424B4 1 vpip20201015_424b4.htm FORM 424B4 vpip20200910_f1.htm

 

Filed pursuant to Rule 424(b)(4)

Registration Nos. 333-248761 and 333-249484

 

PROSPECTUS

 

 

 

VIVOPOWER INTERNATIONAL PLC

 

(Incorporated in England)

 

2,941,176 Ordinary Shares

 


 

We are offering 2,941,176 of our ordinary shares in this offering.

 

Our ordinary shares are listed on The Nasdaq Capital Market under the symbol “VVPR.” On October 15, 2020, the last reported sale price of our ordinary shares as reported on The Nasdaq Capital Market was $8.98 per share.

 

We are an “emerging growth company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings.

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 8, as well as in the documents incorporated by reference into this prospectus, to read about factors you should consider before buying shares our ordinary shares.

 

   

Per share

   

Total

 

Offering price

  $ 8.50     $ 24,999,996  

Underwriter’s discounts and commissions(1)

  $ 0.595     $ 1,749,999.72  

Proceeds to our company before expenses

  $ 7.905     $ 23,249,996.30  

 

 

(1)

We have agreed to reimburse the underwriters for certain expenses. See the section titled “Underwriting” beginning on page 88 of this prospectus for additional disclosure regarding underwriter compensation and offering expenses.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

We have granted the representative of the underwriters an option to purchase from us, at the public offering price, up to 441,176 additional ordinary shares, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the representative of the underwriters exercises the option in full, the total underwriting discounts and commissions payable will be $2,012,499.44, and the total proceeds to us, before expenses, will be $26,737,492.60.

 

The underwriters expect to deliver the shares to purchasers in the offering on or about October 19, 2020.

 

 


 

Sole Book-Running Manager

 

Maxim Group LLC

 

 

The date of this prospectus is October 14, 2020.

 

 

 

 

TABLE OF CONTENTS

 

Page

Prospectus Summary

3

The Offering

6

Summary Consolidated Financial Data

7

Risk Factors

8

Special Note Regarding Forward-Looking Statements

24

Use Of Proceeds

25

Dividend Policy

26

Capitalization

27

Dilution

28

Corporate Structure and History

29

Selected Consolidated Financial Data

31

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

32

Business

48

Management

60

Related Party Transactions

67

Principal Shareholders

69

Description of Share Capital and Articles of Association

70

Shares Eligible for Future Sale

81

Taxation

81

Underwriting

88

Expenses of the Offering

91

Legal Matters

92

Experts

92

Service of Process and Enforcement of Judgments

92

Where You Can Find More Information

92

Index to the Financial Statements

F-1

 

 

You should rely only on the information contained in this prospectus and any related free-writing prospectus that we authorize to be distributed to you. We have not, and the underwriter has not, authorized any person to provide you with information different from that contained in this prospectus or any related free-writing prospectus that we authorize to be distributed to you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of the securities offered hereby.

 

No action is being taken in any jurisdiction outside the United States to permit a public offering of the ordinary shares or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of the prospectus applicable to that jurisdiction.

 

Until 25 days after the date of this prospectus, all dealers that buy, sell, or trade the ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

In this prospectus, “VivoPower,” the “Group,” the “company,” “we,” “us” and “our” refer to VivoPower International PLC and its consolidated subsidiaries, except where the context otherwise requires.

 

1

 

INDUSTRY AND MARKET DATA

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe that the information from these third-party publications, research, surveys and studies included in this prospectus is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. These data involve a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates.

 

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

 

VivoPower, the VivoPower logo and other trademarks or service marks of VivoPower International PLC appearing in this prospectus are the property of VivoPower International PLC. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names.

 

2

 

PROSPECTUS SUMMARY

 

This summary highlights selected information about us and the ordinary shares that we are offering. It may not contain all of the information that may be important to you. Before investing in the ordinary shares, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our consolidated financial statements, and the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus.

 

Overview

 

VivoPower is an international solar and critical power services company that focuses on small and medium scale solar development, engineering, procurement and construction (“EPC”) and selected solar asset ownership and maintenance. Headquartered in London, VivoPower has operations in the United States of America (“U.S.”), Australia and the United Kingdom (“U.K.”).

 

Management analyzes our business in three reportable segments: Critical Power Services, Solar Development, and Corporate Office. Critical Power Services is represented by J.A. Martin Electrical Pty Limited (“J.A. Martin”) and Kenshaw Electrical Pty Limited (“Kenshaw”) operating in Australia with a focus on the design, supply, installation and maintenance of power and control systems, including for solar farms. Solar Development is the development and sale of commercial and utility scale PV solar power projects in the U.S. and Australia. Corporate Office is the Company’s corporate functions, including costs to maintain the Nasdaq public company listing, comply with applicable SEC reporting requirements, and related investor relations and is located in the U.K.

 

Following completion of its strategic review, VivoPower intends to enter the electric vehicle (“EV”) sector, due to interest from its existing customer base, with an initial focus on the Australian infrastructure and mining sectors. It intends to do so through offering holistic sustainable energy solutions (“SES”) that provide cost savings and reliability for industrial and municipal customers, and stable returns for investors.

 

Critical Power Services

 

VivoPower, through its wholly-owned Australian subsidiaries, J.A. Martin and Kenshaw, provides critical energy infrastructure generation and distribution solutions including the design, supply, installation and maintenance of power and control systems to a customer base in excess of 700 active government, commercial and industrial customers and is considered a trusted power adviser. J.A. Martin and Kenshaw are headquartered in the Hunter Valley and Newcastle region, which is the most densely populated industrial belt in Australia. Structural and cyclical factors have created a strong operating environment for our Critical Power Services businesses, particularly the strong growth in infrastructure investment, recovery in the mining sector, and increasing demand for data centers and solar farms.

 

J.A. Martin and Kenshaw are owned by VivoPower through a holding company called Aevitas, which was formed in 2013 and acquired by VivoPower in December 2016.

 

J.A. Martin Electrical Pty Limited

 

Founded in 1968, J.A. Martin is a specialized industrial electrical engineering and power services company that has been servicing the largest commercial and industrial belt in Australia, the Newcastle and Hunter Valley region in New South Wales, for more than 50 years.

 

J.A. Martin operates from two premises in New South Wales, including a factory in Newcastle which manufactures, and services customized industrial switchboards and motor control centers. It also has an office and workshop facility in the Hunter Valley for servicing the infrastructure, mining and industrial sectors.

 

J.A. Martin’s core competencies include: customized industrial switchboard and motor control center design, manufacture and maintenance; industrial electrical engineering, project management for mining, infrastructure and industrial applications; solar farm electrical contracting and EPC; electrical maintenance and servicing; and, industrial, mining and infrastructure CCTV and data cabling. With 103 employees and a fleet of 76 vehicles, J.A. Martin has built a strong reputation throughout eastern Australian for exceptional engineering and design, delivered on time and budget, supported by a high-level of quality and service.

 

J.A. Martin serviced almost 250 customers in the fiscal year ended June 30, 2020 across a diverse range of industries, including solar farms, grain handling and agriculture, water and gas utilities, cotton gins, commercial buildings, mining, marine and rail infrastructure. J.A. Martin’s commitment to health and safety and quality, as recognized by their AS 4801 and ISO 9001 certifications, has positioned them to service some of the largest and most respected firms in the world.

 

Kenshaw Electrical Pty Limited

 

Founded in 1981, Kenshaw has a differentiated mix of critical electrical power, critical mechanical power and non-destructive testing capabilities for customers across a broad range of industries, operating from its facilities in Newcastle, New South Wales, and Canberra, Australian Capital Territory. Kenshaw’s success has been built on the capability of its highly skilled personnel to be able to provide a wide range of critical power generation solutions, products and services across the entire life-cycle for electric motors, power generators, mechanical equipment and non-destructive testing. From the head office in Newcastle, Kenshaw’s engineers provide regular and responsive service to long-standing client base of over 500 customers ranging from data centers, hospitals, mining and agriculture to aged care, transport and utility services. It is well positioned to expand its capabilities to battery energy storage solutions.

 

3

 

Kenshaw’s core competencies include: generator design, turn-key sales and installation; generator servicing and emergency breakdown services; customized motor modifications; non-destructive testing services including asset management of critical plant and equipment using diagnostic testing such as motor testing, oil analysis, thermal imaging and vibration analysis; and, industrial electrical services.

 

Solar Development

 

VivoPower’s strategy in relation to solar development has been to minimize capital intensity and maximize return on invested capital by pursuing a business model predicated on developing and selling projects prior to construction and continually recycling capital rather than owning assets. Successful solar development requires an experienced team that can manage multiple work streams on a parallel path, from initially identifying attractive locations, to land control, permitting, interconnection, power marketing, and project sale to investors. Rather than build a substantial team internally to accomplish all of these activities, our business model is to joint venture on a non-exclusive basis with existing experienced project development teams so that multiple projects can be advanced simultaneously and allow us to focus on provision of capital, project management, and marketing and sale of projects. In Australia we have partnered with ITP Renewables (“ITP”), a global leader in renewable energy engineering, strategy and construction, and energy sector analytics. In the U.S., we partnered with Innovative Solar Systems, LLC (“Innovative Solar”).

 

Electric Vehicles and Sustainable Energy Solutions

 

In August 2020, VivoPower announced its plans to enter into the commercial EV market to provide sustainable energy solutions for light electric vehicles (“LEVs”). VivoPower expects to focus initially on servicing LEV customers in the mining and infrastructure sectors in Australia, before expanding globally in those sectors. VivoPower’s EV strategy is expected to include EV and battery leasing, critical power retrofits of premises (e.g. warehouses and depots) to enable optimized EV battery charging and microgrids and EV battery second life applications. 

 

Recent Developments

 

In September 2020, the Company signed a non-binding Letter of Intent (“LOI”) to acquire, by way of primary investment, a 51% shareholding in Tembo 4x4 e-LV B.V. (“Tembo”). Tembo is a Netherlands-based specialist battery-electric and off-road vehicle company with global sales and distribution channels across four continents. Tembo services a diverse range of sectors, including mining, government services (armed cars, police, ambulances, inspection vehicles), game safari and humanitarian aid by providing a comprehensive fleet of customized electric vehicles. Based on an analysis of publicly available industry data, the Company estimates that the potential global addressable market for electric vehicles could be at least USD$36 billion within the markets in which Tembo is currently active (which presently do not include the United States, Asia or South America). For the fiscal year ended December 31, 2019, Tembo generated USD$2.3 million in revenue (unaudited).

 

Following discussions by the parties, it was agreed to restructure the existing group of companies of which Tembo is a member as a pre-cursor to completion of the proposed investment, such restructure (the “Restructure”) to take place shortly prior to completion of the investment. In consequence of the Restructure, the investment is proposed to be made by way of subscription for shares representing approximately 51% of the share capital of Tembo e-LV B.V. (the “Target”), a new company formed under the laws of the Netherlands for the purposes of the transaction and such company being the sole member of both Tembo and FD 4x4 Centre B.V. (the “Transaction”).

 

Key features of the Transaction, the definitive documents relating to which were signed on 9 October 2020, are (without limitation and subject to completion of the Transaction taking place) that:

 

 

the cash to be subscribed for convertible preferred shares (“Investor Shares”) on completion will be EUR €4 million;

 

 

the proceeds of the investment will be used by the Target and its group (the “Group”) for working capital and growth capital purposes, and for the repayment of certain liabilities of the Group;

 

 

signing and completion will not be simultaneous, and completion will be conditional upon (among certain other formalities relating to the Transaction), a minimum capital fundraise requirement in respect of the Company first being met;

 

 

the Investor Shares will carry (among other rights) a right to vote, rights to income on a basis that is pari passu with all other classes of shares, a preferential right to return of capital on liquidation/exit, customary anti-dilution protections, pre-emption rights (including a right of first refusal on certain proposed share transfers), and certain information and board appointment rights;

 

 

leaver provisions will apply in respect of those persons holding the remaining 49% of the share capital of the Target;

 

 

customary representations, warranties (and certain specific indemnities relating to matters revealed during the course of due diligence) were given on signing and will be repeated at completion to the Company;

 

 

restrictive covenants will be entered into by certain key shareholders of the Target;

 

 

the Company will have right to subscribe a further EUR €4 million on substantially the same terms for a period of 12 months following completion; and

 

 

the Company will have the option to acquire the remaining 49% of the Target on the fifth anniversary of completion of the Transaction.

 

Risk Factors

 

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

 

If we continue to experience losses and we are not able to raise additional financing on sufficiently attractive terms or generate cash through sales of solar projects or other assets, we may not have sufficient liquidity to sustain our operations and to continue as a going concern.

 

4

 

We may not be able to generate sufficient cash flow to service all our indebtedness, any additional debt we may incur and our other ongoing liquidity needs, and we may be forced to take other actions to satisfy our obligations under our indebtedness or any additional debt we may incur, which may not be successful.

 

 

Doing business through joint ventures is a key part of our business and any disagreements or discontinuations could disrupt our operations, put assets at risk or affect the continuity of our business.

 

 

We face a number of risks involving power purchase agreements (“PPAs”) and project-level financing arrangements, including failure or delay in entering into PPAs, defaults by counterparties and contingent contractual terms, all of which could materially and adversely affect our financial condition, results of operations and cash flows.

 

 

Technical, regulatory, and economic barriers to the purchase and use of solar power products may arise that significantly reduce demand for or financial viability of solar power projects, which could have a material adverse effect on our revenues.

 

 

Our business depends on the demand for solar energy, which is still driven largely by the availability and size of government and economic incentives that may ultimately be reduced or eliminated.

 

 

Our ability to expand our operations to the commercial electric vehicle segment is dependent on developing new business opportunities, meeting the requirements of new customers and timely performance of work in different market sectors.

 

 

From time to time, we may become involved in costly and time-consuming litigation and other regulatory proceedings, which require significant attention from our management.

 

 

We cannot assure you that our ordinary shares will always trade in an active and liquid public market. In addition, at times trading in our ordinary shares on Nasdaq has been highly volatile with significant fluctuations in price and trading volume, and such volatility and fluctuations may continue to occur in the future. Low liquidity, high volatility, declines in our stock price or a potential delisting of our ordinary shares may have a negative effect on our ability to raise capital on attractive terms or at all and may cause a material adverse effect on our operations.

 

Corporate Information

 

VivoPower International PLC, a public limited company incorporated under the laws of England, was formed on February 1, 2016. Our registered and principal executive offices are located at The Scalpel, 18th Floor, 52 Lime Street, London, U.K. Our general telephone number is +44-794-116-6696 and our internet address is http://www.vivopower.com. Our website and the information contained on or accessible through our website are not part of this prospectus, and our website address is included in this document as an inactive textual reference only. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., 400 Madison Avenue, 4th Floor, New York, NY 10017.

 

Implications of Being an Emerging Growth Company

 

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of the Company’s initial public offering, (2) the last day of the fiscal year in which we have total annual gross revenues of at least $1.07 billion, (3) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ordinary shares held by non-affiliates exceeded $700.0 million as of the last business day of our most recently completed second fiscal quarter or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company,

 

 

we may present only two years of audited financial statements, plus unaudited condensed financial statements for any interim period, and related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

we may avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

we may provide reduced disclosure about our executive compensation arrangements; and

 

we may not require shareholder non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.

 

5

 

THE OFFERING

 

Ordinary shares offered by us

 

2,941,176 ordinary shares

     

Ordinary shares outstanding prior to this offering

 

13,557,376 ordinary shares

     

Offering price

 

$8.50 per ordinary share

     

Ordinary shares to be outstanding after this offering

 

16,498,552 ordinary shares, assuming all shares offered by this prospectus are sold (or 16,939,728 shares if the over-allotment option is exercised in full).

     

Underwriters’ option to purchase additional ordinary shares

 

We have granted the underwriter an option for a period of 45 days from the date of this prospectus to purchase up to 441,176 additional ordinary shares from us to cover over-allotments, if any.

     

Use of proceeds

 

We estimate the net proceeds that we will receive from this offering will be approximately $22.9 million based on the public offering price of $8.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund working capital needs in connection with the expansion of our operations to the commercial electric vehicle segment, including $4.7 million to fund the Tembo aquisition, and for working capital and other general corporate purposes. See the “Use of Proceeds” section of this prospectus for additional information.

     

Risk Factors

 

You should read the “Risk Factors” section of this prospectus beginning on page 8 for a discussion of factors to consider carefully before deciding to invest in our ordinary shares.

     

Transfer Agent

 

The registrar and transfer agent for the ordinary share is Computershare Trust Company, N.A.

     

The Nasdaq Capital Market symbol

 

“VVPR”

 

The number of our ordinary shares to be outstanding after this offering is based on 13,557,376 of our ordinary shares outstanding as of June 30, 2020, and excludes the following:

 

 

1,229,425 ordinary shares issuable upon exercise of outstanding options at a weighted average exercise price of $nil per share or upon the settlement of outstanding restricted stock units, performance stock units or bonus stock awards under our equity plans as of June 30, 2020;

 

 

126,311 ordinary shares authorized for issuance pursuant to future awards under our equity incentive plans; and

 

 

assumes no exercise by the underwriter of their option to purchase up to 441,176 additional ordinary shares.

 

6

 

SUMMARY CONSOLIDATED FINANCIAL DATA

 

Our historical consolidated financial statements are prepared in accordance with IFRS and are presented in U.S. dollars. The selected historical consolidated statement of comprehensive income and statement of financial position data set forth below has been derived from, and is qualified in its entirety by reference to, our historical consolidated financial statements for the periods presented. Historical information as of and for the year ended June 30, 2020, and for the three months ended June 30, 2019, and for the years ended March 31, 2019, 2018, 2017 and 2016, is derived from, and is qualified in its entirety by reference to, our consolidated financial statements. The financial statements for the year ended June 30, 2020, for the three months ended June 30, 2019, and for the years ended March 31, 2019, 2018, and 2017 have been audited by PKF Littlejohn LLP, our independent registered public accounting firm. The financial statements for 2016 were audited by Marcum LLP. You should read the information presented below in conjunction with those audited consolidated financial statements, the notes thereto and the discussion under Item 5 “Operating and Financial Review and Prospects” in our Annual Report on Form 20-F for the year ended June 30, 2020.

 

Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus and our consolidated financial statements included elsewhere in this prospectus.

 

Consolidated Statement of Comprehensive Income

 

   

Year Ended June 30

 

Three Months Ended June 30

 

Year Ended March 31

 

(US dollars in thousands, except per share amounts) 

 

2020

2019

 

2019

2018

 

2019

2018

2017

2016

 
   

 

(unaudited)

 

 

(unaudited)

 

 

 

 

   
                         

Revenue from contracts with customers

 

48,710

43,545

 

13,617

9,111

 

39,036

33,647

32,250

-

 

Cost of sales

 

(40,885)

(37,452)

 

(11,960)

(7,446)

 

(32,726)

(28,524)

(4,977)

-

 

Gross profit

 

7,825

6,093

 

1,657

1,665

 

6,310

5,123

27,273

-

 

General and administrative expenses

 

(5,479)

(7,195)

 

(1,291)

(2,079)

 

(7,685)

(12,814)

(9,316)

(279)

 

Gain/(loss) on solar development

 

1,589

(2,668)

 

38

(4)

 

(2,615)

1,356

-

-

 

Depreciation of property and equipment

 

(898)

(411)

 

(214)

(204)

 

(430)

(420)

(103)

-

 

Amortization of intangible assets

 

(868)

(1,036)

 

(223)

(207)

 

(990)

(840)

(548)

-

 

Operating (loss)/profit

 

2,169

(5,217)

 

(33)

(829)

 

(5,410)

(7,595)

17,306

(279)

 

Restructuring & other non-recurring costs

 

(3,410)

(2,404)

 

(525)

(40)

 

(2,017)

(1,873)

-

-

 

Impairment of assets

 

-

-

 

-

-

 

-

(10,191)

-

-

 

Impairment of goodwill

 

-

-

 

-

-

 

-

(11,092)

-

-

 

Transaction costs

 

-

-

 

-

-

 

-

-

(5,800)

-

 

Finance income

 

33

-

 

-

-

 

4

9

13

-

 

Finance expense

 

(3,182)

(3,345)

 

(796)

(842)

 

(3,243)

(3,395)

(600)

(2)

 

(Loss)/profit before income tax

 

(4,390)

(10,966)

 

(1,354)

(1,711)

 

(10,666)

(34,137)

10,919

(281)

 

Income tax

 

(713)

(353)

 

(92)

12

 

(557)

6,258

(5,338)

-

 

(Loss)/profit for the period

 

(5,103)

(11,319)

 

(1,446)

(1,699)

 

(11,223)

(27,879)

5,581

(281)

 

Other comprehensive income

                       

Currency translation differences recognized directly in equity

 

(1,028)

-

 

(102)

-

 

(2,998)

222

599

-

 

Total comprehensive (loss)/income

 

(6,131)

(11,319)

 

(1,548)

(1,699)

 

(14,221)

(27,657)

6,180

(281)

 

Earnings per share (dollars)

 

 

 

 

 

 

 

 

 

 

   

Basic

 

(0.38)

(0.83)

 

(0.11)

(0.13)

 

(0.83)

(2.06)

0.73

(0.05)

 

Diluted

 

(0.38)

(0.83)

 

(0.11)

(0.13)

 

(0.83)

(2.06)

0.73

(0.05)

 

Weighted average number of shares used in computing (loss)/earnings per share

 

13,557,376

13,557,376

 

13,557,376

13,557,376

 

13,557,376

13,557,376

7,624,423

5,514,375

 

 

Consolidated Statement of Financial Position Data

 

   

As at June 30

 

As at March 31

 

(US dollars in thousands, except ratios) 

 

2020

2019

 

2019

2018

2017

 
                 

Cash and cash equivalents 

 

2,824

7,129

 

4,522

1,939

10,970

 

Current assets

 

20,473

36,283

 

29,770

21,278

30,814

 

Current liabilities

 

(19,679)

(29,133)

 

(20,807)

(20,610)

(12,197)

 

Current ratio

 

1.04

1.25

 

1.43

1.03

2.53

 

Property and equipment, net

 

2,486

2,951

 

1,205

1,915

2,163

 

Total assets

 

62,380

73,109

 

65,395

76,312

100,836

 

Debt, current and long-term

 

25,954

21,686

 

19,267

22,340

20,255

 

Total shareholders’ equity/(deficit)

 

17,890

22,516

 

23,985

37,003

64,606

 

 

7

 

RISK FACTORS

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below. The risks and uncertainties described below and in the documents incorporated by reference herein are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, operating results and prospects could be materially harmed. In that event, the price of our ordinary shares could decline, and you could lose part or all of your investment.

