Attached files
file | filename |
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EX-10.26 - LEASE AGREEMENT, DATED FEBRUARY 1, 2011 - Parabel Inc. | d286628dex1026.htm |
EX-10.30 - JOINT TESTING AND EVALUATION AGREEMENT, DATED JULY 11, 2011 - Parabel Inc. | d286628dex1030.htm |
EXCEL - IDEA: XBRL DOCUMENT - Parabel Inc. | Financial_Report.xls |
EX-31.1 - RULE 13A-14(A) CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER - Parabel Inc. | d286628dex311.htm |
EX-32.2 - CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. - Parabel Inc. | d286628dex322.htm |
EX-31.2 - RULE 13A-14(A) CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER - Parabel Inc. | d286628dex312.htm |
EX-32.1 - CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. - Parabel Inc. | d286628dex321.htm |
EX-23.1 - CONSENT OF GRANT THORNTON LLP - Parabel Inc. | d286628dex231.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2011
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0 - 24836
Parabel Inc.
(Exact name of registrant as specified in its charter)
Delaware | 33-0301060 | |
(State or other jurisdiction of incorporation) |
(IRS Employer Identification No.) | |
1901 S. Harbor City Blvd., Suite 300 Melbourne, FL |
32901 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 321-409-7500
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. YES ¨ NO x
Indicate by checkmark 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. YES x NO ¨
Indicate by checkmark 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). YES x NO ¨
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrants knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter was approximately $20,945,778 (1,496,127 shares at $14.00).
The number of shares outstanding of the registrants common stock as of March 28, 2012 was 106,920,730 shares of common stock, all of one class.
Table of Contents
Page | ||||||
Item 1. |
Business | 3 | ||||
Item 1A. |
Risk Factors | 9 | ||||
Item 1B. |
Unresolved Staff Comments | 18 | ||||
Item 2. |
Properties | 18 | ||||
Item 3. |
Legal Proceedings | 18 | ||||
Item 5. |
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 18 | ||||
Item 6. |
Selected Financial Data | 19 | ||||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 20 | ||||
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk | 28 | ||||
Item 8. |
Financial Statements and Supplementary Data | 30 | ||||
Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 50 | ||||
Item 9A. |
Controls and Procedures | 50 | ||||
Item 9B. |
Other Information | 51 |
Table of Contents
Table of Contents
ITEM 1. | BUSINESS |
Overview
On February 7, 2012, PetroAlgae Inc. amended its certificate of incorporation to change its name to Parabel Inc..
Parabel Inc. (the Company) provides renewable technology and solutions to address the global demand for new sources of feed, food and fuel. The Company has developed proprietary technology, which it believes will enable customer licensees to grow, harvest and process locally-available aquatic plants (micro-crops) to create products for agriculture and energy markets in a profitable manner. One customer licensee in South America and two prospective customer licensees in southeast Asia are currently implementing this technology at pilot scale.
The Companys strategy is to license and provide management support for production facilities at locations with suitable climates for its technology to achieve maximum productivity, which are generally located within equatorial regions. To allow customer licensees to build out rapidly and efficiently, the Company has developed a scalable and flexible solution, based on modular growth units which enable phased construction and production operations. The Company intends to generate revenue from licensing fees and royalties primarily from customer licensees that are engaged in the global agriculture and energy markets, as well as from investment groups.
Using indigenous, non-genetically modified plants from the Lemnaceae family, the Companys technology platform enables the production of Lemna Protein Concentrate (LPC), Lemna Meal (LM) and Biocrude. In the near-term, the company is positioning LPC and LM in animal feed markets, as fish meal and alfalfa meal alternatives, respectively. Third-party testing commissioned by the Company has indicated the value and viability of the products in these applications. The Company believes that both products could also potentially be applied in fertilizer applications. With further technology and product development, the Company expects LPC to be applied in human food markets and, with the development of third-party conversion technologies, the Company expects Biocrude to be used as a feedstock for renewable fuels.
To date, the Company has entered into a license agreement with Asesorias e Inversiones Quilicura S.A. (AIQ), a customer licensee in South America, with initial construction of a pilot-scale bioreactor (of less than one hectare) completed and testing ongoing. Due to the conditionality of this license agreement, there is no guarantee that AIQ will elect to proceed to the commercial phase of the license agreement. Because this is the first license agreement into which it has entered, the Company has agreed to construct the first commercial phase facility on a turnkey basis, which means that the Company will design, have constructed and equip the facility, in return for payments billed on a progress basis, not to exceed a prescribed limit. The pilot-scale bioreactor, which constitutes the preliminary phase of this license agreement, was constructed at AIQs expense and not on a turnkey basis. As future customer licensees implement the technology at commercial scale, the Company expects to incur minimal capital expenditures, since customer licensees will be expected to invest in the development and construction of the production facilities.
In addition, the Company is currently negotiating license agreements with, and funding and managing the construction and/or operation of pilot-scale projects for, the Salim Group, a prospective customer licensee in Indonesia, and China Energy Conservations and Environmental Protection Group CHONGOING INDUSTRY CO., LTD. (CECEP), a prospective customer licensee in China. The construction of these pilot-scale bioreactors, each of which comprises less than one hectare in size, was completed during the first quarter of 2012 and the Company expects these pilot-scale bioreactors to commence operations during the second quarter of 2012. These parties have expressed an intention to progress to commercial-scale operations, subject to successful pilot results, and have entered into non-binding agreements with the Company regarding their commercial use of the Companys technology.
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In 2012, the Company intends to continue to make significant progress in commercializing its licensed technology and solutions. However, the Company remains in a development stage, it has not generated any revenue, it has experienced net losses since inception, and there is a substantial doubt about its ability to continue as a going concern.
