S-1 1 tm214441-8_s1.htm S-1 tm214441-8_s1 - none - 29.4532916s
As filed with the Securities and Exchange Commission on October 7, 2021.
Registration No. 333-    
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FLEXENERGY GREEN SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware
3629
86-1384045
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
112 Corporate Drive
Portsmouth, NH 03801
(603) 430-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Mark Schnepel
Chief Executive Officer
FlexEnergy Green Solutions, Inc.
112 Corporate Drive
Portsmouth, NH 03801
(603) 430-7000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Garett Sleichter, Esq.
Rutan & Tucker, LLP
18575 Jamboree Road
Suite 900
Irvine, CA 92612
Phone (714) 641-5100
Fax (714) 546-9035
Michael A. Hedge, Esq.
K&L Gates LLP
1 Park Plaza
Twelfth Floor
Irvine, CA 92614
Phone (949) 253-0900
Fax (949) 253-0902
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
Proposed Maximum
Aggregate Offering
Price(1)(2)
Amount of
Registration Fee
Common Stock $ 40,250,000 $ 3,731.17
Underwriters’ Warrants $ 1,207,500 $ 111.94
Total $ 41,457,500 $ 3,843.11
(1)
Includes the aggregate offering price of common stock that may be sold if the option to purchase additional shares of our common stock granted by the registrant to the underwriters is exercised. See “Underwriting.”
(2)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not the solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated October 7, 2021
PRELIMINARY PROSPECTUS
            Shares of Common Stock
[MISSING IMAGE: lg_flexenergygreensolu-4c.jpg]
FlexEnergy Green Solutions, Inc.
We are offering        shares of our common stock, par value $0.0001 per share in this offering. Prior to this offering, there has been no public market for our securities. We estimate that the initial public offering price per share will be between $       and $      . We have applied to list our common stock on The Nasdaq Capital Market (“Nasdaq”) under the symbol “FLXE”.
The offering is being underwritten on a firm commitment basis. The selling stockholder named herein has granted the underwriters an option to buy up to an additional        shares of common stock from them to cover over-allotments. The underwriters may exercise this option at any time and from time to time during the 30-day period from the date of this prospectus. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder.
No Exercise of Over-
Allotment
Full Exercise of Over-
Allotment
Per Share
Total
Per Share
Total
Initial public offering price
$         $        $         $       
Underwriting discounts and commissions(1)
$ $ $ $
Proceeds to us, before expenses
$ $ $ $
Proceeds to the selling stockholder, before expenses
$ $ $ $
(1)
In addition, we have agreed to reimburse the underwriters for certain expenses. See “Underwriting” on page        of this prospectus for additional information.
We have agreed to issue warrants exercisable within three years after the effective date of this prospectus representing 2.5% of the securities issued in this offering to Roth Capital Partners. The warrants will be exercisable at a per share exercise price equal to 120% of the initial public offering price. See “Underwriting — Underwriters’ Warrants.”
We are an “emerging growth company” and a “smaller reporting company” as defined under federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary — Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”
After the completion of this offering, we will be a “controlled company” within the meaning of Nasdaq corporate governance standards. See “Prospectus Summary — Implications of Being a Controlled Company.
Investing in our common stock involves a high degree of risk. See the section captioned “Risk Factors” beginning on page 13 of this prospectus for a discussion of information that should be considered in connection with an investment in our common stock.
Neither the Securities and Exchange Commission nor any other 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.
The underwriters expect to deliver the shares of common stock to the purchasers on or about            , 2021.
Roth Capital Partners
The date of this prospectus is            , 2021

 
TABLE OF CONTENTS
Page
1
8
10
13
35
37
38
39
40
42
58
67
71
76
79
80
83
85
89
98
98
98
F-1
Until            , 2021, all dealers that effect transactions in these securities, 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.
We have not, and the underwriters have not, authorized anyone to provide you with different information, and we and the underwriters take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.
For Investors Outside of the United States
We have not, and the underwriters have not, done anything that would permit this offering or possession of distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. Persons who come into possession of this prospectus and any free writing prospectus we may authorize for use in connection with this offering in jurisdictions outside the U.S. are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.
Basis of Presentation
The financial information provided in this prospectus consists of the consolidated and combined financial information of FlexEnergy, Inc. (“FEI”), and Flex Leasing Power & Service LLC (“FLPS”).
 
i

 
FlexEnergy Green Solutions, Inc. (“FGS”) was formed on December 31, 2020 as a Delaware corporation, and will become a wholly-owned subsidiary of FlexEnergy Power Solutions, LLC (“FPS”) upon completion of the Contribution Transaction described below, FGS has not, to date, conducted any activities other than those incident to its formation and the preparation of the registration statement of which this prospectus is a part. At or prior to the closing of this offering, FPS will contribute its equity interests in FEI and FLPS to FGS, and FEI and FLPS will become wholly owned subsidiaries of FGS. We refer to these contributions collectively as the “Contribution Transaction.” In addition, on August 16, 2021, FPS entered into a Simple Agreement for Future Equity (“SAFE”) with RNS Flex, LLC (RNS”) and TRF Platform Holdings, LLC (“TRF”) whereby, for an aggregate investment of $2,000,000 (but with a call right in favor of FPS for up to an additional $1,000,000) (the aggregate amount so invested being referred to as the “Invested Amount”), RNS and TRF received the right to receive from FPS (i) if the underwriters’ over-allotment exercise is exercised, a cash payment from the net proceeds received by FPS equal to 125% of the Invested Amount (the “Cash Payment”) or (ii) if the net proceeds received by FPS as a result of an over-allotment exercise are insufficient to pay the full Cash Payment to RNS and TRF, a number of the shares of FGS common stock issued to FPS in the Contribution Transaction equal to the Invested Amount minus 80% of the Cash Payment, divided by 80% of the issuance price per share in this offering (the “SAFE Transaction”). See “Certain Relationships and Related Party Transactions  —  SAFE Transaction.”
FGS will be the financial reporting entity following this offering. Other than the balance sheets as of December 31, 2020 and June 30, 2021, financial information of FGS has not been included in this prospectus as since its formation on December 31, 2020 it has not entered into any business transactions or activities, has no capitalization, and had no assets or liabilities during the periods presented in this prospectus.
Trademarks, Trade Names and Service Marks
“FlexEnergy Green Solutions, Inc.” and other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of FGS or one of its subsidiaries (after completion of the Contribution Transaction). Other trademarks, service marks or trade names appearing in this prospectus are the property of their owners. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.
Market, Industry and Other Data
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on reports from various sources. Because this information involves a number of assumptions and limitations, you are cautioned not to give undue weight to such information. Information based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. The information in any such publication, report, survey or article is not incorporated by reference in this prospectus. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section captioned “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”
 
ii

 
PROSPECTUS SUMMARY
This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined consolidated financial statements and the related notes included elsewhere in this prospectus before making an investment decision. Unless the context otherwise requires, the terms “FlexEnergy,” “the Company,” “we,” “us” and “our” refer to (i) upon completion of this offering, FGS and, unless otherwise stated, all of its subsidiaries, and (ii) prior to the completion of this offering, FEI and FLPS and, unless otherwise stated, all of their consolidated subsidiaries.
Our Company
We are an energy focused technology company that designs, manufactures, sells and leases cost-effective energy solutions that lower our customers’ environmental footprint, often by making useable energy from sources of fuel or heat otherwise overlooked or wasted. We do this through two different types of highly engineered products. First, our Flex Turbines offer a reliable source for distributed or grid connected electrical power, capable of being fired by a wide variety of gaseous fuels from waste gas from landfills and natural gas flaring to higher BTU fuels such as propane and synthetic gas. Leasing and sales of Flex Turbines presently represent the bulk of our operations and revenues. Flex Turbines provide our customers with solutions to gain independence over their electricity generation and minimize overall reliance on the grid. Second, we offer heat recovery products that are integral to promising emerging power technologies, such as high efficiency fuel cells for power generation that can be fueled by hydrogen or natural gas. These Flex Heat Recovery products are in the early stages of commercialization, and presently constitute a small but increasingly growing and important portion of our operations and revenues as the future of energy generation emerges.
We focus on providing proven technology and support that enables reliable, efficient and economic green energy solutions. Our business consists of leasing and service of our Flex Turbines supported by a vertically integrated OEM, together with direct sales of our Flex Turbine and Flex Heat Recovery systems. As of June 30, 2021, we have amassed over 8.4 million hours of field runtime on our turbine fleet with over 120 megawatts (“MW”) shipped, of which 49 MW make up our lease fleet. This balance of core competencies in turbine power and heat recovery with current cash flow generation helps fund growth of our technology suite and expansion of applications into new and existing markets. The primary applications of our technology include: converting waste gas to useful energy, improving traditional processes and enabling emerging clean technology. We are actively expanding into other key markets for which our products are well suited, and we are confident in generating opportunities in additional geographic markets and product extensions into different applications.
Our combined consolidated financial statements have been prepared as though we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred operating losses and negative cash flows from operations since inception. As of June 30, 2021, we had an accumulated deficit of approximately $136.15 million. Management expects to continue to incur operating losses and negative cash flows from operations through the remainder of 2021. We are dependent upon the receipt of additional capital investments and other financings to fund our ongoing operations and may need to raise additional capital in order to continue to fund operations. We believe we will be able to obtain additional capital through equity financings or other arrangements to fund operations; however, there can be no assurance that such additional financing, if available, can be obtained on acceptable terms. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Accordingly, these factors raise substantial doubt about our ability to continue as a going concern within one year after the date the combined consolidated financial statements are issued. See “Risk Factors — Risk Factors Relating to our Business and Industry — Our management has expressed substantial doubt about our ability to continue as a going concern without additional capital investment.”
 
1

 
Primary Applications
The primary applications of our technology include:

Converting Waste Gas to Useful Energy:   The Flex Turbine can run on waste fuels such as methane from landfills and carbon dioxide (“CO2”) heavy field gas from oil producing wells down to 350 BTUs, as well as synthetic gasses such as ethane produced in the refining process with up to 2,500 BTUs to produce reliable, distributed electricity.

Improving Traditional Processes:   Flex Heat Recovery systems utilize our proprietary highly efficient, high temperature, high pressure heat exchanger technology. These products have a smaller footprint than competing systems due to their design efficiency, making them ideal for space constrained applications. They are currently being evaluated by potential customers for the next generation of carbon capture technology, multiple fuel cell applications, and emissions reduction projects. The Flex Turbine can be installed in Commercial and Industrial (“C&I”) applications to generate power and heat and/or cooling to reduce facility operating costs. Flex Turbines can simultaneously provide backup power capability to improve resiliency and keep operations running through utility power outages. Moreover, Flex Turbines are capable of generating power on industrial fuels that might otherwise be wasted, further improving C&I operating margins.

Enabling Emerging Clean Technology:   Efficient use of thermal energy is the key to energy efficiency in many of today’s most promising alternative fuel technologies, such as solid oxide fuel cells for power generation technologies, for green hydrogen production, and for certain heat as energy storage applications. We believe our Flex Heat Recovery products enable these green technologies to be more cost competitive with conventional forms of energy production.
Products

Turbine Solutions:   Flex Turbines provide scalable, modular on-site power to both off-grid and grid dependent environments.

Heat Recovery Solutions:   Flex Heat Recovery systems have been used in a broad array of applications, from the extension of the range of turbine powered destroyers in the British Navy, to large scale fuel cell applications for power generation, to being prototyped into key components in the oncoming hydrogen economy, such as solid oxide fuel cells.
Our Market Opportunity
We believe that the world is looking for cleaner, reliable electrical power alternatives both to replace existing sources and to provide electrical power where electricity is not available or reliable. Additionally, we believe the adoption of new emerging technologies and fuels will expand our opportunities to grow.
In 2020, approximately 4.0 trillion kilowatt-hours (“kwh”) were generated from utility-scale facilities, of which 40% comprised natural gas, 19% coal, 20% nuclear, 20% renewables and 1% petroleum and others. Natural gas is one of the most abundant and available sources of clean energy as market trends such as the electrification of vehicles and the phasing out of coal-fired plants becomes more commonplace.
Power generation from fossil fuels and the associated release of CO2 as a byproduct has been shown to be a contributing factor to global climate change. The world continues to rely on technology advances combined with best practices to reduce greenhouse gas emissions.
The following trends have increased onsite, lesser emissions power demand from customers in a growing number of markets, and we expect them to continue to do so:

Continued growth in electricity demand, including for transportation

Decarbonization efforts to mitigate climate change peril, including carbon taxes
 
2

 

Natural gas as replacement for coal and oil-fired equipment and processes

Secular shift to distributed generation to assure power quality and avoid the cost of expanding aging and inefficient transmission infrastructure

Emergence of zero or low pollution alternative sources of power in the hydrogen economy, including fuel cells, solar and wind power

A drive for energy efficiency causing many industries to look for ways to eliminate wasted energy consumption
We believe that these trends will expand the market opportunity for Flex Turbine solutions and Flex Heat Recovery systems.
Our Growth Strategy
Our chief objective is to be a primary provider of clean, affordable and reliable energy. In order to accomplish this, we intend to:

Accelerate growth in underpenetrated markets and expand our geographic footprint.   We believe the total market opportunity for modular, onsite power remains significantly under-penetrated in the U.S. The flexibility and reach of our leasing model, coupled with our scalable turbine packages, allow us to increase market penetration and enter new markets quickly and efficiently. We plan to strengthen our existing relationships and identify new sub-sectors to accelerate our growth. We will seek to enter new markets and geographies over time, both in the U.S. and internationally, where climate, demand for clean energy and regulatory policies position turbine power generation as an economically compelling alternative to centralized electric utilities.

Continued deployment of our turbine fleet and heat recovery solutions to our customers.   We believe that integrated energy systems enhance the reliability, resiliency and predictability of turbine-generated electricity in certain markets, increasing the overall value proposition to customers. We expect demand for the Flex Turbine with on-board hot water heat exchanger, our combined heat and power (“CHP”) solution, to increase over time. We also expect continued requests by our customers to integrate our energy systems with existing energy storage (e.g. photovoltaic battery cells) to provide additional resiliency.

Broaden and enhance service offerings.   We provide ongoing monitoring and service as a standard component of our leasing agreements. We believe there is significant market demand for long-term protection plans for customers who have chosen to finance or purchase systems rather than lease them, and we will strive to capture a significant share of this market. We plan to expand our green energy product and service offerings to provide further cost savings to our customers and optimize the performance of existing traditional processes.

Increase Inventory to Shorten Delivery Times.   Flex Turbines currently are built upon order with a six or more month lead time from order to completion. By investing in additional inventory levels and building certain sub-assemblies in advance, we believe we can substantially shorten the time to delivery and thereby improve our appeal to customers searching for prompt energy solutions.
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those in the section captioned “Risk Factors” and elsewhere in this prospectus. These risks include, but are not limited to, the following:

If we fail to retain existing customers, derive revenue from existing customers consistent with historical performance or acquire new customers cost-effectively, our business could be adversely affected. We are subject to substantial customer concentration. In times of market surplus, our rental prices are subject to enhanced market pressure.
 
3

 

The volatility in the price of oil affects the growth rate of new oil wells coming online. This commodity price volatility may adversely affect the demand for our products and services and negatively impact our results of operations.

Our products involve a lengthy sales cycle, and we may not anticipate sales levels appropriately, which could adversely affect our results of operations.

We have limited operating history with our line of heat recovery products and, as a result, if our estimates of product efficacy, maintenance and repair costs or useful life are inaccurate our business and financial results could be harmed.

The majority of turbines we sell or lease currently run with natural gas as the primary input fuel. As a fossil-fuel based solution, natural gas power generation products are subject to a heightened risk of regulation and to changes in our customers’ energy procurement policies.

We currently rely on a limited number of suppliers for certain parts and equipment to build our products, and we may not be able to find replacements or immediately transition to alternative suppliers, which could adversely affect our business, financial condition and results of operation.

Our credit facility subjects FLPS and its subsidiaries to financial and other restrictive covenants. These restrictions may limit our operational or financial flexibility and could subject us to potential defaults under the credit facility. In addition, any default could result in foreclosure.

Our substantial indebtedness could limit our opportunities for growth.

The distributed generation market is highly competitive. Competing solutions for distributed energy include renewables such as solar, wind and storage, gas-fired reciprocating engines, fuel cells and other gas turbines, any or all which might be perceived as superior to our technology, for economic, ecological or other reasons.

We anticipate that some portion of our future products and performance will rely on the adoption and availability of hydrogen gas as a fuel source and an insufficient supply of hydrogen could negatively affect our sales growth.

We anticipate engineering our products to run on fuel blends with a greater percentage of hydrogen. However, if we are unsuccessful or if there is an insufficient supply of hydrogen, our sales growth could be adversely affected.

If we are unable to attract and retain key employees and hire qualified management, technical, engineering, and sales personnel, our ability to compete and successfully grow our business could be harmed.

Our management has expressed substantial doubt about our ability to continue as a going concern without additional capital investment.

We have identified material weaknesses in our internal control over financial reporting and our information technology environment. We may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our combined consolidated financial statements. If we fail to remediate any material weaknesses or if we fail to establish and maintain effective control over financial reporting, investors may lose confidence in our ability to provide reliable and timely financial reports and the value of our common stock may decline.

At many of our customers’ oil production sites, we utilize the abundant associated gas that is otherwise flared as our primary input fuel. Should midstream infrastructure be put into place that allows the associated gas to be processed and transported to end markets, it would curtail our volume of input fuel for onsite power generation and adversely affect our costs or ability to meet the customer’s power generation demand.

Our largest stockholder, FPS, has a series of senior secured notes that are currently due in full at October 31, 2022, that if not extended or renegotiated, could cause FPS to sell shares of our common stock, which could adversely affect our stock price.
 
4

 

FPS’ Series B and Series B-1 Units have redemption rights that, if exercised, could cause FPS to sell shares of our common stock to pay for the redemption, which could adversely affect our stock price.
Corporate History, Contribution Transaction and SAFE Transaction
On April 2, 2008, FlexEnergy, LLC was initially formed in Delaware in connection with a contribution of certain thermal oxidizer technology assets. Assets related to the thermal oxidizer technology were later contributed to a wholly owned subsidiary, Flex Power Generation, Inc., and all of the outstanding shares of Flex Power Generation, Inc. were distributed to the stockholders of FEI as a special dividend on November 13, 2012.
On December 31, 2010, (i) FEI was converted from FlexEnergy, LLC, (ii) FlexEnergy Energy Systems, Inc. (“FEES”) was incorporated as a wholly owned subsidiary of FEI, and (iii) FEES purchased from Ingersoll Rand Energy Systems Corporation certain assets relating to the development, manufacture, sale and service of turbines.
On January 8, 2014, FEI, FlexEnergy Holdings, LLC and FlexEnergy Merger Sub, Inc. entered into an Agreement and Plan of Merger whereby (i) each then outstanding share of stock and stock option of FEI was converted into a corresponding ownership unit and ownership unit option of FlexEnergy Holdings, LLC, and (ii) FlexEnergy Holdings, LLC became the sole stockholder of FEI at that time.
On December 31, 2015, FPS was formed in Delaware in connection with the contributions of all of the outstanding shares of stock of FEI and all of the outstanding membership interests of FLPS. As a result of the associated transactions, FEI and FLPS became wholly owned subsidiaries of FPS.
On December 31, 2020, FGS was formed in Delaware. On or prior to the closing of this offering FPS intends to contribute all of its assets, which consist solely of 100% equity interests in FEI and FLPS, to FGS, which will result in FEI and FLPS becoming wholly owned subsidiaries of FGS. The diagram below shows our corporate structure after completion of the Contribution Transaction and the SAFE Transaction.
Following the completion of the Contribution Transaction and the SAFE Transaction, and assuming no exercise of the underwriters’ over-allotment exercise, the number of shares of common stock of FGS owned by FPS, RNS and TRF and thus outstanding prior to this offering will be        shares of common stock, assuming an offering price of $       per share of common stock, which is the midpoint of the range on the front cover of this prospectus. However, the precise number of shares of common stock owned by FPS, RNS and TRF as a result of the Contribution Transaction and the SAFE Transaction will differ if the actual initial offering price per share differs from this assumed price in order to preserve the value due to each holder. For example, if the initial offering price of common stock in this offering is (i) $       per share, which is the low point of the price range indicated on the front cover of this prospectus, we would issue        shares of common stock to FPS, and (ii) $       per share, which is the high point of the price range indicated on the front cover of this prospectus, we would issue        shares of common stock to FPS,      of which would be transferred to RNS and TRF in the SAFE Transaction. The following diagram assumes no exercise of the underwriters’ over-allotment option.
 
5

 
[MISSING IMAGE: tm214441d6-fc_corpbw.jpg]
Corporate Information
Our principal executive offices are located at 112 Corporate Drive, Portsmouth, NH 03801. Our telephone number is (603) 430-7000. The address of our website is www.flexenergy.com. The information on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider any such information as part of this prospectus or in deciding whether to purchase our common stock.
 
