ALTERNUS ENERGY INC. Forward-Looking Statements
The following is a discussion and analysis of our financial condition and results of operations for the fiscal years endedDecember 31, 2019 and 2018. You should read this discussion and analysis together with our Consolidated Financial Statements and related notes and the other financial information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under "Risk Factors" and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements." Overview We are a global IPP. We develop, own and operate solar PV parks that connect directly to national power grids. Our current revenue streams are generated from long-term, government-mandated, fixed price supply contracts with terms of between 15-20 years in the form of government FiTs and other energy incentives. Our current contracts deliver annual revenues, of which approximately 75% are generated from these sources with the remaining 25% deriving from revenues generated under contracted PPAs with other energy operators and by sales to the general energy market in the countries we operate. In general, these contracts generate an average sales rate for every kWh of green energy produced by our solar parks. Our current focus is on the European solar PV market. However, we are also actively exploring opportunities in other countries outside ofEurope . The Company is not a manufacturer of solar panels or other related equipment but generates 100% of its revenues from energy sales under long term contracts as described above. By design, we currently focus exclusively on energy generation and as a result, we are technology agnostic and can therefore customize our solar parks based on local environmental and regulatory requirements and continue to take advantage of falling component prices over time. We use annual contracted revenues as a key metric in our financial management of the business as we feel it better reflects the long-term stability of operations. Annual contracted revenues is defined as the estimated future revenue based on the remaining term, price and estimated production of the offtake contract of the solar park. It must be noted that the actual revenues reported by the Company in a particular year may be lower than the annual contracted revenues because not all parks may be revenue generating for the full year in their first year of operation, and also to allow for timing of acquisitions that take place throughout the financial year. Our goal is to grow our asset base and within our operations provide sufficient liquidity for recurring growth capital expenditures and general purposes. We expect to achieve this growth and deliver returns by focusing on the following initiatives:
Value-Oriented Acquisitions:
We focus on sourcing off-market transactions at more attractive valuations than
auction processes. We believe that targeting smaller solar projects 1MW to 20
MWs and working within country developer partners allows us to acquire high
quality assets at attractive relative values. We continue to develop an
acquisition pipeline across our scope of operations.
Margin Enhancements:
We believe there is significant opportunity to enhance our cash flow through
optimizing the performance of our existing assets. In the second quarter of
2019, we executed service agreements with BayWa r.e., such agreements provide
reduction in operations and maintenance expense, provide 24/7 monitoring of our
assets and increase revenue through deployment of technology.
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Factors that Significantly Affect our Results of Operations and Business
We expect the following factors will affect our results of operations:
Offtake contracts
Our revenue is primarily a function of the volume of electricity generated and sold by our renewable energy facilities as well as, where applicable, the sale of green energy certificates and other environmental attributes related to energy generation. Our current portfolio of renewable energy facilities is generally contracted under long-term FiT program or PPAs with creditworthy counterparties. As ofDecember 31, 2019 , the weighted average remaining life of our FiT and PPAs was 13 years. Pricing of the electricity sold under these FiT and PPAs is generally fixed for the duration of the contract, although some of our PPAs have price escalators based on an index (such as the consumer price index) or other rates specified in the applicable PPA. We also generate RECs as we produce electricity. RECs are accounted for as governmental incentives and are considered operational revenue as part of the solar facilities. These RECs are currently sold pursuant to agreements with third parties and the arrangements is recognized as the underlying electricity is generated.
Project operations and generation availability
Our revenue is a function of the volume of electricity generated and sold by our renewable energy facilities. The volume of electricity generated and sold by our renewable energy facilities during a particular period is impacted by the number of facilities that have achieved commercial operations, as well as both scheduled and unexpected repair and maintenance required to keep our facilities operational. The costs we incur to operate, maintain and manage our renewable energy facilities also affect our results of operations. Equipment performance represents the primary factor affecting our operating results because equipment downtime impacts the volume of the electricity that we are able to generate from our renewable energy facilities. The volume of electricity generated and sold by our facilities will also be negatively impacted if any facilities experience higher than normal downtime as a result of equipment failures, electrical grid disruption or curtailment, weather disruptions, or other events beyond our control.
Seasonality and resource variability
The amount of electricity produced and revenues generated by our solar generation facilities is dependent in part on the amount of sunlight, or irradiation, where the assets are located. As shorter daylight hours in winter months result in less irradiation, the electricity generated by these facilities will vary depending on the season. Irradiation can also be variable at a particular location from period to period due to weather or other meteorological patterns, which can affect operating results. As the majority of our solar power plants are located in the Northern Hemisphere (Europe ) we expect our current solar portfolio's power generation to be at its lowest during the first and fourth quarters of each year. Therefore, we expect our first and fourth quarter solar revenue to be lower than in other quarters. As a result, on average, each solar park generates approximately 15% of its annual revenues in Q1 every year, 35% in each of Q2 and Q3, and the remaining 15% in Q4. Our costs are relatively flat over a year, and so we will always report lower profits in Q1 and Q4 as compared to the middle of the year. Interest rates on our debt
Interest rates on our senior debt are mostly fixed for the full term of the finance at low interest rates ranging from 1.7% to 4.2%. The relative certainty of cash flows and the fixed nature of the senior debt payments provide sufficient coverage ratios. Additionally, our senior financing is project specific with no cross-collateralization and with no recourse to the parent. In this environment all free cash flows therefore are available to cover corporate costs and for reinvestment in new projects.