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Solution and Customer Licensee Approach
The Company believes that its solution will result in the commercial scale production of renewable sources of feed, food and fuel ingredients (biomass) for application in industries characterized by limited supply and rising demand. The Companys proprietary technology platform primarily consists of four components: micro-crop selection and testing, growth and harvesting techniques, processing technology, and control systems. Unlike many other agricultural and food production systems, the Companys solution is designed to enable year-round operations, with the objective of providing a high degree of consistency, predictability and profitability.
Although the Company has successfully operated its demonstration facility since 2009, and is currently overseeing and managing the construction and/or operation of three pilot-scale projects, its technology has not been implemented at commercial scale and unforeseen issues may arise when a customer licensee begins to scale up.
To expand its initial base of prospective customer licensees and to promote the rapid build-out of production units, the Company has developed a scalable and flexible model based on micro-crop growth units of 150 hectare increments. This model is designed to be attractive to a wide range of entities, including agricultural customers with an interest in the sustainable production of feed products, larger operators of renewable fuel production facilities and financial investment groups.
The estimated capital expenditure for a 150 hectare facility as an entry point is $12 million (excluding the cost of land and improvements)a model that the Company believes involves manageable costs, risks and build-out times, while also enabling customer licensees to evaluate the commercial potential of the technology on a larger scale. Due to economies of scale, the Company expects that a 600 hectare unit would deliver an attractive internal rate of return on customer licensees investment. The Companys economic projections are informed by operations at its demonstration facility; however, there is no guarantee that projected results will reflect the actual results of commercial operations. To date, the Company has only demonstrated its technology in a demonstration-scale pilot facility of approximately one hectare. Ultimately, the Company anticipates that customer licensees will expand their facilities in 150 hectare increments at similar costs in order to complete facilities of up to 5,000 hectares.
To ensure the successful implementation of its solution, the Company believes that the provision of support services will be important. These services could include pre-planning activities, construction management activities, operations management activities, and equipment procurement and supply chain management services.
In 2011, the Company supplemented its U.S.-based purchasing capabilities through the addition of a purchasing function focused on the identification of sources of supply for the procurement of equipment and other materials in China and other south-east Asian nations. The Companys expanded purchasing capabilities enable the procurement of equipment and materials required by customer licensees in a more cost effective manner as compared to U.S.-based purchasing.
The Company expects that its initial license agreements will be conditional on pilot-scale projects meeting certain minimum performance levels on which it would base projections of commercial profitability. The Company expects such minimum performance levels to be met, which would increase the likelihood of future customer licensees proceeding directly to commercial-scale build-out.
Products and Markets
The Companys current product strategy is to enable customer licensees to sell its LPC product in the global animal feed market as a fish meal alternative and its LM product in the global animal feed market as an alternative to alfalfa meal. Fish meal is a critical ingredient in the diets of aquaculture stocks and nursery animals, and alfalfa meal is a premium forage ingredient used to meet nutrition and growth requirements in numerous animal diets. The Company commissioned the University of Idaho to conduct tests on LPC and the University of Minnesota to conduct tests on LM, which indicated that the products represent viable fish meal and alfalfa meal alternatives, respectively. Additional third-party testing on both products continues.
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The fish meal and alfalfa meal markets are global and significant in size, and the demand in these markets is expected to grow rapidly. The Company believes that LPC and LM will meet a portion of that growing demand. The global fish meal supply is currently limited due to the effects of overfishing and consequent government regulations, while the demand for fish meal as a source of protein in animal diets continues to rise sharply. Global fish meal demand for aquafeed is expected to reach approximately 7 million metric tonnes in 2012 and to rise every year thereafter to approximately 16 million metric tonnes in 2020, a rate which is expected to significantly outpace supply. The supply of alfalfa is limited due to the concentration of production in specific areas, such as the United States and Europe. Meanwhile, demand for alfalfa meal continues to rise, particularly in Asia. For dairy and swine alone, the global demand for alfalfa meal will be approximately 254 million metric tonnes in 2012, rising every year thereafter to approximately 262 million metric tonnes in 2020.
In addition, the Company believes that LPC is well-positioned as an alternative to kelp meal, commonly used in fertilizers for turf grasses, while LM could potentially be used as an ingredient in organic fertilizers and in animal bedding applications.
Furthermore, the Company believes that LPC could qualify as the first major new plant protein source for humans since soy protein entered the human diet in the 1950s. University studies and other third-party tests commissioned by the Company and completed in 2011 indicate that LPC contains high levels of vitamins and other valuable nutritional properties. This is the basis for the Companys belief that, pending further technology and product development, there is potential for LPC to be used as an ingredient in common foods, such as tortillas, pasta, crackers and smoothies. The Company will continue to pursue internal and third-party research to explore the relationship between LPCs nutritive properties and consumer acceptance in these basic human food applications.
In the long term, the Company believes it can develop a higher protein content product from micro-crops using alternative processing techniques. While this process change would increase the capital and operating costs associated with its solutions, the Company anticipates that the increased value of the end product produced would in many cases justify the additional expenses. If the Company achieves this objective, its customer licensees could access specialty markets for higher value prepared foods in which protein boosts nutritional or functional properties, such as baked goods, meats and frozen foods.
Finally, the Company expects that the continued development of third-party conversion technology will facilitate the commercial production of renewable fuel from Biocrude.
