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BBLU > SEC Filings for BBLU > Form 10-Q on 16-May-2014All Recent SEC Filings

Show all filings for BLUE EARTH, INC.

Form 10-Q for BLUE EARTH, INC.


16-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

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. The Company built and owned a 500,000 watt solar powered facility on the Island of Oahu, Hawaii, which it has contracted to sell and has also built, operates and manages seven solar powered facilities in California and is designing and permitting numerous other projects. 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 offered 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. Although the Company has a limited operating history and limited revenues in comparison to the size of the projects it has undertaken, as a result of the Company's acquisitions, it is fully staffed with experienced personnel who have previously built many larger complex power plants. Our first CHP plant is expected to be completed in August 2014 with power revenues commencing thereafter.

We will build, own, operate and/or sell the power plants or build them for the customer to own. As we continue to expand our core energy services business as an independent power producer we intend to sell the electricity, hot water, heat and cooling generated by the power plants that we own under long-term power purchase agreements to utilities, and long-term take or pay contracts to our industrial customers. The Company also finances alternative and renewable energy projects through industry relationships.

We provide our customers with a variety of measures to improve the efficiency of their facilities' energy consumption by designing, developing, engineering, installing, operating, maintaining and monitoring their major building systems, including refrigeration, lighting and heating, ventilation and air-conditioning.

We offer our utility customers, energy efficiency programs, such as our proprietary Keep Your Cool™ refrigeration program, adopted by 19 utilities, targeted to their small and medium-sized commercial customers. Our utility based, rate- payer incentive programs, are designed to help commercial businesses use less energy through the upgrade of existing equipment with new, more efficient equipment that helps reduce demand for electricity, lower energy bills and also enable utilities to satisfy state-mandated energy reduction goals. In addition to designing and administering the utility program, we perform the technical audits, sell the program to the commercial customer and in most instances, provide the installation of the equipment.


We have continued to expand our comprehensive energy solutions business through strategic acquisitions of companies that have been providing energy solutions to an established customer base or have developed a proprietary technology that can be utilized by our customers to improve equipment reliability, reduce maintenance costs and provide a better overall operating environment. The acquired companies' operational activities are being conducted through the following six business units: Blue Earth Solar; Blue Earth CHP; Blue Earth EMS; Blue Earth PPS, Blue Earth Capital and Blue Earth EPS. The primary strategic objective for the respective business units is to establish and build brand awareness about the comprehensive energy solutions provided by the Company to its existing and future customers. Each of the Company's five business units is generating revenue, although Blue Earth PPS and Blue Earth CHP have limited revenues, as described below.

Proprietary technologies owned by the Company are the PeakPower® System (PPS) and the UPStealth™ System. The PeakPower® System is a patented demand response, cloud based technology, that allows remote, wireless monitoring of refrigeration units, lighting and heating, ventilation and air conditioning in thousands of facilities such as super markets and food processing, restaurants and C-stores, drug and discount stores. Blue Earth EPS currently has several energy management systems operational in grocery stores. Revenues are expected to ramp up in 2014, as the Company is making some system changes before a major commercial roll out in 2014. The technology enables the Company's business unit, Blue Earth PPS, to provide energy monitoring and control solutions with real-time decision support to protect our customers' assets by preventing costly equipment failures and food product losses. Our PeakPower® System also serves as a platform to enter into long-term services agreements that allow most types of refrigeration equipment failures to be predicted, thereby enabling preventive servicing based on need rather than periodic, scheduled and costly service calls. The primary purpose of the acquisition of Intelligent Power on July 24, 2013 was to acquire the patent and other intellectual property rights in the above-described energy saving technology.

The patent pending UPStealth™ energy power solution (EPS) Management believes, based on its knowledge of the industry, is the only energy efficient, intelligent digital battery backup management system that was designed to power signalized intersections during loss of utility power. This system has been tested, approved and installed in several cities and municipalities throughout the United States. UPStealth™ is designed as an alternative to lead-acid battery backup systems, enabling the Company's business unit, Blue Earth EPS, to provide its customers with an environmentally friendly product that is completely recyclable with no issues of hazardous out-gassing, corrosion, flammable or explosive characteristics. The UPStealth™ battery backup management system can be formed in various configurations that allow the intelligent battery to bend around corners and fit into spaces that cannot be accessed by traditional battery backup systems. Compared to lead-acid battery backup systems, our innovative UPStealth™ energy power solution's cost of ownership is less, requires less maintenance, performs several years longer, and eliminates costly hazardous disposal issues. We also offer a finance program, which allows cities and municipalities to replace existing systems without capital expenditures.

