Attached files
| file | filename |
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| EX-23.2 - New Generation Biofuels Holdings, Inc | v178644_ex23-2.htm |
| EX-21.1 - New Generation Biofuels Holdings, Inc | v178644_ex21-1.htm |
| EX-31.1 - New Generation Biofuels Holdings, Inc | v178644_ex31-1.htm |
| EX-23.1 - New Generation Biofuels Holdings, Inc | v178644_ex23-1.htm |
| EX-32.1 - New Generation Biofuels Holdings, Inc | v178644_ex32-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
Commission
File No. 1-34022
NEW
GENERATION BIOFUELS HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
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Florida
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26-0067474
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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5850
Waterloo Road, Suite 140
Columbia,
Maryland 21045
(Address
of Principal Executive Offices, Including Zip Code)
(410)
480-8084
(Registrant’s
Telephone Number, Including Area Code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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(Title of Each Class)
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(Name of Exchange on Which
Registered)
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Common
Stock, par value $0.001 per share
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NASDAQ
Capital Market
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. o Yes x No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes x No
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). o Yes o No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
o Large accelerated
filer o Accelerated
filer
o Non-accelerated
filer x Smaller reporting
company
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). o Yes x No
The
aggregate market value of the Registrant’s Common Stock, par value
$0.001 per share, held by nonaffiliates of the Registrant as of June 30,
2009 was $24,755,104.
As of
March 5, 2010, the number of shares of the Registrant’s Common Stock, par value
$0.001 per share, outstanding was 34,702,436.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Company's Proxy Statement for the 2010 Annual Meeting of
Shareholders are incorporated by reference herein as portions of Part III
of this Annual Report on Form 10-K. A definitive copy of the
Proxy Statement will be filed with the SEC within 120 days after the end of
the year covered by this Form 10-K.
TABLE
OF CONTENTS
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Page
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PART I
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1
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Item 1.
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Business
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Item 1A.
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Risk
Factors
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13
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Item 1B.
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Unresolved
Staff Comments
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21
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Item 2.
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Properties
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21
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Item 3.
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Legal
Proceedings
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22
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Item
4.
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Reserved
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22
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PART II
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23
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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23
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Item 6.
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Selected
Financial Data
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24
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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30
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Item 8.
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Financial
Statements and Supplementary Data
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30
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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31
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Item 9A(T).
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Controls
and Procedures
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31
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Item 9B.
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Other
Information
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32
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PART III
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33
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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33
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Item 11.
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Executive
Compensation
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33
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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33
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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33
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Item 14.
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Principal
Accounting Fees and Services
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33
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PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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33
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Signatures
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35
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Index
to Exhibits
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36
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Certifications
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PART
I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve numerous assumptions,
risks and uncertainties, many of which are beyond our control. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth under the
heading “Risk Factors” beginning on page 13 and elsewhere in this report.
Important factors that may cause actual results to differ from projections
include without limitation:
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our
lack of operating history;
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our
dependence on additional financing to continue as a going
concern;
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our
inability to generate revenues or profits from sales of our biofuel and to
establish commercial scale production
facilities;
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the
disproportionally higher cost of production relative to units
sold;
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our
ability to fully realize the value of our technology license agreement,
which is our principal asset;
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our
inability to enter into acceptable sublicensing agreements with respect to
our technology or the inability of any sublicensee to successfully
manufacture, market or sell biofuel utilizing our licensed
technology;
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market
acceptance of our biofuel;
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our
inability to compete effectively in the renewable fuels
market;
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governmental
regulation and oversight, including our ability to qualify our biofuel for
certain tax credits and renewable portfolio
standards;
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our
ability to protect our technology through intellectual property
rights;
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unexpected
costs and operating deficits; and
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adverse
results of any material legal
proceedings.
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All
statements, other than statements of historical facts, included in this report
regarding our strategy, future operations, financial position, estimated revenue
or losses, projected costs, prospects and plans and management objectives
are forward-looking statements. When used in this report, the words
“will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,”
“project,” “plan” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements are based on information
available at the time the statement was made. We undertake no obligation to
update any forward-looking statements or other information contained in this
report as a result of future events, new developments or otherwise. You should
not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements are reasonable, these plans, intentions or
expectations may not be achieved.
As used in this report, the terms
“company,” “we,” “us” and “our” refer to New Generation Biofuels Holdings,
Inc.
ITEM 1. BUSINESS
Our
Business
We produce our biofuels using a
proprietary blending technology that we believe is simpler, cleaner, less
expensive, and less energy intensive than the complex chemical reaction process
used to produce traditional biodiesel. We believe that this technology enables
us to produce biofuels that cost less to produce, use less energy and generate
significantly lower emissions than our competitors. Our technology also gives us
the flexibility to produce our biofuel from multiple feedstocks, which allows us
to use non-edible raw materials in our production process, when desirable. We
believe that these factors will enable us to customize our product to specific
customer requirements and react more quickly to trends in the biofuels
market.
1
During the year ended December 31,
2009, we commenced our principal business operations and have
exited the development stage. Prior to that from our inception, we were a
development stage entity in accordance with the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915, “Development Stage
Entities.”
We have incurred annual operating
losses since inception and expect to incur substantial operating losses in the
future in connection with the development of our core products. As of
December 31, 2009, we had an accumulated deficit of $50.4
million. The operation and development of our business will require
substantial additional capital by the second quarter of 2010 to fund
our operations, payments due under the exclusive license, the acquisition or
development of manufacturing plants, research and development and other
initiatives including potentially the financing of future
acquisitions.
Our near-term business strategy
involves the following:
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Direct
Sales. We are seeking to develop a revenue stream from
direct sales of our biofuel produced at our Baltimore production facility.
Based on existing contracts with our customers, we are seeking to expand
our facility over the next several months. Our longer term
strategy would include construction of additional
plants.
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Technology
Licensing. As a second potential revenue stream, our
business plan contemplates collecting royalties through sublicensing our
proprietary technology where it is more efficient for manufacturers to
produce our biofuel at their own plants rather than requiring production
at our facilities. We are in the process of exploring various technology
licensing relationships.
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Government Tax
Credits. We are also pursuing our eligibility and
qualification for tax credits and other government incentives to
strengthen the competitive position of our biofuel and to otherwise
attempt to take advantage of the U.S. government’s encouragement of
“green” technologies.
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Strategic
Partners. We are seeking arrangements with strategic
partners who would both provide funding and support our efforts to develop
our production capacity and attract
customers.
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Research and
Development. To the extent permitted by our limited
resources, we are continuing to develop our technology and extend it to
fuels with additional applications.
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Recent
Developments during the Fourth Quarter of 2009 and Early 2010
Significant recent developments include
the following:
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Completed
41 production runs at our Baltimore production facility through December
2009.
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Produced
209,000 gallons of our biofuel in
2009.
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Blended
our biofuel with #6 Diesel fuel to diversify our product applications and
expand our potential markets.
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On
March 2010, we received the permit to construct approval from the State of
Maryland to expand our Baltimore facility to 25 million
gallons.
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On
March 12, 2010, we executed a non-binding Memorandum of Understanding, or
MOU, with Regent Trend Investment Ltd (soon to be re-named Milestone
Biofuels Limited, or Milestone), a potential strategic partner from China,
under which Milestone would invest $20 million in our equity securities
and we would collaborate with Milestone to form a joint venture to develop
and operate biofuel production plants in the continental United States
with a total aggregate plant capacity of 250 million gallons per year.
Milestone would fund all of the capital requirements for the joint venture
and we would provide the technology and operate the plants. We
would earn a minimum royalty on all sales from the joint venture and would
share in a percentage of profits above the minimum royalty. The MOU
remains subject to a due diligence period of up to 75 days and
negotiation, execution and delivery of definitive agreements acceptable to
both parties and approved by their respective boards of directors. The
investment also may be subject to shareholder approval under the NASDAQ
listing rules. There is no assurance that definitive agreements will be
signed or that the transaction will
close.
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In
February 2010, we entered into an agreement with Ferdinando Petrucci, the
inventor of our proprietary technology, to issue 1,100,000 shares of
common stock and $120,000 in cash in lieu of the $1 million license
payment payable in two equal installments in February and March 2010 to
help conserve cash and strengthen our
liquidity.
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2
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In
February 2010, we closed a private placement of 1,890,858 shares of common
stock and warrants to purchase 1,890,858 shares of common stock for total
gross proceeds of approximately $1.3
million.
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In
January 2010, Baltimore City Schools named us in their annual heating fuel
request for proposal. This request for proposal by the Baltimore City
Schools is in conjunction with a proposed 1 year contract with the City of
Baltimore. We previously completed a successful test program with the City
of Baltimore and reached an agreement to proceed with a longer contract to
include the Baltimore City Schools.
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In
December 2009, we closed a registered direct offering of 1,926,250 shares
of common stock and warrants to purchase 577,875 shares of common stock
for total gross proceeds of approximately $1.5
million.
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In
November 2009, we entered into a sales contract, following the purchase
order entered into in July 2009, to supply Fenix Energy with 750,000
gallons of our biofuel per month for 12 months under specified conditions.
In March 2010, as provided in the sales contract, we requested a letter of
credit equivalent to one month’s sales. We have not yet received the
letter of credit which Fenix would need to post to satisfy one of the
conditions to shipment. We also would have to complete
modifications to our Baltimore production facility to be able to make
shipments under this arrangement.
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In
November 2009, we received a letter from NASDAQ that confirms that
we are back in compliance with their shareholders’ equity
requirements for continued listing. However, in December 2009, we received
a letter from NASDAQ that states that we are not in compliance
with the NASDAQ minimum bid price requirement for continued listing and
have until June 2010 to regain
compliance.
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In
October 2009, we signed a letter of intent with Ace Biofuels under which
Ace Biofuels intends to license product formulations, manufacturing
technology and know-how from us with the intent of constructing a biofuel
manufacturing facility and marketing our biofuel in Puerto Rico, subject
to completion of definitive
agreements.
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Our
Growth Strategy
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Continue pursuing sales to
large customers through validation of biofuel performance. We are
continuing to work with potential customers regarding sales of our
biofuel. The sales cycle is lengthy, but we continue to
emphasize the fuel characteristics and emissions data regarding our
biofuel. To meet the potential demands of customers
and prospective customers, we will need to develop additional production
capacity.
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Pursue technology sublicensing
opportunities. We plan to pursue a second revenue steam
by collecting royalties through sublicensing our proprietary
technology. In March 2009, we entered into an addendum to our
license agreement to provide for a cross-license with PTJ Bioenergy
Holdings (“PTJ”) for all improvements by us to our proprietary
technology. The royalty payable by PTJ to us for the
cross-licensed technology will equal 5% of PTJ’s revenues outside of our
territory, which under the license agreement includes North America,
Central America and the Caribbean. Additionally, we have entered
into non-binding letters of intent (“LOIs”) with businesses in Puerto Rico
and Canada, which contemplate a payment of a fee per gallon of fuel
produced and sold.
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Power plants that are
constrained by emissions restrictions and eligible for renewable energy
credits. We are marketing our biofuel as a low capital
expenditure solution that would enable customers to meet requirements to
use renewable energy sources and increase the productivity and extend the
useful life of coal and oil power
plants.
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Commercial and industrial
process and space heating customers. These customers
primarily consist of state-owned facilities and privately-owned corporate
manufacturing facilities. Many states have already passed mandates to
utilize renewable energy which will continue to increase
annually. Privately owned corporate manufacturers are also beginning
to concentrate on their responsibilities as a global corporate citizen and
are proactively seeking to lower their greenhouse gas emissions. We
are marketing our biofuel as a fuel alternative to both of these
consumers, including through existing
distributors.
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Expand product lines to
develop new applications. Since many of the advantages of our
biofuel come from their versatility and ability to be customized for
different applications, we intend to continue our research and development
efforts to develop additional applications for commercial use. We
also plan to customize our products to customer specifications and
continue to expand our product line to serve new market segments, such as
blending our biofuel with #6 Oil and co-firing in Coal burning
generators.
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Pursue favorable tax and
regulatory policies for our biofuels. On the federal
level, we have partnered with other renewable fuel providers to support
the renewal of the 50 cent per gallon “alternative fuel” tax credit” that
expired on December 31, 2009. An extension of this credit is
included in legislation that has passed the U.S. Senate, and is awaiting
consideration by the U.S. House of Representatives. We have also
been working with federal policymakers in an effort to qualify our fuel
for the $1 per gallon tax credit for “renewable diesel.” In addition,
on both the federal and state level, we are working to qualify our
biofuels as a fuel that receives credit for renewable energy portfolio
standards that require the use of renewable energy sources and/or to
qualify for Federal and state biofuel mandates and
incentives.
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The
Biofuels Industry and Market Trends
Biofuels
and Feedstocks
Biofuels can be defined generally as
solid, liquid or gas fuels produced from renewable, recently living biological
resources, such as plant biomass. In contrast, fossil fuels are derived
from non-renewable biological material formed from the decayed remains of
prehistoric plants and animals. Biofuels are perceived to have a number of
potential benefits including the ability to reduce greenhouse gas emissions and
environmental pollution, promote energy independence through the growth of
domestic energy sources, increase rural development and establish a sustainable,
renewable future energy supply.
“First generation biofuels,” such as
ethanol or biodiesel, use conventional technologies to produce fuel from crops
high in sugar, such as sugar cane or sugar beets, or high in starch, such as
corn or maize, or from crops containing high amounts of vegetable oil, such as
soybeans or palm oil, or from animal fats. For example, ethanol production
involves fermenting sugars or starches to produce ethyl alcohol, while biodiesel
is produced through a chemical reaction called transesterification to generate a
methyl ester fuel, while yielding glycerin as a by-product. The growth of first
generation biofuels has been criticized because of perceptions that their
feedstocks may divert food from human use and contribute to price increases and
food shortages, particularly in lesser-developed countries.
“Second generation” or “advanced”
biofuels use newer technologies to produce fuel from food crops, non-food plants
and waste vegetable oil sources. We call our biofuel “New Generation
Biofuel” because it can be produced using our less complex, proprietary blending
technology to derive fuels from both food crops like soybeans and non-food
sources such as recycled vegetable oil.
Market
Size and Growth
The
Energy Information Administration (“EIA”) has projected that the use of
alternative fuels, such as ethanol, biodiesel and coal-to-liquid, will increase
substantially as a result of the higher prices projected for traditional fuels
and the support for alternative fuels provided in recently enacted federal and
state legislation. According to a recent report, direct economic output
from the advanced biofuels industry, including capital investment, research and
development, technology royalties, processing operations, feedstock production
and biofuels distribution, is estimated to rise to $5.5 billion in 2012, $17.4
billion in 2016 and $37 billion by 2022.
Government initiatives are expected to
contribute to this growth. For example, the Energy Independence and
Security Act of 2007 increased the minimum production of renewable fuels target
to 36 billion gallons in 2022. Currently, the US produces only 12 billion
gallons of biofuels. According
to a 2008 study performed in connection with the legislation, the economic
impact of increasing renewable fuels production to 36 billion gallons between
2008 and 2022 would include:
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adding
more than $1.7 trillion to the U.S. gross domestic
product;
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generating
an additional $436 billion of household
income;
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supporting
the creation of as many as 1.1 million new jobs;
and
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generating
$209 billion in new federal tax
receipts.
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4
The American Clean Energy and
Security Act of 2009 (“ACESA”)
passed the U.S. House of Representatives in June 2009. The bill, among other
things, (i) establishes a federal renewable energy standard; (ii) permits energy
efficiency measures to satisfy part of the renewable energy standard; and (iii)
establishes a cap-and-trade program to reduce greenhouse gas emissions from
various sectors of the economy, including electric and natural gas utilities.
Similar legislation is currently stalled in the U.S. Senate but if a bipartisan
compromise could be reached, it could result in the passage of enforceable
federal standards, such as a cap-and-trade program, governing greenhouse gas
emissions. If ACESA, or similar legislation, were enacted into law,
we believe that affected companies could utilize our biofuel to meet more cost
effectively the new requirements and in less time. We cannot predict
whether this or similar legislation will be enacted or exactly how such
legislation may impact our business.
Trends
in the Biofuels Market
We believe that our biofuels can
benefit from the favorable market trends that are converging to drive growth
across the renewable fuels industry, including:
Global energy supply and
demand. Despite the recent drops in oil prices due to the
global economic recession, we believe that, over the long term, we are still in
a sustained period of high demand for energy, especially for conventional
sources like petroleum-based fuels. We believe that this demand will
continue to pressure oil supplies worldwide and has led to a heightened interest
in developing domestic, alternative, renewable energy sources.
Short-term energy security
risks. Increased trade may carry a risk of heightened
short-term energy insecurity for all consuming countries, as geographic supply
diversity is reduced and reliance grows on vulnerable supply routes, such as the
Middle East. We believe that in developing domestic renewable energy
sources, the United States will be less vulnerable to overseas markets and the
vulnerability associated with those supply routes.
Environmental and sustainability
concerns. Concerns have risen over the growth in greenhouse
gas emissions and potential negative impact on the global environment and
climate change. Unlike fossil fuels, renewable biofuels are
considered to have a lower carbon footprint because the carbon dioxide released
by burning the fuel is balanced by the carbon dioxide absorbed by new plant
growth.
Government incentives and
mandates for renewable fuels. In the pursuit of climate change
initiatives and energy independence, federal and state governments are
increasingly emphasizing the use of renewable fuels. The revised
renewable fuel standard calls for an increase in mandatory biofuel used as
Environmental Protection Agency approved biofuels. As of January
2010, 29 states plus the District of Columbia have enacted renewable portfolio
standards (RPS) that require electric power producers to use renewable sources
to generate electricity. We believe that these government policies
will generate market opportunities for our biofuel.
Food versus fuel
debate. We believe that the “food v. fuel debate” which has
resulted in growing concerns over diversion of food supplies to fuel production
is pressuring first generation biofuel producers to explore alternative,
non-edible feedstocks to produce their fuels . The United Nations noted in
a 2007 report on sustainable bioenergy that “as second generation technologies.
. . become commercially available, this will lessen the possible negative
effects on land and resource competition on food
availability.” We believe that there will be a transition
period for second and future generations of biofuels before non-edible
feedstocks are widely available in sufficient commercial
quantities. There may also be a transition period before these
technologies become more commercially viable. We also believe that
the ability to use various different kinds of feedstocks (both edible and
non-edible) and waste products will provide an advantage to certain biofuels
during this transition period and beyond.
We believe a significant market
opportunity exists for our biofuel in three target market segments that consume
approximately 15 billion gallons of fuel per year:
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Power Generation.
The power generation sector consumed approximately 2.2 billion
gallons per year of distillate and residual fuel oils, according to the
estimates available from the Energy Information
Administration. This sector includes “peaking” power plants
eligible for government renewable energy credits and constrained by
emissions limitations.
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Commercial and
Industrial. This sector consumes approximately 6.4 billion
gallons of distillate and residual fuel oil per year that could switch to
our biofuels, according to the estimates available from the
Energy Information Administration. This segment includes large
institutional customers like state government buildings, hospitals and
sewage treatment facilities that are taking a leadership role in reducing
greenhouse gases.
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Marine.
According to the estimates available from the
Energy Information Administration, diesel fuel consumption in the
marine market is approximately 6.3 billion gallons per year and includes
commercial and private boats, such as pleasure craft, fishing boats,
tugboats, and ocean-going vessels, including vessels operated by oil
companies. This sector is exploring renewable fuels due to tighter
emissions standards and restrictions on cruise liners idling in
port.
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Our
Products
Product
Formulas
We
presently offer two biofuel product families with different formulations, made
from different feedstocks and having different performance characteristics to
meet the diverse needs of our customers:
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1)
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Classic. Our “Classic” biofuel
formula is made using plant oil, water and a proprietary additive
package. Classic represents our lowest cost product offering for
various diesel fuel applications.
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2)
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Ultra HF. Our “Ultra HF” biofuel
formula is made using plant oil and a premium selection of additives.
Ultra HF, while being more expensive than Classic, offers most of the same
favorable characteristics while having the advantage of a higher flash
point.
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We believe that our ability to offer a
selection of biofuels with different performance characteristics gives us
greater ability to meet customer demand than is the case with many other biofuel
manufacturers. This customization enables us to offer potential customers
biofuels responsive to their specific requirements.
Key
Advantages of our Biofuels
Customer
usage and test burn results have shown that our biofuel is ready to use in
industrial applications without mixing or blending with other fuels, equipment
modification or substantial loss of performance. We believe that
our biofuels can serve as a complete fuel replacement wherever distillate or
residual fuel oils are used today. This feature gives us the flexibility to
deliver biofuels directly to the end user customers or to license the technology
to customers for manufacturing our biofuels for themselves, without relying on
distributors or other intermediaries. However, we also have the flexibility
to blend our biofuels with other fuels, such as diesel, depending on the needs
of the customer.
Another
key characteristic of our biofuels is its lower pour point. The pour point of a
fluid is the temperature at which dissolved solids are no longer completely
soluble and the fluid begins to solidify. The pour point of a fluid is the
lowest temperature at which it will pour or flow under prescribed
conditions. It is a rough indication of the lowest temperature at which the
fluid is readily pumpable. The pour point for some of our biofuels (B100
soybean based, for example) is less than 0 degrees Fahrenheit while that of
conventional biodiesel is 32 degrees Fahrenheit.
Our
biofuels also have certain environmental advantages. They are renewable
“carbon neutral” fuels with minimal net carbon dioxide emissions. We have
demonstrated reductions in nitrogen oxide emissions of 40% or more in utility
scale combustion turbine applications and industrial boilers when compared to
diesel and biodiesel. Furthermore, as a crop based fuel, our biofuels have
virtually no sulfur emissions.
We produce our biofuels using a
blending process that is much simpler than the complex chemical reaction process
used to produce traditional biodiesel. Our technology combines water with
commonly available additives to produce a mixture. The mixture is then combined
with a plant oil or animal fat feedstock and a surfactant to produce our
biofuel. By contrast, conventional biodiesel is produced utilizing a chemical
reaction known as transesterification. In this process, plant oil reacts
with an esterifying agent, usually an alcohol such as methanol or ethanol, to
form two principal products: a methyl ester, which is the biodiesel product, and
glycerin, a low value by-product that requires disposal. The chemical reaction
can be undertaken with or without a catalyst, but typically requires the input
of additional energy to drive the reaction. Our biofuel blending production
process requires a lower input of additional energy to produce the biofuel
and does not result in a glycerin by-product.
6
Traditional Biodiesel
Production Process
Source:
National Biodiesel Board
New Generation Biofuel
Production Process
Our
simpler production process enables biofuels to be produced in smaller
manufacturing plants than is typical for biodiesel. The smaller facility and
less equipment translate into lower capital expenditures per million gallons for
the production facility, a potentially significant cost
advantage. This cost advantage in turn should give us more
flexibility to locate production facilities closer to major
customers. Our production process also requires less energy input
than more complex chemical reactions, making our production process more energy
efficient. Our biofuel production process produces no significant
by-products, wastes, emissions or discharges, unlike many biodiesel fuels, which
again reduces the cost of production and increases efficiency. Compared to
conventional biodiesel production methods, we believe that this proprietary
blending technology is cleaner and less expensive because it is substantially
less complex, less capital and energy intensive and produces fewer disposable
by-products.
We have established a research and
development group, headed by our Chief Technology Officer, Dr. Andrea Festuccia,
which is based in Rome, Italy. Utilizing input from test burns and
existing customers, Dr. Festuccia has worked to optimize our product and improve
its performance to meet certain customer specifications. The
improvements and modifications in the last year have included successfully
blending our biofuel with #2 and #6 Diesel fuel, increasing the energy content,
increasing the flash point and expanding the number of feedstocks we can use to
produce our biofuel. We spent $475,013 on research and development in 2009 and
$1,086,723 in 2008. The decrease in research and development expenses in 2009 is
primarily the result of the beginning of commercial production of our fuel and
conducting fewer test burns which were used extensively during our development
stage to evaluate additional customized fuel formulations using our proprietary
blending technology.
7
Raw
Materials and Principal Suppliers
Due to
the flexibility of our biofuel technology, we are able to utilize multiple
feedstocks without materially changing our production process or substantially
increasing operating costs, although use of different feedstocks will change
certain characteristics of the fuels. We expect that this flexibility
will enable us to opportunistically source our raw materials to adjust to supply
and demand imbalances and price volatility in the vegetable oil and other
commodities markets.
We
have commenced the process of procuring raw materials for production of our
biofuel but have not made any significant commitments or procurements at this
point. We have determined that while we can produce our biofuels from such
different feedstocks as soybeans, canola, palm, sunflower, cottonseed, mustard
seed, jatropha, recycled vegetable oil and animal fats, our principal raw
materials in the near term will be plant oils and animal fats. We expect to
source our raw materials through a variety of sources, including:
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Domestic
and global plant oils producers;
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Animal
fats producers and processors;
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Commodity
brokers;
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Recycled
oil collectors; and
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Spot
market suppliers.
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Production
Facilities
In February 2009, we completed
construction of a 5 million gallon per year capacity production facility in
Baltimore, Maryland and in April 2009, we began shipping our first commercial
product that was made in this facility. The facility can be expanded in the
future to produce up to 50 million gallons of second-generation biofuel a
year. To complement this production facility, we have leased
approximately 6 million gallons of storage tank capacity and related terminal
facilities. Atlantic Terminalling is providing on-site logistics
services, including the receipt of feedstocks, shipping of finished product and
truck loading and unloading facilities. We are in the process of
negotiating to settle various issues under our lease and terminaling services
agreement by reducing rent payments, relinquishing unneeded equipment and
modifying other commercial terms in return for making certain
payments.
We are continuing to explore additional
ways of acquiring manufacturing facilities without having to fund the entire
cost ourselves, including other joint ventures with third parties such as
utilities, independent power producers, sublicensees or other strategic partners
or through project-based financing. To acquire manufacturing plants we would
need to identify suitable facilities that can be cost-effectively modified for
our needs, negotiate acceptable purchase or lease agreements and finance any
such acquisitions and capital improvements. Unless we acquire
existing plants, we may need to obtain government permits and other regulatory
approvals (including environmental, zoning and construction permits), which
could cause delays and/or add significant cost.