Development
The Company is a holding company whose sole asset is its controlling equity interest in its majority-owned operating subsidiary, PA LLC. PA LLC was originally founded in September 2006 by XL TechGroup, Inc. (XL Tech) as a company focused on developing technologies for the renewable energy market. In August 2008, XL Tech exchanged certain of its assets, including the equity it held in PA LLC, for the outstanding debt of XL Tech that was held by the Companys principal stockholder. Subsequent to that exchange, the Companys principal stockholder transferred the equity it received and certain related debt to PetroTech Holdings Corp. (PetroTech), a holding company controlled by the Companys principal stockholder. In December 2008, PetroTech acquired a shell company that traded on the OTC Bulletin Board and assigned its interest in PA LLC to this shell company, which it then renamed PetroAlgae Inc.
The Company has achieved a number of important milestones since it was founded in September 2006, with substantial investment in research and development, technology refinement and product validation. Although the Company continues to test and refine its technology and processes, it is now also focused on overseeing pilot-scale implementation of its technology around the world, building its customer pipeline and entering into license agreements for commercial-scale production operations.
The Companys key milestones to date are as follows:
| Over the past two years, the Company has spent $27.6 million on the research and development of its growth and harvesting technologies. The Company spent these funds on experimentation and testing, developing processes and equipment, and building the infrastructure and databases necessary to support its technology, including the construction of its working demonstration facility. |
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| In 2006, the Company began the research and development of its growth and harvesting technologies. These efforts focused on experimentation and testing, developing processes and equipment, and building the infrastructure and databases necessary to support its technology. |
| During 2007 and 2008, the Company developed its proprietary growth algorithmsthe complex mathematical formulas used to determine the best harvesting parameters considering the density of the micro-crop material, sunlight exposure and other factors. |
| In June 2009, the Company completed its fully operational demonstration facility and established its international business development team. The demonstration facility currently consists of a large bioreactor (approximately one hectare) and three smaller bioreactors that display the Companys technology and processes. |
| In November 2009, the Indonesian Ministry of Agriculture approved the Companys LPC product as a raw material suitable for use in animal feed. |
| In October 2011, the Company entered into a license agreement with AIQ, a customer licensee in South America, with initial construction of a pilot-scale bioreactor now completed and testing ongoing. |
| In November 2011, CECEP, a prospective Chinese customer licensee with which the Company is currently negotiating a license agreement, began construction of a pilot-scale bioreactor. |
| In December 2011, the Salim Group, a prospective Indonesian customer licensee with which the Company is currently negotiating a license agreement, began construction of a pilot-scale bioreactor. |
Site Strategy
The Companys sales strategy targets customer licensees with the capacity to execute commercial-scale production operations at locations with suitable climates, generally within equatorial regions of 15 degrees North latitude to 15 degrees South latitude. However, the Company expects the overall profitability of its technology to be dependent on a range of variables within its control (including capital and operational costs and product composition and pricing), and is therefore not limited to pursuing opportunities exclusively within equatorial regions.
In determining appropriate sites, the Company also considers the following factors:
| the proximity of a prospective customer licensee site to adequate infrastructure; |
| the availability of labor to construct and operate the facilities; |
| the availability of any state or local incentives; |
| the availability and/or potential for the creation of local markets in which end products may be sold; |
| the availability of economical and reliable sources of water and power; and |
| the stability and support of the local and national political environment. |
Raw Materials
The Companys processes primarily use four categories of raw materials: indigenous aquatic plants (from the Lemnaceae family) that are not genetically modified and demonstrate an optimal growth profile for a particular geography and environment; fertilizer; water; and naturally-available elements, such as sunlight and carbon dioxide. The Company refers to these plants as micro-crops, which are grown, harvested and processed with its technology. The micro-crops will be indigenous to the regions in which the Companys customer licensees operate
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and are available in the natural environment. The availability and quality of water in a specific location is among the most important component of the site selection process. The Company intends to provide its customer licensees with a proprietary nutrient mix, which will consist of commercially-available ingredients.
Intellectual Property
The Company has developed proprietary technology, which it believes will bring a competitive advantage and which it seeks to protect through the use of a multilayered intellectual property protection strategy. The Companys intellectual property strategy is focused on a combination of patents, trade secrets and a proprietary control system.
The Company has patent applications in the United States and foreign jurisdictions pending across the entire range of its technology and processes, including bioreactor construction, growth and harvesting, and processing of its micro-crops.
The Companys intention is that its trade secrets will complement and bolster the intellectual property protection expected to be provided by the patents for which it has applied and which relate to each technological aspect of the system, such as growth and harvesting, nutrition, and processing.
The Companys proprietary control system and the accompanying algorithms manage the overall process to optimize yield. The control systems are protected through various multilayered security models that prevent unauthorized access to the software and source code. Under the Companys licensing model, customer licensees will not have access to its encrypted software, the underlying code or databases.
Competition
The Companys objective is to be the leading global provider of technology and processes for the commercial production of micro-crop-based products for agriculture and energy markets. The Company has not identified any other organizations with a comparable micro-crop technology platform or associated licensing model. Furthermore, the Company believes that any organizations seeking to develop and provide similar technology solutions will face significant competitive barriers, as a consequence of the Companys proprietary technology and knowhow, its control systems and its supply chain management infrastructure, as well as the experience gained through the operation of its demonstration facility since 2009 and ongoing pilot projects around the world.
In the near-term, the company expects LPC and LM to compete primarily with fish meal and alfalfa meal, respectively. In these markets, the Companys customer licensees will compete with the established providers of these products, including large international food and agriculture companies. In many cases these companies will have well-developed distribution systems and networks for their products, as well as sales and marketing programs in place to promote their products. The Company believes that LPC and LM can compete favorably with existing alternative products in terms of cost, quality, availability of supply, compatibility with existing infrastructure, sustainability and consumer preference characteristics.