There are several other market verticals where we believe both our proprietary technologies can be applied, separately, or in combination, as a viable, cost effective solution. Examples include: services for data centers, oil and natural gas wells, remote cell towers, risk management services, and demand response systems to decrease energy usage during peak load pricing periods charged by utilities.

Actual Results of Operations

Our revenues are derived from professional services contracts to provide energy service management and technology.

Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 (Actual)

Revenues

The Company recognized $3,234,217 of revenue for the three months ended March 31, 2014, as compared to $2,163,330 in revenues for the three months ended March 31, 2013, an increase of $1,070,887 or 49.5%. The current revenues represent sales from the Company's divisions, Blue Earth Solar ($1,826,309) Blue Earth Energy Management Services ($1,355,049) and Blue Earth Energy Power Solutions of ($52,859). The prior year revenues represent sales from the Company's divisions Blue Earth Solar ($1,481,916) and Blue Earth Energy Management Services ($681,414). Blue Earth Energy Management Services sales include retrofitting refrigeration equipment with energy management systems and gasket sales. Blue Earth Solar's sales are from installation of alternative energy systems and installation and maintenance of HVAC systems. Blue Earth Energy Management Services revenues were affected by a new contract with a national chain of convenience stores. Blue Earth Solar's revenues increased due to the acquisition of EPC contracts for solar generation projects in Hawaii.


Cost of Sales and Gross Profit

Cost of sales for the three months ended March 31, 2014 were $1,788,309 resulting in a gross profit of $1,445,908 or 44.7% of revenues. Blue Earth Energy Management Services had a gross profit of $818,366 or 60.4% compared to $624,900 or 34.2% for Blue Earth Solar and Blue Earth Energy Power Solutions had a gross profit of $1,984 or 3.8%. By comparison, during 2013 we had a cost of sales of $1,443,607 with a gross profit of $719,723 or 33.3%. Blue Earth Energy Management Services had a gross profit of $394,660 or 57.9% compared to $325,063 or 21.9% for Blue Earth Solar.

Operating Expenses

General and Administrative Expenses and Depreciation and Amortization Expense

Operating expenses were $6,908,959 for the three months ended March 31, 2014 as compared to $2,470,697 for the three months ended March 31, 2013, an increase of $4,438,262 or 180%. In 2014 approximately $812,318 (11.8%) of the expenses were from Blue Earth Energy Management Services and $984,719 (14.3%) were from Blue Earth Solar. The balance of $5,111,922 (73.9%) for 2014 was corporate administrative expense. Approximately $1,960,697 (28.4%) of the general and administrative expenses was for payroll costs and $1,602,807 (23.2%) was for consulting and professional fees in 2014.

In 2013 approximately $658,131 (26.7%) of the expenses were from Blue Earth Energy Management Services and $529,611 (21.4%) were from Blue Earth Solar. The balance of $1,282,955 (51.9%) for 2013 was corporate administrative expense. Approximately $757,794 (30.7%) of the general and administrative expenses was for payroll costs and $320,552 (12.0%) was for professional fees in 2013.

In 2014, general and administrative expenses include stock compensation expense of $1,860,269 (26.9%) compared to $50,418 (2.0%) in 2013. We recorded depreciation and amortization expense of $1,076,026 in 2014 compared to $598,697 in 2013. The increase was due to the amortization of the purchase price of Millennium Power Solutions and Intelligent Power which were purchased during 2013 and Blue Earth Capital, Inc. which was purchased in 2014.

We expect our costs for personnel, consultants and other operating expenses to increase as we implement our business plan. Thus, our general and administrative expenses are likely to increase significantly in future reporting periods.

Other Income (Expense)

Total other income (expense) for the three months ended March 31, 2014 was $(223,409) compared to $(82,522) for the three months ended March 31, 2013. The increase was primarily attributable to interest expense which increased to $235,584 in the first quarter of 2014 compared to $71,374 in the first quarter of 2013 due to borrowings of related party notes payable and a line of credit.