In addition to the project specific senior debt, we use a small amount of
promissory notes that reduces, and in some cases eliminates, the requirement for
us to provide equity in the acquisition of the projects. As of
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Cash distribution restrictions
In certain cases, we obtain project-level or other limited or non-recourse financing for our renewable energy facilities which may limit our ability to distribute funds to the parent company,Alternus Energy Inc. for corporate operational costs. These limitations typically require that the project-level cash is used to meet debt obligations and fund operating reserves of the operating subsidiary. These financing arrangements also generally limit our ability to distribute funds generated from the projects if defaults have occurred or would occur with the giving of notice or the lapse of time, or both.
Renewable energy facility acquisitions and investments
Our long-term growth strategy is dependent on our ability to acquire additional renewable power generation assets. This growth is expected to be comprised of additional acquisitions across our scope of operations both in our current focus countries and new countries.
Renewable power has been one of the fastest growing sources of electricity generation globally over the past decade. We expect the renewable energy generation segment in particular to continue to offer growth opportunities driven by:
· the continued reduction in the cost of solar and other renewable energy
technologies, which we believe will lead to grid parity in an increasing
number of markets;
· distribution charges and the effects of an aging transmission infrastructure,
which enable renewable energy generation sources located at a customer's
site, or distributed generation, to be more competitive with, or cheaper
than, grid-supplied electricity;
· the replacement of aging and conventional power generation facilities in the
face of increasing industry challenges, such as regulatory barriers,
increasing costs of and difficulties in obtaining and maintaining applicable
permits, and the decommissioning of certain types of conventional power
generation facilities, such as coal and nuclear facilities;
· the ability to couple renewable energy generation with other forms of power
generation and/or storage, creating a hybrid energy solution capable of
providing energy on a 24/7 basis while reducing the average cost of
electricity obtained through the system;
· the desire of energy consumers to lock in long-term pricing for a reliable
energy source;
· renewable energy generation's ability to utilize freely available sources of
fuel, thus avoiding the risks of price volatility and market disruptions
associated with many conventional fuel sources;
· environmental concerns over conventional power generation; and
· government policies that encourage development of renewable power, such as
country, state or provincial renewable portfolio standard programs, which
motivate utilities to procure electricity from renewable resources.
Access to capital markets
Our ability to acquire additional clean power generation assets and manage our
other commitments will likely be dependent on our ability to raise or borrow
additional funds and access debt and equity capital markets, including the
equity capital markets, the corporate debt markets and the project finance
market for project-level debt. We accessed the capital markets several times in
2018 and 2019, in connection with long-term project debt, and corporate loans
and equity. Limitations on our ability to access the corporate and project
finance debt and equity capital markets in the future on terms that are
accretive to our existing cash flows would be expected to negatively affect our
results of operations, business and future growth.
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Foreign exchange
Our operating results are reported in United States Dollars. Our current
projects revenue and expenses are generated in other currencies, including the
Euro, and the Romanian LEI. This mix may continue to change in the future if we
elect to alter the mix of our portfolio within our existing markets or elect to
expand into new markets. In addition, our investments (including intercompany
loans) in renewable energy facilities in foreign countries are exposed to
foreign currency fluctuations. As a result, we expect our revenues and expenses
will be exposed to foreign exchange fluctuations in local currencies where our
renewable energy facilities are located. To the extent we do not hedge these
exposures, fluctuations in foreign exchange rates could negatively impact our
profitability and financial position.
EPC costs for Solar Projects
EPC costs for solar projects include the costs of construction, connection and procurement. The most significant contributor to EPC costs is the cost of components such as modules, inverters and mounting systems. Our supplier and technology, agnosticism, our strong supply chain management and our strong relationships with equipment suppliers have enabled us to historically purchase equipment at relatively competitive technical performance, prices, terms and conditions.
In recent years, the prices of modules, inverters and mounting systems have decreased as a result of oversupply and improving technology. As the costs of our components have decreased, our solar parks have become more cost competitive and our profitability has increased. As a result, our solar parks have begun to offer electricity at increasingly competitive rates, which has increased the attractiveness of our investment return and our revenue. We expect the cost of components will continue to gradually decrease. Moreover, newly commercialized PV technologies are expected to further drive down EPC costs and increase the energy output of PV systems, which will further increase the competitiveness of our solar parks and allow solar energy to achieve grid parity in more and more markets. Key Metrics Operating Metrics We regularly review a number of operating metrics to evaluate our performance, identify trends affecting our business, formulate financial projections and make certain strategic decisions. We consider a solar park operating when it has achieved connection and begins selling electricity to the energy grid. Operating Nameplate capacity
We measure the electricity-generating production capacity of our renewable
energy facilities in nameplate capacity. We express nameplate capacity in direct
current ("DC"), for all facilities. The size of our renewable energy facilities
varies significantly among the assets comprising our portfolio.
