IN U.S. DOLLARS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE
1 – BASIS OF PRESENTATION:
The accompanying unaudited
condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial
statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary
to present fairly the financial position and results of operations of Blue Sphere Corporation (the “Company”).
These condensed consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s
audited financial statements included in its Annual Report on Form 10-K for the year ended September 30, 2015, as filed with the
U.S. Securities and Exchange Commission. The results of operations for the three months ended December 31, 2015 are not necessarily
indicative of results that could be expected for the entire fiscal year.
NOTE
2 – GENERAL
Blue Sphere Corporation
(“the Company”), together with its wholly-owned subsidiaries, Eastern Sphere Ltd. (“Eastern”), Binosphere
Inc (“Binosphere”), Johnstonsphere LLC (“Johnstonsphere”), and Sustainable Energy Ltd. (“SEL”),
is focused on project integration in the clean energy production and waste to energy markets.
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.
On February 17, 2010, the Company conducted a reverse merger, name change and forward split of its common stock, and in March 2010
current management took over operations, at which point the Company changed its business focus to become a project integrator in
the clean energy production and waste to energy markets.
As of December 31, 2015, Johnstonsphere
had not commenced operations.
On May 12, 2015 the Company
formed Bluesphere Pavia (formerly called Bluesphere Italy S.r.l.). Italy S.r.l, a subsidiary of Eastern in order to acquire certain
biogas plants located in Italy (see note 3 below).
The Company is currently focusing
on (i) 10 projects related to the construction, acquisition or development of biogas facilities and (ii) a recently licensed fast
charging battery technology.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE
3 – INVESTMENT IN BLUE SPHERE PAVIA
On December 14, 2015 (“Closing
Date”), and pursuant to a Share Purchase Agreement, dated May 14, 2015 ( the “Share Purchase Agreement”), by
and among the Company’s indirect wholly-owned subsidiary, Bluesphere Pavia, and Volteo Energie S.p.A., Agriholding S.r.l.,
and Overland S.r.l. (collectively, the “Sellers”), 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”) from the Sellers. 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. Pursuant to the Italy Projects Agreement, the Company also issued a corporate guarantee to the
Sellers, whereby the Company will secure the obligations of Bluesphere Pavia under the Italy Projects Agreement.
Pursuant to the Share Purchase
Agreement, the Company to pay $5,646,628 (€5,200,000) (the “Purchase Price”), subject to certain post-closing
adjustments, to acquire the share capital of the SPVs. The Purchase Price for each SPV was determined based on a Base Line EBITDA
guaranteed by the Sellers and an Equity IRR Target calculated on the Purchase Price of no less than twenty-five percent (25%).
Fifty percent (50%) of the Purchase Price, adjusted for certain post-closing adjustments and closing costs, in the amount of $2,143,181
(€1,952,858) was paid at closing, and the balance is due to the Sellers on the third anniversary of the closing date. The
remaining fifty percent (50%) of the Purchase Price, prior to and after closing date, and any variation of EBITDA results in the
18 months following the closing date, will be promised by a note from each Seller, to be paid on the third anniversary of the
closing, along with interest on the unpaid balance due at an annual rate of two percent (2%).
On August 18, 2015, the
Company and two of its wholly-owned subsidiaries, Eastern and Bluesphere Pavia, entered into a Long Term Mezzanine Loan Agreement
(the “Helios Loan Agreement”) with Helios Italy Bio-Gas 1 L.P. (“Helios”). Under the Helios Loan Agreement,
Helios will make up to $5,646,628 (€5,000,000) available to Bluesphere Pavia (the “Helios Loan”) to finance (a)
ninety percent (90%) of the total required investment of the first four SVPs acquired, (b) eighty percent (80%) of the total required
investment of up to three SVPs subsequently acquired, (c) certain broker fees incurred in connection with the acquisitions, and
(d) any taxes associated with registration of an equity pledge agreement (as described below). Each financing of an SVP acquisition
will be subject to specified conditions precedent and will constitute a separate loan under the Helios Loan Agreement. Helios
may, within 90 days of a closing, require repayment of ten percent (10%) of the relevant loan and broker fees. If no such repayment
is required, Helios may reduce the amount of its commitment to finance the acquisitions of the three additional SVPs to seventy
to eighty percent (70-80%) of the total required investment. Helios’s commitment to provide any loan under the Helios Loan
Agreement that is not utilized by June 30, 2016 will automatically cancel, unless extended in writing by Helios.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE
3 – INVESTMENT IN BLUE SPHERE PAVIA
Subject to specified terms,
representations and warranties, the Helios Loan Agreement provides that each loan thereunder will accrue interest at a rate of
14.5% per annum, paid quarterly. Helios will also be entitled to an annual operation fee, paid quarterly. The final payment for
each loan will become due no later than the earlier of (a) thirteen and one half years from the date such loan was made available
to Bluesphere Italy, and (b) the date that the Feed in Tariff license granted to the relevant SVP expires. Pursuant to the Helios
Loan Agreement and an equity pledge agreement, Eastern Sphere pledged all its shares in Bluesphere Pavia to secure all loan amounts
utilized under the Helios Loan Agreement.