Sublicensing
Business
Strategy. Our exclusive license allows us to sublicense our
proprietary technology in North America, Central America and the Caribbean, and
our business plan contemplates, as a second potential revenue stream, the
collection of royalties through sublicensing our proprietary technology. We
expect to pursue sublicenses where it is more efficient for manufacturers to
produce our biofuel at their own plants, rather than requiring production at our
proposed facilities. In 2009, we took steps to execute this strategy by signing
non-binding letters of intent (“LOIs”) with businesses in Puerto Rico and Canada
that are evaluating sublicensing our technology to construct biofuel
manufacturing facilities and marketing and selling our biofuel under the “New
Generation” brand name. These LOIs contemplated payment to us of a
fee per gallon of fuel produced and sold. We are continuing to
explore sublicensing opportunities both domestically and
internationally.
8
Competition
The
markets for our biofuels are highly competitive. We compete with
petroleum-based fuels, with other biofuels like biodiesel or ethanol, and with
other forms of alternative energy like wind and solar.
Currently,
the cost of producing most alternative fuels forces many manufacturers to
operate at a significant competitive disadvantage compared to petroleum-based
fuels. Producers of alternative fuels generally depend upon government support,
including tax credits and various incentives, upon the willingness of customers
to pay a premium for renewable non-petroleum fuels and upon government mandates
to use specified minimum amounts of renewable fuels, which amounts increase each
year. Our ability to compete with petroleum-based fuels depends
significantly on our ability to qualify for the various tax credits and other
government incentives.
Also
relevant to our ability to compete with petroleum-based fuels is the cost of
adapting equipment to use alternative fuels. Since the vast majority
of fuels currently consumed are petroleum-based, most consumers have equipment
designed for consumption of those fuels, and alternative fuel suppliers often
experience a second cost disadvantage – the expense of adapting the equipment to
accommodate alternative fuels. We believe the ability of our biofuels
to serve as a direct fuel replacement for distillate or residual fuel oils that
requires no significant plant modifications improves our ability to
compete.
Within
the alternative fuels market, the manufacture, marketing and sale of biofuels
and other alternative fuels is highly competitive and highly fragmented. Such competition could
be intense and could drive up the costs of feedstocks, plant construction,
attracting and retaining qualified engineers, chemists and other key employees,
as well as other operating expenses. Additionally, new companies are constantly
entering the market.
We
believe our ability to compete successfully in the biofuel production industry
will depend on several factors, including the following:
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advantages
of our production process, including cost and efficiency
factors;
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fuel
performance characteristics, including the ability of our biofuels to be
used as a complete fuel replacement for distillate or residual fuel oils
and our ability to customize our products to meet a customer’s
requirements;
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·
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feedstock
flexibility, particularly the ability to avoid using edible feedstocks in
our production process;
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overall
demand for biofuels as a result of governmental incentives and
legislation; and
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continued
technological innovation.
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Tax
Credits and Other Government Support
Since our
fuel and other alternative and renewable fuels generally cost more to produce
per unit of energy than petroleum-based fuels or coal, we and other producers of
alternative fuels will be dependent upon government support to make our fuels
cost competitive. This support generally takes the form of tax credits, payments
or other incentives or mandates.
50 cent per gallon
“alternative fuel” tax credit. The 50 cent per gallon credit applicable
to our fuel, when mixed with diesel, kerosene or other taxable fuel and sold at
the retail level, expired on December 31, 2009, along with biodiesel and
other alternative fuel tax credits. Congress is expected to pass in the coming
months a tax extenders bill which will extend (effective retroactive to January
1, 2010) through the end of 2010 or beyond many expired tax provisions, but we
cannot assure you if or when the tax credit applicable to our fuel will be
extended.
9
$1 per gallon tax credit for
biodiesel and “renewable diesel.” We are not currently eligible for the
$1 per gallon federal tax credit currently afforded biodiesel and “renewable
diesel.” We have been engaged in an effort to convince Congress to amend
the tax code definitions to make our biofuel eligible for the same tax credit
provided to biodiesel. In late 2008, the biodiesel tax credit
definitions were amended such that we may qualify for the $1 per gallon tax
credit with appropriate guidance from the U.S. Department of the
Treasury. Until such guidance is issued, however, we will not be
eligible for the $1 per gallon credit available to biodiesel. In
addition, the biodiesel tax credit (and renewable diesel) expired on December
31, 2009.
Intellectual
Property
We
acquired the rights to our proprietary technology through an exclusive license
agreement with the inventor of the technology, Ferdinando Petrucci, in March
2006. Under the license agreement, we have been granted a perpetual, exclusive
license to make, use and exploit certain chemical additives for use in making
biofuel and related know-how. Our exclusive license extends to North
America, Central America and the Caribbean, and we have a right of first offer
for any other territories worldwide (other than Italy and Paraguay, which are
reserved to the inventor). As of March 15, 2010, our license agreement has
remaining payments of $1.0 million per year during each of the next four years,
with the next payment of $1.0 million due in February 2011.
In April
2006, we filed a U.S. provisional patent application on behalf of the inventor
and directed to the technology covered by our license. In April 2007, we filed a
patent application under the Patent Cooperation Treaty which claimed the benefit
of the U.S. provisional application and in September 2008 we filed national
applications in the United States and certain foreign countries. Until patent protection
is granted, we must rely on trade secret protection, which requires reasonable
steps to preserve secrecy. Therefore, we require that our personnel, contractors
and sublicensees not disclose the trade secrets and confidential information
pertaining to the technology. In addition, trade secret protection does not
provide any barrier to a third party “reverse engineering” fuel made with the
technology, to the extent that the technology is readily ascertainable by proper
means. Neither the patent, if it issues, nor trade secret protection will
preclude third parties from asserting that the technology, or the products we or
our sub-licensees commercialize using the technology, infringes upon their
proprietary rights.
Government
Regulations
Environmental
Regulations . Our business is subject to environmental risks and hazards
and we are subject to environmental regulation implemented and/or imposed by a
variety of international conventions as well as federal, state, provincial, and
municipal laws and regulations. Environmental laws restrict and prohibit spills,
discharges and emissions of various substances produced in association with
biofuel manufacturing operations. Environmental laws also require that
manufacturing plants are operated, maintained and decommissioned in such a way
that satisfies applicable regulatory authorities. Environmental permitting of
biofuel manufacturing facilities varies with the characteristics of individual
plants and by state. Our biofuel is manufactured using a process that is
believed to yield little, if any wastes, emissions or discharges.
Compliance
with environmental laws can require significant expenditures and a violation may
result in the imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner we expect may result in
stricter standards and enforcement, larger fines and liability, as well as
potentially increased capital expenditures and operating costs. Compliance with
environmental laws may cause us to limit our production, significantly increase
the costs of our operations and activities, or otherwise adversely affect our
financial condition, results of operations, and/or prospects.
Clean Air Act. We
intend to market our biofuel as a new class of biofuel for power generation,
commercial and industrial heating and marine use. In order to be
legally marketable as a fuel for on-road motor applications, our biofuel must be
registered with the Environmental Protection Agency (EPA) and comply with the
EPA’s rigorous emissions, durability, and health effects regulations promulgated
to implement Section 211 of the Clean Air Act. Under these regulations, a
company registering a fuel must conduct extensive testing on a variety of in-use
motor vehicle engines.
Section
211 of the Clean Air Act generally does not apply to using our biofuel in a
stationary source, such as utility power generation applications or
institutional/commercial heating fuel, or in certain marine applications. There
may, however, be federal or state requirements applicable to emissions from
individual furnaces, boilers, and similar equipment. As a practical matter,
market acceptance of our biofuel may be limited until we can demonstrate that
(i) our biofuel is comparable to conventional fuels from an energy content and
emissions perspective as well as handling and storage perspectives, and
(ii) that our biofuel is compatible with existing heating systems or power
generation systems and other combustion systems. To date, we have only
demonstrated the foregoing in commercially available systems on a very
limited basis. In addition, certain initial testing indicated that
our biofuel may require further development so that its viscosity is more stable
under certain temperature conditions.
10
We also
are evaluating the regulatory requirements for using our fuel in motor vehicle
applications in our territory outside the United States.
Company
History
We are a
Florida corporation that was initially organized as Wireless Holdings, Inc.
in June 2003. Our Delaware subsidiary, New Generation Biofuels, Inc,
formerly H2Diesel, Inc., was formed in February 2006 to acquire the exclusive
license to commercialize the proprietary technology used to produce our
biofuel. Through a reverse merger transaction in October 2006,
H2Diesel became a subsidiary of public company Wireless Holdings, Inc., which we
eventually renamed New Generation Biofuels Holdings, Inc. in March
2008. Since September 2008, our common stock has been listed on
the NASDAQ Capital Market (“NASDAQ”) under the ticker symbol
“NGBF.”
Employees
We have
twelve employees, all of whom are full time employees. We expect to increase the
number of employees as we implement our business objectives and expand our
management team. None of our employees are represented by a labor union or
covered by a collective bargaining agreement. We believe that our relations with
our employees are good.
11
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Name
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Age
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Position
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Lee
S. Rosen
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56
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Chairman
of the Board
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Cary
J. Claiborne
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49
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President,
Chief Executive Officer, Chief Financial Officer and
Director
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David
H. Goebel
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50
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Chief
Operating Officer
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Andrea
Festuccia
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38
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Chief
Technology Officer
|
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Phillip
J. Wallis
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46
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Chief
Marketing Officer
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Connie
Lausten, P.E.
|
42
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Vice
President, Regulatory and Legislative Affairs
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Philip
R. Cherry, Jr.
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47
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Vice
President, Engineering and
Operations
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The
following is a description of the business experience of each of our executive
officers:
Lee S. Rosen, Chairman of
the Board
Mr. Rosen is the founder
of H2Diesel, Inc., our wholly owned subsidiary (now known as New Generation
Biofuels, Inc.) and has served as the Chairman of our Board since October 2006.
Mr. Rosen has been involved in the financial and securities brokerage industry
since 1980 and has worked as a broker dealer with a number of
firms.
Cary J. Claiborne,
President, Chief Executive Officer, Chief Financial Officer and a
Director
Mr. Claiborne became our President,
Chief Executive Officer and a Director in March 2009 and continues to serve as
our Chief Financial Officer. Prior to joining New Generation Biofuels
in December 2007, Mr. Claiborne served as the Chief Financial Officer of Osiris
Therapeutics, a publicly traded Biotech company from 2004 to 2007. From 2001 to
2004, Mr. Claiborne was the Vice President, Financial Planning and Analysis at
Constellation Energy. Mr. Claiborne earned an MBA in Finance from Villanova
University and a BA in business administration from Rutgers
University.
David H. Goebel, Jr., Chief
Operating Officer
Mr.
Goebel has served as our Chief Operating Officer since July 2009. Mr.
Goebel previously served as our Vice President of Global Sourcing and Supply
Chain since September 2007 and previously worked at MeadWestvaco, a packaging
solutions and products company, as the acting Vice President of Supply
Chain/Director of Customer Service. He was responsible for redesigning the
corporate order-to-cash processes, strategizing organizational and process
changes in capacity planning, demand forecasting, inventory management/
operations, logistics/distribution, and customer service. Additionally, for
nearly 20 years, Mr. Goebel worked at ExxonMobil and its predecessor, Mobil
Corporation, in many different leadership capacities including manufacturing,
engineering, supply chain, operations, marketing, and sales. Mr. Goebel holds a
bachelor of science degree in microbiology from University of Minnesota along
with graduate studies at both the University of Texas at Dallas and Northeastern
University.
Andrea Festuccia, PhD, Chief
Technology Officer
Dr.
Festuccia has served as Chief Technology Officer since April 2006. Currently,
Dr. Festuccia is Partner, Technical Director and member of the Board of
Directors of IGEAM S.r.l. (since February 2009), a private Italian company with
about 100 employees engaged in consulting environmental and safety problems
where he has worked since June 1999. Prior to his current position with IGEAM
S.r.l., Dr. Festuccia was the Director of the B.U. “Environment and Territory”
at IGEAM S.r.l. Dr. Festuccia was Adjunct Professor of General and Inorganic
Chemistry with the University of “La Tuscia” of Viterbo from 1999 to 2000. Dr.
Festuccia was a former Technical Director and member of the Board of Directors
of 3TI Progetti Italia (from July 2004 to January 2009). Dr. Festuccia is
currently an external consultant with the University “La Sapienza” of Rome, a
position that he has held since 2001. He also worked as an external expert for
the Minister of Foreign Affairs of Italy-Farnesina from 2002-2004 and as
Technical Director of Ecosystems S.r.l. from 2002 to present. He is the Chairman
of the Board of Directors of OPT SENSOR, a private Italian company dealing with
R&D for electronic equipments to measure chemical/physical parameters, a
spin-off company of University “La Sapienza” of Rome. He is also the CEO of
BART-Biotechnology and Recovery Technologies, a small private Italian company
engaged in biotechnology. In October 1996, he received a degree in chemical
engineering and subsequently, in 2007, his doctor of philosophy degree in
chemical engineering from the University of Rome - “La Sapienza”.
Mr. Wallis joined us in January 2008.
Mr. Wallis served as Manager, Regional Sales and Solutions for Asia Pacific and
Africa at the Chevron Corporation from September 2001 to December 2006 and as
Process Documentation Team Lead, Chevron Supply Trading from December 2006 to
January 2008.
12
Connie Lausten, P.E., Vice
President, Regulatory and Legislative Affairs
Ms.
Lausten joined the management team as Vice President of Legislative and
Regulatory Affairs in May 2007. From 2003 to 2007, Ms. Lausten served as Manager
of Federal Affairs for National Grid USA, one of the world’s largest utilities.
Ms. Lausten also has served at the Federal Energy Regulatory Commission and in
the United States House of Representatives on the Government Reform Committee,
Subcommittee for Energy Policy, Natural Resources and Regulatory Affairs. Ms.
Lausten is a Licensed Professional Engineer and received a Master of Science and
a Bachelor of Science degree in Mechanical Engineering from the University of
Minnesota.
Philip R. Cherry, Jr. Vice
President, Engineering and Operations
Mr.
Cherry has served as Vice President of Engineering and Operations since June
2008. Mr. Cherry was previously employed by the ethanol producer VeraSun from
2007 through May 2008 as Director of Operations where he was responsible for the
commissioning, initial operation and annual maintenance shutdowns of a fleet of
ethanol facilities. Prior to joining VeraSun, Mr. Cherry worked for U.S.
BioEnergy providing contract management to ethanol facility owners. Mr. Cherry
was also with The O-H Group from 2003 through 2006, providing project management
and technical consulting services to renewable fuel producers. Additionally, for
nine years Mr. Cherry worked for Mobil Oil Corporation in a variety of process
and scientific roles. Mr. Cherry holds a Bachelor of Science degree in Chemistry
from Chapman University. He is a member of the American Chemical Society, ASTM
International, and the California Biomass Collaborative.
Other
Information
News and
information about New Generation Biofuels is available on our website, www.newgenerationbiofuels.com.
In addition to news and other information about our company, we have provided
access through this site to our filings with the Securities and Exchange
Commission as soon as reasonably practicable after we file or furnish them
electronically.
We have
also provided access on our website to our Code of Business Conduct and Ethics,
the charters of our Audit, Compensation and Nominating Committees and other
corporate governance documents. Copies of these documents are available to any
shareholder upon written request made to our corporate secretary at our
corporate headquarters at 5850 Waterloo Road, Suite 140, Columbia, Maryland
21045, Attn: Corporate Secretary. In addition, we intend to disclose on our
website any changes to or waivers for executive officers from our Code of
Business Conduct and Ethics.
ITEM 1A. RISK FACTORS
Our
business faces many risks. If any of the events or circumstances described in
the following risks actually occur, our business, financial condition or results
of operations could suffer, and the trading price of our common stock could
decline. Some of the risks described below may apply to more than just the
subsection in which we grouped them for the purpose of this presentation. You
should consider all of the following risks, together with all of the other
information in this Annual Report on Form 10-K, before deciding to invest in our
securities.
13
Risks
Related to Our Business
Our
existing financial resources will only provide financing through mid-May 2010,
and we will need to raise additional capital to continue our business, which
could be particularly challenging in the near term under current financial
market conditions.
The report of our independent
registered public accounting firm for the year ended December 31, 2009 contains
an explanatory paragraph which states that we have incurred negative cash flows
from operations since inception and are dependent upon future financing and,
based on our operating plan and existing working capital deficit, this raises
substantial doubt about our ability to continue as a going concern. Based on our
current estimates, we anticipate that our existing financial resources will be
adequate to permit us to continue to conduct our business through mid May 2010,
and we will need to control costs and raise additional capital to continue our
business beyond May 2010. Accordingly, we will need to complete a financing in
the second quarter of 2010. As of December 31, 2009, we have incurred a net loss
of $14.4 million and negative cash flows from operating activities of $7.1
million. As of December 31, 2009, we had approximately $0.6 million of available
cash and approximately $1.5 million of accounts payable and accrued expenses. In
February 2010, we closed a private placement of common stock for total gross
proceeds of approximately $1.3 million. In addition, under the
license agreement with the inventor of our proprietary technology, we are
required to pay $1.0 million per year over the next four years, with the next $1
million due in February 2011. We are in the process of negotiating to settle
various issues under our site lease and terminaling services agreement for our
Baltimore production facility by reducing rent payments, relinquishing unneeded
equipment and modifying other commercial terms of the agreements in return for
making certain payments. If we are unable to raise additional capital, we will
not be able to continue our business. We cannot ensure that additional funding
will be available or, if available, that it can be obtained on terms and
conditions we will deem acceptable. Any additional funding derived from the sale
of equity securities is likely to result in significant dilution to our existing
shareholders and may require shareholder approval, which cannot be
assured.
We
are an early stage company with a limited operating history, which makes us a
speculative investment.
We are an early stage company that is
commercializing our exclusive licensing rights to proprietary technology to
manufacture biofuel that we acquired in early 2006. Since then, we have been
engaged in organizational activities, including developing our business plan,
hiring key management, optimizing product performance, developing our production
facility, raising capital, conducting test burns with potential customers,
entering into initial sales contracts, delivering initial fuel orders to
customers and exploring sublicensing opportunities. We recorded our first sales
in the fourth quarter of 2008. We currently have twelve employees.
During the year
ended December 31, 2009, we commenced our principal business operations and
have exited the development stage. Prior to that from our inception, we were a
development stage entity.
Accordingly, we have limited relevant operating history upon which you can
evaluate our performance and prospects. You should consider our prospects in
light of the inherent risks, expenses and difficulties encountered by companies
in the early stage of development, particularly companies in new and evolving
markets such as the renewable fuels industry. Such risks include technology
risks, capital requirements, lack of market acceptance of our products, failure
to establish business relationships, competitive disadvantages against larger
and more established companies and regulatory matters.
We
have a history of losses, deficits and negative operating cash flows and will
likely continue to incur losses for the foreseeable future which may impede our
ability to achieve our business objectives.
We expect
to incur operating losses and continued negative cash flows for the foreseeable
future as we invest in sales and marketing, research and development and
production facilities to achieve our business objectives. We may not achieve or
sustain profitability on a quarterly or annual basis in the future. To be
profitable, we will have to significantly increase our revenues and reduce our
costs. Future revenues and profits, if any, will depend upon various factors
such as those discussed here, many of which are beyond our control. If we are
unable to increase our revenues, reduce costs or achieve profitability, we may
have to reduce or terminate our operations.
Sufficient
customer acceptance for our biofuel may never develop or may take longer to
develop than we anticipate, and as a result, our revenues and profits, if any,
may be insufficient to fund our operations.
Sufficient
markets may never develop for our biofuel, may develop more slowly than we
anticipate or may develop with economics that are not favorable for us. The
development of sufficient markets for our biofuel at favorable pricing may be
affected by cost competitiveness of our biofuel, customer reluctance to try a
new product and emergence of more competitive products. Because we only recently
began manufacturing our biofuel, potential customers may be skeptical about
product stability, supply availability, quality control and our financial
viability, which may prevent them from purchasing our biofuel or entering into
long-term supply agreements with us. We cannot estimate or predict whether a
market for our biofuel will develop, whether sufficient demand for our biofuel
will materialize at favorable prices, or whether satisfactory profit margins
will be achieved. If such pricing levels are not achieved or sustained, or if
our technologies and business approach to our markets do not achieve or sustain
broad acceptance, our business, operating results and financial condition will
be materially and adversely impacted.
14
Our
ability to produce and distribute our biofuel on a commercially sustainable
basis is unproven, and until we can prove our technology, we likely will not be
able to generate or sustain sufficient revenues to continue operating our
business.
While
producing biofuel from vegetable oils or animal fats is not a new technology,
the technologies we are pursuing for our biofuel production have never been
utilized on a commercially sustainable basis. Our biofuel, while intended as a
new class of biofuel for power generation, commercial and industrial heating and
marine use, may never achieve technical or commercial viability. All of the
tests and sales that we have conducted to date with respect to our technology
have been performed in a limited scale environment, and the same or similar
results may not be obtainable at competitive costs on a large-scale commercial
basis.
We have
conducted multiple test burns of our biofuel products with potential customers.
However, others may need to replicate these tests before our biofuel becomes
commercially acceptable. We have never utilized our technology under the
conditions or in the volumes that will be required for us to be profitable and
cannot predict all of the difficulties that may arise. Our technology may
require further research, development, regulatory approvals, environmental
permits, design and testing prior to commercialization. Accordingly, our
technology and our biofuel may not perform successfully on a commercial basis
and may never generate any profits.
We
likely will not be able to generate significant revenues until we can
successfully validate our product performance with customers and operate our
manufacturing facility on a commercial scale.
To date,
we have generated a small amount of revenues on sales of limited quantities of
our biofuel. Revenue generation could be impacted by any of the
following:
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delays
in demonstrating the technological advantages or commercial viability of
our proposed products;
|
|
|
·
|
problems
with our commercial scale production plant, including delays in upgrading
the plant, technical staffing, permitting or other operational
issues;
|
|
|
·
|
inability
to interest early adopter customers in our products;
and
|
|
|
·
|
inability
to obtain cost effective supplies of vegetable oil and
feedstocks.
|
Any
planned manufacturing plants may not achieve projected capacity or efficiency,
and we may not be able to sell our biofuel generated at these plants at prices
that will cover our costs. Potential customers may require lengthy or complex
trials or long sampling periods before committing to significant orders for our
products.
The
current credit and financial market conditions may exacerbate certain risks
affecting our business.
Due to the continued disruption in the
financial markets arising from the global recession in 2008 and the slow pace of
economic recovery, many of our potential customers are unable to access capital
necessary to accommodate the use of our biofuel. Many are operating under
austerity budgets that limit their ability to invest in infrastructure necessary
to use alternative fuels and that make it significantly more difficult to take
risks with new fuel sources. As a result, we may experience increased
difficulties in convincing customers to adopt our biofuel as a viable
alternative at this time.
We
may not be able to generate revenues from sublicensing our
technology.
Our
exclusive perpetual license allows us to sublicense our proprietary technology
in North America, Central America and the Caribbean, and our business plan
includes, as a second potential revenue stream, the collection of royalties
through sublicensing our proprietary technology. To date, we do not have any
revenues from sublicenses and have only entered into one sublicense, with Global
Energy Holdings Group, Inc. (formerly Xethanol Corporation, “Global Energy”). It
is extremely unlikely that Global Energy will be able to perform its obligations
under the sublicense. Since Global Energy sold its remaining 5,301,300 shares of
our common stock that it owned in March 2009 and filed for bankruptcy in
November 2009, we are re-evaluating our agreements with Global Energy and may
engage in discussions to modify or terminate them. We likely will need to
continue proving the viability of our technology before we can obtain any
additional sublicense agreements, and we cannot assure you that we will be able
to do so. Companies to which we grant sublicenses may not be able to produce,
market and sell enough biofuel to pay us royalty fees or they may default on the
payment of royalties. We may not be able to achieve profitable operations from
collecting royalties from the sublicensing of our proprietary technology.
15
The
strategic relationships upon which we may rely are subject to
change.
Our
ability to successfully test our technology, to develop and operate
manufacturing plants and to identify and enter into commercial arrangements with
customers or sublicensees will depend on developing and maintaining close
working relationships with industry participants. These relationships will need
to change and evolve over time, as we enter different phases of development. Our
strategic relationships most often are not yet reflected in definitive
agreements, or the agreements we have do not cover all aspects of the
relationship. Our success in this area also will depend on our ability to select
and evaluate new strategic relationships and to consummate transactions. Our
inability to identify suitable companies or enter into and maintain strategic
relationships may impair our ability to grow. The terms of relationships with
strategic partners may require us to incur expenses or undertake activities we
would not otherwise be inclined to incur or undertake in order to maintain these
relationships. Moreover, reliance upon strategic partners to manufacture and
sell our biofuel subjects us to additional risks, including a limited ability to
control the quality of such fuel and the failure of such partners to perform in
accordance with the terms of agreements that they may enter into with us.
Arrangements we enter into with such partners may compete with any biofuel that
we may manufacture at our own plants and therefore may limit our organic
growth.
Our
biofuel and other alternative sources are at significant disadvantage to
petroleum fuels.
Our
biofuel and other alternative fuels like biodiesel compete with petroleum-based
fuels. Currently, the cost of producing most alternative fuels forces
manufacturers to operate at a significant competitive disadvantage compared to
petroleum-based fuels. Producers of alternative fuels generally depend upon
government support, including tax credits and various incentives and mandates to
purchase alternative fuels, and upon the willingness of customers to pay a
premium for cleaner burning, renewable non-petroleum fuels.
We
may be unable to compete successfully in the highly competitive alternative
fuels market.
