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BBLU > SEC Filings for BBLU > Form 10-K/A on 13-May-2014All Recent SEC Filings

Show all filings for BLUE EARTH, INC.

Form 10-K/A for BLUE EARTH, INC.


13-May-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under "Risk Factors".

Company Overview

Blue Earth, Inc. and subsidiaries (the "Company") is a comprehensive provider of energy efficiency and alternative/renewable energy solutions for small and medium sized commercial and industrial facilities. The Company also owns, manages and operates independent power generation systems constructed in conjunction with these services. Our turnkey energy solutions enable our customers to reduce or stabilize their energy related expenditures and lessen the impact of their energy use on the environment. Our services include the development, engineering, construction, operation and maintenance and in some cases, financing of small and medium scale alternative/renewable energy power plants including solar photovoltaic (PV), Combined Heat and Power ("CHP") or on-site cogeneration and fuel cells.

Results of Operations

Twelve Months Ended December 31, 2013 Compared with Twelve Months Ended December 31, 2012

The following Managements' Discussion and Analysis is prepared to provide an understanding of the Company's business activities. We acquired IPS Power Engineering, Inc. effective July 15, 2013, Intelligent Power, Inc. effective July 24, 2013 and Millennium Power Solutions effective August 23, 2013. The following Managements' Discussion and Analysis is prepared to provide an understanding of the Company's business activities.We disposed of HVAC as of January 24, 2014 and have restated our financial statements. The following discussion excludes the discontinued operations of HVAC. We have also provided pro forma numbers as though the acquisitions were effective January 1, 2012 so that the numbers are comparable.

Revenues

We recognized $10,305,736 revenue for the twelve months ended December 31, 2013, as compared to $8,466,965 for the twelve months ended December 31, 2011. Revenue represents sales from our, wholly-owned subsidiaries Castrovilla, whose sales include retrofitting refrigeration equipment with energy management systems and gasket sales from our wholly-owned subsidiary Xnergy, Inc. which provides a wide range of energy solutions, including specialized mechanical engineering and the design, construction and implementation of energy savings products. During 2013, Castrovilla's sales ($3,366,037) for the twelve months accounted for 32.7% of total revenues, while Xnergy's sales accounted for 64.6% ($6,656,828) most of which is EPC work on solar projects and other sales accounted for 2.7% ($282,871). During 2012, Castrovilla's sales ($3,444,821) for the twelve months represented 40.7% of total revenues while Xnergy's sales accounted for 59.3% ($5,022,144). The increase in Xnergy sales was the direct result of allocating most of Xnergy's resources to development of a pipeline of solar and alternative energy construction projects. Revenues for Xnergy are expected to increase in 2014 due to solar projects being constructed in HI and due to the signing of a solar finance partner to purchase solar projects at completion, which facilitates construction financing. Revenues for EPS are expected to increase in 2014 due to city and county agencies adopting the technology and a nationwide distribution network in place. Revenues for Castrovilla are expected to increase due to a new national service account and an increase in online sales.

Pro Forma Revenues

We recognized $10,466,736 of pro forma revenue for the twelve months ended December 31 2013, as compared to pro forma $8,566,660 for the twelve months ended December 31, 2012. Revenue represents sales from the Company's wholly-owned subsidiaries. Xnergy sales for the twelve months increased by 32.5% to $6,656,828 (from $5,022,144), Castrovilla's sales for the twelve months decreased by 2.3%, (from $3,444,821 to $3,366,037). The increase in Xnergy sales was the direct result of allocating most of Xnergy's resources to development of a pipeline of solar and alternative energy construction projects. Revenues for Xnergy are expected to increase in 2014 due to solar projects being constructed in HI and due to the signing of a solar finance partner to purchase solar projects at completion, which facilitates construction financing. Revenues for EPS are expected to increase in 2014 due to city and county agencies adopting the technology and a nationwide distribution network in place. Revenues for Castrovilla are expected to increase due to a new national service account and an increase in online sales.


Cost of Sales and Gross Profit

Cost of sales for the twelve months ended December 31, 2013 were $7,166,464, compared to $5,609,836, for the twelve months ended December 31, 2012, resulting in a gross profit of $3,139,272, or 30.4% of revenues. Castrovilla's gross margin was $1,828,288, or 54.3% of revenues while Xnergy's gross margin was $1,122,074, or 16.9%. Castrovilla's energy efficiency projects have higher gross margins than Xnergy's construction projects.

