate of USD$10,000 + VAT. Mr. Palas will be entitled to participate in any bonus plan or incentive compensation plan for its employees adopted by the Company.
On November 5, 2012, the Board of Directors of the Company approved the issuance of 53,098 shares of the Company to its Chief Executive officer, 44,248 shares to the Chairman of the Board, 44,248 shares to the Executive Vice-President and 35,399 shares to the Chief Carbon Officer and general counsel of the Company.
On March 18, 2013, the Board of Directors of the Company approved the issuance of 53,098 shares of the Company to its Chief Executive Officer, 44,248 shares to the Chairman of the Board, 44,248 shares to the Executive Vice-President and 35,399 shares to the Chief Carbon Officer and general counsel of the Company.
On April 10, 2013, the Company entered into a Service and Consulting Agreement with Mark Radom to serve as the Company’s general counsel for an indefinite term devoting at least 75% of his time to the Company. This agreement was intended to supersede a previously entered into consulting agreement with Mr. Radom. Under the agreement, Mr. Radom is entitled to a monthly fee of $7,000 per month increasing to $10,000 per month starting from the first full month upon the financial closing of the Company’s first project so long the Company has sufficient cash to cover such amount or upon the date that the Company receives funds and compensation paid to other officers and advisors is increased.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTY TRANSACTIONS (continue)
On April 30, 2013, the Board of Directors of the Company approved the issuance of 230,089 shares of the Company and options to purchase 230,089 shares of common stock to its Chief Executive Officer, 203,540 shares and options to purchase 203,540 shares of common stock to the Chairman of the Board, 168,142 shares and options to purchase 168,142 shares of common stock to the Executive Vice-President and 88,496 shares and options to purchase 88,496 shares of common stock to both the Chief Carbon Officer and general counsel of the Company and for the CTO of Company. The shares and options will vest over a two year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant.
On June 19, 2013 the Board of Directors of the Company approved the issuance of 53,098 shares of the Company to its Chief Executive officer, 44,248 shares to the Chairman of the Board, 44,248 shares to the Executive Vice-President and 35,399 shares to the Chief Carbon Officer and general counsel of the Company.
The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available.
On January 26, 2014, the Company signed a subscription agreement with Talya Levy-Tytiun ("Talya") pursuant to which Talya agreed to invest an aggregate of $400,000 into the Company for the sale of 1,739,130 shares of common stock. The Company was obligated to issue Talya additional shares of the Company, if, six months from the date of the agreement her ownership in the Company would be reduced below 12.3%. In addition, the Company guaranteed that if on the first anniversary of the agreement, the share price of the Company common stock was 0.23$ per share or less, the Company shall transfer Talya such amount necessary to make Talya whole and reimburse her for any loss due to her investment. On September 17, 2014 the Company issued Talya 2,866,194, shares of common stock as a reimbursement under the above agreement.
On December 13, 2013 the Board of Directors of the Company approved the issuance of 424,779 shares of the Company to its Chief Executive Officer, 353,982 shares to the Chairman of the Board, 353,982 shares to the Executive Vice-President and 283,186 shares to the Chief Carbon Officer and general counsel of the Company. Such shares were issued at January 9, 2014.
On March 10, 2014 the Board of Directors of the Company approved the issuance of 250,000 shares of the Company to its Chief Executive Officer, 220,000 shares to the Chairman of the Board, 200,000 shares to the Executive Vice-President and 180,000 shares to the Chief Carbon Officer and general counsel of the Company.
On May 27, 2014 the Company appointed Mr. Yigal Barosh as a member of the Board of Directors of the Company. Mr. Barosh was granted 200,000 options to purchase shares of common stock of the Company at an exercise price of $0.01 per share. The Options vets over a period of two years with a pro-rata portion vesting each three month period.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES:
On January 5, 2012, the Company approved the issuance of 11,062 common shares of the Company to an investor for total consideration of $35 Thousand. The consideration for the shares has not yet been received to the date of the approval of the financial statements.
On February 1, 2012 the Company approved and granted 14,160 common shares of the Company for each of its Chief Executive Officer and the Chairman of the Board. In addition, the Company approved and granted 4,425 common shares of the Company for its Chief Carbon Officer and general counsel.
On February 6, 2012 the Company appointed Mr. Joshua Shoham as a director and issued him 17,700 common shares of the Company. The shares are subject to pro-rata forfeiture in the event that Mr. Shoham does not serve his full term of two years as director. In addition, on February 29, 2012 the Company appointed Mr. Shoham as the chairman of the board for a period of two years and granted him with additional 17,700 shares.
On February 20, 2012 Chief Executive Officer and the former Chairman of the Board exercised 147,291 options granted to them on May 13, 2010 into Company shares. The options exercise price was deducted from Company's debt to Chief Executive Officer and the former Chairman of the Board.
On February 20, 2012 the Company approved the grant of 35,399 common shares to a consultant of which 17,700 shares are subject claw-back provision, according to which in the event that the Company has not closed 6 additional deals within 18 months from the effective date as detailed in the consulting agreement, such shares would be returned to the Company. The shares under such agreement have not yet been issued as of the date of the approval of the financial statements.
On February 21, 2012, the Company executed a promissory note (the “Promissory Note”) pursuant to which it borrowed $30,000 from Jean-Marc Karouby, M.D., an individual residing in France (the “French Lender”). Part of the consideration for the Promissory Note was the issuance of 24,779 shares of common stock of the Company. In connection with such issuance of shares, the Company also granted to the French Lender piggy-back registration rights.
The maturity date of the Promissory Note was November 20, 2012. Under the terms of the Promissory Note, interest accrues on the basis of a 270-day year at a rate of 18% per annum or at a higher rate of 24% per annum if such higher rate is permissible under Nevada law. The Promissory Note is governed under the laws of Nevada. The default rate of interest under the Promissory Note is 35% per annum, and a default shall be declared upon a declaration by the Company of bankruptcy under Chapter 7 or Chapter 11 under the applicable federal United States bankruptcy laws or upon the failure to make payments when due on or before 10 days after an applicable due date. Monthly interest payments of $600 are due on or before the 20th of each month while the Promissory Note remains outstanding. In addition to payment of the default interest rate and principal, upon a default the Company shall also issue to the French Lender additional shares of its common stock equal to 150% of the value of the principal and interest due converted at the applicable trading price for the Company’s shares at the time of default. Cash payments due under the Promissory Note have been personally guaranteed by Shlomo Palas, the Company’s Chief Executive Officer. On November 11, 2012 the Company repaid the promissory note in full.
On June 1, 2012 the Company issued to a consultant 8,850 shares. Such shares are restricted from transfer for a period of 12 months from the dates of its issuance.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
During April 2012, third parties converted $110 thousand of the Principal amount of the Asher notes into 255,691 shares of the Company (a conversion price of $0.4497626 per share) (see further information above).
On July 17, 2012 the Company issued to Fidelity 20,649 shares of the Company on account of the placement agreement with Fidelity.
On August 30, 2012 the Company issued to Jelton 22,124 shares of the Company on account of the security purchase agreement with Jelton.