Within
the alternative fuels market, the manufacture, marketing and sale of biofuels
(such as biodiesel) and other alternative fuels is highly competitive. Such
competition could be intense and could drive up the costs of feedstock, plant
construction, attracting and retaining qualified engineers, chemists and other
key employees, as well as other operating expenses. Additionally, new companies
are constantly entering the market. This growth and fragmentation could
negatively impact us or our sublicensees’ ability to obtain additional capital
from investors. Larger companies which have been engaged in this business for
substantially longer periods of time may have access to greater financial and
other resources. These companies may have greater success in recruiting and
retaining qualified employees and in fuel manufacturing and marketing, which may
give them a competitive advantage.
We
may never develop the scale economies necessary to optimize our cost structure
and enable us to produce and sell our biofuels for a profit.
Our current business model depends, in
part, on developing sufficiently large sales volumes and production capacity to
be able to realize economies of scale and minimize raw materials, sourcing,
logistics and transportation costs. If we are unable to generate sufficient
economies of scale in our operations, we may be unable to obtain volume
discounts on raw materials and transportation or cut marginal production costs
to the level necessary to profitably price our biofuel.
The
tax credits for which we were eligible expired at the end of 2009. Failure
to renew these or similar tax credits could make our biofuel less
competitive.
The 50 cent per gallon credit
applicable to our fuel, when mixed with diesel, kerosene or other taxable fuel
and sold at the retail level, expired on December 31, 2009, along with
biodiesel and other alternative fuel tax credits. We depend in part on the
availability of tax credits to incentivize customers to purchase our fuels.
Congress is expected to pass in the coming months a tax extenders bill which
will extend (effective retroactive to January 1, 2010) through the end of 2010
or beyond many expired tax provisions, but we cannot assure you if or when the
tax credit applicable to our fuel will be extended.
16
If
our biofuels do not qualify for government mandated or incentivized renewable
energy credits or renewable portfolio standards or biofuel mandates, our
potential customers may be less likely to pay a premium for our biofuels, which
could negatively impact our ability to generate revenues.
More than thirty states have enacted
renewable energy credits (“RECs”) or renewable portfolio standards (“RPS”), and
several other states have created biofuel mandates, tax credits and other
incentives for the use of renewable fuels. Our business model depends in part,
on our biofuels qualifying for RECs, RPS requirements or biofuel mandates and
that our customers will pay a premium for our biofuels in order to receive tax
credits or comply with the government mandates. If we do not receive this
premium because our biofuel does not qualify our customers for the credits or
incentives, we may be unable to generate sufficient revenues or profits which
could have a negative effect on our business, results of operations and
financial condition.
We
may never fully realize the value of our technology license agreement, which
presently is our principal asset.
We may not be successful in realizing
the expected benefits from our master license agreement, which represented over
70% of our total assets as of December 31, 2009. We recorded our
initial fuel sale in October 2008 and accordingly began to amortize the license
agreement. Further, we initially intended to use the licensed technology to
generate our expected revenues without any significant modification, but we have
conducted significant additional research and development to modify the basic
fuel technology to meet market demands for particular fuel attributes. To date,
we have incurred approximately $2.4 million in research and development separate
from our license payments, and we are continuing to incur additional research
and development costs to optimize our fuels to test different feedstocks and to
tailor the fuel energy output, emissions and other specifications to the
specific needs of potential customers.
Our business depends on proprietary
technology that we may not be able to protect and may infringe on the
intellectual property rights of others.
Our
success will depend, in large part, on our technology’s commercial viability and
on the strength of our intellectual property rights. Much of the technology
presently consists only of trade secret rights, which are difficult to protect.
If others gain access to the trade secrets relating to our technology, including
through analysis or “reverse engineering,” they may able to develop
substantially equivalent technology. Although we filed patent applications to
protect our technology, there can be no assurance that we ultimately will
receive patent protection or that any protection that is obtained will be broad
enough to be effective in protecting our technology against claims or actions by
competitors. Further, any patents that are obtained may not withstand challenges
as to validity and enforceability. Third parties may assert that the technology,
or the products we or our sub-licensees commercialize using the technology,
infringes upon their proprietary rights. We have yet to complete an infringement
analysis and, even
if such an analysis were available at the current time, we could not be certain
that no infringement exists, particularly as our products have not yet been
fully developed. We may need to acquire additional licenses from third parties
in order to avoid infringement claims, and any required licenses may not be
available to us on acceptable terms, or at all. To the extent infringement
claims are made, we could incur substantial costs in the resulting litigation,
and the existence of this type of litigation could impede the development of our
business.
Our technology
may become ineffective or obsolete.
To be
competitive in the biofuel industry, we may be required to continually enhance
and update our technology. The costs of doing so may be substantial, and if we
are unable to maintain the efficacy of our technology, our ability to compete
may be impaired. The impact of technical shortcomings could have a material
adverse effect on our business, financial condition, results of operations and
prospects.
If
we cannot make the required payments under our license agreement for our
proprietary technology, the inventor may be able to terminate the agreement,
which could preclude us from selling our biofuel.
We still
have substantial obligations under the license agreement with the inventor of
our proprietary technology. Specifically, we are required to pay Mr. Petrucci an
additional $1.0 million in cash per year for the next four years, for a total of
$4.0 million in remaining payments. To the extent we default on any of these
payments or breach any other material provisions of our license, the inventor
could terminate the agreement, which is our principal asset. The license
agreement also provides that the inventor may terminate the agreement if an
insolvency or bankruptcy petition is filed against us and is not dismissed
within 90 days.
17
We
depend on key personnel to execute our business plan. If we cannot attract and
retain key personnel, we may not be able to successfully implement our business
plan.
As of
December 31, 2009, we had 12 full-time employees. In 2009 and early 2010, three
of our executives resigned from the Company, including David Gillespie, our
former President, Chief Executive Officer and a Director. Our success depends to
a significant degree upon the continuing contributions of our key management. We
have a relatively small team, and the loss of a key individual or inability to
attract suitably qualified replacements or additional staff could adversely
affect our business. No assurance can be given that our key personnel will
continue their association or employment with us or that replacement personnel
with comparable skills will be found. If we are unable to attract and retain key
personnel and additional employees, our business may be adversely
affected.
2020
Energy, LLC owns approximately 21.0% or our outstanding common stock, and
Ferdinardo Petrucci, the inventor of our proprietary technology owns
approximately 11.6% of our common stock. The managing and sole member of
2020 Energy has partnered with Mr. Petrucci to form PTJ Bioenergy Holdings,
Ltd, an entity that is the licensor (by assignment from Mr. Petrucci) of our
technology. 2020 Energy and Mr. Petrucci may delay, defer or prevent
us from taking actions that would be beneficial to our other
shareholders.
As of
March 5, 2010, 2020 Energy, LLC and Mr. Petrucci combined owned approximately
32.6% of our outstanding common stock. This amount includes an additional
1,100,000 shares that were issued to Mr. Petrucci in February 2010 in lieu of a
license payment. Accordingly, they may be able to exercise
significant influence over the outcome of substantially all matters required to
be submitted to our shareholders for approval, including the election of our
board of directors and any proposed merger or consolidation of our company.
Their ownership interest in our company may discourage potential investors from
investing in our securities due to concerns with the overhang on our common
stock and third parties from seeking to acquire control of our company, which
may adversely affect the market price of our common stock.
Risks
Related to Our Industry
The
current economic and political environment may provide increased uncertainty and
unpredictability that may have an adverse effect on our industry.
Our industry relies heavily on
governmental incentives, usually tax-based, and government mandates to encourage
broad market acceptance and use of alternative fuels. The slow pace of changes
in renewable energy polices by the Obama Administration and Congress has
minimized a positive impact on the market’s willingness to embrace alternative
fuels. The timing and the effectiveness of these policies are unknown and may
not provide the requisite support to ensure success of the alternative fuels
industry. In addition, the global economic recession, the tight capital markets
and the slow economic recovery have depressed fuel prices and energy demand,
limited the ability of customers to spend funds on new, experimental fuels and
limited the funds available to invest in early-stage companies.
Prices
and markets for biofuel are unpredictable and tend to fluctuate
significantly.
The price of biofuels, as well as the
price of conventional petroleum-based fuels and other alternative fuels, is
based on global demand, supply and other factors, all of which are beyond our
control. Global prices for biodiesel fuel have fluctuated widely in recent
years, and we expect that prices will continue to fluctuate. Price fluctuations
will have a significant impact upon our revenue, results of operations and on
our general financial condition. Price fluctuations for biodiesel and other
conventional and alternative fuels may also impact the capital markets, and our
ability to raise capital. In particular, as prices of petroleum-based fuels
decline, the interest in investing in alternative sources of energy, like our
biofuel, may decline as well. Future decreases in the price of biodiesel and
competing fuels may have a material adverse effect on our financial condition
and future results of operations.
Our
financial results are substantially dependent on commodity prices and supplies,
which are subject to significant volatility and uncertainty.
Our results of operations, financial
position and business outlook are substantially dependent on commodity prices,
especially prices for vegetable oil, animal fat feedstock and materials used in
producing our biofuel. The prices for these items are quite volatile and could
cause our results to fluctuate substantially. We may experience periods of
declining prices for our products and increasing costs for our raw materials,
which would result in operating losses. Many biofuel companies attempt to hedge
a portion of the effects of fluctuations in prices by entering into forward
contracts to supply vegetable oil or purchase feedstock or other items or by
engaging in transactions involving exchange-traded futures contracts. These
activities involve substantial costs and substantial risks and may be
ineffective in mitigating changing commodity prices. We have not entered into
any hedging, forward contracts, or similar arrangements and could be at a
competitive disadvantage with companies that have entered into successful
hedging arrangements.
18
The
biofuel industry is subject to significant environmental regulation and may be
adversely affected by regulatory and environmental risks.
Biofuels
businesses are subject to environmental risks and hazards and environmental
regulation imposed by a variety of international conventions as well as federal,
state, provincial, and local laws and regulations. Environmental laws restrict
and prohibit spills, discharges and emissions of various substances produced in
association with biofuel manufacturing operations. Environmental laws also
require that manufacturing plants are operated, maintained and closed in such a
way that satisfies applicable regulatory authorities. Compliance with
environmental laws can require significant expenditures and a violation may
result in the imposition of fines and penalties, some of which may be material.
Environmental legislation is evolving in a manner we expect may result in
stricter standards and enforcement, larger fines and liability, as well as
potentially increased capital expenditures and operating costs. Compliance with
environmental laws may limit production, significantly increase the costs of
operations, or otherwise adversely affect results of operations and
prospects.
To market
our fuel for on-road motor vehicle applications in the United States, our
biofuel must be registered with the U.S. Environmental Protection Agency, or
EPA, and comply with the EPA’s rigorous emissions, engine durability and health
effects regulations. We have not yet applied for such registration. We are
evaluating the regulatory requirements for using our fuel in motor vehicle
applications in our territory outside the United States.
Section
211 of the Clean Air Act generally does not apply to using our biofuel in a
stationary source, such as utility power generation applications or
institutional or commercial heating fuel, or in certain marine applications.
There may, however, be federal or state requirements applicable to emissions
from individual furnaces, boilers, and similar equipment. As a practical matter,
market acceptance of our biofuel may be limited until we can demonstrate that
(i) our biofuel is comparable to conventional fuels from an energy content and
emissions perspective, as well as handling and storage perspectives, and (ii)
that our biofuel is compatible with existing heating systems or power generation
systems and other combustion systems. To date, we have not demonstrated any of
the foregoing in such commercially available systems. In addition, certain
initial testing indicated that our biofuel may require further development so
that its viscosity is more stable under certain conditions.
Our
business is subject to local legal, political, and economic
factors.
To the
extent we operate our business outside of North America, particularly in Central
America and the Caribbean where we have an existing license, we will need to
adapt our business to the local legal, political and economic conditions.
Certain of these areas are less hospitable to US businesses, and US businesses
operating in certain of these areas have been subject at various times to risks
from terrorism, military repression, interference with private contract rights,
currency fluctuations, inflation, exchange controls, laws or policies affecting
environmental issues (including land use and water use), workplace safety,
foreign investment, foreign trade, investment or taxation, restrictions imposed
on the alternative fuel industry (such as restrictions on production) and price
controls and export controls. Any changes in alternative fuel, financial
incentives, investment regulations, policies or a shift in political attitudes
within our operating area are beyond our control and may adversely affect our
business and future financial results.
Risks Related to Our
Securities
Our
declining stock price and need to raise additional capital likely could lead to
significant dilution in future financing transactions.
In light of our need to raise
significant amounts of additional capital, coupled with the recent decline in
our stock price, we may need to issue large amounts of additional shares of
common stock or securities convertible into common stock, resulting in
significant dilution to our shareholders and causing a reduction in their
proportionate ownership and voting power. Under NASDAQ rules, our board of
directors has the ability, without seeking shareholder approval, to issue
additional shares of common stock or convertible preferred stock, aggregating up
to 20% of our outstanding common stock, for such consideration as the board of
directors may consider sufficient, which may be at a discount to the market
price. In addition, we may be required to issue securities that may contain
antidilution provisions or other onerous terms that may also result in
additional dilution to our shareholders.
19
Some
of our recent financing transactions included antidilution provisions that,
if triggered, could dilute the ownership interests of our existing common
shareholders.
Some of our outstanding securities
include antidilution provisions that, when triggered, result in the issuance of
additional shares that would dilute the interests of existing common
stockholders. Our March 2009 private placement included certain antidilution
provisions that apply if we issue additional shares of common stock or
convertible securities in a financing transaction within 15 months of the
closing date with a purchase price or conversion price less than $0.80 per share
or if we issue additional warrants in a financing transaction within the next 15
months with an exercise price less than $0.90 per share, subject to certain caps
required by NASDAQ listing rules. On June 29, 2009 and September 23, 2009, we
obtained waivers from the holders of the warrants issued in the March 2009
offering, which permitted us to enter into future financing transactions without
the potential triggering of the antidilution provisions in their
warrants. Our February 2010 private placement also included certain
antidilution provisions that apply if we issue additional equity securities in a
financing transaction with a purchase price less than $0.69 per share or issue
convertible securities with a purchase price less than $0.69 at any time within
6 months after the registration statement is declared effective, subject to
certain caps required by NASDAQ listing rules.
These antidilution provisions could be
disproportionately dilutive and adversely affect the prevailing market prices of
our common stock. The existence of conversion features also may result in short
selling of our common stock that may further depress the market
price.
If
we do not meet NASDAQ requirements for continued listing, our common stock may
be delisted which could negatively impact our stock’s liquidity.
Under
NASDAQ listing rules, our common stock could be delisted from NASDAQ if we do
not meet certain standards regarding our financial condition and operating
results (including, among other factors, maintaining adequate shareholders’
equity, minimum $1.00 bid price and market capitalization), the distribution of
our publicly held securities and compliance with NASDAQ listing agreements and
SEC rules and regulations. In December 2009, we received a notice from NASDAQ
that we were not in compliance with the minimum bid requirement for 30
consecutive business days and had until June 2010 to regain compliance. NASDAQ
also requires a minimum shareholders’ equity of $2.5 million or, alternatively,
a market value of listed securities of at least $35 million. In August 2009, we
received a communication from NASDAQ when we reported in our Quarterly Report on
Form 10-Q that our shareholders’ equity equaled $648,756 at June 30, 2009. At
September 30, 2009, our shareholders’ equity barely exceeded the minimum
requirement of $2.5 million, and we received confirmation from NASDAQ that we
were back in compliance with such requirement.
In the future, however, due to factors
such as losses from operations and the volatility of our stock price, we may not
be able to meet the listing maintenance requirements of the NASDAQ Capital
Market. If we are unable to satisfy the NASDAQ criteria for maintaining listing,
our common stock may be subject to delisting. Trading, if any, of our securities
would thereafter be conducted on the OTC Bulletin Board or in the so-called
“pink sheets”. As a consequence of any such delisting, our shareholders would
likely find it more difficult to dispose of, or to obtain accurate quotations as
to the prices of, our common stock.
Our
common stock is thinly traded and subject to volatility.
Although our common stock is currently
traded on the NASDAQ and previously was
traded on the Amex, it has traded in relatively small volumes. If our common
stock continues to be thinly traded, it may enhance volatility in the share
price and make it difficult for investors to buy or sell shares in the public
market without materially affecting the quoted share price. Further, investors
seeking to buy or sell a certain quantity of our shares in the public market may
be unable to do so within one or more trading days. If limited trading in our
stock continues, it may be difficult for holders to sell their shares in the
public market at any given time at prevailing prices, which may limit the
liquidity of our common stock.
The
market price of our common stock is likely to be volatile based upon
developments in our business or the industry.
The
market price of our common stock is likely to be volatile as a result of many
factors including, but not limited to:
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|
·
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our
announcement of developments, whether positive or negative, with respect
to our business, including the viability of our biofuel, new or changes in
strategic relationships, and our ability or failure to meet business
milestones;
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20
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·
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developments
concerning intellectual property rights and regulatory
approvals;
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·
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the
announcement of new products or product enhancements by our
competitors;
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|
·
|
changes
in the market for alternative fuels and in commodities used to produce
them;
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|
·
|
fluctuations
in the availability of capital to companies in the early
stages;
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|
|
·
|
changes
in the social, political and economic climate in the regions in which we
operate; and
|
|
|
·
|
the
impact of sales and trading activity with respect to our common stock in
the market.
|
These and
other factors are largely beyond our control, and the impact of these risks,
individually or in the aggregate, may result in material changes to the market
price of our common stock.
A
significant number of our shares are eligible for sale, and their sale could
depress the market price of our common stock.
Sales of
a significant number of shares of our common stock in the public market could
harm the market price of our common stock. Approximately 4 million shares
of our common stock issued in our March 2009 private placements became eligible
for sale in the open market under Rule 144 in September and November 2009,
respectively. In general, a person who has held restricted shares for the
requisite holding period, upon compliance with Rule 144 procedures, may sell
shares into the market. In addition, we are currently in the
process of registering for resale by non-affiliate selling shareholders
3,781,716 shares of our common stock issued in our February 2010 private
placement, including shares issuable upon exercise of options to purchase that
are not currently outstanding. We cannot predict the effect, if any, that the
availability of these shares for sale, or the sale of these shares, will have on
the market price for our common stock. If the number of shares offered for sale
is greater than the number of shares sought to be purchased, then the price of
our common stock would decline. The market price of our securities could be
adversely affected by future sales of these securities.
Our
common stock may be considered “a penny stock” and may be difficult to
sell.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. While penny
stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board
or in the Pink Sheets, they also may trade on securities exchanges. To the
extent the market price of our publicly traded common stock is less than $5.00
per share, it may be designated as a “penny stock” according to SEC rules. This
designation requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of investors to sell
their shares.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
Not applicable.
ITEM
2. PROPERTIES
We own no
real property and currently lease our office and production spaces. As of August
28, 2009, we terminated the lease on our office space in Lake Mary, Florida and
relocated our corporate headquarters from Lake Mary, Florida to Columbia,
Maryland, closer to the Company’s biofuel production plant. The new
corporate headquarters is located at 5850 Waterloo Road, Suite 140, Columbia,
Maryland 21045. The Company has remained a Florida corporation and
currently maintains two smaller administrative offices in
Florida.
On
September 12, 2008, we entered into a site lease agreement to locate our first
commercial scale biofuel manufacturing plant at a port location in Baltimore,
Maryland and a terminaling services agreement to provide certain terminaling
services at the site. The lease agreement covers the physical premises where the
production facility is located as well as approximately six million gallons of
storage tank capacity and related terminaling facilities. The initial term of
the lease agreement is five years with an option to renew for three additional
five year periods. The total base rental commitment, for the initial five year
rental period, is approximately $4,605,000. Under the terminaling services
agreement, we are provided terminaling services that include the receipt, the
unloading and the transfer of raw materials and the subsequent transfer and load
out of finished product from and to railcars, barges and trucks. The term of the
terminaling services agreement runs concurrently with the lease agreement. The
total minimum throughput charges, for the initial five year service agreement
period, are approximately $953,000. We are in the process of
negotiating to settle various issues under our lease and terminaling services
agreement by reducing rent payments, relinquishing unneeded equipment and
modifying other commercial terms in return for making certain
payments.
21
We do not
believe that any currently pending or threatened proceeding, if determined
adversely to us, would have a material adverse effect on our business, financial
condition or results of operations.
22
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Our
common stock began trading on the NASDAQ on September 23, 2008 under the symbol
“NGBF.” Between April 15, 2008 and September 22, 2008 our common
stock traded on the Amex under the symbol “GNB” and prior to trading on Amex,
our common stock was traded on the OTC Bulletin Board under the symbol
“HTWO.OB.” The following table below sets forth the high and low
sales prices per share for the periods our common stock was traded on NASDAQ and
Amex and the high and low bid prices per share for the periods our common stock
was quoted on the OTC Bulletin Board.
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High
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Low
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|||||||
|
2010
|
||||||||
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First
Quarter (through March 15, 2010)
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$
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0.92
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$
|
0.62
|
||||
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2009
|
||||||||
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First
Quarter
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$
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1.12
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$
|
0.43
|
||||
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Second
Quarter
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1.80
|
0.81
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||||||
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Third
Quarter
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1.60
|
0.84
|
||||||
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Fourth
Quarter
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1.25
|
0.61
|
||||||
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2008
|
||||||||
|
First
Quarter
|
$
|
6.00
|
$
|
3.00
|
||||
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Second
Quarter
|
7.08
|
4.25
|
||||||
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Third
Quarter
|
5.15
|
3.45
|
||||||
|
Fourth
Quarter
|
4.50
|
0.71
|
||||||
Shareholders
The
approximate number of holders of record of our common stock as of December 31,
2009 was 142, including those brokerage firms and/or clearing houses holding
shares of common stock for their clientele (with each such brokerage house
and/or clearing house being considered as one holder). As of December 31, 2009,
we had 31,711,578 shares of common stock outstanding. In February 2010, we
completed a private placement of 1,890,858 shares of common stock and warrants
to purchase an additional 1,890,858 shares. As of March 15, 2010, we had
34,702,436 shares of common stock outstanding.
Dividends
We have
never declared or paid dividends on our common stock. We do not intend to
declare dividends in the foreseeable future because we anticipate that we will
reinvest any future earnings into the development and growth of our business.
Any decision as to the future payment of dividends will depend on our results of
operations and financial position and such other factors as our Board of
Directors in its discretion deems relevant.
Registration Rights
Under the
terms of some private placements, we have entered into registration rights
agreements with the purchasers of our convertible preferred stock, common stock
and warrants. Under the registration rights agreements, we were required to file
“resale” registration statements with the SEC covering the shares of our common
stock issued directly, upon conversion of the preferred stock issued or upon
exercise of the warrants issued in the private placements. Pursuant to our
February 2010 private placement, we filed a registration statement
on Form S-3 on February 11, 2010 to register 3,781,716 shares of
common stock for resale by the selling shareholders. This
registration statement has not yet been declared effective by the SEC. In
November 2008, we registered 4,770,990 shares of our common stock for resale by
the selling stockholders on two registration statements on Form S-3
(Registration No. 333-151318 and No. 333-151320). We are obligated to maintain
the effectiveness of these “resale” registration statements from the effective
date until all securities registered under the registration statements have been
sold or are otherwise able to be sold pursuant to Rule 144 under the Securities
Act, without regard to volume limitations, provided we comply with our reporting
obligations. We may also include on future registration statements additional
shares issuable upon exercise of our outstanding warrants and options. We agreed
to use our best efforts to have the “resale” registration statement declared
effective by the SEC as soon as possible after the initial filing, but by no
later than 180 days after the closing of the private placements.
23
Equity
Compensation Plans
Please
refer to Item 12 of this Annual Report for information regarding securities
authorized under our equity compensation plans.
|
ITEM 6.
|
SELECTED FINANCIAL
DATA
|
Not applicable.
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a renewable biofuels provider
that is marketing a new class of “second generation” biofuels for use in diesel
fuel applications, including power generation, commercial and industrial heating
and marine transportation that began generating revenues in 2008.
We
produce our biofuels using a proprietary blending technology that we believe is
simpler, cleaner, less expensive, and less energy intensive than the complex
chemical reaction process used to produce traditional biodiesel. We believe that
this technology enables us to produce biofuels that cost less to produce, use
less energy and generate significantly lower emissions than our competitors. Our
technology also gives us the flexibility to produce our biofuel from multiple
feedstocks, which allows us to use non-edible raw materials in our production
process, when desirable. We believe that these factors will enable us to
customize our product to specific customer requirements and react more quickly
to trends in the biofuels market.
The operation and development of our
business will require substantial additional capital to fund our operations,
payments due under our exclusive technology license, the development or
expansion of our production plants, research and development, and other
initiatives.
Going
Concern Matters
Our ability to continue as a going
concern is dependent upon, among other things, future offerings of capital or
alternative financing arrangements and the expansion of our
operations. Uncertainty as to the outcome of these factors raises
substantial doubt about our ability to continue as a going
concern. We are currently evaluating various courses of action to
address the issues we are facing. There can be no assurance that any of these
efforts will be successful.
Critical
Accounting Policies
Our discussion and analysis of our
financial condition and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosures. On an ongoing basis, we evaluate these estimates, including those
related to revenue recognition, long-lived assets, accrued liabilities, income
taxes, common stock warrant liabilities and antidultion obligations, and
share-based compensation. These estimates are based on historical experience,
information received from third parties, and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
We believe the following critical
accounting policies affect the significant judgments and estimates used in the
preparation of our consolidated financial statements.
24
Revenue
Recognition
We follow the provisions as set forth
by authoritative accounting guidance.
We generally recognize revenue when we
have satisfied all contractual obligations and we are reasonably assured of
collecting the resulting receivable.
We recognize revenue related to the
sale of our inventory as we ship or deliver products, provided all other revenue
recognition criteria have been met. We recognize revenue from products sold
through distributors or other third-party arrangements upon shipment of the
products, if the distributor has a right of return, provided that (a) the price
is substantially fixed and determinable at the time of sale; (b) the
distributor’s obligation to pay us is not contingent upon resale of the
products; (c) title and risk of loss passes to the distributor at time of
shipment; (d) the distributor has economic substance apart from that provided by
us; (e) we have no significant obligation to the distributor to bring about
resale of the products; and (f) future returns can be reasonably estimated. For
any sales that do not meet all of the above criteria, revenue is deferred until
all such criteria have been met.