In the long-term, the Company expects to develop human food applications for LPC, as well as applications of Biocrude for renewable fuel markets. Consequently, the products produced by the Companys technology will compete in large, international food and energy markets, including renewable fuels and transportation fuels markets, in many cases against competitors with greater resources and name recognition.
Employees
The Company maintains a multidisciplinary team, including biologists, engineers, office support staff and business executives. The Company employed 65 full-time individuals and one part-time individual as of February 15, 2012, and considers employee relations to be good. During 2012, the Company anticipates that it will continue to build out its human infrastructure, as necessary, to support the implementation of its technology around the world.
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ITEM 1A. | RISK FACTORS |
The Company has a limited operating history.
The Company is a development stage company. As a result, the Company has no history of revenues, operating or net income, cash flows or the other financial performance metrics that will affect the future market price of its common stock. Any investment made in the Companys common stock will necessarily be speculative and based largely on an investors own views as to the future prospects for the Companys business. If the Company is unable to generate sufficient revenues or profits, it may be unable to continue operating and an investor may lose its entire investment in the Companys common stock.
In addition, because of this limited operating history, investors and research analysts could have more difficulty valuing the Companys common stock, which could lead to significant variability in the value ascribed to the Companys common stock by market participants. This, in turn, could lead to a high degree of volatility in the market price of the Companys common stock, which could have adverse effects on its investors and on the Companys ability to conduct financing activities, determine dividend policy and price any stock options it grants for compensation or other purposes.
The Company has a history of operating losses and the Companys auditors have indicated that there is a substantial doubt about the Companys ability to continue as a going concern.
To date, the Company has not been profitable and has incurred significant losses and cash flow deficits. For the fiscal years ended December 31, 2011, 2010, and 2009, the Company reported net losses before non-controlling interest of $28.5 million, $44.5 million, and $36.8 million, respectively, and negative cash flow from operating activities of $17.8 million, $22.8 million, and $27.6 million, respectively. As of December 31, 2011, the Company had an aggregate accumulated deficit of $122.9 million. The Company anticipates that it will continue to report losses and negative cash flow for the next few years.
As a result of these net losses, cash flow deficits and other factors, the Companys independent auditors issued an audit opinion with respect to the Companys consolidated financial statements for the three years ended December 31, 2011 that indicated that there is a substantial doubt about the Companys ability to continue as a going concern. The Companys financial statements included elsewhere in this annual report on Form 10-K (this Form 10-K) do not include any adjustments that might result from the outcome of this uncertainty. These adjustments would likely include substantial impairment of the carrying amount of the Companys assets and potential contingent liabilities that may arise if the Company is unable to fulfill various operational commitments. In addition, the value of the Companys securities would be greatly impaired. The Companys ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional capital and financing. If the Companys ability to generate cash flow from operations is delayed or reduced and it is unable to raise additional funding from other sources, the Company may be unable to continue in business.
The Company expects to rely on a small number of early-adopter customer licensees for substantially all of its revenue during the Companys next several years of operation.
The Company expects to be reliant on a small number of customer licensees for substantially all of its revenue. During the next several years, the Companys business will depend on the successful operation of the license units to which the Companys initial contracts will relate.
The Companys initial contract is, and it expects that the Companys additional early contracts will be, subject to significant conditionality. These contracts may be terminated by customer licensees if certain conditions are not met. See the risk factor The Companys initial contracts are or will be subject to significant conditionality, including that the pilot-scale facilities built by the Companys customer licensees achieve certain minimum levels of projected investment return, and the failure to meet these conditions may lead to the termination of these contracts. In addition, these contracts are generally subject to termination in the event that the Company fails to satisfy its obligations under such contracts. Although the Company believes that it has satisfied, and intends to continue to satisfy, these obligations, there can be no assurance that the Company will be able to continue to do so in the future.
Furthermore, there is no assurance that the Companys customer licensees will be able to successfully commercialize and distribute LPC, LM or Biocrude created using the Companys technology. If the Companys
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customer licensees are unable to sell the products that they produce with the Companys technology or sell such products on economically feasible terms, they may seek to terminate the Companys contracts or renegotiate the terms. If any of these contracts are terminated or renegotiated on less favorable terms, if contracts are terminated for failure to meet conditions or if any of the Companys customer licensees fail to meet their payment obligations to the Company, the Companys ability to generate revenues will be materially adversely affected, and this could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company expects to agree to build initial license units on a fixed price or turnkey basis, which subjects it to certain legal and financial terms that could adversely affect it.
The Company expects that some of the contracts with the Companys initial early-adopter customer licensees will provide for the build-out of a turnkey license unit of 150 hectares after the successful completion of the testing phase of the Companys technology. This means that the Company will direct the general contractor of such units and the Company will be required to deliver the unit at a fixed cost. The Company will receive payment for the build-out of the license unit on a progress basis as the license unit is constructed. The difference in the amounts and timing of the Companys payments to contractors and suppliers relative to payments it receives from its customer licensees exposes the Company to liquidity risk and could leave the Company vulnerable in the event it encounters challenges in building the facility or bringing it online, delays in achieving commercial viability with the Companys production process, disputes with the Companys customer licensees or other unanticipated events that may occur prior to the time the Company receives payment from its customer licensees. Because the Companys customer licensees payments will be capped, the Company will bear the responsibility for construction costs in excess of those anticipated, which could cause the Company to suffer significant losses on these license units.
The Companys success depends on future royalties the Company expects will be paid to it by the Companys customer licensees, and the Company faces the risks inherent in a royalty-based business model.