 

Risks related to the ordinary shares and this offering

 

If you purchase ordinary shares in this offering, you will suffer immediate dilution of your investment

 

The public offering price of our ordinary shares is substantially higher than the net tangible book value per share of our ordinary shares. Therefore, if you purchase our ordinary shares in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after giving effect to this offering. If you purchase ordinary shares in this offering, you will incur an immediate and substantial dilution in net tangible book value of $7.83 per share. For a further description of the dilution that you will experience immediately after this offering, see “Dilution”.

 

Our management will have broad discretion over the use of the net proceeds from this offering, and you may not agree with how we use the proceeds and the proceeds may not be invested successfully.

 

Our management will have broad discretion as to the use of the net proceeds from this offering and could use them for purposes other than those contemplated at the time of this offering. Accordingly, you are relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds will be used appropriately. It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return.

 

Because we do not anticipate paying any cash dividends on our ordinary shares in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

 

We have never paid or declared any cash dividends on our ordinary shares. We currently intend to retain earnings, if any, to finance the growth and development of our business and we do not anticipate paying any cash dividends in the foreseeable future. As a result, only appreciation of the price of our ordinary shares will provide a return to our shareholders.

 

Sales of a significant number of our ordinary shares in the public markets, or the perception that such sales could occur, could depress the market price of our ordinary shares.

 

Sales of a substantial number of our ordinary shares in the public markets could depress the market price of our ordinary shares and impair our ability to raise capital through the sale of additional equity securities. We, our directors and our executive officers have agreed not to sell, dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus supplement continuing through and including the date 90 days after the date of this prospectus, subject to certain exceptions. The underwriters may, in their discretion, release the restrictions on any such shares at any time without notice. We cannot predict the effect that future sales of our ordinary shares would have on the market price of our ordinary shares.

 

Risks related to our business and operations

 

If we continue to experience losses and we are not able to raise additional financing on sufficiently attractive terms or generate cash through sales of solar projects or other assets, we may not have sufficient liquidity to sustain our operations and to continue as a going concern. 

 

We experienced a loss in the year ended June 30, 2020 of $5.1 million, following a loss in the three months ended June 30, 2019 of $1.4 million, a loss of $11.2 million for the year ended March 31, 2019, and a loss of $27.9 million for the year ended March 31, 2018. If we are unable to generate sufficient revenue from the operation of our businesses, generate sales of solar projects, or if we are unable to reduce our expenses sufficiently, we may continue to experience substantial losses. If losses continue, and we are unable raise additional financing on sufficiently attractive terms or generate cash through sales of solar projects or other material assets or other means, then we may not have sufficient liquidity to sustain our operations and may not be able to continue as a going concern. The accompanying consolidated financial statements are prepared on a going concern basis and do not include any adjustments that result from uncertainty about our ability to continue as a going concern.  

 

We expect to require some combination of additional financing and/or sale of assets to execute our strategy to operate and grow our business. 

 

Our business is capital intensive and our initiatives involve substantial and ongoing deployments of capital to capture the growth potential of our critical power services businesses and the development and sale of our solar projects. In addition, we are subject to substantial and ongoing administrative and related expenses required to operate and grow a public company. Together these items impose substantial requirements on our cash flow. As a result, we expect to require some combination of additional financing or sale of assets in order to execute our strategy and meet the operating cash flow requirements necessary to realize the benefits of our joint venture with Innovative Solar Systems, LLC (the “ISS Joint Venture”) and to operate and grow our business. We may not be able to obtain the requisite funding in order to execute our strategic development plans or to meet our cash flow needs. Our inability to obtain funding or engage in strategic transactions could have a material adverse effect on our business, our strategic development plan for future growth, our financial condition and our results of operations.  

 

8

 

We may not be able to generate sufficient cash flow to service all our indebtedness, any additional debt we may incur and our other ongoing liquidity needs, and we may be forced to take other actions to satisfy our obligations under our indebtedness or any additional debt we may incur, which may not be successful. 

 

As of June 30, 2020, we had an aggregate of $26.0 million in debt obligations. Our ability to make scheduled payments on or to refinance our debt obligations and to fund our ongoing liquidity needs depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. There can be no assurance that we will maintain a level of cash flow from operating activities or that future borrowings will be available to us in an amount or on terms sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell material assets, or to seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. We could also face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations or risk not being able to continue as a going concern. In addition, we may be able to incur additional indebtedness in the future. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify. 

 

If we fail to adequately manage our planned growth, our overall business, financial condition and results of operations could be materially adversely affected. 

 

We have a forward order book of $15.4 million as at June 30, 2020, for our critical power services businesses, representing 32% of the $47.9 million revenue for the year ended June 30, 2020. These businesses are expected to continue to grow significantly over the next few years as they continue to capitalize on the market opportunities available in data centers, health care, and solar development, as further described in Item 4. Information on the Company – B. Business Overview of our Annual Report on Form 20-F for the year ended June 30, 2020. We expect that this growth in activity will place significant stress on our operations, management, employee base and ability to meet working capital requirements sufficient to support this growth over the next 12 to 36 months. Any failure to address the needs of our growing business successfully could have a negative impact on our business, financial condition or operating results. 

 

Our ability to expand our operations to the commercial electric vehicle segment is dependent on developing new business opportunities, meeting the requirements of new customers and timely performance of work in different market sectors. 

 

In August 2020, we announced our plans to enter into the commercial EV market to provide sustainable energy solutions for LEVs. We expect to focus initially on servicing LEV customers in the mining and infrastructure sectors in Australia, before expanding globally in those sectors. Our EV segment will focus on new customers and new industries with which we do not currently do business as part of our business development efforts. As we develop these opportunities, we may face greater costs and we may need to devote more resources to obtain contract work. There can be no assurance that we will successfully identify new business opportunities, accurately estimate the time, cost and complexity of the work, achieve market acceptance of our services or that services provided by others will not render our services obsolete or noncompetitive or we will be able to timely complete the work or avoid cost overruns.

 

We may be unable to obtain favorable financing from our vendors and suppliers, which could have a material adverse effect on our business, financial condition or results of operations. 

 

In addition to obtaining financing from certain financial parties, we have also historically utilized financing from our vendors and suppliers through customary trade payables or account payables. As of June 30, 2020, we had trade payables of $4.8 million. At times, we have increased the number of days’ payables outstanding. There can be no assurance that our vendors and suppliers will continue to allow us to maintain existing or planned payables balances, and if we were forced to reduce our payables balances below our planned level, without obtaining alternative financing, our inability to fund our operations would materially adversely affect our business, financial condition and results of operations. We could also face substantial liquidity problems and might be required to dispose of material assets or enter into economically unfavorable financing arrangements to meet creditor demands or risk not being able to continue as a going concern. 

 

A deterioration or other negative change in economic or financial conditions could have a material adverse effect on our business or operating results. 

 

Our business depends on the availability of third-party financing on attractive terms. If a deterioration, volatility or other negative changes occurred in economic or financial conditions, our access to such financing, or the terms on which we are able to access such financing, could be significantly and negatively affected. Financial markets are subject to periods of substantial volatility and such volatility is difficult or impossible to predict in advance. Debt markets may become tighter and providers of financing may require more restrictive terms, higher lending rates, or both, or may elect not to provide financing at all. Increases in volatility, increasing restrictions in credit terms, increases in interest rates, increases in yield expectations for solar projects, or worsening conditions in financial markets generally could delay or prevent the successful expansion of our critical power services business or development of solar projects in our portfolio and thereby have a material adverse effect on our business or operating results.  

 

9

 

Our results of operations are subject to significant variability and are inherently unpredictable. 

 

Because we do not know the pace at which our revenue will grow, or if it will grow, and because our expenses may grow, we may not be profitable from period to period. Our revenue and operating results are difficult to predict and may vary significantly from period to period. A key reason for these significant fluctuations in our results of operations is that a substantial portion of our revenue and cash flow is derived from the development and sale of a few relatively large utility-scale solar energy projects. The number and type of these projects may, therefore, cause substantial variations in our operating results since at any given time one or two projects may account for a large portion of our revenue or gains on sale in a given period. If such projects are delayed or become subject to higher than predicted expenses, there may be significant negative impacts on our profitability or other results. Any decrease in revenue from, or increase in our expenses associated with, our utility-scale solar power projects could have a significant negative impact on our business. In addition, demand from prospective offtakers of power from solar power plants may fluctuate based on the perceived cost-effectiveness of the electricity generated by our solar power systems as compared to conventional energy sources, such as natural gas and coal (which fuel sources are subject to significant price fluctuations from time to time), and other non-solar renewable energy sources, such as wind.  

 

If we are unable to enter into new financing agreements when needed, or upon desirable terms, or if any of our current financing partners discontinue or materially change the financing terms, we may be unable to finance our operations and development projects or our borrowing costs could increase, which would have a material adverse effect on our business, financial condition and results of operations. 

 

We may require working capital and credit facilities to fund the growth of our critical power services businesses and the up-front costs associated with the development and sale of solar projects. Without access to sufficient and appropriate financing, or if such financing is not available at desirable rates or on terms we deem appropriate, we would be unable to grow our business. Our ability to obtain financing in the future depends on banks’ and other financing sources’ continued confidence in our business model and the industries in which we operate as a whole. In addition, wholesale regulatory changes within financial services markets within specific jurisdictions in which we operate can affect the availability of financing available to our businesses resulting from capital availability in the market and appetite of the market for certain industries, risks, or businesses. Changes to our business, the business of our lenders, or the financing market in a region or as a whole, could result in us being unable to obtain new financing or maintain existing credit facilities. Failure to obtain necessary financing to fund our operations would materially adversely affect our business, financial condition and results of operations. To date, we have obtained financing for our business from a limited number of financial parties. If any of these financial parties decided not to continue financing our business or materially change the terms under which they are willing to provide financing, we could be required to identify new financial parties and negotiate new financing documentation. The process of identifying new financing partners and agreeing on all relevant business and legal terms could be lengthy and could require us to reduce the rate of growth of our business until such new financing arrangements were in place. In addition, there can be no assurance that the terms of the financing provided by a new financial party would compare favorably with the terms available from our current financing partners. In any such case, our borrowing costs could increase, which could have a material adverse effect on our business, financial condition and results of operations. 

 

The market value of our investment in solar assets may decrease, which may cause us to take accounting charges or to incur losses if we decide to sell them following a decline in their values. 

 

The fair market value of investments we have made in solar projects and/or portfolios of solar projects may decline. For example, for the year ended March 31, 2018, we recorded an impairment of $10.2 million with respect to our NC-31 and NC-47 projects in North Carolina. The fair market values of the investments we have made or may make in the future may increase or decrease depending on a number of factors, many of which are beyond our control, including the general economic and market conditions affecting the renewable energy industry, wholesale electricity prices, expectations of future market electricity prices, unforeseen development delays, unfavorable project development costs, prohibitive deposit requirements by power offtakers and utilities for interconnection, and long-term interest rates. Any deterioration in the market values of our investments could cause us to record impairment charges in our financial statements, which could adversely affect our results of operations. If we sell any of our investments when prices for such investments have fallen, the sale may be at less than the investment’s carrying value on our financial statements, which could result in a loss. 

 

Sales of our solar projects may be delayed or may not be fully realized, which could have a material adverse effect on our financial position, results of operations or cash flows. 

 

In the U.S., the Company has a portfolio of 32 utility-scale solar projects under development, representing a total electricity generating capacity of approximately 3,090 GWh/yr. In Australia, the Company has two under development with a generating capacity of approximately 54 GWh/yr. These projects are at varying stages of progress and will take many months or even years to sell, as further discussed in Item 4. Information on the Company – B. Business Overview of our Annual Report on Form 20-F for the year ended June 30, 2020. The successful development and sale of these projects is subject to a range of risks and uncertainties, including risks and uncertainties relating to economic and market conditions, political and regulatory conditions, and business and other factors beyond our control. In addition, the attractiveness of these projects to potential purchasers is subject to numerous risks, including: (i) unfavorable changes in forecast construction costs; (ii) engineering or design problems; (iii) problems with obtaining permits, licenses, approvals or property rights necessary or desirable to consummate the project; (iv) interconnection or transmission related issues; (v) environmental issues; (vi) force majeure events; and (vii) access to project financing (including debt, equity or tax credits) on sufficiently attractive terms or at all. Accordingly, the actual amount of proceeds of sale realized and the actual periods during which these proceeds are realized may vary substantially from our plans and projections. Our inability to realize cash from the sale of solar projects could have a material adverse effect on our financial position, results of operations or cash flows and create a risk that we will not be able to continue as a going concern. 

 

10

 

Doing business through joint ventures is a key part of our business and any disagreements or discontinuations could disrupt our operations, put assets at risk or affect the continuity of our business. 

 

Joint ventures, and in particular, the partnership with ITP Renewables in Australia, is a key part of how we do business. While a joint venture partner may provide local knowledge and experience, entering into joint ventures often requires us to surrender a measure of control over the assets and operations devoted to the joint venture, and occasions may arise when we do not agree with the business goals and objectives of our partner, or other factors may arise that make the continuation of the relationship unwise or untenable. Any such disagreements or discontinuation of our relationship with the joint venture partner could disrupt our operations, put assets dedicated to the joint venture at risk, or affect the continuity of our business.

 

Strategic arrangements with joint venture partners could involve risks not otherwise present when we directly manage our operations, including, for example:

 

 

third parties may share certain approval rights over major decisions within the scope of the relationship;

 

the possibility that these third parties might become insolvent or bankrupt;

 

the possibility that we may incur liabilities as a result of an action taken by one of these third parties;

 

these third parties may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and

 

disputes between us and these third parties may result in litigation or arbitration that would increase our expenses, delay or terminate projects and prevent our officers and directors from focusing their time and effort on our business.

 

If we are unable to resolve issues with a joint venture partner, we may decide to terminate the joint venture and either locate a different partner and continue to work in the area or seek opportunities for our assets in another market. The unwinding of an existing joint venture could prove to be difficult or time-consuming, and the loss of revenue related to the termination or unwinding of a joint venture and costs related to the sourcing of a new partner or the mobilization of assets to another market could adversely affect our financial condition, results of operations or cash flows.

 

We face a number of risks involving power purchase agreements (“PPAs”) and project-level financing arrangements, including failure or delay in entering into PPAs, defaults by counterparties and contingent contractual terms, all of which could materially and adversely affect our financial condition, results of operations and cash flows.

 

We may not be able to enter into PPAs for our solar power projects due to intense competition, increased supply of electricity from other sources, reduction in retail electricity prices, changes in government policies or other factors. There is a limited pool of potential buyers for electricity generated by our solar power plants since the transmission and distribution of electricity is either monopolized or highly concentrated in most jurisdictions. The willingness of buyers to purchase electricity from an independent power producer may be based on a number of factors and not solely on pricing and surety of supply. Failure to enter into PPAs on terms favorable to us, or at all, would negatively impact our revenue and our decisions regarding the development of additional power plants. We may experience delays in entering into PPAs for some of our solar power projects or may not be able to replace an expiring PPA with a contract on equivalent terms and conditions, or otherwise at prices that permit operation of the related facility on a profitable basis. Any delay in entering into PPAs may adversely affect our ability to enjoy the cash flows generated by such projects. If we are unable to replace an expiring PPA with an acceptable new PPA, the affected site may temporarily or permanently cease operations, which could materially and adversely affect our financial condition, results of operations and cash flows.

 

The electric power generated by our solar power projects may be sold under long-term PPAs with public utilities, licensed suppliers or commercial, industrial or government end users. In addition, our future projects may also have long-term PPAs or similar offtake arrangements such as FIT programs. If, for any reason, any of the purchasers of power under our future contracts are unable or unwilling to fulfill their related contractual obligations, they refuse to accept delivery of the power delivered thereunder or they otherwise terminate them prior to their expiration, our assets, liabilities, business, financial condition, results of operations and cash flows could be materially and adversely affected. Further, to the extent any of our future power purchasers are, or are controlled by, governmental entities, our facilities may be subject to legislative or other political action that may impair their contractual performance or contain contractual remedies that do not provide adequate compensation in the event of a counterparty default.

 

Furthermore, our PPAs may be subject to price adjustments over time. If the price under any of our PPAs is reduced below a level that makes a project economically viable, our financial conditions, cash flow and results of operations could be materially and adversely affected.

 

11

 

Cost increases, delays and other constraints to the availability of sufficient electric transmission capacity could have a significant and negative effect on our ability to develop, acquire and/or sell solar energy projects and therefore a significant and negative effect on our results of operations. 

 

Utility-scale solar energy development depends on the availability of sufficient electricity transmission infrastructure for the delivery of electricity from the solar plant to customers. If transmission infrastructure is inadequate, or if upgrades or other changes are needed to the infrastructure for our power plants to be constructed, interconnected or made operational, or if there are delays in or unforeseen costs associated with such changes, then our solar energy projects, such as those in our ISS Joint Venture portfolio, could be delayed, subjected to increased costs or canceled, which could have a substantial and negative effect on our revenues and therefore on our results of operations. 

 

Changes in current and forecasted electricity price expectations can have a material adverse impact on the value of our solar projects and the level of demand from potential investors and financiers. 

 

While we primarily target solar projects that are backed by fixed price power purchase agreements, we may acquire projects that sell electricity at wholesale market rates from commencement or that have PPAs that expire before the end of a project’s useful life. In these circumstances, our business is exposed to current wholesale electricity prices and expectations of future market electricity prices. In the event that these prices decline, or there is a decrease in market consensus forecasts, the demand for our solar projects and the profitability that they could generate may also decline commensurately, impacting our cash flow and earnings. Fossil fuel sources of electricity, such as natural gas-fired power plants, have traditionally been cheaper than solar power. If we are unable to compete successfully with other providers of electricity, or to enter into competitive PPAs, our cash flow from project sales and results of operations will be negatively affected. Furthermore, demand for PPAs from customers is subject to procurement practices that may change, and which could negatively affect the number or terms of the PPAs that our customers elect to enter into with us. 

 

Certain PPAs that we enter into with government regulated counterparties may be subject to regulatory approval, and such approval may not be obtained or may be delayed, which could result in a detrimental impact on our business. 

 

As a solar energy provider, the PPAs executed by us and/or our subsidiaries, particularly with government regulated counterparties, in connection with the development of certain projects are generally subject to approval by the relevant regulatory authority in the local market. There can be no assurance that any such approval will be obtained, and in certain markets, the regulatory bodies have recently demonstrated a heightened level of scrutiny on solar PPAs that have been brought for approval. If the required approval is not obtained for any particular solar PPA, the PPA counterparty may exercise its right to terminate such agreement, and we may lose invested development capital. 

 

General economic conditions including market interest rate levels could negatively impact project investor demand for our solar projects and our ability to sell them profitably. 

 

Our ability to generate cash flows and earnings relies on project investor demand for our solar projects. An increase in market interest rates in the countries in which we operate is likely to result in our project investors requiring higher rates of return on solar projects that they acquire from us. Rising interest rates in certain important countries in which we operate, such as the U.S. and Australia, have the potential to negatively impact our ability to achieve our earnings or cash flow targets. 

 

Technical, regulatory, and economic barriers to the purchase and use of solar power products may arise that significantly reduce demand for or financial viability of solar power projects, which could have a material adverse effect on our revenues. 

 

Energy and electricity markets are influenced by foreign, federal, state and local laws, rules and regulations. These laws, rules and regulations may affect electricity pricing and electricity generation and could have a substantial impact on the relative cost and attractiveness of solar power compared to other forms of energy generation. In addition, the financial viability and attractiveness of solar power projects heavily depends on equipment prices and laws, rules and regulations that affect solar equipment. For example, trade and local content laws, rules and regulations, such as tariffs on solar panels, can increase the pricing of solar equipment, thereby raising the cost of developing solar projects and reducing the savings and returns achievable by offtakers and investors, and also potentially reducing our margins on our projects. In 2018, for example, new tariffs were imposed in the United States on a range of solar cells and modules manufactured abroad, and we expect that solar power equipment and its installation will continue to be subject to a broad range of federal, state, local and foreign regulations relating to trade, construction, safety, environmental protection, utility interconnection and metering, and related matters. Moreover, the European Union and Chinese governments, among others, have in the past imposed tariffs on solar power equipment, or are in the process of evaluating the imposition of tariffs on solar power equipment. These and any other tariffs or similar taxes or duties may increase the cost of our solar power projects, thereby reducing their attractiveness to investors and customers and worsening our results of operations. Any new regulations or policies pertaining to our solar power projects may result in significant additional expenses to us, which could cause a significant reduction in demand for our solar power projects. 