Share-based
Compensation
We calculate the fair value of all
share-based payments to employees and non-employee directors, including grants
of stock options, non-restricted and restricted shares, and amortize these fair
values to share-based compensation in the income statement over the respective
vesting periods of the underlying awards.
Share-based compensation related to
stock options includes the amortization of the fair value of options at the date
of grant determined using Black-Scholes option pricing model. We amortize the
fair value of options to expense over the vesting periods of the underlying
options.
We estimate the fair value of stock
option awards on the date of grant using assumptions about volatility, expected
life of the awards, risk-free interest rate, and dividend yield rate. The
expected volatility in this model is based on the historical volatility of our
common stock. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect at the time awards are granted, based on maturities which
approximate the expected life of the options. The expected life of the options
granted is estimated using the “simplified” method for “plain vanilla” options.
The expected dividend rate takes into account the absence of any historical
payments and management’s intention to retain all earnings for future operations
and expansion.
We estimate the fair value of
non-restricted and restricted stock awards based upon the closing market price
of our common stock at the date of grant. We charge the fair value of
non-restricted awards to share-based compensation upon grant. We amortize the
fair value of restricted awards to share-based compensation expense over the
vesting period of the underlying awards.
Derivative
Accounting
We adopted new guidance as issued on
January 1, 2009 which significantly impacted the accounting for certain of our
freestanding derivative instruments by requiring us to account for these
instruments as liabilities because they were no longer afforded equity treatment
due to their exercise price reset features. We account for these
arrangement in accordance with ASC
Topic 815-10-50, “Accounting for Derivative Instruments
and Hedging Activities,” “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled
in, a Company’s Own Stock,” as well as related interpretations of
these standards. In accordance with GAAP, derivative instruments and hybrid
instruments are recognized as either assets or liabilities in the statement of
financial position and are measured at fair value with gains or losses
recognized in earnings or other comprehensive income depending on the nature of
the derivative or hybrid instruments. Embedded derivatives that are
not clearly and closely related to the host contract are bifurcated and
recognized at fair value with changes in fair value recognized as either a gain
or loss in earnings if they can be reliably measured. When the fair
value of embedded derivative features cannot be reliably measured, we measure
and report the entire hybrid instrument at fair value with changes in fair value
recognized as either a gain or loss in earnings. We determine the
fair value of derivative instruments and hybrid instruments based on available
market data using appropriate valuation models, giving consideration to all of
the rights and obligations of each instrument and precluding the use of
"blockage" discounts or premiums in determining the fair value of a large block
of financial instruments. Fair value under these conditions does not necessarily
represent fair value determined using valuation standards that give
consideration to blockage discounts and other factors that may be considered by
market participants in establishing fair value.
25
Long-Lived
Assets
We review long-lived assets, including
leasehold improvements, property and equipment, and acquired intangible assets
for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable. This
requires us to estimate future cash flows related to these assets. Actual
results could differ from those estimates, which may affect the carrying amount
of assets and the related amortization expense.
Income
Taxes
We account for income taxes pursuant to
authoritative accounting guidance, which prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken
or expected to be taken on our tax return. We do not recognize an
uncertain tax position as a deferred tax asset if it has less than a 50%
likelihood of being sustained.
We have analyzed our filing positions
in all of the federal and state jurisdictions where we are required to file
income tax returns, as well as all open tax years in these jurisdictions. As a
result of our analysis, we have recorded no additional tax
liability.
We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be
realized. While we have considered future taxable income and ongoing tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize our deferred tax
assets in the future in excess of their net recorded amounts, an adjustment to
the deferred tax assets would increase our income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Our deferred tax assets at December 31, 2009 were
fully offset by a valuation allowance.
Results
of Operations
Comparison of the Year ended
December 31, 2009 and the Year ended December 31, 2008
Net
Loss
We incurred a net loss of $14.4 million
for the year ended December 31, 2009, as compared to $13.5 million for the year
ended December 31, 2008.
The increase in net loss of $0.9
million resulted primarily from:
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|
·
|
a
$2.0 million increase in cost of
revenues.
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|
|
·
|
a
$0.1 million increase in general and administrative
expenses.
|
|
|
·
|
a
$1.7 million increase in non-cash loss on fair market value
adjustment.
|
partially
offset by:
|
|
·
|
a
$0.2 million increase in revenues.
|
|
|
·
|
a
$0.6 million decrease in research and development
expenses.
|
|
|
·
|
a
$0.4 million decrease in legal
settlements.
|
|
|
·
|
a
$1.6 million decrease in license
impairments.
|
|
|
·
|
a
$0.2 million increase in gain on debt
extinguishment.
|
Revenue
Total revenues for the year ended
December 31, 2009 were $178,938, an increase of $0.15 million compared to total
revenues of $22,943 for the year ended December 31, 2008. The increase in net
revenues was due to the initiation of biofuel production and sales from our
production plant in Baltimore, Maryland.
Our
product revenue was driven by a number of factors including: in the commercial
and industrial market we offered our product at a substantial discount to the
price of petroleum diesel fuel in order to attract “early adopter” customers and
gain product validation and performance data through their use of our product.
These discounts were partially offset by eliminating the need to perform test
burns to sign up commercial and industrial customers, thereby lowering our
research and development costs. We also gained the ability to utilize
these early customers as a marketing tool, by bringing potential customers to
existing sites for real-time demonstrations of our biofuel performance in their
boiler applications. We have since signed several customers as a result and no
longer offer “early adopter” discounts. We have continued to have success in
signing up customers since discontinuing the “early adopter” discount, but may
from time to time offer volume-related or other promotional pricing discounts as
warranted.
26
Cost
of Product Revenue
Cost of product revenue was $2.3
million for the year ended December 31, 2009, an increase of $2.0 million,
compared to $0.3 million for the year ended December 31, 2008. Cost of product
revenue is comprised of raw material feedstocks used in production of $0.9
million in 2009 compared to $0.1 million in 2008, direct facility costs of $0.8
in 2009 compared to no costs in 2008, and amortization of the license agreement
of $0.6 million in 2009 compared to $0.2 million in 2008.
During 2009 cost of product
revenue was driven by a disproportionally higher cost of production relative to
units sold. We were just beginning to ramp-up production in our Baltimore
facility and were running in small batch processing which does not allow us to
purchase our feedstocks in large enough quantities to leverage volume discounts
and transportation costs. We also amortize our license agreement on a straight
line basis and pay fixed monthly lease costs on the facility. These non-volume
driven items were approximately $1.5 million of the $2.3 million total cost of
product revenue. As we are ramping up our production, the amortization and
direct facility costs will have a disproportionate impact on our cost of product
revenue in relation to units sold. As we begin fulfilling our recently
awarded contracts and our production volume increases, we believe that our per
unit cost of production will decrease as we process much larger production runs,
though there can be no assurance that these cost reductions will
materialize.
Research
and Development Expenses
Research and development expenses were
approximately $0.5 million for the year ended December 31, 2009 compared to $1.1
million for the year ended December 31, 2008. The decrease in
research and development expenses in 2009 is primarily the result of the
beginning of production of our fuel and conducting less test burns which were
used to evaluate additional customized fuel formulations using our proprietary
blending technology.
General
and Administrative Expenses
General
and administrative expenses were $9.8 million for the year ended December 31,
2009, compared to $9.7 million in the prior year. The increase of $0.1 million
in 2009 over the prior year was primarily attributable to the
following:
Increases in expenses related
to:
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|
·
|
$0.3
million in salary and severance pay based on hiring 2 additional employees
and payment of severance to an
executive.
|
|
|
·
|
$0.3
million for lease termination expenses associated with the Lake Mary
office lease termination.
|
|
|
·
|
$0.2
million related to the Baltimore plant lease and terminaling services
lease.
|
|
|
·
|
$0.3
million for board fees. Compensation program was implemented in August
2008.
|
|
|
·
|
$0.3
million for non cash compensation expense related to the fair market value
of warrants issued for services.
|
|
|
·
|
$0.7
million for non cash compensation expense related to restricted stock
awards.
|
|
|
·
|
$0.1
million for general liability and D&O
insurance.
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|
|
·
|
$0.2
million for investor relations and consulting
services.
|
Decreases in expenses related
to:
|
|
·
|
$1.0
million related to non cash compensation expense related to stock
options.
|
|
|
·
|
$0.9
decrease in legal expenses.
|
|
|
·
|
$0.2
million for penalty shares expense incurred in prior year for late filing
of registration statement.
|
|
|
·
|
$0.1
million for recruiting fees as 2 executives positions in prior
year.
|
|
|
·
|
$0.1
million for bonuses.
|
Interest
Expense
Interest expense was $0.5 million for
the year ended December 31, 2009 compared to $0.5 million in the prior year. The
expenses are unchanged as interest expense consists entirely of interest
incurred related to the License Agreement payable.
27
(Loss)
Gain on Fair Value Adjustment
The loss on net change in fair value of
derivative liabilities of $1.7 million for the year ended December 31, 2009, was
the result of the change in fair value of the detachable warrants issued to
investors in connection with several financings during the year ended December
31, 2009. The warrants issued in conjunction with several financings
during the year ended December 31, 2009 are considered derivative liabilities
and must be valued at the end of each period. The carrying value of
the common stock warrant liability is calculated using the Black-Scholes option
pricing model, which requires the input of highly subjective assumptions. These
assumptions include the risk-free rate of interest, expected dividend yield,
expected volatility, and the remaining contractual term of the award. The
risk-free rate of interest is based on the U.S. Treasury rates appropriate for
the expected term of the award. Expected dividend yield is projected at 0%, as
the Company has not paid any dividends on its common stock since its inception
and does not anticipate paying dividends on its common stock in the foreseeable
future. Expected volatility is based on the Company’s historical volatility and
the historical volatilities of the common stock of comparable publicly traded
companies.
Comparison of the Year ended
December 31, 2008 and the Year ended December 31, 2007
Research
and Development Expenses
Research
and development expenses were approximately $1.1 million for the year ended
December 31, 2008, compared to $0.8 million for the year ended December 31,
2007. The increase in research and development expenses in 2008 reflects
primarily costs from conducting tests to evaluate additional customized fuel
formulations using our proprietary blending technology and costs to focus on
further optimizing emissions as well as combustion tuning to enhance reliable
cold engine starts.
General
and Administrative Expenses
General
and administrative expenses were $9.7 million for the year ended December 31,
2008, compared to $7.5 million in the prior year. The increase of $2.2 million
in 2008 over the prior year was primarily attributable to increased expenses of
$1.0 million associated with personnel and related costs, increases related to
legal and audit fees of $0.5 million, and an increase of $0.2 million for rental
costs.
Interest
Expense
Interest
expense was $0.5 million for the year ended December 31, 2008, compared to $0.8
million in the prior year. The decrease of $0.3 million in 2008 over the prior
year was attributable to a reduction in license agreement payable. Interest
expense consists of interest incurred related to the License Agreement
payable.
Other Expense
Other
Expense was zero for the year ended December 31, 2008, compared to $0.3 million
in the prior year. The decrease was attributable to the recognition of a charge,
in the prior year, associated with a forfeited deposit of $250,000 as a result
of the termination by Global Energy of our stock purchase and termination
agreement.
(Loss)
Gain on Fair Value Adjustment
Loss on fair value adjustment was
$717 for the year ended December 31, 2008, compared to a gain of $0.6
million in the prior year. During December 2007, we recorded an
$80,752 contingent liability for 2% of the shares issued in the December 2007
private placement. During 2008, we recorded an additional $186,291
contingent liability for 4% of the shares issued, up to the maximum penalty of
6%. For the year ended December 31, 2008 and 2007, we recorded a loss
on fair value adjustment of $30,169 and a gain on fair value adjustment of
$1,796, respectively, related to this liability as our stock price fluctuated
during this period. Upon issuance of the shares the contingent liability was
eliminated.
In connection with the Series B Private
Placement completed on March 31, 2008, we recorded a contingent liability of
$43,986 for 1% of the amount invested, due to the registration statement not
being declared effective within 180 days of the initial required filing date. We
recorded a gain on fair value adjustment of $29,452 related to this liability as
our stock price declined during this period. Upon issuance of the shares the
contingent liability was eliminated.
We recorded a $1,574,100 contingent
liability at January 1, 2007 based on our stock price at that date. For the year
ended December 31, 2007, we recorded a gain on fair value adjustment of $629,640
related to this liability as our stock price declined during this period. Upon
issuance of the shares the contingent liability was eliminated.
28
Liquidity
and Capital Resources
Liquidity
At
December 31, 2009, we had $0.6 million in cash, compared to $1.3 million at
September 30, 2009.
Although we completed a private
placement of $1,304,692 in gross proceeds in the first quarter of 2010, we will
need to reduce costs and raise additional financing to continue our operations
beyond the second quarter of 2010. We expect that our available cash and
interest income will be sufficient to finance currently planned activities
through mid May 2010. We estimate that we will require an additional $6.0
million to fund our operations through 2010. These estimates are based on
certain assumptions, which could be negatively impacted by the matters discussed
under “Risk Factors.”
Several
existing commitments that require significant expenditures will continue to
impact our liquidity and capital resources. We have monthly lease and other
outstanding payment obligations under our production facility site lease and
terminaling service agreement for past production. We also have incurred costs
associated with developing, upgrading and expanding the capacity of our biofuel
production facility in Baltimore, Maryland. Under the license agreement with the
inventor of our proprietary technology, we also are required to pay $1.0 million
per year over the next four years. We will continue incurring costs to test and
optimize our fuels, enhance research and development, pay our employees and
sustain operations.
We are
unlikely to be able to continue our operations unless we can obtain additional
financing. We likely will seek such funding through public or private financings
or some combination of them. Additional funding may not be available to us on
acceptable terms, or at all. Even after funding our short term needs, given our
ongoing need for capital, we may raise money on an opportunistic basis when the
market makes such funding available on acceptable terms.
We have
financed our operations to date primarily through the sale of our common and
preferred stock and warrants in private placements with accredited investors and
registered direct offerings. In March 2009, we raised $3,166,000 in gross
proceeds from the sale of shares of common stock at a purchase price of $0.80
per share and warrants with an exercise price of $0.90 per share. In July 2009,
we raised $3,196,600 in gross proceeds from the sale of shares of common stock
at a price of $1.05 per share and warrants with an exercise price of $1.60 per
share. In December 2009, we raised $1,541,000 in gross proceeds from
the sale of shares of common stock at a purchase price of $0.80 per share and
warrants with an exercise price of $0.90 per share. In February 2010, we raised
$1,304,700 in gross proceeds from the sale of shares of common stock at a
purchase price of $0.69 per share and warrants with an exercise price of $0.90
per share.
If
we continue to raise capital through the sale of equity securities, or
securities convertible into equity, dilution to our then existing shareholders
would result. If we raise additional capital through the incurrence of debt, we
would likely become subject to covenants restricting our business activities,
and holders of debt instruments would have rights and privileges senior to those
of our equity investors. In addition, servicing the interest and repayment
obligations under these borrowings would divert funds that would otherwise be
available to support research and development or commercialization
activities.
Cash
Flows
Net cash
used in operating activities was $7.1 million for the year ended December 31,
2009 primarily reflecting our net loss of $14.4 million, partially offset by
$3.3 million in non-cash stock-based compensation expense, $0.7 million in
non-cash stock based expense for services rendered by consultants, $0.5 million
in non-cash amortization expense associated with our license agreement payable,
$0.6 million in non-cash amortization expense related to the license, and $1.7
million loss on change in fair value of warrant liability. Net cash used in
operating activities was $6.3 million for the year ended December 31, 2008
primarily reflecting our net loss of $13.5 million, partially offset by $3.4
million in non-cash stock-based compensation expense, $0.6 million in non-cash
stock based expense for services rendered by consultants, $0.5 million in
non-cash amortization expense associated with our license agreement payable,
$0.2 million in non-cash amortization expense related to the license, $0.2
million in non-cash penalty share expense, $0.4 million in warrant expense
associated with legal settlement and $1.6 million in impairment expense related
to the write-down of license value.
Net cash
used in investing activities was $0.9 million attributable to plant additions
for the year ended December 31, 2009. Net cash used in investing activities was
$0.5 million for the year ended December 31, 2008. Net cash used in investing
activities in 2008 was attributable to $0.4 million to build out our plant
facility and purchase furniture and equipment, and $0.1 million of patent
costs.
29
Net cash
provided by financing activities was $7.1 million for the year ended December
31, 2009, and is attributable to the issuance of common stock related to public
and private offerings..
Net cash
provided by financing activities was $6.6 million for the year ended December
31, 2008, and consisted of $7.2 million in net proceeds from the issuance of
preferred stock, and $0.4 million in proceeds from exercise of warrants,
partially offset by $1.0 million in payments for our License
Agreement.
Capital
Requirements and Resources
Our
future capital requirements will depend on many factors, including:
|
|
·
|
the
level of cash flows from product
sales;
|
|
|
·
|
conducting
additional testing with utilities, independent power producers or others,
including product application testing, to gain market acceptance of our
biofuel among customers and equipment
manufacturers;
|
|
|
·
|
maintaining
and improving our production facility in Baltimore, Maryland under our
terminal lease agreement with Pennington Partners, LLC or with others to
supply our products initially for testing and eventually for the broader
biofuels market;
|
|
|
·
|
the
scope and results of our research and development
efforts;
|
|
|
·
|
developing
and executing a sales marketing plan for the commercial and industrial
heating fuel and marine market segments and a technology plan that
complements the marketing plan;
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·
|
entering
into feedstock supply and transportation logistics agreements to supply
our production facilities;
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·
|
developing
additional strategic relationships to attract potential customers and
sublicensees and to obtain the capital commitments necessary to engineer,
construct and operate biofuel plants in our exclusive
territory;
|
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|
·
|
continuing
to pursue favorable tax incentives for our biofuel, particularly efforts
to include our biofuel in the $1 per gallon credit afforded biodiesel and
to have the benefit of such a change extend beyond the current expiration
date of December 31, 2009 and to pursue obtaining EPA
approval;
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|
|
·
|
recruiting
additional key employees to expand the capabilities of our existing
management team; and
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·
|
the
costs of maintaining, expanding and protecting our intellectual property
portfolio, including litigation costs and
liabilities.
|
Off−Balance
Sheet Arrangements
We currently do not have any
off-balance sheet arrangements.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not applicable.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our
Consolidated Financial Statements may be found on pages F-1 through F-31 of this
report.
30
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act, is accumulated and
communicated to management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
As required by Rule 13a-15 under the
Exchange Act, we are required to carry out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end
of the period covered by this report. Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms. This required evaluation was carried out with the
participation of our principal executive officer and principal financial
officer. Based upon such evaluation as of December 31, 2009, our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures were effective at a reasonable assurance level such that
the information relating to us and our consolidated subsidiary required to be
disclosed in our Exchange Act reports (i) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
(ii) is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. Internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) includes those policies
and procedures that: (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles in the
United States of America (“U.S. GAAP”), and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial
statements.
Internal control over reporting,
because of its inherent limitations, may not prevent or detect misstatements.
Projections of any evaluation of effectiveness for future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the
participation of the Company’s management, including the principal executive
officer and the principal financial officer, the Company conducted an evaluation
of the effectiveness of the Company’s internal control over financial reporting
based on the framework and criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on the Company’s evaluation under the COSO framework,
management concluded that the Company maintained effective internal control over
financial reporting as of December 31, 2009.
This annual report does not include
an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
31
Changes
in Internal Control over Financial Reporting
During the year ended December 31,
2009, there were no significant changes in our control over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
32
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information with respect to the identity, business experience and directorships
of our directors and their remuneration is incorporated by reference to the
information set forth in the section captioned “Election of Directors” in our
Proxy Statement for the 2010 Annual Meeting of Shareholders, which is
anticipated to be filed pursuant to Regulation 14A no later than one hundred
twenty (120) days following the end of fiscal year 2009 (the “Proxy
Statement”). The information with respect to our Audit Committee is incorporated
by reference to the information set forth in the section captioned “Committees
of the Board of Directors – Audit Committee” in the Proxy Statement. The
information with respect to material changes in the nominating process for the
Board of Directors, if any is, incorporated by reference to the information set
forth in the appropriate subsection of the section captioned “Election of
Directors” in the Proxy Statement. The information with respect to compliance
with Section 16(a) of the Exchange Act is incorporated by reference to the
section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in
the Proxy Statement. The information with respect to our Code of Ethics is
incorporated by reference to the section captioned “Code of Business Conduct and
Ethics” in the Proxy Statement.
The information with respect to the
identity and business experience of our executive officers is set forth in the
Section captioned “Executive Officers” in Part I of this Annual Report on Form
10-K.
ITEM
11. EXECUTIVE COMPENSATION.
The
information required by this item is incorporated by reference to the
information set forth under the caption “Executive Compensation” in our Proxy
Statement.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
information required by this item is incorporated by reference to the
information set forth under the captions “Security Ownership of Certain
Beneficial Owners and Management” and “Securities Authorized for Issuance Under
Equity Compensation Plans” in our Proxy Statement.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
The
information required by this item, if any, is incorporated by reference to the
information set forth under the captions “Transactions with Related Parties” and
“Independence of the Board of Directors” in our Proxy Statement.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The
information required by this item is incorporated by reference to the
information set forth under the caption “Independent Registered Public
Accounting Firm Fees and Services” in our Proxy Statement.
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1) Financial Statements
The
consolidated financial statements of the registrant as listed in the “Index to
Consolidated Financial Statements” found on pages F-1 through F-32 of this
report, are filed as part of this report.
15(a)(2) Financial Statement
Schedules
Consolidated
financial statement schedules have been omitted because the required information
is not present, or not present in amounts sufficient to require submission of
the schedules, or because the required information is provided in the
consolidated financial statements or notes thereto.
33
15(a)(3) Exhibits
The
exhibits required to be filed as part of this Annual Report on Form 10-K are
listed in the Exhibit Index attached hereto and are incorporated herein by
reference.
34
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
New
Generation Biofuels Holdings, Inc
|
|||
|
By:
|
/s/ Cary
J. Claiborne
|
||
|
President,
Chief Executive Officer & Chief Financial Officer
|
|||
|
Date:
March 26,
2010
|
|||
Power
of Attorney
Know all men by these presents, that
each person whose signature appears below constitutes and appoints Cary J.
Claiborne as his attorney-in-fact, with the power of substitution, for him in
any and all capacities, to sign any amendments to this annual report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/
Cary J. Claiborne
|
President,
Chief Executive Officer and Chief Financial Officer
|
March
26, 2010
|
||
|
Cary
J. Claiborne
|
(Principal
Executive Officer, Principal Financial Officer and Principal Accounting
Officer)
|
|||
|
/s/
Lee S. Rosen
|
Chairman
of the Board
|
March
26, 2010
|
||
|
Lee
S. Rosen
|
||||
|
/s/
John E. Mack
|
Director
|
March
26, 2010
|
||
|
John
E. Mack
|
||||
|
/s/
Douglas S. Perry
|
Director
|
March
26, 2010
|
||
|
Douglas
S. Perry
|
||||
|
/s/
James R. Sheppard, Jr.
|
Director
|
March
26, 2010
|
||
|
James
R. Sheppard, Jr.
|
35
EXHIBIT
INDEX
|
Exhibit
No.
|
Exhibit
Description
|
|
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K filed March 31,
2008).
|
|
|
3.2
|
Articles
of Amendment to the Articles of Incorporation relating to our Series B
Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to
the Current Report on Form 8-K filed March 31, 2008).
|
|
|
3.3
|
Amended
and Restated Bylaws, dated March 5, 2008 (incorporated by reference to
Exhibit 3.3 to the Annual Report on Form 10-K filed March 31,
2008).
|
|
|
4.1
|
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K filed October 26, 2006).
|
|
|
4.2
|
Form
of Warrant (incorporated by reference to Exhibit 4.2 to the Annual Report
on Form 10-K filed March 31, 2008).
|
|
|
4.3
|
Form
of Warrant(incorporated by reference to Exhibit 4.3 to the Annual Report
on Form 10-K filed March 31, 2008).
|
|
|
4.4
|
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K filed March 31, 2008).
|
|
|
4.5
|
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K filed March 4, 2009).
|
|
|
4.6
|
Form
of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report
on Form 8-K filed March 4, 2009).
|
|
|
4.7
|
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K filed July 23, 2009).
|
|
|
4.8
|
Form
of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report
on Form 8-K filed July 23, 2009).
|
|
|
4.9
|
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K filed December 11, 2009).
|
|
|
4.10
|
Form
of Warrant (incorporated by reference to Exhibit 4.2 to the Current Report
on Form 8-K filed December 11, 2009).
|
|
|
4.11
|
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Current Report
on Form 8-K filed February 3, 2010).
|
|
|
10.1
|
Exclusive
License Agreement dated as of March 20, 2006 between H2Diesel, Inc. and
Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed October 26, 2006, portions of which have
been omitted pursuant to a request for confidential
treatment.
|
|
|
10.2
|
Amendment
#1, dated September 11, 2006, to the Exclusive License Agreement between
H2Diesel, Inc. and Ferdinando Petrucci (incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed October 26,
2006).
|
|
|
10.3
|
Amendment
#2, dated December 13, 2006, to the Exclusive License Agreement dated
March 20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed December 15,
2006).
|
36
|
10.4
|
Amendment
#3, dated November 3, 2007, to the Exclusive License Agreement dated March
20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci
(incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form
10-QSB filed November 14, 2007).
|
|
|
10.5
|
Amendment
#4, dated November 9, 2007, to the Exclusive License Agreement dated March
20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci
(incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form
10-QSB filed November 14, 2007).
|
|
|
10.6
|
Amendment
#5, dated February 20, 2008, to the Exclusive License Agreement
dated March 20, 2006, as amended, between H2Diesel, Inc. and
Ferdinando Petrucci (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed February 25,
2008).
|
|
|
10.7
|
Amendment
#6, dated March 25, 2008, to the Exclusive License Agreement dated March
20, 2006, as amended, between H2Diesel, Inc. and Ferdinando Petrucci
(incorporated by reference to Exhibit 10.7 to the Annual Report on Form
10-K filed March 31, 2008).
|
|
|
10.8
|
Amendment
#7, dated January 8, 2009, to the Exclusive License Agreement, dated March
20, 2006, as amended, between New Generation Biofuels, Inc. (formerly
H2Diesel, Inc.) and Ferdinando Petrucci (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed January 12,
2009).
|
|
|
10.