Net loss was $5,686,460 for the three months ended March 31, 2014 as compared with a net loss of $1,877,417 for the three months ended March 31, 2013, an increase of $3,809,043. Excluding the non cash expenses of common stock for services, amortization of intangible assets acquired for stock and stock options/warrants issued for services the loss would have been $2,782,080 and $1,247,225 for 2014 and 2013, respectively. The increase is attributable primarily to the warrants and options issued to management personnel issued in the previous year but vesting the current year. It also increased due to amortization of the assets acquired in the purchase of our new subsidiaries. The net loss attributed to common shareholders was $6,079,348 in 2014 compared to $2,026,583 in 2013 due to the dividends accrued on the Series C preferred stock and paid in common shares. The net loss translates to $0.09 per share in 2014 compared to $0.09 in 2013.

Pro Forma Results of Operations

Our revenues are derived from professional services contracts to provide energy service management and technology. The following pro forma results of operations are presented as though the acquisitions of IPS, MPS and IP took place on January 1, 2013.


Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 (Pro Forma)

Pro Forma Revenues

The Company recognized $3,234,217 of revenue for the three months ended March 31, 2014, as compared to $2,246,086 in pro forma revenues for the three months ended March 31, 2013, an increase of $988,131 or 44%. The current revenues represent sales from the Company's wholly-owned subsidiaries Blue Earth Solar ($1,826,309) Blue Earth Energy Management Services ($1,355,049) and Blue Earth Energy Power Solutions ($52,859). The prior year pro forma revenues represent sales from the Company's divisions, Blue Earth Solar ($1,481,916) and Blue Earth Energy Management Services ($681,414) and Blue Earth Energy Power Solutions ($82,756). Blue Earth Energy Management Services' sales include retrofitting refrigeration equipment with energy management systems and gasket sales. Blue Earth Solar's sales are from installation of alternative energy systems and installation and maintenance of HVAC systems. Blue Earth Energy Management Services's revenues were affected by a new contract with a national chain of convenience stores. Blue Earth Solar's revenues increased due to the acquisition of EPC contracts for solar generation projects in Hawaii.

Pro Forma Cost of Sales and Gross Profit

Cost of sales for the three months ended March 31, 2014 were $1,788,309 resulting in a gross profit of $1,445,908 or 44.7% of revenues. Blue Earth Energy Management Services had a gross profit of $818,366 or 60.4% compared to $624,900 or 34.2% for Blue Earth Solar and Blue Earth Energy Power Solutions had a gross profit of $1,984 or 3.8%.. By comparison, during 2013 we had a pro forma cost of sales of $1,502,317 with a gross profit of $743,769 or 33.1%. Blue Earth Energy Management Services had a gross profit of $394,660 or 57.9% compared to $325,063 or 21.9% for Blue Earth Solar.

Pro Forma Operating Expenses

General and Administrative Expenses and Depreciation and Amortization Expense

Operating expenses were $6,908,959 for the three months ended March 31, 2014 as compared to pro forma $2,693,504 for the three months ended March 31, 2013, an increase of $4,215,455 or 156.5%. In 2014 approximately $812,318 (11.8%) of the expenses were from Blue Earth Energy Management Services and $984,719 (14.3%) were from Blue Earth Solar. The balance of $5,111,922 (73.9%) for 2014 was corporate administrative expense. Approximately $1,960,697 (28.4%) of the general and administrative expenses was for payroll costs and $1,602,807 (23.2%) was for consulting and professional fees in 2014.

In 2013 approximately $658,131 (24.4%) of the expenses were from Blue Earth Energy Management Services and $529,611 (19.7%) were from Blue Earth Solar. The balance of $1,505,762 (55.9%) for 2013 was corporate administrative expense. Approximately $933,351 (34.7%) of the general and administrative expenses was for payroll costs and $324,510 (12.0%) was for professional fees in 2013.

In 2014, general and administrative expenses include stock compensation expense of $1,860,269 (26.9%) compared to $50,418 (2.0%) in 2013. We recorded depreciation and amortization expense of $1,076,026 in 2014 compared to $598,697 in 2013. The increase was due to the amortization of the purchase price of Millennium Power Solutions and Intelligent Power which were purchased during 2013 and Blue Earth Capital, Inc. which was purchased in 2014.

We expect our costs for personnel, consultants and other operating expenses to increase as we implement our business plan. Thus, our general and administrative expenses are likely to increase significantly in future reporting periods.

Pro Forma Other Income (Expense)

Total other income (expense) for the three months ended March 31, 2014 was $(223,409) compared to pro forma $(82,450) for the three months ended March 31, 2013. The increase was primarily attributable to interest expense which increased to $235,584 in the first quarter of 2014 compared to $71,374 in first quarter of 2013 due to borrowings of related party notes payable and a line of credit.


