ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You
should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements
and related notes contained in Part I, Item 1 of this quarterly report.
Note
Regarding Forward-Looking Statements
This
report contains forward-looking statements. Forward-looking statements are projections in respect of future events or our future
financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”,
“expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”,
“potential” or “continue” or the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set out below,
any of which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking
statements. These risks include, without limitation, (i) uncertainties regarding our ability to obtain adequate financing on a
timely basis, including financing for specific projects, (ii) the financial and operating performance of our projects, (iii) uncertainties
regarding the market for and value of carbon credits, renewable energy credits and other environmental attributes, (iv) political
and governmental risks associated with the countries in which we may operate, (v) unanticipated delays associated with project
implementation, including designing, constructing and equipping projects, as well as delays in obtaining required government permits
and approvals, (vi) the development stage of our business and (vii) our lack of operating history.
This
list is not an exhaustive list of the factors that may affect any of our forward-looking statements. These and other factors should
be considered carefully and readers should not place undue reliance on our forward-looking statements.
Forward-looking
statements are made based on management’s beliefs, estimates and opinions on the date the statements are made and we undertake
no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws
of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Company
Overview
Summary
of Current Operations
We
are an international Independent Power Producer (IPP) that is globally active in the clean energy production and waste-to-energy
markets. We are becoming a key player in these rapidly growing markets by developing or acquiring projects with clean energy technologies,
including but not limited to waste-to-energy facilities that generate clean energy, such as electricity, natural gas, heat, compost
and other by-products. These markets provide tremendous opportunity, insofar as there is a virtually endless supply of waste and
organic material that can be used to generate power and valuable by-products. In particular, the disposal of organic material
to landfills in most parts of the world is a costly problem with environmentally-damaging consequences. We seek to offer a cost-effective,
environmentally-safe alternative.
We
are currently developing or operating, as applicable, the following projects:
United
States
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Charlotte, NC Waste to Energy Anaerobic Digester 5.2 MW Plant
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Johnston, RI Waste to Energy Anaerobic Digester 3.2 MW Plant
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Italy
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Soc. agr. AGRICERERE srl – Tromello (Pavia) 999 KW Plant
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Soc. agr. AGRIELEKTRA srl – Alagna (Pavia) 999 KW Plant
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Soc. agr. AGRISORSE srl - Garlasco (Pavia) 999 KW Plant
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Soc. agr. GEFA srl – Dorno (Pavia) 999 KW Plant
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We
have also entered into nonbinding letters of intent to acquire additional biogas facilities in Italy and construct and develop
waste-to-energy facilities in the Netherlands, and we continue to evaluate a pipeline of similar projects in a less mature phase.
Results
of Operations
General
As
of December 14, 2015, we consolidated our indirect wholly-owned subsidiary, Bluesphere Pavia. Bluesphere Pavia completed the acquisitions
of one hundred percent (100%) of the share capital of Agricerere S.r.l., Agrielektra S.r.l., Agrisorse S.r.l. and Gefa S.r.l .
(each, an “SPV” and collectively, the “SPVs”) on December 14, 2015. Each SPV owns and operates an anaerobic
digestion biogas plant in Italy for the production and sale of electricity to Gestore del Servizi Energetici GSE, S.p.A., a state-owned
company, pursuant to a power purchase agreement. Our results of operation have been significantly affected by this transaction.
Deferred
Revenue
$1,481,900
of development fees and reimbursements for the
North Carolina and Rhode Island projects are recorded as deferred revenue. Upon successful completion of the projects, this amount
will be recorded as revenue.
Results
of Operations – For the Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015
Revenues
Revenues
for the three-month period ended June 30, 2016 were $1,303,000, as compared to $0 for the three-month period ended June 30, 2015.
The increase is attributable to the acquisition of the SPVs by our wholly-owned subsidiary, Bluesphere Pavia.
Cost
of Revenues
Cost
of revenues for the three-month period ended June 30, 2016 were $1,008,000, as compared to $0 for the three-month period ended
June 30, 2015. The increase is attributable to the acquisition of the SPVs by our wholly-owned subsidiary, Bluesphere Pavia.
General
and Administrative Expenses
General
and administrative expenses for the three-month period ended June 30, 2016 were $2,809,000, as compared to $2,439,000 for the
three-month period ended June 30, 2015. The increase is mainly attributable to direct expenses related to the acquisition of the
SPVs by our wholly-owned subsidiary, Bluesphere Pavia, and general and administrative expenses of Bluesphere Pavia.
Net
Loss
We
incurred a net loss of $3,644,000 for the three-month period ended June 30, 2016, as compared to a net loss of $3,133,000 for
the three-month period ended June 30, 2015. The increase in net loss is mainly attributable to the results of operations of Blueshpere
Pavia, increase in financial expenses and increase of our general and administrative expenses as detailed above.
Results
of Operations – For the Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015
Revenues
Revenues
for the six-month period ended June 30, 2016 were $2,706,000, as compared to $0 for the six-month period ended June 30, 2015.