We believe the combined nameplate capacity of our portfolio is indicative of our
overall production capacity and period to period comparisons of our nameplate
capacity are indicative of the growth rate of our business. The table below
outlines our operating renewable energy facilities as of December 31, 2018 and 2019. MWs (DC) Nameplate Capacity by Country 2019 2018 Romania 6.1 6.1 Italy 7.9 2.9 Germany 1.4 - Netherlands 11.8 - Total 27.2 9.0
In addition to the above, as of
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Megawatt hours sold
Megawatt hours ("MWh") sold refers to the actual volume of electricity sold by
our renewable energy facilities during a particular period. We track kWh sold as
an indicator of our ability to realize cash flows from the generation of
electricity at our renewable energy facilities. Our kWh sold for renewable
energy facilities for the year ended December 31, 2019 and 2018, were as
follows:
MWhs by Country 2019 2018
Romania 6,476,760 6,574,852
Italy 5,177,688 1,951,467
Germany 1,027,144 -
Netherlands 72,032 -
Total 12,753,624 8,526,319
Consolidated Results of Operations
The following table illustrates the consolidated results of operations for the
year ended
2019 2018
Revenues $ 2,585,568 $ 2,592,964
Cost of revenues (738,097 ) (1,278,614 )
Gross Profit 1,847,471 1,314,350
Operating Expenses
Selling, general and administrative 4,453,155 1,817,567
Loss on disposal of investment in energy asset -
681,421
Depreciation, amortization, and accretion 1,193,107 699,573 Total Operating Expenses 5,646,262 3,198,561 Loss from Operations (3,798,791 ) (1,884,211 ) Other Income (Expense) Interest expense (3,210,299 ) (1,412,864 ) Other income (expense) (132,976 ) 480 Gain on bargain purchase 4,113,148 1,623,883 Total other income (expense) 769,873 211,499 (Loss) Before Provision for Income Taxes (3,028,918 ) (1,672,712 ) Provision for Income Taxes - (180,000 ) Net Loss$ (3,028,918 ) $ (1,852,712 )
Major Components of Our Results of Operations
For the year ended
We generate our revenue from the sale of electricity from our solar parks. The
revenue is either from a Feed in Tariff (Fit) program, Power Purchase Agreement
(PPA), or Renewable Energy Credit (RECs)
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Operating Revenues, net
Operating revenues, net for the for the year ended December 31, 2019 and 2018
were as follows:
Net Revenue, by Country 2019 2018 Change
Italy $ 1,533,298 $ 829,794 $ 703,504
Romania 932,382 1,763,170 (830,788 )
Germany 106,734 - 106,734
Netherlands 13,154 - 13,154
Total $ 2,585,568 $ 2,592,964 $ (7,396 )
Net revenue decreased slightly for the year ended 2019 compared to 2018. The
decrease was due to lower production and no energy trading revenue in Romania ,
and offset by the new acquisitions in Italy , Germany , and the Netherlands .Net Revenue, by Offtake Type 2019 2018 Change Feed in Tariff$ 1,653,186 $ 829,794 $ 823,392 Green Certificates 631,740 789,740 (158,000 ) Energy Offtake Agreements 300,642 973,430 (672,788 ) Total$ 2,585,568 $ 2,592,964 $ (7,396 ) Cost of Revenues We capitalize the equipment costs, development costs, engineering and construction related costs. Our cost of revenues with regards to our IPP solar parks primarily is a result of the asset management, operations and maintenance, as well as tax, insurance, and lease expenses. Certain economic incentive programs, such as FiT regimes, generally include mechanisms that ratchet down incentives over time. As a result, we seek to connect our IPP solar parks to the local power grids and commence operations in a timely manner to benefit from more favorable existing incentives. Therefore, we generally seek to make capital investments during times when incentives are most favorable.
Cost of revenues for the year ended
Cost of Revenue, by Country 2019 2018 Change Italy$ 206,149 $ 132,776 $ 73,373 Romania 490,001 1,145,838 (655,837 ) Germany 41,947 - 41,947 Netherlands - - - Total$ 738,097 $ 1,278,614 $ (540,517 )
Cost of revenue decreased by$540,517 for the year endedDecember 31, 2019 , compared to 2018. This was due to reduction of operating costs in theRomania plant specific to reduction of operations and maintenance cost and no expenses related to energy trading. Gross profit inItaly was significantly higher thanRomania due to the fact that in 2018 Romania had higher costs associated with the sale of energy and green certificates, which decreased the profit margin. Gross profit Gross profit is equal to revenue less cost of revenues. Our gross profit depends on a combination of factors, including primarily our revenue model, the geographic distribution of the solar parks, the mix of electricity sold during the reporting period, the costs of services outsourced to third-party contractors and management costs. 47 Table of Contents Gross profit for the years endedDecember 31, 2019 and 2018 were as follows: For the Year Ended Gross Profit, by Country 2019 2018 Change Italy$ 1,327,149 $ 697,018 $ 630,131 Romania 442,381 617,332 (174,951 ) Germany 64,787 - 64,787 Netherlands 13,154 - 13,154 Total$ 1,847,471 $ 1,314,350 $ 533,121 Gross Profit % 71.5 % 50.7 % 20.8 % Gross profit increased for the year endedDecember 31, 2019 by$533,121 compared to 2018, which was due to higher sales volume and lower cost of revenue inItaly as a result of the new acquisition. In January of 2019, we executed a new operations and maintenance agreement with Baywa, which lowered our operations and maintenance cost inRomania by 13%. In 2018 Romania had higher costs associated with the sale of energy and green certificates, which decreased
the profit margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended
2019 2018 Change
Selling, General and Administrative Expenses 4,453,155 1,817,567 (2,635,588 ) Total$ 4,453,155 $ 1,817,567 $ (2,635,588 ) Selling, general and administrative expenses increased from for the year ended 2019 compared to 2018. This was mainly due to additional stock compensation of$947,061 , and accounting, legal and consulting fees of$699,958 related to our audits and Form 10 filings,$492,061 of costs associated with acquisitions. In addition, in the fourth quarter of 2018, the Company hired a full time General Counsel and Chief Financial Officer. Acquisition Costs As discussed in Note 4. Acquisitions and Dispositions to our consolidated financial statements, the Company acquired four SPVs in April of 2019 and one SPV in December of 2019. These projects were considered business combinations under GAAP and therefore the acquisition costs were expensed and not capitalized. The expenses were included in selling general and administrative expenses.