On October 25, 2012 the Company entered into a Subscription Agreement with a non-US investor for the sale of 88,496 shares of common stock for an aggregated amount of $20,000.
On October 25, 2012 the Company entered into an agreement with a non-US investor to sell 380,531 shares of common stock for an aggregated amount of $50,000.
On November 5, 2012 the Company entered into an agreement with a non-US investor to sell 265,487 shares of common stock at December 25, 2012 for an aggregated amount of $70,000.
On November 5, 2012 the Board of Directors of the Company approved the issuance of 53,098 shares of the Company to its Chief Executive officer, 44,248 shares to the Chairman of the Board, 44,248 shares to the Executive Vice-President and 35,399 shares to the Chief Carbon Officer and general counsel of the Company.
On November 20, 2012, the Company agreed to issue 331,859 shares of the Company. Such shares have been issued on January 11, 2013 and were valued based on the share price of the Company to be $101 thousands.
On December 20 2012, the Company entered into an agreement with a non-US investor to sell 309,735 shares of common stock at a price of $0.32286 per share for $100,000 and to purchase another 154,868 shares of common stock for $50,000 in January 2013 and another 154,868 shares of common stock for $50,000 in February 2013. Additionally, the Company was (i) obligated to issue such investor 88,496 shares of common stock in February 2013 at no additional cost and (ii) issue to such investor an option to purchase 66,372 shares of common stock for one year for 2.26 per share and to purchase 66,372 shares of common stock for two years at a price per share of $4.52.
The Company has estimated the aggregate fair value of such options granted using the Black-Scholes option pricing to be approximately $76,000.
On January 3, 2013, the Company signed a consulting agreement with Emerging Market Consulting, LLC (the “EMC”). According to the agreement, EMC would assist the Company with the design, development and dissemination of corporate information for a period of three month with an option to extend the agreement for an additional nine months. The Company paid EMC $11,000 and issued 39,824 restricted shares of the Company common stock, for the first period. The Company evaluated the cost of such issuance based on the share price of the Company to be $11 thousand. The Company elected not to renew the agreement and the agreement expired on April 3, 2013.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
On February 2, 2013 the Company issued 451,328 shares of common stock to an investor for an aggregate amount of $50,000.
On February 19, 2013, the Company signed a subscription agreement with a non-US investor pursuant to which such investor agreed to invest an aggregate of $75,000 into the Company in three installments: (i) $25,000 on March 10, 2013, (ii) $25,000 on April 10, 2013 and (iii) $25,000 on May 10, 2013. For each $25,000 invested, the Company was obligated to issue 88,496 shares of common stock to the investor. As of September 30, 2013 the investor transferred to the Company all three installments and the Company issued to the investor 265,487 shares. In addition, the non-US investor invested an additional $25,000 for an additional 88,496 shares of common stock of the Company.
On February 20, 2013, the Company signed a subscription agreement with a non-US investor pursuant to which such investor agreed to invest an aggregate of $50,000 into the Company in three installments: (i) $16,600 on March 10, 2013, (ii) $16,600 on April 10, 2013 and (iii) $16,700 on May 10, 2013. Upon receipt of each installment, the Company was obligated to issue 146,903 shares of common stock to the investor. As of September 30, 2013, the Company received all three installments totaling $50,000 and issued 440,708 shares. Additionally, on May 23, 2013 the Company issued 35,399 shares of the Company for $4,000 to the non-US investor under the same terms of the agreement above.
On March 18, 2013 the Board of Directors of the Company approved the issuance of 53,098 shares of the Company to its Chief Executive Officer, 44,248 shares to the Chairman of the Board, 44,248 shares to the Executive Vice-President and 35,399 shares to the Chief Carbon Officer and general counsel of the Company.
On April 30, 2013 the Board of Directors of the Company approved the issuance of 230,089 shares of the Company and 203,089 options to its Chief Executive officer, 203,540 shares and 203,540 options to the Chairman of the Board, 168,142 shares and 168,142 options to the Executive Vice-President and 88,496 shares and 88,496 options to both the Chief Carbon Officer and general counsel of the Company and for the CTO of Company. The shares and options will vest over a two year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant.
In May and July 2013, the Company issued 495,576 shares of common stock to an investor for an aggregate amount of $49,315.
On June 19, 2013 the Board of Directors of the Company approved the issuance of 53,098 shares of the Company to its Chief Executive officer, 44,248 shares to the Chairman of the Board, 44,248 shares to the Executive Vice-President and 35,399 shares to the Chief Carbon Officer and general counsel of the Company.
On June 19, 2013 the Company entered into an agreement with a third party. In exchange for his services the Company issued the third party 176,992 shares of common stock of the Company. On June 23, 2013, the Company signed an additional agreement with the third party according to which the Company issued additional 156,611 shares of common stock of the Company.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
On June 19, 2013 the Company entered into an agreement with a non-US investor to sell 132,744 shares of common stock for an aggregate amount of $50,000.
On June 19, 2013 the Company entered into an agreement with a non-US investor to sell 53,634 shares of common stock for an aggregate amount of $20,000.
On June 26, 2013 the Company entered into an agreement with a non-US investor to sell 53,098 shares of common stock for an aggregate amount of $20,000.
On June 26, 2013 the Company signed a Capital Markets Advisory Consulting Agreement with Incline Partners, LLC (“Incline”). According to the agreement, Incline agreed to provide the Company with capital market advisory and monthly distribution of articles and media for a period between June 15, 2013 through August 15, 2013. In consideration for the above services, the Company paid Incline a cash payment of $28,000 and issued 88,496 restricted shares of the Company common stock.
On July 22, 2013 the Company entered into an agreement with a non-US investor to sell 268,169 shares of common stock for an aggregate amount of $100,000.
On September 3, 2013 the Company entered into an agreement with a non-US investor to sell 268,169 shares of common stock for an aggregate amount of $100,000.
On October 13, 2013 a non-US investor converted $87,000 principal loan for 384,956 shares of the Company’s common stock.
On October 13, 2013, a non-US investor converted $37,000 principal loan for 163,717 shares of the Company’s common stock.
During October 2013, holders of $47,878 of principal amount of Asher convertible notes converted their notes into 402,276 shares of the Company's common stock.
On October 8, 2013, the Company issued 88,496 shares of common stock for consulting services.
On November 5, 2013, the Company’s subsidiary, Eastern Sphere, Ltd., entered into an agreement with an investor providing for the issuance of 491,642 shares of the Company’s common stock in consideration for $100,000.
On November 14, 2013, the Company’s subsidiary, Eastern Sphere, Ltd., entered into an agreement with an investor providing for the issuance of 146,016 shares of the Company’s common stock in consideration for $29,107.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
On December 4, 2013, the Company entered into an agreement with an investor that agreed to provide collateral in the amount of 353,200 Euro ($480,000) to enable the Company to receive a letter of credit in respect of the Company’s North Carolina project. In consideration for providing the collateral, the investor shall be entitled to a 4% ownership stake in the North Carolina project companies and was issued 44,248 shares of the Company’s common stock. Mr. Shlomi Palas personally guaranteed the Company’s obligations under the agreement with the investor. In addition, in accordance with the agreement, the Company issued to the investor a convertible note due on March 4, 2014 in the principal amount of 353,200 Euro bearing interest at 1% per month, payable on a monthly basis. On or after March 4, 2014, any outstanding and unpaid principal under the convertible note is convertible into the Company’s shares of common stock based on the then applicable market price of the Company’s shares. The Company and the investor have verbally agreed to extend the maturity of such convertible note indefinitely and, in the meantime, the Company continues to make 1% interest payments on a monthly basis.