6

 
Implications of Being an Emerging Growth Company and a Smaller Reporting Company
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the year following the fifth anniversary of the consummation of this offering, (2) the last day of the year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the year in 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 (the “Exchange Act”), which would occur if the market value of our common stock held by non-affiliates exceeded $700,000,000 as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than $1 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 are presenting herein only two years of audited combined consolidated financial statements and related management’s discussion and analysis of financial condition and results of operations;

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

we will provide less extensive disclosure about our executive compensation arrangements; and

we will not be required to hold stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.
We are also a smaller reporting company as defined under federal securities laws. We may continue to be a smaller reporting company so long as either (i) the market value of our stock held by non-affiliates is less than $250,000,000 or (ii) our annual revenue was less than $100,000,000 during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700,000,000. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. For so long as we remain a smaller reporting company, we are permitted to rely on exemptions from certain disclosure and other requirements that are applicable to other public companies that are not smaller reporting companies.
As a result, the information that we provide to our stockholders may be different than the information you might receive from other public reporting companies in which you hold equity interests.
Implications of Being a Controlled Company
After the Contribution Transaction and prior to the completion of this offering, FPS will own 100% of our common stock and, after completion of this offering, FPS will own approximately       % of our common stock (or       % if the underwriter exercises in full its option to purchase additional shares of our common stock from FPS). As a result, we will be a “controlled company” within the meaning of Nasdaq corporate governance standards because more than 50% of our voting common stock is owned by FPS. For further information on the implications of this distinction, see “Risk Factors – Risk Factors Relating to Ownership of Our Common Stock – We are a “controlled company” within the meaning of the rules of Nasdaq and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.
 
7

 
THE OFFERING
Common stock we are offering
       shares
Common stock to be outstanding immediately after this offering
       shares
Underwriters’ over-allotment option
The selling stockholder has granted the representative of the underwriters a 30 day option to purchase up to            additional shares of our common stock at a public offering price of $       per share.
Use of proceeds
We estimate that the net proceeds from the sale of the common stock in this offering will be approximately $      , based upon the initial public offering price of $       per share (which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholder.
The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock and to facilitate future access to the public equity markets for us and our stockholders. We currently intend to use the net proceeds from this offering for next generation product development, to expand our fleet to support our Energy-as-a-Service (“EaaS”) model, to expand our sales force, to pay down outstanding borrowings under our credit facility, for working capital and other general corporate purposes. We may use a portion of the net proceeds to acquire complementary businesses or technologies. However, we do not have agreements or commitments for any acquisitions at this time. See “Use of Proceeds” for additional information.
Dividend policy
We currently do not intend to declare or pay any cash dividends in the foreseeable future. Any determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on the terms of our financing arrangements, our financial condition, results of operations, capital requirements, general business conditions, contractual restrictions and other factors that our board of directors considers relevant. See “Dividend Policy” for additional information.
Risk factors
See “Risk Factors” beginning on page 13 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
Proposed trading symbol
We have applied to Nasdaq to list our common stock under the symbol “FLXE”.
Lock-up
We and our directors, officers and principal stockholder have agreed with the underwriters not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of 180 days after the date of this prospectus. See “Underwriting” for additional information.
 
8

 
The total number of shares of our common stock that will be outstanding after this offering excludes        shares of common stock reserved for future grant or issuance under our proposed 2021 Incentive Award Plan (“2021 Plan”), which will become effective in connection with the completion of this offering.
Except as otherwise indicated, all information in this prospectus assumes:

the completion of the Contribution Transaction;

no exercise by the underwriters of their over-allotment option to purchase additional shares; and
We estimate that we will issue             shares of our common stock in the Contribution Transaction based upon an initial public offering price of $       per share (which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). A $1.00 increase (decrease) in the assumed initial public offering price of $       per share would increase (decrease) the number of shares of our common stock we estimate that we will issue in the Contribution Transaction by            . Assuming that the initial public offering price remains the same, an increase (or decrease) in the number of shares offered by us in this offering would not increase (or decrease) the number of shares we will issue in the Contribution Transaction.
 
9

 
SUMMARY HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA
FGS was formed in December 2020 and does not have historical financial data. The historical financial data presented in this prospectus is the historical combined consolidated financial data of FEI and FLPS, our wholly-owned subsidiaries upon completion of the Contribution Transaction. The summary historical financial data for the years ended December 31, 2020 and 2019 are derived from the audited combined consolidated financial statements of FEI and FLPS for those periods, which are included elsewhere in this prospectus. The summary historical financial data as of June 30, 2021 and for the six months ended June 30, 2021 and 2020 are derived from the unaudited condensed combined financial statements of FEI and FLPS for those periods, which are included elsewhere in this prospectus.
You should read this data together with the combined consolidated financial statements of FEI and FLPS and related notes, as well as the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.
Years Ended
December 31,
Six Months
Ended June 30,
(in thousands)
2020
2019
2021
2020
(unaudited)
Statement of Operations and Comprehensive Loss Data:
Revenue
Turbine leasing fleet
$ 17,838 $ 16,833 $ 7,272 $ 10,024
Turbine service on sold product
2,213 2,824 1,601 1,120
Manufactured product
3,276 5,716 1,276 1,658
Total revenue
$ 23,327 $ 25,373 $ 10,149 $ 12,802
Cost of revenue
Turbine leasing fleet (excluding depreciation of fleet turbines)
$ 4,884 $ 5,442 $ 2,967 $ 2,562
Turbine service on sold product
1,691 2,797 1,107 961
Manufactured product
5,789 9,531 2,530 3,458
Depreciation of fleet turbines
5,007 4,713 2,167 2,766
Total cost of revenue
$ 17,371 $ 22,483 $ 8,771 $ 9,747
Operating expenses
Selling, general and administrative
$ 11,826 $ 12,400 $ 6,759 $ 5,957
Research and development
120 237 67 75
Total operating expenses
$ 11,946 $ 12,637 $ 6,826 $ 6,032
Operating loss
$ (5,990) $ (9,747) $ (5,448) $ (2,977)
Other income (expense)
Interest expense
$ (1,114) $ (992) $ (539) $ (665)
Other income (expense), net
31 (159) 2,534 52
Total other income (expense), net
$ (1,083) $ (1,151) $ 1,995 $ (613)
Loss before income taxes
$ (7,073) $ (10,898) $ (3,453) $ (3,590)
Income tax expense
(31) (7) (178) (4)
Net loss
$ (7,104) $ (10,905) $ (3,631) $ (3,594)
Other comprehensive gain (loss), net of tax
Foreign currency translation adjustments
$ 443 $ 185 $ 209 $ (213)
Total other comprehensive gain (loss), net of tax
$ 443 $ 185 $ 209 $ (213)
Comprehensive loss
$ (6,661) $ (10,720) $ (3,422) $ (3,807)
EBITDA
$ 1,114 $ (3,712) $ 751 $ 511
Adjusted EBITDA
$ 1,209 $ (3,457) $ (1,189) $ 546
 
10

 
As of June 30, 2021
(unaudited)
(in thousands)
Actual
As Adjusted(1)
Balance Sheet Data
Cash
$ 667 $          
Working capital(2)
$ 6,711 $
Total assets
$ 50,207 $
Line of credit
$ 22,963 $
Total liabilities
$ 31,825 $
Total stockholder’s equity
$ 18,382 $
(1)
On an as adjusted basis to give effect to the issuance and sale of        shares of our common stock in this offering at an assumed initial public offering price of $       per share (which is the midpoint of the price range set forth on the cover page of this prospectus after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option.
(2)
Working capital is defined as total current assets minus total current liabilities.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with generally accepted accounting principles (“GAAP”), we believe “EBITDA” and “Adjusted EBITDA”, non-GAAP measures, are useful in evaluating our operating performance. We use these financial measures to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding facility relocation expenses, equity-based compensation, restructuring costs and forgiveness of the PPP loans, which are unusual or non-cash charges and thus not indicative of our historical business and results of operations or of our outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as a tool for comparison. A reconciliation is provided below for our non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.
EBITDA and Adjusted EBITDA
We believe EBITDA and Adjusted EBITDA are key performance measures used by our management to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes and in evaluating acquisition opportunities.
We calculate EBITDA as net income (loss), plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense. We define Adjusted EBITDA as EBITDA plus or minus (i) equity-based compensation expense and (ii) certain non-cash charges and unusual or non-recurring charges or income that we do not view as representative of our ongoing operations.
 
11

 
The following table presents a reconciliation of EBITDA and Adjusted EBITDA from the most comparable GAAP measure, net income (loss), for each of the years ended December 31, 2020 and 2019 and for the six months ended June 30, 2021 and 2020:
Year Ended
December 31,
Six Months Ended
June 30,
(unaudited)
(in thousands)
2020
2019
2021
2020
Net Loss
$ (7,104) $ (10,905) $ (3,631) $ (3,594)
Depreciation and amortization
7,073 6,194 3,665 3,436
Interest expense, net
1,114 992 539 665
Provision for income taxes
31 7 178 4
EBITDA
$ 1,114 $ (3,712) $ 751 $ 511
One-time non-operating facility relocation expenses(1)
25 185 301
Restructuring charges
101
PPP loan forgiveness
(2,378)
Equity-based compensation
70 70 36 35
Adjusted EBITDA
$ 1,209 $ (3,457) $ (1,189) $ 546
(1)
Represents non-recurring out of pocket expenses incurred in moving our heat recovery-focused facility.
Some of the limitations of EBITDA and Adjusted EBITDA include (i) these non-GAAP measures do not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and EBITDA and Adjusted EBITDA do not reflect these capital expenditures. Our non-GAAP measures may not be comparable to similarly titled measures of other companies because they may not calculate them in the same manner as we calculate, the measure, limiting its usefulness as a comparative measure. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. EBITDA and Adjusted EBITDA should not be considered as an alternative to loss before benefit from income taxes, net loss, earnings per share, or any other performance measures derived in accordance with U.S. GAAP. When evaluating our performance, you should consider adjusted our non-GAAP measures alongside other financial performance measures, including our net loss and other GAAP results.
 
12

 
RISK FACTORS
The following section discusses material risks and uncertainties that could adversely affect our business and financial condition. Investing in our common stock involves substantial risks. You should carefully consider the following risk factors, as well as all of the other information contained in this prospectus, including “Management’s Discussion and Analysis of the Financial Condition and Results of Operations” and the combined consolidated financial statements and related notes thereto included elsewhere in this prospectus, before deciding to invest in our common stock. Additional risks and uncertainties that we are unaware of may also become important factors that adversely affect our business. The occurrence of any of the following risks, or additional risks that we are unaware of, could adversely affect our business, strategies, prospects, financial condition, results of operations and cash flows. In that case, the market price of our common stock could decline, and you could lose all or part of your investment.
Risk Factors Relating to our Business and Industry
If we fail to retain existing customers, derive revenue from existing customers consistent with historical performance or acquire new customers cost-effectively, our business could be adversely affected. We are subject to substantial customer concentration.
Our success, and our ability to increase revenues and operate profitably, depends in part on our ability to retain and keep existing customers engaged so that they continue to purchase or lease equipment from us, and to acquire new customers cost-effectively. We intend to continue to expand our customer base as part of our growth strategy. If we fail to retain existing customers and to attract and retain new customers, our business, financial condition and results of operations could be adversely affected. Our two largest customers accounted for approximately 18% and 17% of total revenue for the six months ended June 30, 2021. Our two largest customers accounted for approximately 24% and 13% of total revenue for the six months ended June 30, 2020. In 2020, our three largest customers generated 23%, 14% and 10%, respectively, of our total revenue, and in 2019, our largest customer generated approximately 28% of our total revenue. Two customers accounted for 33% and 15%, respectively of our accounts receivable balance as of June 30, 2021. Two customers accounted for 15% and 14%, respectively, of our accounts receivable balance as of December 31, 2020. One customer accounted for 32% of our accounts receivable balance as of December 31, 2019. Accordingly, we are subject to customer concentration risk in the form of non-renewal of terminating lease contracts, which can be brought on by financial distress, aggressive pricing offers from our competitors, or merger and acquisition activity that is beyond our control. If one of our largest customers elects not to renew or extend existing lease contracts or insists upon price concessions, we could realize a substantial loss of lease revenue from a single customer until the point where we can identify new opportunities to redeploy these available turbine units elsewhere, which could adversely affect our business, financial condition and results of operations. In certain instances we face the financial burden of de-installation, transportation and cost of redeployment.
The volatility in the price of oil affects the growth rate of new oil wells coming online. This commodity price volatility may adversely affect the demand for our products and services and negatively impact our results of operations.
The majority of our turbines since inception have been deployed in the oil and gas (“O&G”) sector to oil production sites requiring onsite power generation. Our addressable market in this sector is largely defined by the existing oil wells in production, along with new oil wells coming online. During the prolonged low price environment in 2016-2017, and more recently the sharp price decline beginning in a second low price environment between March 2020 and January 2021, we experienced reduced demand from our customer base for power generation equipment, resulting in a reduction in sales of new turbine units, and a decrease in our total lease deployment count. Significant decreases in the price of oil typically result in a reduction of the number of new wells coming online in a given time period, which in turn decreases and/or defers the need for incremental power generation equipment over that time.
 
13

 
Our products involve a lengthy sales cycle, and we may not anticipate sales levels appropriately, which could adversely affect our results of operations.
A portion of our revenue and associated production volume in a given quarter and year comes from turbines we sell outright to our customers as a capital purchase. The sale of our turbine products typically involves a significant commitment of capital by customers, which can result in typical delays associated with large capital expenditures. Delays for placing purchase orders can come from a number of sources, including an extensive review of all competing sources of self-generation, the need to procure outside financing, and delays and uncertainties imposed from the local utilities regarding interconnect permitting requirements. For these and other reasons, the sales cycle associated with our products can be lengthy and subject to a number of significant risks over which we have little or no control. We plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, our financial condition, results of operations and cash flow would suffer.
We have limited operating history with our line of heat recovery products and, as a result, if our estimates of product efficacy, maintenance and repair costs or useful life are inaccurate our business and financial results could be harmed.
Although our heat recovery technology has historically been an important element of our turbines, the external sale of our heat recovery products independently from our turbines began in 2017 and therefore we do not have a long operating history with these products. As a result, we do not have sufficient historical data to prove efficacy and maintenance and repair costs over a long period of use and any estimates regarding long-term product life or repair and replacement costs may prove to be incorrect. If incorrect, we may incur additional design and product development costs to achieve desired product performance.
Additionally, we have sold heat exchangers to only a limited number of customers. In order for our heat recovery products to achieve broader market acceptance, we will need to further develop these products, produce them in large quantities cost effectively, and market and sell them in greater quantities. If we are unsuccessful, our profitability will be adversely affected.
The majority of turbines we sell or lease currently run with natural gas as the primary input fuel. As a fossil-fuel based solution, natural gas power generation products are subject to a heightened risk of regulation and to changes in our customers’ energy procurement policies.
The production of CO2 has been shown to be a contributing factor to global climate change. Our turbines running on natural gas do produce CO2. As such, we may be negatively impacted by CO2 related changes in applicable laws, regulations, ordinances, rules, or the requirements of the incentive programs on which we and our customers currently rely. Changes (or a failure to recognize the benefit of our technology as one means to maintain reliable and resilient electric service with a lower greenhouse gas emission profile) in any of the laws, regulations, ordinances, or rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our gas turbines on particular sites, thereby negatively affecting our ability to deliver cost savings to customers, or we could be prohibited from completing new installations or continuing to operate existing projects. Certain municipalities in California have already banned the use of distributed generation products that utilize fossil fuel. Additionally, our customers’ and potential customers’ energy procurement policies may prohibit or limit their willingness to procure gas turbines. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances, or rules applicable to our gas turbines, or by our customers’ and potential customers’ energy procurement policies.
We currently rely on a limited number of suppliers for certain parts and equipment to build our products and we may not be able to find replacements or immediately transition to alternative suppliers, which could adversely affect our business, financial condition and results of operation.
We currently rely on a limited number of suppliers, and in some instances, a single supplier, for certain equipment and components to build our products. If demand for the equipment or components necessary
 
14

 
to build our products increases or our suppliers face financial distress or bankruptcy, they may not be able to provide the equipment or components on schedule or at current prices. For example, steel is the principal raw material used in manufacturing our systems. The price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors which we have no control over. If our suppliers are unable to provide the raw materials and components needed to build our products on schedule or at current prices, we may need to seek other suppliers, which may adversely affect our revenues or increase our costs.
In order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon certain criteria. Due to the complexity of some of our components, we may not timely find alternate suppliers, if at all. If we fail to accurately anticipate customer demand, an oversupply of parts could result in excess or obsolete inventories, which could adversely affect our business. Additionally, if we fail to correctly anticipate our internal supply requirements, an undersupply of parts could limit our production capacity. Our inability to meet volume commitments with suppliers could affect the availability or pricing of our parts and components. A reduction or interruption in supply, a significant increase in price of one or more components or a decrease in demand of products could adversely affect our business and operations and could adversely affect our customer relationships. Financial problems of suppliers on whom we rely could limit our supply of components or increase our costs.
In addition, suppliers may de-prioritize our orders if another larger customer places orders with them. Due to our volume of purchases, we typically are unable to take advantage of any bulk volume pricing. Also, we cannot guarantee that any of the parts or components that we purchase will be of adequate quality or that the prices we pay for the parts or components will not increase. Inadequate quality of products from suppliers could interrupt our ability to supply quality products to our customers in a timely manner. Additionally, defects in materials or products supplied by our suppliers that are not identified before our products are placed in service by our customers could result in higher warranty costs and damage to our reputation. We also outsource certain of our components internationally, which may subject us to delays in delivery because of regulations associated with the import/export process, delays in transportation or regional instability.
We have cash payments due under FEI incentive plans on January 1, 2023 and January 1, 2026, which might require us to use funds that we would otherwise use for other purposes, such as operations, growth or distribution.
Our subsidiary, FEI, has a 2013 Equity Incentive Plan (the “2013 Plan”) that provides cash payment awards. The payments under the 2013 Plan have been frozen and there will be no further grants made under the 2013 Plan. Under the 2013 Plan, an aggregate payout of $0.6 million is due to the participants on the earlier of January 1, 2023 or a Change of Control (as defined in the 2013 Plan). FEI also has a 2016 Target Incentive Plan (the “2016 Plan”) that provides for fixed potential cash payouts totaling $3.2 million. The payments under the 2016 Plan are only due to the participants if a Change in Control (as defined in the 2016 Plan) that constitutes a Qualifying Sale (as defined in the 2016 Plan) occurs on or before the earlier of January 1, 2026 or a Termination Transaction (as defined in the 2016 Plan). If payments are due under the 2016 Plan, they must be paid within 60 days after the Change in Control (as defined in the 2016 Plan) that constitutes a Qualifying Sale (as defined in the 2016 Plan). At the time these payments come due, we may have more pressing needs for this cash, such as working capital, debt reduction or investment in growth and expansion. Use of this cash to make these payouts at inopportune times could impede our growth and stress our cash position, adversely affecting our results of operations. Our obligations to pay the amounts may also reduce the proceeds otherwise payable to our stockholders in the event of or following a Change of Control (as defined in the 2013 Plan) or a Change in Control (as defined in the 2016 Plan).
We are exposed to the credit risk of our customers, and any material nonpayment or nonperformance by our customers could adversely affect our financial results.
During times of significant oil price shocks or sustainably low oil prices, some of our leasing customers face significant financial hardship whereby it becomes increasingly difficult to stay current with the monthly operating payments for the provision of our services. Likewise, our C&I customers have varying levels of financial strength. In cases where C&I customers opt to make the capital invested into a self-generation
 
15

 
project, the required investment can be substantial relative to the business’ operations and revenue base, and in many cases it requires outside financing to be secured. This can result in delays and nonperformance in our customers’ ability to make the agreed scheduled progress payment against the executed purchase order, production build and delivery of our gas turbines going towards the self-generation project.
Further, our heat recovery modules are custom designed to meet the specific operating requirements and specific performance goals of our customers. With this customization comes inherent risk of designing a solution specific to a given customer since there is very little secondhand value in the finished product should the customer be unable to pay on time or in full. The typical production cycle between purchase and completion and delivery of a module can be six to eighteen months, with defined payment milestones. Should a customer face financial hardship over the course of this long build cycle, we may incur financial losses should milestone payments not be made on time or loss of revenue should the customer not be able to make full payment and take delivery of the finished heat exchanger module.
Our credit procedures and policies may not be adequate to fully reduce customer credit risk. If we are unable to adequately assess the creditworthiness of existing or future customers or unanticipated deterioration in their creditworthiness, any resulting increase in nonpayment or nonperformance by them and our inability to re-market or otherwise use our equipment could adversely affect our financial results.
Variations in the spread between available fuel for self-power generation and otherwise available electricity prices, may adversely affect our revenue, profitability, cash flows and growth.
Our economic value proposition to our C&I customers is premised on the financial savings they would achieve by self-generating a portion of the electricity and heat that they would otherwise receive from their utilities. This value proposition is subject to risk in at least three ways:
First, our turbine products typically run on natural gas as the input fuel. Unless our units are run on available, waste gas or some alternative fuel source (e.g. propane or hydrogen), an increase in the price of natural gas will produce less cost savings for our customers. Therefore, the economic value of our power generation products depends largely on the spread between natural gas fuel and electricity prices or other alternative distributed generation solutions. While electricity rates have historically increased steadily every year in most states in the U.S., declining electric utility rates would adversely affect the savings produced by self-generation by increasing the payback period for customers who invest the upfront capital in their onsite generation plant. Similarly, increased prices or greater variability in the price of natural gas could adversely affect the predicted cost savings of a self-generation project and, due in part to the unpredictable nature of the cost savings, could cause our customers to forego the investment into producing their own onsite energy.
Second, electric utilities could offer rate reductions to its C&I customers, in response to the competition from distributed energy solutions, including from us. If electric utilities offer price concessions that result in lower or more predictable utility bills over time, C&I customers may find that the cost savings generated by our products may be less than the cost savings generated by these price concessions.
Third, we compete with alternative distributed generation solutions, including gas-fueled engines, gas-fueled fuel cells and renewable sources of energy such as wind and solar power. If the cost of alternative distributed generation solutions decline in the future, particularly for baseload distributed energy solutions such as the pairing of intermittent solar power and battery storage solutions, then the potential cost savings produced by these alternative distributed generation solutions could be greater than the potential cost savings products by our products.
Utility companies may resist the adoption of distributed generation and could impose customer fees or interconnection requirements on our customers that could make our products less desirable.
Electric utilities may impose measures that make it more difficult for its customers to decrease their reliance on the utility by self-generating a portion of its energy. The vast majority of our customers who utilize our gas turbines for self-generation for a portion of their baseload power still rely on the utility for
 