The Company also entered into
a no-interest bearing promissory note, dated December 8, 2015 (the “Palas Promissory Note”), with R.S. Palas Management
Ltd. to finance a small portion of the Purchase Price. The Palas Promissory Note is for an amount of $129,146 (€118,000) and
is due and payable, without interest or premium, on December 31, 2015. The payee under the Palas Promissory Note, R.S. Palas Management
Ltd., is an entity owned and controlled by Shlomi Palas, the Company’s President and Chief Executive Officer and a member
of its Board of Directors.
In accordance with a Framework
EBITDA Guarantee Agreement, dated July 17, 2015 (the “EBITDA Agreement”), between the Company and Austep S.p.A. (“Austep”),
Austep will operate, maintain and supervise each biogas plant owned by the SPVs. In addition, Austep will guarantee a monthly
aggregate EBITDA of $204,147 (€188,000) from the four SPVs for the initial six months following the acquisition, and thereafter
Austep will guarantee an annual aggregate EBITDA of $4,082,946 (€3,760,000) from the four SPVs. Pursuant to the terms of
the agreements with Austep, the Company will receive the guaranteed levels of EBITDA and Austep will receive 90% of the revenue
more than these levels.
The Company applied the
equity method of accounting for those investments because the Framework EBITDA Guarantee Agreement between the Company and Austep whereas Austep operates, maintains and supervises each biogas plants prevents us from exercising
a controlling influence over operating policies of the plants. Under this method, our equity investment is reflected as an investment
in non-consolidated subsidiaries on our Condensed Balance Sheets and the net earnings or losses of the investments is reflected
as equity in net earnings of non-consolidated companies on our Consolidated Statements of Operations.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE
4 – INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim
consolidated financial statements as of December 31, 2015 and for the three months then ended, have been prepared in accordance
with accounting principles generally accepted in the United States relating to the preparation of financial statements for interim
periods. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended December 31, 2015 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2016.
The September 30, 2015 Condensed
Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles
generally accepted in the United States of America. These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015.
NOTE 5 – SIGNIFICANT
ACCOUNTING POLICIES
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.
|
Business combinations and Goodwill
|
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.
Acquisition-related and integration
costs associated to 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.
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.
|
b.
|
Investment in non-consolidated and affiliated companies
|
Investments
in non-consolidated and affiliated companies that are not controlled but over which the Company can exercise significant influence
(generally, entities in which the Company holds approximately between 20% to 100% of the voting rights of the investee) are presented
using the equity method of accounting. Profits on intercompany sales, not realized outside the Company, are eliminated. The Company
discontinues applying the equity method when its investment (including advances and loans) is reduced to zero and the Company
has not guaranteed obligations of the affiliate or otherwise committed to provide further financial support to the affiliate.
Investments
in preferred shares, which are not in substance common stock, are recorded on a cost basis according to ASC 323-10-15-13, “Investments
- Equity Method and Joint Ventures - In-substance Common Stock” and ASC 323-10-40-1, “Investment -Equity Method and
Joint Ventures - Investee Capital Transactions”.
A
change in the Company’s proportionate share of an investee’s equity, resulting from issuance of common or in-substance
common shares by the investee to third parties, is recorded as a gain or loss in the consolidated income statements in accordance
with ASC 323-10-40-1.