On December 13, 2013 the Board of Directors of the Company approved the issuance of 424,779 shares of the Company to its Chief Executive Officer, 353,982 shares to the Chairman of the Board, 353,982 shares to the Executive Vice-President and 283,186 shares to the Chief Carbon Officer and general counsel of the Company. Such shares were issued at January 9, 2014.
On December 15, 2013, the Company agreed to issue 600,000 shares of common stock to a consultant providing investor relation services. The shares are to be issued in three tranches of 200,000 each, the first within 10 days of entering into the agreement, the second on the four month anniversary of the agreement and the final on the eight month anniversary of the agreement. The first tranche of 200,000 shares was issued on January 9, 2014. During October 2014, the Company terminated the investor relation service agreement.
On January 9, 2014, the Company issued 265,486 shares of common stock to an investor for $25,000 in cash.
On January 9, 2014, the Company issued 345,132 shares of common stock for consulting services.
On January 9, 2014, the Company issued 17,700 shares of common stock for consulting services.
On January 26, 2014, the Company signed a subscription agreement with Talya Levy-Tytiun ("Talya") pursuant to which Talya agreed to invest an aggregate of $400,000 into the Company for the sale of 1,739,130 shares of common stock. The Company was obligated to issue Talya additional shares of the Company, if, six months from the date of the agreement her ownership in the Company would be reduced below 12.3%. In addition, the Company guaranteed that if on the first anniversary of the agreement, the share price of the Company common stock was 0.23$ per share or less, the Company shall transfer Talya such amount necessary to make Talya whole and reimburse her for any loss due to her investment. On September 17, 2014 the Company issued Talya 2,866,194, shares of common stock as a reimbursement under the above agreement.
On February 7, 2014, the Company issued an aggregate of 1,200,000 shares of our common stock to CTW - Changing the World Technologies, Ltd. (“CTW”) in exchange for (i) an investment of $77,000 (for which CTW received 385,000 shares of common stock) and (ii) the provision of financial engineering services (for which CTW received 815,000 shares of common stock).
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
On March 5, 2014 Eastern Institutional Funding, LLC purchased $68,750 of the Company’s 20% notes due one year from such date that are convertible into shares of the Company’s common stock at a discount of 50% from the lowest trade price over the last 20 days from the date of conversion. On March 21, 2014, Capitoline Ventures II, LLC purchased $68,750 of the Company’s 20% notes due one year from such date that are convertible into shares of the Company’s common stock at a discount of 50% from the lowest trade price over the last 20 days from the date of conversion. As of June 30, 2014, the Company issued 5,114,073 shares of common stock in respect of the above notes and the remaining 1,320,000 shares were issued on July 2014.
On March 10, 2014 the Board of Directors of the Company approved the issuance of 250,000 shares of the Company to its Chief Executive Officer, 220,000 shares to the Chairman of the Board, 200,000 shares to the Executive Vice-President and 180,000 shares to the Chief Carbon Officer and general counsel of the Company.
On April 22, 2014 the Company signed a Consulting Services Agreement with a non-US person pursuant to which, the Company agreed to issue 4,000,000 shares of its common stock in exchange for consulting services to include, but not be limited to, advice on investor relations, public relations, transaction structuring, ongoing introductions to investors and strategic initiatives. The agreement is effective for one year commencing September 1, 2013. During the third quarter of 2014, the Company issued 3,350,000 shares of common stock in the Company.
During the third quarter of 2014, the Company signed several investment agreements according to which the Company issued 880,000 shares of common stock the Company for total consideration of $109,721 in cash. In addition, the investors received options to purchase 822,500 shares of common stock of the Company for an exercise price of 0.10 cent per share.
During the third quarter of 2014, the Company signed several investment agreements according to which the Company issued 759,041 shares of common stock the Company for total consideration of $77,127 in cash. In addition, the investors received options to purchase 759,041 shares of common stock of the Company for an exercise price of 0.10 cent per share and 759,041 shares of common stock of the Company for an exercise price of 0.13 cent per share.
During the third quarter of 2014, the Company signed several investment agreements according to which the Company issued 352,805 shares of common stock the Company for total consideration of $98,784 in cash. In addition, the investors received options to purchase 352,805 shares of common stock of the Company for an exercise price of 0.60 cent per share.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
On May 1, 2014, the Company signed a consulting agreement with an investor according to which the company shall issue 2,819,000 shares of common stock of the Company and warrants to purchase 1,193,000 shares of common stock of the Company at an exercise price of $0.10 for one year commencing May 1, 2014. On September 22, 2014 the Company issued the consultant, 2,484,000 shares of common stock of the Company under the above agreement. In addition, on September 22, 2014 the Company issued 963,000 shares of common stock the Company to the consultant, for total cash consideration of $52,708. In addition, on May 1, 2014 the Company signed an agreement with the consultant according to which the consultant would provide investor relations services for a period of 12 months. Based on the agreement the Company issued the consultant 300,000 shares of the Company and 1,500,000 options to purchase shares of the Company at an exercise price of 0.10 cent per share. The options expire after 5 years. In addition, the Company agreed to issue 500,000 additional shares upon fulfillment of other conditions set in the agreement. The Company evaluated the fair value of the 300,000 shares and 1,500,000 options issued at $90,000 and $151,434, respectively.
On May 2, 2014 the Company signed an agreement with a consultant according to which the consultant would provide investor relations services for a period of 12 months. Based on the agreement the Company issued the consultant 211,084 shares of the Company. The Company evaluated the fair value of the 211,084 shares at $41,518.
On May 25, 2014 the Company signed an agreement with a consultant according to which the consultant would provide investor relations services for a period of 6 months. Based on the agreement the Company issued the consultant 350,000 shares of the Company and 350,000 warrants to purchase shares of the Company at an exercise price of 0.20 cent per share. The options expire after 6 month. In addition, the Company agreed to issue 150,000 additional shares after 6 month from the date of the agreement and additional 150,000 shares for $0.20 per share, and pay the consultant NIS 18,000 per month during the agreement term. The Company evaluated the fair value of the 300,000 shares at $54,600. In addition the company recorded an expense related to the warrants issued of $28,310.
On June 1, 2014 the Company signed an investment agreement with a third party according to which the Company issued 179,856 shares of common stock the Company for total consideration of $28,874 in cash. In addition, the investor received options to purchase 179,856 shares of common stock of the Company for an exercise price of 0.25 cent per share.