Pro Forma Cost of Sales and Gross Profit

Pro forma cost of sales for the twelve months ended December 31, 2013 were $7,313,368, compared to $5,685,174 for the twelve months ended December 31, 2012, resulting in a gross profit of $3,153,368, or 30.7% of revenues. In 2012 Castrovilla's gross margin was, $1,291,127, or 37.5% of revenues while Xnergy's pro forma gross margin was $1,566,002, or 31.2%. Castrovilla's energy efficiency products have higher gross margins than Xnergy's construction projects.

Operating Expenses

Operating expenses were $28,497,962 for the twelve months ended December 31, 2013 as compared to $14,167,889 for the twelve months ended December 31, 2012, an increase of $14,330,073 or 101.1%, due to common stock, options and warrants granted to management and consultants. During the year ended December 31, 2013 we incurred $17,106,843 of stock based compensation expense compared to $4,805,023 during 2012. Approximately $2,782,819 of our operating expenses for the twelve months ended December 31, 2013 were from the operations of Castrovilla and $3,052,414 were from Xnergy with the balance of $22,662,729 from our corporate administrative expenses. $2,322,778 of the operating expenses for the twelve months ended December 31, 2012 were from the operations of Castrovilla and $2,531,521 were from Xnergy with the balance of $9,313,590 our administrative expenses. Our administrative expenses for 2013 include $2,617,618 from the amortization of intangible assets acquired with Castrovilla, Xnergy, IP and MPS compared to $2,319,095 for 2012.

Pro Forma Operating Expenses

Pro forma operating expenses were $30,191,653 for the twelve months ended December 31, 2013 as compared to $15,732,561 for the twelve months ended December 31, 2012, due to an increase of $12,301,820 to common stock, options and warrants granted to management and consultants. During the year ended December 31, 2013 we incurred $17,478,571 of stock based compensation expense compared to $4,805,023 during 2012. Approximately $2,782,819 of our operating expenses for the twelve months ended December 31, 2013 were from the operations of Castrovilla and $3,052,414 were from Xnergy with the balance $24,356,420 from our corporate administrative expenses. $2,322,778 of the operating expenses for the twelve months ended December 31, 2012 were from the operations of Castrovilla and $2,531,521 were from Xnergy with the balance $10,878,262 from our corporate administrative expenses. Our pro forma administrative expenses for 2013 include $3,153,666 from the amortization of intangible assets acquired with Castrovilla, Xnergy, IP and MPS compared to $3,153,078 for 2012.

Net Loss

The net loss from continuing operations for the twelve months ended December 31, 2013 was $25,277,153, a $15,636,575, or 162% increase from the $9,640,578 for the twelve months ended December 31, 2012. This translates to a loss per share of $0.69 from continuing operations in 2013 compared to $0.51 in 2012.

Pro Forma Net Loss

The pro forma net loss from operations for the twelve months ended December 31, 2013 was $27,151,643, a $15,981,335 or 143% increase over the net loss of $11,170,308 for the twelve months ended December 31, 2012. This translates to a pro forma loss per share of $0.74 in 2011 compared to $0.59 in 2012.


Results of Operations

Twelve Months Ended December 31, 2012 Compared with Twelve Months Ended December 31, 2011

The following Managements' Discussion and Analysis is prepared to provide an understanding of the Company's business activities. We disposed of HVAC as of January 24, 2014 and have restated our financial statements. The following discussion excludes the discontinued operations of HVAC.

Revenues

We recognized $8,466,965 revenue for the twelve months ended December 31, 2012, as compared to $4,914,118 for the twelve months ended December 31, 2011 an increase of 72.3%. Revenue represents sales from our, wholly-owned subsidiaries Castrovilla, whose sales include retrofitting refrigeration equipment with energy management systems and gasket sales from the our wholly-owned subsidiary Xnergy, Inc. which provides a wide range of energy solutions, including specialized mechanical engineering and the design, construction and implementation of energy savings products. During 2012, Castrovilla's sales ($3,444,821) for the twelve months represented 40.7% of total revenues while Xnergy's sales accounted for 59.3% ($5,022,144). During 2011, Castrovilla's sales ($3,861,534) for the twelve months accounted for 78.6% of total revenues, while Xnergy's sales accounted for 21.4% ($1,052,584). Revenues increased from 2011 to due to management securing project financing for financing seven California solar projects and one Hawaiian solar project.