16

 
additional power supply in a given month. The local electric utility may impose “departing load,” “standby,” or other charges, including power factor charges, on our customers in connection with their acquisition of our gas turbines, the amounts of which are outside of our control and which may have a material impact on the economic benefit of our gas turbines to our customers.
In some instances, an interconnect permit is required at the outset of the project installation. Based on the varying requirements of the local utilities around interconnection, the associated cost and timing can be unpredictable and in some cases unviable for the self-generation project to move forward into operation.
The distributed generation market is highly competitive. Competing solutions for distributed energy include renewables such as solar, wind and storage, gas-fired reciprocating engines, fuel cells and other gas turbines, any or all which might be perceived as superior to our technology, for economic, ecological or other reasons.
Within our O&G addressable market, we face competition from other technologies that can provide remote, onsite power in what is typically an off-grid application. The most direct competition to our oilfield leasing solution are regional rental businesses that own and operate a fleet of diesel and gas reciprocating engines. Competing rental companies include Gravity, Baseline, Mesa, Moser and Aggreko. The OEM equipment providers of these engines are large, well established companies such as Caterpillar, Cummins, MAN and Doosan. While we believe we have a differentiating and superior technology in our proprietary turbine technology for various remote oilfield power applications, competing rental companies in partnership with their large engine OEM providers have extensive manufacturing, field service and financial resources that creates intense competition in the form of large available supply capacity and highly competitive pricing to our customer base.
Within our CHP addressable market for the C&I sector, we face intense competition from a wide variety of distributed generation sources that can allow businesses to self-generate a portion of their energy demand. These competing solutions include diesel and gas-fueled reciprocating engines, fuel cells and other small-scale gas turbines. They also include intermittent renewable energy such as solar and wind power, which traditionally cannot provide 24/7 baseload power to commercial and industrial customers. However, the adoption of battery storage technology paired with intermittent renewables could emerge as a viable and proven baseload self-generation solution in the future and could thus become direct competition to our baseload energy solution. Our competitors include several well-known companies that have substantially greater resources than we do and have established manufacturing and global field service organizations.
Our failure to adequately protect our intellectual property rights could impair our ability to compete effectively or defend ourselves from litigation, which could harm our business, financial condition, and results of operations.
Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, trademark, and trade secret laws, as well as confidentiality and non-disclosure agreements, and other contractual protections, to protect our technologies and proprietary know-how, all of which offer only limited protection. The steps we have taken to protect our intellectual property rights may not be adequate to prevent the misappropriation, infringement, or other violation of our proprietary information or intellectual property rights, and our ability to prevent misappropriation, infringement, or other violation is uncertain, particularly in countries outside of the U.S.
We have nine issued U.S. patents (expiring generally between 2021 and 2037), 15 patents issued in foreign countries (expiring generally between 2024 and 2037), and one patent application pending internationally. There can be no assurance that the patent application will issue as a granted patent, and even if it does issue, the patent claims may be insufficient to prevent third parties from utilizing our technologies. We cannot assure you that the scope of the rights granted to us will be meaningful or provide us with any commercial advantage. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Further, our foreign patent protection is less comprehensive than our U.S. patent protection and may not protect our intellectual property rights in some countries where our products are sold or may be sold in the future. Many U.S.-based companies have encountered substantial third-party intellectual property infringement in foreign countries.
 
17

 
Even if foreign patents are granted, effective enforcement in foreign countries may not be available. We have ceased using certain of our patents that we no longer view as being useful.
We believe that the success of our business depends more on proprietary technology, information and processes, and know-how than on our patents or trademarks. Much of our proprietary information and technology related to manufacturing processes is not patented and may not be patentable. As such, we generally rely on trade secret protection with respect to our processes and software. While we believe our technology is difficult to reverse engineer, we cannot assure you that our competitors will not be able to do so.
In addition, we also rely on contractual protections with our customers, suppliers, distributors, employees, and consultants, and we implement security measures designed to protect our trade secrets and know-how. However, we cannot assure you that we have entered into these agreements with every such party, that these contractual protections and security measures will not be breached, that we will have adequate remedies for a breach, or that our customers, suppliers, distributors, employees, or consultants will not assert rights to intellectual property or damages arising out of these contracts.
We may in the future need to initiate infringement claims or litigation in order to try to protect or enforce our intellectual property rights. Litigation, whether we are a plaintiff or a defendant, can be expensive and time-consuming and may divert the efforts of our management and other personnel, which could harm our business, whether or not the litigation results in a determination favorable to us. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Further, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims against us. If we are unable to meaningfully protect our proprietary rights or if third parties independently develop or gain access to our or similar technologies, our business, financial condition, results of operations, reputation, and competitive position could be harmed.
Our products are exposed to operating conditions that may require us to repair and replace critical components ahead of their scheduled replacement cycle, which adds cost that we must cover under the terms of our purchase warranties, service care contracts and leasing contracts.
As our fleet of rental equipment ages, the cost of maintaining that equipment, if not replaced within a certain period of time, generally increases. Determining the optimal age for our rental fleet equipment is subjective and requires considerable estimates by management. We have made estimates regarding the relationship between the age of our rental fleet equipment, and the maintenance and repair costs, and the market value of used equipment. Our future operating results could be adversely affected because our maintenance and repair costs may be higher than estimated and market values of used equipment may fluctuate.
In addition, our products are exposed to operating conditions that may require us to repair and replace critical components ahead of scheduled replacement times, which increases our operating costs. We are required by our service care contracts, leasing contracts, and product warranty to repair and replace these components if they are covered by the terms of the applicable contract or warranty and we incur the full costs of repair or replacement. While we have improved our products with each successive generation and while our service care and leasing contracts have restrictions on misuse of our products, there is no guarantee that these maintenance and repair costs will consistently be at or below budgeted amounts.
Our turbine products use inherently dangerous, flammable fuels, and operate at high temperatures and speeds, each of which could subject our business to product liability claims.
Our business exposes us to potential product liability claims that are inherent in products that operate at high temperatures and/or speeds or use hydrogen. Our products utilize fuels such as natural gas. The fuels we use are combustible and may be toxic. In addition, our turbine products operate at high voltage, temperatures, speeds, and pressure and also use corrosive material, which could expose us to potential liability claims. Although we have incorporated a robust design and redundant safety features in our turbine products, we cannot guarantee that there will not be accidents. Any accidents involving our products or other hydrogen-using products could materially impede widespread market acceptance and demand for our
 
18

 
products. In addition, we might be held responsible for damages beyond the scope of our insurance coverage. We also cannot ensure you that we will be able to maintain adequate insurance coverage on acceptable terms.
We anticipate engineering our products to run on fuel blends with a greater percentage of hydrogen. However, if we are unsuccessful or if there is an insufficient supply of hydrogen, our sales growth could be adversely affected.
We believe our turbines can currently run on a fuel blend comprising up to 30% hydrogen, and we plan to engineer our turbines to accept fuel blends containing higher percentages of hydrogen, including accepting only hydrogen. As such, we are currently dependent upon, and in the future expect to be more dependent upon, the availability of cost-effective hydrogen fuel blends for the profitable commercialization of our products and services. If these fuels are not readily available or if their prices are such that energy produced by our products costs more than energy provided by other sources, then our products could be less attractive to potential users and our products’ value proposition could be negatively affected. There may be an insufficient supply of hydrogen for this market that could negatively affect our sales and deployment of our products and services. In addition, while we believe we have the engineering capabilities to succeed in developing and manufacturing turbines that can accept only hydrogen as a fuel source, we are unable to adequately forecast the timing and cost requirements in order to sell these products to our customers. We may also ultimately be unable to develop and manufacture products that are suitable for customers. There can be no assurances that we achieve market acceptance of these products, or that products and technologies developed by others will not render our products or technologies obsolete or uncompetitive.
Our field service operations are subject to environmental and occupational health and safety laws and regulations, as well as safety requirements outlined in customer MSAs, that may expose us to material costs and liabilities.
Many of our oilfield customers require us to execute their Master Service Agreement (“MSA”) before entering into any leasing or service care contracts. These MSAs and other agreements typically require that we follow strict safety protocol while conducting onsite operations, maintain sufficient insurance levels, and in some cases agree to a maximum amount of liquidated damages. In addition to the environmental and safety requirements of our customers, we must also adhere to federal, state and local environmental and safety measures across our field service operations. Environmental laws impose obligations and liability for the cleanup of properties affected by hazardous substance spills or releases. These liabilities can be imposed on the parties generating or disposing of such substances or the operator of the affected property, often without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous substances. Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if a contaminated property is not currently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property.
We may not be in strict compliance with all federal, state and local environmental and occupational health and safety laws and regulations at all times. We are subject to potentially material civil or criminal fines or penalties if we fail to comply with any of these requirements. We have made and will continue to make capital and other expenditures in order to comply with these laws and regulations. However, the requirements of these laws and regulations are complex, change frequently, and could become more stringent in the future. It is possible that these requirements will change or that liabilities will arise in the future in a manner that could adversely affect our business, financial condition and results of operations.
If we are unable to attract and retain key employees and hire qualified management, technical, engineering, and sales personnel, our ability to compete and successfully grow our business could be harmed.
We believe that our success and our ability to reach our strategic objectives are highly dependent on the contributions of our key management, technical, engineering, and sales personnel, including Mark Schnepel, our President and Chief Executive Officer, Wes Kimmel, our Chief Financial Officer, and Doug Baltzer, our Chief Commercial Officer. This executive management team has been primarily responsible for determining the strategic direction of our business and for executing its growth strategy and is integral to our brand, culture, product development and the reputation it enjoys with suppliers, distributors, customers
 
19

 
and business partners. In particular, Mr. Schnepel’s involvement in the development and redesign of the turbine is a key component of our technological durability. In addition, Mr. Schnepel and Mr. Baltzer are the primary sales and marketing contacts for our customers.
We cannot assure you that we will be able to successfully attract and retain senior leadership necessary to grow our business. Furthermore, there is increasing competition for talented individuals in our field. Any such departure could be viewed in a negative light by investors and analysts, which may cause the price of our common stock to decline. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our products and services and negatively impact our business, relationship with key customers and suppliers, branding, creative strategies, prospects, and operating results, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. We do not currently carry key-person life insurance for any of our management team.
Our management has expressed substantial doubt about our ability to continue as a going concern without additional capital investment.
The combined consolidated financial statements have been prepared as though we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred operating losses and negative cash flows from operations since inception. As of June 30, 2021, we had an accumulated deficit of approximately $136.1 million. Management expects to continue to incur operating losses and negative cash flows from operations for the remainder of 2021. We have financed our operations to date with proceeds from equity infusions from FPS and drawing down on our credit facility.
If we are unable to successfully complete this offering, we will need to create alternate financing or operational plans to continue as a going concern. There can be no assurance that such alternate financing, if available, can be obtained on acceptable terms. If we are unable to obtain such alternate financing, future operations would need to be scaled back or discontinued.
Accordingly, these factors raise substantial doubt about our ability to continue as a going concern within one year after the date the combined consolidated financial statements are issued. The combined consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.
As of June 30, 2021, we had significant U.S. federal and state net operating loss (“NOL”) carryforwards and U.S. federal and state research and development tax credit carryforwards. These net operating loss and U.S. federal tax credit carryforwards could expire unused and/or be unavailable to offset future income tax liabilities. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We performed a Section 382 analysis as of December 31, 2020 to determine if an ownership change has occurred. It has been preliminarily determined that ownership changes occurred under these rules, and an annual limitation on the use of pre-ownership change NOL carryforwards and certain other losses and/or credits has been applied. The preliminary analysis indicates $48.4 million of federal net operating loss carryforwards as of December 31, 2020 will expire unutilized. In addition, we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control and which could further limit our ability to utilize NOL carryforwards.
On March 27, 2020, the CARES Act was signed into law as a result of the COVID-19 pandemic. The new legislation includes a number of income tax provisions applicable to individuals and businesses. In addition, governments around the world have enacted or implemented various forms of tax relief measures
 
20

 
in response to the economic conditions in the wake of the COVID-19 pandemic. Although, due to our historical net operating losses incurred in the U.S., the CARES Act did not have a material impact on our combined consolidated financial statements as of December 31, 2020 and June 30, 2021, we continue to examine the elements of the CARES Act and other changes in tax laws and regulations and the impact they may have on us in the future.
Our operating history is characterized by net losses. We anticipate further losses and we may never become profitable.
Since inception, we have incurred annual operating losses. We expect this trend to continue until we can sell a sufficient number of units and achieve a cost structure to become profitable. We have made, and expect to continue making, significant investments to further develop and expand our technology suite and broaden our product base. These investments may not result in increased revenue or growth on a timely basis or at all. Even if we do achieve profitability, we may be unable to increase our sales and sustain or increase our profitability in the future.
Our rental fleet is subject to residual value risk upon disposition.
The market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:

the market price for new equipment of a like kind;

wear and tear on the equipment relative to its age;

the time of year that it is sold (prices are generally higher during the construction season);

worldwide and domestic demands for used equipment;

the supply of used equipment on the market; and

general economic conditions.
We include in operating income the difference between the sales price and the depreciated value of an item of equipment sold. We cannot assure you that used equipment selling prices will not decline. Any significant decline in the selling prices for used equipment could adversely affect our business, financial condition, results of operations or cash flows.
We have identified material weaknesses in our internal control over financial reporting and our information technology environment. We may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our combined consolidated financial statements. If we fail to remediate any material weaknesses or if we fail to establish and maintain effective control over financial reporting, investors may lose confidence in our ability to provide reliable and timely financial reports and the value of our common stock may decline.
Pursuant to Section 404 of Sarbanes Oxley, we will in the future be required to include in our annual reports on Form 10-K our assessment of the effectiveness of our internal controls over financial reporting. This assessment will include disclosure of any material weaknesses identified by our management in our internal controls over financial reporting. We may in the future identify material weaknesses in our internal controls over financial reporting that we have not discovered to date. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our securities.
As a private emerging growth company, we have not been required to document and test our internal controls over financial reporting nor was our management required to certify the effectiveness of internal controls and our auditors were not required to opine on the effectiveness of their internal control over financial reporting. Ensuring that we have adequate internal financial and accounting controls and procedures
 
21

 
in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort. Our accounting and finance department is small, with limited expertise in the areas of financial reporting and SEC requirements. Thus, we have a need for additional resources within the accounting and finance functions due to the requirement to produce timely financial information and to ensure the level of segregation of duties customary for a U.S. public company. We have identified material weaknesses in our internal financial and accounting controls and procedures, including an insufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements and ineffective information technology controls related to access security, segregation of duties and governance of financial systems. Furthermore, we do not have a formal risk assessment or fraud risk assessment and therefore, have not designed controls to mitigate risks to the business. We have assessed the deficiencies in controls and have concluded that we need to implement an enterprise resource planning information management system to provide for greater depth and breadth of functionality and effectively manage our business data, communications, supply chain, order entry and fulfillment, inventory and warehouse management, financial reporting and other business processes. Further, we have identified the need to implement additional information technology systems to ensure that an authorized user can only access privileges necessary to perform his or her assigned duties and prevent improper segregation of duties. The actions we have taken and plans we expect to pursue are subject to continued implementation, subject to the availability of qualified professionals. While we have plans to remediate these weaknesses, we cannot assure you that we will be able to do so.
Even after establishing internal controls, our management does not expect that our internal controls ever will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. No evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected. Our failure to remediate the material weaknesses identified above or the identification of additional material weaknesses in the future, could adversely affect our ability to report financial information, including our filing of quarterly or annual reports with the SEC on a timely and accurate basis. Moreover, our failure to remediate the material weakness identified above or the identification of additional material weaknesses could prohibit us from producing timely and accurate financial statements, which may adversely affect our the market price of shares of our common stock and we may be unable to maintain compliance with Nasdaq listing requirements.
We need to implement an Enterprise Resource Planning (“ERP”) system. Significant additional costs, cost overruns and delays in connection with the implementation of an ERP system may adversely affect results of operations.
We do not have a current ERP system and we are in the process of implementing one company-wide. This is a lengthy and expensive process that will result in a diversion of resources from other operations. Any disruptions, delays or deficiencies in the design and/or implementation of the new ERP system, particularly any disruptions, delays or deficiencies that impact operations, could adversely affect our ability to run and manage our business effectively.
The implementation of an ERP system has involved and will continue to involve substantial expenditures on system hardware and software, as well as design, development and implementation activities. There can be no assurance that other cost overruns relating to the ERP system will not occur. Our business and results of operations may be adversely affected if we experience operating problems, additional costs, or cost overruns during the ERP implementation process.
At many of our customers’ oil production sites, we utilize the abundant associated gas that is otherwise flared as our primary input fuel. Should midstream infrastructure be put into place that allows the associated gas to be processed and transported to end markets, it would curtail our volume of input fuel for onsite power generation and adversely affect our costs or ability to meet the customer’s power generation demand.
The increased annual volumes of flaring recorded in the upstream O&G industry in recent years is in large part due to oil production – and the byproduct associated petroleum gas that comes from oil
 
22

 
production – outpacing the ability to build the appropriate amount of midstream gas infrastructure required to gather, process and transport the associated petroleum gas to commercial markets. Should the substantial upfront investment be made to expand midstream gas infrastructure and in effect provide a greater outlet for the associated petroleum gas, it could curtail the supply of onsite fuel we use to power our customers’ operations and adversely affect our operating costs.
We focus geographically in areas of oil producing regions where grid power is unreliable, insufficient or absent altogether. The buildout and expansion of utility power over time may lead to certain customers opting to connect their production sites to utility power should it becomes available and sufficient to meet the onsite demand.
The demand for onsite power generation for oil production wells can be both temporary and long-term in nature. While often times we can provide power generation to a new wellsite more quickly than power can be made available to the wellsite from the local electricity grid, we face the threat of the utility grid expanding geographically over time to reach the wellsite power demand. Given the long-term nature of multi-well oil pads that can expect to produce oil for well over a decade, regional utilities may be incentivized to invest in transmission and distribution upgrades to their system in order to compete for the supply of power to these well sites.
Risk Factors Relating to Financing Matters
Our credit facility subjects FLPS and its subsidiaries to financial and other restrictive covenants. These restrictions may limit our operational or financial flexibility and could subject us to potential defaults under the credit facility. In addition, any default could result in foreclosure.
On February 8, 2019, FLPS entered into a senior secured revolving credit facility with Texas Capital Bank, National Association (“TCB”). We subsequently amended and restated our original revolving credit facility by entering into a Third Amendment to Credit Agreement, dated December 22, 2020 (“Credit Facility”) to add Flex Leasing Power and Service ULC, a Canadian unlimited liability company, an indirect wholly-owned subsidiary of FLPS (“FLPS Canada” and together with FLPS, the “Borrowers”) as an additional borrower. The commitment amount is for $30.0 million and borrowing availability is based on a borrowing base calculation of eligible assets and other conditions. Interest is defined based on a tiered leverage ratio and an applicable margin of (i) 1.50% to 2.00% above the base rate for base rate loans, or (ii) 2.50% to 3.00% above the adjusted Eurodollar rate for Eurodollar rate loans. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources – Senior Secured Credit Facility.” As of June 30, 2021, borrowings outstanding under the Credit Facility amounted to $23.0 million.
The Credit Facility requires the Borrowers to make monthly interest payments. Should the Borrowers’ cash flow from operations be negatively impacted in a significant manner, they may not have sufficient cash available to cover interest payments, which would trigger an event of default unless otherwise cured. The Credit Facility matures on February 8, 2024 at which point the amount outstanding is due in full, unless the Borrowers refinance the Credit Facility prior to this date, which they may not be successful in executing. The Credit Facility is secured by a first priority lien on substantially all of the assets of the Borrowers, and guaranteed by FPS and Flex Power Co., a wholly-owned subsidiary of FLPS. If the Borrowers are unable to repay amounts outstanding under the Credit Facility, TCB could foreclose on the collateral granted thereunder to secure the indebtedness.
The Borrowers are subject to financial covenants of a maximum leverage ratio and minimum fixed charge coverage ratio to be tested quarterly. As of December 31, 2020 and as of March 31, 2021, the Borrowers’ leverage ratio was in excess of the maximum leverage ratio permitted under the Credit Facility. In connection with an exercise of the Borrowers’ equity cure right under the Credit Facility, TCB has waived any event of default with respect to this noncompliance. Should they fail to comply with the quarterly maintenance covenants, remedies would need to be implemented in order to avoid an event of default, including equity cure rights or a waiver by TCB, which we cannot guarantee will be granted. As of June 30, 2021, the Borrowers were in compliance with financial covenants. The Borrowers are also subject to certain negative covenants, including restrictions on their ability to incur additional indebtedness, create
 