During the third quarter of 2014, the Company signed several investment agreements according to which the Company issued 199,039 shares of common stock the Company for total consideration of $19,904 in cash. In addition, the investors received options to purchase 199,039 shares of common stock of the Company for an exercise price of 0.13 cent per share and 199,039 shares of common stock of the Company for an exercise price of 0.16 cent per share.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
On June 18, 2014 the Company signed an advisory board agreement with an accredited investor according to which the investor will serve on the Company’s advisory board for a period of one year from the date of the agreement unless otherwise extended by the parties. For his services, the advisor is entitled to 150,000 shares of the Company’s common stock of which75,000 vest on the date of the agreement and the remaining amount in three quarterly 25,000 shares, beginning 90 days from the date of the agreement.In addition the advisor is entitled to receive 150,000 warrants of the Company's common stock. The warrants vest in 4 equal amounts over a period of twelve (12) months, the initial amount vesting on the agreement date. The warrants will allow the director to purchase the common stock of the Company for a period of 3 years from the agreement date. The warrants shall be exercisable in the following amounts: 1/3 at $0.30 a share, 1/3 at $0.40 a share, and 1/3 at $0.50 a share. In the event the advisor ceases to be a member of Board at any time during the vesting period for any reason, then any unvested warrants or unvested shares shall be irrefutably forfeited. On July 10, 2014 the Company issued 75,000 shares on account of such agreement.
At April and June 2014 the Company signed three agreements with a non-US investor who provided the Company with several loans amounted to $78,400, according to which the investor converted his balance of loans into 800,892 shares of common stock of the Company. In addition, the Company issued the non-US investor invested 380,435 shares of common stock of the Company for total cash consideration of $69,000.
On July 3, 2014 the Company issued 1,250,000 shares of common stock the Company to an investor for total cash consideration of $75,000.
On July 29, 2014 the Company issued 144,054 shares of common stock the Company to an investor for total cash consideration of $34,522. In addition, the investor received options to purchase 144,054 shares of common stock of the Company for an exercise price of 0.32 cent per share.
During July 2014, the Company issued a non-US investor 190,000 shares of common stock pursuant to a convertible loan agreement dated June 2013.
During July and August 2014, the Company issued a non-US investor 3,969,133 shares of common stock of which 650,000 were issued pursuant to the April 22, 2014 Consulting Services Agreement signed with the non-US person and the remaining were issued pursuant to the August 21, 2014 consulting agreement.
On July 10, 2014 a loan in the amount of $24 thousand amount was converted into 115,000 shares of the Company. In addition, the Company granted the investor additional 75,000 shares for granting the loan.
During July through September, 2014 the Company issued a consultant, 2,177,000 shares of common stock of the Company under his September 10, 2013 and April 22, 2014 consulting agreements.
On September 21, 2014, the Company issued 280,592 shares of common stock of the Company for total cash consideration of $59,000.
On September 21, 2014 the Company issued 48,183 shares of common stock the Company for total cash consideration of $11,557. In addition, the investor received options to purchase 48,183 shares of common stock of the Company for an exercise price of 0.32 cent per share.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMON SHARES: (continue)
Reverse stock split
On November 26, 2013, the Company amended and restated its Articles of Incorporation to authorize the issuance of 500,000,000 shares of preferred stock, $0.001 par value, in one or more series and with such rights, preferences and privileges as its Board of Directors may determine and to effect a 1 for 113 reverse stock split of the Company’s outstanding common stock. In addition, the Amended and Restated Articles of Incorporation provide, among other things, for indemnification and limitations to the liability of the Company’s officers and directors.
As a result of the reverse stock split, which became effective on December 4, 2013, every 113 shares of the Company’s outstanding common stock prior to the effect of that amendment was combined and reclassified into one share of the Company’s common stock, and the number of outstanding shares of the Company’s common stock was reduced from 1,292,103,309 to 11,434,611 shares.
All share, stock option and per share information in these consolidated financial statements have been restated to reflect the stock split on a retroactive basis.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK OPTIONS:
The 2010 share option plan was established on March 3, 2010.
The following table presents the Company’s stock option activity for employees and directors of the Company for the years ended September 30, 2012 through 2014:
The fair value of the stock options granted in 2013 was estimated using the Black-Scholes option valuation model that used the following assumptions:
The fair value of the options granted above using the Black-Scholes model is $0.565 per option.
The fair value of the stock options granted in 2014 was estimated using the Black-Scholes option valuation model that used the following assumptions:
The fair value of the options granted above using the Black-Scholes model is between $0.190 to $0.214 per option.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - STOCK OPTIONS (continue)
Costs incurred in respect of stock based compensation for employees and directors, for the year ended September 30, 2014, 2013 and 2012 were $1,711, $203 and $2,956 thousands respectively.
The following table summarizes information about options and warrants to employees, officers and directors outstanding at September 30, 2014 under the plans:
NOTE 6 - INCOME TAXES:
US resident companies are taxed on their worldwide income for corporate income tax purposes at a statutory rate of 35%. No further taxes are payable on this profit unless that profit is distributed. If certain conditions are met, income derived from foreign subsidiaries is tax exempt in the US under applicable tax treaties to avoid double taxation.
Taxable income of Israeli companies is subject to tax at the rate of 24% in 2011 and 25% in 2012 and 2013 and 26.5% in the year 2014 and onwards.
The Company accounts for income taxes using the liability method, which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Deferred tax assets are adjusted by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred income taxes reflect the net effects of temporary differences between the amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The breakdown of the deferred tax asset as of September 30 2013, 2012 and 2011 is as follows:
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (continue)
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Management has determined, based on its recurring net losses, lack of a commercially viable product and limitations under current tax rules, that a full valuation allowance is appropriate.
Carry forward losses of the Israeli subsidiary are approximately $2,046 thousand at September 30, 2014.
NOTE 7 - NET LOSS PER SHARE DATA:
The shares issuable upon the exercise of options, and conversion of convertible notes and warrants, which have been excluded from the diluted per share amounts because their effect would have been anti-dilutive, include the following:
NOTE 8 - OTHER LOSS:
On January 31, 2012, the Company lent an Israeli company, CTG Clean Technology Group Limited (the “Borrower”), U.S. $30,000 at an annual rate of interest of eight percent (8%). The purpose of this loan was to provide the borrower capital to continue its operations while the Company considered acquiring such company. On February 8, 2012, the Company received the cash to make such loan to the Borrower from a Cyprus company (JLS Investment Holding). The Borrower pledged the revenues from its Angolan waste-water project toward the repayment of the principal and interest of this loan. Management is in negotiations with CTG with respect to repayment of such loan together with accrued and unpaid interest, however, to-date, the Company has not received any payment whatsoever from the borrower therefore such loan had been written-off in whole in the financial statements for the year ended September 30, 2013.
BLUE SPHERE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SUBSEQUENT EVENTS:
On October 16, 2014, Asher converted $42,500 principal amount out of the April 11, 2014 notes for 471,967 shares of the Company’s common stock.
On October 28, 2014 the Company issued 335,000 shares of the Company’s common stock, in connection with the May 1, 2014 service agreement as detailed in note 4 above.
On December 8, 2014 the Company issued 209,041 shares of the Company’s common stock to Carter Terry, in connection with the issuance of as detailed in note 3 above.