Acquisition costs were
Depreciation, Accretion and Amortization Expense
Depreciation, accretion and amortization expense increased by
Interest Expense, Net
For the Year Ended
2019 2018 Change
Interest Expense (3,210,299 ) (1,412,864 ) (1,797,435 )
Total $ (3,210,299 ) $ (1,412,864 ) $ (1,797,435 )
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Interest expense increased for the year ended December 31, 2019 , compared to
2018, primarily as a result of interest expenses associated with warrant
issuance for debt of $357,635 and interest expense associated with short term
financing of the Italy acquisition, which includes third party commission on
financing.
Bargain Purchase Gain on Acquisition of Renewable Energy Facilities
InApril 2019 , PC-Italia-02 S.R.l., a wholly owned subsidiary ofAlternus Energy Inc.'s (the "Company")Netherlands' subsidiary, completed the acquisition of 100% of the share capital of 4 out of 5 SPVs (Special Purpose Vehicles) the Company planned to purchase under a definitive sale and purchase agreement signed withRisen Energy PV Holding Italy GmbH andRisen Energy (HongKong) Co., Limited . The total acquisition consisted of 7 operating photovoltaic plants located inItaly having a total installed capacity of 5.1 MWs in exchange for approximately$8.1M cash, less$1.5M held back for the acquisition of the 5th SPV, and less$0.4M held in escrow for 2 months from closing against certain tax open items and as a hold back for any unexpected items not found in due diligence. The purchase was treated as business combination, as defined by
ASC 805, Business Combinations. The fair value of the purchase consideration issued to the sellers of the project was allocated to the net assets acquired. The Company accounted for the acquisition as the purchase of a business underU.S. GAAP under the acquisition method of accounting, and the assets and liabilities acquired were recorded as of the acquisition date at their respective fair values and consolidated with those of the Company. The fair value of the net assets acquired was approximately$9.9 million , which led to a bargain purchase gain of$4.1M . The excess of the aggregate fair value of the net tangible assets has been treated as a gain on bargain purchase in accordance with ASC 805. The purchase price allocation was based, in part, on management's knowledge of the project and the results of a fair value assessment that the Company performed. The Company then undertook a review to determine what factors might contribute to a bargain purchase and if it was reasonable for a bargain purchase to occur. The main reason for the bargain purchase price was a motivated seller who was looking to exit the business. The seller is manufacture of product for the solar industry and not an operator. Part of their strategy to increase product sales is to develop and construct solar projects. The seller is not a long-term operator like Alternus, so their strategy is to not keep operating assets on their books for the long-term. Also, because of the small size of the operating assets we purchased and the fact that they were spread out acrossItaly made it more difficult for the seller to manage the assets since they are not an operator. This led to their willingness to sale the assets at a market discount. Subsequent to the acquisition of solar park,Alternus Energy signed a letter of intent with the seller to purchase an additional 10MWs of similar solar Projects at a price of18.5M (euros) . The price per MW was1.85M (Euros) for an uninstalled asset as compared to the1.35M (euros) they sold the operating asset for. Further, at the time of sale, Alternus has no side agreement or other commitment to purchase any assets from the seller. The difference between the bargain purchase gain at acquisition and the amount on the income statement is due to foreign currency translation. Total Cost of acquisitions Cash paid for assets$ 6,131,004 Total acquisition cost$ 6,131,004 Fair value of assets acquired Investment in energy property 9,939,414 Net working capital acquired 384,397 Asset retirement liability (65,114 )$ 10,258,697 Gain on bargain purchase$ 4,127,693 49 Table of Contents
Liquidity and Capital Resources
Capital Resources A key element to our financing strategy is to raise the majority of our debt in the form of project specific non-recourse borrowings at our subsidiaries with investment grade metrics. Going forward, we intend to primarily finance acquisitions or growth capital expenditures using long-term non-recourse debt that fully amortizes within the asset's contracted life, as well as retained cash flows from operations and issuance of equity securities through public markets. The following table summarizes the total capitalization and debt as ofDecember 31, 2019 and 2018: 2019 2018 Short term line of credit$ 35,120 $ 73,560
Promissory notes related parties 48,821 207,753 Convertible notes related parties 291,540 284,000
Senior secured debt 19,575,794 10,192,602 Promissory notes 15,478,536 13,278,803 Convertible promissory notes 2,169,401 1,097,289 Gross debt 37,599,212 25,134,007 Debt discount (784,130 ) (303,563 ) Net Debt 36,815,082 24,830,444 Less current maturities (22,705,665 ) (14,510,204 )
Long Term Debt, net of current maturities$ 14,109,417 $ 10,320,240
Liquidity Position
