Item 1. Financial Statements
EUROSITE POWER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30,
2016
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December 31,
2015
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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4,597,780
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$
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587,819
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Accounts receivable
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216,845
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303,782
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|
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UK energy tax incentives receivable
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—
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369,485
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Value added and other tax receivable
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29,338
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(5,297
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)
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Inventory
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192,133
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137,093
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Other current assets
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79,423
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57,152
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Total current assets
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5,115,519
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1,450,034
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Property and equipment, net
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7,992,328
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7,516,262
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Other assets, long-term
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9,883
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11,004
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TOTAL ASSETS
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$
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13,117,730
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$
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8,977,300
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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206,618
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$
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313,293
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Due to related party
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57,988
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98,979
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Accrued expenses and other current liabilities
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226,906
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286,814
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Note payable - bank, short-term
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69,933
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—
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Total current liabilities
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561,445
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699,086
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Long-term liabilities:
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Convertible debentures
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—
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1,585,264
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Convertible debentures due to related parties
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308,026
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951,158
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Note payable - bank
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279,732
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—
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Note payable - related party
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—
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2,000,000
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Total liabilities
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1,149,203
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5,235,508
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Commitments and contingencies (Note 6)
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Stockholders’ equity:
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Common stock, $0.001 par value; 100,000,000 shares authorized; 82,265,056 and 65,747,100 issued and outstanding at September 30, 2016 and December 31, 2015, respectively.
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82,265
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65,747
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Additional paid-in capital
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22,116,857
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12,224,064
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Accumulated deficit
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(10,230,595
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)
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(8,548,019
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)
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Total stockholders' equity
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11,968,527
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3,741,792
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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13,117,730
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$
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8,977,300
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See Notes to Condensed Consolidated Financial Statements (Unaudited)
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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September 30,
2016
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September 30,
2015
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Revenues
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Energy revenues
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$
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459,114
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$
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410,055
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Turnkey & other revenues
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—
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11,936
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459,114
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421,991
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Cost of sales
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Fuel, maintenance and installation
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308,511
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365,097
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Depreciation expense
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111,761
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102,485
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420,272
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467,582
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Gross profit (loss)
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38,842
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(45,591
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)
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Operating expenses
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General and administrative
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379,286
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194,053
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Selling
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127,917
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122,826
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Engineering
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110,593
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87,853
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617,796
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404,732
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Loss from operations
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(578,954
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)
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(450,323
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)
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Other income (expense)
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Interest income
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6,167
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|
965
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Interest expense, net of debt premium amortization
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(10,039
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)
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(8,599
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)
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(3,872
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)
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(7,634
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)
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Net loss
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$
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(582,826
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)
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$
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(457,957
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)
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Net loss per share - basic and diluted
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$
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(0.01
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)
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$
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(0.01
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)
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Weighted-average shares outstanding - basic and diluted
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82,265,056
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65,747,100
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See Notes to Condensed Consolidated Financial Statements (Unaudited)
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Nine Months Ended
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September 30,
2016
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September 30,
2015
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Revenues
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Energy revenues
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$
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1,784,844
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$
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1,473,307
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Turnkey & other revenues
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1,739
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39,711
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1,786,583
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1,513,018
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Cost of sales
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Fuel, maintenance and installation
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1,160,274
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1,192,276
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Depreciation expense
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341,482
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289,621
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1,501,756
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1,481,897
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Gross profit
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284,827
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31,121
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Operating expenses