9
|
Addendum,
dated March 30, 2009, to the Exclusive License Agreement, dated March 20,
2006, as amended, between New Generation Biofuels, Inc. (formerly
H2Diesel, Inc.) and PTJ Bioenergy Holdings Ltd. (as successor by
assignment to Ferdinando Petrucci) (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed April 7,
2009).
|
|
|
10.10
|
Amendment
#8, dated February 19, 2010, to the Exclusive License Agreement, dated
March 20, 2006, as amended, between New Generation Biofuels, Inc.
(formerly H2Diesel, Inc.) and Ferdinando Petrucci (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed February
23, 2010).
|
|
|
10.11*
|
Omnibus
Incentive Plan adopted November 14, 2007 (incorporated by reference to
Exhibit 10.13 to the Annual Report on Form 10-K filed March 31,
2008).
|
|
|
10.12
|
Form
of Director Non-Qualified Stock Option Agreement under Omnibus Incentive
Plan (incorporated by reference to Exhibit 10.14 to the Annual Report on
Form 10-K filed March 31, 2008).
|
|
|
10.13
|
Amended
Form of Non-Qualified Stock Option Agreement under Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.11 to the Annual Report on Form
10-K filed March 31, 2009).
|
|
|
10.14
|
Amended
Form of Incentive Stock Option Agreement under Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.11 to the Annual Report on Form
10-K filed March 31, 2009).
|
|
|
10.15
|
Amended
Form of Restricted Stock Agreement under Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.13 to the Annual Report on Form
10-K filed March 31, 2009).
|
|
|
10.16*
|
Employment
Agreement dated as of October 18, 2006 between David A. Gillespie
and H2Diesel, Inc. (incorporated by reference to Exhibit 10.5
to the Current Report on Form 8-K filed October 26,
2006).
|
|
|
10.17*
|
Employment
Agreement dated as of July 23, 2009 between Lee S. Rosen and the
Company (incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K filed July 29, 2009).
|
|
|
10.18*
|
Separation
Agreement, dated March 24, 2009, between the David A. Gillespie and the
Company (incorporated by reference to Exhibit 10.17 to the Annual Report
on Form 10-K filed March 31,
2009).
|
37
|
10.19*
|
Amended
and Restated Employment Agreement dated as of September 19, 2006, between
Andrea Festuccia and H2Diesel, Inc. (incorporated by reference to Exhibit
10.7 to the Current Report on Form 8-K filed October 26,
2006).
|
|
|
10.20*
|
Amended
and Restated Employment Agreement dated as of December 18, 2007 between
Cary J. Claiborne and H2Diesel, Holdings, Inc. (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed January 11,
2008).
|
|
|
10.22
|
Form
of Registration Rights Agreement in connection with Private Placement of
Common Stock in February 2010 (incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K filed on February 3,
2010) .
|
|
|
10.23
|
Option
Agreement dated September 15, 2006, between Lee S. Rosen and H2Diesel,
Inc. (incorporated by reference to Exhibit 10.10 to the Current Report on
Form 8-K filed October 26, 2006).
|
|
|
10.24
|
Option
Agreement dated September 19, 2006, between Andrea Festuccia and H2Diesel,
Inc. (incorporated by reference to Exhibit 10.11 to the Current Report on
Form 8-K filed October 26, 2006).
|
|
|
10.25
|
Option
Agreement dated October 18, 2006, between David A. Gillespie and H2Diesel,
Inc. (incorporated by reference to Exhibit 10.12 to the Current Report on
Form 8-K filed October 26, 2006).
|
|
|
10.26
|
Option
Agreement dated December 19, 2008 between Cary J. Claiborne and H2Diesel
Holdings, Inc. (incorporated by reference to Exhibit 10.30 to the amended
Annual Report on Form 10-K/A filed July 25, 2008).
|
|
|
10.27
|
Form
of Independent Director Stock Option Agreement (incorporated by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed February 21,
2007).
|
|
|
10.28
|
Option
Agreement dated April 24, 2007, between Kim Johnson and H2Diesel Holdings,
Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-QSB filed May 15, 2007).
|
|
|
10.29
|
Site
Lease Agreement, dated September 12, 2008, by and between Pennington
Partners, LLC and the Company (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed September 18,
2008).
|
|
|
10.30
|
Terminaling
Services Agreement, dated September 12, 2008, by and between Atlantic
Terminalling, LLC and N the Company (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed September 18, 2008, portions
of which have been omitted pursuant to a request for confidential
treatment).
|
|
|
10.31
|
Lease
Termination Agreement, dated August 28, 2009, by and between Central
Florida Educators’ Federal Credit Union and the Company (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
September 3, 2009).
|
|
|
14.1
|
Code
of Business Conduct and Ethics adopted November 13, 2007 (incorporated by
reference to Exhibit 14.1 to the Annual Report on Form 10-K
filed March 31, 2008).
|
|
|
16.1
|
Letter
of Imowitz Koenig & Co. LLP, dated October 20, 2009, addressed to the
Securities and Exchange Commission (incorporated by reference to Exhibit
16.1 to the Current Report on Form 8-K filed October 21,
2009).
|
|
|
16.2
|
Letter
of Imowitz Koenig & Co. LLP, dated November 1, 2009, addressed to the
Securities and Exchange Commission (incorporated by reference to Exhibit
16.1 to the Current Report on Form 8-K filed November 3,
2009).
|
|
|
21.1†
|
Subsidiaries
of the Company
|
|
|
23.1†
|
Consent
of Reznick Group, P.C.
|
|
|
23.2†
|
Consent
of Imowitz Koenig & Co.,
LLP
|
38
|
24.1†
|
Power
of Attorney (included on signature page).
|
|
|
31.1†
|
Certification
pursuant to Section 302 of Sarbanes Oxley Act of 2002 (includes both
Principal Executive Officer and Principal Financial
Officer)
|
|
|
32.1†
|
Certification
pursuant to Section 906 of Sarbanes Oxley Act of 2002 (includes both
Principal Executive Officer and Principal Financial
Officer)
|
|
†
|
Filed
herewith.
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
39
New
Generation Biofuels Holdings, Inc.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
F-5
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009
and 2008
|
F-6
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
New
Generation Biofuels Holdings, Inc.
We have
audited the consolidated balance sheet of New Generation Biofuels Holdings, Inc.
(a Florida Corporation) and subsidiaries (the “Company”) as of December 31,
2009, and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of New Generation Biofuels
Holdings, Inc. and subsidiaries as of December 31, 2009, and the results of
their operations and their cash flows for the year the ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 1 to the consolidated financial
statements, the Company has experienced negative cash flows from operations
since inception and is dependent upon future financing in order to fund its
planned operating activities. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management's plans regarding
these matters are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As
discussed in Note 1 to the consolidated financial statements, the Company
adopted Emerging Issues Task Force 07-5, “Determining Whether an Instrument (or
Embedded Feature) is Indexed to an Entity’s Own Stock” (codified in FASB ASC
Topic 815), effective as of January 1, 2009 and adjusted its accounting for its
consolidated financial statements for the year ended December 31, 2009 presented
herein.
/S/
REZNICK GROUP, P.C.
Vienna,
Virginia
March 26,
2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
New
Generation Biofuels Holdings, Inc.
We have
audited the accompanying consolidated balance sheet of New Generation Biofuels
Holdings, Inc. (the “Company”) (A Development Stage Enterprise) as of December
31, 2008 and the related consolidated statements of operations, stockholders’
equity, and cash flows for the year ended December 31, 2008. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor have we been
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for purposes of expressing an opinion
on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as, evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of New Generation
Biofuels Holdings, Inc. (A Development Stage Enterprise) as of December 31, 2008
and the results of its operations and its cash flows for the year ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is in the development stage
and has incurred losses and negative cash flows from
operations. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
|
/s/
Imowitz Koenig & Co., LLP
|
|
|
Certified
Public Accountants
|
New York,
New York
March 31,
2009
F-3
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Consolidated
Balance Sheets
|
December 31, 2009
|
December 31, 2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
567,647
|
$
|
1,476,246
|
||||
|
Accounts
receivable
|
63,900
|
22,943
|
||||||
|
Other
receivables
|
41,406
|
–
|
||||||
|
Inventories
|
11,708
|
–
|
||||||
|
Prepaid
expenses and other current assets
|
237,635
|
195,369
|
||||||
|
Total
current assets
|
922,296
|
1,694,558
|
||||||
|
Property,
plant and equipment, net
|
1,120,911
|
378,946
|
||||||
|
License
agreement, net
|
5,650,988
|
6,267,460
|
||||||
|
Other
assets, net
|
346,073
|
392,208
|
||||||
|
TOTAL ASSETS
|
$
|
8,040,268
|
$
|
8,733,172
|
||||
|
LIABILITIES AND STOCKHOLDER'S
EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued expenses
|
$
|
1,472,519
|
$
|
1,385,311
|
||||
|
Loan
payable
|
50,000
|
50,000
|
||||||
|
License
agreement payable, current portion
|
||||||||
|
(net
of unamortized discount of $375,467 and $71,270)
|
624,533
|
928,730
|
||||||
|
Accrued
dividends on preferred stock
|
1,078,003
|
765,369
|
||||||
|
Common
stock warrant liability and antidilution obligation
|
110,874
|
-
|
||||||
|
Total
current liabilities
|
3,335,929
|
3,129,410
|
||||||
|
License
agreement payable
|
||||||||
|
(net
of unamortized discount of $622,274 and $1,464,132)
|
3,377,726
|
3,535,868
|
||||||
|
Deferred
rent
|
324,409
|
–
|
||||||
|
Total
liabilities
|
7,038,064
|
6,665,278
|
||||||
|
Commitments
and contingencies
|
-
|
-
|
||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock; $0.001 par value; 9,450,000 shares authorized; no shares issued and
outstanding at December 31, 2009 and 2008
|
-
|
-
|
||||||
|
Series
A Cumulative Convertible Preferred Stock; $0.001 par value; $100.00 stated
value; 300,000 shares authorized, 18,400 and 26,400 shares issued and
outstanding as of December 31, 2009 and 2008, respectively; aggregate
liquidation preference of $2,264,328
|
710,970
|
1,020,087
|
||||||
|
Series
B Cumulative Convertible Preferred Stock; $0.001 par value; $100.00 stated
value; 250,000 shares authorized, 45,785 and 72,126 shares issued and
outstanding as of December 31, 2009 and 2008, respectively; aggregate
liquidation preference of $5,232,234
|
3,094,872
|
5,023,429
|
||||||
|
Common
stock; $0.001 par value; 100,000,000 shares authorized; 31,711,578 and
19,299,168 shares issued and outstanding as of December 31, 2009 and 2008,
respectively
|
31,712
|
19,299
|
||||||
|
Additional
paid-in-capital
|
47,593,489
|
29,889,220
|
||||||
|
Accumulated
deficit
|
(50,428,839
|
)
|
(33,884,141
|
)
|
||||
|
Total
stockholders' equity
|
1,002,204
|
2,067,894
|
||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
|
$
|
8,040,268
|
$
|
8,733,172
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
NEW
GENERATION BIOFUEL HOLDINGS, INC.
Consolidated
Statements of Operations
|
For the Year
Ended December
31, 2009
|
For the Year
Ended December
31, 2008
|
|||||||
|
Revenues:
|
||||||||
|
Product
|
$
|
137,532
|
$
|
22,943
|
||||
|
Alternative
fuel tax credit
|
41,406
|
–
|
||||||
|
Total
revenue
|
178,938
|
22,943
|
||||||
|
Operating
expenses:
|
||||||||
|
Cost
of product revenue (including depreciation and amortization of $685,806
and $193,471, respectively)
|
2,311,576
|
307,541
|
||||||
|
Research
and development
|
475,013
|
1,086,723
|
||||||
|
General
and administrative
|
9,751,064
|
9,653,380
|
||||||
|
Legal
settlement
|
-
|
359,595
|
||||||
|
License
impairment charge
|
-
|
1,600,369
|
||||||
|
Total
operating expenses
|
12,537,653
|
13,007,608
|
||||||
|
Loss
from operations
|
(12,358,715
|
)
|
(12,984,665)
|
|||||
|
Interest
income
|
3,458
|
29,418
|
||||||
|
Interest
expense
|
(537,661
|
)
|
(536,581)
|
|||||
|
Other
income
|
–
|
7,208
|
||||||
|
Gain
on debt extinguishment
|
241,500
|
–
|
||||||
|
Loss
on net change in fair value of derivative liabilities
|
(1,745,383)
|
(717)
|
||||||
|
Net
loss
|
(14,396,801
|
)
|
(13,485,337)
|
|||||
|
Dividends
to preferred stockholders
|
(4,691,379
|
)
|
(3,689,317)
|
|||||
|
Net
loss attributable to common stockholders
|
$
|
(19,088,180
|
)
|
$
|
(17,174,654)
|
|||
|
Basic
and diluted net loss per share
|
$
|
(0.73
|
)
|
$
|
(0.92)
|
|||
|
Weighted
average number of shares outstanding
|
26,236,636
|
18,725,312
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Consolidated
Statements of Stockholders' Equity
|
Common Stock
|
Preferred Stock - Series A
|
Preferred Stock - Series B
|
Additional
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||||||||
|
Balance
at January 1, 2008
|
18,165,793 | $ | 18,166 | 42,050 | $ | 1,624,798 | – | – | $ | 18,955,101 | $ | (16,709,487 | ) | $ | 3,888,578 | |||||||||||||||||||||
|
Compensation
expense associated with options, stock and restricted
stock
|
– | – | – | – | – | – | 3,268,363 | – | 3,268,363 | |||||||||||||||||||||||||||
|
Issuance
of options and warrants for services rendered
|
– | – | – | – | – | – | 558,505 | – | 558,505 | |||||||||||||||||||||||||||
|
Warrant
expense related to legal settlement
|
– | – | – | – | – | – | 359,595 | – | 359,595 | |||||||||||||||||||||||||||
|
Issuance
of common stock for services rendered
|
16,250 | 16 | – | – | – | – | 78,484 | – | 78,500 | |||||||||||||||||||||||||||
|
Issuance
of common stock - registration rights agreement
|
61,128 | 61 | – | – | – | – | 309,894 | – | 309,955 | |||||||||||||||||||||||||||
|
Issuance
of common stock - dividends on conversion of preferred
stock
|
33,947 | 34 | – | – | – | – | 135,754 | – | 135,788 | |||||||||||||||||||||||||||
|
Issuance
of preferred stock and warrants in private offering
|
– | – | – | – | 79,405 | 5,556,361 | 2,032,739 | – | 7,589,100 | |||||||||||||||||||||||||||
|
Dividend
associated with the beneficial conversion feature of the preferred
stock
|
– | – | – | – | – | – | 2,963,995 | (2,963,995 | ) | – | ||||||||||||||||||||||||||
|
Private
placement costs
|
– | – | – | – | – | – | (401,450 | ) | – | (401,450 | ) | |||||||||||||||||||||||||
|
Conversion
of preferred stock into common stock
|
570,617 | 571 | (15,650 | ) | (604,711 | ) | (7,279 | ) | (532,932 | ) | 1,171,511 | – | 34,439 | |||||||||||||||||||||||
|
Exercise
of warrants into common stock
|
451,433 | 451 | – | – | – | – | 456,729 | – | 457,180 | |||||||||||||||||||||||||||
|
Dividends
accrued on preferred stock
|
– | – | – | – | – | – | – | (725,322 | ) | (725,322 | ) | |||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | – | – | – | (13,485,337 | ) | (13,485,337 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
19,299,168 | $ | 19,299 | 26,400 | $ | 1,020,087 | 72,126 | $ | 5,023,429 | $ | 29,889,220 | $ | (33,884,141 | ) | $ | 2,067,894 | ||||||||||||||||||||
|
Cumulative
effect of reclassification of warrants (ASC Topic 815)
|
- | - | - | - | - | - | (2,803,597 | ) | 2,543,482 | (260,115 | ) | |||||||||||||||||||||||||
|
Balance
at January 1, 2009, as adjusted
|
19,299,168 | $ | 19,299 | 26,400 | $ | 1,020,087 | 72,126 | $ | 5,023,429 | $ | 27,085,623 | $ | (31,340,659 | ) | $ | 1,807,779 | ||||||||||||||||||||
|
Issuance
of stock options and restricted stock to employees
|
1,208,325 | 1,209 | – | – | – | – | 3,292,109 | – | 3,293,318 | |||||||||||||||||||||||||||
|
Issuance
of stock options to non-employees
|
– | – | – | – | – | – | 35,684 | – | 35,684 | |||||||||||||||||||||||||||
|
Issuance
of warrants to non-employees for prepaid consulting
services
|
– | – | – | – | – | – | 595,763 | – | 595,763 | |||||||||||||||||||||||||||
|
Issuance
of warrants for payment of accounts payable and accrued
expenses
|
– | – | – | – | – | – | 99,732 | – | 99,732 | |||||||||||||||||||||||||||
|
Issuance
of common stock for payment of accounts payable and accrued
expenses
|
25,000 | 25 | – | – | – | – | 24,975 | – | 25,000 | |||||||||||||||||||||||||||
|
Issuance
of restricted stock to non-employees for prepaid consulting
services
|
155,000 | 155 | – | – | – | – | 137,745 | – | 137,900 | |||||||||||||||||||||||||||
|
Issuance
of common stock for settlement of license agreement
payable
|
925,000 | 925 | – | – | – | – | 757,575 | – | 758,500 | |||||||||||||||||||||||||||
|
Proceeds
from the issuance of common stock and warrants, net of offering
costs
|
8,928,131 | 8,928 | – | – | – | – | 7,054,411 | – | 7,063,339 | |||||||||||||||||||||||||||
|
Accrued
preferred stock dividends converted into shares of common
stock
|
113,330 | 113 | – | – | – | – | 373,472 | – | 373,585 | |||||||||||||||||||||||||||
|
Conversion
of preferred stock into common stock
|
1,057,624 | 1,058 | (8,000 | ) | (309,117 | ) | (26,341 | ) | (1,928,557 | ) | 2,236,616 | – | - | |||||||||||||||||||||||
|
Warrant
liability associated with issuance of common stock
|
– | – | – | – | – | – | (2,163,943 | ) | – | (2,163,943 | ) | |||||||||||||||||||||||||
|
Warrant
liability associated with issuance of common stock
|
– | – | – | – | – | – | (50,428 | ) | – | (50,428 | ) | |||||||||||||||||||||||||
|
Antidilution
obligation associated with issuance of common stock
|
– | – | – | – | – | – | (102,500 | ) | – | (102,500 | ) | |||||||||||||||||||||||||
|
Reclassification
of warrant liability associated with antidilution triggering event on
Series B preferred stock
|
– | – | – | – | – | – | 158,451 | – | 158,451 | |||||||||||||||||||||||||||
|
Reclassification
of warrant liability in connection with waiver of antidilution
provision
|
– | – | – | – | – | – | 4,053,043 | – | 4,053,043 | |||||||||||||||||||||||||||
|
Deemed
dividend associated with the beneficial conversion feature on Series B
preferred stock
|
– | – | – | – | – | – | 4,005,161 | (4,005,161 | ) | – | ||||||||||||||||||||||||||
|
Preferred
stock dividends
|
– | – | – | – | – | – | – | (686,218 | ) | (686,218 | ) | |||||||||||||||||||||||||
|
Net
loss
|
– | – | – | – | – | – | – | (14,396,801 | ) | (14,396,801 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
31,711,578 | $ | 31,712 | 18,400 | $ | 710,970 | 45,785 | $ | 3,094,872 | $ | 47,593,489 | $ | (50,428,839 | ) | $ | 1,002,204 | ||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
Consolidated
Statement of Cash Flows
|
For the Year Ended
December 31, 2009
|
For the Year Ended
December 31, 2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$
|
(14,396,801
|
)
|
$
|
(13,485,337
|
)
|
||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization expense
|
91,951
|
7,383
|
||||||
|
Loss
on disposal of property and equipment
|
70,974
|
–
|
||||||
|
Amortization
of license agreement
|
616,472
|
193,471
|
||||||
|
Amortization
of license agreement payable discount
|
537,661
|
536,581
|
||||||
|
Compensation
expense associated with stock, stock options, and restricted
stock
|
3,293,318
|
3,268,363
|
||||||
|
Compensation
expense associated with accrued stocks and warrants
|
–
|
124,732
|
||||||
|
Stock
options issued to non-employees for services
|
35,684
|
637,005
|
||||||
|
Penalty
share expense
|
–
|
230,277
|
||||||
|
Warrant
expense related to legal settlement
|
–
|
359,595
|
||||||
|
Loss
on net change in fair value of derivative liabilities
|
1,745,383
|
717
|
||||||
|
Gain
on debt extinguishment
|
(241,500)
|
–
|
||||||
|
Amortization
of prepaid consulting fee
|
662,323
|
–
|
||||||
|
License
impairment
|
–
|
1,600,369
|
||||||
|
Bad
debt expense
|
7,208
|
–
|
||||||
|
–
|
||||||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(40,957
|
)
|
(22,943
|
)
|
||||
|
Other
receivables
|
(41,406
|
)
|
–
|
|||||
|
Inventories
|
(11,708
|
)
|
–
|
|||||
|
Prepaid
expenses and other current assets
|
29,073
|
(110,401)
|
||||||
|
Other
assets
|
15,227
|
(264,136)
|
||||||
|
Accounts
payable and accrued expenses
|
211,941
|
625,996
|
||||||
|
Deferred
rent
|
324,409
|
–
|
||||||
|
Net
cash used in operating activities
|
(7,090,748
|
)
|
(6,298,328
|
)
|
||||
|
|
|
|||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
–
|
||||||||
|
Purchase
of property and equipment
|
(881,190
|
)
|
(386,329)
|
|||||
|
Payment
for patents
|
–
|
(128,072)
|
||||||
|
Net
cash used in investing activities
|
(881,190
|
)
|
(514,401)
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Payments
for license agreement payable
|
–
|
(1,000,000
|
)
|
|||||
|
Net
proceeds from the issuance of common stock
|
7,063,339
|
–
|
||||||
|
Net
proceeds from the issuance of preferred stock
|
–
|
7,187,650
|
||||||
|
Proceeds
from the exercise of warrants
|
–
|
457,180
|
||||||
|
Net
cash provided by financing activities
|
7,063,339
|
6,644,830
|
||||||
|
Net
decrease in cash and cash equivalents
|
(908,599
|
)
|
(167,899)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
1,476,246
|
1,644,145
|
||||||
|
Cash
and cash equivalents at end of year
|
$
|
567,647
|
$
|
1,476,246
|
||||
|
Supplemental
Disclosure of Non-Cash Operating, Investing and Financing
Activities
|
|
|
|
|
|
|||
|
Accrued
dividends on preferred stock
|
$
|
686,218
|
$
|
725,322
|
||||
|
Issuance
of restricted stock to non-employees for prepaid consulting
services
|
$
|
137,900
|
$
|
–
|
||||
|
Issuance
of warrants to non-employees for prepaid consulting
services
|
$
|
595,763
|
$
|
–
|
||||
|
Common
stock warrant liability
|
$
|
2,214,371
|
$
|
–
|
||||
|
Reclassification
of warrant liability in connection with waivers of antidilution
provision
|
$
|
4,053,043
|
$
|
–
|
||||
|
Reclassification
of warrant liability in connection with antidilution triggering
event
|
$
|
158,451
|
$
|
–
|
||||
|
Cumulative
effect of reclassification of warrants (ASC Topic 815)
|
$
|
260,115
|
$
|
–
|
||||
|
Common
stock issued for payment of license agreement payable
|
$
|
758,500
|
$
|
–
|
||||
|
Common
stock issued for payment of accounts payable and accrued
expenses
|
$
|
25,000
|
$
|
–
|
||||
|
Warrants
issued for payment of accounts payable and accrued
expenses
|
$
|
99,732
|
$
|
–
|
||||
|
Accrued
preferred stock dividends converted into shares of common
stock
|
$
|
373,585
|
$
|
–
|
||||
|
Deemed
dividend related to beneficial conversion feature on Series B Preferred
Stock
|
$
|
4,005,161
|
$
|
–
|
||||
|
Conversion
of Series A preferred stock to common stock
|
$
|
309,117
|
$
|
–
|
||||
|
Conversion
of Series B preferred stock to common stock
|
$
|
1,928,557
|
$
|
–
|
||||
|
Antidilution
obligation associated with issuance of common stock
|
$
|
102,500
|
$
|
–
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company
New
Generation Biofuels Holdings, Inc. (the “Company”), a Florida corporation,
through its wholly owned subsidiary, New Generation Biofuels, Inc., a Delaware
corporation, holds an exclusive license for North America, Central America and
the Caribbean to commercialize proprietary technology (the “Technology”) to
manufacture alternative biofuels from vegetable oils and animal fats that the
Company intends to market as a new class of renewable fuel for power generation,
commercial and industrial heating and marine transportation.
During
the period from inception through March 31, 2009, the Company was
considered to be a development stage company. In the second and third quarters
of 2009, the Company placed in service its first biofuel production plant, a 5
million gallon per year facility located in Baltimore, Maryland, and has
generated revenues from planned principal operations. The Company has therefore
emerged from the development stage as of December 31, 2009.
Recent
Developments
As more
fully described in Note 2, on February 19, 2010, the Company entered into an
Amendment to the Exclusive License Agreement dated March 20, 2006, as
amended. Under the terms of the Exclusive License Agreement, as amended,
the Company was required to pay the inventor of the Company’s proprietary
technology $500,000 on February 20, 2010 and March 20, 2010. In lieu of
making such payments, the Amendment to the Exclusive License Agreement permits
the Company to pay $120,000 in cash on February 19, 2010 and issue 1,100,000
shares of common stock. The fair value of the shares issued was $726,000,
based on the fair market value on the date of issuance, or $0.66 per
share.