 

The low commodity price environment, particularly for natural gas and coal, could impact both the size of our project pipeline and our ability to sell solar projects to our investors profitably.  

 

Traditional forms of electricity generation using commodities such as natural gas and coal provide a source of competition for solar electricity. In the current volatile commodity price environment, these traditional forms of generation may be cheaper and more competitive than our solar projects in some cases. Our ability to generate cash flows and earnings relies on our success in sourcing potential solar projects from our project pipeline and selling them profitably to our investors. Increased competition from a prolonged low commodity price environment could impact the number of viable solar projects that we are able to purchase, resulting in a smaller project pipeline. In addition, such an environment could impact the competitiveness of our solar projects and the price at which we can sell them to our investors. This has the potential to negatively impact our ability to achieve our earnings or cash flow targets.  

 

12

 

There are a limited number of purchasers of power from utility-scale projects, which exposes us to concentration risk. 

 

A key element of our business is financing the development of utility-scale solar projects. Utility-scale solar projects are large solar energy projects that deliver electricity to utility purchasers, and generally range in size from as small as five megawatts to larger than eighty megawatts in nameplate capacity. In part because of the size of utility-scale solar projects, there are a limited number of possible purchasers for electricity from utility-scale solar projects in a given region. As a result, we may not be able to negotiate favorable terms under new PPAs or find new customers for the electricity generated by our power plants should this become necessary.  

 

Our business depends on the demand for solar energy, which is still driven largely by the availability and size of government and economic incentives that may ultimately be reduced or eliminated. 

 

Solar energy demand continues to be driven mainly by the availability and size of government and economic incentives related to the use of solar power because, currently, the cost of solar power exceeds the cost of power furnished by the electric utility grid in most locations. As a result, government bodies in many countries have historically provided incentives in the form of feed-in-tariffs to solar project developers or customers to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. Most countries, including the U.S., however, have continued to regularly reduce the rates paid to solar power system owners for generating electricity under their respective feed-in-tariff programs, and these scheduled reductions in feed-in tariff rates are expected to continue. Moreover, the value and pricing of Performance Based Incentives (“PBIs”) and Renewable Energy Certificates (“RECs”), as well as the state Public Utilities Commissions (“PUC”) approved PPA rates for utilities (which are frequently higher than electricity rates for electricity generated from other energy sources), are likely to continue to decrease, further reducing the U.S. revenue stream from solar projects. In addition, in the U.S. we rely upon income tax credits and other state incentives for solar energy systems. These government economic incentives could be further reduced or eliminated altogether. In addition, some of these solar program incentives expire, decline over time, are limited in total funding or require renewal of authority. Moreover, certain policy changes that have been announced or suggested by the U.S. government, including the announcement of departure from the Paris Accord for greenhouse gas reduction and the elimination of the U.S. government’s Clean Power Plan, could also have a negative effect on demand for solar energy and other renewable energy technologies, Finally, certain countries have altered, and others may alter, their programs retroactively which would impact our current solar systems. Reductions in, or eliminations or expirations of, governmental incentives could result in decreased viability of our projects and pipeline, which could have a material adverse effect on our business, financial condition or results of operations. 

 

Recent reduction to the U.S. federal income corporate tax rates may reduce the appetite of investors for project investments that are eligible for federal investment tax credit and could therefore have a negative impact on our ability to secure capital at an attractive cost for our United States projects.

 

Our business in the United States relies on the federal investment tax credit under Section 48 of the Internal Revenue Code (the “Code”). The recent U.S. federal income tax reform enacted under the Tax Cuts and Jobs Act included a substantial reduction to the federal income corporate tax rate.

 

The reform recently carried out in the United States has significantly reduced tax rates for corporations, which may have a negative effect on the appetite of investors for project investments that are eligible for the federal investment tax credit, and which therefore could have a negative impact on our ability to secure capital at an attractive cost for our United States projects. Such a reduction may diminish the appetite that investors have for utilizing the federal investment tax credit under Section 48 of the Code (the “ITC”). Because investors utilizing the ITC have been an important source of capital for solar energy projects in the US, including our projects, a decrease in investor appetite for utilizing the ITC in solar projects could have a substantial and negative effect on our ability to secure capital at an attractive cost for our United States solar projects. 

 

Existing regulations and policies governing the electric utility industry, as well as changes to these regulations and policies, may adversely affect demand for our projects and services and materially adversely affect our business, financial condition or results of operations. 

 

The market for electricity generation is heavily influenced by local country factors including federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by public utility commissions and electric utilities. These regulations and policies govern, among other matters, electricity pricing and the technical interconnection of distributed electricity generation to the grid. The regulations and policies also regulate net metering in the U.S., which relates to the ability to offset utility-generated electricity consumption by feeding electricity produced by onsite renewable energy sources, such as solar energy, back into the grid. Purchases of alternative energy, including solar energy, by utility customers could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our solar energy systems. Changes in consumer electricity tariffs or peak hour pricing policies of utilities, including the introduction of fixed price policies, could also reduce or eliminate the cost savings derived from solar energy systems and, as a result, reduce customer demand for our systems. Any such decrease in customer demand could have a material adverse effect on our business, financial condition or results operations. 

 

13

 

If solar and related technologies are not suitable for widespread deployment with attractive returns, our results of operations will be negatively affected. 

 

 The solar energy business is still at an early stage of development. If Photovoltaic (“PV”) technology proves unsuitable for widespread adoption, we may be unable to generate sufficient revenue to grow our business profitably. The attractiveness of PV technology is dependent on numerous factors, including: (i) the cost-efficiency and performance of solar-generated electricity compared to other energy sources, such as natural gas, wind, hydroelectric, geothermal and coal; (ii) the regulatory, legal and tax landscape for energy generation, distribution and consumption, which substantially affects the costs and returns associated with use of different energy sources; (iii) the availability or absence of environmental and energy incentives, credits, standards and attributes that seek to promote use of renewable energy technologies; and (iv) the level of competitiveness in the renewable energy industry generally.  

 

Our operations span multiple markets and jurisdictions, exposing us to numerous legal, political, operational and other risks that could negatively affect our operations and profitability. 

 

We continue to explore expansion of our international operations in certain markets where we currently operate and in selected new or developing markets. New markets and developing markets can present many risks including the actions and decisions of foreign authorities and regulators, the imposition of limits on foreign ownership of local companies, changes in laws (including tax laws and regulations) as well as their application or interpretation, civil disturbances and political instability, difficulties in protecting intellectual property, fluctuations in the value of the local currency, restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting local currencies we hold into U.S. dollars, British Pounds or other currencies, as well as other adverse actions by foreign governmental authorities and regulators, such as the retroactive application of new requirements on our current and prior activities or operations. Additionally, evaluating or entering into a developing market may require considerable time from management, as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local political, economic and market conditions. As we continue to operate our business internationally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. The impact of any one or more of these or other factors could adversely affect our business, financial condition or operating results. 

 

If we fail to meet changing customer demands, we may lose customers and our sales could suffer. 

 

The industry in which we operate changes rapidly. Changes in our customers’ requirements result in new and more demanding technologies, product specifications and sizes, and manufacturing processes. Our ability to remain competitive will depend upon our ability to develop technologically advanced products and processes. We must continue to meet the increasingly sophisticated requirements of our customers on a cost-effective basis. We cannot be certain that we will be able to successfully introduce, market and cost-effectively source any new products, or that we will be able to develop new or enhanced products and processes that satisfy customer needs or achieve market acceptance. Any resulting loss of customers could have a material adverse effect on our business, financial condition or results of operations. 

 

We may incur unexpected warranty and performance guarantee claims that could materially and adversely affect our financial condition or results of operations. 

 

In connection with our products and services, we may provide various system warranties and/or performance guarantees. While we generally are able to pass through manufacturer warranties we receive from our suppliers to our customers, in some circumstances, our warranty period may exceed the manufacturer’s warranty period or the manufacturer warranties may not otherwise fully compensate for losses associated with customer claims pursuant to the warranty or performance guarantee we provided. For example, most manufacturer warranties exclude many losses that may result from a system component’s failure or defect, such as the cost of de-installation, re-installation, shipping, lost electricity, lost renewable energy credits or other solar incentives, personal injury, property damage, and other losses. In addition, in the event we seek recourse through manufacturer warranties, we will also be dependent on the creditworthiness and continued existence of these suppliers. As a result, warranty or other performance guarantee claims against us could cause us to incur substantial expense to repair or replace defective products in our solar energy systems. Significant repair and replacement costs could materially and negatively impact our financial condition or results of operations, as well divert employee time to remedying such issues. In addition, quality issues can have various other ramifications, including delays in the recognition of revenue, loss of revenue, loss of future sales opportunities, increased costs associated with repairing or replacing products, and a negative impact on our reputation, any of which could also adversely affect our business or operating results. 

 

We face competition in the markets and industry segments in which we operate, which could force us to reduce our prices to retain market share or face losing market share and revenues. 

 

We face competition in the growing renewable energy services market internationally as well as in the critical power services market in Australia from a large number of competitors. In the renewable energy services market our competitors include companies such as Cypress Creek Renewables, LLC, First Solar, Inc., NextEra Energy, Inc. and 8minuteenergy Renewables, LLC in the U.S., and Overland Sun Farming Pty Ltd, Edify Energy Pty Ltd., Maoneng Group and Renew Estate in Australia. In the critical power services market in Australia our competitors include Sulzer, Generator Power, MacFarlane, Wilkenm Hix and Electrospark. Some of our competitors: (i) have substantially more financial, technical, engineering and manufacturing resources than we do to develop products that may compete favorably against our products; (ii) are developing or are currently producing products based on new solar power technologies that may ultimately have costs similar to or lower than our projected costs; (iii) have substantial government-backed financial resources or parent companies with substantially greater depth of resources than available to us; (iv) may have longer and more established operating records than we do; or (v) may have longer operating histories, greater name and brand recognition, access to larger customer bases or financing partners, greater resources and significantly greater economies of scale than we do. In addition, some of our competitors may have stronger relationships or may enter into exclusive relationships with some of the key distributors or system integrators to whom we sell our products. As a result, they may be able to respond more quickly to changing customer demands or devote greater resources to the development, promotion and sales of their products. Some of our competitors have more diversified product offerings, which may better position them to withstand a decline in demand for solar power products. In addition, new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share. If we fail to compete successfully, our business will suffer and we may not be able to maintain or increase our market share.

 

14

 

We expect that our competitors will continue to improve their ability to develop, invest in, and sell solar energy projects, and our failure to compete effectively could have a material adverse effect on our business, financial condition or results of operations. We may need to reduce our prices to respond to aggressive pricing by our competitors in order to retain or gain market share or undertake other measure to increase the competitiveness of our products or services, which could have a material adverse effect on our business, financial condition or results of operations. 

 

Our solar projects may underperform expected levels due to a variety of factors including sunlight and other weather conditions, which could materially and adversely affect our results of operations. 

 

The productivity, and therefore the results, of our operating solar projects may be lower than expected due to fewer than expected sunlight hours, power conversion, or adverse weather events, among other factors. This underperformance could adversely affect the attractiveness of our projects to potential buyers and may result in our business not achieving expected financial returns on investment. 

 

We may have liabilities and obligations under management services agreements that we enter into with our customers, which could have a detrimental financial impact on us if enforced. 

 

We provide ongoing solar system and project management services for our customers and co-investors under management services agreements. Under the terms of these agreements, many of which are long-term, we have certain liabilities and obligations which could be enforced in the event of a breach of our responsibilities. If called, some of these obligations and liabilities could be material and negatively affect our results of operations or financial position.  

 

A failure to obtain change of control consents from counterparties when selling projects to investors could materially impact the results of our operations. 

 

Our profitability relies in part on our ability to continue to transfer projects to other investors. Certain project agreements and non-recourse project financing documents require counterparty consent to a change of project or solar system ownership. If such consents cannot be obtained on reasonable terms, or at all, our ability to invest capital and generate earnings and cash flows will be materially diminished, adversely impacting the results of our operations and future growth prospects. 

 

We have a limited history in the development and sale of solar projects and, as a result, we may not be successful developing projects profitability resulting in losses on investment in whole or in part. 

 

We have limited experience in the development and sale of solar assets. The Company has successfully developed and sold two solar projects to date in the U.S., each of which commenced operation in 2017. In Australia, the Company sold 84 operating solar projects between 2017 and 2019. Our prospects of successfully completing the projects currently under development within the ISS Joint Venture and in Australia must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of operation, particularly in a rapidly evolving industry such as ours. We cannot assure you that we will be successful in addressing the risks we may encounter and our failure to do so could have a material adverse effect on our business, financial condition, results of operations or cash flows. 

 

Our Australian critical power services workforce may become unionized resulting in higher cost of operation and reduced labor efficiency. 

 

Part of our workforce is currently unionized. The critical power services business in Australia represents the largest proportion of our workforce, which includes 160 operational personnel, or 97% of our total workforce as of June 30, 2020. This part of our business operates in the Hunter Valley region of Australia whose economy is predominately driven by the mining industry and many businesses in the area are unionized. In periods of strong growth and activity in the mining sector, such as has been experienced over the past four years, the labor market usually becomes extremely competitive, which may entice our workforce to seek collective bargaining through union representation. Unionization of our critical power services workforce could result in additional costs for industrial relations, legal and consulting services, higher labor rates, new requirements for additional employment benefits, more restrictive overtime rules, and less flexible work scheduling, all of which could result in a significant increase in the cost of labor and the requirement for additional labor to maintain existing productivity. Should this occur, it could have a material adverse effect on our business, financial condition or results of operation. 

 

Aside from the ownership of certain trademarks for VivoPower and our subsidiary J.A. Martin, we do not have material ownership of any other intellectual property. Our lack of ownership and inability to protect our intellectual property could adversely affect our business. The intellectual property that we currently own may not cover all aspects of our business or all relevant geographical territories, might be encumbered with third party interests, and might not remain valid and in force at all times during our business. We may also be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

 

The lack of adequate protection for our proprietary rights could result in, for example, our competitors offering similar solar technology services more quickly than anticipated, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue which would adversely affect our business prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. We rely on intellectual property laws, primarily a trade secret and trademark laws in the U.S., as well as license agreements and other contractual provisions, to protect our the associated brand. We cannot be certain that our agreements and other contractual provisions will not be breached, including a breach involving the use or disclosure of our know-how, or that adequate remedies will be available in the event of any breach.

 

15

 

We cannot be certain our products and our business do not or will not violate the intellectual property rights of a third party. Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our business methods. Such parties may claim we have misappropriated, misused, violated or infringed third-party intellectual property rights and if we gain greater recognition in the market, we face a higher risk of being the subject of claims we have violated others' intellectual property rights. Any claim we violated a third party's intellectual property rights, whether with or without merit, could be time-consuming, expensive to settle or litigate and could divert our management's attention and other resources, all of which could adversely affect our business, results of operations, financial condition and cash flows. We also may be prohibited from using the relevant intellectual property during the pendency of the dispute. If we do not successfully settle or defend an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content or brands. To avoid an injunction, we could seek a license from third parties, which could require us to pay significant royalties, increasing our operating expenses. If a license is not available at all or not available on commercially reasonable terms, we may be required to develop or license a non-violating alternative, either of which could adversely affect our business, results of operations, financial condition and cash flows.

 

Our brand and reputation are key assets of our business, and if our brand or reputation is damaged, our business and results of operations could be materially adversely affected. 

 

If we fail to deliver our solar products or power service within the planned timelines and contracted obligations, or our products and services do not perform as anticipated, or if we materially damage any of our clients’ properties, or cancel projects, our brand name and reputation could be significantly impaired, which could materially adversely affect our business and results of operations. 

 

We are exposed to foreign currency exchange risks because certain of our operations are located in foreign countries. 

 

We generate revenues and incur costs in a number of currencies. Changes in economic or political conditions in any of the countries in which we operate could result in exchange rate movement, new currency or exchange controls or other restrictions being imposed on our operations or expropriation. Because our financial results are reported in U.S. dollars, if we generate revenue or earnings in other currencies, the translation of those results into U.S. dollars can result in a significant increase or decrease in the amount of those revenues or earnings.  

 

From time to time, we may become involved in costly and time-consuming litigation and other regulatory proceedings, which require significant attention from our management. 

 

In addition to potential litigation related to defending our intellectual property rights, we may be named as a defendant from time to time in other lawsuits and regulatory actions relating to our business, some of which may claim significant damages.

 

For example, as discussed in Item 8. Financial Information – A. Consolidated Statements and Other Financial information – Legal Proceedings of our Annual Report on Form 20-F for the year ended June 30, 2020, on February 26, 2018, Philip Comberg, formerly Chief Executive Officer and formerly a member of the Board of Directors of VivoPower, filed a claim in the High Court of Justice Queen’s Bench Division in the U.K. against VivoPower and a subsidiary, VivoPower International Services Limited (“VISL”). The claim is in respect of payments alleged to be due to Mr. Comberg, damages, and restitution in relation to services allegedly rendered by Mr. Comberg, interest and costs. In particular, Mr. Comberg claims VISL committed a repudiatory breach of Mr. Comberg’s service agreement with VISL in connection with the termination of Mr. Comberg’s employment in October 2017, and claims as damages amounts including £615,600 in unpaid amounts allegedly relating to the notice period under the service agreement, £540,000 relating to shares of stock in VivoPower that Mr. Comberg alleges were not delivered to him but were due, and, inter alia, amounts relating to bonuses alleged to be due, fees relating to services Mr. Comberg claims he provided, as well as interest and costs (collectively, the “Comberg Claims”).

 

On April 9, 2018, VivoPower and VISL filed a defense and counterclaims against Mr. Comberg. In the defense, VivoPower and VISL denied that a repudiatory breach was committed by VISL and denied the other Comberg Claims and asserted that Mr. Comberg was terminated for cause and/or by the acceptance on the part of VISL of Mr. Comberg’s own repudiatory breach of Mr. Comberg’s service agreement. VivoPower and VISL also filed counterclaims against Mr. Comberg alleging that Mr. Comberg had mismanaged the Company, misrepresented information to the VivoPower Board, and failed to report his own wrongdoing in breach of his services agreement and fiduciary duties to VivoPower and VISL.

 

On November 26, 2018, VivoPower and VISL agreed to a settlement of the counterclaims for an undisclosed amount. Following aborted attempts at settlement with respect to Mr. Comberg's claim, the matter was heard in the U.K. High Court in March 2020. On September 11, 2020, the U.K. High Court handed down a judgment on the case, in which the Company was partially successful, and the majority of Mr. Comberg’s claims were dismissed. The U.K. High Court also concluded that Mr. Comberg will be entitled to some damages for wrongful dismissal for loss of salary (subject to mitigation), but not including any loss of bonus. The damages also include loss of Omnibus/EIS shares, but such damages are limited by the number of shares and their value. In addition, there will be a judgment for Mr. Comberg for Deferred Remuneration and Mr. Comberg will be entitled to his October 2017 salary payment. The parties have been asked by the U.K High Court to express in money terms the effect of the various findings, and rulings on these matters remain outstanding.

 

In addition to the foregoing litigation, we may be subject in the future to, or may file ourselves, claims, lawsuits or arbitration proceedings related to matters in tort or under contracts, employment matters, securities class action lawsuits, whistleblower matters, tax authority examinations or other lawsuits, regulatory actions or government inquiries and investigations. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on our business and financial position, results of operations or cash flows or limit our ability to engage in certain of our business activities. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings are often expensive, lengthy, disruptive to normal business operations and require significant attention from our management. 

 

16

 

We operate in a number of different countries and could be adversely affected by any violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act 2010 (“U.K. Bribery Act”), and other anti-bribery laws, rules and regulations.  

 

The FCPA generally prohibits companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. We are also subject to other anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Some (e.g., the FCPA and the U.K. Bribery Act) extend their application to activities outside of their country of origin. The U.K. Bribery Act also includes a corporate offence of failure to prevent a bribe being paid to obtain or retain business advantage, which can make a commercial organization criminally liable for bribes paid by any persons associated with it, without fault on the part of the organization. Although we have implemented policies and procedures designed to promote and enable compliance with these anti-bribery laws, our employees, agents, partners and contractors may take actions in violation of such policies and procedures and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us and such persons to criminal and/or civil penalties or other sanctions, which could have a material adverse effect on our reputation and results of operations. 

 

We are subject to the U.K. Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, import and customs laws, trade and economic sanctions laws and other laws governing our operations.

 

Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or the Bribery Act, the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. §201, the U.S. Travel Act, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, the FCPA and these other laws generally prohibit us and our employees and intermediaries from authorizing, promising, offering, or providing, directly or indirectly, improper or prohibited payments, or anything else of value, to government officials or other persons to obtain or retain business or gain some other business advantage.