The notes to our consolidated financial statements contained in this Annual Report on Form 10-K for the year endedDecember 31,2019 include a disclosure describing the existence of certain conditions that raise substantial doubt about our ability to continue as a going concern. Our auditors' report on ourDecember 31, 2019 financial statements, reflect that there is substantial doubt about our ability to continue as a going concern for twelve months from the issuance of this Annual Report on Form 10-K.. Our operating revenues are insufficient to fund our operations and our assets already are pledged to secure our indebtedness to various third party secured creditor, respectively. The unavailability of additional financing could require us to delay, scale back or terminate our acquisition efforts as well as our own business activities, which would have a material adverse effect on the Company and its viability and prospects. The terms of our indebtedness, including the covenants and the dates on which principal and interest payments on our indebtedness are due, increases the risk that we will be unable to continue as a going concern. To continue as a going concern over the next twelve months, we must make payments on our debt as they come due and comply with the covenants in the agreements governing our indebtedness or, if we fail to do so, to (i) negotiate and obtain waivers of or forbearances with respect to any defaults that occur with respect to our indebtedness, (ii) amend, replace, refinance or restructure any or all of the agreements governing our indebtedness, and/or (iii) otherwise secure additional capital. However, we cannot provide any assurances that we will be successful in accomplishing any of these plans. Our consolidated financial statements as ofDecember 31, 2019 have been prepared under the assumption that we will continue as a going concern. If we are not able to continue as a going concern, it is likely that holders of our common stock will lose all of their investment. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. See risk factors relating to our financial condition as well as other risk factors that we face in Part 1, Item 1A hereof under the caption
"Risk Factors" above.
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As reflected in the accompanying financial statements, the Company had net loss of ($3,028,918 ) and ($1,852,712 ) for the years endedDecember 31, 2019 and 2018, respectively. The Company had accumulated shareholders' equity of$3,878,161 and$5,034,364 as ofDecember 31, 2019 andDecember 31, 2018 , respectively, and a working capital deficit of$23,772,002 and$14,114,724 as ofDecember 31, 2019 andDecember 31, 2018 , respectively. AtDecember 31, 2019 , the Company had$1,076,995 of cash on hand. The recent outbreak of the corona virus, also known as "COVID-19", has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the corona virus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures may have an adverse impact on global economic conditions as well as on the Company's business activities. The extent to which the corona virus may impact the Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken inthe United States and other countries to contain and treat the disease. These events are highly uncertain and as such, the Company cannot determine their financial impact at this time. The following table summarizes corporate liquidity and available capital as ofDecember 31, 2019 and 2018: 2019 2018 Cash and cash equivalents 1,076,995 1,026,533
Restricted cash for future acquisitions 349,434 8,857,966
$ 1,426,429 $ 9,884,499
The cash was restricted for the acquisition of the 5MWs of project in
Financing Activities Line of Credit:
The credit line is a revolving credit facility available for the payment of trade payables up to the agreed limit. The term is twelve months which was renewed by agreement of both parties. Drawn funds accrue interest annually at a rate of the Romania CentralBank Rate (ROBOR) 3M + 3.3%, which was 6.64% as ofDecember 31, 2019 and 6.6% as ofDecember 31, 2018 . The Company had used$35,120 and$71,747 of the facility as ofDecember 31, 2019 and 2018.
Related Party Promissory Notes:
As of
Related Party Convertible Notes:
In February of 2019, the terms under which all cash previously loaned byVestCo Corp. , a company owned and controlled by, the Company's CEO, to the Company to date has been amended and restated under the identical investment transaction terms as described below, pursuant to which the Corporation executed a Securities Purchase Agreement withVestCo Corp. and issued toVestCo Corp. i) a convertible promissory note with a 15% OID, and therefore having a Principal Amount of$291,540 , having a two year term, secured behind a third party accredited investor via a US UCC filing on all assets of the Corporation, having a call option right for the noteholder, a redemption right for the Corporation, and convertible at$0.20 per share, and ii) a warrant to purchase up to 619,522 shares of the Corporation's Class A common stock, exercisable at$0.25 per share or through its cashless exercise provision and having a 4 year term. During the twelve months endedDecember 31, 2017 , the Company issued a$100,000 convertible promissory note to the Chief Executive Office (CEO) and a$100,000 convertible promissory note toVestCo Corp. , a company controlled by the CEO, in exchange for$200,000 cash to be provided to the Company as required for working capital purposes. The notes accrue 10% annual interest and are convertible into shares of restricted Class A common stock at$0.20 per share, at the noteholder's option, and having a repayment date of the earlier of (i)March 31, 2018 , or (ii) the closing date of a third party funding/financing/investment in the Company, or (iii) the date upon which Tre Valli Energia S.R.L. may sold by the Company, whichever is the earliest. As the conversion price was above the market price at the time of at the time of issuance of the note no beneficial costs were recorded. As atDecember 31, 2018 ,$284,000 was past due under loan notes issued to the CEO,VestCo Corp 51 Table of Contents Senior secured debt: In 2016, the Company guaranteed a 6.5 million RON (equivalent to approximatelyUS$1,592,500 ) promissory note issued by one of its subsidiaries, Power Clouds S.R.L., a Romanian company ("Power Clouds Romania") to OTP Bank inRomania , which is secured in first position against the Romanian solar parks and customer contracts held by Power Clouds Romania, accruing interest annually at a rate of ROBOR 3M + 3.3% and having a term of 60 months. The Company had principal outstanding of$423,783 and$698,820 as ofDecember 31, 2019 and 2018. In October of 2018, in order to complete additional solar park acquisitions inGermany , the Company entered into the following agreements with a third party accredited investor (the "Lender"), in connection with the Company's German subsidiary, PCG_HoldCo UG (PCG) with an interest rate of 12% and a term of 2 years. The Company had principal outstanding of$3,585,366 and$3,644,585 as ofDecember 31, 2019 and 2018.