Cost of Sales and Gross Profit

Cost of sales for the twelve months ended December 31, 2012 were $5,609,836, compared to $2,559,545, for the twelve months ended December 31, 2011, resulting in a gross profit of $2,857,129, or 33.7% of revenues during 2012. Castrovilla's gross margin was $1,291,127, or 37.5% of revenues while Xnergy's gross margin was $1,566,002, or 31.2%. By way of comparison cost of sales for the twelve months ended December 31, 2011 were $2,559,545, resulting in a gross profit of $2,354,573, or 47.9%. Castrovilla's gross margin was $2,268,235, or 58.7% of revenues while Xnergy's gross margin was $86,338, or 8.2%. The decline in total gross margin percentage was due to the increase in Xnergy's revenues as a percentage of total revenues. Castrovilla's products have higher gross margins than Xnergy's construction projects.

Operating Expenses

Operating expenses were $14,167,889 for the twelve months ended December 31, 2012 as compared to $15,504,604 for the twelve months ended December 31, 2011, a decrease of $1,336,715 or 8.6%, due to cost cutting activities imposed by management. During the year ended December 31, 2012 we incurred $4,805,023 of stock based compensation expense compared to $7,774,692 during 2011 which accounts the majority of the cost reductions. $2,322,778 of the operating expenses for the twelve months ended December 31, 2012 were from the operations of Castrovilla and $2,531,521 were from Xnergy with the balance of $9,313,590 were our administrative expenses. Approximately $2,837,083 of our operating expenses for the twelve months ended December 31, 2011 were from the operations of Castrovilla and $1,022,834 were from Xnergy with the balance $11,644,687 from our corporate administrative expenses. Our administrative expenses for 2012 include $2,319,095 from the amortization of intangible assets acquired with Castrovilla and Xnergy compared to $1,209,769 for 2011 since Xnergy was acquired in August 2011.

Net Loss

The net loss from continuing operations for the twelve months ended December 31, 2012 was $9,640,578, a $4,359,770, or 31.1% decrease from the $14,000,348 for the twelve months ended December 31, 2011. This translates to a loss per share of $0.51 in 2012 compared to $0.93 in 2011.


Liquidity and Capital Resources as of December 31, 2013

Net cash used in continuing operations during the twelve months ended December 31, 2013 ("Fiscal 2013") totaled $11,969,742 which resulted primarily from the operating expenses associated with the parent company related to carrying out our business plan. In addition to a net loss of $25,473,394, we recognized an increase in prepaid expenses and deposits of $1,013,109, an increase in accounts receivable and billings in excess of costs of $2,827,827 and an increase in construction in progress totaling $1,548,859. These decreases were partially offset by stock based compensation expense of $17,106,843 and $2,745,126 of depreciation and amortization expense.

Net cash used in continuing operations during the twelve months ended December 31, 2012 totaled $5,686,300 which resulted primarily from the operating expenses associated with the parent company related to carrying out our business plan.
In addition to a net loss of $9,607,134, we incurred a decrease in the warrant derivative liability of $2,037,325, an increase in billings in excess of costs of $2,615,316. These decreases were partially offset by common stock, options and warrants issued for services expensed at $4,805,023 and $2,532,673 of depreciation and amortization expense.

Net cash used in continuing operations during the twelve months ended December 31, 2011 totaled $3,921,516 which resulted primarily from the operating expenses associated with the parent company related to carrying out our business plan.
In addition to a net loss of $14,018,986, we incurred an increase an increase in inventory of $347,174 and a decrease in accounts payable and accrued expenses of $260,627. These decreases were partially offset by common stock, options and warrants issued for services expensed at $8,672,945, an increase in the warrant derivative liability of $749,166, and $1,209,769 of depreciation and amortization expense.