 

Under the Bribery Act, we may also be liable for failing to prevent a person associated with us from committing a bribery offense. We and those acting on our behalf operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose corrupt or illegal activities could potentially subject us to liability under the Bribery Act, FCPA or local anticorruption laws, even if we do not explicitly authorize or have actual knowledge of such activities. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted. Furthermore, compliance with the Bribery Act, the FCPA and these other laws is expensive and difficult, particularly in countries in which corruption is a recognized problem.

 

We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United States and the U.K., and authorities in the European Union, including applicable export control regulations, economic sanctions and embargoes on certain countries and persons, anti-money laundering laws, import and customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.

 

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by United States, U.K. or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition. Further, the failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting.

 

If we are unable to maintain effective internal controls over financial reporting or effective disclosure controls and procedures, or if material weaknesses in our internal controls over financial reporting or in our disclosure controls and procedures develop, it could negatively affect the reliability or timeliness of our financial reporting and result in a reduction of the price of our ordinary shares or have other adverse consequences. 

 

There can be no assurance that our internal controls or our disclosure controls and procedures will provide adequate control over our financial reporting and disclosures and enable us to comply with the requirements of the Sarbanes-Oxley Act. In addition, carrying out our growth plan may require our controls and procedures to become more complex and may exert additional resource requirements in order for such controls and procedures to be effective. Any material weaknesses in our internal controls over financial reporting, or in our disclosure controls and procedures, may negatively affect the reliability or timeliness of our financial reporting and could result in a decrease in the price of our ordinary shares, limit our access to capital markets, harm our liquidity or have other adverse consequences.

 

Our future success depends on our ability to retain our chief executive officer and other key executives.

 

We are highly dependent on Kevin Chin, our President and Chief Executive Officer, and other principal members of our management team. Although we have formal employment agreements with each of our executive officers, these agreements do not prevent our executives from terminating their employment with us at any time. We do not maintain “key person” insurance on any of our executive officers. The unplanned loss of the services of any of these persons could materially impact our business and results of operations. 

 

The success of our company is heavily dependent on the continuing services of key personnel and retention of additional personnel. 

 

Our industry is characterized by intense competition for personnel. The success of our company is highly dependent on the contributions of executives and other key personnel, and if we were to lose the contributions of any such personnel, it could have a negative impact on our business and results of operations. Moreover, our growth plan will require us to hire additional personnel in the future. If we are not able to attract and retain such personnel, our ability to realize our growth objectives will be compromised. In addition, talented employees may choose to leave the company because of our cost reduction initiatives. When talented employees leave, we may have difficulty replacing them and our business may suffer. While we strive to maintain our competitiveness in the marketplace, there can be no assurance that we will be able to successfully retain and attract the employees that we need to achieve our business objectives. 

 

17

 

We are subject to a substantial range of requirements as a public company, which impose significant demands on the time and resources of our company and executive personnel. 

 

As a public company listed on The Nasdaq Stock Market (“Nasdaq”), we are subject to a wide range of legal and regulatory requirements, including the Securities Act Exchange of 1934, as amended, and the rules and regulations thereunder, as well as the requirements of Nasdaq, in addition to other applicable securities laws. Maintaining compliance with these requirements is expensive and time-consuming, has imposed substantial and ongoing costs on our business and can divert the attention and time of our executive personnel from our operating activities, which could have negative impacts on our business and results of operations. In addition, director and officer liability insurance for public companies is expensive and in the future, we may be required to accept reduced coverage or incur significantly higher costs to maintain similar coverage, which could make it more difficult for us to attract and retain qualified directors or executive personnel. 

 

Seasonal variations in demand linked to construction cycles and weather conditions may influence our results of operations.

 

Our business is subject to seasonal variations in demand linked to construction cycles and weather conditions. Demand for solar power products and services from some countries may also be subject to significant seasonality due to adverse weather conditions that can complicate the installation of solar power systems and negatively impact the construction schedules of solar power projects. Seasonal variations could adversely affect our results of operations and make them more volatile and unpredictable.

 

General global economic conditions may have an adverse impact on our operating performance and results of operations.

 

The demand for solar power products and services is influenced by macroeconomic factors, such as global economic conditions, demand for electricity, supply and prices of other energy products, such as oil, coal and natural gas, as well as government regulations and policies concerning the electric utility industry, the solar and other alternative energy industries and the environment. As a result of global economic conditions, some governments may implement measures that reduce the FITs and other subsidies designed to benefit the solar industry. During 2017, 2018 and 2019, a decrease in solar power tariffs in many markets placed downward pressure on the price of solar systems in those and other markets. In addition, reductions in oil and coal prices may reduce the demand for and the prices of solar power products and services. Our growth and profitability depend on the demand for and the prices of solar power products and services. If we experience negative market and industry conditions and demand for solar power projects and solar power products and services weakens as a result, our business and results of operations may be adversely affected.

 

Our future business depends in part on our ability to make strategic acquisitions, investments and divestitures and to establish and maintain strategic relationships, and our failure to do so could have a material and adverse effect on our market penetration and revenue growth.

 

We frequently look for and evaluate opportunities to acquire other businesses, make strategic investments or establish strategic relationships with third parties to improve our market position or expand our products and services. When market conditions permit and opportunities arise, we may also consider divesting part of our current business to focus management attention and improve our operating efficiency. Investments, strategic acquisitions and relationships with third parties could subject us to a number of risks, including risks associated with integrating their personnel, operations, services, internal controls and financial reporting into our operations as well as the loss of control of operations that are material to our business. If we divest any material part of our business, we may not be able to benefit from our investment and experience associated with that part of the business and may be subject to intensified concentration risks with less flexibility to respond to market fluctuations. Moreover, it could be expensive to make strategic acquisitions, investments, divestitures and establish and maintain relationships, and we may be subject to the risk of non-performance by a counterparty, which may in turn lead to monetary losses that materially and adversely affect our business. We cannot assure you that we will be able to successfully make strategic acquisitions and investments and successfully integrate them into our operations or make strategic divestitures or establish strategic relationships with third parties that will prove to be effective for our business. Our inability to do so could materially and adversely affect our market penetration, our revenue growth and our profitability.

 

In light of our recently announced entry into a definitive agreement to acquire Tembo 4x4 e-LV B.V., our future growth and success is dependent upon the market acceptance of, and we are subject to an elevated risk of any reduced demand for, new zero-emission specialist battery-electric and off-road vehicles in the mining, government services, game safari and humanitarian aid sectors.

 

In light of recently announced entry into a definitive agreement to acquire Tembo 4x4 e-LV B.V. (“Tembo”), our future growth is dependent upon the market acceptance of, and we are subject to an elevated risk of any reduced demand for, new zero-emission specialist battery-electric and off-road vehicles in the mining, government services, game safari and humanitarian aid sectors.  If this market does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed and we may need to raise additional capital. This market is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. Factors that may influence the market acceptance of new zero-emission vehicles, and the conversion of existing vehicles to zero-emission electric vehicles include:

 

•     perceptions about zero-emission electric vehicle quality, safety design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of any electric vehicle;

 

•     perceptions about the limitations in the technology resulting in a limited range over which zero-emission electric vehicles may be driven on a single battery charge (increases in distance requires additional batteries, which increases weight, and, at some point, too much weight diminishes the additional distance being sought before requiring a charge);

 

•     perceptions about vehicle safety in general, in particular safety issues that may be attributed to the use of advanced technology;

 

•     the availability of alternative fuel vehicles, including competitive vehicles and improvements in the fuel economy of the internal combustion engine may cause a slow-down in the demand to switch to zero-emission electric vehicles;

 

18

 

•     the availability of service for zero-emission electric vehicles;

 

•     the environmental consciousness of owners of diesel- and gasoline-powered buses, truck and other fleet vehicles;

 

•     changes in the cost of oil and gasoline;

 

•     government regulations and economic incentives, including a change in the administrations and legislations of federal and state governments, promoting fuel efficiency and alternate forms of energy;

 

•     access to charging stations both public and private, standardization of electric vehicle charging systems and perceptions about convenience and cost to charge an electric vehicle;

 

•     the availability of tax and other governmental incentives and rebates to purchase and operate electric vehicles or future regulation requiring increased use of zero-emission or hybrid vehicles;

 

•     perceptions about and the actual cost of alternative fuel; and

 

•     macroeconomic factors.

 

Additionally, we have limited experience in introducing new products, as we commenced production and deliveries of our products within the most recent two years. To the extent that we are not able to build our products in accordance with customer expectations, our future sales could be harmed.  We may also become subject to regulations that require us to alter the design of Tembo’s vehicles, which could negatively impact interest in our products.

 

The influence of any of the factors described above may cause current or potential customers not to purchase Tembo’s electric vehicles, which would materially adversely affect our business, operating results, financial condition and prospects.

 

If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows.

 

We may make acquisitions of solar energy systems and related businesses and joint ventures. The consummation and timing of any future acquisitions will depend upon, among other things, whether we are able to:

 

 

identify attractive acquisition candidates;

 

negotiate acceptable purchase agreements;

 

obtain any required governmental or third party consents;

 

obtain financing for these acquisitions on economically acceptable terms, which may be more difficult at times when the capital markets are less accessible; and

 

outbid any competing bidders.

 

Additionally, any acquisition involves potential risks, including, among other things:

 

 

mistaken assumptions about assets, revenues and costs of the acquired company, including synergies and potential growth;

 

an inability to secure adequate customer commitments to use the acquired systems or facilities;

 

an inability to successfully integrate the assets or businesses we acquire;

 

coordinating geographically disparate organizations, systems and facilities;

 

the assumption of unknown liabilities for which we are not indemnified or for which our indemnity is inadequate;

 

mistaken assumptions about the acquired company's suppliers or dealers or other vendors;

 

the diversion of management's and employees' attention from other business concerns;

 

unforeseen difficulties operating in new geographic areas and business lines;

 

customer or key employee losses at the acquired business; and

 

poor quality assets or installation.

 

If we consummate any future acquisitions, our capitalization, results of operations and future growth may change significantly and our shareholders will not have the opportunity to evaluate the economic, financial and other relevant information we will consider in deciding to engage in these future acquisitions, which may not improve our results of operations or cash flow to the extent we projected.

 

Risks related to ownership of our ordinary shares

 

We cannot assure you that our ordinary shares will always trade in an active and liquid public market. In addition, at times trading in our ordinary shares on Nasdaq has been highly volatile with significant fluctuations in price and trading volume, and such volatility and fluctuations may continue to occur in the future. Low liquidity, high volatility, declines in our stock price or a potential delisting of our ordinary shares may have a negative effect on our ability to raise capital on attractive terms or at all and may cause a material adverse effect on our operations.  

 

The market price of our ordinary shares may be influenced by many factors, many of which are beyond our control, including those described above in “Risks Related to our Business and Operations.” As a result of these and other factors, investors in our ordinary shares may not be able to resell their shares at or above the price they paid for such shares or at all. The market price of our ordinary shares has frequently been highly volatile and has fluctuated in a wide range. The liquidity of our ordinary shares as reflected in daily trading volume on Nasdaq has usually been low. As of October 15, 2020, the trading price of our ordinary shares on Nasdaq was $8.98 per share. At certain points in the past year, the trading price of our ordinary shares on Nasdaq has fallen below $1.00 per share. If the trading price of our ordinary shares was to fall below $1.00 for a sustained period, we may not be able to meet Nasdaq’s continued listing standards in the future. Low liquidity, high volatility, declines in our stock price or potential delisting of our ordinary shares may have a material adverse effect on our ability to raise capital on attractive terms or at all and a material adverse effect on our operations. 

 

19

 

The accounting treatment for many aspects of our business is complex and any changes to the accounting interpretations or accounting rules governing our business could have a material adverse effect on our reported results of operations and financial results. 

 

The accounting treatment for many aspects of our business is complex, and our future results could be adversely affected by changes in the accounting treatment applicable to our business. In particular, any changes to the accounting rules regarding the following matters may require us to change the manner in which we operate and finance our business: 

 

 

revenue recognition and related timing;

 

intercompany contracts;

 

operation and maintenance contracts;

 

joint venture accounting, including the consolidation of joint venture entities and the inclusion or exclusion of their assets and liabilities on our balance sheet;

 

long-term vendor agreements; and

 

foreign holding company tax treatment.

 

We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our reported results of operations. 

 

In connection with the preparation of our consolidated financial statements included in Item 17. Financial Statements of our Annual Report on Form 20-F for the year ended June 30, 2020, we use certain estimates and assumptions, which are more fully described in Notes 2 and 3 of the financial statements filed as part of our Annual Report on Form 20-F for the year ended June 30, 2020, starting on page F-1. The estimates and assumptions we use in the preparation of our consolidated financial statements affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our financial statement presentation, financial condition, results of operations and cash flows, any of which could cause our share price to decline. 

 

Future sales of our ordinary shares may depress our share price. 

 

Future sales of substantial amounts of our ordinary shares in the public market, or the perception that these sales could occur, could adversely affect the price of our ordinary shares and could impair our ability to raise capital through the sale of additional shares. Furthermore, the market price of our ordinary shares could drop significantly if our executive officers, directors, or certain large shareholders sell their shares, or are perceived by the market as intending to sell them.

 

The market price of our shares may be significantly, and negatively, affected by factors that are not in our control. 

 

The market price of our shares may vary significantly and may be significantly, and negatively, affected by factors that we do not control. Some of these factors include: variance and volatility in global markets for equity and other assets; changes in legal, regulatory or tax-related requirements of governmental authorities, stock exchanges, or other regulatory or quasi-regulatory bodies; the performance of our competitors; and the general availability and terms of corporate and project financing. 

 

Our largest shareholder has substantial influence over us and its interests may conflict with or differ from interests of other shareholders. 

 

Our largest shareholder (collectively with its affiliates and subsidiaries, the “Significant Shareholder”) owned approximately 60.3% of our outstanding ordinary shares at June 30, 2020 Accordingly, the Significant Shareholder exerts substantial influence over the election of our directors, the approval of significant corporate transactions such as mergers, tender offers, and the sale of all or substantially all of our assets, the adoption of equity compensation plans, and all other matters requiring shareholder approval. The interests of the Significant Shareholder could conflict with or differ from interests of other shareholders. For example, the concentration of ownership held by the Significant Shareholder could delay, defer, or prevent a change of control of the Company or impede a merger, takeover, or other business combination, which other shareholders may view favorably. 

 

We are a holding company whose material assets consist of our holdings in our subsidiaries, upon whom we are dependent for distributions. 

 

We are a holding company whose material assets consists of our holdings in our subsidiaries. We do not have independent sources of revenue generation. Although we intend to cause our subsidiaries to make distributions to us in an amount necessary to cover our obligations, expenses, taxes and any dividends we may declare, if one or more of our operating subsidiaries became restricted from making distributions under the provisions of any debt or other agreements or applicable laws to which it is subject, or is otherwise unable to make such distributions, it could have a material adverse effect on our financial condition and liquidity. 

 

Changes to our tax liabilities or changes to tax requirements in the jurisdictions in which we operate could significantly, and negatively, affect our profitability. 

 

We are subject to income taxes and potential tax examinations in various jurisdictions, and taxing authorities may disagree with our interpretations of U.S. and foreign tax laws and may assess additional taxes. The taxes ultimately paid upon resolution of such examinations could be materially different from the amounts previously included in our income tax provision, which could have a material impact on our profitability and cash flow. Moreover, changes to our operating structure, losses of tax holidays, changes in the mix of earnings in countries with tax holidays or differing statutory tax rates, changes in tax laws, and the discovery of new information in the course of our tax return preparation process could each have a negative impact on our tax burden and therefore our financial condition. Changes in tax laws or regulations may also increase tax uncertainty and adversely affect our results of operations. 

 

20

 

Security breaches, loss of data and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

 

In the ordinary course of our business, we collect and store sensitive data, and intellectual property and proprietary business information owned or controlled by ourselves or our customers. This data encompasses a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face four primary risks relative to protecting this critical information: loss of access; inappropriate disclosure; inappropriate modification; and inadequate monitoring of our controls over the first three risks.

 

The secure processing, storage, maintenance, and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses, breaches, interruptions due to employee error, malfeasance, lapses in compliance with privacy and security mandates, or other disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost, or stolen.

 

Any such security breach or interruption, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful.

 

In addition, the European Parliament and the Council of the European Union adopted a comprehensive general data privacy regulation, or GDPR, in 2016 to replace the current European Union Data Protection Directive and related country-specific legislation. The GDPR took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is wide-ranging in scope, will impose several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. While we have taken steps to comply with the GDPR, including such as reviewing our security procedures and entering into data processing agreements with relevant contractors, we cannot assure you that our efforts to remain in compliance will be fully successful.

 

Further, unauthorized access, loss or dissemination of sensitive information could also disrupt our operations, including our ability to conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our reputation and our business. In addition, there can be no assurance that we will promptly detect any such disruption or security breach, if at all. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development of our products could be delayed.

 

Changes in, or any failure to comply with, privacy laws, regulations, and standards may adversely affect our business. 

 

The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Governmental bodies around the world have adopted, and may in the future adopt, laws and regulations affecting data privacy. Industry organizations also regularly adopt and advocate for new standards in this area. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that apply to us. Any changes in such laws, regulations or standards may result in increased costs to our operations, and any failure by us to comply with such laws, regulations and standards may have a significant and negative impact on our business or reputation.  

 

As a foreign private issuer under the rules and regulations of the SEC, we are exempt from a number of rules under the U.S. securities laws that apply to U.S.-based issuers and are permitted to file less information with the SEC than such companies.  

 

We are a “foreign private issuer” under the rules and regulations of the SEC. As a result, we are not subject to all of the disclosure requirements applicable to U.S.-based issuers. For example, we are exempt from certain rules under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that impose disclosure and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to securities registered under the Exchange Act. In addition, we are not required to file periodic reports and consolidated financial statements with the SEC as frequently or as promptly as U.S.-based public companies. As a result, there may be less publicly available information concerning our company than there is for U.S.-based public companies. Furthermore, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules. 

 

U.S. holders of our shares could be subject to material adverse tax consequences if we are considered a “passive foreign investment company” for U.S. federal income tax purposes. 

 

We do not believe that we are a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes, and we do not expect to become a PFIC. However, the determination of whether we are a currently, or may become in the future, a PFIC, depends on the particular facts and circumstances (such as the valuation of our assets, including goodwill and other intangible assets) and may also be affected by the application of the PFIC rules, which are subject to differing interpretations. Because that factual determination is made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable years.

 

21

 

If we are a PFIC, U.S. holders of our ordinary shares would be subject to adverse U.S. federal income tax consequences, such as ineligibility for any preferred tax rates on capital gains or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional reporting requirements under U.S. federal income tax laws and regulations. A U.S. holder of our ordinary shares may be able to mitigate some of the adverse U.S. federal income tax consequences described above with respect to owning the ordinary shares if we are classified as a PFIC, provided that such U.S. investor is eligible to make, and validly makes, a “mark-to-market” election. In certain circumstances a U.S. Holder can make a “qualified electing fund” election to mitigate some of the adverse tax consequences described with respect to an ownership interest in a PFIC by including in income its share of the PFIC’s income on a current basis. However, we do not currently intend to prepare or provide the information that would enable a U.S. Holder to make a qualified electing fund election.

 

Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our ordinary shares. For more information related to classification as a PFIC, see Certain Material U.S. Federal Income Tax Considerations -- Passive Foreign Investment Company Considerations.

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.  

 

As a foreign private issuer, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. In the future, we would lose our foreign private issuer status if we failed to meet the requirements set forth in Rule 405 of the Securities Act of 1933, as amended (the “Securities Act”). If we were to lose our status as a foreign private issuer, we would become subject to the regulatory and compliance costs associated with being a U.S. domestic issuer under U.S. securities laws, rules and regulations and stock exchange requirements, which costs may be significantly greater than costs we incur as a foreign private issuer. We would be required under current SEC rules to prepare our consolidated financial statements in accordance with U.S. GAAP and modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers; these requirements would be additional to, and not in place of, those under U.K. law to prepare consolidated financial statements under IFRS and comply with applicable U.K. corporate governance laws. If we do not qualify as a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive in certain respects than the forms available to a foreign private issuer. Such conversion and modifications will involve additional costs, both one-off in nature on conversion and ongoing costs to meet reporting in both U.S. GAAP and IFRS, which would reduce our operating profit. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers. Therefore, the additional costs that we would incur if we lost our foreign private issuer status could have a significant and negative impact on our financial condition, operating results or cash flows.  

 

U.S. investors may have difficulty enforcing civil liabilities against our Company, our directors or members of senior management and the experts named in our Annual Report on Form 20-F for the year ended June 30, 2020

 

Most of our directors and the experts named in our Annual Report on Form 20-F for the year ended June 30, 2020 are non-residents of the United States, and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible to serve process on such persons or us in the United States or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. There may be doubt as to whether the courts of England and Wales would accept jurisdiction over and enforce certain civil liabilities under U.S. securities laws in original actions or enforce judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere are likely to be unenforceable in England and Wales (an award for monetary damages under the U.S. securities laws may be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and appears to be intended to punish the defendant). The enforceability of any judgment in England and Wales will depend on a number of criteria, including public policy, as well as the laws and treaties in effect at the time. The United States and the U.K. do not currently have any treaties providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.    

 

As an “emerging growth company” under the Jump Start Our Business Startups Act of 2012 (the “JOBS Act”), we are permitted to rely on exemptions from certain disclosure requirements, which could make our ordinary shares less attractive to investors. 