During October and December 2014, the Company issued convertible promissory notes (the “Notes”) to accredited investors in an aggregate principal amount of $191,250 for an aggregate purchase price of $170,000. The Notes mature one-year from the date of issuance and accrue interest at rates ranging from 8% to 10% per annum and in an event of default, the Notes bear interest at rates ranging from 16% to 24% per annum. The Notes may generally be converted into shares of the Company’s common stock at a conversion price discount to lowest trade or closing price during periods in proximity to the time of conversion subject to increases in the discount in certain cases such as a DTC “chill”.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’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 officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was completed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2013. Based on that evaluation, our officers concluded that our disclosure controls and procedures were not effective in providing reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act was recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms.
Evaluation of Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting”, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement. An evaluation of effectiveness is subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may decrease over time.
Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized use, acquisition, or disposition of our assets that could have a material effect on the consolidated financial statements.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the year ended September 30, 2014. In making this assessment, we utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework.
A material weakness is a deficiency or a combination of deficiencies in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based upon that evaluation, we concluded that our internal controls over financial reporting were not effective as of September 30, 2014. Specifically, during our assessment of the effectiveness of internal control over financial reporting as of September 30, 2014, management identified material weaknesses related to the lack of segregation of duties and the need for stronger financial reporting oversight. Due to our limited resources, we do not have multiple levels of transaction review. Additionally, we do not have a formal audit committee, and the Board of Directors does not have a financial expert, thus we lack the board oversight role within the financial reporting process.
Our management is in the process of determining how best to change our current system and implement a more effective system of controls and procedures. However, given limitations in financial and manpower resources, we may not have the resources to address fully the weaknesses in controls. No assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the year ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
The following disclosure would have otherwise been filed on Form 8-K under the heading “Item 1.01 Entry into a Material Definitive Agreement”, “Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant” and “Item 3.02 Unregistered Sales of Equity Securities”:
Between September 17, 2014 and December 3, 2014, we issued convertible promissory notes (the “Notes”) to accredited investors in an aggregate principal amount of $516,250 for an aggregate purchase price of $316,250, with a Note in the principal amount of up to $250,000 subject to further funding of up to $175,000 in the discretion of the holder at any time in the future.
Notes in the principal amount of $266,250 mature one-year from the date of issuance and a Note in the principal amount of up to $250,000 matures two years from the date of payment. The Notes accrue interest at rates ranging from 8% to 12% per annum and in an event of default, the Notes bear interest at rates ranging from 12% to 24% per annum. The Notes may generally be converted into shares of our common stock at conversion prices ranging from 37% to 42% discounts to our lowest trade or closing prices during periods in proximity to the time of conversion subject to further discounts in the case of certain events of default.
The Notes include customary default provisions related to payment of principal and interest and bankruptcy or creditor assignment. In addition, it shall constitute an event of default under certain of the Notes if we are delinquent in our filings with the Securities and Exchange Commission, cease to be quoted on the OTCQB, or our common stock is not DWAC or DTC eligible. In the event of an event of default the Notes may become immediately due and payable at premiums to the outstanding principal. The Notes also provide that if shares issuable upon conversion of the Notes are not timely delivered in accordance with the terms of the Notes then we shall be subject to certain cash penalties that increase proportionally to the duration of the delinquency.
The Note in the principal amount of up to $250,000 may be prepaid at a premium at any time during the first 90 days from issuance and may not be prepaid thereafter and Notes in the principal amount of $266,250 may be prepaid at a premium to the outstanding principal or funded amount during the first 180 days from issuance but may not be prepaid thereafter.
The Company paid aggregate commissions of $7,500 to MD Global Partners, LLC and $46,000 to Carter Terry & Company (“Carter Terry”), registered broker-dealers, in connection with the issuance of some of Notes in the aggregate principal of up to $480,000. In addition, Carter Terry is entitled to a further amount of shares of our common stock equal to 4% of capital raised by them divided by the closing price of our common stock on the date of close.
Additional covenants, representations, and warranties between the parties are included in the Notes and any accompanying Securities Purchase Agreement that was entered into.
The foregoing are summaries of certain terms and agreements discussed herein. These summaries do not purport to be complete and are qualified in their entirety by reference to the full text of any Securities Purchase Agreement and Notes, filed as exhibits to this Annual Report on Form 10-K.
The securities above were offered and sold pursuant to an exemption from the registration requirements under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering and the securities were acquired for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers and Directors
The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each. There are no family relationships among any of our directors and executive officers.
Name
Age
Position
Joshua Shoham
Chairman of the Board.
Shlomo Palas
Chief Executive Officer and Director
Roy Amizur
Executive Vice President
Shlomo Zakai
Chief Financial Officer
Mark Radom
General Counsel and Chief Carbon Officer
Joshua Shoham - Chairman of the Board
Mr. Shoham became our Chairman on March 2, 2012. Mr. Shoham has extensive experience in senior executive management and in international business development in the USA, Europe and China. He held several General Manager positions, e.g. the General Manager of the Israeli subsidiary of International Paper (a Fortune 100 Company), and was co-founder of several high-tech startups (e.g. Infowrap Systems). Mr. Shoham was also a strategic market development consultant responsible for a range of transactions in the Israeli and Chinese traditional and high-tech industries, e.g. initiating a joint venture between Saifun Semiconductors and Infineon, which resulted in Infineon becoming an equity partner in Saifun and Saifun going public on NASDAQ. He has served for six years as a Board of Directors Member in Bio-Cell (TASE: BCEL), which reversed merged its activities into Protalix Biotherapeutics (AMEX: PLX; TASE: PLX). Mr. Shoham holds an MBA and a B.A. in Economics, both from the Hebrew University of Jerusalem, and an LL.B degree from the Faculty of Law of Tel-Aviv University. The Board has determined that Mr. Shoham is qualified to serve on the Board as a result of his extensive experience in senior management and international business development.
Shlomo Palas - Chief Executive Officer and Director
Mr. Palas became our Chief Executive Officer and director on March 3, 2010. Mr. Palas is a highly experienced entrepreneur who has held executive positions at a number of leading Israeli firms. From 2005 to 2010, he served as an entrepreneur advising companies in the biodiesel industry. Prior to that he was a senior consultant with Mitzuv, a leading management consulting firm, and before joining Mitzuv, he served in a variety of marketing roles. For the past four years, Mr. Palas has specialized in the renewable and clean tech industries. He has gained significant experience in renewable and clean tech manufacturing, off-take contracts with leading petrol companies, legal/financial structuring, and fundraising for these industries. He has also developed a large network in private and government sectors in many cities across China. Mr. Palas served as Chief Executive Officer of Becco Biofuels China Ltd., which was a company active in the biofuel industry. Mr. Palas participated in the establishment of the largest commercial algae farm in China together with one of China’s largest electrical utilities. Mr. Palas holds a B.A. in Statistics and Management from Haifa University and an M.S. from Baruch College. The Board has determined that Mr. Palas is qualified to serve on the Board as a result of his significant experience in renewable and clean tech manufacturing and his management and entrepreneurial experience.