Basis of Presentation and
Going Concern
The
Company has a history of recurring losses, including net losses of $14.4 million
and $13.5 million for the years ended December 31, 2009 and 2008, a working
capital deficit of $2.4 million and an accumulated deficit of $50.4 million as
of December 31, 2009. Based on the Company’s current operating plan, its
existing working capital and capital resources will not be sufficient to meet
the cash requirements to fund the Company’s planned operating expenses, capital
expenditures, payments under the Exclusive License Agreement, as amended, and
working capital requirements through December 31, 2010 without additional
sources of cash and/or the deferral, reduction or elimination of significant
planned expenditures.
These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company’s assets and the
satisfaction of liabilities in the normal course of business.
The
Company is seeking to raise additional capital through public and/or private
placement offerings and targeting strategic partners in an effort to increase
revenues. The ability of the Company to continue as a going concern is
dependent upon the success of capital offerings or alternative financing
arrangements and expansion of its operations. If the Company is
unsuccessful in raising additional capital from any of these sources, it will
defer, reduce, or eliminate certain planned expenditures. The Company will
continue to consider other financing alternatives. There can be no assurance
that the Company will be able to obtain any sources of financing on acceptable
terms, or at all.
If the
Company cannot obtain sufficient additional financing in the short-term, it may
be forced to restructure or significantly curtail its operations, file for
bankruptcy or cease operations. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be forced to take any such actions.
The
consolidated financial statements include the Company and its wholly owned
subsidiaries New Generation Biofuels, Inc. and NGB Marketing LLC. All
intercompany accounts and transactions have been eliminated in
consolidation.
F-8
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Reclassifications
Certain
reclassifications have been made to the December 31, 2008 financial statements
to conform to the December 31, 2009 financial statement presentation.
These reclassifications did not materially change previously reported total
assets, liabilities, stockholders’ equity or net loss.
Use of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The most significant estimates and assumptions
relate to the recoverability of the purchased license intangible asset,
realization of deferred income taxes, accrued liabilities, common stock warrant
liability and antidilution obligation, and the valuation of stock-based
transactions. These estimates generally involve complex issues and require
the Company to make judgments, involve analysis of historical and the prediction
of future trends, and are subject to change from period to period. Actual
results could differ from those estimates.
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.
Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount, net of related cash discounts
and do not bear interest.
Other
Receivables
As of
December 31, 2009, other receivables were comprised of non-trade receivables in
connection with the 50 cent per gallon U.S. federal alternative fuel excise tax
credit. The Company records its alternative fuel tax credits as revenue in
its consolidated statements of operations as the credits are fully refundable
and do not need to offset income tax liabilities to be received.
Inventories
Inventories,
consisting mainly of supplies and spare parts, are stated at the lower of cost
or net realizable market value, cost being determined using the first-in,
first-out method. Reserves for slow-moving and obsolete inventories are provided
based on historical experience and current product demand. The Company evaluates
the adequacy of these reserves quarterly.
Concentration of Credit
Risk
The
financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash balances with financial institutions and
accounts receivable. At various times during the years ended December 31, 2009
and 2008, the Company had deposits in excess of the Federal Deposit Insurance
Corporation (“FDIC”) limit at a financial institution in the United
States.
The
Company does not generally require collateral or other security to support
accounts receivable. Management must make estimates of the uncollectibility of
the accounts receivable. The allowance for doubtful accounts is based on a
specific review of the Company’s accounts receivable. At December 31, 2009
and 2008, there was no allowance for doubtful accounts. The Company does not
have any off-balance sheet exposure related to its customers.
During
the year ended December 31, 2009, sales to three customers represented 36%, 32%
and 32% of total product revenues, respectively. At December 31, 2009,
these customers made up 9%, 49% and 42% of accounts receivable,
respectively.
F-9
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Property, Plant and
Equipment
Property,
plant and equipment are stated at cost and depreciated over the estimated useful
lives of the assets (generally three to fifteen years) using the straight-line
method. Amortization of leasehold improvements is computed over the
shorter of the lease term or the estimated useful life of the related
assets. Depreciation expense for the years ended December 31, 2009 and
2008 was $68,251 and $7,383, respectively.
Property
and equipment consists of the following at December 31, 2009 and December 31,
2008:
|
2009
|
2008
|
|||||||
|
Furniture
and fixtures
|
$
|
-
|
$
|
82,181
|
||||
|
Property
and equipment
|
1,109,571
|
54,439
|
||||||
|
Construction
in progress
|
72,542
|
249,709
|
||||||
|
1,182,113
|
386,329
|
|||||||
|
Less:
accumulated depreciation
|
(61,202
|
)
|
(7,383
|
)
|
||||
|
Property
and equipment – net
|
$
|
1,120,911
|
$
|
378,946
|
||||
In
connection with the lease termination described in Note 6, the Company wrote-off
certain assets, with a net book value of $70,974, recorded in general and
administrative expense during the year ended December 31, 2009.
License
Agreement
As more
fully described in Note 2, on March 20, 2006, the Company entered into a
Perpetual License with the inventor of the Company’s proprietary
technology. As consideration, the Company agreed to pay $11.0 million in
the aggregate to the Licensor. The $11.0 million was recorded as a license
agreement payable and was non-interest bearing. The Company utilized an
imputed interest rate of 14% to determine the principal owed of $7,515,552,
which was recorded as an intangible asset. The Company also issued 893,750
shares of common stock to the Licensor as additional consideration for the
Perpetual License which was valued at $545,748, based on the fair market value
on the date of issuance, or $0.61 per share, and recorded as an intangible
asset.
The
following table sets forth the change in the Company’s license agreement
intangible, net during the years ended December 31, 2009 and 2008:
|
Balance,
January 1, 2008
|
$ | 8,061,300 | ||
|
Write-down
|
(1,600,369 | ) | ||
|
Amortization
expense
|
(193,471 | ) | ||
|
Balance,
December 31, 2008
|
6,267,460 | |||
|
Amortization
expense
|
(616,472 | ) | ||
|
Balance,
December 31, 2009
|
$ | 5,650,988 |
The fair
value of the Perpetual License is being amortized to cost of revenue over its
useful life. The Company has estimated the economic life of the license
based upon the expected future cash flow contributions over the expected useful
life to be 13 years.
Amortization
expense for the years ended December 31, 2009 and 2008 was $616,472, and
$193,471, respectively. Amortization expense for each of the five
succeeding years based upon the license agreement intangible as of December 31,
2009 is estimated to be approximately $620,000 annually.
Capitalized Patent
Costs
Third
party costs, primarily legal fees, incurred for submitting patent applications
to the United States Patent and Trademark Office and other foreign authorities
for patents have been capitalized. Patent costs are being amortized using the
straight-line method over the related 10 year lives. The Company begins
amortizing patent costs once a filing receipt is received stating the patent
serial number and filing date from the Patent Office or other foreign
authority.
F-10
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Capitalized
patent costs, included in other assets, consists of the following at December
31, 2009 and December 31, 2008:
|
2009
|
2008
|
|||||||
|
Patent
costs
|
$
|
290,669
|
$
|
128,072
|
||||
|
Less:
accumulated amortization
|
(23,700
|
)
|
-
|
|||||
|
Patent
costs, net
|
$
|
266,969
|
$
|
128,072
|
||||
Patent
amortization expense for the years ended December 31, 2009 and 2008 was $23,700,
and $-0-, respectively. Patent amortization expense for each of the five
succeeding years based upon patents as of December 31, 2009 is estimated to be
approximately $30,000 annually.
Long-Lived
Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets might not be recoverable.
Conditions that would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant change in the
extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and fair value. Various factors including
estimated future sales growth and estimated profit margins are included in this
analysis. Management believes at this time that carrying values and useful lives
continue to be appropriate. For the year ended December 31, 2009, no
impairment charges were deemed necessary. For the year ended December 31,
2008, the Company recorded an impairment charge in the amount of $1,600,369
related to its license agreement intangible.
Loan
Payable
On June
30, 2006 the Company received a $50,000 loan from Global Energy Holdings Group,
Inc. (formerly Xethanol Corporation).
Debt
Discounts
Note
discounts are deferred and expensed over the term of the related financing
arrangement using the effective interest method. Should the Company repay
an obligation earlier than its contractual maturity, any remaining debt
discounts are charged to earnings at the time of such
repayment.
Common Stock Warrant
Liability and Antidilution Obligation
Effective
January 1, 2009, the Company adopted guidance related to determining whether an
instrument or embedded feature is indexed to an entity’s own stock. This
guidance applies to any freestanding financial instruments or embedded features
that have the characteristics of a derivative and to any freestanding financial
instruments that are potentially settled in an entity’s own common stock.
As a result of adopting this accounting guidance, outstanding common stock
purchase warrants to purchase 643,850 common shares that were previously treated
as equity pursuant to the derivative treatment exemption, were no longer
afforded equity treatment (see Note 5). These warrants had an exercise price of
$6.25 per share and expire in March and May 2013. As such, effective
January 1, 2009 the Company reclassified the fair value of these common stock
purchase warrants, which have exercise price reset features, from equity to
liability status as if these warrants were treated as a derivative
liability since their date of issue in March and May 2008. On January 1,
2009, the Company reclassified from additional paid-in capital, as a cumulative
effect adjustment, $2,543,482 to beginning accumulated deficit and $260,115 to
common stock warrant liability to recognize the fair value of these
warrants on such date.
F-11
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
These
common stock purchase warrants were initially issued in connection with the
Company’s March and May 2008 Series B Preferred Stock issuance of 75,891 shares
of Series B cumulative convertible preferred stock. The common stock purchase
warrants were not issued with the intent of effectively hedging any future cash
flow, fair value of any asset, liability or any net investment in a foreign
operation. The warrants do not qualify for hedge accounting, and as such, all
future changes in the fair value of these warrants will be recognized currently
in earnings until such time as the warrants are exercised or
expire.
These
common stock purchase warrants do not trade in an active securities market, and
as such, the Company estimated the fair value of these warrants using the
Black-Scholes option pricing model using the following
assumptions:
|
January 1,
|
||||
|
2009
|
||||
|
Annual
dividend yield
|
—
|
|||
|
Expected
life (remaining contractual life in years)
|
4.33
|
|||
|
Risk-free
interest rate
|
1.55
|
%
|
||
|
Expected
volatility
|
100
|
%
|
||
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using daily pricing observations for recent periods that correspond
to the expected life. The Company believes this method produces an estimate that
is representative of its expectations of future volatility over the expected
term of these warrants. The Company currently has no reason to believe future
volatility over the expected remaining life of these warrants is likely to
differ materially from historical volatility. The expected life is based on the
remaining term of the warrants. The risk-free interest rate is based on
five-year U.S. Treasury securities.
The
Company has issued other warrants during the year ended December 31, 2009 that
are accounted for as derivative liabilities (see Note 4). At December 31,
2009, the fair value of these derivative instruments totaled $52,425 and is
included on the accompanying consolidated balance sheet in common stock warrant
liability and antidilution obligation. The fair value of these derivative
liabilities will be adjusted at the end of each interim accounting period as
well as at the end of each fiscal year as long as they are
outstanding.
Registration Rights
Agreements
In
connection with the sale of certain equity instruments, the Company has entered
into a number of registration rights agreements. Generally, these agreements
require the Company to file registration statements with the Securities and
Exchange Commission (the “SEC”) to register the resale of common shares that may
be issued to selling stockholders on conversion of preferred stock, to permit
resale of common shares previously sold under an exemption from registration or
to register the resale of common shares that may be issued on exercise of
outstanding options or warrants.
If the
Company determines a payment under outstanding registration rights arrangements
is probable and can be reasonably estimated, a liability is recorded. As of
December 31, 2009 and 2008, the Company concluded the likelihood of having to
make any payments under the arrangements was remote, and therefore did not
record any related contingent liabilities as of December 31, 2009 and
2008. For the year ended December 31, 2008, the Company recorded $230,277
in liquidated damages, which is included in general and administrative expense
in the accompanying consolidated statements of operations. For the year
ended December 31, 2008, the net adjustment to fair value related to the
registration rights agreements resulted in a loss of $717 and is included in net
change in fair value of derivative liabilities. During the year ended
December 31, 2008, the Company issued 61,128 shares of common stock valued at
$309,955 on the date of issuance in satisfaction of amounts outstanding under
registration rights agreements.
Scheduled
rent increases in connection with operating leases are recognized as adjustments
to rental expense on a straight-line basis over the associated lease
term.
F-12
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Commitments and
Contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment and/or remediation can be
reasonably estimated. Legal costs incurred in connection with loss
contingencies are expenses as incurred.
Revenue
Recognition
The
Company recognizes revenue when the following criteria have been met: i)
persuasive evidence of an arrangement exists; ii) services have been rendered or
product has been delivered; iii) price to the customer is fixed and
determinable; and iv) collection of the underlying receivable is reasonably
assured.
The
Company recognizes product revenue at the time of shipment to the customer,
provided all other revenue recognition criteria have been met. The Company
recognizes product revenues upon shipment to distributors, provided that (i) the
price is substantially fixed and determinable at the time of sale; (ii) the
distributor’s obligation to pay the Company is not contingent upon resale of the
products; (iii) title and risk of loss passes to the distributor at time of
shipment; (iv) the distributor has economic substance apart from that provided
by the Company; (v) the Company has no significant obligation to the distributor
to bring about resale of the products; and (vi) future returns can be reasonably
estimated. For any sales that do not meet all of the above criteria, revenue is
deferred until all such criteria have been met.
The
Company recognizes alternative fuel tax credits as revenue in its consolidated
statements of operations as the credits are fully refundable and do not need to
offset income tax liabilities to be received. The Company classified the
tax credits as revenue because (i) the tax credit enables the Company to reduce
the price it charges its customers for the Company's products without an actual
reduction in revenue associated with the lower prices and (ii) under current tax
law, the tax credit expires on December 31, 2009 and the Company believes
classifying the tax credit as a reduction in operating expenses would be
potentially misleading.
Cost of Product
Revenue
Cost of
product revenue includes both internal and third-party fixed and variable costs
including materials and supplies, labor, facilities and other overhead costs
associated with its product revenues. The Company expenses the cost of idle
manufacturing capacity to cost of product revenue as incurred. Shipping and
handling costs are included in cost of product revenue.
Research and
Development
Research
and development expenditures are expensed as incurred.
Share-Based
Compensation
Compensation
expense for share-based payment arrangements with employees is based on the
grant date fair value of awards. The Company applies the Black-Scholes
option-pricing model to determine the fair value of stock options and management
must use its judgment in estimating key assumptions that are important elements
in the model and in expense recognition, such as the expected stock-price
volatility, expected stock option life, expected dividends and expected
forfeiture rates. Stock options and restricted stock units with performance
based vesting provisions are expensed based on the Company’s estimate of
achieving the specific performance criteria on a straight-line basis over the
requisite service period. The Company performs periodic reviews of the progress
of actual achievement against the performance criteria in order to reassess the
likely vesting scenario and, when applicable, realign the expense associated
with that outcome. Stock-based employee compensation cost is recognized as
a component of general and administrative expense in the consolidated statements
of operations. For the years ended December 31, 2009 and 2008, stock-based
employee compensation expense was $3,293,318 and $3,268,363,
respectively.
Stock
compensation expense for awards granted to non-employees is determined using the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The fair value of
options, common stock purchase warrants and restricted stock awards granted to
non-employees is periodically remeasured as the underlying options or awards
vest. The value of the instrument is amortized to expense over the vesting
period with final valuation measured on the vesting date. Stock-based
compensation cost to non-employees is recognized as a component of general and
administrative expense in the consolidated statements of operations. For
the years ended December 31, 2009 and 2008, stock-based compensation expense to
non-employees was $35,684 and $637,005, respectively.
F-13
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Income
Taxes
The
Company computes deferred income taxes based on the differences between the
financial statement and tax basis of assets and liabilities using the enacted
rates in effect in the years in which the differences are expected to
reverse. The Company establishes a valuation allowance to offset temporary
deductible differences, net operating loss carryforwards and tax credits when it
is more likely than not that deferred tax assets will be realized.
The
Company has considered its income tax positions, including any positions that
may be considered uncertain by the relevant tax authorities in the jurisdictions
in which the Company operates. As of December 31, 2009 and 2008, the
Company had no uncertain tax positions and no unrecognized tax benefits.
Potential interest and penalties associated with uncertain tax positions are
recorded as a component of income tax expense. The Company has not
incurred any penalties relating to income taxes recognized in the consolidated
financial statements as of and for the years ended December 31, 2009 and
2008.
Computation of Net Loss per
Share
Basic
loss per share is computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding for all
periods. Diluted earnings per share is computed by dividing net loss
attributable to common shareholders by the weighted average number of shares
outstanding, increased by common stock equivalents. Common stock equivalents
represent incremental shares issuable upon exercise of outstanding options and
warrants, the conversion of preferred stock and the vesting of restricted stock.
However, potential common shares are not included in the denominator of the
diluted loss per share calculation when inclusion of such shares would be
anti-dilutive, such as in a period in which a net loss is recorded.
As of
December 31, 2009 and 2008, there were 20,990,376 and 11,539,937, respectively,
shares of common stock equivalents including options (8,954,845 shares of common
stock as of December 31, 2009 and 6,566,289 shares of common stock as of
December 31, 2008), non employee options (1,741,000 shares of common stock as of
December 31, 2009 and 1,591,000 shares of common stock as of December 31, 2008),
and warrants (10,294,531 shares of common stock as of December 31, 2009 and
3,382,648 shares of common stock as of December 31, 2008) excluded from the
computation of diluted earnings per share because the inclusion of such shares
have been anti-dilutive. As of December 31, 2009 and 2008, there were 18,400 and
26,400, respectively, shares of Series A Convertible Preferred Stock outstanding
which are convertible into 566,082 and 660,000, respectively, shares of common
stock excluded from the computation of diluted earnings per share because the
inclusion of such shares have been anti-dilutive. As of December 31, 2009 and
2008, there were 45,785 and 72,126, respectively, shares of Series B Convertible
Preferred Stock outstanding which are convertible into 1,744,078 and 1,697,082,
respectively, shares of common stock that were excluded from the computation of
diluted earnings per share because the inclusion of such shares have been
anti-dilutive
Fair Value of Financial
Instruments
The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable, other receivables, accounts payable and loan
payable approximate their fair values.
The
Company recorded its liability pertaining to the acquisition of its license
agreement intangible at the estimated fair value at the time of acquisition,
using a discount rate then prevailing, based on management’s estimate of the
rate at which the Company would have been able to secure financing with similar
terms. The Company uses the effective interest method to amortize the
total imputed interest over the life of the liability. The license
agreement payable, which was recorded at fair value using a discount rate of
14%, the market rate for similar instruments at the time of
acquisition.
Fair Value
Measurements
Effective
January 1, 2009, the Company adopted authoritative guidance for fair value
measurements and the fair value option for financial assets and financial
liabilities. The Company did not record an adjustment to accumulated deficit as
a result of the adoption of the guidance for fair value measurements, and the
adoption did not have a material effect on the Company’s consolidated results of
operations. The guidance for the fair value option for financial assets and
financial liabilities provides companies the irrevocable option to measure many
financial assets and liabilities at fair value with changes in fair value
recognized in earnings. The Company has not elected to measure any financial
assets or liabilities at fair value that were not previously required to be
measured at fair value.
F-14
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Fair
value is defined as the exit price, or the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available. Observable inputs are inputs
market participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect the Company’s assumptions about the
factors market participants would use in valuing the asset or liability. The
guidance establishes three levels of inputs that may be used to measure fair
value:
Level 1 -
Quoted prices in active markets for identical assets and
liabilities.
Level 2 -
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
Assets
and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements. The Company reviews
the fair value hierarchy classification on a quarterly basis. Changes in the
observability of valuation inputs may result in a reclassification of levels for
certain securities within the fair value hierarchy.
The
following table presents the Company’s fair value hierarchy for assets and
liabilities measured at fair value on a recurring basis as of December 31,
2009:
|
Description
|
December 31,
2009
|
Quoted Prices
in
Active Markets
Level 1
|
Significant
Other
Observable
Inputs
Level 2
|
Significant
Unobservable
Inputs
Level 3
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 567,647 | $ | 567,647 | $ | – | $ | – | ||||||||
|
Total
assets
|
$ | 567,647 | $ | 567,647 | $ | – | $ | – | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
- warrants
|
$ | 52,425 | $ | – | $ | – | $ | 52,425 | ||||||||
|
Antidilution
obligation
|
$ | 58,449 | $ | – | $ | – | $ | 58,449 | ||||||||
|
Total
liabilities
|
$ | 110,874 | $ | – | $ | – | $ | 110,874 | ||||||||
F-15
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
The following table presents a reconciliation of the assets and liabilities measured at fair value on a quarterly basis using significant unobservable inputs (Level 3) from January 1, 2009 to December 31, 2009:
|
Derivative –
warrants and
antidilution
obligation
|
||||
|
Balance
at January 1, 2009
|
$ | 260,115 | ||
|
Transfers
to (from) Level 3(1)
|
2,158,420 | |||
|
Adjustment
to fair value included in earnings (2)
|
205,609 | |||
|
Balance
March 31, 2009
|
$ | 2,624,144 | ||
|
Transfers
to (from) Level 3(3)
|
(2,648,883 | ) | ||
|
Adjustment
to fair value included in earnings (2)
|
2,935,039 | |||
|
Balance
June 30, 2009
|
$ | 2,910,300 | ||
|
Transfers
to (from) Level 3(3)
|
(1,404,161 | ) | ||
|
Adjustment
to fair value included in earnings (2)
|
(1,343,577 | ) | ||
|
Balance
September 30, 2009
|
$ | 162,562 | ||
|
Transfers
to (from) Level 3(3)
|
– | |||
|
Adjustment
to fair value included in earnings (2)
|
(51,688 | ) | ||
|
Balance
December 31, 2009
|
$ | 110,874 | ||
|
(1)
|
Represents increase in derivative
liability of $2,214,371 related to the detachable warrants issued to
investors in connection with the March 2009 Private Placement, increase in
antidilution obligation of $102,500 in connection with the March 2009
Private Placement, offset by $158,451 reclassification of derivative
liability in association with Series B Preferred Stock antidilution
triggering event related to the detachable warrants issued to Series B
Preferred Stock investors.
|
|
(2)
|
The carrying value of the common
stock warrant liability is calculated using the Black-Scholes option
pricing model, which requires the input of highly subjective assumptions.
These assumptions include the risk-free rate of interest, expected
dividend yield, expected volatility, and the remaining contractual term of
the award. The risk-free rate of interest is based on the U.S. Treasury
rates appropriate for the expected term of the award. Expected dividend
yield is projected at 0%, as the Company has not paid any dividends on its
common stock since its inception and does not anticipate paying dividends
on its common stock in the foreseeable future. Expected volatility is
based on the Company’s historical volatility and the historical
volatilities of the common stock of comparable publicly traded companies.
The fair value of the antidilution obligation is calculated using an
estimate of the number of shares (82,322 shares) to be issued to all
investors in the March 2009 Private Placement pursuant to the antidilution
provisions times an estimated fair market value ($0.71)of the Company’s
common stock. The carrying value of the antidilution obligation
requires the input of highly subjective assumptions. For the year
ended December 31, 2009, the net adjustment to fair value resulted in a
loss of $1,745,383 and is included in loss on net change in fair value of
derivative liabilities on the accompanying consolidated statements of
operations.
|
|
(3)
|
Represents reclassification of
derivative liability in connection with waiver of antidilution provision
related to the detachable warrants issued to investors in connection with
the March 2009 Private
Placement.
|
Recent Accounting
Pronouncements
The
Financial Accounting Standards Board (“FASB”) established the “FASB Accounting
Standards Codification ™” (“Codification”) as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements issued for interim and annual periods ended
after September 15, 2009. The Codification has changed the manner in which GAAP
guidance is referenced, but did not have an impact on the Company’s consolidated
financial position, results of operations or cash flows.
In
October 2009, the FASB issued authoritative guidance for arrangements with
multiple deliverables. The guidance will allow companies to allocate arrangement
consideration in multiple deliverable arrangements in a manner that better
reflects the transaction’s economics. The guidance also removes non-software
components of tangible products and certain software components of tangible
products from the scope of existing software revenue guidance. The new guidance
requires expanded qualitative and quantitative disclosures and is effective for
fiscal years beginning on or after June 15, 2010. Early adoption of the guidance
is permitted. The Company is currently evaluating the impact of adopting this
guidance on the Company’s future consolidated financial statements.
F-16
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Subsequent
Events
The
Company has evaluated subsequent events occurring through the filing date of
these consolidated financial statements and has determined that all appropriate
subsequent event disclosures, if any, have been made in the Notes to
Consolidated Financial Statements (see Note 9).
NOTE 2 – EXCLUSIVE LICENSE
AGREEMENT AND PAYABLE
On March
20, 2006 (the “Effective Date”), the Company entered into an Exclusive License
Agreement (the “Perpetual License”) with the inventor of its proprietary
technology (the “Technology”), Ferdinando Petrucci (the “Licensor”), to obtain
an exclusive Perpetual License to manufacture, use and sell the Technology in
North America, Central America and the Caribbean as well as other territories
that may be added by mutual agreement of the parties to the Perpetual
License. Pursuant to the agreement the Company agreed to pay $11.0 million
in the aggregate to the Licensor. The $11.0 million was recorded as a
license agreement payable and was non-interest bearing. The Company
utilized an imputed interest rate of 14% to determine the principal owed of
$7,515,552. The Company classified the $7,515,552 as an intangible
asset. The Company also issued 893,750 shares of common stock to the
Licensor as additional compensation for the Perpetual License. The $11.0
million was to be payable to the Licensor as follows: $1.5 million paid upon the
Effective Date, $1.0 million within 180 days after the Effective Date, $1.5
million within one year after the Effective Date and $1.0 million on each
subsequent anniversary of the Effective Date for the succeeding seven
years. For the years ended December 31, 2009 and 2008, the resulting debt
discount, included in interest expense in the consolidated statements of
operations, was $537,661 and $536,581, respectively.