23

 
liens, pay dividends, make certain investments or material changes in their business, engage in transactions with affiliates, conduct asset sales or otherwise dispose of the Borrowers’ assets. These restrictions may limit their operational or financial flexibility and could lead to potential defaults under the Credit Facility, which could result in foreclosure. In anticipation of the Contribution Transaction and this offering, we are in the process of negotiating a modification to the Credit Facility. As part of this modification, we expect that FGS will become an additional guarantor with respect to the Credit Facility subject to the same obligations and restrictions applicable to FPS thereunder, but that FGS will not otherwise be subject to the covenants and restrictions applicable to the Borrowers.
The Borrowers are also subject to routine asset appraisal that factors into the borrowing base calculation of the Credit Facility. Should the Borrowers’ outstanding indebtedness exceed the borrowing base at any point in time, the amount of indebtedness in excess of the borrowing base will become due immediately, and the Borrowers may not have sufficient liquidity to make required repayment at that time.
Our substantial indebtedness could limit our opportunities for growth.
We have a significant amount of indebtedness outstanding. As of June 30, 2021, we had total outstanding indebtedness of approximately $23.2 million, consisting of $23.0 million outstanding under the Credit Facility with TCB and $0.2 million in capital lease obligations. As of June 30, 2021, there was borrowing availability under the Credit Facility of approximately $2.9 million.
Our substantial indebtedness could have important consequences. For example, it could:

increase our vulnerability to general adverse economic, industry and competitive conditions;

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

place us at a competitive disadvantage compared to our competitors that have less debt; and

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes.
We expect to use cash flow from operations and borrowings under the Credit Facility to meet our current and future financial obligations, including funding our operations, debt service and capital expenditures. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, which could result in our inability to repay indebtedness, or to fund other liquidity needs. If we do not have enough capital, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, including the Credit Facility, on or before maturity. We cannot make any assurances that we will be able to accomplish any of these alternatives on terms acceptable to us, or at all. In addition, the terms of existing or future indebtedness, including the Credit Facility, may limit our ability to pursue any of these alternatives.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Credit Facility are at variable rates of interest and expose us to interest rate risk. As such, our results of operations are sensitive to movements in interest rates. There are many economic factors outside our control that have in the past and may, in the future, impact rates of interest including publicly announced indices that underlie the interest obligations related to a certain portion of our debt. Currently, a portion of our outstanding borrowings under the Credit Facility are borrowed at LIBOR plus an applicable margin and it is unclear how increased regulatory oversight and changes in the method for
 
24

 
determining LIBOR may affect our results of operations or financial conditions. LIBOR is an interest rate benchmark used as a reference rate for a wide range of financial transactions, including derivatives and loans. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop compelling banks to submit LIBOR rates after 2021. On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted. At this time, we cannot predict the future impact of a departure from LIBOR as a reference rate. The expected discontinuation of LIBOR may require us to amend the Credit Facility. Also, factors that impact interest rates include governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our results of operations would be adversely impacted.
The agreement governing FPS’ Series B Preferred Units restricts our business and our ability to engage in certain corporate and financial transactions or in other businesses.
Under the terms of FPS’ Series B Preferred Unit issuance, FPS has agreed to certain covenants that our board believes restricts our ability to do business and enter into certain financial transactions, including restricting FPS’ and our ability to incur, guarantee or otherwise permit to exist any indebtedness for borrowed money that is senior in right of payment to the Series B Preferred Units other than senior indebtedness in an amount not to exceed $50.0 million. As of June 30, 2021, the amount of senior indebtedness (as defined therein) totaled approximately $48.5 million, thus limiting the amount of availability to approximately $1.5 million of additional senior indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources – Series B and B-1 Preferred Equity at FlexEnergy Power Solutions, LLC.
Risk Factors Relating to Ownership of Our Common Stock
Our largest stockholder, FPS, has a series of senior secured notes that are currently due in full at October 31, 2022, that if not extended or renegotiated, could cause FPS to sell shares of our common stock, which could adversely affect our stock price.
Since December 2015, FPS has entered into multiple funding rounds with the holders (the “FPS Noteholders”) of senior secured promissory notes issued by FPS (the “Notes”). As part of the Contribution Transaction, FPS will pledge its shares of FGS in favor of the FPS Noteholders and we will agree not to grant any further security interests in our or our subsidiaries’ assets so long as the Notes are outstanding, except for certain permitted encumbrances similar in nature to those permitted under the Credit Facility, without the prior written consent of FPS.
As of June 30, 2021, the total amount outstanding under the Notes was $25.5 million. All Notes are due and payable in full on October 31, 2022, unless extended or refinanced prior to this date, which FPS may not be successful in executing. If the Notes are not extended, refinanced or repaid prior to October 31, 2022, FPS may be forced to sell sufficient shares of our common stock to pay the amount outstanding under the Notes, which could cause the trading price of our common stock to decline significantly and possibly below the offering price. Similarly, if FPS is unable to repay the amount outstanding under the Notes, the FPS Noteholders could foreclose on and sell sufficient shares of our common stock to pay the amount outstanding under the Notes, which could cause the trading price of our common stock to decline significantly and possibly below the offering price.
 
25

 
FPS’ Series B and Series B-1 Units have redemption rights that, if exercised, could cause FPS to sell shares of our common stock to pay for the redemption, which could adversely affect our stock price.
FPS’ Series B Units may be called for redemption by the holders at any time by delivering written notice to FPS. The aggregate redemption price for FPS’ Series B Units is $37.2 million as of June 30, 2021. FPS’ Series B-1 Units may be called for redemption by the holders at any time by delivering written notice to FPS. The aggregate redemption price for FPS’ Series B-1 Units is $18.0 million as of June 30, 2021. Following a redemption notice, FPS must use commercially reasonable efforts, as soon as is reasonably possible, to redeem the Series B or Series B-1 Units, as applicable. If the holders of FPS’ Series B or Series B-1 Units exercise their redemption rights, FPS may be required to sell sufficient shares of our common stock (after the expiration of the lock-up period described in “Shares Eligible for Future Sale” and subject to Rule 144) to pay the redemption price. If not redeemed within 180 days, the Series B accrual rate of 12% and Series B-1 accrual rate of 8%, as applicable, incrementally increase by up to an additional 3%. If FPS sells substantial amounts of our common stock (for example, if all or large numbers of the Series B and Series B-1 Units are called for redemption) the trading price of our common stock could decline significantly and could decline below the offering price.
After this offering, voting control with respect to our company will remain concentrated in the hands of FPS. FPS will continue to be able to exercise significant influence on us.
Following the completion of the offering, FPS is expected to hold       % of our total outstanding common stock, or       % if the over-allotment option is exercised in full. As such, FPS will have significant control over the election of the members of our board of directors and thereby may significantly influence our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, the incurrence or modification of debt, amendments to our amended and restated certificate of incorporation (“Certificate of Incorporation”) and our amended and restated bylaws (“Bylaws”), and the entering into of extraordinary transactions, and FPS’s interests may not in all cases be aligned with those of other stockholders.
In the event of a conflict between our interests and the interests of FPS, we have adopted policies and procedures, specifically a Code of Ethics and Business Conduct and, included in our Audit Committee Charter, a Related Party Transactions Policy, to identify, review, consider and approve these conflicts of interest. In general, if an affiliate of a director, executive officer or significant stockholder, including FPS, intends to engage in a transaction involving our company, that director, executive officer or significant stockholder must report the transaction for consideration and approval by our audit committee. However, there are no assurances that our efforts and policies to eliminate the potential impacts of conflicts of interest will be effective.
This concentrated control will limit your ability to influence corporate matters for the foreseeable future and potentially in perpetuity. This concentrated control could also discourage a potential investor from acquiring our common stock and might harm the market price of our common stock. We cannot predict whether this concentrated control will result in a lower or more volatile market price of our common stock or in adverse publicity or other adverse consequences.
We are a “controlled company” within the meaning of the rules of Nasdaq and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.
Following the completion of this offering, FPS will continue to own in excess of 50% of the voting power of our outstanding share capital. As a result, we are a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under the rules of Nasdaq, a company of which more than 50% of the outstanding voting power is held by an individual, group or another company is a “controlled company” and is exempt from certain stock exchange corporate governance requirements, including:

the requirement that a majority of the board of directors consists of independent directors;

the requirement that a listed company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
 
26

 

the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

the requirement for an annual performance evaluation of the nominating and governance committee and compensation committee.
We currently have a board composed entirely of independent directors (for all purposes other than audit committee independence requirements) and thus our nominating and corporate governance and compensation committees are composed entirely of independent directors. If we decide to avail ourselves of any of the controlled company exemptions, you would not have the same protections afforded to stockholders of companies that are subject to all of the stock exchange corporate governance requirements.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
Provisions in our Certificate of Incorporation and Bylaws, as well as provision of the DGCL, may have the effect of delaying or preventing a change of control or changes in our management. Our Certificate of Incorporation and Bylaws include provisions that:

authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

once FPS no longer holds at least 50% of the voting power of the Company, require that any action to be taken by our stockholders be effectuated at a duly called annual or special meeting and not by written consent;

specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;

establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

prohibit cumulative voting in the election of directors;

provide that vacancies on our board of directors may be filled by a majority of directors then in office, even if less than a quorum; and

once FPS no longer holds at least 50% of the voting power of the Company, require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of capital stock to amend our Bylaws and certain provisions of our Certificate of Incorporation.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. Any delay or prevention of a change of control transaction or changes in our management could cause our stock price to decline.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things: (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of Sarbanes Oxley; (ii) comply with any new requirements if adopted by the PCAOB requiring mandatory audit
 
27

 
firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; (iii) provide certain disclosures regarding executive compensation required of larger public companies; or (iv) hold nonbinding advisory votes on executive compensation. In addition, since we are an emerging growth company that is a newly public company, we will not be required to provide management’s assessment of the effectiveness of our system of internal control over financial reporting until we are required to file our Form 10-K.
We may remain an emerging growth company until December 31, 2026, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700.0 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common stock to be less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
As a “smaller reporting company,” certain reduced disclosure and other requirements will be available to us after we are no longer an emerging growth company.
We are also a “smaller reporting company” pursuant to the Exchange Act. Some of the reduced disclosure and other requirements available to us as a result of the JOBS Act may continue to be available to us after we are no longer an emerging growth company pursuant to the JOBS Act but remain a “smaller reporting company” pursuant to the Exchange Act. As a “smaller reporting company” we are not required to: (i) have an auditor report regarding our internal controls of financial reporting pursuant to Section 404(b) of Sarbanes Oxley; (ii) present more than two years audited financial statements in our registration statement and annual reports on Form 10-K and present selected financial data in such registration statements and annual reports; (iii) make risk factor disclosures in our annual reports of Form 10-K; and (iv) make certain otherwise required disclosures in our annual reports on Form 10-K and quarterly reports on Form 10-Q.
We have not been managed as a public company, and our current resources may not be sufficient to fulfill our public company obligations.
As a privately held company, we had not been required to comply with a number of corporate governance and financial reporting practices and policies required for a public company listed on a national stock exchange. As a public, listed company, we will incur significant legal, accounting and other expenses that we were not required to incur in the recent past, particularly after we are no longer an “emerging growth company,” as defined under the JOBS Act. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) and the rules and regulations promulgated and to be promulgated thereunder, as well as under Sarbanes Oxley, the JOBS Act, and the rules and regulations of the SEC and Nasdaq have created uncertainty for public companies and increased the costs and the time that our board of directors and management will need to devote to complying with these rules and regulations. We expect these rules and regulations to increase our legal and financial compliance costs and lead to a diversion of management time and attention from revenue-generating activities.
Furthermore, the need to establish the corporate infrastructure necessary for a public, listed company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal control over financial reporting, accounting systems disclosure controls and procedures, auditing functions and other procedures related to public reporting in order to meet our reporting obligations as a public company.
Nasdaq may delist our common stock from trading on its exchange, which could adversely affect the market liquidity of our common stock, limit investors’ ability to make transactions in our common stock and adversely affect our ability to raise additional funds.
We cannot assure you that our common stock will continue to be listed on Nasdaq after this offering. In order to continue listing our common stock on Nasdaq, we must maintain certain financial, distribution
 
28

 
and share price levels. Generally, following our initial public offering, we must maintain a minimum amount in stockholders’ equity (generally $2.5 million) and a minimum number of holders of our common stock (generally 300 public holders).
If Nasdaq delists our common stock from trading on its exchange and we are not able to list our securities on another national securities exchange, we and our stockholders could face significant material adverse consequences, including:

a limited availability of market quotations for our securities;

reduced liquidity for our securities;

a determination that our common stock is “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock;

a limited amount of news and analyst coverage; and

a decreased ability to issue additional securities or obtain additional financing in the future.
We have no present intention to pay dividends on our common stock in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our common stock, as applicable, appreciates.
We have never declared or paid any cash dividends on our common stock and we have no present intention to pay dividends in the foreseeable future. Any recommendation by our board of directors to pay dividends will depend on many factors, including our financial condition (including losses carried forward), results of operations, legal requirements and other factors. If the price of our common stock declines before we pay dividends, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.
Further, although the Credit Facility does not prohibit us from declaring or paying dividends, the Credit Facility does prohibit FLPS from making further distributions to us unless certain conditions are met (see Note 11 to our Notes to Combined Consolidated Financial Statements included elsewhere in this prospectus). FLPS is currently our primary source of positive operating cash flow. As such, if the conditions are not met and FLPS is prohibited from making further distributions to us, then any cash available at FLPS cannot be passed along to you in the form of dividends.
Future sales of common stock by us, FPS, RNS or TRF could depress the market price of our common stock.
If we, FPS, RNS or TRF issues, sells, or indicates an intent to issue or sell, substantial amounts of common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the offering price. Upon completion of this offering, all of the outstanding shares of common stock other than those sold in this offering are subject to the 180-day contractual lock-up referred to above. The representatives of the underwriters may permit us, FPS, RNS or TRF to issue or sell shares prior to the expiration of the lock-up agreements. See “Underwriting.”
After the lock-up agreements pertaining to this offering expire,             additional shares will be eligible for sale in the public market, all of which shares are or will be held by FPS, RNS or TRF and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). In addition, shares reserved for future issuance under our equity incentive plan will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations.
After expiration of the 180-day lock-up period and upon our eligibility to use Form S-3 for secondary offerings, FPS, RNS or TRF may request that shares of our common stock issued to them in the Contribution Agreement or transferred to them in the SAFE Transaction be registered for public resale. If FPS, RNS or
 
29

 
TRF sells a significant number of shares of our common stock through such a resale registration, the price of our common stock could be adversely affected.
Following this offering, we intend to file one or more registration statements with the SEC covering shares available for future issuance under our equity incentive plan. Upon effectiveness of those registration statements, any shares subsequently issued under the plan will be eligible for sale in the public market, except to the extent that they are restricted by the lock-up agreements referred to above and subject to compliance with Rule 144 in the case of our affiliates. Sales of a large number of the shares issued under the plan in the public market could adversely affect the market price of our common stock.
See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline substantially.
Our Certificate of Incorporation includes a forum selection clause, which could discourage claims or limit stockholders’ ability to make a claim against us, our directors, officers, other employees or stockholders.
Our Certificate of Incorporation includes a forum selection clause. Our Certificate of Incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any stockholder (including a beneficial owner) to bring any: (i) derivative action or proceeding brought on our behalf; (ii) action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; (iii) action asserting a claim against us, our directors, officers or employees arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or our Certificate of Incorporation or Bylaws; or (iv) action asserting a claim against us, our directors, officers or employees governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim (A) as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following the determination), (B) that is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or (C) for which the Court of Chancery does not have subject matter jurisdiction. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the U.S. shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under federal securities laws, including the Securities Act. We note however, that there is uncertainty as to whether a court would enforce this provision and that investors cannot waive compliance with federal securities laws and the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. This forum selection clause may discourage claims or limit stockholders’ ability to submit claims in a judicial forum that they find favorable and may result in additional costs for a stockholder seeking to bring a claim. While we believe the risk of a court declining to enforce this forum selection clause is low, if a court were to determine the forum selection clause to be inapplicable or unenforceable in an action, we may incur additional costs in conjunction with our efforts to resolve the dispute in an alternative jurisdiction, which could have a negative impact on our results of operations and financial condition. Notwithstanding the foregoing, the forum selection clause will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the U.S. shall be the sole and exclusive forum.
As a new investor, you will experience immediate and substantial dilution in the book value of the shares that you purchase in this offering.
The public offering price is substantially higher than the as adjusted net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore, if you purchased our common stock in this offering at the public offering price of $       per share, you would experience an immediate dilution of $       per share, the difference between the price per share you pay for our common stock and our as adjusted net tangible book value per share as of June 30, 2021, after giving effect to the issuance by us of             shares of our common stock
 
30

 
in this offering, which does not include the underwriters’ option to purchase additional shares from us. This dilution is due in large part to the fact that our earlier investors paid substantially less than the offering price when they purchased their shares. You will experience additional dilution if we issue additional shares below the public offering price. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”
We will incur significantly increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.
We will incur significant legal, accounting, insurance and other expenses as a result of being a public company. Dodd-Frank and Sarbanes Oxley, as well as related rules implemented by the SEC, have required changes in corporate governance practices of public companies. In addition, rules that the SEC is implementing or is required to implement pursuant to Dodd-Frank are expected to require additional change. We expect that compliance with these and other similar laws, rules and regulations, including compliance with Section 404 of Sarbanes Oxley, will substantially increase our expenses, including legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and it may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, which may make it more difficult for us to attract and retain qualified persons to serve on the board of directors or as officers. Although the JOBS Act may, for a limited period of time, somewhat lessen the cost of complying with these additional regulatory and other requirements, we nonetheless expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our results of operations and financial condition.
General Risk Factors
The ongoing effects of the COVID-19 pandemic could adversely affect our business, financial condition, results of operations, or cash flows.
In March 2020, we began to monitor the global effects of “COVID-19,” an infectious disease caused by Severe Acute Respiratory Syndrome Coronavirus 2 (“SARS CoV-2”) that was first detected in December 2019. The World Health Organization characterized COVID-19 as a pandemic on March 11, 2020. Thereafter, most U.S. states imposed “stay-at-home” orders on their populations to slow the spread of COVID-19. Governments, public institutions, and other organizations in countries and localities throughout the world have taken and are continuing to take certain emergency measures to combat the spread of COVID-19, including implementation of restrictions on travel and orders that restrict the operations of institutions such as schools and businesses.
In addition, due to domestic and international governmental orders restricting certain activities in response to COVID-19, we have experienced, and may in the future experience, COVID-19 related delays from certain vendors and suppliers, which, in turn, has caused delays in the build out of our leasing fleet and could cause delays in the manufacturing and installation of our products and adversely impact our cash flows and results of operations including revenue. To date, we have been able to offset any delays, but in the future, it may not be possible to find replacement products or supplies, and ongoing delays could affect our business and growth. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential impacts on our business, the alternative energy industry or the global economy as a whole. However, these effects could adversely impact our business, financial condition, results of operations, or cash flows.
Expanding operations internationally could expose us to risks.
Although we currently operate primarily in the U.S., we will seek to expand our business internationally. Our primary focus around international expansion involves identifying key oil producing regions where we can scale an installed base of turbine fleet, either in the form of leasing units or selling and servicing an installed base in collaboration with a local channel partner. Managing any international expansion will
 
31

 
require additional resources. Any expansion internationally could subject our business to risks associated with international operations, including:

conformity with applicable business customs, including translation into foreign languages and associated expenses;

lack of availability of government incentives and subsidies;

challenges in arranging, and availability of, financing for our customers;

difficulties in staffing and managing foreign operations in an environment of diverse culture, laws, and customers, and the increased travel, infrastructure, and legal and compliance costs associated with international operations;

installation challenges that we have not encountered before, which may require the development of a unique model for each country;

compliance with multiple, potentially conflicting and changing governmental laws, regulations, and permitting processes including environmental, banking, employment, tax, privacy, and data protection laws and regulations such as the EU Data Privacy Directive;

compliance with U.S. and foreign anti-bribery laws including the Foreign Corrupt Practices Act;

difficulties in collecting payments in foreign currencies and associated foreign currency exposure; restrictions on repatriation of earnings;

compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and compliance with applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of these tax laws, and potentially adverse tax consequences due to changes in these tax laws; and

regional economic and political conditions.
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful.
We are subject to cyber security risks. If a cyber security incident occurs, we could suffer information theft, data corruption, operational disruption and our business and results of operations could be harmed.
Our customers, and our industry generally, have become more dependent on digital and connected technologies to conduct business. We depend on digital and connected technologies to monitor our turbines, perform many of our services and to process and record financial and operating data, among other things. We also expect to increase our dependence on these technologies as we expand our EaaS offerings. Ensuring the secure and reliable processing, maintenance and transmission of this data is important to our operations and our customers. As cyber security incidents (including deliberate attacks) have increased in number, scope, and sophistication, energy assets (and related networks) may become the targets of more incidents. Our technologies, systems and networks, and those of our customers, vendors, suppliers and other business partners, may become the target of cyberattacks or information security breaches that could result in the loss or destruction of proprietary and other information, or other disruption of business operations. In addition, while we depend on certain business partners to store certain information regarding our customers and employees, these third parties may be a target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, or misuse of sensitive information. Our recourse against these business partners, if any, may be limited. In addition, we, our customers, vendors, and/or business partners may be unable to detect certain breaches (such as unauthorized surveillance) for an extended period of time. Our systems and controls for protecting against cyber security risks, and those used by our business partners, may be insufficient. The loss, misuse, destruction, unauthorized release, gathering, or monitoring of sensitive information result in significant financial losses, loss of customers and business opportunities, reputation damage, litigation (including any damages awarded), regulatory fines, penalties or intervention, reimbursement or other compensatory costs, or otherwise adversely affect our
 
32

 
business, financial condition or results of operations. We will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber security incidents. The reliability and capacity of our systems is critical to our operations. Any difficulties in implementing or integrating new systems or enhancing current systems, or any material disruption in our information technology systems or systems could have an adverse effect on our business and results of operations.
There has been no prior active market for our common stock and an active and liquid market for our common stock may fail to develop, which could harm the market price of our common stock.
Prior to this offering, there has been no active public market for our common stock. Although we have applied to list our common stock on Nasdaq, an active trading market for our common stock may never develop or be sustained following this offering. The initial public offering price of our common stock will be based and determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.
The market price of our equity securities may be volatile, and purchasers of our common stock could incur substantial losses.
The market price for our common stock may be volatile. The stock market in general and the market for green energy in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price originally paid for the security. The market price for our common stock may be influenced by many factors, including:

actual or anticipated fluctuations in our financial condition and operating results;

actual or anticipated changes in our growth rate relative to our competitors;

competition from existing products or new products that may emerge;

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;

failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

issuance of new or updated research or reports by securities analysts;

fluctuations in the valuation of companies perceived by investors to be comparable to us;

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

additions or departures of key management or scientific personnel;

disputes or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;

changes in laws or regulations applicable to our products;

changes to electric utility policies;

announcement or expectation of additional debt or equity financing efforts;

sales of our common stock by us, our insiders or our other stockholders; and

general economic and market conditions.
 