The Company is a licensing business without a substantial amount of tangible assets, and the Companys long-term success depends on future royalties paid by customer licensees. The amount of royalty payments the Company expects to receive will be primarily based upon the revenues generated by the Companys customer licensees operations, so it will be dependent on the successful operations of the Companys customer licensees for a significant portion of the Companys revenues. Furthermore, the Company expects that the terms of some of the Companys early-adopter customer license contracts will provide for royalty payments in lieu of license fees, which will cause the Company to recognize revenue from these contracts only once the license units have been built and are operational and the end products are being sold by the customer licensee. The Company faces risks inherent in a royalty-based business model, many of which are outside of the Companys control, including those arising from the Companys reliance on the management and operating capabilities of the Companys customer licensees and the cyclicality of supply and demand for end-products produced using the Companys technology. Should the Companys customer licensees fail to achieve sufficient profitability in their operations, the Companys royalty payments would be diminished and the Companys business, financial condition and results of operations could be materially adversely affected.
The Companys initial contracts are or will be subject to significant conditionality, including that the pilot-scale facilities built by the Companys customer licensees achieve certain minimum levels of projected investment return, and the failure to meet these conditions may lead to the termination of these contracts.
The Companys initial contract is, and the Company expects that its additional early contracts will be, subject to significant conditionality. For example, the Companys initial contract may be terminated if the Companys customer licensee deems the performance of its pilot-scale facility to be unsatisfactory. In the contracts that the Company is currently negotiating, the Companys prospective customer licensees will be permitted to terminate their agreements if projected investment returns, based upon the performance of their pilot-scale facilities and other factors, do not meet minimum investment return requirements. The Company generally will not receive any revenues under these contracts unless such returns are met during the test periods prescribed in each such contract. The Company cannot provide any assurances that any or all of its customer licensees pilot-scale facilities will meet the minimum investment returns required under these contracts. If a pilot-scale facility does not meet the minimum investment return requirements, the relevant contract may be terminated by the customer licensee, which in turn could have a material adverse effect on the Companys business, financial condition and results of operations and the Companys ability to generate revenue.
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The Companys proposed licensing terms may not be accepted by prospective customer licensees and, even if accepted, there can be no assurance that customer licensees will meet their payment obligations under these licensing terms.
Prospective customer licensees may not accept the Companys planned license agreement model. For example, prospective customer licensees may be unwilling to pay the proposed licensing fees prior to or during the construction of the Companys micro-crop production system or prior to full commercial deployment of the system. The Company expects that its initial contracts will generally be royalty-based and will not involve any significant payment of license fees, and there can be no assurance that future contracts will involve significant license fees. Therefore, even if the Company is successful in attracting new customer licensees for its technology, the Company may not realize revenue from such customer licensees in the form or time frame it currently anticipates. Furthermore, there is no guarantee that customer licensees will make payments in the time frame to which they agree. If prospective customer licensees are unwilling or unable to pay as anticipated, the timing of the Companys revenues and incoming cash flows could be reduced or delayed, which could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company may be unable to acquire and retain customer licensees.
The Companys main source of revenue will be in the form of licensing fees and royalties from its customer licensees. Therefore, obtaining a significant number of customer licensees is critical for the Companys growth and operation. Because the Companys technology has not previously been deployed in the marketplace, it is uncertain whether it will be accepted by prospective customer licensees and there is a risk that the Company will be unable to acquire and retain customer licensees due to a number of factors, including the Companys proposed licensing fee and royalty structure, capital expenditure requirements or questions surrounding the commercial feasibility of the Companys technology. For example, the projected investment returns of the Companys micro-crop production system and the processes and methodologies used to operate the system may not yield a result that is commercially attractive to prospective customer licensees (compared to competitive products or otherwise). The Companys micro-crop production system requires its customer licensees to incur large fixed capital costs, which could render the system cost prohibitive for prospective customer licensees. A failure to secure customer licensees in a timely manner could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company has yet to construct its technology on a commercial scale, and may be unable to solve technical and engineering challenges that would prevent the Companys technology from being economically attractive to prospective customer licensees.
Although the Company has successfully built a fully operational demonstration facility (approximately one hectare) and has extracted small field-scale quantities of LPC, LM and Biocrude for technical validation, the Company has not demonstrated that its technology is viable on a commercial scale, which the Company defines as an operation consisting of at least 150 hectares. All of the tests conducted to date by the Company with respect to its technologies have been performed on limited quantities of micro-crops, and the Company cannot provide any assurances that the same or similar results could be obtained at competitive cost on a large-scale commercial basis. The Company has never utilized this technology under the conditions or in the volumes that will be required to be profitable and cannot predict all of the difficulties that may arise. While the Companys bioreactors are modular in design, a single commercial-scale facility would be substantially larger than its demonstration facility, and the implementation of the Companys technology on that scale will require further research, development, design and testing. Such an undertaking involves significant uncertainties, and consequently the construction of a commercial-scale facility may face delays, failures or unexpected costs. Furthermore, the Company may not be able to successfully design a scalable, cost-effective system for the growth and harvesting of micro-crops.
In addition, once a customer licensee begins to scale up and replicate such a system, unforeseen factors and issues may arise which make any such system uneconomical, thus causing additional delays or outright failure. The production of LPC and LM from micro-crops involves complex outdoor aquatic systems with inherent risks, including weather, disease, and contamination. As a result, the operations of the Companys customer licensees may be adversely affected from time to time by climatic conditions, such as severe storms, flooding, dry spells and changes in air and water temperature or salinity, and may also be adversely affected by pollution and disease. Any of these or other factors could cause production at commercial-scale operations to be significantly below those the Company projects based on results it has achieved at its demonstration facility. Because the Company expects to
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rely on license fees and royalties for its revenues, any operational difficulties experienced by the Companys customer licensees would have an adverse effect on the Companys revenues and profitability, and such effects could be material.