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General and administrative
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1,011,546
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627,798
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Selling
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421,251
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359,298
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Engineering
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289,089
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162,008
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1,721,886
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1,149,104
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Loss from operations
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(1,437,059
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)
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(1,117,983
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)
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Other income (expense)
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Interest income
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9,606
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5,277
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Interest and other expenses
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(30,341
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)
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(32,625
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)
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Debt conversion expense
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(224,782
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)
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—
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(245,517
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)
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(27,348
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)
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Loss before income taxes
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(1,682,576
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)
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(1,145,331
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)
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Benefit for income taxes
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—
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2,188
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Net loss
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$
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(1,682,576
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)
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$
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(1,143,143
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)
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Net loss per share - basic and diluted
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$
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(0.02
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)
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$
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(0.02
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)
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Weighted-average shares outstanding - basic and diluted
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73,605,329
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65,747,100
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See Notes to Condensed Consolidated Financial Statements (Unaudited)
EUROSITE POWER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended
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September 30,
2016
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September 30,
2015
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$
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(1,682,576
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)
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$
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(1,143,143
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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347,066
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291,465
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Non-cash debt conversion and interest expense
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235,782
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—
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Amortization of convertible debt premium
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(44,132
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)
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(72,216
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)
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Stock-based compensation
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243,175
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57,217
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Changes in operating assets and liabilities
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(Increase) decrease in:
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Accounts receivable
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86,937
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(51,605
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)
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UK energy tax incentives receivable
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369,485
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636,661
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Value added and other tax receivable
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(34,635
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)
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3,025
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Inventory
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(55,040
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)
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(10,058
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)
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Prepaid and other current assets
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(22,271
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)
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(27,289
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)
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Other assets, long-term
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1,121
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1,440
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Increase (decrease) in:
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Accounts payable
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(106,675
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)
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178,702
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Due to related party
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(40,991
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)
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—
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Accrued expenses and other current liabilities
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(59,908
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)
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132,352
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Net cash used in operating activities
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(762,662
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)
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(3,449
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)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property and equipment
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(823,132
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)
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(1,571,533
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)
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Net cash used in investing activities
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(823,132
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)
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(1,571,533
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)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Payment on note payable - related party
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(2,000,000
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)
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(1,000,000
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)
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Proceeds from sale of common stock, net of costs
|
7,246,090
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|
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—
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Proceeds from loan payable - bank
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349,665
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|
|
—
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Net cash provided by (used in) financing activities
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5,595,755
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(1,000,000
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)
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Net increase (decrease) in cash and cash equivalents
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4,009,961
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(2,574,982
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)
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Cash and cash equivalents, beginning of the period
|
587,819
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|
|
3,776,852
|
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Cash and cash equivalents, end of the period
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$
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4,597,780
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$
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1,201,870
|
|
|
|
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Supplemental disclosures of cash flow information:
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|
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Taxes paid
|
$
|
—
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|
|
$
|
—
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Interest paid
|
$
|
72,764
|
|
|
$
|
—
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|
|
Common Stock exchanged for convertibles debentures, non-cash
|
$
|
2,184,264
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|
|
$
|
—
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|
See Notes to Condensed Consolidated Financial Statements (Unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements for the period ending
September 30, 2016
.
Note 1. Description of Business and Basis of Presentation
Description of Business
EuroSite Power Inc., (the "Company", we, our, or us), distributes, owns and operates clean, on-site energy systems that produce electricity, hot water and heat and cooling in the United Kingdom. We provide comprehensive power purchase style thermal and power generation solutions to our customers. These solutions include equipment installation as well as operation and ongoing maintenance under multi-year service agreements at no upfront cost to the customer. We own and operate the equipment that we install at customers' facilities and sell the energy produced by these systems to the customers on a long-term contractual basis at prices guaranteed to the customer to be below conventional utility rates. We call this business the EuroSite Power “On-Site Utility” model.
The Company was incorporated as a Delaware corporation on
July 9, 2010
as a subsidiary of American DG Energy Inc., or American DG Energy. On September 17, 2010, the Company registered EuroSite Power Limited as a wholly-owned subsidiary with the Registrar of Companies for England and Wales to introduce the American DG Energy business model to the United Kingdom and the European market, although as of
September 30, 2016
, we operated in the United Kingdom only.