33

 
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance, which may limit or prevent investors from readily selling their common stock and may otherwise negatively affect the liquidity of our common stock.
If securities or industry analysts do not publish research or publish inaccurate research or unfavorable research about our business, the price of our common stock and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If no or few securities or industry analysts cover our company, the trading price for our common stock would be negatively impacted. If one or more of the analysts who covers us downgrades our common stock or publishes incorrect or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, or downgrades our common stock, demand for our common stock could decrease, which could cause the price of our common stock or trading volume to decline.
 
34

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance and expectations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “could”, “intends”, “target”, “projects”, “contemplates”, “believes”, “estimates”, “predicts”, “potential”, “opportunity”, “confident” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

our future financial performance and results of operations;

our growth plans;

our business plan and our ability to manage our growth effectively;

the effects of competition in our market and our ability to compete effectively;

our plans to use the proceeds from this offering;

estimates of our expenses, future revenues, capital requirements, our needs for additional capital and our ability to obtain additional capital;

our ability to attract and retain qualified directors, employees and key personnel;

future acquisitions of or investments in complementary companies;

the effects of trends on, and fluctuations in, our results of operations;

research and development activities;

sales expectations;

sources for components and parts;

federal, state and local government regulations;

industry and economic conditions applicable to us;

the efficiency, reliability and environmental advantages of our products and their need for maintenance;

market advantage;

customer satisfaction;

the value of using our products;

our ability to achieve economies of scale;

anticipation of product supply requirements;

listing requirements;

our turbine and heat exchanger technologies;

the utilization of our products;

the introduction of new technology;

our production capacity;

international markets;
 
35

 

protection of intellectual property;

cybersecurity threats;

the adequacy of our facilities;

dividends;

business strategy;

capital expenditures;

liquidity;

amortization expense of intangibles;

cost of warranties;

equity-based compensation;

recently issued accounting standards;

market risk;

interest rate sensitivity;

the Jobs Act; and

the effects of the COVID-19 pandemic.
We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section captioned “Risk Factors” and elsewhere in this prospectus. These risks are not exhaustive. Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. Furthermore, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
The forward-looking statements made in this prospectus relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this prospectus or to conform such statements to actual results or revised expectations, except as required by law.
 
36

 
USE OF PROCEEDS
We estimate that our net proceeds from the sale of our common stock in this offering will be approximately $       million, assuming an initial public offering price of $       per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds of the sale of shares of common stock by the selling stockholder if the underwriters exercise their option to purchase additional shares.
A $1.00 increase (decrease) in the assumed initial public offering price of $       per share would increase (decrease) the net proceeds to us from this offering by approximately $      , assuming that the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $      , assuming the assumed initial public offering price per share remains the same and after deducting estimated underwriting discounts and commission.
The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate future access to the public equity markets. We intend to use approximately $      million of the net proceeds from this offering to expand our fleet of equipment for lease, approximately $      million to expand into new C&I markets and for product improvements, approximately $      million for heat exchanger product development and to expand our sales force, approximately $      million for hydrogen development, and approximatively $      to pay down outstanding borrowings under our Credit Facility. We intend to use the remainder of the net proceeds from this offering, if any, for working capital and general corporate purposes. We may also use a portion of the net proceeds from this offering to acquire, license, or invest in products, technologies or businesses that are complementary to our business. However, we currently have no agreements or commitments to complete any such transaction.
Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with complete certainty all of the particular uses for the net proceeds to be received upon the closing of this offering or the actual amounts that we will spend on the uses set forth above.
Our management will have broad discretion in the application of the net proceeds from this offering, and investors will be relying on the judgment of our management regarding the application of those net proceeds. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending the uses described above, we plan to invest the net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.
 
37

 
DIVIDEND POLICY
We do not anticipate declaring or paying any cash dividends on our capital stock in the foreseeable future. Any future determination to declare and pay cash dividends, if any, will be made at the discretion of our board of directors and will depend on a variety of factors, including applicable laws, our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, general business or financial market conditions, and other factors our board of directors may deem relevant. In addition, our ability to pay cash dividends is indirectly restricted by the terms of the agreements governing the Credit Facility, which prohibits our subsidiary, FLPS, from making distributions to us. See “Risk Factors –  Risk Factors Relating to our Business and Industry – We have no present intention to pay dividends on our common stock in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our common stock, as applicable, appreciates.” Our ability to pay cash dividends on our capital stock in the future may also be limited by the terms of any preferred securities we may issue or agreements governing any additional indebtedness we may incur.
 
38

 
CAPITALIZATION
The following table sets forth our cash and capitalization as of June 30, 2021:

on an actual basis; and

on an as adjusted basis to give effect to the issuance and sale of             shares of common stock in this offering at an assumed initial public offering price of $      per share (which is the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and assuming no exercise of the underwriters’ over-allotment option.
The as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our combined consolidated financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.
As of June 30, 2021
Actual
As Adjusted
Cash
$ 667 $       
Line of credit
22,963
Notes payable, net of current portion
Capital leases, net of current portion
126
Preferred stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, as adjusted
Common stock, par value $0.001 per share 100,000,000 shares authorized,          shares issued and outstanding, actual; 100,000,000 shares authorized,          shares issued and outstanding, as adjusted
Net parent investment
153,776
Additional paid-in capital
Accumulated deficit
(136,146)
Accumulated other comprehensive income
752
Total stockholder’s equity
$ 18,382 $
Total capitalization
$ 41,471 $
Each $1.00 increase or decrease in the assumed initial public offering price of $      per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease each of cash, total stockholder’s equity and total capitalization on an as adjusted basis by approximately $      , assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Each 1,000,000 share increase or decrease in the number of shares offered in this offering would increase or decrease each of cash, total stockholder’s equity and total capitalization on an as adjusted basis by approximately $      , assuming that the price per share for the offering remains at $      (which is the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The information in the table above excludes shares of our common stock that will become available for future issuance under our 2021 Incentive Award Plan, which will become effective in connection with the completion of this offering.
 
39

 
DILUTION
If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of our common stock after this offering.
Our historical net tangible book value as of June 30, 2021 was $0.00, or $0.00 per share of our common stock. Historical net tangible book value represents the amount of total tangible assets less total liabilities, and historical net tangible book value per share represents net tangible book value divided by the number of shares of our common stock outstanding as of June 30, 2021, after giving effect to the Contribution Transaction.
Our pro forma net tangible book value as of June 30, 2021 was $18.13 million, or $       per share of our common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities, after giving effect to the Contribution Transaction. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares of our common stock outstanding as of June 30, 2021, after giving effect to the Contribution Transaction.
After giving further effect to the sale of             shares of common stock in this offering at an assumed initial public offering price of $       per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2021 would have been approximately $      , or $       per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $       per share to the existing stockholder and an immediate dilution of $       per share to new investors. The following table illustrates this per share dilution:
Assumed initial public offering price per share
$
Historical net tangible book value per share as of June 30, 2021
$ 0.00
Pro forma increase in net tangible book value per share as of June 30, 2021
$
Pro forma net tangible book value per share as of June 30, 2021
$
Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering
$
Pro forma as adjusted net tangible book value per share after this offering
$
Dilution per share to investors in this offering
$
A $1.00 increase (decrease) in the assumed initial public offering price of common stock of $       per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease), our as adjusted net tangible book value per share after this offering by $      , and would increase (decrease) dilution per share to new investors in this offering by $      , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) our as adjusted net tangible book value per share after this offering by approximately $       per share and decrease (increase) the dilution to new investors by approximately $       per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.
The following table shows, as of June 30, 2021, after giving effect to the Contribution Transaction, the number of shares of common stock purchased from us, the total consideration paid to us and the price paid per share by the existing stockholder and by new investors purchasing common stock in this offering at an assumed initial public offering price of $       per share, before deducting the underwriting discount and estimated offering expenses payable by us, and assuming no exercise of the underwriters’ over-allotment option (in thousands, except per share amounts and percentages):
 
40

 
Shares Purchased
Total Consideration
Average Price
Per Share
Number
Percent
Amount
Percent
Existing stockholder
   % $          % $      
New investors
   %    %
Total
       100% $ 100% $
A $1.00 increase (decrease) in the assumed initial public offering price of $       per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $      , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $      , assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.
A $1.00 increase (decrease) in the assumed initial public offering price of $       per share would (decrease) increase the number of shares of our common stock issued to FPS but would not increase the total consideration paid by it in the Contribution Transaction. Assuming that the initial public offering price remains the same, an increase (or decrease) in the number of shares offered by us in this offering would not increase (or decrease) the number of shares we will issue to FPS in the Contribution Transaction.
The above table and discussion includes             shares of common stock outstanding as of June 30, 2021, after giving effect to the Contribution Transaction, and excludes, as of June 30, 2021,             shares of common stock reserved for future grant or issuance under our 2021 Plan, which will become effective in connection with the completion of this offering.
 
41

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our combined consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Our Predecessors and FlexEnergy Green Solutions Inc.
FGS was formed in December 2020 and does not have historical financial data. The historical financial data discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of FEI and FLPS and their consolidated subsidiaries. After the completion of the Contribution Transaction, FEI and FLPS will be wholly-owned subsidiaries of FGS.
Basis of Presentation
The combined consolidated financial statements include the consolidated accounts of FEI, the accounts of its wholly-owned subsidiaries FEES and FlexEnergy Support Services, Inc., the consolidated accounts of FLPS, and the accounts of its wholly-owned subsidiary Flex Power Co. Flex Power Co. includes the accounts of its wholly-owned subsidiary FLPS Canada. Our combined consolidated financial statements have been prepared in accordance with U.S. GAAP.
Overview
We provide turbine power generation and heat recovery products to C&I customers focused on improving their performance, increasing energy efficiency, and reducing their carbon footprint. We believe we are the premier manufacturer and project operator of 300 kW to 1.3 MW, ultra-clean, highly reliable gas turbines and custom-fit heat recovery products. We were founded in December of 2010 upon the acquisition of our small gas turbine product from Ingersoll Rand Energy Systems, which was developed beginning in 1996 and commercialized in the 2000’s. Key personnel including a leading team of turbine engineers joined our business, along with the acquisition of manufacturing operations and intellectual property. Beginning in 2012, we launched our lease offering and began building out our field service operations, focusing on offering our turbine product for power generation in the North American oilfield market. Beginning in 2017, we began selling our industrial heat recovery products. With our established leasing and field service infrastructure paired with original equipment manufacturing, engineering expertise and proprietary technology, we believe we have a differentiated, vertically integrated business model that is unique to the distributed power industry.
Our product offering includes 333 kW and 1.3MW gas turbine units and customized heat recovery products. Our clean, reliable gas turbines convert waste gas into useful energy and reduce CO2 and NOx emissions. As of June 30, 2021, our turbine products have approximately 8.4 million run hours of operations including 4.8 million run hours within our lease fleet, and have demonstrated a 99% uptime performance. Our heat recovery products enable improved heat transfer to minimize energy waste and consumption.
We have delivered approximately 120 MW of installed capacity of our Flex Turbine product into the market through both direct sales and leasing our turbine fleet which we own and operate for the life of the asset. Our lease fleet currently comprises approximately 49 MW of installed capacity, which has accumulated since inception in 2012 at a compounded annualized growth rate of 37%.
Our Primary Applications
We believe we are in a strong position to grow our business amid the transition towards more sustainable, lower carbon sources of energy. We believe this energy transition will include:

Long-term, sustainable growth in electric demand

Efforts for industries and individual companies to reduce carbon emissions and air pollution
 
42

 

Energy efficiency playing a major role in decarbonization efforts

Ongoing secular shift to distributed power generation
We have proven solutions that are well supported by the above trends. Primary applications of our proven solutions include:
Converting Waste Gas to Useful Energy:

The Flex Turbine can run on waste fuels such as methane from landfills and CO2 heavy field gas from oil producing wells down to 350 BTUs, as well as synthetic gasses such as ethane produced in the refining process with up to 2,500 BTUs to produce reliable, distributed electricity.

Our current and future customer base under this vertical are predominantly represented by North American independent oil producers, global supermajors and midstream gas companies who desire our turbine products.
Improving Traditional Processes:

Flex Heat Recovery products incorporate the most effective high temperature, high pressure heat exchanger technology. They have a smaller footprint than competing systems due to their design efficiency, making them ideal for space constrained applications. They are currently being evaluated for the next generation of carbon capture technology, multiple fuel cell applications, and emissions reduction projects.

Our current and future customer base under this vertical are predominantly represented by the companies in U.S. C&I sector who desire our turbine products as well as original manufacturers who produce fuel cells, internal combustion engines, and gas turbines and who desire our heat recovery products.
Enabling Emerging Clean Technology:

Efficient use of thermal energy is the key to energy efficiency in many of today’s most promising alternative fuel technologies, such as solid oxide fuel cells for power generation, traditional fuel cell technology for power, green hydrogen production, and certain heat as energy storage applications, like molten salt. We believe our Flex Heat Recovery products enable these green technologies to be more cost competitive with conventional forms of energy production.

Our current and future customer base under this vertical are predominantly represented by manufacturers of fuel cells, internal combustion engines and gas turbines who desire our heat recovery products.
Our Customer Base and Demand for our Products
We believe the current and future demand for our products will be underpinned by sustainable, growing demand from our Converting Waste Gas to Useful Energy vertical and augmented by emerging demand for our heat recovery products to improve industrial processes and enable new clean technologies.
The majority of demand for our product to date has come from oil producers who require highly reliable onsite power solutions at their well sites that often do not have reliable access to utility power. Our Flex Turbine’s unique ability to run on a wide range of unprocessed field gas that is often otherwise burned off by flaring - along with very low maintenance, high up-time performance and cyclic load handling - has driven customers to our power generation solution. As further described below, our zero capex leasing solution and direct field service support are paramount to our success of winning and retaining new business. We expect our growth in this market vertical will be driven primarily by the following:

Sustained drilling of new oil wells in our core North American market

Expansion of our proven solution to very large international flare gas to power project opportunities
 
43

 

Heightened efforts for oil producers to seek solutions to reduce carbon emissions across their operations, including a concerted focus on significantly reducing levels of upstream flaring.
In addition, we serve and expect additional demand from the C&I sector for our Flex Turbines. While overall revenue from our Flex Heat Recovery products comprised less than 10% of total revenue for the year-ended December 31, 2020 and for the six months ended June 30, 2021, we expect to grow revenue from these products as we believe customers will demand heat recovery products that improve traditional processes and help enable emerging clean technology.
Revenue Generation under our EaaS Business Model
Under our EaaS business model, we have accumulated an asset base that represents a modern fleet of long-lived power generation assets. Since 2012, we have offered customers the option of purchasing our manufactured product or entering into an equipment leasing contract. We have experienced strong annualized growth of our turbine leasing fleet, predominantly to North American oil producers who largely prefer to lease or rent power generation equipment for wellsite power as opposed to purchasing generation equipment within their annual capital budgets. We believe this zero-capex solution for our customer base extends beyond our O&G vertical and into the C&I sector where customers are not only increasingly self-generating their own power but, we believe, also want a power solution that replicates a consistent monthly utility bill. At the same time, we also believe our EaaS leasing solution is beneficial to our stakeholders because we own and operate our bespoke generation asset in a manner that generates attractive life cycle returns on our underlying capital investment. Because we own, operate and directly maintain our asset at customer sites, we have gained a tremendous amount of field learning knowledge. In coordination between our field service, manufacturing and engineering teams, this field learning and operating data retention has translated into both exceptional uptime to our customers as well as solutions that can significantly extend the life of our turbine asset base. Included in a customer’s monthly lease rate is also the service of the unit from our trained service technicians.
In addition to our EaaS offering, we have customers who prefer to make a capital investment in their power generation asset through direct purchases of our manufactured products. This includes both our gas turbine products and our heat recovery products. Many of our customers, particularly those in the U.S., enter into a long-term service agreement in addition to purchasing equipment, while other customers instead prefer to have their purchased equipment serviced on a time-and-materials basis. Together the long-term service agreements, the time and materials that we charge our third-party customers and commissioning services make up our service revenue.
Costs of Conducting Our Business
The principal costs associated with operating our business are:

Cost of revenues (excluding turbine fleet depreciation)

Depreciation associated with our rental fleet

Selling, general and administrative expenses

Interest expense
Cost of revenues (excluding turbine fleet depreciation) include:

Cost of Turbine Leasing Fleet, which includes the direct cost of field service personnel and consumable spare parts allocated to maintaining our leasing turbines

Cost of Turbine Service on Sold Product, which includes the direct cost of field service personnel and consumable spare parts allocated to maintaining our aftermarket service arrangements of customer purchased turbines; and

Cost of Manufactured Product, which includes the cost of manufacturing the equipment sold, including material and manufacturing labor and overhead. Since acquiring the manufacturing
 
44

 
operations in 2010, our available throughput volume has exceeded our actual volume of turbine production on an annual basis. In recent years we have taken measures to reduce our production and associated costs down to a more suitable level that we believe fulfills the measured demand coming from our turbine leasing fleet and third-party customers. We have begun to realize further cost reductions in the first half of 2021 by consolidating our two production facilities to a single facility. This facility will be the single point of production for both the continued growth of our turbine installed base as well as what we believe will be emerging demand for our heat recovery products in future years.
Our depreciation expense consists of the depreciation expense related to our own turbine assets. These assets are depreciated over a 10 year period.
Our selling, general and administrative expenses primarily consist of salaries expense, marketing expense and professional services, including legal expenses.
Interest expense primarily represents monthly interest paid under our asset-back financing arrangement as further described below in “Liquidity and Capital Resources.”
How We Evaluate our Operations
We use a variety of qualitative, operational and financial metrics to assess our performance. Among other measures, management considers (i) the size of our turbine leasing fleet (ii) revenue, (iii) EBITDA and (iv) Adjusted EBITDA.
Size of our lease fleet
We believe the continued growth of our turbine leasing fleet is an important indicator of current and future financial performance, given the proven and sustainable revenue stream as well as the opportunity to realize cost efficiencies within our cost of turbine leasing with additional growth of the underlying asset base. We measure the size of our lease fleet in the form of total megawatts based on the combined installed capacity our turbine units as well as the number of turbine units in the fleet.
Revenue
We analyze our revenue by comparing actual quarterly and annual revenue to our internal projections for a given period and to prior periods to assess our performance.
EBITDA and Adjusted EBITDA
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense. We define Adjusted EBITDA as EBITDA plus or minus (i) equity-based compensation expense and (ii) certain non-cash charges and unusual or non-recurring charges or income that we do not view as representative of our ongoing operations.
Factors Impacting Comparability of Our Financial Results
Public Company Expenses
Upon completion of this offering, we expect to incur direct, incremental general and administrative (“G&A”) expenses as a result of being a publicly traded company, including, but not limited to, costs associated with hiring new personnel, implementation of compensation programs that are competitive with our public company peer group, annual and quarterly reports to stockholders, tax return preparation, independent auditor fees, investor relations activities, registrar and transfer agent fees, additional legal fees, incremental director and officer liability insurance costs and incremental independent director compensation. These direct, incremental G&A expenses are not included in our historical results of operations.
 
45

 
We Will Incur Additional Taxes as a Result of being “C” Corporation
Prior to the completion of the Contribution Transaction, the results of operations of the business (comprised of the businesses of FEI and FLPS) were consolidated into the financial statements of FPS, a limited liability company taxed as a partnership. Upon completion of the Contribution Transaction, the operations of the business will be conducted under FGS, a “C” corporation for tax purposes. Thus, once we have become profitable and have fully utilized all net operating loss carry forwards available to us, we anticipate significant increases in income tax expenses for periods after the completion of the Contribution Transaction. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Income Taxes.”
Effect of COVID-19
Demand and pricing in the oil and gas markets fell significantly due to the COVID-19 pandemic and an increase in global oil supply driven by disagreements with respect to oil pricing between Russia and members of OPEC. The effects of the COVID-19 pandemic continued to drive reduced demand leading to volatility in prices during 2020 and the first six months of 2021. This commodity price volatility adversely affected demand for our products and services and negatively impacted our results of operations during 2020 and the first six months of 2021.
Going Concern
The combined consolidated financial statements have been prepared as though we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred operating losses and negative cash flows from operations since inception. As of June 30, 2021, we have an accumulated deficit of approximately $136.15 million. Management expects to continue to incur operating losses and negative cash flows. We have financed our operations to date with proceeds from equity infusions from FPS and from debt financings.
We will need to raise additional capital in order to continue to fund operations. We believe we will be able to obtain additional capital through equity financings or other arrangements to fund operations; however, there can be no assurance that such additional financing, if available, can be obtained on acceptable terms. If we are unable to obtain such additional financing, future operations would need to be scaled back or discontinued.
Accordingly, these factors raise substantial doubt about our ability to continue as a going concern within one year after the date the combined consolidated financial statements are issued. The combined consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
The following table sets forth our results of operations for the years ended December 31, 2020 and 2019.
 