 

We qualify as an “emerging growth company” as defined in the JOBS Act. For as long as we are deemed an emerging growth company, we may be exempt from certain reporting and other regulatory requirements that are applicable to other U.S. public companies. Subject to certain conditions set forth in the JOBS Act, if we choose to rely on such exemptions, we may not be required to, among other things: (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); or. (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer’s compensation to median employee compensation. We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act or such earlier time that we cease to be an emerging growth company. We cannot predict if investors will view our ordinary shares as less attractive because we may rely on these exemptions. If some investors find our ordinary shares to be less attractive, there may be a less active trading market for our ordinary shares, which could materially and adversely affect the price and the liquidity of our ordinary shares. 

 

22

 

We face risks related to natural disasters, health epidemics, such as COVID-19, and other catastrophes, which could significantly disrupt our operations. 

 

Our business could be materially and adversely affected by natural disasters or other catastrophes, such as earthquakes, fire, floods, hail, windstorms, severe weather conditions, environmental accidents, power loss, communications failures, explosions, terrorist attacks and similar events. Our business could also be materially and adversely affected by public health emergencies, such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Zika virus, Ebola virus, the 2019 novel coronavirus or other local health epidemics in the U.S., U.K., Australia and other regions we currently or may in the future operate in, and global pandemics. If any of our employees is suspected of having contracted any contagious disease, we may, under certain circumstances, be required to quarantine those employees and the affected areas of our operations. As a result, we may have to temporarily suspend part or all of our facilities. Furthermore, authorities may impose restrictions on travel and transportation and implement other preventative measures in affected regions to deal with the catastrophe or emergency, which may lead to the temporary closure of our facilities and declining economic activity at large. A prolonged outbreak of any health epidemic or other adverse public health developments could have a material adverse effect on our business operations. 

 

In early February 2020, the World Health Organization declared the outbreak of novel coronavirus, or COVID-19, a Public Health Emergency of International Concern. In an effort to limit the spread of the disease, the Australian and U.S. authorities took various emergency measures, including implementing travel bans, closing factories and businesses, and placing quarantine restrictions on high-risk areas. These measures prevented many of our employees from going to work for several weeks during the first quarter of 2020, which adversely impacted our business operations during that time. Many employees in the critical power services businesses were stood down and some roles were made redundant to cope with the sharp collapse in demand. While the majority of our employees have since resumed their normal working functions, any further outbreaks resulting in prolonged deviations from normal daily operations could further negatively impact our business. Due to the widespread nature and severity of COVID-19 as well as the measures taken to limit its spread, the U.S. and Australian economies have been adversely impacted in the first quarter of 2020 and beyond. Further, the spread of COVID-19 has caused severe disruptions in Australia and the U.S. and global economies and financial markets and could potentially create widespread business continuity issues of an as-yet unknown magnitude and duration. To the extent that COVID-19 or any health epidemic harms the Australian, U.S. and global economies in general, our results of operations could be adversely affected. 

 

We currently report our financial results under IFRS, which differs in certain significant respects from U.S. GAAP.

 

We report our financial statements under IFRS. There have been and there may in the future certain significant differences between IFRS and U.S. GAAP, including but not limited to differences related to revenue recognition, share-based compensation expense, income tax, impairment of long-lived assets and earnings per share. As a result, our financial information and reported earnings for historical or future periods could be significantly different if they were prepared in accordance with U.S. GAAP. As a result, you may not be able to meaningfully compare our financial statements under IFRS with those companies that prepare financial statements under U.S. GAAP.

 

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation. 

 

We are incorporated under English law. The rights of holders of ordinary shares are governed by English law, including the provisions of the Companies Act 2006, and by our Articles of Association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations. Pursuant to the Companies Act 2006, before rights to subscribe for shares are granted, the directors must have in place the relevant shareholder authorities to allot the shares. In addition, shareholders are required to disapply pre-emption rights in respect of shares to be allotted as a result of such rights to subscribe. There is no requirement to seek such authority where awards are made pursuant to an “employees’ share scheme” however, where awards are made to non-employees those will not be made pursuant to an employees’ share scheme. When awards of Restricted Stock Units were awarded to non-employees in April 2020 and June 2020 pursuant to the VivoPower International Plc 2017 Omnibus Incentive Plan, it was not the intention of the board to satisfy those awards using newly issued shares and therefore it was considered that they were not “rights to subscribe for shares”. Consequently, the directors consider that no such shareholder approvals were required, however, it was always a possibility that the awards could be satisfied using newly issued shares (despite that not being in the contemplation of the directors at the relevant time, for commercial reasons). The Company will however take steps to seek ratification in relation to the allotment. See “Issued Share Capital—Differences in Corporate Law”, for a description of the principal differences between the provisions of the Companies Act 2006 applicable to us and, for example, the Delaware General Corporation Law relating to shareholders’ rights and protections. 

 

23

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains estimates and forward-looking statements, principally in “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Some of the matters discussed concerning our operations and financial performance include estimates and forward-looking statements within the meaning of the Securities Act and the Exchange Act.

 

These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. These forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we expect to operate in the future. Important factors that could cause those differences include, but are not limited to:

 

 

our expectations regarding our revenue, expenses and other results of operations;

 

our plans to acquire, invest in, develop or sell our investments in energy projects or joint ventures;

 

our ability to attract and retain customers;

 

the growth rates of the markets in which we compete;

 

our liquidity and working capital requirements;

 

our ability to raise sufficient capital to realize development opportunities and thereby generate revenue;

 

our anticipated strategies for growth;

 

our ability to anticipate market needs and develop new and enhanced solutions to meet those needs;

 

anticipated trends and challenges in our business and in the markets in which we operate;

 

our expectations regarding demand for solar power by energy users or investor in projects;

 

our expectations regarding changes in the cost of developing and constructing solar projects;

 

our ability to compete in our industry and innovation by our competitors;

 

the extent to which the COVID-19 pandemic affects our business, financial condition and results of operations;

 

our ability to assume management control of the ISS Joint Venture and our expectations regarding our settlement of the ISS Joint Venture dispute;

 

our expectations regarding our ongoing legal proceedings;

 

our ability to adequately protect our intellectual property; and

 

our plans to pursue strategic acquisitions.

 

Additional factors that could cause actual results, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results to differ materially include, but are not limited to, those discussed under “Risk Factors” in this prospectus. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this prospectus not to occur. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only at the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this prospectus might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive of, but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.

 

24

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $22,930,029 million from the sale of our ordinary shares offered in this offering, based on the public offering price per share of $8.50, or approximately $26,417,525 million, if the underwriter exercises their option to purchase additional shares in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund working capital needs in connection with the expansion of our operations to the commercial electric vehicle segment, including $4.7 million to fund the Tembo aquisition, and for working capital and other general corporate purposes.

 

We believe opportunities may exist from time to time to expand our current business through acquisitions of complementary businesses or technologies. While we have no current agreements, commitments or understandings for any specific acquisitions at this time, we may use a portion of the net proceeds for these purposes.

 

The expected uses of the net proceeds we receive from this offering represent our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenses may vary significantly depending on numerous factors. Accordingly, we will have broad discretion over the uses of the net proceeds in this offering and investors will be relying on the judgment of our management regarding the application of the net proceeds. In addition, it is possible that the amount set forth above will not be sufficient for the purposes described above.

 

Pending their use as described above, we plan to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or guaranteed obligations of the U.S. government.

 

25

 

DIVIDEND POLICY

 

We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare dividends on our ordinary shares in the foreseeable future. Any determination to pay dividends to holders of our ordinary shares will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our debt arrangements and other factors that our board of directors deem relevant.

 

26

 

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2020 as follows:

 

 

on an actual basis; and

 

 

on an as adjusted basis to reflect the issuance and sale by us of 2,941,176 ordinary shares in this offering, at the public offering price of $8.50 per share, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

Our capitalization following the completion of this offering will be adjusted based on the actual public offering price and other terms of the offering determined at pricing. You should read this information together with the information set forth under “Selected Financial Data” in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

   

As at June 30, 2020

 

(US dollars in thousands)

 

Actual

   

As Adjusted

 
                 

Cash and cash equivalents

  $ 2,824       25,755  

Shareholders' equity:

               

Liabilities

               

Non-current loans & borrowings

    24,642       24,642  

Current loans & borrowings

    1,312       1,312  

Total debt

    25,954       25,954  

Equity

               

Issued capital

    163       198  

Share premium

    40,215       63,111  

Retained earnings / (accumulated deficit) and other reserves

    (22,672 )     (22,672

Non-controlling interests

    184       184  

Total shareholders' equity

    17,890       40,821  

Total capitalization

    42,532       65,463  

 

 

The number of our ordinary shares to be outstanding after this offering is based on 13,557,376 of our ordinary shares outstanding as of June 30, 2020, and excludes the following:

 

 

1,229,425 ordinary shares issuable upon exercise of outstanding options at a weighted average exercise price of $nil per share or upon the settlement of outstanding restricted stock units, performance stock units or bonus stock awards under our equity plans as of June 30, 2020;

 

126,311 ordinary shares authorized for issuance pursuant to future awards under our equity incentive plans; and

 

assumes no exercise by the underwriter of their option to purchase up to 441,176  additional ordinary shares.

 

27

 

DILUTION

 

If you invest in our ordinary shares in this offering, your ownership interest will be diluted to the extent of the difference between the public offering price per share of our ordinary shares in this offering and the as adjusted net tangible book value per share of our ordinary shares immediately after the closing of this offering.

 

As of June 30, 2020, our historical net tangible book value was ($12.0) million, or ($0.88) per ordinary share. Our historical net tangible book value per share is equal to our total tangible assets, less total liabilities, divided by the number of outstanding ordinary shares as of June 30, 2020. After giving effect to the sale of 2,941,176 ordinary shares in this offering at the public offering price of $8.50 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2020 would have been $11.0 million, or $0.67 per share ordinary share. This amount represents an immediate increase in as adjusted net tangible book value of $1.55 per share to our existing shareholders and an immediate dilution of $7.83 per share to investors participating in this offering. We determine dilution per share to investors participating in this offering by subtracting as adjusted net tangible book value per share after this offering from the public offering price per share paid by investors participating in this offering.

 

Public offering price per share of our ordinary shares

          $ 8.50  

Net tangible book value as of June 30, 2020

  $ (0.88

)

       

Increase in net tangible book value attributable to new investors

  $ 1.55          

Adjusted net tangible book value immediately after this offering

          $ 0.67  

Dilution to new investors

          $ 7.83  

 

 

The number of our ordinary shares to be outstanding after this offering is based on 13,557,376 of our ordinary shares outstanding as of June 30, 2020, and excludes the following:

 

 

1,229,425 ordinary shares issuable upon exercise of outstanding options at a weighted average exercise price of $nil per share or upon the settlement of outstanding restricted stock units, performance stock units or bonus stock awards under our equity plans as of June 30, 2020;

 

126,311 ordinary shares authorized for issuance pursuant to future awards under our equity incentive plans; and

 

assumes no exercise by the underwriter of their option to purchase up to 441,176  additional ordinary shares.

 

28

 

CORPORATE STRUCTURE AND HISTORY

 

History and Development of the Company

 

VivoPower International PLC is an international solar and critical power services business with operations in the U.K., Australia and the U.S. The Company’s main activity is the provision of critical energy infrastructure generation and distribution solutions to a diverse range of government, commercial and industrial customers throughout Australia. It also engages in the development, construction, and sale of PV solar projects in Australia and the U.S. and to plans enter into the commercial electric vehicle market to provide sustainable energy solutions for light electric vehicles. VivoPower is a certified B Corporation.

 

VivoPower was incorporated on February 1, 2016 under the laws of England and Wales, with company number 09978410, as a public company limited by shares. At the time, it had subsidiaries in the U.K. and the U.S. and was, itself, a wholly owned subsidiary of AWN Holdings Limited (“AWN”), an Australian public company traded on the Australian Securities Exchange under the symbol “AWN”.

 

On August 11, 2016, VivoPower entered into a Contribution Agreement with Arowana Inc., a Cayman Islands exempted company (“ARWA”), and AWN (as amended, the “Contribution Agreement”).

 

On December 28, 2016, the Company completed the transactions contemplated by the Contribution Agreement (the “Business Combination”), pursuant to which ARWA contributed cash to the Company in exchange for newly issued ordinary shares which shares were then distributed by ARWA to ARWA’s shareholders and warrant holders. Upon the closing of the Business Combination, we became a public company whose shares are listed on The Nasdaq Capital Market under the symbol “VVPR”.

 

Contemporaneously with the Business Combination, the Company completed the acquisitions of VivoPower Pty Limited (“VivoPower Australia”) and Aevitas O Holdings Pty Ltd., the parent of Aevitas Group Limited (“Aevitas”), for a total cash consideration of $10.1 million. VivoPower acquired VivoPower Australia for aggregate consideration of $23.1 million, consisting of $0.6 million of cash and the remainder in shares of VivoPower International PLC. Aevitas was acquired for a cash consideration of $9.5 million.

 

VivoPower Australia was established on August 8, 2014 as a proprietary limited company in Australia. The primary business activity of VivoPower Australia is to invest in the origination, development, construction, financing, operation and optimization of solar electricity generation and storage facilities in Australia. Its initial majority shareholder was Hadouken Pty Limited (an entity associated with former VivoPower Australia management), with AWN subsequently acquiring an initial interest in VivoPower Australia on or around August 29, 2014 through its Arowana Australasian Special Situations Fund 1. Other shareholders included Aevitas, VivoPower Australia management as well as Arowana Energy Holdings Pty Ltd, a wholly owned subsidiary of AWN. Following the Business Combination, 80.1% of VivoPower Australia’s ordinary shares are held by VivoPower International Services Ltd and 19.9% are held by Aevitas.

 

Aevitas O Holdings Pty Ltd was established on June 1, 2016 and is an Australian proprietary limited company. It held options to acquire 99.9% of the shares in Aevitas, an Australian unlisted public company established on February 28, 2013. The primary business activity of Aevitas is to provide power generation and distribution solutions to over 700 active customers in Australia, including the design, supply, installation and maintenance of power and control systems, with an increasing focus on data centers, solar project engineering, procurement, and construction.

 

VivoPower received its B Corporation certification in April 2018.

 

In August 2020, VivoPower announced its plans to enter into the commercial EV market to provide sustainable energy solutions for LEVs. VivoPower expects to focus initially on servicing LEV customers in the mining and infrastructure sectors in Australia, before expanding globally in those sectors. VivoPower’s EV strategy is expected to include EV and battery leasing, critical power retrofits of premises (e.g. warehouses and depots) to enable optimized EV battery charging and microgrids and EV battery second life applications. 

 

In September 2020, the Company signed a non-binding Letter of Intent (“LOI”) to acquire, by way of primary investment, a 51% shareholder in Tembo 4x4 e-LV B.V. (“Tembo”). Tembo is a Netherlands-based specialist battery-electric and off-road vehicle company with global sales and distribution channels across four continents. Tembo services a diverse range of sectors, including mining, government services (armed cars, police, ambulances, inspection vehicles), game safari and humanitarian aid by providing a comprehensive fleet of customized electric vehicles. Based on an analysis of publicly available industry data, the Company estimates that the potential global addressable market for electric vehicles could be at least USD$36 billion within the markets in which Tembo is currently active (which presently do not include the United States, Asia or South America). For the fiscal year ended December 31, 2019, Tembo generated USD$2.3 million in revenue (unaudited).

 

Following discussions by the parties, it was agreed to restructure the existing group of companies of which Tembo is a member as a pre-cursor to completion of the proposed investment, such restructure (the “Restructure”) to take place shortly prior to completion of the investment. In consequence of the Restructure, the investment is proposed to be made by way of subscription for shares representing approximately 51% of the share capital of Tembo e-LV B.V. (the “Target”), a new company formed under the laws of the Netherlands for the purposes of the transaction and such company being the sole member of both Tembo and FD 4x4 Centre B.V. (the “Transaction”).

 

Key features of the Transaction, the definitive documents relating to which were signed on 9 October 2020, are (without limitation and subject to completion of the Transaction taking place) that:

 

 

the cash to be subscribed for convertible preferred shares (“Investor Shares”) on completion will be EUR €4 million;

 

 

the proceeds of the investment will be used by the Target and its group (the “Group”) for working capital and growth capital purposes, and for the repayment of certain liabilities of the Group;

 

 

signing and completion will not be simultaneous, and completion will be conditional upon (among certain other formalities relating to the Transaction), a minimum capital fundraise requirement in respect of the Company first being met;

 

 

the Investor Shares will carry (among other rights) a right to vote, rights to income on a basis that is pari passu with all other classes of shares, a preferential right to return of capital on liquidation/exit, customary anti-dilution protections, pre-emption rights (including a right of first refusal on certain proposed share transfers), and certain information and board appointment rights;

 

 

leaver provisions will apply in respect of those persons holding the remaining 49% of the share capital of the Target;

 

 

customary representations, warranties (and certain specific indemnities relating to matters revealed during the course of due diligence) were given on signing and will be repeated at completion to the Company;

 

29

 

 

restrictive covenants will be entered into by certain key shareholders of the Target;

 

 

the Company will have right to subscribe a further EUR €4 million on substantially the same terms for a period of 12 months following completion; and

 

 

the Company will have the option to acquire the remaining 49% of the Target on the fifth anniversary of completion of the Transaction.

 

VivoPower has 25 subsidiary and associated entities, including VivoPower Australia and Aevitas. See “Organizational Structure” for a list of each entity and its jurisdiction of incorporation.

 

Organizational Structure

 

VivoPower has 25 subsidiaries and associate undertakings (collectively with VivoPower, “the Group”). The following list shows the Company’s shareholdings in subsidiaries, associate and joint ventures owned directly and indirectly as at June 30, 2020.

 

Subsidiaries

Incorporated

% Owned

Purpose

VivoPower International Services Limited

Jersey

100%

Operating company

VivoPower USA, LLC

United States

100%

Operating company

VivoPower US-NC-31, LLC

United States

100%

Dormant

VivoPower US-NC-47, LLC

United States

100%

Dormant

VivoPower (USA) Development, LLC

United States

100%

Holding company

VivoPower Pty Ltd

Australia

100%

Operating company

VivoPower WA Pty Ltd

Australia

100%

Operating company

VVP Project 1 Pty Limited

Australia

100%

Dormant

Amaroo Solar Pty Ltd.

Australia

100%

Operating company

SC Tco Pty Limited

Australia

100%

Dormant

SC Hco Pty Limited

Australia

100%

Dormant

SC Fco Pty Limited

Australia

100%

Dormant

Aevitas O Holdings Pty Ltd

Australia

100%

Holding company

Aevitas Group Limited

Australia

99.9%

Holding company

Aevitas Holdings Pty Ltd

Australia

100%

Holding company

Electrical Engineering Group Pty Limited

Australia

100%

Holding company

JA Martin Electrical Pty Limited

Australia

100%

Operating company

Kenshaw Electrical Pty Limited

Australia

100%

Operating company

VivoPower Philippines Inc.

Philippines

64%

Dormant

VivoPower RE Solutions Inc.

Philippines

64%

Dormant

Yoogali Solar Farm Pty Ltd

Australia

60%

Operating company

Daisy Hill Solar Farm Pty Ltd

Australia

60%

Operating company

V.V.P. Holdings Inc.

Philippines

40%

Dormant

 

Associate and Joint Venture Undertakings

Incorporated

% Owned

Purpose

VVPR-ITP TopCo Pty Ltd

Australia

50%

Holding company

Innovative Solar Ventures I, LLC

United States

50%

Operating company

 

Notwithstanding only 40% ownership by the Company, V.V.P. Holdings Inc is under the control of VivoPower Pty Ltd, and therefore is consolidated into the group financial statements of VivoPower International PLC.

 

30

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

Our historical consolidated financial statements are prepared in accordance with IFRS and are presented in U.S. dollars. The selected historical consolidated statement of comprehensive income and statement of financial position data set forth below has been derived from, and is qualified in its entirety by reference to, our historical consolidated financial statements for the periods presented. Historical information as of and for the year ended June 30, 2020, and for the three months ended June 30, 2019, and for the years ended March 31, 2019, 2018, 2017 and 2016, is derived from, and is qualified in its entirety by reference to, our consolidated financial statements. The financial statements have been audited by PKF Littlejohn LLP, our independent registered public accounting firm. You should read the information presented below in conjunction with those audited consolidated financial statements, the notes thereto and the discussion under “Item 5. Operating and Financial Review and Prospects” in our Annual Report on Form 20-F for the year ended June 30, 2020.

 

Our historical results are not necessarily indicative of the results that may be expected in the future. The following selected consolidated financial data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus and our consolidated financial statements included elsewhere in this prospectus.

