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 March 31, 2016 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
LLC (“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 March 31, 2016, 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).
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE
3 – INVESTMENT IN BLUE SPHERE PAVIA
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. 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.
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%). The portion of the Purchase Price
paid at closing was primarily financed by a loan of $3,149,081 (€2,900,000) pursuant to the Helios Loan Agreement whereas
the Company repaid $281,580 (€255,102) during the three months ended March 31, 2016.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE
3 – INVESTMENT IN BLUE SPHERE PAVIA (continued)
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 ninety (90%) of the
revenue in excess of 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.
NOTE
4 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited
condensed consolidated financial statements as of March 31, 2016 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 March 31, 2016 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.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
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;
|
|
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.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 5 – SIGNIFICANT
ACCOUNTING POLICIES (continued)
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 March 31, 2016, the Company had
approximately $1,753,000 in cash and cash equivalents, approximately $7,668,000 in negative working capital, a stockholders’
deficit of approximately $6,384,000 and an accumulated deficit of approximately $48,573,000. Management anticipates their business
will require substantial additional investments that have not yet been secured. Management is continuing in the process of fund
raising in the private equity markets as the Company will need to finance future activities. 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.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE
8 – COMMON SHARES
On January 26, 2016, the Company
issued 1,000,000 shares of Common Stock pursuant to a subscription agreement dated June 12, 2015.
On February 1, 2016 the Company issued 540,000 shares of Common Stock to a consultant in respect of his consulting
services for the Company. The Company has estimated the fair value of such shares, and recorded an expense of $108,327.
In February 2016, the
Company conducted an offering (the “Offering”) consisting of (a) up to USD $1,925,000 of the Company’s
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 $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 warrants were accounted for as derivative liabilities. The Company has estimated the fair value of
such warrants at a value of $933,358 at the date of issuance and using the Black-Scholes option pricing model using the following
assumptions:
|
|
%
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.20
|
%
|
Expected term (years)
|
|
|
5
|
|
Volatility
|
|
|
203
|
%
|
BLUE SPHERE CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE
8 – COMMON SHARES (continued)
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, warrants to purchase, in the aggregate,
up to 2,800,000 shares of Common Stock at an exercise price of $0.0605 per share and to purchase, in the aggregate, up to 1,400,000
shares of Common Stock at an exercise price of $0.11 per share. The Company has estimated the fair value of such warrants at a
value of $224,413 at the date of issuance and using the Black-Scholes option pricing model using the following assumptions:
|
|
%
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.20
|
%
|
Expected term (years)
|
|
|
5
|
|
Volatility
|
|
|
203
|
%
|
On March 15, 2016, the Company
issued 85,000 shares of common stock to a consultant in respect of his consulting services for the Company. The Company has estimated
the fair value of such shares, and recorded an expense of $5,685.
NOTE 9 – DEBENTURES
AND NOTES
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 warrants exercisable at a price per share of $0.05 and
the other 50% of the warrants exercisable at price per share of $0.075.
BLUE SPHERE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
NOTE 9 – DEBENTURES
AND NOTES (continued)
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:
|
|
%
|
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 and warrants to purchase, in the aggregate,
up to 4,480,000 shares of Common Stock at an exercise price of $0.06875 per share. The Company has estimated the fair value of
such warrants at a value of $116,599 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
|
|
%
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.74
|
%
|
Expected term (years)
|
|
|
5
|
|
Volatility
|
|
|
202
|
%
|
On February 3, 2016, the
Company issued 3-year warrants to purchase up to 1,500,000 shares of Company’s common stock at an exercise price of $0.06
per share, in full satisfaction of certain obligations of the Company.
The Company has estimated
the fair value of such warrants at a value of $87,331 at the date of issuance using the Black-Scholes option pricing model using
the following assumptions:
|
|
%
|
Dividend yield
|
|
|
0
|
|
Risk-free interest rate
|
|
|
1.2
|
%
|
Expected term (years)
|
|
|
3
|
|
Volatility
|
|
|
203
|
%
|
Changes in the fair value of the warrants are
recorded as interest expenses.
NOTE 10 – SUBSEQUENT
EVENTS
On April 13, 2016 the Company
issued 1,000,000 shares of Common Stock of the Company to a consultant in consideration for corporate finance, investor communications
and financial and investor public relations services. The consulting agreement provides for the issuance of an additional 1,000,000
shares of common stock as a service bonus if the agreement is not terminated prior to June 9, 2016. The Company has estimated
the fair value of such shares, and recorded an expense of $72,733.
On April 13, 2016, we issued an aggregate of 875,000 shares of Common Stock to a consultant, pursuant
to consulting agreements dated September 1, 2015 and March 1, 2016, in consideration for investor relations and communications
services. The Company has estimated the fair value of such shares, and recorded an expense of $42,467.
On May 18, 2016, a 1.5-year warrant to purchase shares
of Common Stock, dated May 4, 2015, was exercised into 700,000 shares of common stock at an exercise price of $0.058 per share,
for total consideration of $40,600.
On June 2, 2016 the Company
issued 13,930,742 shares of Common Stock in consideration of $145,526 that were received in December 2015 to finance a portion
of the acquisitions of one hundred percent (100%) of the SPVs.