The Company has experienced total net losses since inception of approximately
$10.2 million
. For the foreseeable future, the Company expects to experience continuing operating losses and negative cash flows from operations as its management executes its current business plan. The Company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, its ability to control certain costs, including those related to general and administrative expenses, the project financing arrangements and the line of credit available from its CEO will be sufficient to meet the working capital requirements of its existing business for the foreseeable future; however, as the Company continues to grow its business by adding more energy systems, the cash requirements will increase.
The Company is engaged in continual fundraising efforts, primarily for the installation of energy systems.
On May 12, 2016, the Company completed a private placement with related parties of
12,608,696
shares of its common stock for aggregate proceeds of
$7.25 million
at
$0.575
per share.
The shares sold in this placement are subject to a registration rights agreement where the Company has agreed to use its best efforts to register the shares issued at the request of the holder.
The Company used a portion of these proceeds to pay off its debt to its former Chairman, of
$2,000,000
, with the balance being retained to fund operations and growth.
On June 28, 2016,
$2.1 million
of the Company’s
$2.4 million
of related party convertible debentures were converted into
3,909,260
shares of common stock of the Company at a price of
$0.54
per share. Additionally,
$11,000
of accrued interest was also converted at the same price. As the price used to convert the convertible debentures was less than the then contractual conversion price of
$0.60
per share of common stock, the fair value of the incremental shares issued to the holders of the convertible debentures over and above the contractually required amount of
$224,782
was expensed as debt conversion expense.
As of
September 30, 2016
, American DG Energy owned a
2.03%
interest in the Company and accounts for this ownership at fair value in its financial statements in accordance with Generally Accepted Accounting Principles ("GAAP"), as of that date. Immediately prior to this date, American DG Energy accounted for its 20.5% investment in the Company on the equity method in accordance with GAAP. Prior to June 28, 2016 American DG accounted for its 48.04% investment in the Company as a consolidated subsidiary as it determined it was the primary beneficiary of EuroSite under the variable interest model. That determination included consideration of an implicit variable interest held by American DG Energy in the form of a guarantee of the long-term convertible indebtedness of EuroSite Power. On June 28, 2016, substantially all of that convertible indebtedness was converted by the holders into shares of EuroSite Power (see Note 5 Convertible debentures), rendering the American DG’s guarantee inconsequential in the determination. As a result, American DG Energy concluded it no longer held a variable interest in EuroSite Power. American DG deconsolidated EuroSite Power in its consolidated financial statements and accounted for the investment on the equity method in its financial statements in accordance with GAAP, as of that date.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article
8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete 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
nine months ended
September 30, 2016
are not necessarily indicative of the results that may be expected for the year ended
December 31, 2016
.
The condensed consolidated balance sheet at
December 31, 2015
has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
, or the Annual Report.
There have been no significant changes in accounting principles, practices or inherent estimates from those reported in the Annual Report.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, EuroSite Power Limited, a United Kingdom registered company.
The Company’s operations are comprised of
one
business segment. The Company’s business is to sell energy in the form of electricity, heat, hot water, cooling, and natural gas to its customers under long-term sales agreements.
Note 2. Loss Per Common Share
The Company computes basic loss per share by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. The Company computes its diluted earnings per common share using the treasury stock method. For purposes of calculating diluted earnings per share, the Company considers its shares issuable in connection with stock options, warrants and debentures to be dilutive Common Stock equivalents when the exercise price is less than the average fair market value of the Company’s Common Stock for the period. For the
nine months ended
September 30, 2016
, the Company excluded
11,022,790
potentially dilutive shares resulting from stock options, warrants and convertible debentures. For the
nine months ended
September 30, 2015
, the Company excluded
11,165,000
potentially dilutive shares resulting from stock options, warrants and convertible debentures. All shares issuable for both periods were anti-dilutive as a result of the reported net loss.
Note 3. Income Taxes
The benefit for income taxes in the accompanying consolidated statements of operations for the
nine months ended
September 30, 2016
and
2015
differs from that which would be expected by applying the federal and foreign statutory tax rate primarily due to losses for which no benefit is recognized.