Investments
in non-marketable equity securities of entities in which the Company does not have control or the ability to exercise significant
influence over their operation and financial policies, are recorded at cost (generally when the Company holds less than 20% of
the voting rights).
Management
evaluates investments in affiliated companies, partnerships and other non-marketable equity securities for evidence of other-than-temporary
declines in value. Such evaluation is dependent on the specific facts and circumstances. Accordingly, in determining whether other-than-temporary
declines exist, management evaluates various indicators for other-than-temporary declines and evaluates financial information
(e.g. budgets, business plans, financial statements, etc.). During 2015 and 2014, no material impairment was recognized.
Intangible assets consist of
non-monetary and separately identifiable assets, which 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.
The costs incurred internally
to develop new services and platforms are considered intangible assets generated internally and are recognized as assets only
if the following requirements are met:
|
1.
|
the cost incurred for the development of
the assets can be reliably measured;
|
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 5 – SIGNIFICANT
ACCOUNTING POLICIES (continue)
|
2.
|
the entity has the intention, the availability
of financial resources, the ability to complete the assets and to use or sell them;
|
Capitalized development costs
include only expenses incurred that can be directly attributed to the process of developing new products and services.
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.
Changes in expected useful lives,
or in the way the future economic benefits will be generated by the assets, are either recognized through a change in the period
or in the amortization method and are accounted for as changes in accounting estimates. The amortization charges for intangible
assets with a finite useful life are classified in the statement of income, in the costs appropriate for the function of the related
intangible assets.
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.
NOTE 6 – GOING CONCERN
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of
December 31, 2015, the Company had approximately $1,888 thousand in cash and cash equivalents, approximately $7,879 thousand
in negative working capital, a stockholders’ deficit of approximately $3,486 thousand and an accumulated deficit of
approximately $44,692 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. Company’s ability to continue as a going
concern is dependent upon raising capital from financing transactions and revenue from operations.
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.
NOTE 7 – NEWLY ISSUED
ACCOUNTING PRONOUNCEMENTS:
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.
NOTE
8 – COMMON SHARES:
On October 21, 2015 the
Company issued 10,114,848 shares of common stock of the Company for the aggregate purchase price of $214,527. Such issuance was
made pursuant to the April 15, 2015, Subscription Agreement with Dr. Borenstein Ltd. (the “April Borenstein Subscription
Agreement”).
On October 12, 2015, the
Company issued 375,000 shares of common stock to a consultant in respect of its general advisory services and strategic planning
consulting agreement with the Company. The Company has estimated the fair value of such shares, and recorded an expense of $22,586.
On October 26, 2015, the
Company issued 690,000 shares of common stock to a consultant in respect of his consulting agreements with the Company. The Company
has estimated the fair value of such shares, and recorded an expense of $25,803.
On December 2, 2015, the
Company issued 625,000 shares of common stock to a consultant in respect of his consulting agreements with the Company. The Company
has estimated the fair value of such shares, and recorded an expense of $43,411.
On December 2, 2015,
the Company issued 745,000 shares of common stock to a consultant in respect of his consulting agreements with the Company. The
Company has estimated the fair value of such shares, and recorded an expense of $16,544.
In July 2015, the Company
conducted a private placement of up to $250,000 of the company’s common stock at $0.0176 per share to certain accredited
investors (the “July 2015 Offering”). On December 2, 2015, the Company closed on the July Offering, resulting in gross
proceeds to the Company of $225,526, and agreed to issue 21,588,871 shares of our common stock at $0.0104 per share (the “July
2015 Shares”), pursuant to certain subscription agreements (the “July Offering Subscription Agreements”). All
investors in the July Offering were part of group led by a member of our Board of Directors, and one of the investors included
a company in which he is the chief executive officer, but has no equity interest. The proceeds to the Company of the July Offering
were received in December 2015, and were used to finance a portion of the closing of the acquisitions of the purchase of the SPVs
by Blueshpere Pavia.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 9 – DEBENTURES
AND NOTES:
Senior
Debentures
offering
Beginning in November 2015,
the Company conducted an offering (the “Offering”) of up to $3,000,000 of the Company’s Senior Debentures (the
“Debentures”) and Warrants (the “Warrants”, together with the “Debentures”, the “Securities”)
to purchase up to 8,000,000 shares of common stock of the Company, par value $0.001 per share, in proportion pro rata to each Subscriber’s
subscription amount relative to the total Offering amount, with 50% of the shares exercisable at a price per share of $0.05 and
the other 50% of the shares exercisable at price per share of $0.075.