In December of 2018, PSM 20GmbH & Co KG entered into a senior secured loan withSparkase Bank inGermany . This relates to the acquisition of 7 photovoltaic installations as part of the PSM 20GmbH & Co KG acquisition with an interest rate of 2.10% and a term of 18 years. The Company had principal outstanding of$2,251,298 and$2,587,081 as ofDecember 31, 2019 and 2018. In April of 2018, PSM 40GmbH & Co KG entered into a senior secured loan withGLS Bank inGermany . This relates to the acquisition of 6 photovoltaic installations as part of the PSM 40GmbH & Co KG acquisition with an interest rate of 2.0% and a term of 18 years. The Company had principal outstanding of$2,515,866 and$2,529,212 as ofDecember 31, 2019 and 2018. In October of 2018, GRT 1.1 GmbH entered into a senior secured loan withMVB Bank inGermany . This relates to the acquisition of 1 photovoltaic installations as part of theGRT GmbH acquisition, with an interest rate of 2.05% and a term of 19 years. The Company had principal outstanding of$671,446 and$715,531 as ofDecember 31, 2019 and 2018. In December of 2019, as part of the acquisition ofZonnepark Rilland BV we assumed a third-party senior bank debt facility in the amount of approximately$7.7 million , with an interest rate of 1.7% and a term of 14 years. The Company had principal outstanding of$7,366,816 as ofDecember 31, 2019 , which was net of the required debt service reserve fund and maintenance reserve fund of$349,434 .
In December of 2019, as part of the acquisition of
Promissory Note:
In December of 2018, in order to complete additional solar park acquisitions inItaly , the Company entered into the following agreements with a third party accredited investor (the "Lender"), in connection with the Company's German subsidiary, PCG_HoldCo UG (PCG) issuing a loan note, with an interest rate of 12% and a term of 6 months. The Company had principal outstanding of$504,667 ad$4,405,331 as ofDecember 31, 2019 and 2018. In December of 2018, in order to complete additional solar park acquisitions inItaly , the Company entered into the following agreements with a third party accredited investor (the "Lender"), in connection with the Company'sNetherlands subsidiary,Power Clouds Europe B.V. (PCE) issuing a loan note, with an interest rate of 12% and a term of 6 months. The Company had principal outstanding of$8,857,656 as ofDecember 31, 2018 and the loan was repaid in 2019. In March of 2019, in order to complete additional solar park acquisitions inItaly , the Company entered into certain loan agreement with a third party accredited investor (the "Lender"), in connection with the Company'sNetherlands subsidiary, AE Europe B.V, with an interest rate of 12% and a term of twelve months. The proceeds of which were used to pay down existing senior secured debt. The Company had principal outstanding of$3,398,063 as ofDecember 31, 2019 . 52 Table of Contents In June of 2019, the Company entered into certain agreements with a third party accredited investor (the "Lender"), in connection with the Company'sNetherlands subsidiary, AE Europe B.V, with an interest rate of 7.5% until October of 2019 and then 10% thereafter and a term of ten months. The proceeds of which were used to pay down existing senior secured debt. The Company had principal outstanding of$9,676,069 as ofDecember 31, 2019 . The loan maturity date was extended untilMay 31, 2020 . In December of 2019, as part of the acquisition ofZonnepark Rilland BV , the Company entered into a$1.9 million loan agreement with the seller of the park, which is dueJanuary 31, 2020 , with no interest rate. The Company had principal outstanding of$1,895,137 as ofDecember 31, 2019 . OnSeptember 30, 2015 , as part of the transaction withWorld Global Assets Pte. Ltd. (WGA), in conjunction with the spin out of WRMT,$492,000 was assigned to various third parties, is not convertible, with interest of 7.5% and a maturity date ofDecember 31, 2020 . The Company had principal outstanding of$509,267 as ofDecember 31, 2019 andDecember 31, 2018 , which was included in convertible promissory notes in the above table.