Note 4. Related Parties
American DG Energy and Tecogen Inc. are affiliated companies by virtue of common ownership and common leadership.
The Company purchases some of its energy equipment from American DG Energy. American DG Energy purchases energy equipment primarily from Tecogen, an affiliate of the Company, which manufactures natural gas, engine-driven commercial and industrial cooling and cogeneration systems and ultra-high efficiency heating products, such as a high efficiency water heater, for commercial and industrial applications utilizing advanced thermodynamic principles.
Elias Samaras is the Company's Chief Executive Officer, President, and a member of the board of directors. He is also a member of the board of directors of American DG Energy. His Company salary is
$1.00
per year, exclusive of option awards. On average, Dr. Samaras spends approximately
60%
of his business time on the affairs of the Company, but such amount varies widely depending on the needs of the business and is expected to increase as the business of the Company develops.
John N. Hatsopoulos was the chairman of the Company's board of directors, resigning on May 16, 2016, and is also the Co-Chief Executive Officer of American DG Energy and Tecogen. He is also a member of the board of directors of American DG Energy and Tecogen. His Company salary was
$1.00
per year. On average, Mr. Hatsopoulos spent
approximately
20%
of his business time on the affairs of the Company, but such amount varied widely depending on the needs of the business and is expected to increase as the business of the Company develops.
Bonnie J. Brown is the Chief Financial Officer, treasurer and secretary of the Company and American DG Energy. Her salary is paid by American DG Energy; however a portion was reimbursed by the Company according to the requirements of the business. On average, Ms. Brown spends approximately
25%
of her business time on the affairs of the Company, but such amount varies widely depending on the needs of the business.
Gabriel J. Parmese, was the Chief Financial Officer, treasurer and secretary of the Company and American DG Energy until August 12, 2015. His salary was paid by American DG Energy; however a portion was reimbursed by the Company according to the requirements of the business. On average, Mr. Parmese spent approximately
15%
of his business time on the affairs of the Company, but such amount varied widely depending on the needs of the business.
During the first quarter of
2015
, the Company prepaid
$1,000,000
of a related party note according to the terms of the agreement, leaving an outstanding balance of
$2,000,000
. During the second quarter of 2016, the outstanding balance of
$2,000,000
was repaid and this related party note was cancelled.
On July 7, 2015, the Company entered into a Revolving Line of Credit Agreement, (or the "Agreement"), with Elias Samaras, who is the Company's Chief Executive Officer, President, and a member of the board of directors. Under the terms of the Agreement, Dr. Samaras has agreed to lend the Company up to an aggregate of
$1 million
, at the written request of the Company. Any amounts borrowed by the Company pursuant to the Agreement will bear interest at
6%
per year. Interest is due and payable quarterly in arrears. The term of the Agreement is from July 7, 2015 to June 30, 2017. Repayment of the principal amount borrowed pursuant to the Agreement will be due on June 30, 2017. Prepayment of any amounts due under the Agreement may be made at any time without penalty. As of
September 30, 2016
,
no
amounts have been drawn on this line.
On June 28, 2016,
$2.1 million
of the Company’s
$2.4 million
of related party convertible debentures were converted into
3,909,260
shares of common stock of the Company at a price of
$0.54
per share. Additionally,
$11,000
of accrued interest was also converted at the same price. As the price used to convert the convertible debentures was less than the then contractual conversion price of
$0.60
per share of common stock, the fair value of the incremental shares issued to the holders of the convertible debentures over and above the contractually required amount of
$224,782
was expensed as debt conversion expense.
The Company’s operations are headquartered in Macclesfield England and consists of leased office space. The Company's corporate headquarters are located in Waltham, Massachusetts and consist of
3,282
square feet of office and storage space used by our former parent, American DG Energy and leased from Tecogen. American DG Energy is not currently charging the Company for utilizing its share of office space in the United States since it believes it is insignificant. The amounts due to American DG Energy and Tecogen as of
September 30, 2016
was
$22,029
and
$35,959
, respectively.