46

 
Years Ended
December 31,
(in thousands)
2020
2019
(FEI and FLPS)
Statement of Operations and Comprehensive Loss Data:
Revenue
Turbine leasing fleet
$ 17,838 $ 16,833
Turbine service on sold product
2,213 2,824
Manufactured product
3,276 5,716
Total revenue
$ 23,327 $ 25,373
Cost of revenue
Turbine leasing fleet (excluding depreciation of fleet turbines)
$ 4,884 $ 5,442
Turbine service on sold product
1,691 2,797
Manufactured product
5,789 9,531
Depreciation of fleet turbines
5,007 4,713
Total cost of revenue
$ 17,371 $ 22,483
Operating expenses
Selling, general and administrative
$ 11,826 $ 12,400
Research and development
120 237
Total operating expenses
$ 11,946 $ 12,637
Operating loss
$ (5,990) $ (9,747)
Other income (expense)
Interest expense
$ (1,114) $ (992)
Other (expense) income, net
31 (159)
Total other income (expense), net
$ (1,083) $ (1,151)
Loss before income taxes
$ (7,073) $ (10,898)
Income tax provision
(31) (7)
Net loss
$ (7,104) $ (10,905)
Other comprehensive gain, net of tax
Foreign currency translation adjustments
$ 443 $ 185
Total other comprehensive gain, net of tax
$ 443 $ 185
Comprehensive loss
$ (6,661) $ (10,720)
EBITDA $ 1,114 $ (3,712)
Adjusted EBITDA
$ 1,209 $ (3,457)
Size of our lease fleet
Our lease fleet has increased by 4 MW of installed capacity, or 9%, to 49 MW at December 31, 2020 compared to 45 MW of installed capacity at December 31, 2019. This increase was due to the additions of newbuild turbine assets that were manufactured and made field-ready during 2020.
Revenue
Turbine Leasing Fleet.   Our turbine leasing fleet revenue increased $1.01 million, or 6%, to $17.84 million for the year ended December 31, 2020 compared to $16.83 million for the year ended December 31, 2019. This increase was primarily due to strong demand and a 12% increase in average annual deployments for turbines under leasing contracts across our customer base.
Turbine Service on Sold Product.   Our turbine service on sold product revenue decreased $0.61 million, or 22%, to $2.21 million for the year ended December 31, 2020 compared to $2.82 million for the
 
47

 
year ended December 31, 2019. This decrease was primarily due to customers of sold manufactured product deferring or cancelling anticipated major component overhauls performed on a time and materials basis amid economic uncertainty and travel restrictions throughout the majority of 2020. Such time and materials revenue decreased $0.68 million, or 47%, to $0.75 million for the year ended December 31, 2020 compared to $1.43 million for the year ended December 31, 2019.
Manufactured Product.   Our manufactured product revenue decreased $2.44 million, or 43%, to $3.28 million for the year ended December 31, 2020 compared to $5.72 million for the year ended December 31, 2019. This decrease was primarily due to the fact that we de-expedited the production of new turbines under executed purchase orders, both to address the needs of our customers and to decrease our production levels given disruptions within our supply chain amid larger economic uncertainty.
Cost of Revenues
Turbine Leasing Fleet.   Our cost of turbine leasing fleet decreased $0.56 million, or 10%, to $4.88 million for the year ended December 31, 2020 compared to $5.44 million for the year ended December 31, 2019. This decrease was primarily due to proactive measures across our field operations to reduce cost such as travel, overtime and spare parts purchases.
Turbine Service on Sold Product.   Our cost of turbine service on sold product decreased $1.11 million, or 40%, to $1.69 million for the year ended December 31, 2020 compared to $2.80 million for the year ended December 31, 2019. This decrease was primarily due to customers of sold manufactured product deferring or cancelling anticipated major component overhauls performed on a time and materials basis amid economic uncertainty and travel restrictions throughout the majority of 2020.
Manufactured Product.   Our cost of manufactured product decreased $3.74 million, or 39%, to $5.79 million for the year ended December 31, 2020 compared to $9.53 million for the year ended December 31, 2019. This decrease was primarily due to the corresponding reduction in product sales caused by the fact that we de-expedited the production of new turbine under executed purchase orders, both to address the needs of our customers and also decrease our production levels given disruptions within our supply chain amid larger economic uncertainty. The annual cost of our direct manufacturing labor and overhead decreased $1.50 million, or 26%, to $4.23 million for the year ended December 31, 2020 compared to $5.73 million for the year ended December 31, 2019.
Depreciation of Fleet Turbines.   Our cost of depreciation of fleet turbines increased $0.29 million, or 6%, to $5.00 million for the year ended December 31, 2020 compared to $4.71 million for the year ended December 31, 2019. This increase was primarily due to the increase in the size of our fleet.
Operating Expenses
Selling, General and Administrative Expenses.   Selling, general and administrative expenses (“SG&A”) decreased $0.57 million, or 5%, to $11.83 million for the year ended December 31, 2020 compared to $12.40 million for the year ended December 31, 2019. This decrease was primarily due to a series of cost reduction measures implemented beginning in the second quarter of 2020 in response the economic uncertainty caused by the COVID-19 pandemic.
We expect SG&A expenses to increase considerably in future periods as a result of being a public company. Please see “Risk Factors – Risk Factors Relating to Ownership of Our Common Stock – We will incur significantly increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.”
Research and Development.   Research and development expenses decreased $0.12 million, or 49%, to $0.12 million for the year ended December 31, 2020 compared to $0.24 million for the year ended December 31, 2019. This decrease was primarily due to the suspension of research and development spending beginning in the second quarter of 2020 in response the economic uncertainty caused by the COVID-19 pandemic.
 
48

 
Other income (expense)
Interest Expense.   Interest expense increased $0.12 million, or 12%, to $1.11 million for the year ended December 31, 2020 compared to $0.99 million for the year ended December 31, 2019. This increase was primarily due to higher average balances on our line of credit during the year ended December 31, 2020.
Other Income (Expense).   Other income increased $0.19 million to $0.03 million for the year ended December 31, 2020 compared to $(0.16) million for the year ended December 31, 2019. This increase was primarily due to expenses incurred for facility relocation in 2019 that were not incurred in 2020.
Income Tax Provision
Prior to the closing of this offering, the results of operations of the business (comprised of the businesses of FEI and FLPS) were consolidated into the financial statements of FPS, a limited liability company taxed as a partnership. After the closing of this offering, the operations of the business will be conducted under FGS, a “C” corporation for tax purposes. Thus, once we have become profitable and have fully utilized all NOL carryforwards available to us, we anticipate significant increases in income tax expenses for periods after the closing of this offering.
At December 31, 2020, we had federal, state and foreign NOL carryforwards of $106.85 million, $78.22 million and $0.22 million, respectively, which will expire, if unused, beginning in 2031, 2026 and 2035, respectively; provided that federal NOLs generated post-Tax Cuts and Jobs Act (“the Tax Act”) for the tax years ended December 31, 2018 and thereafter ($29.48 million at December 31, 2020) do not expire.
Our NOL utilization could be limited under Internal Revenue Code Section 382 due to certain ownership changes that have occurred and that may occur in the future. Our preliminary analysis indicates that $48.40 million of our NOLs will expire unutilized. See “Risk Factors – Risk Factors Relating to our Business and Industry – We might not be able to utilize a significant portion of our net operating loss carryforwards and research and development tax credit carryforwards.” and Note 10 to our Notes to Combined Consolidated Financial Statements included elsewhere in this prospectus.
Net Loss
Net loss decreased $3.81 million, or 35%, to $7.10 million for the year ended December 31, 2020 compared to $10.91 million for the year ended December 31, 2019, primarily due to the decreases in cost of revenue discussed above.
Foreign Currency Translation Adjustments
Foreign currency translation adjustments increased $0.26 million, or 139%, to $0.44 million for the year ended December 31, 2020 compared to $0.19 million for the year ended December 31, 2019.
Comprehensive Loss
Comprehensive loss decreased $4.06 million, or 38%, to $6.66 million for the year ended December 31, 2020 compared to $10.72 million for the year ended December 31, 2019, primarily due to the decreases in cost of revenue discussed above.
Adjusted EBITDA
Adjusted EBITDA increased $4.67 million to $1.21 million for the year ended December 31, 2020 compared to $(3.46) million for the year ended December 31, 2019. The increase was primarily due to an increase in Flex Turbine lease fleet revenue coupled with decreases in cost of revenue and operating expenses resulting from a series of cost reduction measures implemented to preserve our liquidity amid the greater economic uncertainty resulting from the COVID-19 pandemic.
 
49

 
Comparison of the Six Months Ended June 30, 2021 and 2020
Six Months Ended
June 30,
(in thousands)
2021
2020
(unaudited)
Statement of Operations and Comprehensive Loss Data:
Revenue
Turbine leasing fleet
$ 7,272 $ 10,024
Turbine service on sold product
1,601 1,120
Manufactured product
1,276 1,658
Total revenue
$ 10,149 $ 12,802
Cost of revenue
Turbine leasing fleet (excluding depreciation of fleet turbines)
$ 2,967 $ 2,562
Turbine service on sold product
1,107 961
Manufactured product
2,530 3,458
Depreciation of fleet turbines
2,167 2,766
Total cost of revenue
$ 8,771 $ 9,747
Operating expenses
Selling, general and administrative
$ 6,759 $ 5,957
Research and development
67 75
Total operating expenses
$ 6,826 $ 6,032
Operating loss
$ (5,448) $ (2,977)
Other income (expense)
Interest expense
$ (539) $ (665)
Other (expense) income, net
2,534 52
Total other income (expense), net
$ 1,995 $ (613)
Loss before income taxes
$ (3,453) $ (3,590)
Income tax provision
(178) (4)
Net loss
$ (3,631) $ (3,594)
Other comprehensive gain (loss), net of tax
Foreign currency translation adjustments
$ 209 $ (213)
Total other comprehensive gain (loss), net of tax
$ 209 $ (213)
Comprehensive loss
$ (3,422) $ (3,807)
EBITDA
$ 751 $ 511
Adjusted EBITDA .
$ (1,189) $ 546
Size of our lease fleet
Our lease fleet has increased by 2 MW of installed capacity, or 4%, to 49 MW at June 30, 2021 compared to 47 MW of installed capacity at June 30, 2020. This increase was due to the additions of newbuild turbine assets that were manufactured and made field-ready during the second half of 2020 and the first half of 2021.
Revenue
Turbine Leasing Fleet.   Our turbine leasing fleet revenue decreased $2.75 million, or 27%, to $7.27 million for the six months ended June 30, 2021 compared to $10.02 million for the six months ended
 
50

 
June 30, 2020. This decrease was primarily due to a 23% decrease in average monthly deployments for turbines under leasing contracts across our customer base, following a record high level of average monthly deployments set in the first half of 2020.
Turbine Service on Sold Product.   Our turbine service on sold product revenue increased $0.48 million, or 43%, to $1.60 million for the six months ended June 30, 2021 compared to $1.12 million for the six months ended June 30, 2020. This increase was primarily due to customers of sold manufactured product resuming anticipated major component overhauls performed on a time and materials basis amid increased economic certainty and an ease on travel restrictions. Such time and materials revenue increased $0.38 million, or 87%, to $0.83 million for the six months ended June 30, 2021 compared to $0.45 million for the six months ended June 30, 2020.
Manufactured Product.   Our manufactured product revenue decreased $0.38 million, or 23%, to $1.28 million for the six months ended June 30, 2021 compared to $1.66 million for the six months ended June 30, 2020. This decrease was primarily due to moving production facilities during the first three months of 2021, during which time the manufacture of turbines was significantly curtailed.
Cost of Revenues
Turbine Leasing Fleet.   Our cost of turbine leasing fleet increased $0.41 million, or 16%, to $2.97 million for the six months ended June 30, 2021 compared to $2.56 million for the six months ended June 30, 2020. This increase was primarily due to an increased level of travel, overtime and spare parts purchasing resulting from resuming more normalized field operations versus the restrictions put into place during the first half of 2020 amid the COVID-19 outbreak.
Turbine Service on Sold Product.   Our cost of turbine service on sold product increased $0.15 million, or 15%, to $1.11 million for the six months ended June 30, 2021 compared to $0.96 million for the six months ended June 30, 2020. This increase was primarily due to customers of sold manufactured product resuming anticipated major component overhauls performed on a time and materials basis amid increased economic uncertainty and an ease on travel restrictions.
Manufactured Product.   Our cost of manufactured product decreased $0.93 million, or 27%, to $2.53 million for the six months ended June 30, 2021 compared to $3.46 million for the six months ended June 30, 2020. This decrease was primarily due to the realization of lower operating cost in the form of rent, utilities and other expenses associated with the consolidation of our operating facilities into one central location and where all turbines, heat recovery products and aftermarket refurbishment takes place. The cost of our direct manufacturing labor and overhead decreased $0.70 million, or 30%, to $1.66 million for the six months ended June 30, 2021 compared to $2.36 million for the six months ended June 30, 2020.
Depreciation of Fleet Turbines.   Our cost of depreciation of fleet turbines decreased $0.60 million, or 22%, to $2.17 million for the six months ended June 30, 2021 compared to $2.77 million for the six months ended June 30, 2020. This decrease was primarily due to a 23% decrease in average monthly deployments for turbines under leasing contracts across our customer base, following a record high level of average monthly deployments set in the first half of 2020.
Operating Expenses
Selling, General and Administrative Expenses.   SG&A expenses increased $0.80 million, or 13%, to $6.76 million for the six months ended June 30, 2021 compared to $5.96 million for the six months ended June 30, 2020. This increase was primarily due to increased depreciation recorded as operating expenses for units not currently deployed and a series of cost reduction measures implemented beginning in the second quarter of 2020 in response the economic uncertainty caused by the COVID-19 pandemic. During 2021, these cost reduction measures were lifted.
We expect SG&A expenses to increase considerably in future periods as a result of being a public company. Please see “Risk Factors — Risk Factors Relating to Ownership of Our Common Stock — We will
 
51

 
incur significantly increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.”
Research and Development.   Research and development expenses decreased $0.01 million, or 11%, to $0.07 million for the six months ended June 30, 2021 compared to $0.08 million for the six months ended June 30, 2020.
Other income (expense)
Interest Expense.   Interest expense decreased $0.13 million, or 19%, to $0.54 million for the six months ended June 30, 2021 compared to $0.67 million for the six months ended June 30, 2020. This decrease was primarily due to lower average balances on our line of credit during the six months ended June 30, 2021.
Other Income (Expense).   Other income increased $2.48 million to $2.53 million for the six months ended June 30, 2021 compared to $0.05 million for the six months ended June 30, 2020. This increase was primarily due to the forgiveness of the PPP loans during the second quarter of 2021, which resulted in a gain on forgiveness of debt of $2.38 million.
Net Loss
Net loss increased $0.04 million, or 1%, to $3.63 million for the six months ended June 30, 2021 compared to $3.59 million for the six months ended June 30, 2020, primarily due to a series of cost reduction measures implemented beginning in the second quarter of 2020 in response the economic uncertainty caused by the COVID-19 pandemic, and a decline in turbine leasing revenue, partially offset by $2.38 million of other income related to forgiveness of the PPP loan described above. During 2021, these cost reduction measures were lifted.
Foreign Currency Translation Adjustments
Foreign currency translation gain (loss) adjustments increased $0.42 million, or 198%, to $0.21 million for the six months ended June 30, 2021 compared to $(0.21) million for the six months ended June 30, 2020.
Comprehensive Loss
Comprehensive loss decreased $0.39 million, or 10%, to $3.42 million for the six months ended June 30, 2021 compared to $3.81 million for the six months ended June 30, 2020, for the reasons set forth in “Net Loss” above, partially offset by positive foreign currency translation adjustments.
Adjusted EBITDA
Adjusted EBITDA decreased $1.74 million to $(1.19) million for the six months ended June 30, 2021 compared to $0.55 million for the six months ended June 30, 2020. The decrease was primarily due to the forgiveness of the PPP loans during the second quarter of 2021, which had reduced our net loss, a decline in turbine leasing revenue, and an increase in costs due to the restoration of cost reduction measures that were implemented as a result of the COVID-19 pandemic.
Comparison of Non-GAAP Financial Measures
We view EBITDA and Adjusted EBITDA as important indicators of performance. We define EBITDA as net income (loss), plus (i) depreciation and amortization expense, (ii) interest expense and (iii) income tax expense. We define Adjusted EBITDA as EBITDA plus or minus (i) equity-based compensation expense and (ii) certain non-cash charges and unusual or non-recurring charges or income that we do not view as representative of our ongoing operations.
We believe that our presentation of EBITDA and Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. Net income is the GAAP measure
 
52

 
most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA should not be considered alternatives to net income or loss presented in accordance with GAAP. Because EBITDA and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing their utility. The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net loss for each of the periods indicated.
Year Ended
December 31,
Six Months Ended
June 30,
(in thousands)
2020
2019
2021
2020
Net Loss
$ (7,104) $ (10,905) $ (3,631) $ (3,594)
Depreciation and amortization
7,073 6,194 3,665 3,436
Interest expense, net
1,114 992 539 665
Income tax provision
31 7 178 4
EBITDA
$ 1,114 $ (3,712) $ 751 $ 511
One-time facility relocation expenses(1)
25 185 301 0
Equity-based compensation
70 70 36 35
PPP loan forgiveness
0 0 (2,378) 0
Restructuring charge
0 0 101 0
Adjusted EBITDA
$ 1,209 $ (3,457) $ (1,189) $ 546
(1)
Represents non-recurring out of pocket expenses incurred in moving our heat recovery-focused facility.
Some of the limitations of EBITDA and Adjusted EBITDA include (i) these non-GAAP measures do not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and EBITDA and Adjusted EBITDA do not reflect these capital expenditures. Our non-GAAP measures may not be comparable to similarly titled measures of other companies because they may not calculate them in the same manner as we calculate, the measure, limiting its usefulness as a comparative measure. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. EBITDA and Adjusted EBITDA should not be considered as an alternative to loss before benefit from income taxes, net loss, earnings per share, or any other performance measures derived in accordance with U.S. GAAP. When evaluating our performance, you should consider adjusted our non-GAAP measures alongside other financial performance measures, including our net loss and other GAAP results.
Liquidity and Capital Resources
Overview
Since the acquisition of the turbine product and manufacturing operations from Ingersoll Rand in December of 2010 and the subsequent inception of the leasing operations in 2012, our business has been funded by a combination of cash from the FPS Noteholders via the Notes (whereby FPS contributed the cash received from the Notes to FEI and FLPS as capital), the Credit Facility, the PPP loans and, effective August 16, 2021, proceeds from the SAFE Transaction (which were also contributed by FPS to FEI and FLPS as capital). The primary uses of this capital have been to invest in the growth of our turbine leasing fleet, support manufacturing operations and engineering efforts including turbine and heat exchanger product development.
As further described below, since the equity contribution of FLPS and FEI to the newly formed parent FPS on January 1, 2016, the Notes were funded over the years 2016, 2017 and 2018 to support the expansion of the leasing business into new geographies and manufacturing operations. As of June 30, 2021, the
 
53

 
amount outstanding under the Notes payable by FPS totaled approximately $25.51 million, including $19.79 million of principal and $5.72 million of accrued interest. In 2019, with what we believed to be an appropriate level of scale of our turbine lease fleet, we closed on the Credit Facility to support the continued growth of the fleet. As of June 30, 2021, total borrowings under the Credit Facility totaled approximately $22.96 million. See “Risk Factors – Risk Factors Relating to our Business and Industry – Our substantial indebtedness could limit our opportunities for growth.”
A key underpinning of our business plan has been to scale the fleet of our long-lived turbine assets to the level where the associated revenue streams of leasing and service fully cover our operating activities. Furthermore, depending on market conditions we can flexibly scale up or down our manufacturing operations, including newbuild leasing turbines, and not have any direct impact to our ability to generate revenue off our existing installed base. We successfully executed this strategy during the year ended December 31, 2020, realizing an increase year-over-year in revenue attributed to our installed base – namely the combination of revenue from turbine leasing fleet and turbine service on sold product – while significantly reducing operating costs, primarily in our production operations, and significantly reducing outgoing cash flow expenditures on new turbine inventory amid the challenging macroeconomic environment. We have maintained this modest level of turbine production in 2021, and for the remainder of fiscal year 2021, our production plans are set at a fixed level of fulfilling executed orders for third party customers in our target C&I markets of New York City, Southern California and South Korea. Absent a surge in top-line leasing demand or new sources of funding, we currently anticipate returning to a moderately increased level of newbuild turbine production for the full fiscal year 2022 representing a combination of (i) additional third party orders from C&I customers and (ii) additional turbines into our own lease fleet, which we expect to execute with our current sources of liquidity.
As described in “Use of Proceeds”, we intend to invest newly raised equity capital into the further growth of our turbine leasing fleet, development new turbine products that enlarges our applicable market reach and expand our heat exchanger offering.
As of June 30, 2021, total available liquidity was $4.06 million, including $0.67 million of balance sheet cash and $3.39 million of available commitments under the Credit Facility and the Notes.
Cash Flows
The following table sets forth a summary of our cash flows for the years ended December 31, 2020 and 2019 and the six months ended June 30, 2021 and 2020:
Year Ended
December 31,
Six Months
Ended June 30,
(in thousands)
2020
2019
2021
2020
Net cash provided by (used in) operating activities
$ (6,275) $ (14,848) $ 2,318 $ (5,547)
Net cash (used in) investing activities
(1,077) (3,231) (501) (411)
Net cash provided by (used in) financing activities
6,889 18,823 (2,805) 7,390
Foreign currency translation adjustments
165 81 (47) 2
Net increase (decrease) in cash
$ (298) $ 825 $ (1,035) $ 1,434
Operating Activities
For the year ended December 31, 2020, $6.28 million of cash was used in operating activities, compared to $14.85 million for the year ended December 31, 2019, a net cash flow increase of $8.57 million. The increase in operating cash flow was primarily attributable to the 35% decrease in net loss to $(7.10) million for the year ended December 31, 2020 compared to $(10.91) million for the year ended December 31, 2019, along with a reduction in inventory spending for newbuild leasing fleet turbines during the year ended December 31, 2020 based on uncertain demand for additional turbine fleet capacity as well as the de-expedition of our production operations.
 