On
September 11, 2006, the Perpetual License was amended to extend to December 31,
2006 each of the following: (i) the due date of the $1.0 million payment that
was due on September 20, 2006, (ii) the expiration of the option to add South
America, excluding Paraguay, to the covered territory, and (iii) the deadline to
file a registration statement with the SEC with respect to the Company’s
securities, to December 31, 2006.
On
December 13, 2006, the Perpetual License, as amended, was further amended: (i)
to require the Company to make a $400,000 payment by December 15, 2006; (ii) to
reduce to $600,000 the $1.0 million payment due December 31, 2006 and to extend
the due date for such payment to July 31, 2007. In addition, the due date
for the $1.5 million payment which was scheduled for March 20, 2007 was extended
to October 31, 2007. The Company made the required $400,000 payment on
December 15, 2006.
On
November 3, 2007, the Perpetual License, as amended, was further amended: (i) to
extend the October 31, 2007 payment of $1,500,000 until November 15, 2007 and
(ii) the Company agreed to prepay $500,000 of the $1,000,000 that was due on
March 20, 2008.
On
November 9, 2007, the Perpetual License, as amended, was further amended to
extend the $2,000,000 due on November 15, 2007 to November 29, 2007.
Additionally, the remaining payment of $500,000 that was due on March 20, 2008
was extended to February 20, 2008. The $1,000,000 payment due on March 20,
2009 was extended to February 20, 2009. Of the $1,000,000 payment due on
March 20, 2010, $500,000 was to be prepaid on February 20, 2010. In
December 2007, the Company paid $1,500,000 of the $2,000,000 due on November 29,
2007.
On
February 20, 2008, the Perpetual License, as amended, was further amended, to
extend the remaining $500,000 that was due on November 29, 2007 to March 20,
2008. Additionally, the due date for the $500,000 payment due February 20,
2008 was extended to March 20, 2008.
On March
20, 2008, the Company paid $150,000 of the $1,000,000 payment due on March 20,
2008. On March 23, 2008, the Perpetual License, as amended, was further
amended, to extend the remaining $850,000 March 20, 2008 payment until the
closing of the Company’s next financing, with net proceeds that exceeded
$850,000. On April 3, 2008, the Company paid the remaining
$850,000.
F-17
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
On
January 8, 2009, the Perpetual License, as amended, was further amended, to
allow the Company to issue 925,000 shares of common stock in lieu of the
$1,000,000 payment due on February 20, 2009. The fair value of the shares
issued was $758,500, or $0.82 per share, resulting in a gain on debt
extinguishment of $241,500 for the year ended December 31,
2009.
On
February 19, 2010, Perpetual License, as amended, was further amended, to allow
the Company to pay $120,000 in cash on February 19, 2010 and issue 1,100,000
shares of common stock in lieu of making the $500,000 payments due on February
20, 2010 and March 20, 2010. The fair value of the shares issued was
$726,000, based on the fair market value on the date of issuance, or $0.66 per
share, resulting in a gain on debt extinguishment of $154,000 for the period
subsequent to December 31, 2009.
The
following is a schedule of future payment requirements under the Perpetual
License, as amended:
|
Year ended December 31,
|
Amount Due
|
|||
|
2010
|
1,000,000
|
|||
|
2011
|
1,000,000
|
|||
|
2012
|
1,000,000
|
|||
|
2013
|
1,000,000
|
|||
|
2014
|
1,000,000
|
|||
|
5,000,000
|
||||
|
Unamortized
discount
|
(997,741
|
)
|
||
|
$
|
4,002,259
|
|||
NOTE
3 – OPTIONS,
RESTRICTED STOCK, STOCK AND WARRANTS
In
October 2007, the Company’s board of directors approved an Omnibus Incentive
Plan (the “Incentive Plan”) to attract, retain and motivate key employees, to
provide an incentive for them to achieve long-range performance goals and to
enable them to participate in the long-term growth of the Company. The Company’s
shareholders approved the Incentive Plan at their annual meeting in November
2007. Options granted under the Incentive Plan may include non-qualified stock
options as well as incentive stock options intended to qualify under Section
422A of the Internal Revenue Code. The aggregate number of shares of common
stock that are reserved for issuance under the Incentive Plan must not exceed
2.7 million shares.
In April
2009, the Company’s board of directors and shareholders approved an amendment to
the Incentive Plan to increase the number of shares reserved for issuance under
the Incentive Plan from 2.7 million to 6.4 million shares. Other than this
increase in the number of shares reserved for issuance, all other provisions of
the Incentive Plan will remain the same as adopted in October 2007 by the
Company’s board of directors and in November 2007 by the Company’s
shareholders.
Each
stock option agreement specifies when all or any installment of the option
becomes exercisable. Option awards are generally granted with an exercise price
equal to the market price of the Company’s common stock on the grant date,
generally vest immediately or in equal installments over three years of
continuous service and have a ten year contractual term.
Employee
Options
The fair
value of employee stock option awards for the years ended December 31, 2009 and
2008 was estimated using Black-Scholes option pricing model on the date of grant
using the assumptions in the following table. The expected volatility in
this model is based on the historical volatility of the Company’s stock. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time awards are granted, based on maturities which approximate the expected
life of the options. The Company uses the “simplified” method for determining
the expected term of its “plain vanilla” stock options. The expected
dividend rate takes into account the absence of any historical dividends paid by
the Company and management’s intention to retain all earnings for future
operations and expansion.
|
2009
|
2008
|
|||||||
|
Weighted
average grant date fair value
|
$ | 0.72 | $ | 3.88 | ||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
|
Risk
free rate of return
|
1.54 – 2.93 | % | 1.63 – 3.28 | % | ||||
|
Expected
life in years
|
4.4 – 6.0 | 3.0 – 5.0 | ||||||
|
Volatility
|
100-106 | % | 100 | % | ||||
F-18
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
A summary of the status of the Company’s employee options outstanding as of December 31, 2009 and the changes during the year ending on that date are presented below:
|
Number of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding at January 1, 2009
|
6,566,289 | $ | 2.85 | 8.10 | ||||||||||||
|
Granted
|
3,372,254 | $ | 1.06 | 9.37 | ||||||||||||
|
Forfeited
or cancelled
|
(983,698 | ) | $ | 1.27 | 7.74 | |||||||||||
|
Options
outstanding at December 31, 2009
|
8,954,845 | $ | 2.35 | 7.98 | ||||||||||||
|
Vested
and expected to vest at December 31, 2009
|
6,878,959 | $ | 2.45 | 7.68 | $ | – | ||||||||||
|
Options
exercisable at December 31, 2009
|
5,978,106 | $ | 2.58 | 7.44 | $ | – | ||||||||||
Options
exercisable at December 31, 2009 do not include 2,075,886 performance based
options. The Company recognizes compensation cost for performance based options
once the performance milestones are probable of achievement. The applicable
portion of the compensation costs earned to date is recognized and the remaining
unrecognized expense attributable to the milestone is recorded over the service
period.
The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on December 31,
2009 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had vested option holders
exercised their options on December 31, 2009. This amount changes based upon
changes in the fair market value of the Company’s common stock.
The
Company recognized $2,623,403 and $3,225,711 in compensation expense for stock
options issued to employees for the years ended December 31, 2009 and 2008,
respectively, which is included in general and administrative expense in the
consolidated statements of operations. As of December 31, 2009, there was
approximately $900,000 of total unrecognized compensation expense related to
unvested employee stock options. This expense is expected to be recognized
over a weighted-average period of approximately 1.0 year.
Non-Employee
Options
The fair
value of non-employee stock option awards for the years ended December 31, 2009
and 2008 was estimated using Black-Scholes option pricing model on the date of
grant using the assumptions in the following table. The expected
volatility in this model is based on the historical volatility of the Company’s
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time awards are granted, based on maturities which approximate the
contractual life of the options. The Company uses the contractual term as the
expected term of its non-employee stock options. The expected dividend
rate takes into account the absence of any historical dividends paid by the
Company and management’s intention to retain all earnings for future operations
and expansion.
|
2009
|
2008
|
|||||||
|
Weighted
average grant date fair value
|
$ | 0.78 | $ | 4.82 | ||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
|
Risk
free rate of return
|
3.7 | % | 1.53 – 3.28 | % | ||||
|
Expected
life in years
|
10 | 3.0 – 5.0 | ||||||
|
Volatility
|
99 | % | 100 | % | ||||
F-19
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
A summary of the status of the Company’s non-employee options outstanding as of December 31, 2009 and the changes during the year ending on that date are presented below:
|
Number of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding at January 1, 2009
|
1,591,000 | $ | 6.02 | 3.38 | ||||||||||||
|
Granted
|
150,000 | $ | 1.04 | 9.10 | ||||||||||||
|
Forfeited
or cancelled
|
– | $ | – | – | ||||||||||||
|
Options
outstanding at December 31, 2009
|
1,741,000 | $ | 5.59 | 7.50 | ||||||||||||
|
Vested
and expected to vest at December 31, 2009
|
191,000 | $ | 4.87 | 8.10 | $ | – | ||||||||||
|
Options
exercisable at December 31, 2009
|
141,000 | $ | 6.23 | 7.75 | $ | – | ||||||||||
Options
exercisable at December 31, 2009 do not include 1,550,000 performance based
options. The Company recognizes compensation cost for performance based
options once the performance milestones are probable of achievement. The
applicable portion of the compensation costs earned to date is recognized and
the remaining unrecognized expense attributable to the milestone is recorded
over the service period.
The
Company recognized $35,684 and $426,178 in compensation expense for stock
options issued to non-employees for the years ended December 31, 2009 and 2008,
respectively, which is included in general and administrative expense in the
consolidated statements of operations. As of December 31, 2009, there was
approximately $3,300 of total unrecognized compensation expense related to
unvested employee stock options. This expense is expected to be recognized
over a weighted-average period of approximately 0.2 years.
Restricted Stock
Grants
In May
2008, the Compensation Committee of the Company’s board of directors approved a
Management Equity Compensation Plan (the “Equity Compensation Plan”) to ensure
that equity remains a significant component of management compensation, to align
employee and shareholder interests, by providing opportunities for employees to
own the Company’s common stock and to motivate and retain key employees with
multi-year equity incentives. The Equity Compensation Plan generally
contemplates annual restricted stock grants based on achieving certain
performance targets and vesting annually over three years. The amount of each
award is relative to an employee’s total compensation and based on the
individual’s ability to affect the Company’s results, with higher level
positions generally receiving grants equal to a greater percentage of their
compensation than lower level positions. All shares and options issued under the
Equity Compensation Plan are issued pursuant to the Company’s Omnibus Incentive
Plan that has been approved by the
Company's shareholders.
In May
2008, the Company granted under the Equity Compensation Plan 69,489 restricted
shares to certain employees based on achieving certain 2007 performance targets.
The number of shares was calculated based on the dollar value of the award
divided by the closing price of the Company’s common stock on the date the grant
was approved by the Compensation Committee. The restricted stock was granted at
$6.40 per share. The Company issued the 31,989 restricted shares during
the year ended December 31, 2009.
In March
2009, the Company granted and issued under the Equity Compensation Plan 585,015
restricted shares to certain employees based on a salary reduction plan whereby
employee’s salary was reduced by 30% and the employees were granted restricted
shares and stock options in lieu of their reduced cash compensation. The
restricted stock was granted at $0.80 per share. The options were granted
at an exercise price of $0.90 per share.
In April
2009, the Company granted and issued 100,000 restricted shares to its former
President and Chief Executive Officer as part of a separation agreement.
The restricted stock was granted at $0.87 per share.
In April
2009, the Company granted and issued under the Equity Compensation Plan 555,585
restricted shares to certain employees based on achieving certain 2008
performance targets as determined by the Compensation Committee and 29,531
restricted shares to an employee. The grant was approved by the
Compensation Committee. The number of restricted shares issued was calculated
based on the dollar value of the award divided by the closing price of the
Company’s common stock on the date the grant was approved by the Compensation
Committee. The restricted stock was granted at $1.25 per
share.
F-20
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
In July
2009, the Company issued and granted under the Equity Compensation Plan 260,833
restricted shares to an employee vesting in July 2010. The grant was approved by
the Compensation Committee. The restricted stock was granted at $0.99 per
share.
In
September 2009, subsequent to the termination of the salary reduction plan, the
Company cancelled 585,015 shares of previously issued and unvested restricted
stock in connection with the salary reduction plan and re-issued 201,317 shares
of fully vested restricted stock. The restricted stock was granted at
$0.80 per share.
Information
with respect to all of the Company’s restricted share awards is as
follows:
|
Shares
|
Weighted Average
Fair Value
|
|||||||
|
Awards
outstanding at January 1, 2009
|
69,489 | $ | 6.40 | |||||
|
Granted
|
1,732,281 | $ | 0.98 | |||||
|
Forfeited
and cancelled
|
(622,515 | ) | $ | 1.14 | ||||
|
Awards
outstanding at December 31, 2009
|
1,179,255 | $ | 1.22 | |||||
|
Shares
|
Weighted Average
Fair
Value
|
|||||||
|
Non-vested
awards outstanding at January 1, 2009
|
69,489 | $ | 6.40 | |||||
|
Granted
|
1,732,281 | $ | 0.98 | |||||
|
Vested
|
(211,980 | ) | $ | 1.08 | ||||
|
Forfeited
and cancelled
|
(622,515 | ) | $ | 1.14 | ||||
|
Non-vested
awards outstanding at December 31, 2009
|
967,275 | $ | 1.05 | |||||
The
Company recognized $644,916 and $42,652 in compensation expense for restricted
stock awards issued to employees for the years ended December 31, 2009 and 2008,
respectively, which is included in general and administrative expense in the
consolidated statements of operations. As of December 31, 2009, there was
approximately $1,300,000 of total unrecognized compensation expense related to
unvested employee restricted stock awards. This expense is expected to be
recognized over a weighted-average period of approximately 1.2
years.
Stock
Grants
In March
2009, the Company issued 25,000 shares of non-restricted common stock to its
President and Chief Executive Officer, included in accounts payable and accrued
expenses on the consolidated balance sheet at December 31, 2008, as part of his
employment agreement. The restricted stock was issued at $1.00 per
share.
In
December 2009, the Company issued 29,070 shares of non-restricted common stock
to its President and Chief Executive Officer as part of his employment
agreement. The restricted stock was issued at $0.86 per
share.
The
Company recognized $25,000 in compensation expense for non-restricted stock
awards issued to its President and Chief Executive Officer for the years ended
December 31, 2009 and 2008, respectively, which is included in general and
administrative expense in the consolidated statements of
operations.
F-21
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
Warrants to Purchase Common
Stock
The fair
value of warrants to purchase common stock for the years ended December 31, 2009
and 2008 was estimated using Black-Scholes option pricing model on the date of
grant using the assumptions in the following table. The expected
volatility in this model is based on the historical volatility of the Company’s
stock. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time awards are granted, based on maturities which approximate the
contractual life of the options. The Company uses the contractual term as the
expected term of its warrants to purchase common stock. The expected
dividend rate takes into account the absence of any historical dividends paid by
the Company and management’s intention to retain all earnings for future
operations and expansion.
|
2009
|
2008
|
|||||||
|
Weighted
average grant date fair value
|
$ | 0.61 | $ | 4.35 | ||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
|
Risk
free rate of return
|
1.72 – 2.53 | % | 2.46 – 3.17 | % | ||||
|
Expected
life in years
|
4.5 – 5 | 5 | ||||||
|
Volatility
|
99-105 | % | 100 | % | ||||
The
following table summarizes the Company’s warrant activity for the years ended
December 31, 2009 and 2008:
|
Shares
|
Weighted Average
Exercise Price
|
|||||||
|
Warrants
outstanding at January 1, 2008
|
3,196,565 | $ | 3.85 | |||||
|
Issued
to investors in connection with the sale of Series B Preferred
Stock
|
467,083 | $ | 6.25 | |||||
|
Issued
to non-employees for services
|
264,100 | $ | 4.85 | |||||
|
Exercised
|
(545,100 | ) | $ | 1.82 | ||||
|
Warrants
outstanding at December 31, 2008
|
3,382,648 | $ | 4.52 | |||||
|
Issued
to investors in connection with the sale of common stock
|
5,144,251 | $ | 0.98 | |||||
|
Exchange
warrants issued to investors in connection with March
2009
Private Placement
|
97,792 | $ | 1.00 | |||||
|
Issued
non-employees for services
|
1,352,807 | $ | 1.10 | |||||
|
Issued
to investors in connection with waivers of antidilution
provisions
|
414,825 | $ | 0.90 | |||||
|
Canceled
|
(97,792 | ) | $ | 3.00 | ||||
|
Warrants
outstanding at December 31, 2009
|
10,294,531 | $ | 1.95 | |||||
The
following table summarizes the Company’s warrants outstanding at December 31,
2009:
|
Number of
Warrants
|
Exercise Prices
|
Expiration Dates
|
|||
|
5,275,788
|
$
|
0.90
|
2014
|
||
|
97,792
|
$
|
1.00
|
2014
|
||
|
875,000
|
$
|
1.09
|
2014
|
||
|
158,480
|
$
|
1.50
|
2011
|
||
|
340,000
|
$
|
1.50
|
2012
|
||
|
761,095
|
$
|
1.60
|
2014
|
||
|
100,000
|
$
|
2.00
|
2011
|
||
|
100,000
|
$
|
2.25
|
2011
|
||
|
77,920
|
$
|
2.50
|
2011
|
||
|
9,000
|
$
|
2.53
|
2013
|
||
|
796,058
|
$
|
3.00
|
2011
|
||
|
50,000
|
$
|
3.50
|
2013
|
||
|
28,333
|
$
|
4.00
|
2013
|
||
|
62,083
|
$
|
4.00
|
2012
|
||
|
950,357
|
$
|
5.25
|
2012
|
||
|
589,875
|
$
|
6.00
|
2012
|
||
|
22,750
|
$
|
9.00
|
2012
|
||
|
10,294,531
|
|||||
F-22
NOTE 4 – COMMON
STOCK
In March
2009, the Company completed a private placement (the “March 2009 Private
Placement”) of 3,957,500 shares of common stock, at a price of $0.80 per share
to “accredited investors” as defined under the Securities Act of 1933, as
amended (the “Securities Act”). The gross proceeds from the March 2009
Private Placement were $3.2 million and net proceeds, after deducting placement
agent's fees and estimated offering expenses payable by the Company, were
approximately $3.1 million. Each investor in the March 2009 Private
Placement also received a warrant exercisable for a number of shares of common
stock equal to the number of shares of common stock purchased by each investor.
The exercise price of the warrants is $0.90 per share (the “$0.90 warrants”).
The warrants are exercisable at any time after the six month anniversary of the
issue date but prior to the fifth anniversary of the issue date. The $0.90
warrants and the March 2009 Placement Agent Warrants had a fair value of
$2,163,943 on the date of issuance based on the Black-Scholes options pricing
method.
In
addition, the Company exchanged new warrants at an exercise price of $1.00 per
share with investors that participated in the Company’s 2008 Series B Private
Placement (see Note 5) and invested a specified amount in the March 2009 Private
Placement (the “$1.00 warrants”). Under this exchange, the Company
canceled and reissued warrants to purchase a total of 97,792 shares. The
warrants are exercisable at any time after the six month anniversary but prior
to the fifth anniversary of the issue date, either for cash or by means of a
“cashless exercise.” The $1.00 warrants had a fair value of $50,428 on the date
of issuance based on the Black-Scholes options pricing method.
The March
2009 Private Placement contains certain antidilution provisions. If the
Company issues additional shares of common stock or convertible securities in a
financing transaction in the succeeding fifteen (15) months from the March 2009
Private Placement with a purchase price or conversion price less than $0.80 per
share, the Company will issue additional shares of its common stock to the
investors in the March 2009 Private Placement, up to a maximum cap of 82,322
additional shares. This cap ensures that the number of shares issued to
all investors in the March 2009 Private Placement and pursuant to the
antidilution provisions in the aggregate will not exceed the maximum number of
shares that the Company can issue under NASDAQ rules without shareholder
approval, which is slightly less than 20% of the Company’s common stock
outstanding prior to the March 2009 Private Placement. Similarly, if the
Company issues additional warrants in a financing transaction in the succeeding
fifteen (15) months from the March 2009 Private Placement with an exercise price
less than $0.90 per share, the Company will reduce the exercise price of the
warrants issued in the March 2009 Private Placement to the price of the warrants
in the subsequent financing transaction (but the number of shares underlying the
warrants will not change). The antidilution adjustments do not apply to
certain excluded issuances of equity securities or warrants, such as securities
not issued in capital raising transactions (for example, to customers,
suppliers, joint venture partners or the Company's Technology Licensor) or in
connection with equity awards that the Company grants to employees, consultants
and directors under employee benefit plans approved by the Company's board of
directors.
The
Company agreed to take steps to allow investors to sell their shares under Rule
144 but did not enter into any registration rights agreements in connection with
the March 2009 Private Placement.
The $0.90
warrants are considered to be a derivative liability to be marked to market at
each reporting date due to their exercise price reset feature. The Company
recorded a $2,063,562 common stock warrant liability at the issuance date
related to the $0.90 warrants.
The $1.00
warrants are considered to be a derivative liability to be marked to market at
each reporting date due to their exercise price reset feature. The Company
recorded a $50,428 common stock warrant liability at the issuance date related
to the $1.00 warrants.
For
services rendered in connection with the March 2009 Private Placement, the
Company paid the March 2009 Placement Agent cash commissions of $122,080 and
issued warrants to purchase 190,750 shares of common stock (the “March 2009
Placement Agent Warrants”). The March 2009 Placement Agent Warrants had a fair
value of $100,381 on the date of issuance based on the Black-Scholes option
pricing model. The March 2009 Placement Agent Warrants are considered to
be a derivative liability to be marked to market at each reporting date due to
their exercise price reset feature. The Company recorded a $100,381 common
stock warrant liability at the issuance date related to the March 2009 Placement
Agent Warrants.
On June
29, 2009, the Company entered into a Warrant Waiver Agreement with an investor
in the March 2009 Private Placement. The investor agreed to waive the
exercise price reset feature in the $0.90 warrants. On the effective date
of this amendment, the change in fair value from the most recent reporting date
to the effective date of the amendment was recorded in the consolidated
statements of operations and the then-current fair value of the warrants
$2,648,883 was reclassified from common stock warrant liability to additional
paid-in capital.
F-23
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
On
September 23, 2009, the Company entered into Warrant Waiver Agreements with the
remaining investors and the March 2009 Placement Agent in the March 2009 Private
Placement. The investors and the March 2009 Placement Agent agreed to
waive the exercise price reset feature in the remaining $0.90 warrants. On
the effective date of these amendments, the change in fair value from the most
recent reporting date to the effective date of the amendment was recorded in the
consolidated statements of operations and the then-current fair value of the
warrants $1,404,161 was reclassified from common stock warrant liability to
additional paid-in capital.
In
connection with the Warrant Waiver Agreements described in the preceding
paragraphs, the Company issued new five-year warrants to purchase 414,825 shares
of common stock at $0.90 per share. The warrants had a fair value of
$405,304 on the date of issuance based on the Black-Scholes option pricing
model. The estimated fair value of the warrants is included in additional
paid-in capital.
For the
year ended December 31, 2009, the net adjustment to fair value related to the
$0.90 Warrants and March 2009 Placement Agent Warrants resulted in a loss of
$1,889,100 and is included in loss on net change in fair value of derivative
liabilities on the accompanying consolidated statements of
operations.
For the
year ended December 31, 2009, the net adjustment to fair value related to the
$1.00 Warrants resulted in a loss of $1,999 and is included in loss on net
change in fair value of derivative liabilities on the accompanying consolidated
statements of operations.
The
Company has determined that the antidilution provisions in the March 2009
Private Placement are, in effect, a net share settled written put option and
that the valuation of the antidilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as gain/loss on fair value adjustment. The
Company estimated the fair value of the antidilution obligation to be $102,500
at the issuance date. At December 31, 2009, the fair value of the
antidilution obligation was calculated using an estimate of the number of shares
(82,322 shares) to be issued to all investors in the March 2009 Private
Placement pursuant to the antidilution provisions times an estimated fair market
value ($0.71) of the Company’s common stock. The carrying value of the
antidilution obligation requires the input of highly subjective
assumptions. For the year ended December 31, 2009, the net adjustment to
fair value resulted in a gain of $44,051 and is included in loss on net change
in fair value of derivative liabilities on the accompanying consolidated
statements of operations.
In July
2009, the Company completed a registered direct offering of 3,044,381
shares of common stock and warrants to purchase 608,876 shares of common stock
(the “July 2009 Offering”). The common stock and the warrants were sold in
units at a price of $1.05 per unit, with each unit consisting of one share of
common stock and a warrant to purchase 0.20 shares of common stock at an
exercise price of $1.60 per share. The gross proceeds of the July 2009 Offering
were $3.2 million and net proceeds, after deducting the placement agent’s fees
and estimated offering expenses payable by the Company, were approximately $2.7
million. The warrants have a five year term from the date of issuance,
will not be exercisable prior to six months after issuance and will include
provisions providing for adjustments to the number of shares exercisable
thereunder upon stock dividends, stock splits and similar events. The warrants
had an estimated fair value of $580,993 on the date of issuance based on the
Black-Scholes options pricing method. The estimated fair value of the
warrants is included in additional paid-in capital. For services rendered
in connection with the July 2009 Offering, the Company issued warrants to
purchase 152,219 shares of common stock to the placement agent. The
warrants had a fair value of $145,248 on the date of issuance
based on the Black-Scholes option pricing model. The estimated fair
value of the warrants is included in additional paid-in capital. All of
the securities were offered pursuant to an effective shelf registration
statement.