 

Consolidated Statement of Comprehensive Income

 

   

Year Ended June 30

 

Three Months Ended June 30

 

Year Ended March 31

 

(US dollars in thousands, except per share amounts) 

 

2020

2019

 

2019

2018

 

2019

2018

2017

2016

 
   

 

(unaudited)

 

 

(unaudited)

 

 

 

 

   
                         

Revenue from contracts with customers

 

48,710

43,545

 

13,617

9,111

 

39,036

33,647

32,250

-

 

Cost of sales

 

(40,885)

(37,452)

 

(11,960)

(7,446)

 

(32,726)

(28,524)

(4,977)

-

 

Gross profit

 

7,825

6,093

 

1,657

1,665

 

6,310

5,123

27,273

-

 

General and administrative expenses

 

(5,479)

(7,195)

 

(1,291)

(2,079)

 

(7,685)

(12,814)

(9,316)

(279)

 

Gain/(loss) on solar development

 

1,589

(2,668)

 

38

(4)

 

(2,615)

1,356

-

-

 

Depreciation of property and equipment

 

(898)

(411)

 

(214)

(204)

 

(430)

(420)

(103)

-

 

Amortization of intangible assets

 

(868)

(1,036)

 

(223)

(207)

 

(990)

(840)

(548)

-

 

Operating (loss)/profit

 

2,169

(5,217)

 

(33)

(829)

 

(5,410)

(7,595)

17,306

(279)

 

Restructuring & other non-recurring costs

 

(3,410)

(2,404)

 

(525)

(40)

 

(2,017)

(1,873)

-

-

 

Impairment of assets

 

-

-

 

-

-

 

-

(10,191)

-

-

 

Impairment of goodwill

 

-

-

 

-

-

 

-

(11,092)

-

-

 

Transaction costs

 

-

-

 

-

-

 

-

-

(5,800)

-

 

Finance income

 

33

-

 

-

-

 

4

9

13

-

 

Finance expense

 

(3,182)

(3,345)

 

(796)

(842)

 

(3,243)

(3,395)

(600)

(2)

 

(Loss)/profit before income tax

 

(4,390)

(10,966)

 

(1,354)

(1,711)

 

(10,666)

(34,137)

10,919

(281)

 

Income tax

 

(713)

(353)

 

(92)

12

 

(557)

6,258

(5,338)

-

 

(Loss)/profit for the period

 

(5,103)

(11,319)

 

(1,446)

(1,699)

 

(11,223)

(27,879)

5,581

(281)

 

Other comprehensive income

                       

Currency translation differences recognized directly in equity

 

(1,028)

-

 

(102)

-

 

(2,998)

222

599

-

 

Total comprehensive (loss)/income

 

(6,131)

(11,319)

 

(1,548)

(1,699)

 

(14,221)

(27,657)

6,180

(281)

 

Earnings per share (dollars)

 

 

 

 

 

 

 

 

 

 

   

Basic

 

(0.38)

(0.83)

 

(0.11)

(0.13)

 

(0.83)

(2.06)

0.73

-

 

Diluted

 

(0.38)

(0.83)

 

(0.11)

(0.13)

 

(0.83)

(2.06)

0.73

-

 

Weighted average number of shares used in computing (loss)/earnings per share

 

13,557,376

13,557,376

 

13,557,376

13,557,376

 

13,557,376

13,557,376

7,624,423

   

 

Consolidated Statement of Financial Position Data

 

   

As at June 30

 

As at March 31

 

(US dollars in thousands, except ratios) 

 

2020

2019

 

2019

2018

2017

 
                 

Cash and cash equivalents 

 

2,824

7,129

 

4,522

1,939

10,970

 

Current assets

 

20,473

36,283

 

29,770

21,278

30,814

 

Current liabilities

 

(19,679)

(29,133)

 

(20,807)

(20,610)

(12,197)

 

Current ratio

 

1.04

1.25

 

1.43

1.03

2.53

 

Property and equipment, net

 

2,486

2,951

 

1,205

1,915

2,163

 

Total assets

 

62,380

73,109

 

65,395

76,312

100,836

 

Debt, current and long-term

 

25,954

21,686

 

19,267

22,340

20,255

 

Total shareholders’ equity/(deficit)

 

17,890

22,516

 

23,985

37,003

64,606

 

 

31

 

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with Selected Consolidated Financial Data, and our consolidated financial statements included elsewhere in this prospectus.

 

The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Risk Factors and Forward-Looking Statements in this prospectus. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

 

Note: we previously announced results for our fiscal year ended March 31, 2019 and comparative years. In 2019, we transitioned to report our results on a June 30 calendar year basis. As such, we are reporting herein audited results for the year ended, June 30, 2020, comparative year ended June 30, 2019 derived from our unaudited results, audited results for the transition period three months ended June 30 2019 unaudited comparative for the three months ended June 30 2018 and audited results for the years ended March 31, 2019, 2018 and 2017.

 

Overview

 

   

Year Ended June 30

 

(US dollars in thousands) 

 

2020

2019

 
   

 

(unaudited)

 
         

Revenue from contracts with customers

 

48,710

43,545

 

Cost of sales

 

(40,885)

(37,452)

 

Gross profit

 

7,825

6,093

 

General and administrative expenses

 

(5,479)

(7,195)

 

Gain/(loss) on solar development

 

1,589

(2,668)

 

Depreciation of property and equipment

 

(898)

(411)

 

Amortization of intangible assets

 

(868)

(1,036)

 

Operating (loss)/profit

 

2,169

(5,217)

 

Restructuring & other non-recurring costs

 

(3,410)

(2,404)

 

Finance expense

 

(3,149)

(3,345)

 

(Loss)/profit before income tax

 

(4,390)

(10,966)

 

Income tax

 

(713)

(353)

 

Loss for the year

 

(5,103)

(11,319)

 
         

Adjusted EBITDA

 

3,935

(3,770)

 

 

During the year ended June 30, 2020, the Group generated statutory revenue of $48.7 million, gross profit of $7.8 million, operating profit of $2.2 million and a net loss of $5.1 million. For the year ended June 30, 2019, the Group generated revenue of $43.5 million, gross profit of $6.1 million, operating loss of $5.2 million, and a net loss of $11.3 million.

 

Adjusted EBITDA for the year ended June 30, 2020 was a profit of $3.9 million, compared to a loss of $3.8 million for the previous year. Adjusted EBITDA is a non-IFRS financial measure. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, impairment of assets, impairment of goodwill, and one-off non-recurring costs, including restructuring expenses.

 

The results of operations for the year ended June 30, 2020 reflect a period of significant growth for the Critical Power Services business segment, primarily as a result of a number of new contracts for Kenshaw with data center and hospital sector customers. These have contributed to a $5.7 million growth in Critical Power Services revenues, to $48.6 million in the year ended June 30, 2020, compared to $42.9 million in the year ended June 30, 2019. Solar revenues of $0.1 million in the year ended June 30, 2020, resulted from Australian solar projects, which was lower than the $0.6 million generated for the year ended June 30, 2019 due to the cessation of distribution revenues from sold US projects.

 

The Group also recorded a net gain of $1.6 million on Solar Development projects, comprising a $2.3 million gain on sale of VivoRex, LLC in the U.S and a $0.5 million gain on the sale of Sun Connect portfolio in Australia, partly offset by a $1.2 million loss on discontinued projects in the ISS portfolio. The $2.7 million loss on Solar Development projects in the year ended June 30, 2019 related primarily to onerous contracts for future obligations to purchase Solar Renewable Energy Certificates (“SRECs”).

 

32

 

The results for the year ended June 30, 2020 also reflect savings of $1.7 million in general and administrative costs compared to the year ended June 30, 2019. There was significant effort to rationalize the cost base of the Solar Development business and Corporate Office segments in the year.

 

The results of operations for the year ended June 30, 2020 further reflect $3.4 million restructuring and other non-recurring costs. These comprise $1.0 million for legal and professional fees and $1.1 million provision for the expected outcome of litigation related to disputes with a former CEO, Dr. Philip Comberg. In addition, $0.2 million of costs were incurred for workforce reduction and $1.1 million costs related to detailed project review and investigation costs for the ISS joint venture portfolio whilst still under management and development responsibility of our joint venture partner, Innovative Solar Systems, LLC. Restructuring and other non-recurring costs are further described in Note 7 to the consolidated financial statements.

 

Management analyses our business in three reportable segments: Critical Power Services, Solar Development, and Corporate Office. Critical Power Services is represented by J.A. Martin and Kenshaw operating in Australia with a focus on the design, supply, installation and maintenance of power and control systems. Solar Development is the development and sale of commercial and utility scale PV solar power projects in the U.S. and Australia. Corporate Office is all U.K. based corporate functions.

 

Total finance expense for the year ended June 30, 2020 was $3.1 million, compared to $3.3 million for the year ended June 30, 2019, with interest on convertible loan notes and preferred share financing in Critical Power Services of $1.6 million and interest on the $19.0 million Arowana shareholder loan of $1.2 million both in line with prior year. The reduction of $0.2 million compared to the prior year is a result of larger foreign exchange losses incurred in the prior year.

 

As at June 30, 2020, the Group’s current assets were $20.5 million (as at June 30, 2019: $36.3 million; as at March 31, 2019: $29.8 million), which was comprised of $2.8 million (as at June 30, 2019: $7.1 million; March 31, 2019: $4.5 million) of cash and cash equivalents, $1.0 million restricted cash (as at June 30, 2019: $0.6 million; March 31, 2019: $1.3 million), $12.6 million (as at June 30, 2019: $15.0 million; March 31, 2019: $10.4 million) of trade and other receivables, and $4.1 million (as at June 30, 2019: $13.5 million; March 31, 2019: $13.5 million) of assets held for sale related to the ISS Joint Venture portfolio, with the remainder of the portfolio not expected to be sold within a 12 month timeframe reclassified to non-current equity accounted investments.

 

Current liabilities were $19.7 million as at June 30, 2020, (as at June 30, 2019: $29.1 million; March 31, 2019: $20.8 million). The decrease results from a $5.5 million reversal of contract liabilities and accrued contract costs related to critical power contracts that were in process at June 30, 2019, and $4.0 million of amounts repaid via capitalization into the refinanced parent company loan on June 30, 2020, being accrued loan interest ($2.2 million) related party payables ($1.1 million) and short term related party loans ($0.8 million).

 

Current asset-to-liability ratio as at June 30, 2020 was 1.04:1 (as at June 30, 2019: 1.25:1; March 31, 2019: 1.43:1).

 

As at June 30, 2020, the Group had net assets of $17.9 million (as at June 30, 2019: $22.5 million; March 31, 2019: $24.0 million), including intangible assets of $29.8 million (as at June 30, 2019: $31.8 million; March 31, 2019: $32.4 million). Property, plant and equipment decreased from $3.0 million as at June 30, 2019 to $2.5 million as at June 30, 2020, reflecting depreciation less replacement capital expenditure.

 

Cash used for the year ended June 30, 2020, was $4.3 million, arising from cash outflow from operating activities of $4.6 million, cash generated by investing activities of $0.3 million, and cash inflow from financing activities of nil. At June 30, 2020, the Group had cash reserves of $2.8 million (June 30, 2019: $7.1 million; March 31, 2019: $4.5 million) and debt of $26.0 million (June 30, 2019: $21.7 million; March 31, 2019: $19.3 million), giving a net debt position of $23.1 million (June 30, 2019: $14.6 million; March 31, 2019: $14.7 million).

 

Cash flows from investing activities in the current year comprised $1.0 million proceeds from sale of Sun Connect Solar project assets in Australia and $0.4 million proceeds from sale of property, plant and equipment in Critical Power Services businesses, offset by purchase of $0.9 million of property, plant and equipment in Critical Power Services businesses and $0.3 million investment in Solar project assets in Australia.

 

Cash inflows from financing activities of net nil in the year ended June 30, 2020 comprising $1.3 million short term parent company loan, $0.3 million chattel mortgage borrowings and $0.3 million bank loans, offset by $0.3 million repayment of parent company loans, $0.4 million lease liability repayments, $0.3 million net repayment of debtor finance borrowings, $0.4 million net transfer to restricted cash, and $0.5 million finance expenses.

 

33

 

Year Ended June 30, 2020 Compared to Year Ended June 30, 2019

 

Year Ended June 30, 2020
(US dollars in thousands)

 

Critical Power Services

   

Solar Developments

   

Corporate Office

   

Total

 

Revenue

    48,638       69       3       48,710  

Costs of sales

    (40,865 )     (20 )     -       (40,885 )

Gross profit

    7,773       49       3       7,825  

General and administrative expenses

    (2,745 )     (469 )     (2,265 )     (5,479 )

Gain/(loss) on solar development

    41       1,548       -       1,589  

Depreciation and amortization

    (1,718 )     (45 )     (3 )     (1,766 )

Operating profit/(loss)

    3,351       1,083       (2,265 )     2,169  

Restructuring & other non-recurring costs

    (124 )     (1,296 )     (1,990 )     (3,410 )

Finance expense - net

    (1,436 )     (9 )     (1,704 )     (3,149 )

Profit/(loss) before income tax

    1,791       (222 )     (5,959 )     (4,390 )

Income tax

    15       (728 )     -       (713 )

Profit/(loss) for the period

    1,806       (950 )     (5,959 )     (5,103 )

 

Year Ended June 30, 2019
(US dollars in thousands)

 

Critical Power Services

   

Solar Developments

   

Corporate Office

   

Total

 

Revenue

    42,852       693       -       43,545  

Costs of sales

    (37,110 )     (342 )     -       (37,452 )

Gross profit

    5,742       351       -       6,093  

General and administrative expenses

    (2,798 )     (1,671 )     (2,726 )     (7,195 )

Gain/(loss) on sale of assets

    (21 )     (2,542 )     (105 )     (2,668 )

Depreciation and amortization

    (1,225 )     (216 )     (6 )     (1,447 )

Operating profit/(loss)

    1,698       (4,078 )     (2,837 )     (5,217 )

Restructuring & other non-recurring costs

    (23 )     (297 )     (2,084 )     (2,404 )

Finance expense - net

    (1,615 )     (99 )     (1,631 )     (3,345 )

Profit/(loss) before income tax

    60       (4,474 )     (6,552 )     (10,966 )

Income tax

    (367 )     14       -       (353 )

Profit/(loss) for the period

    (307 )     (4,460 )     (6,552 )     (11,319 )

 

Revenue

 

Revenue for the year ended June 30, 2020 increased $5.2 million to $48.7 million, from $43.5 million in the year ended June 30, 2019.

 

Revenue by product and service is follows:

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Electrical products and related services

  $ 47,917     $ 42,852  

Other revenue

    793       693  

Total revenue

  $ 48,710     $ 43,545  

 

34

 

The sale of electrical products and related services is generated from our Australian-based Critical Power Services businesses, J.A. Martin and Kenshaw, and is focused on the design, supply, installation and maintenance of power and control systems. Revenue generated in these operations is recognized in two ways. On smaller projects, revenue is recognized when the project is completed and is invoiced at that time. On larger projects, revenue is recognized on the achievement of specific milestones defined in each individual project. When the milestones and performance obligations are reached, the customer is invoiced, and the revenue is then recognized.

 

Revenue from electrical products and related services for the year ended June 30, 2020, of $47.9 million increased $5.1 million compared to the $42.9 million earned for the year ended June 30, 2019. This is primarily a result of new contracts for Kenshaw with data center and hospital sector customers.

 

Other revenue for the year ended June 30, 2020 comprised $0.7 million government grants to Critical Power Services operations as a result of the COVID-19 pandemic in Australia, and $0.1 million power generation income from Solar projects in Australia. Other revenue for the year ended June 30, 2019 included $0.4 million from the sale of SRECs purchased from the NC Projects, $0.3 million earnings distribution related to the equity investment in the NC Projects carried at cost prior to their disposal in July 2018.

 

Revenue by geographic location is follows:

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Australia

  $ 48,710     $ 42,933  

United States

    -       611  

Total revenue

  $ 48,710     $ 43,545  

 

Australian revenue of $48.7 million for the year ended June 30, 2020, is comprised of $48.6 million revenue from Critical Power Services provided by Kenshaw and J.A. Martin, and $0.1 million of power generation income from Australian solar projects. This compares to $42.9 million in the year ended June 30, 2019, comprising $42.8 million of revenue from Critical Power Services, and $0.1 million of power generation income from Australian solar projects.

 

The growth in Critical Power Services revenue in the year ended June 30, 2020, compared to the prior year, is primarily driven by the significant growth in larger scale projects such as data centers in the Kenshaw business.

 

U.S. revenue was nil for the year ended June 30, 2020. This compares to U.S. revenue of $0.6 million for the year ended June 30, 2019, which comprises other revenue from the sale of SREC’s ($0.3 million) and distribution of earnings from the NC Projects ($0.3 million).

 

The Group had one customer representing more than 10% of revenue for the year ended June 30, 2020. Revenue recognized for this customer amounted to $20.4 million in the Critical Power Services segment.

 

Costs of sales

 

Cost of sales by product or service is as follows:

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Electrical products and related services

  $ 40,865     $ 37,110  

Other revenue

    20       342  

Total cost of sales

  $ 40,885     $ 37,452  

 

Total cost of sales totaled $40.9 million for the year ended June 30, 2020, as compared to $37.5 million for the year ended June 30, 2019.

 

Cost of sales related to electrical products and related services consists of material purchases and direct labor costs, motor vehicle expenses and any directly related costs attributable to manufacturing, service, or other cost of sales and was $40.9 million for the year ended June 30, 2020, as compared to $37.1 million for the year ended June 30, 2019. The increase in total cost of sales was primarily driven by the revenue growth in Critical Power Services as described above.

 

The cost of sales related to other revenue was nil for the year ended June 30, 2020, and $0.3 million for the year ended June 30, 2019 comprising the cost of SREC purchases from the NC Projects.

 

35

 

Gross Profit

 

Gross profit by product and service is as follows:

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Electrical products and related services

  $ 7,052     $ 5,743  

Other revenue

    773       350  

Total gross profit

  $ 7,825     $ 6,093  

 

The Company’s gross profit is equal to revenue less cost of sales and totaled $7.8 million for the year ended June 30, 2020, and $6.1 million for the year ended June 30, 2019.

 

The gross profit from electrical products and related services (the Critical Power Services business) was $7.1 million, which represents a gross margin of 14.5%. This compares to gross profit of $5.7 million for the year ended June 30, 2019, which represented a gross margin percentage of 13.4%. The margin improvement is due to effective cost management and increasing market demand allowing for selective price increases.

 

The gross profit from other revenue of $0.8 million for the year ended June 30, 2020 relates to $0.7 million JobKeeper government grants for support payroll costs and retain employees in the Critical Power Services business during the COVID-19 pandemic, and $0.1 million power generation income from Australian solar projects.

 

Gross profit from other revenue of $0.4 million for the year ended June 30, 2019, related to $0.3 million distributions from NC-31 and NC-47 projects prior to their sale in July 2018, and $0.1 million power generation income from Australian solar projects.

 

Research and development expenditure

 

Our business model does not currently, and for the last three fiscal years did not, entail substantial investment in research and development, patents or licenses other than standard third-party licenses or similar rights obtained in the ordinary course of business relating to the equipment and/or technology used in our projects.

 

General and administrative expenses

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Salaries and benefits

  $ 3,431     $ 4,634  

Professional fees

    804       1,183  

Insurance

    698       587  

Travel

    57       57  

IT licensing and support

    234       263  

Office and other expenses

    255       471  

Total general and administrative expenses

  $ 5,479     $ 7,195  

 

General and administrative expenses decreased by $1.7 million to $5.5 million for the year ended June 30, 2020, compared to $7.2 million for the year ended June 30, 2019. These expenses consist primarily of operational expenses, such as those related to employee salaries and benefits, professional fees, insurance, travel, IT, office and other expenses.

 

Salaries and benefits are $3.4 million for the year ended June 30, 2020, (year ended June 30, 2019: $4.6 million), or 62.6% (year ended June 30, 2019: 84.6%) of total general and administrative expenses. The reduction of $1.2 million was achieved in the Solar segment, where there was a reduction in average headcount to 6.2 full time equivalents in the year ended June 30, 2020 (year ended June 30, 2019: 9.9) in the U.S. and U.K., whilst administrative headcount and salary costs in the Critical Power Services segment remained largely unchanged despite growth in sales volumes in the segment. Key management personnel account for $1.2 million of the total salary and benefits expense for the year ended June 30, 2020.

 

36

 

Professional fees of $0.8 million for the year ended June 30, 2020, (year ended June 30, 2019: $1.2 million), or 14.7% (year ended June 30, 2019: 16.4%) of total general and administrative expenses, are comprised of audit and accounting fees, consulting fees to support business development and legal fees. Professional fees reduced due to cost saving measures implemented in the Solar segment.

 

Insurance expense of $0.7 million for the year ended June 30, 2020, (year ended June 30, 2019: $0.6 million) increased in the Corporate Office segment, as a result of increase in market premiums on group-wide policies.

 

IT licensing and support expenses represent the cost of accounting, operations, email and office, file storage, and security software products and licenses. Office and other expenses include office and meeting space rental, communication and marketing, bank fees and general office administrative costs. Travel, IT, office and other expenses reduced from $0.8 million in the year ended June 30, 2019, to $0.5 million in year ended June 30, 2020, due to cost savings in the Solar Development segment.

 

Gain/(loss) on solar development

 

The gain on solar development for the year ended June 30, 2020, arose principally on the sale of VivoRex LLC. On July 02, 2019, the Company sold its 100% interest in VivoRex, LLC, a Solar segment entity, for $1 and recorded a gain for accounting purposes of $2.3 million as a result of the disposal of onerous contract obligations of $2.0 million and other liabilities of $0.5 million, less cash and other current assets of $0.2 million.

 

The Company also recorded a gain on sale of $0.5 million for Solar projects in Australia, related primarily to the sale of its 100% interest in SC OCo Pty Ltd, including the Sun Connect Solar portfolio, in October 2019. The gain on sale of $0.3 million, comprised proceeds $1.0 million, less disposal of $0.8 million net book value of intangible assets and $0.1 million other net liabilities. The Company also recorded a $1.2 million loss on discontinued solar development projects in the ISS Joint Venture.