54

 
For the six months ended June 30, 2021, net cash provided by (used in) operating activities was $2.32 million, compared to $(5.55) million for the six months ended June 30, 2020, a net cash flow increase of $7.87 million. The increase in operating cash flow was primarily attributable to favorable changes in deferred revenue and inventories in addition to a significantly lower volume of inventory purchases as a result of our plant relocation project during the first half of 2021.
Investing Activities
For the year ended December 31, 2020, $1.08 million of cash was used in investing activities, compared to $3.23 million for the year ended December 31, 2019, a net cash flow increase of $2.15 million. The increase in investing cash flow was primarily attributable to a reduction in discretionary purchases of new property and equipment.
For the six months ended June 30, 2021, $0.50 million of cash was used in investing activities, compared to $0.41 million for the six months ended June 30, 2020, a net cash flow decrease of $0.09 million. The decrease in investing cash flow was primarily attributable to a slight increase in discretionary purchases of new property and equipment.
Financing Activities
For the year ended December 31, 2020, cash provided by financing activities was $6.89 million, compared to $18.82 million for the year ended December 31, 2019, a net cash flow decrease of $11.93 million. The decrease in financing cash flow was primarily attributable to a significant reduction in credit line advances in fiscal year 2020 in response to the greater economic uncertainty brought on by the COVID-19 pandemic.
For the six months ended June 30, 2021, cash provided by (used in) financing activities was $(2.81) million, compared to $7.40 million for the six months ended June 30, 2020, a net cash flow decrease of $10.20 million. The decrease in financing cash flow was primarily attributable to $2.35 million in proceeds from the PPP loans received in the first half of 2020 and to paydowns made in the first half of 2021 on our Credit Facility.
Foreign Currency Translation Adjustments
For the year ended December 31, 2020, the effects of foreign currency translation adjustments to cash totaled $0.17 million, compared to $0.08 million for the year ended December 31, 2019, a net cash flow increase of $0.09 million.
For the six months ended June 30, 2021, the effects of foreign currency translation adjustments to cash totaled $(0.05) million, compared to $0.00 million for the six months ended June 30, 2020, a net cash flow decrease of $0.05 million.
Senior Secured Credit Facility
On February 8, 2019, FLPS entered into the Credit Facility with TCB, which was subsequently amended and restated on December 22, 2020 to add FLPS Canada as a borrower. The initial commitment amount is for $30.00 million and availability under the Credit Facility is based on a borrowing base calculation of eligible assets and other conditions. The Credit Facility is backed by a first priority lien of substantially all of the assets of FLPS, and the maturity date of the Credit Facility is February 8, 2024. Interest is defined based on a tiered leverage ratio and an applicable margin of (i) 1.50% to 2.00% above the base rate for base rate loans, or (ii) 2.50% to 3.00% above the adjusted Eurodollar rate for Eurodollar rate loans.
The Borrowers are subject to financial covenants of a maximum leverage ratio and minimum fixed charge coverage ratio to be tested quarterly. The Borrowers are in compliance with the Credit Facility’s financial covenants as of June 30, 2021.
 
55

 
The Borrowers are also subject to certain negative covenants, including restrictions on their ability to incur additional indebtedness, create liens, pay dividends, make certain investments or material changes in their business, engage in transactions with affiliates, conduct asset sales or otherwise dispose of the Borrowers’ assets. In anticipation of the Contribution Transaction and this offering, we are in the process of negotiating a modification to the Credit Facility. As part of this modification, we expect that FGS will become an additional guarantor with respect to the Credit Facility subject to the same obligations and restrictions applicable to FPS thereunder, but that FGS will not otherwise be subject to the covenants and restrictions applicable to the Borrowers.
Between January 2020 and June 2021, FLPS entered into a series of amendments to the Credit Facility whereby (i) the borrowing base was amended to include certain non-turbine field equipment, (ii) certain terms within the borrowing base definition of accounts receivables relating to investment grade and non-investment grade customers were modified, (iii) FLPS ULC was added as an additional borrower under the Credit Facility, (iv) annualized EBITDA used to calculate the quarterly financial covenants was increased, (v) the availability under the revolving credit facility was reduced by $3.50 million, and (vi) the due date of the FLPS financial statements to be delivered to TCB was modified.
As of June 30, 2021, borrowings outstanding under the Credit Facility totaled approximately $22.96  million and availability based on the borrowing base totaled approximately $2.94 million. This amount includes $10.00 million of permitted distributions funded in 2019 that was used to redeem a portion of the outstanding Notes. Additional uses of capital for borrowings under the Credit Facility have been for working capital purposes, including the investment into the production of new-build turbine leasing units.
Paycheck Protection Program Loans
On April 14, 2020, FLPS entered into a Promissory Note with TCB pursuant to which TCB made a loan to FLPS under the PPP offered by the SBA in a principal amount of approximately $0.99 million pursuant to the CARES Act. On May 7, 2021, this loan was forgiven by the SBA. On May 6, 2020, FEES entered into a Promissory Note with BofA as the lender pursuant to which BofA made a loan to FEES under the PPP offered by the SBA in a principal amount of approximately $1.36 million pursuant to the CARES Act. On June 17, 2021, this loan was forgiven by the SBA.
The proceeds from the PPP loans were to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits and paid leaves, rent, utilities and interest on certain other outstanding debt.
Notes at FlexEnergy Power Solutions, LLC
Between December 2015 and July 2021, FPS issued the Notes to the FPS Noteholders who together, along with their affiliates, account for a majority of FPS’ voting securities and representation of its board of directors. The cash received from the Notes was contributed as capital to FEI and FLPS. The Notes have a maturity date of October 31, 2022.
Under the terms of the Credit Facility, FPS funded permitted payments in fiscal year 2019 of $10.00 million with all proceeds used to redeem a portion of the Notes totaling approximately $7.76 million of principal and $2.24 million of accrued interest. A portion of this $10.00 million was re-contributed when FPS issued an additional $7.80 million and $0.80 million in Notes in years 2019 and 2020, respectively for working capital purposes. FPS issued an additional $1.50 million in Notes during the six months ended 2021 for working capital purposes.
SAFE Transaction
On August 16, 2021, FPS entered into the SAFE Transaction with RNS and TRF whereby each of RNS and TRF paid $1.00 million to FPS (with the option for FPS to call an additional $0.50 million from each) in exchange for the right to receive from FPS (i) if the underwriters’ over-allotment exercise is exercised, the Cash Payment, or (ii) if there is no over-allotment exercise or if the net proceeds received by FPS as a
 
56

 
result of an over-allotment exercise are insufficient to pay the full Cash Payment to RNS and TRF, a number of the shares of FGS common stock issued to FPS in the Contribution Transaction equal to the amount invested minus 80% of the Cash Payment, divided by 80% of the issuance price per share in this offering. The proceeds of the SAFE Transaction were contributed by FPS to FEI and FLPS as capital.
Series B and B-1 Preferred Equity at FlexEnergy Power Solutions, LLC
Under the terms of FPS’ Series B Preferred Unit issuance, FPS has agreed to certain covenants that restrict FPS’ and our ability to materially change our business and enter into certain enumerated financial transactions. Under the terms governing the Series B Units, FPS shall not permit to exist any indebtedness for borrowed money that is senior in right of payment to the Series B Preferred Units other than senior indebtedness (as defined therein) in an amount not to exceed $50.00 million. As defined therein, senior indebtedness does not include any amounts outstanding under our PPP loans, but does include the aggregate amount outstanding under the Notes. As of June 30, 2021, the amount of senior indebtedness as defined therein totaled $48.50 million, thus limiting the amount of availability to $1.50 million of additional senior indebtedness. The boards of FPS and FGS view this covenant as limiting our ability to raise additional indebtedness that is senior in priority to the Series B Preferred Units.
Critical Accounting Estimates
While our significant accounting policies are described in more detail in the notes to our combined consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies used in the preparation of our combined consolidated financial statements require the most significant judgments and estimates.
Revenue Recognition
Our revenue consists of lease revenue and the sales of products, parts, accessories and service. Lease revenue consists mainly of lease agreements which provide for monthly lease payments. These lease agreements are classified as operating-type leases and the revenue generated from the monthly lease payments is recognized over the rental term.
All our revenue relates to contracts with customers. Our accounting contracts are from purchase orders or purchase orders combined with purchase agreements. Our revenue is recognized on a point-in-time basis and over time. For the sale of new turbines and heat exchanger products, we satisfy our performance obligations based on the contractual terms with our customers. For our leasing, commissioning and maintenance services, we have performance obligations that are satisfied over time. See Note 4 to our Notes to Combined Consolidated Financial Statements included elsewhere in this prospectus for additional information related to revenue policies.
 
57

 
BUSINESS
Our Company
We are an energy focused technology company that designs, manufactures, sells and leases cost-effective energy solutions that lower our customers’ environmental footprint, often by making useable energy from sources of fuel or heat otherwise overlooked or wasted. We do this through two different types of highly engineered products. First, our Flex Turbines offer a reliable source for distributed or grid connected electrical power, capable of being fired by a wide variety of gaseous fuels from waste gas from landfills and natural gas flaring to higher BTU fuels such as propane and synthetic gas. Leasing and sales of Flex Turbines presently represent the majority of our operations and revenues. Flex Turbines provide our customers with solutions to gain independence over their electricity generation and minimize overall reliance on the grid. Second, we offer heat recovery products that are integral to promising emerging power technologies, such as high efficiency fuel cells for power generation that can be fueled by hydrogen or natural gas. Our Flex Heat Recovery products are in the early stages of commercialization, and presently constitute a small but increasingly growing and important portion of our operations and revenues as the future of energy generation emerges.
Our focus is on providing proven technology and support that enables reliable, efficient and economic green energy solutions. Our business consists of leasing and service of our Flex Turbines supported by a vertically integrated OEM with some direct-sales of manufactured products. As of June 30, 2021, we have amassed over 8.4 million hours of field runtime on our turbine fleet with over 120 MW shipped, of which 49 MW make up our lease fleet. This balance of core competencies in turbine power and heat recovery with current cash flow generation helps fund growth of our technology suite and expansion of applications into new and existing markets. The primary applications of our technology include: converting waste gas to useful energy, improving traditional processes and enabling emerging clean technology. We are actively expanding into other key markets for which our products are well suited, and we are confident in generating opportunities in additional geographic markets and product extensions into different applications.
We serve a diverse range of customers in the global O&G, transportation, power, and C&I end markets. Our primary focus is on base load, distributed, electric generation using Flex Turbines, with the technology base to expand in additional untapped end-markets.
On December 31, 2010, as part of a spin-out transaction, we purchased from Dresser-Rand (now Ingersoll Rand) certain assets in order to finish the development of a 4th generation 333 kW turbine and to commercialize the turbine offering. From 1996 through 2010, Ingersoll Rand invested over $250 million to develop a downsized replica of its 2 MW KG2 turbine (first launched as a 250 kW model) as a way to penetrate the small-scale industrial remote power market.
In 2013, we initiated a business transformation in response to the O&G industry’s downturn by creating FLPS, and transitioned from an original equipment manufacturer (“OEM”) sales model to an EaaS model. O&G production requires substantial amounts of electrical power to run subsurface pumps and other equipment. Much of the recent development of O&G in the U.S. is remote and not served by the country’s electrical grid. Flex Turbines are a well-suited source of the needed power for O&G production because they operate more than 99% of the time in extreme conditions, require little maintenance and can run on untreated field gas, which is otherwise typically flared as waste. While customers valued the enhanced uptime and environmental benefits of using waste gas instead of flaring it, the consequences of the O&G industry downturn made companies more hesitant to use scarce capital resources to purchase electrical generating equipment like Flex Turbines. Instead, energy companies were resorting to renting diesel generators for power production despite the resulting added pollution and lower operating time.
This led us to determine that our customers would more easily enjoy the benefits of our product offering if they could access clean electricity-on-demand as a service. With FLPS’ leasing options, customers can lease capacity or purchase the amount of power they actually used, with no up-front capital expenditure. Through this EaaS program, we deploy Flex Turbines for electricity-on-demand, which in the case of our O&G customers is powered exclusively by the available on-site field gas, which would otherwise be flared. The
 
58

 
cost of our lease service option remains less than most customers typically pay for diesel fuel alone (not to mention the cost of renting the generators).
For the six months ended June 30, 2021, our two largest customers generated 18% and 17%, respectively of total revenue. In 2020, our three largest customers generated 23%, 14% and 10%, respectively, of our total revenue, and in 2019, our largest customer generated approximately 28% of our total revenue. Two customers accounted for 33% and 15%, respectively, of our accounts receivable balance as June 30, 2021. Two customers accounted for 15% and 14%, respectively, of our accounts receivable balance as of December 31, 2020. One customer accounted for 32% of our accounts receivable balance as of December 31, 2019. Accordingly, we are subject to customer concentration risk in the form of non-renewal or termination of lease contracts. For additional information, see “Risk Factors – Risk Factors Relating to our Business and Industry – If we fail to retain existing customers, derive revenue from existing customers consistent with historical performance or acquire new customers cost-effectively, our business could be adversely affected. We are subject to substantial customer concentration.
Since the inception of FLPS, leasing has provided customers with higher uptimes in production and eliminated more than 1,000,000 tons of CO2. This turnkey, clean power solution makes it easier for customers to adopt our clean energy solution. We are adaptive to individual site issues and differences, supplying modular accessories such as fuel skids, switchgears, filters and other non-turbine apparatuses to projects based on their needs. The EaaS solution allows for broader exposure to markets that need to lower electricity costs, increase efficiency, decrease pollution and access on-demand, 24/7 base load power generation.
Each of our gas turbines consists primarily of a turbine engine, gear box, combustor and recuperator (collectively, a “Flex Turbine”). We refer to all of our deployable Flex Turbines together as our “turbine fleet.” Our 162 unit, 49 MW turbine fleet accelerates an independence from the energy grid in 10 MW and under applications including the following selling points:

Flexible:   Wide fuel tolerance using natural gases, oilfield flare gases, biogas, etc.

Rugged and Resilient:   Generally runs 24/7 in harsh environments and weather

Sustainable:   California Air Resources Board certified clean emission standards

Scalable:   Modularity and mobility to match changing power needs

Adaptable:   Standalone microgrids and integration with storage and renewables

Reliable:   Proven performance of high up-time, low maintenance long-lived assets (high uptime, 99%+)

Cogeneration:   CHP increases efficiency and savings, meeting California’s strict Air Quality Management District standards
Competitive Environmental Advantages vs. Industry Standard/Alternatives.   Flex Turbine power generation provides scalable, modular, on-site power to both off-grid environments and grid dependent environments. Diesel generators remain the industry standard in most remote, off-grid applications that are often home to extreme conditions (weather, temperature, etc.). Diesel, however, is more carbon intensive relative to natural gas, emitting on average 161 pounds of CO2 per million BTU (“mmbtu”) in comparison to 117 pounds of CO2 per mmbtu, respectively. Not only can natural gas turbines reduce emissions because of its fuel flexibility, many times the Flex Turbine eliminates 100% of the diesel pollution by converting the gas that would otherwise have been flared into power that would have otherwise been produced by a diesel generator.
Customer Service and Customization.   As an organization we are highly customer-centric. We have a service organization in place that responds 24/7 to support our customers. Our engineers act as consultants to our customers to meet their needs. We size our solution to each job by linking our Flex Turbines together in custom site configurations for each customer application. Our sense of urgency, especially in the leasing business, enables us to maintain very high uptimes. Our Flex Heat Recovery solutions do not try to force a
 
59

 
customer’s application to conform to our design. Rather, our design is easily fitted to a customer’s specific application. We are a well-equipped manufacturing organization. Because we do not out-source manufacturing, we can make modifications to meet customer needs and produce service parts more quickly.
Flex Heat Recovery Solutions.   The technologies developed in our Flex Heat Recovery business supply critical components to the Flex Turbine. Namely, the Flex Recuperator is a proprietary high temperature and high-pressure heat exchanger that recovers waste heat in industrial processes into the energy cycle, thus significantly improving operating efficiency and reducing carbon emissions. Because our heat recovery technology was so effective in the Flex Turbine, we began investigating other markets in which the technology could be used to harvest wasted heat energy in high pressure and high temperature applications. Flex Heat Recovery products have been used in a broad array of applications, from the extension of the range of turbine powered destroyers in the British Navy, and in large scale fuel cell applications for power generation, to being prototyped into key components in the oncoming hydrogen economy, such as solid oxide fuel cells. Flex Heat Recovery products that we have developed include:

Plate-Fin: Modular, counter flow (high efficiency), low pressure drop, high flow, high temperature designs;

Fin-Tube: High efficiency counter flow, compact (1/4 size of a typical Shell & Tube), high pressure, 100% welded construction, high temperature, low pressure drop designs; and

Chevron: Highly configurable and scalable, low pressure drop, high temperature, primary surface design is material efficient (no expensive fin) designs.
Competitive Advantage of Flex Heat Recovery Solutions Technology
Power Generation – Improve efficiency and reduce CO2 emissions

Various gas turbines – Up to 28-50% increase in fuel efficiency and lower emissions

Nuclear power – Air to air heat exchangers to enhance reactor safety

Biogas to energy projects – Enables thermal storage and power generation from low grade biogases
Fuel Cells – Improve efficiency and reduce CO2 emissions

Molten carbonate fuel cells – Up to 30% increase in fuel efficiency and reduced emissions

Solid oxide fuel cells – Up to 30% increase in fuel efficiency and reduced emissions
Energy Efficiency Projects

Air preheating from waste heat energy for industrial processes – Reduces fuel and energy costs by recycling waste heat
Emissions Reduction Projects

Exhaust heat reduction for treatment – Reduces cost of emissions control

Carbon capture – Enables emissions reduction technologies that generate a return on investment
Automotive

Combustion-based range extender for electric vehicles – Up to 28-50% increase in fuel efficiency and lower emissions

Split cycle reciprocating engines – Up to 20% increase in fuel efficiency of diesel engines and corresponding emissions reduction
 
60

 
Our Industry
Natural gas is a compelling fuel for power production, as global economies seek cleaner alternatives to coal-fired and oil-fired power plants to fill the gap in demand not currently met by renewable energy sources. In 2020, approximately 4.0 trillion kwh were generated from utility-scale facilities, of which 40% comprised natural gas, 19% coal, 20% nuclear, 20% renewables and 1% petroleum and others.
The production of CO2 has been shown to be a contributing factor to global climate change. However, while the current generation of our gas turbines running on natural gas does produce some CO2, the amount produced by Flex Turbines is only a fraction of that produced by other forms of U.S. combustion power generation. Regardless, we may occasionally be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances, rules, or the requirements of the incentive programs on which we and our customers currently rely.
Today approximately 70% of the world’s electricity is consumed by 10 countries and 850 million people. Approximately 11% of the world’s population currently lack access to electricity, according to the International Energy Agency’s 2019 World Energy Outlook. According to the IEA, as economic development worldwide spurs demand for electricity, approximately 10.0 million MWh of incremental power is expected to be needed by 2040. Further, we believe that many countries around the world, keenly focused on economics as well as the environment, will increasingly look to natural gas to displace environmentally dirtier fuels such as heavy fuel oil (HFO), automotive diesel oil (ADO), and coal that are used to generate power, particularly if natural gas is cheaper than these fuels.
The same can be said for the U.S. as its consumers continue to rely heavily on the grid for access to electricity, with the assumption that a given demand region is within close proximity to utility facilities. Furthermore, the reliability of electric utilities according to EIA’s System Average Interruption Duration Index (SAIDI), or the total time an average customer experiences non-momentary interruptions lasting longer than five minutes, has ranged between 3 and 8 hours per customer since 2013. In 2018, U.S. electricity customers averaged power outages of 5.8 hours per customer.
We believe the power industry’s future will be shaped by the mega-trends that favor the development of highly reliable, low pollution, distributed power systems and alternative energy sources that should drive demand for highly efficient Flex Turbines, Flex Heat Recovery solutions and other components of our technology suite. We believe our product offerings will be further instrumental in mega-trends such as:

Continued growth in electricity demand, including for transportation

Decarbonization efforts to mitigate climate change peril, including carbon taxes

Natural gas as replacement for coal and oil-fired equipment and processes

Secular shift to distributed generation to assure power quality and avoid the cost of expanding aging and inefficient transmission infrastructure

Emergence of zero or low pollution alternative sources of power in the hydrogen economy, including fuel cells, solar and wind power

A drive for energy efficiency causing every industry to look for ways to eliminate wasted energy consumption
Primary Applications
Converting Waste Gas to Useful Energy
The Flex Turbine can produce reliable, distributed electricity by running on waste fuels such as methane from landfills and CO2 heavy field gas from oil producing wells down to 350 BTUs, as well as synthetic gasses such as ethane produced in the refining process with up to 2,500 BTUs.
 
