| INVESTMENT IN BLUE SPHERE PAVIA | NOTE
3 – INVESTMENT IN BLUE SPHERE PAVIA On August 18, 2015, the
Company and two of its wholly-owned subsidiaries, Eastern and Bluesphere Pavia, entered into a Long Term Mezzanine Loan Agreement
(the “Helios Loan Agreement”) with Helios Italy Bio-Gas 1 L.P. (“Helios”). Under the Helios Loan Agreement,
Helios will make up to $5,646,628 (€5,000,000) available to Bluesphere Pavia (the “Helios Loan”) to finance (a)
ninety percent (90%) of the total required investment of the first four SVPs acquired, (b) eighty percent (80%) of the total required
investment of up to three SVPs subsequently acquired, (c) certain broker fees incurred in connection with the acquisitions, and
(d) any taxes associated with registration of an equity pledge agreement (as described below). Each financing of an SVP acquisition
will be subject to specified conditions precedent and will constitute a separate loan under the Helios Loan Agreement. Helios
may, within 90 days of a closing, require repayment of ten percent (10%) of the relevant loan and broker fees. If no such repayment
is required, Helios may reduce the amount of its commitment to finance the acquisitions of the three additional SVPs to seventy
to eighty percent (70-80%) of the total required investment. Helios’s commitment to provide any loan under the Helios Loan
Agreement that is not utilized by June 30, 2016 will automatically cancel, unless extended in writing by Helios. Subject to specified
terms, representations and warranties, the Helios Loan Agreement provides that each loan thereunder will accrue interest at a
rate of 14.5% per annum, paid quarterly. Helios will also be entitled to an annual operation fee, paid quarterly. The final payment
for each loan will become due no later than the earlier of (a) thirteen and one half years from the date such loan was made available
to Bluesphere Italy, and (b) the date that the Feed in Tariff license granted to the relevant SVP expires. Pursuant to the Helios
Loan Agreement and an equity pledge agreement, Eastern Sphere pledged all its shares in Bluesphere Pavia to secure all loan amounts
utilized under the Helios Loan Agreement. On December 14, 2015 (“Closing
Date”), and pursuant to a Share Purchase Agreement, dated May 14, 2015 (the “Share Purchase Agreement”), by
and among the Company’s indirect wholly-owned subsidiary, Bluesphere Pavia, and Volteo Energie S.p.A., Agriholding S.r.l.,
and Overland S.r.l. (collectively, the “Sellers”), Bluesphere Pavia completed the acquisitions of one hundred percent
(100%) of the share capital of Agricerere S.r.l., Agrielektra S.r.l., Agrisorse S.r.l. and Gefa S.r.l. (each, an “SPV”
and collectively, the “SPVs”) from the Sellers. Each SPV owns and operates an anaerobic digestion biogas plant in
Italy for the production and sale of electricity to Gestore del Servizi Energetici GSE, S.p.A., a state-owned company, pursuant
to a power purchase agreement. Pursuant to the Italy Projects Agreement, the Company also issued a corporate guarantee to the
Sellers, whereby the Company will secure the obligations of Bluesphere Pavia under the Italy Projects Agreement. Pursuant to the Share Purchase
Agreement, the Company to pay $5,646,628 (€5,200,000) (the “Purchase Price”), subject to certain post-closing
adjustments, to acquire the share capital of the SPVs. The Purchase Price for each SPV was determined based on a Base Line EBITDA
guaranteed by the Sellers and an Equity IRR Target calculated on the Purchase Price of no less than twenty-five percent (25%).
Fifty percent (50%) of the Purchase Price, adjusted for certain post-closing adjustments and closing costs, in the amount of $2,143,181
(€1,952,858) was paid at closing, and the balance is due to the Sellers on the third anniversary of the closing date. The
remaining fifty percent (50%) of the Purchase Price, prior to and after closing date, and any variation of EBITDA results in the
18 months following the closing date, will be promised by a note from each Seller, to be paid on the third anniversary of the
closing, along with interest on the unpaid balance due at an annual rate of two percent (2%). The portion of the Purchase Price
paid at closing was primarily financed by a loan of $3,149,081 (€2,900,000) pursuant to the Helios Loan Agreement whereas
the Company repaid $281,580 (€255,102) during the three months ended March 31, 2016. In accordance with a Framework
EBITDA Guarantee Agreement, dated July 17, 2015 (the “EBITDA Agreement”), between the Company and Austep S.p.A. (“Austep”),
Austep will operate, maintain and supervise each biogas plant owned by the SPVs. In addition, Austep will guarantee a monthly aggregate
EBITDA of $204,147 (€188,000) from the four SPVs for the initial six months following the acquisition, and thereafter Austep
will guarantee an annual aggregate EBITDA of $4,082,946 (€3,760,000) from the four SPVs. Pursuant to the terms of the agreements
with Austep, the Company will receive the guaranteed levels of EBITDA and Austep will receive ninety (90%) of the revenue in excess of these levels. The Company applied
the equity method of accounting for those investments because the Framework EBITDA Guarantee Agreement between the Company
and Austep whereas Austep operates, maintains and supervises each biogas plants prevents us from exercising a controlling
influence over operating policies of the plants. Under this method, our equity investment is reflected as an investment in
non-consolidated subsidiaries on our Condensed Balance Sheets and the net earnings or losses of the investments is
reflected as equity in net earnings of non-consolidated companies on our Consolidated Statements of Operations. |