The Debentures bear interest
at 11%, paid quarterly, and mature in two years. The Debentures are secured by a pledge agreement between the Company and each
investor, whereby the Company pledged as collateral up to 49% of its shares of common stock in Eastern Sphere, Ltd., our wholly-owned
subsidiary (the “Pledge Agreement”). The Pledge Agreement further provides that the Company’s obligations under
the Debentures rank senior to all other indebtedness of Blue Sphere Corporation, but are subordinate to all indebtedness and liabilities
of its subsidiaries and project-level operating entities. The Warrants are exercisable for 5 years from the date of issuance, with
50% exercisable at $0.05 per share and 50% exercisable at $0.075 per share
The warrants were accounted
for as derivative liabilities. The Company has estimated the fair value of such warrants at a value of $208,597 at the date of
issuance using the Black-Scholes option pricing model using the following assumptions:
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|
%
|
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.74
|
%
|
Expected term (years)
|
|
|
5
|
|
Volatility
|
|
|
202
|
%
|
The Securities were offered
pursuant to subscription agreements with each investor (the “Subscription Agreement”). Pursuant to the Subscription
Agreements, the investors in the Offering shall have the right to collectively designate one observer or member to the Company’s
Board of Directors.
On December 23, 2015, the Company
completed the closing of the Offering and entered into Subscription Agreements with investors representing aggregate gross proceeds
to the Company of $3,000,000.
The Company engaged Maxim Group
LLC (“Maxim”) to assist in the Offering. Pursuant to the terms of an engagement letter between Maxim and the Company,
Maxim received commissions equal to 7% of the gross proceeds raised by Maxim in the Offering, as well as common stock purchase
warrants for a number of securities equal to 8% of the total amount of securities sold in the Offering, at a price per share equal
to 110% of the price of the securities paid by investors in the Offering. Based on the agreement the Company granted Maxim 4,480,000
warrants at an average exercise price of $ 0.06875.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 10 – SUBSEQUENT
EVENTS:
On January 26, 2016 the
Company issued 1,000,000 shares of Common Stock of the Company to a consultant in consideration of $20,000 for financial consulting
services.
In February 2016, the Company
conducted an offering (the “Offering”) consisting of (a) up to USD $1,925,000 of the Company’s shares of common
stock, par value $0.001 per share (“Common Stock”), priced at the closing price for shares of Common Stock, as reported
on the OTCQB Venture Marketplace, on the trading day prior to the closing of the Offering, and (b) 5-year warrants to purchase
shares of Common Stock in an amount equal to 50% of the number of shares of Common Stock so purchased by the subscriber (the “Warrants”,
together with the shares of Common Stock subscribed for, the “Securities”).
The Securities have been offered
pursuant to subscription agreements with each investor (the “Subscription Agreement”). In addition to other customary
provisions, each Subscription Agreement provides that the Company will use its reasonable commercial efforts to register all shares
of Common Stock sold in the Offering, including all shares of Common Stock underlying the Warrants, within 60 days of the closing
of the Offering. The Warrants are exercisable for 5 years from the date of issuance at $0.10 per share, include an option by which
the holder may exercise the Warrant by means of a cashless exercise, and include customary weighted-average price adjustment and
anti-dilution terms.
On February 15, 2016, the Company
completed the only closing of the Offering, representing aggregate gross proceeds to the Company of USD $1,925,000. In connection
with the closing, the Company and subscribers entered into (a) Subscription Agreements for, in the aggregate, 35,000,000 shares
of Common Stock at $0.055 per share, and (b) Warrants to purchase, in the aggregate, up to 17,500,000 shares of Common Stock at
an exercise price of $0.10 per share.
The Company engaged Maxim Group
LLC (“Maxim”) to assist in the Offering. Pursuant to the terms of an engagement letter between Maxim and the Company,
Maxim received commissions equal to 7% of the gross proceeds raised by Maxim in the Offering, as well as common stock purchase
warrants for a number of securities equal to 8% of the total amount of securities sold in the Offering, at a price per share equal
to 110% of the price of the securities paid by investors in the Offering.