Net cash used in investing activities during Fiscal 2013 totaled $2,321,905. Of this amount, $126,351 was used to purchase property and equipment and $2,195,554 were loans made to unrelated parties to enhance our access to solar panels. Net cash used in continuing investing activities during Fiscal 2012 totaled $10,188 and resulted from the purchase of property and equipment. Net cash used in continuing investing activities during Fiscal 2011 totaled $1,403,181 and resulted from the purchase of property and equipment of $117,789, a license to technology of $100,000 and the acquisition of subsidiaries of $1,185,392.

Net cash provided by continuing financing activities during Fiscal 2013 totaled $22,138,931 and resulted from $8,517,315 of net proceeds from the sale of preferred stock, $12,396,321 from the exercise of warrants and options and $3,000,000 in proceeds from a line of credit. These proceeds were offset, in part, by payments on notes payable of $2,034,312 and related party loans of $691,853. Included in the foregoing, on October 30, 2013, David Lies, a principal stockholder and selling stockholder of the Company, purchased 333,334 shares of Common Stock upon the exercise of Class A Warrants as a standby purchaser, for a purchase price of $1,000,000 evidenced by a non-interest bearing promissory note due March 31, 2014 and the pledge of the underlying common stock. The underlying shares of common stock were purchased pursuant to an effective registration statement and the promissory note has been paid in full. A second standby purchaser, Firerock Capital, purchased 200,000 shares of registered common stock pursuant to a promissory note for $600,000 due May 15, 2014, as extended.

Net cash provided by continuing financing activities during Fiscal 2012 totaled $5,720,251 and resulted from $3,598,388 of net proceeds from the sale of preferred stock, $91,950 from the exercise of warrants, $1,605,000 from related party loans and $1,208,008 from the proceeds of notes payable. These inflows were offset, in part, by payments on notes payable of $776,481 and payments on related party loans of $6,614.

Net cash provided by continuing financing activities during Fiscal 2011 totaled $2,113,549 and resulted from $2,000,000 of proceeds from the sale of preferred stock, $16,336 from related party loans and $1,711,655 in cash received from the acquired subsidiaries. These inflows were offset, in part, by payments on notes payable of $1,614,442.

At December 31, 2013, we had working capital of $14,321,543 including $8,403,731 in cash. At December 31, 2012, we had a working capital deficit of $951,340, including $485,366 in cash. The increase in working capital was the result of the completion of common stock warrant funding and the Series C preferred stock funding.


We anticipate our revenue generating activities to continue and even increase as we execute on our alternative/renewable energy and energy efficiency initiatives as well as from future acquisitions. Our ability to execute our business plan is subject to our ability to generate profits and/or obtain necessary funding from outside sources, including by the sale of our securities, or obtaining loans from lenders, where possible. Our continued net operating losses increase the difficulty of our meeting these goals. Nonetheless, the Company expects that it has sufficient cash and borrowing capacity to meet its working capital needs for at least the next 12 months. The Company's project financing requirements are separate and apart from our working capital needs. Historically, we have financed our working capital and capital expenditure requirements primarily from the sales of our equity securities. We may seek additional equity and/or debt financing in order to implement our business plan. During 2013, we completed private placements of Preferred Stock and warrants of $20,913,636, which we believe will fund our operations at least through December 31, 2014.

On February 22, 2013, we entered into a credit agreement with a $10 million line of credit of which $1,500,000 was funded and repaid during 2013. $4,000,000 is currently available upon our meeting the terms and conditions of the credit facility and a second draw of $1,500,000 was subsequently borrowed by the Company. This outstanding loan of $1,500,000 is being paid monthly with interest at 12% per annum, primarily from tax grant proceeds from five completed solar projects. The balance is expected to be fully paid during the second quarter ending June 30, 2014. Additional draws are subject to approval of the planned use of proceeds by the lender in order to borrow against the facility. The Company has elected to not draw down any additional funds at this time and expects to replace this credit facility with larger debt agreements that meet our ongoing project finance requirements. See "Risk Factors -- Our credit facilities and debt instruments contain financial and operating restrictions that may limit our business activities and our access to credit."

We are seeking additional equity and/or debt financing in order to implement our business plan. During the fourth quarter of 2013, the Company raised approximately $12 million (including $1,600,000 payable through promissory notes) in equity capital through the exercise of approximately four million registered Class A warrants at $3 per share. The primary use of the capital raise will be to provide the equity component of project financing of approximately $130 million for up to seven initial combined heat and power ("CHP") projects for a large U.S and International protein provider.