Note 5. Note payable - Bank
On September 30, 2016, the Company drew on its project loan agreement with Societe Generale for principal amount of $
349,665
, with interest at
5.34%
for a period of
5
years. This loan is collateralized by one project with minimum payments of 5,181.99 GBP to be made by the customer on a monthly basis.
Note 6. Commitments and Contingencies
The Company has certain commitments through its agreements with Tecogen and other related parties. See Note 4 "Related Parties" for more detail.
Note 6. Subsequent Events
The Company has evaluated subsequent events through the date of this filing and determined that no subsequent events occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Forward-looking statements are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company’s estimates change. Readers should not rely on those forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q, or the Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in this Quarterly Report and those included in the Company's Annual Report.
Overview
The Company distributes, owns and operates clean, on-site energy systems that produce electricity, hot water, heat and cooling in the United Kingdom. The Company derives sales from selling energy in the form of electricity, heat, hot water, cooling, and natural gas to its customers under long-term energy sales agreements (with a typical term of 10 to 15 years). The energy systems are owned by the Company and are installed in our customers' buildings. Each month we obtain readings from our energy meters to determine the amount of energy produced for each customer. We multiply these readings by the appropriate published price of energy (electricity, natural gas or oil) from our customers' local energy utility, to derive the value of our monthly energy sale, less the applicable negotiated discount. Our revenues per customer on a monthly basis may vary based on the amount of energy produced by our energy systems and the published price of energy (electricity, natural gas or oil) from our customers' local energy utility that month. The Company adds revenue streams as new energy systems are deployed and become operational.
The profitability of our business model is highly dependent on the functionality of our energy equipment, the price of electricity, the demand for electricity, and to a lesser extent, the price of natural gas. Increase in demand for electricity tends to cause prices to rise. Higher electricity prices increase the Company’s revenue and liquidity. Lower natural gas prices decrease operational cost. The Company does not have a primary source of natural gas or a principal supplier. The Company buys its natural gas from its customers and its customers' contracts with various local suppliers of natural gas. The Company does not hedge or lock in local natural gas prices, therefore, it is exposed to some natural gas cost risk. In addition, an uncertainty in the Company’s business model exists where the pricing model of electricity and natural gas in Europe differs from the pricing model in the United States. To mitigate the risk of low electrical rates, the Company pursues energy system projects in areas with higher electrical rates.
The Company is engaged in continual fundraising efforts. The primary purpose of these efforts is to raise capital for the installation of energy systems. Generally, fundraising causes liquidity to increase. When the Company spends these funds to add new energy systems, its liquidity decreases and its capital expenditures increase. Generally, when the Company’s new energy systems begin producing energy, the Company’s revenue increases.
There is an ongoing consideration of how to access and lower the cost of capital. The Company regularly assesses the cost and availability of debt capital, preferred stock, convertible debentures, private equity financing, and public common stock offerings. The effect these fundraising efforts have on the business will depend on the type of fundraising. Generally, debt and convertible debenture financing will increase interest expense. Generally, convertible debentures, private equity, and public equity have the potential to dilute shareholder’s earnings per share. To date, the Company has largely financed its growth through the private placements of convertible debt and equity. During the first quarter of 2016, the Company signed two project financing agreements which will provide funding for projects going forward.
On May 12, 2016, the Company completed a private placement with related parties of
12,608,696
shares of its common stock for aggregate proceeds of
$7.25 million
at
$0.575
per share. The shares sold in this placement are subject to a registration rights agreement where the Company has agreed to use its best efforts to register the shares issued at the request of the holder. The Company used a portion of the proceeds to pay off its debt to its former Chairman of $2,000,000, with the balance being retained to fund operations and growth.