Roy Amitzur - Executive Vice President
Mr. Amitzur has served as our Executive Vice President since August 2011. Since 2008, Mr. Amitzur has served as President of Clean Technologies Group Ltd, a holding and integration company specializing in investment in water technologies and water and waste water project execution. In addition, Mr. Amitzur has managed a number of start-up companies including, Bio Pure Technology Ltd., Proxy Aviation Systems, Inc., and Aquarius Technologies Inc. Mr. Amitzur has significant experience in implementing BOT and turn-key projects in water technologies and water and waste water execution around the world.
Shlomo Zakai - Chief Financial Officer
Mr. Zakai has served as our Chief Financial Officer since January 9, 2012. Mr. Zakai is an expert in finances with many years of experience with U.S. public companies. He established his own accounting firm in 2004, providing a range of services to publicly traded companies as well as private companies, and he has served as controller and Chief Financial Officer of a number of private companies. Mr. Zakai serves as the internal auditor of several Israeli traded companies and oversees Sarbanes-Oxley compliance in several U.S. and Israelis traded companies. He has worked as an accountant for nine years in the hi-tech department of Kost, Forer, Gabbay & Kasierer, an independent registered public accounting firm and a member firm of Ernst & Young Global, where he last served as a senior manager and worked with companies publicly traded on NASDAQ and in Israel. Mr. Zakai is a CPA (Certified Public Accountant) and holds a B.A. in Accounting from the College of Management in Rishon Le'Zion.
Mark Radom - Chief Carbon Officer and General Counsel
Mr. Radom has served as our Chief Carbon Officer and General Counsel since October 25, 2010. From 2007 to 2009, Mr. Radom was general counsel and chief operating officer of Carbon Markets Global Limited, a London-based carbon credit and renewable energy project developer. From 2009 through 2010, Mr. Radom was managing director of Carbon MPV Limited, a Cyprus company focused on developing carbon credit and renewable energy projects. Mr. Radom has extensive experience in the carbon and renewable energy sector. He was legal counsel for a number of carbon and ecological project developers and was responsible for structuring joint ventures and advising on developing projects through the CDM/JI registration cycle and emission reduction purchase agreements. He advised aviation companies on the inclusion of aviation in the third phase of the EU ETS and was an executive of a European-based developer and integrator of carbon and ecological projects. Mr. Radom has experience in identifying and implementing promising industrial gas (N2O and SF6), methane (landfill, compost, coal mine, waste water and associated gas), fuel switch (from diesel to natural gas) and a range of renewable energy projects (wind, solar and biogas to energy). Mr. Radom has assisted in the preparation of project design documents and has prepared complex projects for validation. Prior to this, he worked on Wall Street and in the City of London as a US securities and capital markets lawyer where he represented sovereigns, global investment banks and fortune 500 companies across a broad range of capital raising and corporate transactions. He is a graduate of Duke University and Brooklyn Law School. Mr. Radom is admitted to practice law in New York and New Jersey and speaks fluent Russian.
Our directors, executive officers and control persons have not been involved in any of the following events during the past ten years:
(1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and
(4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Election of Directors
Our directors are elected by the vote of a majority in interest of the holders of our voting stock and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified. The Board of Directors may also appoint additional directors to fill vacancies up to the maximum number permitted under our by laws.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent in writing to the action.
Board Independence
We currently have three directors serving on our Board of Directors. We are not a listed issuer and, as such, are not subject to any director independence standards. Using the definition of “independent director,” as defined by Section 5605(a)(2) of the rules of the Nasdaq Stock Market, neither of our directors would be considered an independent director.
Committees
Due to our small size, we do not currently have a standing audit, nominating or compensation committee of the board of directors, or any committee performing similar functions. Our board of directors currently performs the functions of audit, nominating and compensation committees.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the Board of Directors or compensation committee of any other entity that has one or more of its executive officers serving as a member of our Board of Directors.
Code of Ethics
At present, we have not adopted a Code of Ethics applicable to our principal executive, financial and accounting officers; however, our Board is considering implementation of such a Code in the near future.
Board Leadership Structure
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have determined that it is currently in the best interests of the Company and its shareholders to separate these roles. Mr. Shoham has served as our Chairman since March 2, 2012, and Mr. Shlomo Palas has been our Chief Executive Officer and a director since March 3, 2010.
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board of Directors focuses on the most significant risks facing us and our general risk management strategy, and also ensures that risks undertaken by us are consistent with the board’s appetite for risk. While the Board oversees our risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.
Board’s Role in Risk Oversight
The Board assesses on an ongoing basis the risks faced by us. These risks include financial, technological, competitive, and operational risks. The Board dedicates time at each of its meetings to review and consider the relevant risks faced by the Company at that time. In addition, since the Company does not have an Audit Committee, the entire Board is also responsible for the assessment and oversight of the Company’s financial risk exposures.
Compliance under Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by the SEC to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of copies of reports furnished to us, or written representations that no reports were required, we believe that during the year ended December 31, 2014, our executive officers, directors and 10% holders complied with all filing requirements, with the following possible exceptions: Form 3s have not been filed for Joshua Shoham, Yigal Brosh, Roy Amitzur and Shlomo Zakai and Form 4s have not been filed for Shlomo Palas, Joshua Shoham, Roy Amitzur and Mark Radom with respect to various grants of shares made to them during the year ended December 31, 2014.
Item 11.
Item 11. Executive Compensation
Summary Compensation
The table below sets forth, for our last two fiscal years, the compensation earned by Shlomo Palas, our Chief Executive Officer, Shlomo Zakai, our Chief Financial Officer, Roy Amitzur, our Executive Vice President, Mark Radom, our Chief Carbon Officer and general counsel.
Outstanding Equity Awards at Fiscal Year-End
As of September 30, 2014, the following named executive officers had the following unexercised options, stock that has not vested, and equity incentive plan awards:
(1) The share amounts and share prices set forth in the table and footnotes give retroactive effect to our 1 for 113 reverse stock split which was effected on December 4, 2013.
(2) On April 30, 2013, Mr. Shoham was granted 168,142 shares of our common stock and options to purchase 168,142 shares of common stock, each of which will vest over a two-year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. The options are exercisable for 5 years at an exercise price of $0.5763 per share
(3) On April 30, 2013, Mr. Palas was granted 230,089 shares of our common stock and options to purchase 230,089 shares of common stock, each of which will vest over a two-year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. The options are exercisable for 5 years at an exercise price of $0.5763 per share.
(4) On April 30, 2013, Mr. Amitzur was granted 168,142 shares of our common stock and options to purchase 168,142 shares of common stock, each of which will vest over a two-year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. The options are exercisable for 5 years at an exercise price of $0.5763 per share.
(5) On April 30, 2013, Mr. Radom was granted 88,496 shares of our common stock and options to purchase 88,496 shares of common stock, each of which will vest over a two-year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. The options are exercisable for 5 years at an exercise price of $0.5763 per share.