61

 
Improving Traditional Processes
Flex Heat Recovery solutions are most effective in high temperature, high pressure environments. These systems have a smaller footprint due to their design efficiency, making them ideal for retrofitting existing facilities. They are currently being evaluated by potential customers for the next generation of carbon capture technology, multiple fuel cell applications, and emissions reduction projects.
Enabling Clean Technology
We see efficient use of thermal energy as the key to energy efficiency in many of today’s most promising alternative fuel technologies, such as solid oxide fuel cells for power generation, traditional fuel cell technology for power, green hydrogen production, and certain heat as energy storage applications, like molten salt. We have sold Flex Heat Recovery production or prototype systems for each of these energy alternatives. In addition, components of the Flex Turbine have been integrated with renewable energy projects that provide heat from external sources to power the turbine and produce energy.
Our Market Opportunity
We believe that the world is looking for cleaner, reliable electrical power alternatives both to replace existing sources and to provide electrical power where electricity is not available or reliable. Additionally, we believe the adoption of new emerging technologies and fuels will expand our opportunities to grow.
In 2020, approximately 4.0 trillion kwh were generated from utility-scale facilities, of which 40% comprised natural gas, 19% coal, 20% nuclear, 20% renewables and 1% petroleum and others. Natural gas is one of the most abundant and available sources of clean energy as market trends such as the electrification of vehicles and the phasing out of coal-fired plants becomes more commonplace.
Power generation from fossil fuels and the associated release of CO2 as a byproduct has been shown to be a contributing factor to global climate change. The world continues to rely on technology advances combined with best practices to reduce greenhouse gas emissions.
The following trends have increased onsite, lesser emissions power demand from customers in a growing number of markets, and we expect them to continue to do so:

Continued growth in electricity demand, including for transportation

Decarbonization efforts to mitigate climate change peril, including carbon taxes

Natural gas as replacement for coal and oil-fired equipment and processes

Secular shift to distributed generation to assure power quality and avoid the cost of expanding aging and inefficient transmission infrastructure

Emergence of zero or low pollution alternative sources of power in the hydrogen economy, including fuel cells, solar and wind power

A drive for energy efficiency causing many industries to look for ways to eliminate wasted energy consumption
We believe that these trends will expand the market opportunity for Flex Turbine solutions and Flex Heat Recovery systems.
Our Growth Strategy
Our chief objective is to be a primary provider of clean, affordable and reliable energy. In order to accomplish this, we intend to:

Accelerate growth in underpenetrated markets and expand our geographic footprint.   We believe the total market opportunity for modular, onsite power remains significantly under-penetrated in
 
62

 
the U.S. The flexibility and reach of our leasing model, coupled with our scalable turbine packages, allow us to increase market penetration and enter new markets quickly and efficiently. We plan to strengthen our existing relationships and identify new sub-sectors to accelerate our growth. We will seek to enter new markets and geographies over time, both in the U.S. and internationally, where climate, demand for clean energy and regulatory policies position turbine power generation as an economically compelling alternative to centralized electric utilities.

Continued deployment of our turbine fleet and heat recovery solutions to our customers.    We believe that integrated energy systems enhance the reliability, resiliency and predictability of turbine-generated electricity in certain markets, increasing the overall value proposition to customers. We expect demand for the Flex Turbine with on-board hot water heat exchanger, our combined heat and power (“CHP”) solution, to increase over time. We also expect continued requests by our customers to integrate our energy systems with existing energy storage (e.g. photovoltaic battery cells) to provide additional resiliency.

Broaden and enhance service offerings.   We provide ongoing monitoring and service as a standard component of our leasing agreements. We believe there is significant market demand for long-term protection plans for customers who have chosen to finance or purchase systems rather than lease them, and we will strive to capture a significant share of this market. We plan to expand our green energy product and service offerings to provide further cost savings to our customers and optimize the performance of existing traditional processes.

Increase Inventory to Shorten Delivery Times.   Flex Turbines currently are built upon order with a six or more month lead time from order to completion. By investing in additional inventory levels and building certain sub-assemblies in advance, we believe we can substantially shorten the time to delivery and thereby improve our appeal to customers searching for prompt energy solutions.
Competition
Our Flex Turbines broadly compete with existing technologies, including diesel generators, used in the generation of distributed power. Some of our competitors who produce distributed generation technology and products are large, well-capitalized companies with a global presence, significant brand recognition, economies of scale, and substantial product development, distribution, and marketing resources.
In remote locations, our Flex Turbines compete primarily with traditional internal combustion engine generators, such as those manufactured by Caterpillar, GE-Jenbacher, and Cummins, and provided by these companies as well as others such as Gravity, Moser, United Rentals, Aggreko and Baseline. These engine generators are a well-established technology and are often used as a lower-cost remote power or co-generation solution. These engines, however, have disadvantages that may outweigh the benefits, including relatively high emissions, high maintenance costs, higher levels of low frequency noise emissions, and require significant downtime for routine maintenance. In contrast, the Flex Turbine operating on natural gas, either pipeline or well gas, produces low levels of emissions, requires very limited routine maintenance, is sound-attenuated to 62 dba and has demonstrated a 99% uptime.
Where available, the cost of purchasing electricity from the electric utility grid is usually lower than acquiring the same amount of energy through a distributed generation technology. Utilities may charge customers using a distributed generation technology additional fees to connect to their grids, which distributed generation customers typically do when grid access is available. That said, where grid electricity is very expensive or where the utility grid is occasionally unreliable (particularly in remote or extreme environments), a distributed generation solution may be a viable and economic solution for many customers. In addition to the engine generator providers above, other turbine providers such as Capstone, OPRA and Siemens also provide solutions. Reasons why our Flex Turbine may be chosen include low emissions, a wide range of fuel acceptance, high reliability, low maintenance, and owned service response infrastructure. Additionally, we can provide additional economic value to our customers who repurpose or reuse wasted gas or heat for heating, cooling, dehumidification, and other uses with a heat recovery solution added to the Flex Turbine.
 
63

 
In the future, our Flex Turbines will likely compete with other distributed generation technologies, including solar-powered and wind powered microgrids, as well as emerging technologies like fuel cells. Solar and wind generation face the challenge of unreliable weather conditions and may require the use of storage technologies in order to mitigate the intermittent power generation. However, storage technology may not be sufficient to completely supplement the inconsistent power generated. Fuels cells and other emerging energy alternatives face the challenges of cost, performance and durability. Our Flex Turbine produces constant low emission electricity that is available 24/7 and has demonstrated 99% uptime performance.
We believe Flex Turbine competitive advantages include:

Clean – low emissions, CARB approved

Reliable – low maintenance (one 8-hour scheduled maintenance per year)

Wide Fuel Tolerance – pipeline to well gas, propane, high H2S gas

High Uptime – 99% uptime proven over 8 million operating hours

Scalable – can operate individually or in parallel

Valuable – high uptime maximizes customer revenue

Zero Capex Leasing Solution – leasing model allows customers to limit capital expenditures
Flex Heat Recovery products compete against the products of other companies providing heat exchangers to the high temperature, high pressure heat transfer industry, including Alfa Laval, Mezzo Technologies, Munters and Sumitomo. Traditional heat exchanger companies fall into two broad categories: those that supply standard products and designs whereby customers fit a standard exchanger to their application and those that engineer specific one-off exchangers for specific customer applications. The standard product approach provides low costs with design inefficiencies such as size, shape and the custom approach provides optimal design at high cost. We have developed proprietary Flex Heat Recovery products that address both cost and configuration. Our solution provides a proprietary standard and scalable approach that also provides a customized solution for each customer’s application. This approach is especially important for developing technologies in the emerging hydrogen economy. These technologies include solid oxide fuel cells (SOFC) and molten carbonate fuel cells (MCFC). Existing and alternative energy technologies also benefit from custom heat exchanger solutions to drive peak efficiency. These applications include: internal combustion engines, large and small gas turbine recuperation, combine heat and power projects, and emissions reduction equipment. In each application, customers typically value compactness, thermal efficiency, and custom designs over price and lead-time.
Flex Heat Recovery solutions competitive advantages include:

Very high temperature, high pressure capability

Low pressure drop

Highly efficient design

Customizable to meet customer needs

Scalable
Employees
As of July 31, 2021, we had 99 full-time employees. Of those, 8 employees are engaged in commercial functions (including sales and marketing), 60 employees are engaged in customer service, and 14 employees are engaged in engineering functions (including field support, production support and research and development). None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
 
64

 
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of equity-based compensation awards. For more information regarding our equity incentive plans, see “Executive Compensation – Equity Compensation.
Intellectual Property
We believe that neither we nor our competitors can achieve a significant proprietary position on the basic technologies currently used in turbine systems. As such, we generally rely on trade secret protection with respect to our processes or software, such as our manufacturing processes, specific software applications related to our O&G customers, and with respect to core technology in our heat exchanger business. We also believe, however, that our technology, components and manufacturing processes are difficult to reverse engineer. We have nine issued U.S. patents (expiring generally between 2021 and 2037), 15 patents issued in other countries (expiring generally between 2024 and 2037), and one patent application pending internationally. As discussed above, Ingersoll Rand invested over $250 million from 1996 through 2010 on certain technology development and this investment has contributed to developing our intellectual property portfolio and trade secrets, in particular regarding our software applications related to our O&G customers, among other things. Our issued patents and pending patent applications generally relate to combustor, recuperator, core engine, heat exchanger, and gearbox technologies.
In general, our employees are party to agreements providing that all inventions, whether patented or not, made or conceived while being our employee, which are related to or result from work or research that we perform, will remain our sole and exclusive property. In addition, we also rely on contractual protections with our customers, suppliers, and distributors, in addition to our security measures, to protect our trade secrets and know-how.
We made the strategic decision to focus our patent portfolio on those patents that we believe will be beneficial to our business and, as a result, have ceased using certain patents that we believe will have no or limited use. Please see section captioned “Risk Factors – Risk Factors Relating to our Business and Industry – Our failure to adequately protect our intellectual property rights could impair our ability to compete effectively or defend ourselves from litigation, which could harm our business, financial condition, and results of operations” for further discussion regarding our intellectual property.
Engineering
Because the clean energy technology industry is characterized by its early state of adoption, our ability to compete successfully is heavily dependent upon our ability to ensure a continual and timely flow of competitive products, services, and technologies to the marketplace. We continue to engineer and develop new products and technologies and to enhance existing products in the areas of cost, size, weight, and in supporting service solutions in order to drive commercialization.
Facilities
We recently completed the relocation of our manufacturing and office space from a single facility in Portsmouth, New Hampshire where approximately 42 of our employees were located. We relocated our office space to our new corporate headquarters at 112 Corporate Drive, Portsmouth, New Hampshire, and our manufacturing capabilities have been relocated to our facility located in Dover, New Hampshire.
We also lease office space and service facilities in various locations described below. These facilities together comprise approximately 96,010 square feet of space. On December 23, 2020, we signed a new lease for 5,800 square feet of space for our new Portsmouth, New Hampshire corporate headquarters. The lease term begins in February 2021 and expires in June 2024. Our current lease for our Dover facility was entered into in January 2019 and expires in June 2027. In addition to our corporate headquarters, we lease office space located in Greenwood Village, Colorado. Our current lease for our Greenwood Village facility was entered into in May 2018 and expires in September 2023. We also have service facilities located in
 
65

 
(i) Odessa, Texas; (ii) Alexander, North Dakota; and (iii) Grand Prairie, Alberta, Canada. Our current lease for our Odessa facility was entered into in August 2019 and expires in August 2024. Our current lease for our Alexander facility was entered into in May 2016 and is currently on a month to month basis. Our current lease for our Grand Prairie facility was entered into in January 2016 and expires in December 2021. We believe our facilities are adequate to support our business for at least the next twelve months.
Legal Proceedings
From time to time, we are involved in legal proceedings or subject to claims arising in the ordinary course of our business. Although the results of legal proceedings and claims cannot be predicted with certainty, we are not currently party to any legal proceedings the outcome of which, in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. In a situation where the outcome of a legal proceeding would be adverse to our interests, we anticipate that most payments we may be required to make in connection therewith would be adequately covered by our existing insurance policies.
 
66

 
MANAGEMENT
Executive Officers and Directors
The following table sets forth information about our executive officers and directors, as of October   , 2021:
Name
Age
Position(s)
Executive Officers
Mark Schnepel 46 Chief Executive Officer
Wes Kimmel 38 Chief Financial Officer
Doug Baltzer 52
Chief Commercial Officer
Non-Employee Directors
Thomas Denison 60 Director
Patrick Connelly 45 Director
George Walker 64 Director
Executive Officers
Mark Schnepel has been the President of FEES since 2013. Concurrently with the completion of the Contribution Transaction, Mr. Schnepel will assume the role of President and Chief Executive Officer of FGS. He brings more than 20 years of manufacturing and development experience in the turbo machinery industry. He first joined the Ingersoll Rand Energy Systems turbine business in 2000 and transitioned with us when we purchased that business in 2011. His responsibilities have included: product engineering, test engineering, lab operations, manufacturing operations, procurement, business development, and field service. Prior to Ingersoll-Rand and our company, Mr. Schnepel worked as a production engineer for the Tech-Ceram Corporation, a high-volume electronics package manufacturer. He is based in Portsmouth NH. Mr. Schnepel received a B.S. in Mechanical Engineering from Union College.
Doug Baltzer has been the President of FLPS since 2013. Concurrently with the completion of the Contribution Transaction, Mr. Baltzer will assume the role of President and Chief Commercial Officer of FGS. He is responsible for our growth initiatives, business development and overall commercial management. Mr. Baltzer has over 27 years of experience in senior management positions. His roles have ranged from Regional Manager, National Director and President at companies including Northland Power Service, Aggreko, FEI and FLPS. Over the past 15 years, he has been involved in five start-up companies and has helped raise more than $75 million in venture capital to support each company’s growth goals. Mr. Baltzer received a B.S. in Business and Finance from Tabor College and an Executive M.B.A. from the University of Denver.
Wes Kimmel has been the Chief Financial Officer and Secretary of FEES since 2013. Concurrently with the completion of the Contribution Transaction, Mr. Kimmel will assume the role of Chief Financial Officer, Treasurer and Secretary of FGS. Prior to joining us, he was Vice President of RNS Capital Partners, a private equity firm with a significant indirect equity stake in our company. While at RNS Capital Partners, Mr. Kimmel worked closely with our management on internal finance, fundraising, sales and marketing plans, and strategic initiatives. Prior to RNS Capital Partners, he was an associate at First Reserve Corporation, an energy-focused private equity firm, where he helped manage the firm’s investments in power generation and oilfield services. Prior to First Reserve Corporation, Mr. Kimmel worked in both the Mergers & Acquisitions group and Leveraged Finance group at Morgan Stanley. He graduated Phi Beta Kappa from Washington and Lee University with majors in Economics and American History.
Non-Employee Directors
George Walker is the Chairman of our board of directors and our lead independent director. From July 2014 until April 2020 he was the Chief Executive Officer of Cahill Services, LLC, a Houston-based
 
67

 
provider of specialty rental services to customers in the O&G, refining, industrial, petrochemicals, utilities and related industries. Since March 2020, Mr. Walker has also served as the Chairman of the board of directors of Cahill Services, LLC. With more than 35 years of domestic and international expertise in the industrial service sector Mr. Walker is practiced in dealing with all aspects of commercial business development in both mature and developing markets. Mr. Walker retired from Aggreko LLC in July 2014 after 27 years, where he served as President of the North American region and Executive Director on the Main Board of Aggreko PLC. He had been a part of or led the acquisition of more than ten companies during his years at Aggreko. Mr. Walker received a Bachelor of Business Administration degree in Finance from the University of Texas.
Thomas Denison is a 30-year participant in the private equity energy business. He is currently and since 2010 has been the managing partner of RNS Capital Partners, a closely held, private equity firm with portfolio companies in technology, energy and service businesses. Prior to co-founding RNS Capital Partners, Mr. Denison served ten years as managing director and general counsel for First Reserve Corporation, an energy-focused private equity firm. Mr. Denison joined First Reserve Corporation after an 11-year career with Gibson, Dunn & Crutcher, LLP. He was a partner in the firm at the time of his departure. Mr. Denison holds a Bachelor of Science degree from the University of Denver in Business, and a Juris Doctorate from the University of Virginia School of Law.
Patrick Connelly is a Co-Managing Partner of Amberjack Capital Partners, a Houston based private equity firm that provides growth equity capital and strategic support to innovative companies serving the infrastructure, industrial and energy industries. Before joining Amberjack Capital Partners, Mr. Connelly invested in numerous oilfield service companies in the U.S. and Canada through his work as a Managing Director at SCF Partners, an energy focused private equity fund. Mr. Connelly’s career began as active duty infantry officer in the US Army, serving in leadership roles during multiple overseas assignments. Mr. Connelly received a Bachelor of Science degree from the U.S. Military Academy at West Point, a Master of Public Administration from Harvard’s Kennedy School of Government, and a Master of Business Administration from Harvard Business School.
Board Composition and Leadership Structure
Our board of directors is composed of three directors, all of whom are independent directors (other than for purposes of audit committee independence requirements). All of our independent directors are highly accomplished and experienced business leaders in their respective fields, who have demonstrated leadership in significant enterprises and are familiar with board processes. Each of our directors holds a one-year term of office until our next annual meeting of stockholders and serves until his or her successor is duly elected and qualified or until his or her earlier death, resignation, retirement, disqualification or removal.
George Walker serves as our lead independent director. As lead independent director, George Walker presides over executive sessions of our independent directors, and perform such additional duties as our board of directors may otherwise determine and delegate. As a result, we believe that the lead independent director can help ensure the effective independent functioning of our board of directors in its oversight responsibilities.
Board Oversight of Risk
Our board of directors has an active role, as a whole and also at the committee level, in overseeing the management of our risks. Our board of directors is responsible for general oversight of risks and regular review of information regarding our risks, including credit risks, liquidity risks and operational risks. The compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The audit committee is responsible for overseeing the management of risks relating to accounting matters and financial reporting. The nominating and corporate governance committee is responsible for overseeing the management of risks associated with the independence of our board of directors and potential conflicts of interest. Although each committee is responsible for evaluating certain risks and overseeing the management of such risks, our entire board of directors is regularly
 
68

 
informed through discussions from committee members about such risks. Our board of directors believes its administration of its risk oversight function has not negatively affected the board of directors’ leadership structure.
Code of Ethics
We have adopted a Code of Ethics applicable to our directors, executive officers and employees that complies with the rules and regulations of Nasdaq. Upon the completion of this offering, a copy of the Code of Ethics will be available on our website at www.flexenergy.com and will be provided without charge upon request to us in writing at 112 Corporate Drive, Portsmouth, NH 03801. We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.
Board Committees
The standing committees of our board of directors currently include an audit committee, a compensation committee, and a nominating and corporate governance committee. Each of the committees report to the board of directors as they deem appropriate and as the board of directors may request. The composition, duties and responsibilities of these committees are set forth below.
Audit Committee
Our audit committee consists of Messrs. Walker, Denison and Connelly. The board of directors has determined that Mr. Walker is independent under Nasdaq listing standards and Rule 10A-3(b)(1) under the Exchange Act. The chairperson of our audit committee is George Walker. The board of directors has determined that Patrick Connelly is an “audit committee financial expert” within the meaning of SEC regulations. Our board of directors has also determined that each member of the audit committee has the requisite financial expertise required under the applicable requirements of Nasdaq. In arriving at this determination, the board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector.
In accordance with Rule 10A-3(b)(1)(iv) under the Exchange Act, within 90 days from the effectiveness of the registration statement of which this prospectus is a part, the audit committee will consist of a majority of independent directors (for purposes of Rule 10A-3(b)(1)), and within one year from the effectiveness of the registration statement of which this prospectus is a part, the audit committee will consist solely of independent directors.
The primary purpose of the audit committee is to discharge the responsibilities of the board of directors with respect to our accounting, financial, and other reporting and internal control practices and to oversee our independent registered accounting firm. Specific responsibilities of our audit committee include:

selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

helping to ensure the independence and performance of the independent registered public accounting firm;

discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

reviewing policies on risk assessment and risk management;

reviewing related party transactions;
 
69

 

obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

approving (or, as permitted, pre-approving) all audit and all permissible non-audit service to be performed by the independent registered public accounting firm.
Compensation Committee
The compensation committee consists of Messrs. Walker, Denison and Connelly. Our Board has determined each member is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. The chairperson of the compensation committee is George Walker. The primary purpose of the compensation committee is to discharge the responsibilities of the board of directors to oversee our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. Specific responsibilities of the compensation committee will include:

reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, if any is paid by us, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;

reviewing and approving on an annual basis the compensation, if any is paid by us, of all of our other officers;

reviewing on an annual basis our executive compensation policies and plans;

implementing and administering our incentive compensation equity-based remuneration plans;

assisting management in complying with our proxy statement and annual report disclosure requirements;

approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our officers and employees;

if required, producing a report on executive compensation to be included in our annual proxy statement; and

reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Messrs. Walker, Denison and Connelly. Our board of directors has determined each member is independent under Nasdaq listing standards. The chairperson of our nominating and corporate governance committee is George Walker. Specific responsibilities of the compensation committee will include:

making recommendations to our board of directors regarding candidates for directorships;

making recommendations to our board of directors regarding the size and composition of our board of directors;

overseeing our corporate governance policies and reporting; and

making recommendations to our board of directors concerning governance matters.
 
70

 
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents summary information regarding the total compensation awarded to, earned by, and paid to our principal executive officer and each of our named executive officers during fiscal years 2019 and 2020. These individuals are our named executive officers for 2019 and 2020:
Name and Principal Position
Fiscal
Year
Salary(1)
($)
Bonus(2)
($)
Equity
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
All Other
Compensation
($)
Total ($)
Mark Schnepel
Chief Executive Officer
2020 253,005 55,000 308,005
2019 262,948 30,000 292,948
Wes Kimmel
Chief Financial Officer
2020 236,512 65,000