The increase is attributable to the acquisition of the SPVs by our wholly-owned subsidiary, Bluesphere Pavia.
Cost
of Revenues
Cost
of revenues for the six-month period ended June 30, 2016 were $2,323,000, as compared to $0 for the six-month period ended June
30, 2015. The increase is attributable to the acquisition of the SPVs by our wholly-owned subsidiary, Bluesphere Pavia.
General
and Administrative Expenses
General
and administrative expenses for the six-month period ended June 30, 2016 were $4,590,000, as compared to $3,450,000 for the six-month
period ended June 30, 2015. The increase is mainly attributable to direct expenses related to the acquisition of the SPVs by our
wholly-owned subsidiary, Bluesphere Pavia, and general and administrative expenses of Bluesphere Pavia.
Net
Loss
We
incurred a net loss of $7,215,000 for the six-month period ended June 30, 2016, as compared to a net loss of $4,944,000 for the
six-month period ended June 30, 2015. The increase in net loss is mainly attributable to the results of operations of Blueshpere
Pavia, increase in financial expenses and increase of our general and administrative expenses as detailed above.
Inflation
and Seasonality
In
management’s opinion, our results of operations have not been materially affected by inflation or seasonality, and management
does not expect that inflation risk or seasonality would cause material impact on our operations in the future.
Critical
Accounting Policies
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 consider our critical accounting policies
to be those that require the more significant judgments and estimates in the preparation of financial statements. No new accounting
standards have been adopted since the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015
was filed. The significant accounting policies applied in the annual financial statements of the Company as of September 30, 2015
are applied consistently in these financial statements, except for the following:
a.
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Business Combinations and Goodwill
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The Company accounts for its business combinations using the purchase method of accounting. Under this method, the Company allocates the purchase price to tangible and intangible assets acquired and liabilities assumed based on estimated fair values at the date of acquisition, with the excess of the purchase price amount being allocated to goodwill.
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Acquisition-related and integration costs associated with the business combination are expensed as incurred. Changes in estimates associated with future income tax assets after measurement period are recognized as income tax expense with prospective application to all business combinations regardless of the date of acquisition.
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Goodwill for each reporting unit is assessed for impairment at least annually, or when an event or circumstance occurs that more likely than not reduces the fair value of a reporting unit below its carrying amount. An impairment charge is recorded when the carrying amount of the reporting unit exceeds its fair value and is determined as the difference between the goodwill’s carrying amount and its implied fair value.
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b.
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Intangible Assets
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Intangible assets consist of non-monetary and separately identifiable assets that can be controlled and are expected to generate future economic benefits. Such assets are recognized at acquisition and/or production cost, including directly attributable expenses to make the asset ready for use, net of accumulated amortization charges and any impairment losses. Intangible assets with a finite useful life are amortized on a straight-line basis over their useful lives and are tested for impairment when circumstances indicate that the carrying value may be impaired. The amortization period and the amortization method for intangible assets with a finite useful lives are reviewed at least at each reporting date.
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c.
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Long-Lived Assets
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When events or changes in circumstances indicate that the carrying amount of long-lived assets, such as capital assets and intangible assets, may not be recoverable, undiscounted estimated cash flows are projected over their remaining term and compared to the carrying amount. To the extent that such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge is recorded to reduce the carrying amount to the projected future discounted cash flows.
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d.
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Revenue Recognition
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Revenues related to the sale of electricity are recorded based upon output delivered and capacity provided at rates specified under relevant contract terms.
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Liquidity
and Capital Resources
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 June 30, 2016, we had
cash and cash equivalents of $1,280,000, as compared to $161,000 as of September 30, 2015. As of June 30, 2016, we had a working
capital deficit of $14,456,000, as compared to $7,542,000 as of September 30, 2015. The increase in our working capital deficit
is mainly attributable the increase in our deferred revenues from joint ventures in the amount of $3,975,000, increase in our
current maturities of long term loans in the amount of $1,678,000, increase in our accounts payables in the amount of $3,417,000
and increase in our other accounts payable and liabilities in the amount of $636,000.
Net
cash used in operating activities was $2,266,000 for the six-month period ended June 30, 2016, as compared to cash from operating
activities of $198,000 for the six-month period ended June 30, 2015.
Net
cash used in investing activities was $18,000 for the six-month period ended June 30, 2016, as compared to net cash used in investing
activities of $1,000 for the six-month period ended June 30, 2015.
Net
cash provided by financing activities was approximately $821,000 for the six-month period ended June 30, 2016, as compared to
approximately $48,000 used in financing activities for the six-month period ended June 30, 2015.
We
have principally financed our operations through the sale of our common stock and warrants and the issuance of convertible debt,
including the Debenture Offering, February Offering and June Offering described in the notes to the condensed consolidated financial
statements included in this quarterly report.
Off-Balance
Sheet Arrangements
As
at June 30, 2016, we had no off-balance sheet arrangements of any nature.