On June 28, 2016, $2.1 million of the Company’s $2.4 million of convertible debentures were converted into
3,909,260 shares of
common stock of the Company at a price of $0.54 per share. Additionally, $11,000 of accrued interest was also converted at the same price. As the price used to convert the convertible debentures was less than the then contractual conversion price of $0.60 per share of common stock, the fair value of the incremental shares issued to the holders of the convertible debentures over and above the contractually required amount was expensed as debt conversion expense.
Third Quarter 2016
Compared to the
Third Quarter 2015
Revenues
Revenues in the
third quarter of 2016
were
$459,114
compared to
$421,991
for the same period in
2015
, an increase of
$37,123
or
8.8%
. The revenues increased primarily due to new sites and more sites being fully operational for a longer period of time in the
third quarter of 2016
as compared to the
third quarter of 2015
. At
September 30, 2016
, we had
32
systems operational compared to
28
systems as of
September 30, 2015
.
Cost of Sales
Cost of sales, including depreciation expense, in the
third quarter of 2016
was
$420,272
compared to
$467,582
for the same period in
2015
. The decrease of
47,310
or
10.1%
is primarily attributable to lower maintenance and fuel costs.
Gross Profit
Gross profit in the
third quarter of 2016
was
$38,842
, compared to
$(45,591)
for the same period in
2015
. Gross margin in the
third quarter of 2016
was
8.5%
compared to
(10.8)%
for the
third quarter of 2015
. The principal reason for the increase in profitability was the decrease in maintenance costs as well as lower fuel prices.
Operating Expenses
General and administrative expenses were
$379,286
in the
third quarter of 2016
, compared to
$194,053
for the same period in
2015
, an increase of
$185,233
or
95.5%
. The increase in general and administrative expenses was primarily due to an increase in stock compensation expense as well as the unfavorable currency exchange rate.
Selling expenses were
$127,917
in the
third quarter of 2016
, compared to
$122,826
for the same period in
2015
, an increase of
$5,091
or
4.1%
. The increase was primarily due to the addition of a new salesperson.
Engineering expenses were
$110,593
in the
third quarter of 2016
, compared to
$87,853
for the same period in
2015
. The increase in expense of
$22,740
, or
25.9%
, was due to higher payroll for new engineering staff and supplies expenses as a result of bringing service in house.
Other Income (Expense)
Interest income was
$6,167
in the
third quarter of 2016
, compared to
$965
for the same period in
2015
, which represents interest on our cash balance. The increase in interest income is due to the higher cash balance for the
third quarter of 2016
as compared to the
third quarter of 2015
. Interest and other expense was
$10,039
in the
third quarter of 2016
, compared to expense of
$8,599
for the same period in
2015
. The principal reason for higher expense in the
third quarter of 2016
was due to exchange rate charges resulting from funds transferred from the US.
Net Loss
Net loss was
$582,826
in the
third quarter of 2016
, compared to a net loss of
$457,957
for the same period in
2015
, an increase of
27.3%
from the prior year. This larger net loss is substantially due to the additional stock compensation expense, unfavorable currency fluctuations and increased engineering expenses.
First Nine Months of 2016
Compared to the
First Nine Months of 2015
Revenues
Revenues in the
first nine months of 2016
were
$1,786,583
compared to
$1,513,018
for the same period in
2015
. This was an increase of
$273,565
or
18.1%
. The revenues during the period increased due to the installation, start and expansion of energy generation at several sites. At
September 30, 2016
, we had
32
sites operational compared to
28
sites as of
September 30, 2015
.
Cost of Sales
Cost of sales including depreciation expense and expense for fuel, maintenance, and installation, in the
first nine months of 2016
was
$1,501,756
compared to
$1,481,897
for the same period in
2015
. This increase of
$19,859
or
1.3%
, is due to higher depreciation expense associated with more operating sites.
Gross Profit
Gross profit, in the
first nine months of 2016
, was
$284,827
, compared to
$31,121
for the same period in
2015
. Gross margin improved to
15.9%
as compared to
2.1%
for the same period in
2015
, an improvement of
13.8%
. The principal reason for the improvement in profitability was the decrease in maintenance costs as well as lower gas prices.