The Company is negotiating with alternative financing services for a various combination of equity and debt project financing. The Company has non-binding term sheets from an international bank and mezzanine debt providers that would result in approximately 8% equity and 92% project finance debt for our larger CHP power plants. To date, the Company is using cash on hand to advance the projects on schedule while negotiating with numerous alternative sources of funding. The Company intends to start signing financing agreements in time to match the debt and equity components to keep the project completion dates on target. While there can be no assurance the Company will be able to secure needed financing, Management believes it will be able to select the financing package needed to insure that all seven projects can be completed in the third quarter of 2014 through the first quarter of 2015. Any additional equity or convertible debt financing may be dilutive to existing shareholders and may involve preferential rights over common shareholders.

Between December 2013 and March 2014, the Company ordered generators for an aggregate of five of the initial seven power plant systems at a total cost of approximately $23.7 million. The Company is funding the installment equipment payments and construction activities from cash on hand until we select the best debt financing alternatives for each project or combination of projects. The Company believes the project financing needs will be met from a combination of warrant exercises and debt financings, none of which can be assured. Management's present estimate of timing and funding for the seven co-generation projects is as follows:

The cost of the initial 7 projects is $5,000,000 to $25,000,000 per project with a total estimated cost of $130,000,000. Funding will through equity (generally 8-30%), senior debt (generally 60-70%) and mezzanine debt (generally 0-30%). The equity component is expected to be provided from cash on hand and the exercise of warrants. All seven projects are in the pre-construction phase (permitting, interconnect activities, site analysis, design engineering and procurement of equipment).The first project is expected to produce power in the third quarter of 2014, projects 2-5 are expected to produce power by late fourth quarter 2014 or early 2015 and projects 6-7 ae expected to produce power in the first quarter of 2015. Furthermore, any additional equity or convertible debt financing will be dilutive to existing shareholders and may involve preferential rights over common shareholders. Debt financing, with or without equity conversion features, may involve restrictive covenants.

Related Party Transactions

During the years ended December 31, 2013 and 2012 we borrowed $420,000 and $1,605,000 from a director. We repaid $691,853 to the director during the year ended December 31, 2013.

Off-Balance Sheet Arrangements

Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.


New Accounting Pronouncements

See Note 2 to our audited condensed consolidated financial statements for a discussion of recently issued accounting pronouncements.

Use of Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities.On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to valuation of accounts receivable and allowance for doubtful accounts, those related to the estimates of depreciable lives and valuation of property and equipment, valuation of derivatives, valuation of payroll tax contingencies, valuation of share-based payments, and the valuation allowance on deferred tax assets.

Accounts Receivable

The Company records accounts receivable related to its construction contracts based on billings or on amounts due under the contractual terms. Accounts receivable throughout the year may decrease based on payments received, credits for change orders, or back charges incurred.

Management reviews accounts receivable periodically to determine if any receivables will potentially be uncollectible. Management's evaluation includes several factors including the aging of the accounts receivable balances, a review of significant past due accounts, economic conditions, and our historical write-off experience, net of recoveries. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Revenue Recognition

The Company generates revenues from professional services contracts. Customers are billed, according to individual agreements. Revenues from professional services are recognized on a completed-contract basis, in accordance with ASC Topic 605-35, "Construction-Type and Production-Type Contracts." Under the completed-contract basis, contract costs are recorded to a deferred asset account and billings and/or cash received are recorded to a deferred revenue liability account during the periods of construction. Costs include direct material, direct labor and subcontract labor. All revenues, costs, and profits are recognized in operations upon completion of the contract. A contract is considered complete when all costs except insignificant items have been incurred and final acceptance has been received from the customer. Corporate general and administrative expenses are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as incurred.

For uncompleted contracts, the deferred asset (accumulated contract costs) in excess of the deferred liability (billings and/or cash received) is classified under current assets as Costs in excess of billings on uncompleted contracts. The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current liabilities as Billings in excess of costs on uncompleted contracts. Contract retentions are included in accounts receivable.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, "Income Taxes." Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year, and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity's financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized. A liability (including interest if applicable) is established in the consolidated financial statements to the extent a current . . .

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