 

The loss on solar development for the year-ended June 30, 2019, totaling $2.7 million includes a $1.9 million provision for onerous contracts related to future obligations for VivoRex LLC to purchase SRECs from the NC U.S. Solar Projects, prior to recognizing a gain on sale of VivoRex LLC in July 2019 as noted above. The loss on sale also includes a $0.2 million correction to the gain on the sale of Amaroo Australian Solar project reported in the prior year, an $0.8 million loss on discontinued ISS Joint Venture solar development projects, offset by a $0.4 million correction to the gain on sale of the NC Projects recorded in the prior year.

 

Depreciation and amortization

 

Depreciation is charged on property, plant and equipment on a straight-line basis and is charged in the month of addition. We depreciate the following class of assets at differing rates dependent on their estimated useful lives. The net book value of assets held as of June 30, 2020, was $2.5 million (June 30, 2019: $3.0 million).

 

Tangible asset

Estimated useful life (in years)

Computer equipment

3

Fixtures and fittings

3 - 20

Motor vehicles

5

Plant and equipment

3.5 - 10

Right-of-use assets

2 months - 6 years

 

Amortization costs relate to the amortization of intangible assets generated on the acquisition of VivoPower Australia and Aevitas as part of the Business Combination. The intangible assets identified in the acquisition of Aevitas and VivoPower Australia and their estimated useful life is provided in the table below:

 

Identifiable intangible asset

Estimated useful life (in years)

Customer relationships

10

Trade names

15 - 25

Favorable supply contracts

15

Databases

5

 

37

 

Under IFRS, intangible assets and goodwill are subject to an annual impairment review. No impairment charge was recorded for the year, following the impairment review as of June 30, 2020.

 

An impairment review tests the recoverable amount of the cash-generating unit which gave rise to the intangible asset or goodwill in order to determine the existence or extent of any impairment loss. The recoverable amount is the higher of fair value less costs to sell and the value in use to the Group. An impairment loss is recognized to the extent that the carrying value exceeds the recoverable amount. In determining a cash-generating unit’s or asset’s value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time-value of money and risks specific to the cash-generating unit or asset that have not already been included in the estimate of future cash flows. All impairment losses are recognized in the Statement of Comprehensive Income.

 

The Group conducts impairment tests on the carrying value of goodwill annually, or more frequently if there are any indications that goodwill might be impaired. The recoverable amount of the Cash Generating Unit (“CGU”) to which goodwill has been allocated are determined from value in use calculations. The key assumptions in the calculations are the discount rates applied, expected operating margin levels and long-term growth rates. Management estimates discount rates that reflect the current market assessments while margins and growth rates are based upon approved budgets and related projections.

 

The Group prepares cash flow forecasts using the approved budgets for the coming financial year and management projections for the following two years. Cash flows are also projected for subsequent years as management believe that the investment is held for the long term. These budgets and projections reflect management’s view of the expected market conditions and the position of the CGU’s products and services within those markets.

 

The CGU represented by Aevitas O Holdings Limited was assessed to have a value in excess of its carrying value and hence no additional adjustments to goodwill were considered necessary. Key assumptions used in the assessment of impairment were discount rate based on the weighted average cost of capital of 10.6% (June 30, 2019: 8.8%; March 31, 2019: 8.8%; 2018: 9.2%; 2017: 8.3%) and annual growth rate of 3.0% per annum. No sensitivity analysis is provided as the Company expects no foreseeable changes in the assumptions that would result in impairment of the goodwill.

 

The CGU represented by VivoPower Pty Ltd was assessed to have a value in excess of its carrying value and hence no additional adjustments to goodwill were considered necessary. Key assumptions used in the assessment of impairment were weighted average cost of capital of 10.9% (June 30, 2019: 11.0%; March 31, 2019: 11.0%; 2018: 12.1%; 2017: 10.6%), an average annual growth rate in years 1-5 of 53% during the initial expansion phase, and a long term growth rate of 3.0% in year 6 onwards.

 

If the weighted average cost of capital had been 1% higher than management’s estimates, the Group would have had to recognize an impairment of $1.5 million. If project realizations in years 1-5 resulted in an EBITDA 10% below management’s estimates, the Group would have had to recognize an impairment of $0.9 million. If the long-term growth rate in year 6 onwards was 2% instead of 3%, the Group would have had to recognize an impairment of $1.2 million.  

 

38

 

Restructuring and Other Non-Recurring Costs

 

Restructuring costs by nature are one-time incurrences, and therefore, we believe have no bearing on the financial performance of our business. To enable comparability in future periods, the costs are disclosed separately on the face of our Statement of Comprehensive Income.

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Corporate restructuring – legal and other fees

  $ 1,031     $ 2,095  

Corporate restructuring – litigation provision

    1,104       -  

Corporate restructuring –detailed review and investigation costs on solar projects

    1,112       309  

Corporate restructuring – workforce reduction

    163       -  

Total restructuring and other non-recurring costs

  $ 3,410     $ 2,404  

 

During the year ended June 30, 2020 and the year ended June 30, 2019, the Company incurred further costs related to the restructuring measures commenced in the year ended March 31, 2018.

 

During the year ended March 31, 2018, the Company undertook a strategic restructuring of its business to align operations, personnel, and business development activities to focus on a fewer number of areas of activity that we believe have the most potential to generate profitability and return. Associated with this restructuring was the departure of a number of employees and contractors from our business. Professional fees represent legal fees incurred to resolve certain disputes related to some of these separations, including the Comberg Claims (see “Item 8. Financial Information – A. Consolidated Statements and Other Financial Information - Legal Proceedings” in our Annual Report on Form 20-F for the year ended June 30, 2020). Litigation provision represents the expected financial outcome of the court hearing held in March 2020 in relation to the Comberg Claims.

 

Cost of restructuring and terminating projects include the costs incurred for business development of specific solar development projects in South America and Australia for which the decision was made not to proceed for economic reasons, and cost of detailed review and sales campaign for the ISS Joint Venture portfolio in the U.S.

 

Finance expense

 

Finance expense consists primarily of interest expense associated with the interest payable on our outstanding parent company loan with AWN, and the Aevitas convertible preference share and loan notes reflected as equity instruments in our accounts.

 

In the year ended June 30, 2020, the Company incurred finance costs on the parent company loan of $1.7 million, interest on the Aevitas convertible preference share and loan notes of $1.2 million, interest and fees on debtor invoice financing in Critical Power Services of $0.2 million, and interest on lease liabilities of $0.1 million.

 

In the year ended June 30, 2019, the Company incurred provision discount unwinding costs following the recognition on March 31, 2019, of a $1.9 million onerous contract provision related to future obligations to purchase SRECs from the NC Projects.

 

The components of net finance expense are as follows:

 

   

Year Ended June 30

 

(US dollars in thousands)

 

2020

   

2019

(unaudited)

 

Shareholder loan

  $ 1,653     $ 1,573  

Convertible preference shares and loan notes

    1,185       1,185  

SolarTide loan

    -       42  

Debtor invoice financing

    174       317  

Interest on leases

    95       158  

Provision discount unwinding

    -       42  

Other finance costs

    75       30  

Foreign exchange

    (33 )     181  

Total net finance expenses

  $ 3,149     $ 3,348  

 

Foreign exchange expense consists primarily of foreign exchange fluctuations related to short-term intercompany accounts and foreign currency exchange gains and losses related to transactions denominated in currencies other than the functional currency for each of our subsidiaries. We expect our foreign currency exchange gains and losses to continue to fluctuate in the future as foreign currency exchange rates change. We expect our exposure to currency fluctuations to be minimal and immaterial, and as such, have not entered into any hedging contracts.

 

39

 

Income tax

 

We are subject to income tax for the year ended June 30, 2020 at rates of 19%, 21%, and between 27.5% and 30% in the U.K., the U.S., and Australia, respectively, and we use estimates in determining our provision for income taxes. We account for income taxes in accordance with IFRS 12, using an asset and liability approach that requires recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax basis, and for net operating loss and tax credit carry forwards.

 

We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At June 30, 2020 and 2019, we did not have any uncertain tax positions that would impact our net tax provision.

 

Critical Judgments in Applying our Accounting Policies

 

In preparing the consolidated financial statements, the directors are required to make judgements in applying the Group’s accounting policies and in making estimates and making assumptions about the future. These estimates could have a significant risk of causing a material adjustment to the carrying value of assets and liabilities in the future financial periods. The critical judgements that have been made in arriving at the amounts recognized in the consolidated financial statements are discussed below.

 

Revenue from contracts with customers – determining the timing of satisfaction of services

 

The Group concluded that solar development revenue and revenue from other long-term projects is recognized over time as the customer simultaneously receives and consumes the benefits provided. The Group determined that the percentage completion basis is the best method in measuring progress because there is a direct relationship between the Group’s effort and the transfer of services to the customer. The judgement used in applying the percentage completion basis affects the amount and timing of revenue from contracts.

 

Impairment of non-financial assets

 

The carrying values of property, plant and equipment, investments and intangible assets other than goodwill are reviewed for impairment only when events indicate the carrying value may be impaired. Goodwill is tested annually for impairment or when events or changes to circumstances indicate that it might be impaired.

 

To assess impairment, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time-value of money and risks specific to the related cash-generating unit. Judgement was applied in making estimates and assumptions about the future cash flows, including the appropriateness of discounts rates applied.

 

Operating profit/(loss)

 

In preparing the consolidated financial statements of the Group, judgement was applied with respect to those items which are presented in the consolidated statement of comprehensive income as included within operating profit/(loss). Those revenues and expenses which are determined to be specifically related to the on-going operating activities of the business are included within operating profit/(loss). Expenses or charges to earnings which are not related to operating activities, are one-time costs determined to be not representative of the normal trading activities of the business, or that arise from revaluation of assets, are reported below operating profit/(loss).

 

Litigation provision

 

The $1.1 million litigation provision recorded at June 30, 2020 is estimated by management making a judgement, in conjunction with advice from legal counsel, on the probability of success of each element of the claim, in accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. Additional allowance is made for anticipated costs.

 

Income taxes

 

In recognizing income tax assets and liabilities, management makes estimates of the likely outcome of decisions by tax authorities on transactions and events whose treatment for tax purposes is uncertain. Where the outcome of such matters is different, or expected to be different, from previous assessments made by management, a change to the carrying value of the income tax assets and liabilities will be recorded in the period in which such determination is made. The carrying values of income tax assets and liabilities are disclosed separately in the consolidated Statement of Financial Position

 

Deferred tax assets

 

Deferred tax assets for unused tax losses amounting to $0.8 million at June 30, 2020 (June 30, 2019: $1.005 million) are recognized to the extent that it is probable that sufficient taxable profit will be available against which the losses can be utilized. Management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits.

 

Share option reserve

 

As part of the Initial Public Offering Listing, VivoPower issued an amended and restated unit purchase option (“UPO”) replacing the options issued by Arowana Inc. The options are viewed as a share-based award granted to Early Bird Capital. The cost of the award is recognized directly in equity and is applied against capital raising costs. As the option holder has the right to receive shares in the Company, the share-based payment transaction would be equity settled. The fair value of the options was determined at the grant date, using the Black Scholes Model, and not remeasured subsequently. As the options have no vesting conditions the related expense was recognized immediately. The options lapsed during the year ended June 30, 2020.

 

40

 

Exchangeable preference shares and exchangeable notes

 

As part of the IPO listing process VivoPower acquired Aevitas. The instruments previously issued by Aevitas were restructured to become exchangeable into VivoPower shares. The Company considered IAS 32 paragraph 16 in determining the accounting treatment. The Company has determined the instruments to be treated as equity under the “fixed-for-fixed” rule meaning that both the amount of consideration received/receivable and the number of equity instruments to be issued must be fixed for the instrument to be classified as equity. Both elements are satisfied within the instruments.

 

Liquidity and Capital Resources

 

Cash Flows

 

Our principal sources of liquidity in the year ended June 30, 2020 have been cash generated by our operating activities in the Critical Power Services segment, $1.0 million proceeds from the sale of the Sun Connect Solar projects in Australia, a $1.3 million short-term shareholder loan, $0.3 million in bank loans and $0.3 million chattel mortgages for motor vehicle purchases. Our principal uses of cash have been financing costs of $0.5 million, $0.1 million repayment of leases, loans from related parties and reduction in debtor finance facilities, capital expenditure of $0.9 million in the Critical Power Services segment and $0.3 million in the Solar segment, and working capital and general corporate purposes. The timing of our development activities, including the timing of investments, capital deployments and sales of assets, can vary substantially and therefore have a substantial effect on our cash position and liquidity.

 

Our principal sources of liquidity in the three months ended June 30, 2019 have been cash generated by our operating activities in the Critical Power Services segment, an $0.8 million additional short-term shareholder loan, and $0.1 million increase in debtor finance borrowings. Our principal uses of cash have been financing costs of $0.8 million, capital expenditure in the Critical Power Services segment of $0.4 million and working capital and general corporate purposes.

 

Our principal sources of liquidity in the year ended March 31, 2019 were cash generated by our operating activities in the Critical Power Services segment and $11.8 million proceeds from the sale of sale of NC-31 and NC-47 projects. Our principal uses of cash were repayment of the $2.0 million DEPCOM loan, financing costs of $3.2 million, $1.5 million repayment of shareholder loans, working capital and general corporate purposes.

 

Our principal sources of liquidity in the year ended March 31, 2018 were cash generated by our operating activities (which consisted principally of the collection of development fee revenue earned in the prior year) and the $2.0 million DEPCOM loan. Our principal uses of cash were for investment in the ISS Joint Venture, business development, working capital and general corporate purposes.

 

Our principal sources of liquidity in the year ended March 31, 2017 were cash generated from operations, net cash proceeds $11 million generated by listing on NASDAQ and $19.8 million from inception of a parent company loan from AWN. Our principal uses of cash were for acquisitions of Aevitas, investment in capital projects, operations and general corporate purposes.

 

The following table shows net cash provided by (used in) operating activities, net cash used in investing activities, and net cash provided by (used in) financing activities for the year ended June 30, 2020, the three months ended June 30, 2019 and the years ended March 31, 2019, 2018 and 2017:

 

   

Year Ended

June 30

   

Three Months

Ended June 30

   

Year Ended March 31

 

(US dollars in thousands)

 

2020

   

2019

   

2019

   

2018

   

2017

 
                                         

Net cash provided by (used in) operating activities

    (4,573 )     2,188       (1,565 )     8,897       6,376  

Net cash used in investing activities

    294       (316 )     11,856       (16,618 )     (26,736 )

Net cash provided by financing activities

    22       744       (7,635 )     (1,310 )     31,302  

Total cash flow

    (4,257 )     2,616       2,656       (9,031 )     10,942  

 

Operating activities

 

Our net cash outflow from operating activities in the year ended June 30, 2020, was $4.6 million. This was attributable to a net outflow from working capital movements of $3.1 million and a net cash outflow after tax from operations of $1.5 million. The working capital movements of $3.1 million comprise a decrease in trade and other payables of $6.9 million, offset by a decrease of trade and other receivables of $2.4 million and an increase in provisions of $1.3 million. The $1.5 million outflow after tax from operations consists of the $5.1 million loss, other non-cash and non-operating components of earnings including $3.1 million of finance expense, $1.6 million gain on solar development, $1.8 million depreciation and amortization, and $0.1 million increase in equity instruments, and tax payments of $0.5 million.

 

41

 

Our net cash inflow from operating activities in the three months ended June 30, 2019, was $2.2 million. This was attributable to a net inflow from working capital movements of $2.0 million and a net cash inflow from operations of $0.2 million. The working capital movements of $2.0 million comprised an increase in trade and other payables of $6.7 million, offset by an increase of trade and other receivables of $4.6 million and reduction in provisions of $0.1 million. The $0.2 million inflow from operations consists of the $1.4 million loss and other non-cash and non-operating components of earnings including $0.8 million of finance expense, $0.4 million depreciation and amortization, and $0.4 million increase in equity instruments.

 

Our net cash outflow from operating activities in the year ended March 31, 2019, was $1.6 million. This was attributable to a net inflow of $0.5 million from working capital movements, offset by the net cash used by operations of $2.1 million. The working capital movements of $0.5 million comprised an increase in trade and other payables of $3.8 million, offset by an increase of trade and other receivables of $2.5 million and reduction in provisions of $0.7 million. The $2.1 million used by operations consists of the $11.2 million loss, reduced by $0.9 million non-cash income tax expense, $2.6 million loss on solar development, and other non-cash and non-operating components of earnings including $3.2 million of finance expense, $1.4 million depreciation and amortization, and $0.8 million increase in equity instruments.

 

Our net cash generated from operating activities in the year ended March 31, 2018, was $8.9 million. This net cash inflow was primarily attributable to collection of trade and other receivables of $11.5 million and an increase in trade and other payables and provisions of $7.0 million, offset by the net cash used by operations of $9.6 million. This $9.6 million used by operations consisted of the $27.9 million loss, increased by $6.3 million non-cash income tax expense and $1.4 gain on solar development, and reduced by other non-cash and non-operating components of earnings including $10.2 million impairment of assets, $11.1 million impairment of goodwill, $3.4 million of finance expense, and $1.3 million depreciation and amortization.

 

In the year ended March 31, 2017, $6.3 million of cash was generated from operating activities. This net cash inflow was generated from the profit for the year of $5.6 million, increased by $5.3 million non-cash income tax expense, $5.8 million non-operating exceptional and non-recurring costs, and $10.0 million increase in trade and other payables and provisions, and reduced by $21.0 million increase in trade and other receivables and $0.7 million of depreciation and amortization expense.

 

Investing activities

 

In the year ended June 30, 2020, net cash generated by investing activities of $0.3 million comprised capital expenditure on property, plant and equipment of $0.9 million in the Critical Power Services segment and Solar project capital expenditure $0.3 million in Australia, offset by $1.0 million proceeds on sale of the Sun Connect Solar portfolio in Australia and $0.4 million proceeds on sale of property, plant and equipment in the Critical Power Services segment.

 

In the three months ended June 30, 2019, net cash used in investing activities of $0.3 million comprised $0.4 million capital expenditure in the Critical Power Services businesses, offset by $0.1 million proceeds on sale of solar projects in the Sun Connect portfolio in Australia.

 

Net cash generated by investing activities in the year ended March 31, 2019 of $11.9 million (2018: used $16.7 million, 2017: used $26.7 million) consisted of $12.0 million (2018: nil, 2017: nil) proceeds on sale of the NC Projects, a $0.2 (2018: $14.1, 2017: nil) million investment in the ISS Joint Venture, $nil (2018: $3.5 million, 2017: $18.1 million) investment in the NC Projects, purchase of $0.2 million (2018: $0.6 million , 2017: $0.1 million ) of operating assets in the Critical Power Services businesses, $0.1 million (2018: $0.8 million, 2017: nil) investment in solar projects in Australia, offset by $0.5 million (2018: $2.3 million , 2017: nil) proceeds on solar development, principally the sale of the Juice Capital solar project assets in Australia (2018: Amaroo solar project in Australia).

 

Under the terms of the ISS Joint Venture, the Company has committed to invest $14.1 million in the ISS Joint Venture for its 50% equity interest, after reducing the commitment by $0.8 million in potential brokerage commissions that have not been required and which have been credited towards the Company’s commitment. The $14.1 million commitment is allocated to each of the 38 projects based on monthly capital contributions determined with reference to completion of specific project development milestones under an approved development budget for the ISS Joint Venture. Over the course of the year ended June 30, 2020, the Company contributed nil (three months ended June 30, 2019: nil, year ended March 31, 2019: $0.2 million; year ended March 31, 2018: $12.9 million) to the ISS Joint Venture. To June 30, 2020, the Company has contributed $13.1 million of the $14.1 million commitment to the ISS Joint Venture, leaving a remaining capital commitment at June 30, 2020, of $1.1 million, which is recorded in trade and other payables. To June 30, 2020, six projects have been discontinued, resulting in a cumulative reduction in the invested value of $ 2.0 million.

 

During the year ended March 31, 2018, a final $3.6 million was paid to complete to complete the funding of the NC Projects, one of which was fully operational as of March 31, 2017, and the second was fully operational in May 2017.

 

There was no acquisition activity in the years ended June 30, 2020, March 31, 2018 and 2019, or three month period ended June 2019. In the year ended March 31, 2017, we consummated two acquisitions for a total $10.1 million, or $8.6 million net of cash acquired. These acquisitions were the Aevitas Group of Companies for cash consideration of $9.5 million, or $8.2 million net of cash acquired, and VivoPower Pty Ltd for cash consideration of $0.6 million, or $0.3 million net of cash acquired.

 

42

 

The companies acquired in the year ended March 31, 2017 and added to the Group were as follows:

 

Aevitas Group of Companies

 

 

Incorporated

% Owned

Purpose

Aevitas O Holdings Pty Ltd

Australia

100%

Holding company

Aevitas Group Limited

Australia

99.9%

Holding company

Aevitas Holdings Pty Ltd

Australia

100%

Holding company

Electrical Engineering Group Pty Limited

Australia

100%

Holding company

J.A. Martin Electrical Pty Limited

Australia

100%

Operating company

Kenshaw Electrical Pty Limited

Australia

100%

Operating company

 

 VivoPower Pty Ltd

 

 

Incorporated

% Owned

Purpose

VivoPower Pty Ltd

Australia

100%

Operating company

VivoPower WA Pty Ltd

Australia

100%

Operating company

VVP Project 1 Pty Limited

Australia

100%

Holding company

VVP Project 2 Pty Limited

Australia

100%

Dormant

Amaroo Solar Tco Pty Limited

Australia

100%

Holding company

Amaroo Solar Hco Pty Limited

Australia

100%

Holding company

Amaroo Solar Fco Pty Limited

Australia

100%

Holding company

Amaroo Solar Pty. Ltd.