Convertible Promissory Notes:
OnSeptember 30, 2015 , the Company issued a convertible loan note for$1,000,000 toWorld Global Assets Pte. Ltd. (WGA), in conjunction with the spin out of WRMT. The note had a three-year term, accrued no interest, and was convertible at a fixed price of$0.20 per share, subject to certain triggers and restrictions. In 2016 a portion of the convertible loan note of approximately$300,000 was assigned to various third parties and is now convertible at market price, with a floor price of$0.20 per share. The Company had principal outstanding of$244,800 and$244,800 as ofDecember 31, 2019 and 2018. In July of 2018, the Company issued a convertible promissory note to a third party foreign investor in exchange for a cash provided to the Company for working capital purposes. The note accrues 15% annual interest and is convertible into shares of restricted Class A common stock at$0.20 per share, at the noteholder's option, and is repayable onJanuary 30, 2020 . As the conversion price was above the market price at the time of at the time of issuance of the note no beneficial costs were recorded. The Company had principal outstanding of$304,294 and$251,666 as ofDecember 31, 2019 and 2018. In July of 2018, the Company issued a €80,000 convertible promissory note to a third party foreign consultant in exchange for sales commissions owed. The note accrues 15% annual interest and is convertible into shares of restricted Class A common stock at$0.20 per share, at the noteholder's option, and is repayable onJanuary 30, 2020 . As the conversion price was above the market price at the time of at the time of issuance of the note no beneficial costs were recorded. The Company had principal outstanding of$89,718 and$91,555 as ofDecember 31 ,
2019 and 2018. In February of 2019, the Company entered into a Securities Purchase Agreement with 4 accredited investors (the "Lenders"), in connection with an investment of a total amount of$300,000 , and pursuant to which the Company issued i) a convertible promissory note with a 15% OID, having a two year term, secured behind a third party accredited investor via a US UCC filing on all assets of the Company, having a call option right for the noteholder, a redemption right for the Corporation, and convertible at$0.20 per share., and ii) a warrant to purchase shares of the Corporation's Class A common stock equal to 50% of the total number of shares if the Note is fully converted, divided by the Exercise Price of$0.25 , (equal to a total of 750,000 warrants) subject to adjustment as provided therein, exercisable at$0.25 per share or through its cashless exercise provision and having a 4 year term. We recorded a debt discount of$123,805 related to the warrants issued for both theFebruary 2019 , related party note and convertible promissory note. The Company had principal outstanding of$294,118 as ofDecember 31, 2019 . In May of 2019, the Corporation entered into Securities Purchase Agreements with 4 accredited investors (the "Lenders"), in connection with an investment of up to a total amount of$150,000 , and pursuant to which the Corporation issued a convertible promissory note with a 15% OID, having a two year term, secured behind an accredited investors via a US UCC filing on all assets of the Corporation, having a call option right for the noteholder, a redemption right for the Corporation, and convertible at$0.25 per share, and a warrant to purchase shares of the Corporation's Class A common stock equal to 25% of such Lender's investment divided by the Conversion Price of$0.25 , subject to adjustment as provided therein, exercisable at$0.30 per share and having a 3 year term. We recorded$36,000 for the warrant cost allocated to debt discount and$110,118 for the beneficial conversion cost related to the convertible debt. The Company had principal outstanding of$176,471 as ofDecember 31, 2019 .
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May of 2019, the Corporation entered into a Securities Purchase Agreement with
another accredited investor (the "Lender"), in connection with an investment of
$500,000 , and pursuant to which the Corporation issued a convertible promissory
note accruing 12% interest per annum with bi-annual interest payments, having a
two year term, senior in priority to all obligations of the Company other than
the Company's obligations to an accredited investor and its affiliated
investment funds, or a similar replacement thereto, having a call option right
for the noteholder, a redemption right for the Corporation, and convertible at
$0.25 per share. The Company had principal outstanding of $500,000 as of
December 31, 2019 .
In November of 2019, the Company issued two convertible promissory notes to two
accredited investors in the amount of $280,000 each, convertible at 70% of the
lowest trading price of the Company's Common Stock for the last 15 trading days
prior to conversion, and accruing 12% interest per annum and each having a
$25,000 original issue discount, with a maturity date of November 21, 2020 . As
part of the consideration for this investment, the Company issued 145,000 shares
of restricted Class A common stock to each of the investors, as well as 725,000
shares of restricted Class A common stock to each investor that shall be
returned to the Company provided that the Company repays the Notes in full by
May of 2020. The Company had principal outstanding of $560,000 as of December
31, 2019 .
Debt Service Obligations
We remain focused on refinancing near-term facilities on acceptable terms and
maintaining a manageable maturity ladder. We do not anticipate material issues
in addressing our borrowings through 2020 on acceptable terms and expect to be
able to do so opportunistically based on the prevailing interest rate
environment.
The aggregate contractual principal payments of long-term debt due after
Note principal payments next five years and thereafter:
2020 2021 2022 2023
2024 Thereafter Total
Gross Debt
(784,130 )
Net debt $ 22,705,667 $ 742,842 $ 1,108,229 $ 1,113,219 $ 1,118,312 $ 10,026,813 $ 36,815,082
Equity Investment
On March 27, 2020 (the "Effective Date"), Alternus Energy Inc. , a Nevada
corporation (the "Company") and a foreign institutional accredited investor (the
"Investor") entered into a securities purchase agreement (the "Securities
Purchase Agreement") pursuant to which the Company sold and issued to the
Investor an aggregate of 30,000,000 shares of the Company's Class A Common
Stock, par value $0.001 per share (the "Class A Common Stock"), at a price of
$0.10 per share (the "Private Placement"). Pursuant to the Securities Purchase
Agreement, the Company issued to the Investor a one-year warrant ("Class A
Warrant") to purchase up to 12,000,000 shares of the Class A Common Stock. Class
A Warrant will have an exercise price equal to $0.125 , subject to the additional
terms of Class A Warrant (the "Exercise Price").