Operating Expenses
General and administrative expenses were
$1,011,546
in the
first nine months of 2016
, compared to
$627,798
for the same period in
2015
, an increase of
$383,748
or
61.1%
. The increase in general and administrative expenses was primarily due to an increase in stock compensation, legal and public relations expenses, as well as the unfavorable currency exchange rate.
Selling expenses were
$421,251
in the
first nine months of 2016
, compared to
$359,298
for the same period in
2015
, an increase of
$61,953
or
17.2%
. The increase was primarily due to the addition of a new salesperson as well as increased advertising and bad debt expenses.
Engineering expenses were
$289,089
in the
first nine months of 2016
, compared to
$162,008
for the same period in
2015
. The increase in expense of
$127,081
or
78.4%
is due to higher payroll, as well as transportation and supplies expenses as a result of bringing service in house.
Other Income (Expense)
Other income (expense), net was an expense of
$245,517
for the
first nine months of 2016
, compared to an expense of
$27,348
for the same period in
2015
, an increase in expense of
$218,169
. The principal reason for higher expense in 2016 was the debt conversion expense of
$224,782
incurred in connection with the second quarter 2016 conversion of debt to common stock of the Company on terms more favorable than the original contract.
Net Loss
Net loss was
$1,682,576
in the
first nine months of 2016
, compared to net loss of
$1,143,143
for the same period in
2015
. The increase in the net loss is primarily due to the debt conversion expense, additional stock compensation expense, currency fluctuations and increased selling expenses.
Liquidity and Capital Resources
Consolidated working capital was
$4,554,074
as of
September 30, 2016
, compared to
$750,948
at
December 31, 2015
. Included in working capital were cash and cash equivalents of
$4,597,780
as of
September 30, 2016
, compared to
$587,819
at
December 31, 2015
. The increase in working capital was primarily a result of the
$7.25 million
private placement of our common stock during the second quarter of 2016, offset by a payoff of related party debt of
$2 million
, as well as costs of operations and purchases of property and equipment related to our sites.
Cash used in operating activities was
$762,662
in the
first nine months of 2016
. Cash was provided by operating activities due to the receipt of the UK tax energy incentives of
$369,485
, offset by a net loss of
$1,682,576
.
The primary investing activities of the Company’s operations included the purchase of equipment. During the
nine months ended
September 30, 2016
, the Company used
$823,132
for purchases of equipment.
The Company owns the energy-producing equipment at the customer’s site; therefore, the business is capital intensive. The Company believes that its existing resources, including cash and cash equivalents, future cash flow from operations, its ability to control certain costs, including those related to general and administrative expenses, the project financing arrangements and the line of credit available from its CEO will be sufficient to meet the working capital requirements of its existing business for the foreseeable future; however, as the Company continues to grow its business by adding more energy systems, the cash requirements will increase. The Company may need to raise additional capital.
Our ability to continue to access capital could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us. If these conditions continue and we cannot increase our authorized shares and raise funds through a public or private debt financing, or an equity offering, our ability to grow our business may be negatively affected. In any such event, the Company may need to suspend any new installation of energy systems and significantly reduce its operating costs until market conditions or our access to capital improve.
Significant Accounting Policies and Critical Estimates
The Company's significant accounting policies are discussed in “Note 1 - Description of Business and Summary of Significant Accounting Policies” to its Consolidated Financial Statements which are incorporated in the Company's Annual Report filed with the Securities and Exchange Commission, or the SEC. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in “Note 1 - Description of Business and Summary of Significant Accounting Policies” to the Consolidated Financial Statements described above.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Emerging Growth Company
We are and we will remain an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, until the earliest to occur of (i) the last day of the fiscal year during which our total annual gross revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a large accelerated filer under the Securities Exchange Act of 1934, as amended.
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or Securities Act, for complying with new or revised accounting standards. However, we chose to “opt out” of any extended transition period, and as a result we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