In
December 2009, the Company completed a registered direct offering of 1,926,250
shares of common stock and warrants to purchase 577,875 shares of common stock
(the “December 2009 Offering”). The common stock and the warrants were
sold in units at a price of $0.80 per unit, with each unit consisting of one
share of common stock and a warrant to purchase 0.30 shares of common stock at
an exercise price of $0.90 per share. The gross proceeds of the December 2009
Offering were $1.5 million and net proceeds, after deducting the placement
agent’s fees and estimated offering expenses payable by the Company, were
approximately $1.3 million. The warrants have a five year term from the
date of issuance, will not be exercisable prior to six months after issuance and
will include provisions providing for adjustments to the number of shares
exercisable thereunder upon stock dividends, stock splits and similar
events. The warrants had an estimated fair value of $296,953 on the date
of issuance based on the Black-Scholes options pricing method. The
estimated fair value of the warrants is included in additional paid-in
capital. For services rendered in connection with the December 2009
Offering, the Company issued warrants to purchase 134,838 shares of common stock
to the placement agent. The warrants had a fair value of $69,289 on the
date of issuance based on the Black-Scholes option pricing model.
The estimated fair value of the warrants is included in additional paid-in
capital. All of the securities were offered pursuant to an effective shelf
registration statement.
F-24
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
NOTE 5 – PREFERRED
STOCK
Series A Preferred
Stock
On May 9,
2007, the Company completed the offering (the “Series A Private Placement”) of
27,950 shares of the Company’s newly issued Series A Cumulative Convertible
Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) at
price of $100.00 per share to “accredited investors” as defined under the
Securities Act. The gross proceeds were $2,795,000. Under the terms of the
Series A Private Placement, each investor had the option to purchase additional
securities up to the amount initially purchased on the same terms as those of
the Series A Private Placement (the “Subscriber Option”). On June 8, 2007, the
Company sold an additional 14,600 shares of Series A Preferred Stock at price of
$100.00 per share in connection with exercises of the Subscriber Option. The
gross proceeds were $1,460,000.
At any
time prior to the third anniversary of the initial date of issuance, any holder
of Series A Preferred Stock may convert all or a portion of their shares into
shares of the Company’s common stock calculated by multiplying the number of
shares to be converted by such shares’ “stated value” ( i.e. , $100 per share
plus the amount of all dividends accumulated thereon) and dividing the result by
the “conversion price” then in effect. The initial conversion price of
each share of Series A Preferred Stock is $4.00, and each share of Series A
Preferred Stock is initially convertible into 25 shares of the Company's common
stock. Upon the third anniversary of the date of issuance, each share of
Series A Preferred Stock shall automatically, and without any action on the part
of the holder, convert into that number of shares of the Company's common stock
computed by dividing such share’s “stated value” by the “conversion price” then
in effect. The “conversion price” is subject to adjustment upon the
occurrence of certain events, including, among others, a stock split, reverse
stock split, stock dividend or combination of the Company's common stock.
The Series A Preferred Stock is not redeemable.
Each
share of Series A Preferred Stock will accrue cumulative dividends on a
quarterly basis at a rate of 8% per annum. All dividends will be paid in shares
of common stock having a fair market value at the time of issuance equal to the
amount of dividends to be paid, provided that to the extent the shares of common
stock to be issued are not then registered under the registration rights
agreements with the Series A Preferred Stock investors, dividends shall cumulate
but shall remain unpaid until such time as the shares are registered and
issued. The Company may elect to pay any dividends in cash in lieu of
issuing shares of common stock, subject to any restrictions on dividends under
Florida law. The Series A Preferred Stock shall also participate on an
as-converted basis with all dividends paid on the shares of common stock. As of
December 31, 2009 and 2008, accrued dividends for the Series A Preferred Stock
were $424,313 and $360,905, respectively.
Upon any
liquidation of the Company, the holders of the Series A Preferred Stock will be
entitled to be paid, prior to the common stock or any other securities that by
their terms are junior to the Series A Preferred Stock, the original issue price
of the Series A Preferred Stock plus all accrued and unpaid dividends. To the
extent the proceeds of liquidation are insufficient to pay such amounts in full,
the proceeds available will be allocated pro rata among the shares of Series A
Preferred Stock. As of the most recent balance sheet date, December 31, 2009,
the liquidation value of the Series A Preferred Stock was
$2,264,328.
Each
investor in the Series A Private Placement also received a warrant exercisable
for a number of shares of common stock equal to 50% of the number of shares of
common stock into which the Series A Preferred Stock purchased by such investor
is initially convertible. The initial exercise price of the warrants is $6.00
per share. At any time following the first anniversary of the closing date and
provided that the shares of common stock issuable upon exercise of the warrants
are not then registered for resale pursuant to an effective registration
statement under the Securities Act, the warrants may also be exercised by means
of a “cashless exercise.” The warrants had a fair value of $2,610,882 on the
date of issuance based on the Black-Scholes options pricing method. The
estimated fair value of the warrants was included in additional paid-in
capital.
F-25
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
On March
31, 2008, the Company completed the offering (the “Series B Private Placement”)
of a total 43,986 shares of the Company’s newly issued Series B Convertible
Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”) at a
price of $100.00 per share to “accredited investors” under the Securities Act.
The gross proceeds from the issuance of 40,768 shares of Series B Preferred
Stock was $4,076,800. In addition, the Company issued 3,218 shares of Series B
Preferred Stock as commission in connection with the Private
Placement.
On May
13, 2008, the Company completed a second closing of the Series B Private
Placement of a total 35,419 shares of the Company’s Series B Preferred Stock.
The gross proceeds from the issuance of 35,123 shares of Series B Preferred
Stock was $3,512,300. In addition, the Company issued 296 shares of Series B
Preferred Stock as commission in connection with the Private Placement. In
summary, in the offering that was closed on March 31, 2008 and May 13, 2008, the
Company sold a total of 75,891 shares of Series B Preferred Stock and warrants
to purchase 446,413 shares of its common stock for total gross proceeds of
$7,589,100.
The
Series B Preferred Stock ranks junior to the Series A Preferred Stock and senior
to the common stock with respect to the payment of dividends and amounts payable
upon liquidation, dissolution or winding up of the Company. The Series B
Preferred Stock also is not redeemable.
At any
time prior to the third anniversary of the date of issuance, any holder of
Series B Preferred Stock may convert all or a portion of their shares into
shares of the Company’s common stock calculated by dividing the sum of the
stated value and all accrued dividends not previously paid or added to the
stated value to the date of such conversion by the Series B conversion price
then in effect. Upon the third anniversary of the initial issue date of the
Series B Preferred Stock, each share of Series B Preferred Stock will
automatically convert into the number of shares of common stock into which it is
then convertible. The initial conversion price is $4.25 per share, subject to
adjustment upon the occurrence of certain major corporate events such as
reorganizations and stock splits (the “Series B Conversion Price”).
Dividends
will be payable from the date of issuance at a rate of 8% per year when and as
declared by the board of directors. To the extent that dividends are not
declared, or cannot be paid, there will be an increase in the stated value of
the Series B Preferred Stock in the amount of 8% per year. In the event
dividends are declared by the board of directors and paid by the Company on the
common stock, holders of Series B Preferred Stock will either share ratably in
such dividends based on the number of shares of common stock into which the
Series B Preferred Stock may be converted or (to the extent that dividends are
not declared or cannot be paid), there will be a corresponding increase in the
stated value. Dividends will be paid semiannually, at the Company’s election, in
cash, in shares of Series B Preferred Stock (valued at stated value) or in
common stock valued at the market price, on September 30 and March 31 of each
year beginning on September 30, 2008 to holders of record on the 15th day of the
preceding month. If there is an increase in stated value because dividends were
not or could not be paid, that increase will occur semiannually on the dates
that dividends would have been paid. As of December 31, 2009 and 2008, accrued
dividends on the Series B Preferred Stock were $653,690 and $404,464,
respectively.
The
Series B Preferred Stock was convertible into 1,868,367 shares of common stock,
at the election of the holders, at an initial conversion price of $4.25 per
share. The fair market value the beneficial conversion was calculated based
on the difference between the share price of the common stock, at the time of
issuance, and the initial conversion price. This resulted in a $2,963,995 deemed
dividend related to the beneficial conversion feature during the year ended
December 31, 2008.
Each
investor in the Series B Private Placement also received a warrant exercisable
for a number of shares of common stock equal to 25% of the number of shares of
common stock into which the Series B Preferred Stock purchased by such investor
is initially convertible. The initial exercise price of the warrants is $6.25
per share. Both the Series B Preferred Stock and the warrants include
antidilution provisions that, if triggered, could result in a reduction of the
conversion price of the Series B Preferred Stock or the exercise price of the
warrants, but not below $3.00 per share. The warrants have a fair value of
$2,032,739 based on the Black-Scholes option pricing method. The estimated
fair value of the warrants was included in additional paid-in
capital.
F-26
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
In
connection with the Series B Private Placement, the Company agreed to register
the resale of the shares of common stock issuable (i) upon conversion of the
Series B Preferred Stock, (ii) as dividends on the Series B Preferred Stock, and
(iii) upon exercise of warrants, all in accordance with registration rights
agreements among the Company and each of the investors. Under the registration
rights agreement, the Company was required to file a “resale” registration
statement with the SEC covering such shares on or before the 30th day following
the closing of the Series B Private Placement. The Company filed the
registration statement on May 30, 2008, within the required time period. Since
the registration statement was not declared effective by the SEC within 180 days
of the initial required filing date, during the year ended December 31, 2008 the
Company recorded an expense of $43,986 for 1% of the shares issued in the March
31, 2008 Series B Private Placement. The registration statement was declared
effective by the SEC on November 24, 2008.
If at any
time prior to the first to occur of (i) the first anniversary of the
registration of the common stock underlying the Series B Preferred Stock or (ii)
18 months after the closing , the Company issues any additional shares of common
stock with a purchase price less than the conversion price of the Series B
Preferred Stock, or additional convertible securities with a conversion price
less than the conversion price of the Series B Preferred Stock, the conversion
price of the Series B Preferred Stock will be reduced to the purchase price at
which such common stock has been issued or the conversion price of such
additional convertible securities, but not below a conversion price of $3.00 per
share. The antidilution adjustments in the Series B Preferred Stock and warrants
will not apply to certain issuances of equity securities or warrants, including
those not issued in capital-raising transactions (such as to customers,
suppliers, joint venture partners or in connection with acquisitions of
property) or in connection with equity award or options granted by the Company
to employees, consultants and directors under employee benefit plans approved by
the board of directors under which options generally are granted with exercise
prices at least equal to the Company’s stock price on the grant
dates.
In
conjunction with the March 2009 Private Placement, as noted in Note 4 above, the
antidilution provisions were triggered. The conversion price of the Series B
Preferred Stock and the exercise price of the warrants were reset to $3.00 per
share. The Company recorded $4,005,161 as an additional deemed dividend related
to the beneficial conversion feature during the year ended December 31, 2009.
The additional beneficial conversion feature was calculated based on the number
of shares that would be received upon conversion based on the adjusted
conversion price. The Company then compared the number of shares that
would be received upon conversion based on the adjusted conversion price with
the number that would have been received prior to the occurrence of the
contingent event. The excess number of shares was multiplied by the
commitment date stock price to determine the incremental intrinsic value
resulting from the resolution of the contingency and the corresponding
adjustment to the conversion price.
In
connection with the Series B Private Placement, the Company paid a commission of
$249,288, issued 3,514 shares of Series B Preferred Stock and warrants
exercisable for 197,437 shares of common stock as consideration for investors
introduced to the Company. The warrants had a fair value of $770,858 on the date
of issuance based on the Black-Scholes option pricing model. The estimated fair
value of the warrants was included in additional paid-in capital.
As
discussed in Note 1, effective January 1, 2009, the Company reclassified the
fair value of the Series B Private Placement common stock purchase warrants,
which had exercise price reset features, from equity to liability status as if
these warrants were treated as a derivative liability since their date of issue
in March and May 2008. On January 1, 2009, the Company reclassified from
additional paid-in capital, as a cumulative effect adjustment, $2,543,482 to
beginning accumulated deficit and $260,115 to common stock warrant liability to
recognize the fair value of these warrants on such date.
In
conjunction with the March 2009 Private Placement, as noted in Note 4 above, the
antidilution provisions were triggered in the Series B Private Placement common
stock purchase warrants. The exercise price of the warrants was reset to
$3.00 per share. Accordingly, the change in fair value from the most
recent reporting date to the date of March 2009 Private Placement was recorded
in the consolidated statements of operations and the then-current fair value of
the warrants $158,451 was reclassified from common stock warrant liability to
additional paid-in capital.
For the
year ended December 31, 2009, the net adjustment to fair value related to the
Series B Private Placement common stock purchase warrants resulted in a gain of
$101,665 and is included in loss on net change in fair value of derivative
liabilities on the accompanying consolidated statements of
operations.
F-27
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
The
ability of the Company to pay dividends in the future is limited by regulatory
requirements, legal availability of funds, recent and projected financial
results, capital levels and liquidity of the Company, general business
conditions and other factors deemed relevant by the Company’s Board of
Directors.
On March
14, 2008, the Company entered into a lease agreement for office space in Lake
Mary, Florida. The lease was secured by a Letter of Credit for $175,000. In June
2009, the Company entered into negotiations with the landlord to terminate the
agreement. Accordingly, the Company did not make the June 2009 rental payment in
accordance with the terms of the agreement. As a result, the landlord drew on
the $175,000 Letter of Credit due to the lease payment default as per the terms
of the agreement. On August 31, 2009, the Company settled the early termination
of the lease agreement with the landlord. In exchange for full settlement of the
lease and release of further liabilities, the Company agreed to allow the
landlord to retain all of the remaining office furniture along with an
additional payment of $85,000. For the year ended December 31, 2009, the
Company recognized lease termination expense of $330,974 which consists of the
$175,000 Letter of Credit, $85,000 additional payment, and $70,974 for the
disposal of property and equipment. These amounts are included in general and
administrative expense in the consolidated statements of
operations.
The
reconciliation of income tax computed at the Federal statutory tax rate to the
benefit for income taxes is as follows:
|
2009
|
2008
|
|||||||
|
Tax
at statutory rate
|
$ | (6,490,000 | ) | $ | (5,839,000 | ) | ||
|
State
taxes, net of federal benefit
|
(467,000 | ) | (339,000 | ) | ||||
|
Permanent
differences and other
|
(1,828,000 | ) | 2,718,000 | |||||
|
Change
in valuation allowance
|
8,785,000 | 3,460,000 | ||||||
|
Income
tax expense
|
$ | - | $ | - | ||||
The
Company has considered its income tax positions, including any positions that
may be considered uncertain by the relevant tax authorities in the jurisdictions
in which the Company operates. As of December 31, 2009 and 2008, the
Company had no uncertain tax positions and no unrecognized tax benefits.
Potential interest and penalties associated with uncertain tax positions are
recorded as a component of income tax expense. The Company has not
incurred any penalties relating to income taxes recognized in the consolidated
financial statements as of and for the years ended December 31, 2009 and
2008.
The
following table sets forth the detail of the Company’s deferred
taxes:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$
|
8,961,000
|
$
|
5,604,000
|
||||
|
Intangible
assets and property, plant and equipment
|
789,000
|
549,000
|
||||||
|
Stock
option expense
|
5,180,000
|
18,000
|
||||||
|
Other
|
122,000
|
96,000
|
||||||
|
Total
deferred tax assets
|
$
|
15,052,000
|
$
|
6,267,000
|
||||
|
Valuation
allowance
|
(15,052,000
|
)
|
(6,267,000
|
)
|
||||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
||||
At of
December 31, 2009, the Company has federal and state net operating loss
carryforwards of approximating $23,775,000. The federal net operating loss
carryforwards will begin to expire in 2026 unless utilized.
Pursuant
to Section 382 of the Internal Revenue Code, annual use of the Company’s net
operating loss and credit carry-forwards may be limited due to cumulative
changes in ownership of more than 50%. A valuation allowance of
$15,052,000 and $6,267,000 has been recognized to offset the deferred tax assets
at December 31, 2009 and 2008 as realization of such assets is
uncertain.
F-28
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
The
Company recognizes windfall tax benefits associated with the exercise of stock
options directly to stockholders’ equity only when realized. Accordingly,
deferred tax assets are not recognized for net operating loss carryforwards
resulting from windfall tax benefits occurring from January 1, 2006
onward.
NOTE 8 – COMMITMENTS AND
CONTINGENCIES
The
Company is a party to a sublicense agreement with Global Energy Holdings, Inc.
(formerly Xethanol Corporation, “Global Energy”), a renewable fuels company
engaged in the production and sale of ethanol and its by-products, that the
Company entered into in April 2006. Under this agreement, the Company
granted Global Energy a ten-year exclusive right, subject to certain retained
rights of use, to make and sell the Company’s biofuel and other products using
its proprietary chemical additives. The license is exclusive within the eastern
United States and includes a non-exclusive right to sell certain other products
anywhere in North America, Central America and the Caribbean. The Company
is obligated to supply Global Energy with the proprietary additives for its
production of products, including biofuel, at a purchase price equal to the
lesser of the Company’s actual cost of the raw materials for the additives plus
10 percent or the lowest price charged to a third party that is not controlled
by the Company. The sublicense agreement requires Global Energy to pay the
Company a quarterly royalty per gallon of product sold directly or indirectly by
or through Global Energy equal to the lesser of a fixed amount and the lowest
royalty per gallon that the Company charges any other sublicensed third party
not controlled by the Company. Global Energy is obligated to pay this royalty
with respect to a minimum of 20 million gallons of fuel during the first 12
months following the date that the Company informs Global Energy that it is
ready to accept orders for the additives and provide the necessary engineering
specifications for a process plant to produce products, including biofuel, using
the technology. Thereafter, the required minimum volume increases by 10 million
gallons in each subsequent 12 month period during the term. If Global Energy
fails to pay the minimum mandatory royalties during the first three years, the
Company may terminate the sublicense or convert it to a non-exclusive basis.
After the first three years, a failure to pay the minimum royalties results in
the automatic conversion of the sublicense to a non-exclusive basis. The
sublicense will automatically renew at the end of the initial 10 year term for
successive one year terms, and the rate will adjust in accordance with the GNP
Implicit Price Deflator, as defined in the agreement.
Concurrently
with the sublicense, the Company also entered into a Technology Access Agreement
with Global Energy which provides Global Energy access to the formula and know
how to manufacture the additives if the Company suffers certain bankruptcy
events or is involved in a change of control in which the acquiring entity is a
competitor of Global Energy.
In
October 2007, the Company entered into a stock purchase and termination
agreement with Global Energy in which it agreed, subject to raising the
requisite financing, to purchase from Global Energy 5,460,000 shares of the
Company’s common stock, and upon the repurchase of the shares, to cancel all
existing agreements with Global Energy and to terminate any further commercial
relationship between the parties. The Company did not raise the necessary funds
and ultimately Global Energy terminated the stock purchase and termination
agreement, effective January 17, 2008.
In March
2009, Global Energy sold its remaining 5,301,300 shares of the Company’s common
stock to 2020 Energy, LLC, the Company’s largest shareholder. In
connection with the sale of the Company’s common stock, Global Energy agreed to
assign its rights under the sublicense agreement to 2020 Energy, LLC. In
November 2009, Global Energy filed a voluntary petition under Chapter 11 of the
U.S. Bankruptcy Court for the District of Delaware to protect its assets and
restructure its business. The Company is uncertain as to whether the
assignment has been completed. As of December 31, 2009, the Company has
not received any royalties pursuant to the sublicense agreement.
In March
2009, the Company entered into an addendum to its Exclusive License Agreement
with PTJ Bioenergy Holdings, Ltd. under which the Company in consideration of
the rights in product improvements made by the Company, as defined in the
agreement, agreed to pay fees and royalty payments to PTJ Bioenergy Holdings,
Ltd. based on a percentage of specified sales of product. No expense was
recognized under the agreement for the year ended December 31,
2009.
On
September 12, 2008, the Company entered into a site lease agreement (the “Lease
Agreement”) with Pennington Partners, LLC (“Pennington”) to locate the Company’s
first commercial scale biofuel manufacturing plant at a port location in
Baltimore, Maryland and a terminaling services agreement (the “Services
Agreement”) with Atlantic Terminalling, LLC (“Atlantic”), an affiliate of
Pennington, to provide certain terminaling services at the site. The Lease
Agreement covers the physical premises where the production facility will be
located as well as approximately six million gallons of storage tank capacity
and related terminaling facilities. The initial term of the Lease Agreement is
five years with an option to renew for three additional five year periods. The
initial base rent rate is $35,000 per month for the first six months, $55,000
per month for the next six months, $75,000 per month in the second year and then
to an amount equal to the monthly base rent payable during the preceding rental
year increased by 3%. Under the Services Agreement, Atlantic will provide
terminaling services that include the receipt, the unloading and the transfer of
raw materials and the subsequent transfer and load out of finished product from
and to railcars, barges and trucks. The term of the Services Agreement will run
concurrently with the Lease Agreement. The Company will pay a throughput charge
for each gallon of product outflow, subject to certain minimums. The minimum
monthly throughput charge will range from $7,802 through the first six months to
$16,600 after the first year. Maximum monthly throughput charges will vary
based upon our production volume. The total minimum throughput charges, for the
initial five year service agreement period, are approximately
$916,000.
F-29
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
At
December 31, 2009, the Company’s minimum commitments under non-cancelable
operating leases were as follows:
|
Year
ending December 31,
|
||||
|
2010
|
$
|
1,107,444
|
||
|
2011
|
1,140,667
|
|||
|
2012
|
1,174,887
|
|||
|
2013
|
900,844
|
|||
|
Total
minimum lease payments
|
$
|
4,323,842
|
||
For the
years ended December 31, 2009 and 2008, rent and terminaling service expense
under operating leases included in cost of product revenue was $926,630 and
$-0-, respectively. For the years ended December 31, 2009 and 2008, rent
and terminaling service expense under operating leases included in general and
administrative expense was $319,775 and $163,406, respectively.
On or
about January 4, 2010, the Company was notified that it was in default under the
Lease Agreement and Services Agreement primarily due to its failure to pay rent
in the amount of $320,000. The Company is seeking to negotiate a
settlement of the amounts owed and to restructure the remaining obligations
under the agreements. There can be no assurance that the Company will be
successful in negotiating a settlement with the landlord, and the landlord may
terminate the lease as a result of the Company’s default and, among other
potential remedies, accelerate the Company’s obligations due under the
agreements. As of December 31, 2009, accrued and unpaid rent under the
agreements totaled approximately $362,500 and is included in accounts payable
and accrued expenses on the consolidated balance sheets.
At
December 31, 2009, the Company had three non-cancelable operating leases
expiring at various times through July 31, 2010. For the years ended
December 31, 2009 and 2008, rent expense for other minor operating leases for
corporate offices included in general and administrative expense was $70,206 and
$85,304, respectively.
In August
2008, the Company settled a lawsuit with a former consultant involving claims
for breach of contract and specific performance in order to avoid uncertainties
and potential litigation expenses. Pursuant to the settlement agreement, the
Company modified the exercise price and the quantity of stock warrants
originally issued to the former consultant. Accordingly, for the year
ended December 31, 2008, the Company recorded a legal settlement expense of
$359,595.
NOTE 9 – SUBSEQUENT
EVENTS
In
February 2010, the Company completed a private placement (the “February 2010
Private Placement”) of 1,890,858 shares of Common Stock, at a price of $0.69 per
share to “accredited investors” under the Securities Act. The gross proceeds
from the February 2010 Private Placement were $1,305,000 and approximately
$1,200,000 in net proceeds, after deducting finders’ fees. Each investor
in the February 2010 Private Placement also received a warrant exercisable for a
number of shares of common stock equal to the number of shares of common stock
purchased by each investor. The exercise price of the warrants is $0.90 per
share. The warrants are exercisable at any time after the six month anniversary
of the issue date but prior to the fifth anniversary of the issue
date
Each
investor who subscribed for units will have an option to purchase additional
units consisting of shares of common stock and warrants during an exercise
period ending 30 days after a registration statement registering shares issued
in the February 2010 Private Placement is declared effective by the SEC.
The option warrants will have the same exercise price, terms and conditions as
the other warrants issued in the February 2010 Private Placement. Subject to
NASDAQ listing approval and determination that shareholder approval is not
required for the issuance of option units, the option will permit purchases of
up to the number of units initially purchased in the 2010 February Private
Placement.
F-30
NEW
GENERATION BIOFUELS HOLDINGS, INC.
Notes
to Consolidated Financial Statements
The 2010
February Private Placement also included certain antidilution provisions for the
benefit of investors. If at any time prior to six (6) months after the
registration statement is declared effective the Company issues additional
equity securities in a “financing transaction” (as defined in the transaction
documents) with a purchase price less than the unit price or issues convertible
securities with a purchase price less than the unit price, the Company is
obligated to issue additional shares of common stock to investors in the 2010
February Private Placement so that the aggregate number of shares received by
the investor is equal to the number of shares of common stock that the investor
would have received if the same dollar amount had been invested at the purchase
price of the additional equity securities. There are no anti-dilution
provisions in the warrants. The total number of shares issued to all
investors in the 2010 February Private Placement and pursuant to anti-dilution
provisions will not exceed the maximum number of shares that may be issued
without our obtaining shareholder approval under listing rules of the NASDAQ
Capital Market.
In
connection with the 2010 February Private Placement, the Company agreed to
register the resale of the shares issued in the 2010 February Private Placement
or upon exercise of the option, but excluding shares underlying the
warrants. The Company is required to file the registration statement
within 10 days of closing. The Company is obligated to maintain the
effectiveness of the registration statement indefinitely, until the shares have
been disposed of in accordance with the registration statement, the shares have
been distributed to the public or could be sold by the investor pursuant to Rule
144 under the Securities Act, or the shares have ceased to be
outstanding.
On
February 19, 2010, the Perpetual License, as amended, was further amended, to
allow the Company to pay $120,000 in cash on February 19, 2010 and issue
1,100,000 shares of common stock in lieu of making the $500,000 payments due on
February 20, 2010 and March 20, 2010. The fair value of the shares
issued was $726,000, based on the fair market value on the date of issuance, or
$0.66 per share, resulting in a gain on debt extinguishment of $154,000 for the
period subsequent to December 31, 2009.
F-31