Australia

100%

Operating company

SC Tco Pty Limited

Australia

100%

Holding company

SC Hco Pty Limited

Australia

100%

Holding company

SC Fco Pty Limited

Australia

100%

Holding company

SC Oco Pty Limited

Australia

100%

Operating company

ACN 613885224 Pty Limited

Australia

100%

Dormant

VivoPower Singapore Pte Limited

Singapore

100%

Operating company

V.V.P. Holdings Inc.

Philippines

40%

Holding company

VivoPower Philippines Inc.

Philippines

64%

Operating company

VivoPower RE Solutions Inc.

Philippines

64%

Operating company

 

Financing activities

 

Cash generated by financing activities for the year ended June 30, 2020, was nil. This comprised $0.5 million finance expenses, $0.4 million lease repayments in Critical Power Services businesses, $0.3 million repayment of related party loans, $0.3 million net repayments against the debtor finance facility in Critical Power Services businesses and $0.4 million funding of restricted cash, primarily project bank guarantees in Critical Power Services, as discussed in Note 16 to the consolidated financial statements. The cash outflows were partly offset by a $1.3 million short-term bridging shareholder loan, $0.3 million bank loans provided to Critical Power Services businesses and $0.3 million chattel mortgages for vehicles.

 

Cash generated from financing activities for the three months ended June 30, 2019, was $0.7 million. This cash inflow comprised an $0.8 million short-term shareholder loan from AWN, $0.2 million additional borrowings against the debtor finance facility in Critical Power Services businesses, and $0.7 million release of restricted cash, primarily $0.5 million released from escrow and paid to SolarTide, LLC, as discussed in Note 16 to the consolidated financial statements. The cash inflows were partly offset by $0.1 million lease repayments in Critical Power Services businesses and $0.8 million finance expenses.

 

Cash used by financing activities for the year ended March 31, 2019, was $7.6 million. This cash outflow for the current year was primarily due to financing expense of $3.2 million, a $1.5 million repayment of shareholder loans from AWN, $2.0 million repayment of the DEPCOM Loan, $1.3 million funding transfers to restricted cash accounts, and a net $0.3 million of additional lease liabilities for motor vehicles within the Critical Power Services businesses. Financing activities for the year also included advance of $4.0 million from the purchaser of the NC Projects in the form of a loan pending satisfaction of conditions precedent to the final sale of the projects, at which time the $4.0 million previously advanced was repaid by deduction from the final proceeds.

 

Cash used by financing activities for the year ended March 31, 2018, was $1.3 million. This cash outflow was primarily due to financing expense of $3.4 million and a $1.0 million bank loan repayment on the sale of the Amaroo solar project in Australia, offset by $2.0 million proceeds on the DEPCOM Loan and a $0.8 million short-term loan from AWN, and a net $0.3 million of additional lease liabilities for motor vehicles within the Critical Power Services businesses.

 

Cash generated from financing activities for the year ended March 31, 2017 was $31.4 million. This cash inflow was primarily due to proceeds from shareholder borrowings of $20.0 million, proceeds from the Business Combination of $22.6 million in December 2016, and proceeds from other borrowings of $0.3 million. This cash inflow was offset by the costs of the Business Combination of $11.5 million.

 

43

 

Borrowing obligations outstanding at the end of the period were as follows:

 

   

As at June 30

   

As at March 31

 

(US dollars in thousands)

 

2020

   

2019

   

2019

   

2018

   

2017

 
                                         

Current liabilities:

                                       

Debtor financing

    508       901       751       -       -  

Lease liabilities

    641       660       136       285       145  

SolarTide, LLC loan

    -       -       -       2,000       -  

Short-term shareholder loan

    -       766       -       770       -  

Shareholder loan – payments due next 12 months

    -       -       -       900       -  

Bank loan

    66       -       -               90  

Chattel mortgage

    51       -       -       -       -  

Bank loan on Amaroo solar project

    46       -       -       -       -  
      1,312       2,327       887       3,955       235  

Non-current liabilities:

                                       

Shareholder loan – payments due beyond 12 months

    23,401       18,242       18,242       18,092       18,992  

Lease liabilities

    714       1,117       138       293       95  

Bank loan

    278       -       -       -       -  

Chattel mortgage

    249       -       -       -       -  

Bank loan on Amaroo solar project

    -       -       -       -       933  
      24,642       19,359       18,380       18,385       20,020  

Total borrowing

    25,954       21,686       19,267       22,340       20,255  

 

In August 2018, the Company secured a $3.6 million (AU$5 million) debtor finance facility to support the growing working capital requirements of its Critical Power Services businesses. The facility is secured by a fixed charge over the debtors’ book and floating charge over all other assets of J.A. Martin and Kenshaw. Net drawdowns on the facility at June 30, 2020 totaled $0.5 million.

 

J.A. Martin and Kenshaw have lease arrangements in place to finance business properties and motor vehicle fleets. During the year ended June 30, 2020, $0.1 million of new leases were added and $0.3 million of payments were made. The obligation for future minimum lease payments under the facility are as follows:

 

   

Minimum lease payments

   

Present value of minimum lease payments

 
   

As at June 30

   

As at March 31

   

As at June 30

   

As at March 31

 

(US dollars in thousands)

 

2020

   

2019

   

2019

   

2018

   

2020

   

2019

   

2019

   

2018

 
                                                                 

Amounts payable under lease liabilities:

                                                               

Less than one year

    695       692       147       291       649       660       136       285  

Later than one year but not more than five

    759       1,299       143       327       708       1,117       138       293  
      1,454       1,991       290       618       1,356       1,777       274       578  

Future finance charges

    (98 )     (214 )     (16 )     (40 )     -       -       -       -  

Total obligations under lease liabilities

    1,356       1,777       274       578       1,356       1,777       274       578  

 

In June 2020, the Company refinanced its shareholder loan due to AWN Holdings Limited (“AWN”), the Company’s majority shareholder, capitalizing current and non-current shareholder loans, accrued interest and related party trade payables, into a new shareholder loan of initial principal $23.3 million plus capitalized costs.

 

The new shareholder loan bears interest at 10.0% per annum plus a line fee of 2.0% per annum, payable monthly in advance. However, no interest or line fee settlements are required until after a corporate liquidity event has occurred. No repayment of principal is required until July 2021, and then is repayable in 9 equal monthly instalments until March 2022. Security granted to AWN comprises a Specific Security Deed over the assets of Aevitas O Holdings Pty Ltd and general security over the assets of VivoPower International PLC.

 

44

 

In February 2020, the Company agreed an unsecured bridging loan with AWN to provide additional liquidity to the Company. Interest on the loan was charged at 10.0% per annum. A total of $1.3 million was advanced to the Company under the bridging loan, which was capitalized, including interest thereon, into the refinanced shareholder loan, in June 2020.

 

In May and June 2020, the Company obtained $0.3m in government backed loans in Australia to provide additional liquidity during the COVID-19 pandemic.

 

In addition to lease liabilities, in the year ended June 30, 2020, J.A. Martin Electrical Pty Limited and Kenshaw Electrical Pty Limited have also taken out vehicle financing in the form of chattel mortgages, totaling $0.3 million.

 

The SolarTide, LLC loan was made in January 2018 and was subject to a loan fee of $0.3 million, as well as interest of 12% per annum, and was repaid in May 2018.

 

The short-term shareholder loan of $0.8 million was due from AWN, the Company’s majority shareholder, bore interest at 10.0% per annum paid monthly in arrears, and was unsecured. Repayment is due as restricted cash held for bank guarantee security is released, as further described in Note 16. The $0.8 million short-term shareholder loan in March 2018 bore interest at 8.5% per annum and was repaid in April 2018.

 

Prior to refinancing in June 2020, the non-current $18.2 million shareholder loan due to AWN, bore interest at 8.5% per annum paid monthly in advance, and was unsecured. The repayment terms required no repayment of principal payments until July 2020, and then repayable in 21 equal monthly instalments. Terms of the loan required that 50% of the net proceeds from sale of more than $10 million of the ISS Joint Venture or any Critical Power Services business also be directed to loan repayment. Under previous terms of the loan, a total of $750,000 of the loan balance was repaid in the year ended March 31, 2019.

 

The $0.9 million ANZ Bank loan which was secured by the Amaroo project assets was repaid in February 2018 on sale of the Amaroo solar project. The loan was denominated in AUD and was repayable over an 11.5 year period at a monthly repayment amount of approximately $7,500 (or AU$ 9,783) per month for 138 months.

 

Cash reserves and liquidity

 

Cash reserves at June 30, 2020, of $2.8 million are unrestricted and are domiciled as follows:

 

  

Local currency

Amount in USD

AUD

3.3 million

$2.3 million

USD

0.4 million

$0.4 million

GBP

0.1 million

$0.1 million

Total cash reserves

 

$2.8 million

 

Our treasury policy is to maintain sufficient cash reserves denominated in the currencies required for near term working capital to minimize the risk of currency fluctuation. Cash reserves are monitored on a daily basis to maximize capital efficiency. Our cash position is reviewed weekly by upper management to ensure the allocation best meets the coming needs of the business.

 

The Solar Development business is reliant for liquidity on the sale of specific projects from the ISS Joint Venture. As the sale of projects or groups of projects are dependent on negotiations with parties interested in buying projects from the portfolio, delays in the sale process could adversely affect our liquidity.

 

We review our forecasted cash flows on an on-going basis to ensure that we will have sufficient capital from a combination of internally generated cash flows and proceeds from financing activities, if required, in order to fund our working capital and capital expenditure requirements and to meet our short-term debt obligations and other liabilities and commitments as they become due. We believe that our current cash and cash equivalents, proceeds from the sale of ISS Joint Venture, anticipated cash flows from operations, and planned bank refinancing intended to release the restricted cash in J.A. Martin, will be sufficient to meet our cash requirements for at least the next 12 months. We may, however, require additional cash or cash equivalents due to changing financial, economic or business conditions, changes in our development activities or the timing of project investments or dispositions, or other factors.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual commitments and obligations as of June 30, 2020.

 

   

Payments Due by Period

 

Year Ended June 30, 2020

(US dollars in thousands)

 

Total

   

Less than

1 year

   

1 - 3 years

   

3 - 5 years

   

More than 5 years

 

Debt obligations, principal

  $ 19,909     $ 1,667     $ 18,242     $ -     $ -  

Debt obligations, interest

    3,487       2,192       1,295       -       -  

Lease obligations

    1,991       692       1,077       222       -  

Total contractual obligations

  $ 25,387     $ 4,551     $ 20,614     $ 222     $ -  

 

45

 

Off-Balance Sheet Arrangements

 

Up to and including the most recent fiscal year, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As a result, we are not exposed to related financing, liquidity, market or credit risks that could arise if we had engaged in those types of arrangements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency rates, although we also have some exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.

 

Foreign Exchange Risk

 

The majority of our sales are denominated in Australian dollars and U.S. dollars, with the majority of our costs and expenses denominated in Australian dollar, British pounds, and U.S. dollars. Most of our cash and cash equivalents and restricted cash are denominated in Australian dollars. Therefore, fluctuations in currency exchange rates may have a significant impact on our financial stability.

 

Fluctuations in exchange rates, particularly between the U.S. dollar, Australian dollar and British pound sterling, may result in fluctuations in foreign exchange gains or losses.

 

The Group is exposed to foreign exchange risk on the following balances at June 30, 2020:

 

 

Cash and cash equivalents $2.3 million denominated in AUD and $0.1 million denominated in GBP;

 

Restricted cash $1.1 million denominated in AUD;

 

Trade and other receivables $12.3 million denominated in AUD and $0.2 million denominated in GBP;

 

Trade and other payables $10.6 million denominated in AUD and $1.5 million in GBP;

 

Borrowings of $2.5 million denominated in AUD; and

 

Provisions of $2.0 million denominated in AUD and $1.1 million in GBP.

 

As of June 30, 2019, we held $6.2 million (March 31, 2019, $5.9 million; 2018: $5.3 million; 2017: $5.2 million) in accounts receivable, of which $6.1 million (March 31, 2019, $5.8 million; 2018: $5.2 million; 2017: $3.6 million) were denominated in Australian dollars and $nil (March 31, 2019, $nil; 2018: $nil; 2017: $1.6 million) were denominated in British pounds sterling.

 

We have not entered into any hedging transactions to reduce the foreign exchange rate fluctuation risks but may do so in the future when we deem it appropriate in light of the significance of such risks. However, if we decide to hedge our foreign exchange exposure in the future, we cannot assure you that we will be able to reduce our foreign currency risk exposure in an effective manner, at reasonable costs, or at all. See “Item 3. Key Information—D. Risk Factors—Risks Related to our Business and Industry— We are exposed to foreign currency exchange risks because certain of our operations are located in foreign countries” in our Annual Report on Form 20-F for the year ended June 30, 2020.

 

Our financial statements are expressed in U.S. dollars, while some of our subsidiaries use different functional currencies, such as the Australian dollar and British pound sterling. The value of your investment in our common shares will be affected by the foreign exchange rate between the U.S. dollar and other currencies used by our subsidiaries. To the extent we hold assets denominated in currencies other than U.S. dollars, any appreciation of such currencies against the U.S. dollar will likely result in an exchange gain while any depreciation will likely result in an exchange loss when we convert the value of these assets into U.S. dollar equivalent amounts. On the other hand, to the extent we have liabilities denominated in currencies other than U.S. dollars, any appreciation of such currencies against the U.S. dollar will likely result in an exchange loss while any depreciation will likely result in an exchange gain when we convert the value of these liabilities into U.S. dollar equivalent amounts. These and other effects on our financial condition resulting from the unfavorable changes in foreign currency exchange rates could have a material adverse effect on the market price of our common shares, the dividends we may pay in the future, and your investment.

 

Interest Rate Risk

 

Our interest rate risk relates primarily to variable-rate restricted cash, bank balances and short-term working capital borrowings. It is our policy to keep borrowings for longer than one-year at fixed rates to minimize the interest rate risk. Our management reasonably believes that that a change in interest rate to the relevant financial instruments will not result in material changes to our financial position or results of operations.

 

Credit Risk

 

Our credit risk primarily relates to our trade and other receivables, restricted cash, bank balances and amounts due from related parties. We generally grant credit only to clients and related parties with good credit ratings and also closely monitors overdue debts. In this regard, we consider that the credit risk arising from our balances with counterparties is significantly reduced.

 

In order to minimize credit risk, we have a team responsible for determining credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, we review the recoverable amount of each individual debtor at the end of each reporting period to ensure that adequate impairment losses are made for irrecoverable amounts. We will negotiate with the counterparties of the debts for settlement plans or changes in credit terms, should the need arise. In this regard, we consider that our credit risk is significantly reduced.

 

46

 

Liquidity Risk

 

Our liquidity risk management framework is intended to ensure that we maintain sufficient funds to meet our obligations as they become due, and as part of our framework we continuously monitor our liquidity and cash resources and seek to maintain sufficient cash using cash flows generated by our business activities, debt arrangements and other resources. We continuously review forecasted cash flows to ensure our businesses have sufficient cash resources and liquidity to meet their obligations.

 

Jumpstart Our Business Startups Act of 2012

 

The Jumpstart Our Business Startups Act of 2012, or JOBS Act, permits an emerging growth company such as us to take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. Among these provisions is an exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company's internal control over financial reporting. We have elected to rely on this exemption and will not provide such an attestation from our auditors.

 

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of the Company’s initial public offering, (2) the last day of the fiscal year in which we have total annual gross revenues of at least $1.07 billion, (3) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ordinary shares held by non-affiliates exceeded $700.0 million as of the last business day of our most recently completed second fiscal quarter or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act.

 

47

 

BUSINESS

 

Overview

 

Business Overview

 

VivoPower is an international solar and critical power services business and a certified B Corporation. The Company’s main activity is the provision of critical energy infrastructure generation and distribution solutions to a diverse range of government, commercial and industrial customers throughout Australia. It also engages in the development, construction, and sale of PV solar projects in Australia and the U.S. VivoPower is headquartered in London and has operations in the U.S., Australia and the U.K.

 

Management analyzes our business in three reportable segments: Critical Power Services, Solar Development, and Corporate Office. Critical Power Services is represented by J.A. Martin Electrical Pty Limited (“J.A. Martin”) and Kenshaw Electrical Pty Limited (“Kenshaw”) operating in Australia with a focus on the design, supply, installation and maintenance of critical power, control and distribution systems, including for solar farms. Solar Development is the development and sale of commercial, industrial and utility scale PV solar power projects in the U.S. and Australia. Corporate Office is the Company’s corporate functions, including costs to maintain the Nasdaq public company listing, comply with applicable SEC reporting requirements, and related investor relations and is located in the U.K.

 

Critical Power Services

 

VivoPower, through its wholly-owned Australian subsidiaries, J.A. Martin and Kenshaw, provides critical energy infrastructure generation and distribution solutions including the design, supply, installation and maintenance of power and control systems to a customer base in excess of 700 active government, commercial and industrial customers and is considered a trusted power adviser. J.A. Martin and Kenshaw are headquartered in the Hunter Valley and Newcastle region, which is the most densely populated industrial belt in Australia. Structural and cyclical factors have created a strong operating environment for our Critical Power Services businesses, particularly the strong growth in infrastructure investment, recovery in the mining sector, and increasing demand for data centers and solar farms.

 

J.A. Martin and Kenshaw are owned by VivoPower through a holding company called Aevitas, which was formed in 2013 and acquired by VivoPower in December 2016.

 

The Critical Power Services businesses have several core competencies, encompassing a range of electrical, mechanical and non-destructive testing services.

 

J.A. Martin Electrical Pty Limited

 

Founded in 1968, J.A. Martin is a specialized industrial electrical engineering and power services company that has been servicing the largest commercial and industrial belt in Australia, the Newcastle and Hunter Valley region in New South Wales, for more than 50 years.

 

J.A. Martin operates from two premises in New South Wales, including a factory in Newcastle which manufactures, and services customized industrial switchboards and motor control centers. It also has an office and workshop facility in the Hunter Valley for servicing the infrastructure, mining and industrial sectors.

 

J.A. Martin’s core competencies include: customized industrial switchboard and motor control center design, manufacture and maintenance; industrial electrical engineering; project management for mining, infrastructure and industrial applications; solar farm electrical contracting and engineering, procurement and construction (“EPC”); electrical maintenance and servicing; and, industrial, mining and infrastructure CCTV and data cabling. With 103 employees and a fleet of 76 vehicles, J.A. Martin has built a strong reputation throughout eastern Australia for exceptional engineering and design, delivered on time and budget, supported by a high-level of quality and service.

 

J.A. Martin serviced almost 250 customers in the fiscal year ended June 30, 2020 across a diverse range of industries, including solar farms, grain handling and agriculture, water and gas utilities, cotton gins, commercial buildings, mining, marine and rail infrastructure. J.A. Martin’s commitment to health and safety and quality, as recognized by their AS 4801 and ISO 9001 certifications, has positioned them to service some of the largest and most respected firms in the world.

 

With their history and core business centered in the industrial and mining sector of New South Wales, J.A. Martin has taken a strong foothold in the Australian solar EPC market, focusing on the small and medium sized solar project segment of the market. Since commencement of its solar business in 2016, J.A. Martin has successfully and profitably completed over 100MW of solar projects. The Australian solar generation market is expected to experience strong growth over the coming years and J.A. Martin’s strategy has been to deliberately focus on the less competitive small and medium sized solar project segment of the market. According to the Australian Energy Market Operator (“AEMO”), 26GW of new utility-scale, grid-connected renewable energy assets will be required by 2040 to replace aging coal generators scheduled to be retired by that time. AEMO forecasts periods when up to 90% of energy demand in Australia’s National Electricity Market could be met by renewables in 2035. In addition, there is continued growth of behind the meter ground mount and roof-top solar installations as commercial, industrial and government entities respond to concerns about energy security and costs by embracing cheaper solar power solutions. J.A. Martin has recently completed the provision of electrical installation and services for its fourth solar farm, the 89MWdc Goonumbla Solar Farm near the town of Parkes, New South Wales, and has commenced work on three further solar projects. VivoPower believes that the business is very well positioned competitively to leverage the strong growth outlook for Australian solar.

 

48

 

Revenue is earned entirely within Australia and is comprised of the following activities:

 

   

Year Ended
June 30

 

Three Months Ended

June 30

 

Year Ended

March 31

(US dollars in thousands) 

 

2020

2019

 

2019

2018

 

2019

2018

   

 

(unaudited)

 

 

(unaudited)

 

 

 

                   

Electrical installation projects

 

11,420

11,009

 

774

1,030

 

8,375

6,165

Electrical service contracts

 

3,494

5,082

 

2,998

2,244

 

7,361

9,425

Electrical switchboard manufacturing

 

3,582

4,041

 

1,813

2,466

 

4,949

4,372