Pro Forma Net Loss

Net loss was $5,686,460 for the three months ended March 31, 2014 as compared with a pro forma net loss of $2,075,655 for the three months ended March 31, 2013, an increase of $3,610,805. Excluding the non cash expenses of common stock for services, amortization of intangible assets acquired for stock and stock options/warrants issued for services the loss would have been $2,782,080 and $1,445,463 for 2014 and 2013, respectively. The increase is attributable primarily to the warrants and options issued to management personnel issued in the previous year but vesting the current year. It also increased due to amortization of the assets acquired in the purchase of our new subsidiaries. The net loss attributed to common shareholders was $6,079,348 in 2014 compared to pro forma $2,224,821 in 2013 due to the dividends accrued on the Series C preferred stock and paid in common shares. The net loss translates to $0.09 per share in 2014 compared to pro forma $0.10 in 2013.

Liquidity and Capital Resources as of March 31, 2014 compared with December 31, 2013

Net cash used in operating activities during the three months ended March 31, 2014 totaled $2,704,046 and 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 $5,686,460, we incurred an increase in accounts receivable and billings in excess of $731,331 that was partially offset by common stock options and warrants granted for services expensed at $1,189,727, common stock issued for services valued at $670,542 and depreciation and amortization of $1,076,026. We also increased our accounts payable and accrued expenses by $406,480 due to costs incurred on construction in progress.

Net cash used in operating activities s during the three months ended March 31, 2013 totaled $1,296,979 and 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 $1,877,417, we incurred an increase in accounts receivable and billings in excess of $506,849 and an increase in inventory of $103,897. These outflows were partially offered by common stock warrants and options granted for services expensed at $42,217, common stock issued for services valued at $8,201, depreciation and amortization of $598,697, an increase in accounts payable and accrued expenses of $349,384 and a decrease in prepaid expenses and deposits of $161,620. We expect to continue with a negative cash flow from operations for the foreseeable future as we continue to build our business.

Net cash used in investing activities during the three months ended March 31, 2014 totaled $1,354,475 which included $1,353,588 for purchases of equipment. Net cash used in investing activities during the three months ended March 31, 2013 totaled $-0-.

Net cash provided by financing activities during the three months ended March 31, 2014 totaled $658,143 and resulted from $1,000,000 of collections on stock subscriptions receivable and $100,857 from the exercise of options and warrants. The cash inflows were offset by principal payments on notes payable and line of credit $438,710 and notes payable to related parties of $4,004. Net cash provided by financing activities during the three months ended March 31, 2013 totaled $1,267,213. These inflows primarily came from $281,450 of gross proceeds from the exercise of options and warrants, related party loans of $290,000 and proceeds of the line of credit of $1,500,000. The inflows were offset by payments on notes payable of $54,237 and notes payable to related parties of $750,000.

At March 31, 2014, we had working capital of $10,571,090 including $4,985,471 in cash and cash equivalents compared with working capital of $14,321,543 at December 31, 2013. 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. 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 increase in working capital was the result of our positive cash flow from financing activities.

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.

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.


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. In 2013, we completed a private placement of preferred stock of $8,517,315 and of options and warrants of $12,396,321. We raised an additional $1,100,857 as of March 31, 2014. We have a line of credit for $10,000,000 of which $4,000,000 is available and we are currently using $1,064,502 to meet our cash needs.
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.

On August 30, 2013 we entered into a Strategic Partnership Agreement, as amended on October 10, 2013, with Talesun Solar USA, Ltd. ("Talesun") and New Generation Power LLC ("NGP"), as amended on October 10, 2013, which includes a commitment from Talesun to grant us engineering, procurement and construction contracts ("EPC") for 18 MW of Talesun Solar PV projects. NGP granted us EPC contracts for approximately 150 MW of projects over the next 20 months. EPC contracts have been signed for several projects, but project financing has not occurred; therefore, they are still considered pipeline. We loaned NGP $2,000,000, which was collateralized by safe harbored solar panels to be utilized on NGP's solar projects. Our commitment to lend up to an additional $4,500,000, as verbally extended, expired on March 31, 2014, however, we are negotiating a possible extension of the commitment. NGP will contract with us to build the solar projects on a cost plus basis. The loan is to be repaid during the construction phase of the projects..

Related Party Transactions

The Company had no significant related party transactions during the three months ended March 31, 2014.

New Accounting Pronouncements

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

Critical Accounting Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed 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.

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.

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