If the Company encounters significant engineering or other obstacles in implementing its technology at commercial scale, or if the Companys customer licensees experience significant operational difficulties, the Companys business, financial condition, and results of operations could be materially adversely affected.
The market may not accept the end-products produced by the Companys technology.
The biomass produced by the Companys micro-crop production system produces several end-products: principally LPC, LM and Biocrude. The commercial viability of the Companys technology largely depends on the ability of its customer licensees to sell these end-products into existing markets.
It has yet to be proven that potential buyers for the specific end-products produced by the Companys technology, such as feed companies, would ultimately purchase the end-products produced by its customer licensees. For example, market acceptance of the Companys LPC and LM will be a function, among others, of digestibility and palatability (the assessment of which will require additional laboratory and field study). Should these studies not proceed favorably, the market for the Companys LPC and LM may not materialize or could be materially diminished. Failure to establish such a market or any significant reduction in a customer licensees profitability would decrease the amount of any royalties the Company would otherwise receive and may result in their failing to pay the Company expected licensing fees. Any of these events may have a material adverse effect on the Companys business, financial condition and results of operations.
The revenue and returns the Company believes its customer licensees will realize from the Companys technology will be highly dependent on the market price of the end-products produced using its technology.
The economic viability of the Companys technology depends on the ability of the Companys customer licensees to generate sufficient revenues from the sale of LPC, LM and other potential end-products of its technology. These revenues, and the internal rates of return the Companys customer licensees can expect from their investment in the Companys technology, are sensitive to the market prices of these products. Should the Companys customer licensees be unable to obtain an adequate price for these products, their profits would be lower than expected and they might incur losses.
If the Companys customer licensees cannot operate at a reasonable level of profit or incur losses, they might cease operations, which would result in the Companys losing license fees and royalty payments. In such a circumstance, it is also likely that the Company would face significant difficulties attracting new customer licensees. Either or both outcomes would likely have a materially adverse effect on the Companys business, financial condition and results of operations.
The end-products produced by the Companys technology are subject to industry and regulatory testing.
The end-products produced by the Companys technology generally require industry or regulatory testing in the countries in which they are produced or sold. For example, LPC requires regulatory approvals before it can be used in animal feed or for human consumption. To date, the Company has obtained approval for the use of LPC in animal feed only in Indonesia. Regulatory approvals in other jurisdictions will be essential to the commercial viability of the Companys technology. In addition, the Company has not yet submitted LPCs application for human consumption for regulatory approval in any jurisdiction. Such approvals could take several years or longer to obtain, if they can be obtained at all.
Should the end-products produced by the Companys technology fail to meet industry or regulatory requirements, there would be an adverse effect on the ability of its customer licensees to market the products of their micro-crop operations, which would adversely affect their profitability. Since the Company expects to rely on licensing fees and royalties for the substantial majority of its revenues, such events would also materially adversely affect the Companys business, financial condition and results of operations.
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The assumptions underlying the projected revenues and profitability of the Companys license units that it develops in conjunction with its customer licensees are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause the Companys customer licensees actual results to differ materially from those projected.
The projected revenues and returns on investment of the Companys license units that it develops in conjunction with its customer licensees are based on assumptions relating to construction costs and other capital costs associated with building a unit, operating expenses and productivity, end-product price ranges and numerous other assumptions, all of which are inherently uncertain and are subject to significant business, economic, meteorological, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those projected. If the Companys license units do not achieve the projected results, its customer licensees may not generate revenues or profits sufficient for them to continue operating license units or the revenues that the Company receives from such license units may be significantly less than it anticipates. Any of the foregoing could have a material adverse effect on the Companys business, financial condition and results of operations.
If a competitor were to achieve a technological breakthrough, the Companys financial condition, results of operations and business could be negatively impacted.
There currently exist a number of businesses that are pursuing the use of algae, bacteria and other micro-crops and other methods for creating biomass, food and feed products, and alternative fuels. Should a competitor achieve a research and development, technological or biological breakthrough with significantly lower production costs, or if the costs of similar competing products were to fall substantially, the Company may have difficulty attracting customer licensees. In addition, competition from other technologies considered green technologies could decrease the demand for the end-products produced by the Companys technology. Furthermore, competitors may have access to larger resources (capital or otherwise) that provide them with an advantage in the marketplace, which could result in a negative impact on the Companys business, financial condition and results of operations.
Any competing technology that produces biomass of similar quality and on a more efficient cost basis than the Companys biomass could render the Companys technology obsolete. In addition, because the Company does not have any issued patents, it may not be able to preclude development of even directly competing technologies using the same methods, materials and procedures as it uses to achieve its results. Any of these competitive forces may inhibit or materially adversely affect the Companys ability to attract and retain customer licensees, or to obtain royalties or other fees from its customer licensees. This could have a material adverse effect on the Companys business, financial condition and results of operations.
If the Company fails to establish, maintain and enforce intellectual property rights with respect to its technology, the Companys financial condition, results of operations and business could be negatively impacted.
The Companys ability to establish, maintain and enforce intellectual property rights with respect to the technology that it licenses to its customer licensees will be a significant factor in determining the Companys future financial and operating performance. The Company seeks to protect its intellectual property rights by relying on a combination of patent, trade secret and copyright laws. It also uses confidentiality and other provisions in its agreements that restrict access to and disclosure of its confidential know-how and trade secrets.
The Company has filed patent applications with respect to many aspects of its technologies, including those relating to its bioreactors, growth management systems and downstream processing technologies. However, it cannot provide any assurance that any of these applications will ultimately result in issued patents or, if patents are issued, that they will provide sufficient protections for the Companys technology against competitors. See the risk factor Although the Company has filed patent applications for some of its core technologies, the Company does not currently hold any issued patents and it may face delays and difficulties in obtaining these patents, or it may not be able to obtain such patents at all.