Employment Contracts and Termination of Employment Agreements
Shlomi Palas
On February 29, 2012, we entered into an employment agreement with Mr. Palas to serve as the Company’s Chief Executive Officer (“CEO”) for an indefinite term. This agreement was intended to extend the term of a previously entered into employment agreement with Mr. Palas whose term was expiring. As CEO, Mr. Palas, among other duties, is responsible for setting the overall corporate direction for us, including establishing and maintaining budgets for us and ensuring we have adequate capital for our operations, marketing and general corporate activities, all subject to any applicable law and to instructions provided by the Board of Directors. Under the agreement, Mr. Palas receives monthly remuneration at a gross rate of USD$10,000 + VAT. Mr. Palas will be entitled to participate in any bonus plan or incentive compensation plan for its employees adopted by us. Mr. Palas’ employment may be terminated at any time for no cause by any of the parties with a prior notice of six months and may be terminated at any time for cause or disability, as such terms are defined in the employment agreement.
On February 1, 2012, November 5, 2012 and March 18, 2013, Mr. Palas was issued 14,160, 53,098 and 53,098 shares of our common stock, respectively. On April 30, 2013, the Board of Directors authorized the issuance to Mr. Palas 230,089 shares of our common stock and options to purchase 230,089 shares of common stock, each of which will vest over a two year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. On June 19, 2013 and December 13, 2013, the Board of Directors authorized the issuance to Mr. Palas of 53,098 and 424,779 shares of our common stock, respectively. The foregoing share amounts give effect to the 1 for 113 reverse stock split which was effected on December 4, 2013.
Mark Radom
On April 10, 2013, we entered into a Service and Consulting Agreement with Mr. Radom to serve as our general counsel for an indefinite term devoting at least 75% of his time to us. This agreement was intended to supersede a previously entered into consulting agreement with Mr. Radom. As our legal counsel, Mr. Radom, among other duties, will assist us in the process of making strategic decisions, business development, project appraisal, project management and development, monetization of emissions reductions and offsets, financial analysis, transaction negotiation and structuring both in the USA and in other countries. Under the agreement, Mr. Radom is entitled to a monthly fee of $7,000 per month increasing to $10,000 per month upon either the financial closing of our first project and have sufficient cash to cover such amount or upon the date that we receive funds and compensation paid to other officers and advisors is increased. Both we and Mr. Radom have the right to terminate the agreement for any reason with prior notice of ninety days. We also have the right to terminate the agreement at any time for cause or disability, as such terms are defined in the agreement.
On February 1, 2012, November 5, 2012 and March 18, 2013, Mr. Radom was issued 4,425, 35,399 and 35,399 shares of our common stock, respectively. On April 30, 2013, the Board of Directors authorized the issuance to Mr. Radom 88,496 shares of our common stock and options to purchase 88,496 shares of common stock, each of which will vest over a two year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. On June 19, 2013 and December 13, 2013, the Board of Directors authorized the issuance to Mr. Radom of 35,399 and 283,186 shares of our common stock, respectively. The foregoing share amounts give effect to the 1 for 113 reverse stock split which was effected on December 4, 2013.
Roy Amitzur
On July 25, 2011, we, JLS and Roy Amitzur entered into a Management Services Agreement according to which JLS, a corporation owned by Mr. Amitzur, and Mr. Amitzur are engaged to provide management services to us devoting at least 75% of this time to us, with Mr. Amitzur serving as Executive Vice President. The term of the agreement was originally for two years and in July 2013, was extended for a further eight months. The agreement was further extended on the same terms on an oral basis. For services rendered under the agreement, JLS is entitled to a monthly fee of US$10,000 + VAT when applicable subject to us raising an aggregate amount of at least $450,000, which payments began in September 2012. Subsequently, such fee increases to a monthly fee of $15,000 + VAT after we raise an aggregate equity investment of $2,000,000. JLS is currently paid a monthly fee of $10,000 + VAT. In addition, we issued to JLS 110,620 shares of common stock (after giving effect to the 1 for 113 reverse stock split which was effected on December 4, 2013) vesting in equal amounts quarterly over 24 months, all of which have fully vested. JLS and Mr. Amitzur are entitled to participate on similar terms as the other executives of the Company in bonus plans or incentive compensation plans for its employees. Both we and JLS/Mr. Amitzur have the right to terminate the agreement for any reason with prior notice of ninety days. We also have the right to terminate the agreement at any time for cause or disability, as such terms are defined in the agreement.
Mr. Amitzur also received 9,514 shares of common stock (after giving effect to the 1 for 113 reverse stock split which was effected on December 4, 2013) on August 23, 2011 for his extraordinary contributions to us.
On November 5, 2012 and March 18, 2013, Mr. Amitzur was issued a further 44,248 and 44,248 shares of our common stock, respectively. On April 30, 2013, the Board of Directors authorized the issuance to Mr. Amitzur 168,142 shares of our common stock and options to purchase 168,142 shares of common stock, each of which will vest over a two year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. On June 19, 2013 and December 13, 2013, the Board of Directors authorized the issuance to Mr. Amitzur of 44,248 and 353,983 shares of our common stock, respectively. The foregoing share amounts give effect to the 1 for 113 reverse stock split which was effected on December 4, 2013.
Shlomo Zakai
On January 9, 2012, we and Shlomo Zakai entered into a Services Agreement engaging Mr. Zakai as our Chief Financial Officer. Under the agreement, Mr. Zakai was originally paid on an hourly basis of 220 NIS per hour and, following amendment of the agreement, from September 2012, is paid $1,500 per month plus NIS80-150 per hour for bookkeeping services. Commencing January 1, 2014, Mr. Zakai began to receive a variable monthly rate of $1,500 to $3,500. Both we and Mr. Zakai have the right to terminate the agreement for any reason with prior notice of thirty days.
Director Compensation
(1) Reflects the aggregate grant date fair value of stock awards granted during the relevant fiscal year calculated in accordance with FASB ASC Topic 718. See Notes 4 and 5 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2013.
On July 1, 2012, we entered into an advisory agreement with Joshua Shoham engaging him as a strategic advisor for five years in addition to his role as Chairman of the Board. Under the terms of the agreement, Mr. Shoham is entitled to $10,000 plus VAT per month increasing to $15,000 plus VAT at the end of the term. Mr. Shoham has the right to convert into shares of our common stock any unpaid and accrued fees due to him at the average trading price of our common stock during the 10 days prior to conversion. The agreement may be terminated by either party at any time for cause upon 12 months prior notice.
In connection with his retention as a director in February 2012, he was issued 35,400 shares of our common stock. Such shares are subject to pro rata forfeiture should Mr. Shoham resign from his directorship prior to the second anniversary of his joining the Board. On November 5, 2012 and March 18, 2013, Mr. Shoham was issued a further 44,248 and 44,248 shares of our common stock, respectively. On April 30, 2013, the Board of Directors authorized the issuance to Mr. Shoham 203,540 shares of our common stock and options to purchase 203,540 shares of common stock, each of which will vest over a two year period with 1/8 of the total amount of the shares and options vesting at the end of each quarter from the date of the grant. On June 19, 2013 and December 13, 2013, the Board of Directors authorized the issuance to Mr. Shoham of 44,248 and 353,983 shares of our common stock, respectively. The foregoing share amounts give effect to the 1 for 113 reverse stock split which was effected on December 4, 2013.
This compensation has been individually negotiated and any directors who subsequently serve on as a director may receive the same of different compensation as a director.