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Cash Flow Discussion
We use traditional measures of cash flow, including net cash flows from operating activities, investing activities and financing activities to evaluate our periodic cash flow results.
For the Year Ended
The following table reflects the changes in cash flows for the comparative
periods:
2019 2018 Change
Net cash provided by operating
activities $ (2,469,063 ) $ 53,776 $ (2,522,839 )
Net cash (used in) provided by investing
activities (9,065,211 ) (10,114,235 )1,049,024
Net cash provided by (used in) financing activities 3,098,038 10,666,627 (7,568,589 )
Net cash used in operating activities for the year ended
Net cash used in investing activities for the year ended
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the year endedDecember 31, 2019 compared to 2018 decreased due to proceeds from debt issuance associated with the acquisition of the new Italian andNetherlands solar parks.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires us to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related footnotes. In preparing these consolidated financial statements, we have made our best estimates of certain amounts included in the consolidated financial statements. Application of accounting policies and estimates, however, involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In arriving at our critical accounting estimates, factors we consider include how accurate the estimate or assumptions have been in the past, how much the estimate or assumptions have changed and how reasonably likely such change may have a material impact. Our critical accounting policies are discussed below. Business Combinations We account for business combinations by recognizing in the financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interests in the acquiree at fair value at the acquisition date. We also recognize and measure the goodwill acquired or a gain from a bargain purchase in the business combination and determines what information to disclose to enable users of an entity's financial statements to evaluate the nature and financial effects of the business combination. In addition, acquisition costs related to business combinations are expensed as incurred. Business combinations is a critical accounting policy as there are significant judgments involved in the allocation of acquisition cost. 55 Table of Contents
When we acquire renewable energy facilities, we allocate the purchase price to (i) the acquired tangible assets and liabilities assumed, primarily consisting of land, plant, and long-term debt, (ii) the identified intangible assets and liabilities, primarily consisting of the value of favorable and unfavorable rate PPAs and REC agreements and the in-place value of market rate PPAs, (iii) non-controlling interests, and (iv) other working capital items based in each case on their fair values in accordance with ASC 805. We perform the analysis of the acquisition using the various valuation methodologies of replacement cost approach, or an income approach or excess earnings approach. Factors considered by management in its analysis include considering current market conditions and costs to construct similar facilities. We also consider information obtained about each facility as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets and liabilities acquired or assumed. In estimating the fair value, we also establish estimates of energy production, current in-place and market power purchase rates, tax credit arrangements and operating and maintenance costs. A change in any of the assumptions above, which are subjective, could have a significant impact on the results of operations.
The allocation of the purchase price directly affects the following items in our consolidated financial statements:
• The amount of purchase price allocated to the various tangible and intangible
assets, liabilities and non-controlling interests on our balance sheet;
• The amounts allocated to the value of favorable and unfavorable rate PPAs and
REC agreements are amortized to revenue over the remaining non-cancelable
terms of the respective arrangement. The amounts allocated to all other
tangible assets and intangibles are amortized to depreciation or amortization
expense, with the exception of favorable and unfavorable rate land leases and
unfavorable rate O&M contracts which are amortized to cost of operations; and
The period of time over which tangible and intangible assets and liabilities • are depreciated or amortized varies, and thus, changes in the amounts
allocated to these assets and liabilities will have a direct impact on our
results of operations.
Impairment of Renewable Energy Facilities and Intangibles
Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate carrying values may not be recoverable. An impairment loss is recognized if the total future estimated undiscounted cash flows expected from an asset are less than its carrying value. An impairment charge is measured as the difference between an asset's carrying amount and its fair value. Fair values are determined by a variety of valuation methods, including appraisals, sales prices of similar assets and present value techniques. Impairment ofGoodwill Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. A reporting unit is either the operating segment level or one level below, which is referred to as a component. The level at which the impairment test is performed requires judgment as to whether the operations below the operating segment constitute a self-sustaining business or whether the operations are similar such that they should be aggregated for purposes of the impairment test. In assessing goodwill for impairment, we may elect to use a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of our reporting units are less than their carrying amounts. If we determine that it is not more-likely-than-not that the fair value of our reporting units are less than their carrying amounts, we are not required to perform any additional tests in assessing goodwill for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, then we are required to perform the quantitative impairment test. 56 Table of Contents
Depreciable lives of Long-lived Assets
We have significant investments in renewable energy facility assets. These assets are generally depreciated on a straight-line basis over their estimated useful lives which range from 15 to 30 years for our solar generation facilities.
The estimation of asset useful lives requires significant judgment. Changes in our estimated useful lives of renewable energy facilities could have a significant impact on our future results of operations. See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements regarding depreciation and estimated service lives of our renewable energy facilities.
Recently Issued Accounting Standards
See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements for our year end audited financial statements for disclosures concerning recently issued accounting standards.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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