Outside of these patent applications, the Company seeks to protect its technology as trade secrets and technical know-how. However, trade secrets and technical know-how are difficult to maintain and do not provide the same legal protections provided by patents. In particular, only patents will allow the Company to prohibit others from using independently developed technology that is similar. If competitors develop knowledge substantially equivalent or superior to the Companys trade secrets and technical know-how, or gain access to the Companys knowledge through other means such as observation of the Companys technology that embody trade secrets at customer sites which the Company does not control, the value of the Companys trade secrets and technical know-how would be diminished.
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While the Company strives to maintain systems and procedures to protect the confidentiality and security of its trade secrets and technical know-how, these systems and procedures may fail to provide an adequate degree of protection. For example, although the Company generally enters into agreements with its employees, consultants, advisors, customer licensees and strategic partners restricting the disclosure and use of trade secrets, technical know-how and confidential information, the Company cannot provide any assurance that these agreements will be sufficient to prevent unauthorized use or disclosure. In addition, some of the technology deployed at the Companys customer licensee sites, which the Company does not control, may be readily observable by third parties who are not under contractual obligations of non-disclosure, which may limit or compromise the Companys ability to continue to protect such technology as a trade secret.
Although the Company seeks to secure intellectual property rights with respect to its technology where such rights are available, certain aspects of the Companys technology cannot be protected as intellectual property. For example, unlike certain other companies operating in the alternative energy or biofuel industry, the Companys technology does not involve the creation or use of manufactured or genetically engineered organisms. The micro-crops that the Companys processes ultimately convert to LPC, LM and Biocrude are naturally-occurring species indigenous to the environments in which the Companys customer licensees operate. Since the Company does not have, and cannot obtain, intellectual property rights with respect to these species, and consequently other companies are free to develop competing technologies to grow these organisms, it is important that the Company secures and protects its intellectual property rights in the technology that it licenses to customer licensees, including the Companys processes and system for growing micro-crops at an optimal rate. If the Company fails to secure and protect these rights, other companies will be able to freely copy or otherwise reproduce the Companys technology, which may in turn cause it to lose customer licensees and prospective customer licensees to those competitors.
While the Company is not currently aware of any infringement or other violation of its intellectual property rights, monitoring and policing unauthorized use and disclosure of intellectual property is difficult. If the Company learned that a third party was in fact infringing or otherwise violating its intellectual property, the Company may need to enforce its intellectual property rights through litigation. Litigation relating to the Companys intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.
From the Companys customer licensees standpoint, the strength of the intellectual property under which it grants licenses can be a critical determinant of the value of these licenses. If the Company is unable to secure, protect and enforce its intellectual property, it may become more difficult for the Company to attract new customer licensees. Any such development could have a material adverse effect on the Companys business, financial condition and results of operations.
Although the Company has filed patent applications for some of its core technologies, the Company does not currently hold any issued patents and it may face delays and difficulties in obtaining these patents, or it may not be able to obtain such patents at all.
Patents are a key element of the Companys intellectual property strategy. The Company has currently filed patent applications for six families of technologies, both in the United States and in foreign jurisdictions. These pending patent applications relate to, among other aspects of the Companys technology, the design of its bioreactors, the physical and chemical treatment processes for biomass, its growth algorithms, multi-spectral cameras and imaging algorithms, the use of the Companys processes to make Biocrude, LPC and LM, and the Companys enterprise management system. The Companys patent applications are in the early stages and the Company has not received substantive feedback from relevant patent offices regarding the viability of its patent applications. It may take two or more years for any patents to issue from the Companys applications, it cannot provide any assurance that any patents will ultimately be issued or that any patents that do ultimately issue will issue in a form that will adequately protect the Companys commercial advantage.
The Companys ability to obtain patent protection for its technologies is uncertain due to a number of factors, including that it may not have been the first to make the inventions covered by the Companys pending patent applications or to file patent applications for these inventions. The Company has not conducted any formal analysis of the prior art in the areas in which it has filed its patent applications, and the existence of any such prior art would bring the novelty of the Companys technologies into question and could cause the pending patent applications to be rejected.
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Further, changes in U.S. and foreign patent law may also impact the Companys ability to successfully prosecute its patent applications. For example, the United States Congress and other foreign legislative bodies may amend their respective patent laws in a manner that makes obtaining patents more difficult or costly. Courts may also render decisions that alter the application of patent laws and detrimentally affect the Companys ability to obtain patent protection.
Even if patents do ultimately issue from the Companys patent applications, these patents may not provide meaningful protection or commercial advantage. Patents only provide protection for a 20-year period starting from the filing date and the longer a patent application takes to issue the less time there is to enforce it. Further, the claims under any patents that issue from the Companys applications may not be broad enough to prevent others from developing technologies that are similar or that achieve similar results to the Companys results. It is also possible that the intellectual property rights of others will bar the Company from licensing its technology and bar it or the Companys customer licensees from exploiting any patents that issue from the Companys pending applications. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which the Company has developed and is developing its technology. These patents and patent applications might have priority over the Companys patent applications and could subject its patent applications to invalidation. Finally, in addition to those who may claim priority, any patents that issue from the Companys applications may also be challenged by the Companys competitors on the basis that they are otherwise invalid or unenforceable.
The Company may be unable to fully enforce its intellectual property in certain countries.