Currently, the Board has not determined standard, uniform compensation and expense reimbursement arrangements for all individuals serving only as a director. Uniform compensation and expense reimbursement arrangements for persons serving only as directors may be determined when more such individuals join the Board.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Stockholders
The following table sets forth certain information as of January 12, 2015 regarding the beneficial ownership of our common stock, by (i) each person or entity who, to our knowledge, owns more than 5% of our common stock; (ii) our named executive officers; (iii) each director; and (iv) all of our executive officers and directors as a group. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is 35 Asuta Street, Even Yehuda, Israel 40500. Shares of common stock subject to options, warrants, or other rights currently exercisable or exercisable within 60 days of January 12, 2015, are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the stockholder holding such options, warrants or other rights, but are not deemed outstanding for computing the percentage of any other stockholder.
* Less than 1%
(1) Based on 51,486,338 shares of common stock outstanding as at January 13, 2015.
(3) Includes 201,327 shares issuable upon options exercisable within 60 days following January 13, 2015.
(4) Includes 178,097 shares issuable upon options exercisable within 60 days following January 13, 2015.
(5) Includes 75,000 shares issuable upon options exercisable within 60 days following January 13, 2015.
(6) Includes 77,434 shares issuable upon options exercisable within 60 days following January 13, 2015.
(7) Includes 147,124 shares issuable upon options exercisable within 60 days following January 13, 2015. In addition, includes 910,489 shares of common stock owned by JLS Advanced Investment, a company controlled by Roy Amitzur.
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.
Item 13.
Item 13. Certain Relationships, Related Transactions and Director Independence
Except as set forth in Item 11 under “Executive Compensation” and as set forth below, there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
Item 14.
Item 14. Principal Accounting Fees and Services
Audit Fees
The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended September 30, 2014 and 2013 were $45,000 and $45,000 respectively.
Tax Fees
There were no fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended September 30, 2014 and 2013.
.
All Other Fees
There were no other fees billed for products or services provided by our principal accountant for the fiscal years ended September 30, 2014 and 2013.
The Company does not have an audit committee and, as such, has not reviewed, considered or otherwise approved any such fees.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
No. Description
3.1 Amended and Restated Articles of Incorporation dated November 22, 2013 (1)
3.2 Bylaws dated February 2, 2010 (2)
10.1 Amended and Restated Orbit Energy Charlotte, LLC Purchase Agreement dated as of November 19, 2014 between Blue Sphere Corporation and Orbit Energy, Inc.
10.2 Amended and Restated Orbit Energy Rhode Island, LLC Purchase Agreement dated as of January 7, 2015 between Blue Sphere Corporation and Orbit Energy, Inc.
10.3 Amended and Restated Construction Financing Agreement dated as of June 6, 2014 between Orbit Energy Charlotte, LLC and Caterpillar Financial Services Corporation.
10.4 Securities Purchase Agreement between Blue Sphere Corporation and Adar Bays, LLC dated as of August 4, 2014.
10.5 Convertible Redeemable Note due August 4, 2015 issued to Adar Bays, LLC in the principal amount of $50,000.
10.6 Securities Purchase Agreement between Blue Sphere Corporation and LG Capital Funding LLC dated as of August 4, 2014.
10.7 Convertible Redeemable Note due August 4, 2015 issued to LG Capital Funding LLC in the principal amount of $110,250.
10.8 Securities Purchase Agreement between Blue Sphere Corporation and Union Capital, LLC dated as of August 4, 2014.
10.9 Convertible Redeemable Note due August 4, 2015 issued to Union Capital, LLC in the principal amount of $75,000.
10.10 Convertible Note dated August 7, 2014 issued to JSJ Investments Inc. in the principal amount of $125,000.
10.11 Securities Purchase Agreement between Blue Sphere Corporation and Iliad Research and Trading, L.P. dated as of August 18, 2014.
10.12 Convertible Promissory Note issued August 18, 2014 to Iliad Research and Trading, L.P. in the principal amount of $447,500.
10.13 Convertible Note dated August 26, 2014 issued to JMJ Financial in the principal amount of up to $350,000.
10.14 Original Issue Discount Convertible Promissory Note dated August 28, 2014 to JMJ Financial in the principal amount of up to $130,000.
10.15 Securities Purchase Agreement between Blue Sphere Corporation and Blue Citi, LLC dated as of August 27, 2014.
10.16 Convertible Redeemable Note due August 27, 2015 issued to Blue Citi, LLC in the principal amount of $100,000.
10.17 Securities Purchase Agreement between Blue Sphere Corporation and Coventry Enterprises, LLC dated as of September 17, 2014.
10.18 Convertible Redeemable Note due September 17, 2015 issued to Coventry Enterprises, LLC in the principal amount of $75,000.
10.19 Convertible Note dated September 22, 2014 issued to Vista Capital Investments, LLC in the principal amount of up to $250,000.
10.20 Securities Purchase Agreement between Blue Sphere Corporation and Eastmore Capital, LLC dated as of October 22, 2014.
10.21 Convertible Promissory Note dated October 22, 2014 issued to Eastmore Capital, LLC in the principal amount of $62,500.
10.22 Securities Purchase Agreement between Blue Sphere Corporation and Union Capital, LLC dated as of October 27, 2014.
10.23 Convertible Redeemable Note due October 27, 2015 issued to Union Capital, LLC in the principal amount of $50,000.
10.24 Securities Purchase Agreement between Blue Sphere Corporation and LG Capital Funding LLC dated as of December 3, 2014.
10.25 Convertible Redeemable Note due December 3, 2015 issued to LG Capital Funding LLC in the principal amount of $78,750.
21.1 List of Subsidiaries
31.1 Rule 13a-14(a)/15d-14(a) Certifications (ii) Rule 13a-14/15d-14 Certification Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certifications (ii) Rule 13a-14/15d-14 Certification Chief Financial Officer
32.1 Section 1350 Certification Chief Executive Officer
32.2 Section 1350 Certification Chief Financial Officer
The following materials from Blue Sphere Inc.’s Annual Report on Form 10-K for the year ended September 30, 2014 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statement of Shareholders' Equity/ (Deficit), (iv) the Consolidated Statements of Cash Flow, and (iv) Notes to Consolidated Financial Statements.
(1) Incorporated by reference to our Form 8-K filed with the SEC on December 3, 2013.
(2) Incorporated by reference to our Form 10-K filed with the SEC on January 13, 2014.
SIGNATURES
Pursuant to the requirements 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.
Blue Sphere Corporation
January 13, 2015 By: /s/ Shlomo Palas
Shlomo Palas
President, Chief Executive Officer, Secretary and Director
(Principal Executive 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 capacities and on the dates indicated.
By: /s/ Shlomo Palas
January 13, 2015
Shlomo Palas
President, Chief Executive Officer, Secretary and Director
(Principal Executive Officer)
By: /s/ Shlomo Zakai
January 13, 2015
Shlomo Zakai
Chief Financial Officer and Treasurer
(Principal Accounting Officer and Principal Financial Officer)
By: /s/ Joshua Shoham
January 13, 2015
Joshua Shoham
Director
By: /s/ Yigal Brosh
January 13, 2015
Yigal Brosh
Director