Based on the Companys current negotiations with prospective customer licensees, the Company expects that many of its customer licensees will be in certain countries, including, among others, China and Indonesia, where it may have difficulty enforcing its intellectual property rights due to the general nature of the intellectual property enforcement mechanisms that are in place in such countries. These jurisdictions may have weaker statutory protections for intellectual property, or judicial or administrative regimes that make enforcement of these protections more difficult than in the United States. As a result, the Company might not be able to pursue adequate remedies in the event that its intellectual property rights are violated. In particular, the Company might be unable to effectively prevent the continuing infringement of its intellectual property rights.
To the extent that any material infringement of the Companys intellectual property occurs for which it is unable to obtain a remedy, the Company is likely to suffer a loss of potential revenues, since it will not receive license fees or royalties for such infringing uses, and other existing and prospective customer licensees might become hesitant to pay license fees for a technology being used freely by their competitors in the marketplace. If the infringing uses became widespread, this could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company may face claims that it is violating the intellectual property rights of others.
The Company may face claims, including from direct competitors, other energy companies, scientists or research universities, asserting that the Companys technology or the commercial use of such technology by its customer licensees or partners infringes or otherwise violates the intellectual property rights of others. The Company has not conducted infringement, freedom to operate or landscape analyses, and as a result it cannot be certain that its technologies and processes do not violate the intellectual property rights of others. The Company expects that it may increasingly be subject to such claims as it begins to earn revenues and the Companys market profile grows.
The Company may also face infringement claims from the employees, consultants, agents and outside organizations it has engaged to develop its technology. While the Company has sought to protect itself against such claims through contractual means, it cannot provide any assurance that such contractual provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology that they were engaged to develop for the Company.
If the Company were found to be infringing or otherwise violating the intellectual property rights of others, it could face significant costs to implement work-around methods, and it cannot provide any assurance that any such work-around would be available or technically equivalent to its current technology. In such cases, the Company might need to license a third partys intellectual property, although any required license might not be available to it on acceptable terms, or at all. If the Company is unable to work around such infringement or obtain a license on acceptable terms, it might face substantial monetary judgments against it or an injunction against continuing to license its technology, which might cause the Company to cease operations.
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In addition, even if the Company is not infringing or otherwise violating the intellectual property rights of others, it could nonetheless incur substantial costs in defending itself in suits brought against it for alleged infringement. Also, if the Companys license agreements provide that it will defend and indemnify the Companys customer licensees for claims against them relating to any alleged infringement of the intellectual property rights of third parties in connection with such customer licensees use of the Companys technologies, it may incur substantial costs defending and indemnifying its customer licensees to the extent they are subject to these types of claims. Such suits, even if without merit, would likely require the Companys management team to dedicate substantial time to addressing the issues presented. Any party bringing claims might have greater resources than the Company does, which could potentially lead to its settling claims against which it might otherwise prevail on the merits.
Any claims brought against the Company or its customer licensees alleging that the Company and/or its customer licensees has violated the intellectual property of others could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company expects to rely on third parties, such as academic institutions and agriculture and energy companies.
The Company expects to rely on third parties, such as academic institutions and agriculture and energy companies, to aid in the development and marketing of its technology and processes. Should these third parties reduce their commitment to the Company or terminate their relationship with it, pursue competing relationships or attempt to develop or acquire products or services that compete with the end-products produced using the Companys technology, such action could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company will have to devote significant management resources to its compliance with the requirements imposed by Section 404 of the Sarbanes-Oxley Act of 2002, which could harm the Companys growth.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), and the rules and regulations promulgated by the Securities and Exchange Commission (the SEC) to implement Section 404, the Company is required to include in its Annual Reports on Form 10-K a report by the Companys management regarding the effectiveness of the Companys internal control over financial reporting. The report must include, among other things, an assessment of the effectiveness of the Companys internal control over financial reporting as of the end of the Companys fiscal year, including a statement as to whether or not the Companys internal control over financial reporting is effective. The Dodd-Frank Wall Street Reform and Consumer Protection Act exempts non-accelerated filers from complying with the requirement set forth in Section 404(b) of the Sarbanes-Oxley Act, which requires that reporting companies include in their annual reports an independent auditors attestation report on the effectiveness of the reporting companys internal control over financial reporting. For the fiscal year ended December 31, 2011, the Company will not be an accelerated filer and will therefore be exempt from the requirements of Section 404(b) of the Sarbanes-Oxley Act. However, the Company anticipates becoming an accelerated filer upon the completion of its initial public offering and thereafter will be required to comply with the requirements of Section 404(b) of the Sarbanes-Oxley Act, which will increase the diversion of the Companys managements limited resources and attention.
If the Company fails to manage future growth effectively, its business could be harmed.
The Company expects to experience rapid growth as it commercializes its technology. This growth will likely place significant demands on the Companys management and on the Companys operational and financial infrastructure. To manage the Companys growth effectively, it must continue to improve and enhance its managerial, operational and financial controls, hire sufficient numbers of capable employees and upgrade its infrastructure. The Company must also manage an increasing number of new and existing relationships with customer licensees, suppliers, business partners and other third parties. These activities will require significant expenditures and allocation of valuable management resources. If the Company fails to maintain the efficiency of its organization as it grows, the Companys revenues and profitability may be harmed, and it might be unable to achieve its business objectives.
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The Company may be unable to recruit and retain the necessary personnel to support its future growth.
The Company currently relies on key individuals in the management and operation of its business. In order to continue the research and design of the Companys micro-crop production system and to move to larger commercial scaling and deployment, it will be necessary for the Company to recruit a significant number of additional qualified individuals, including experienced management and specific technical experts. Any inability on the Companys part to retain key employees or obtain the appropriate resources through hiring, outsourcing or through other contractors could delay or impair the Companys ability to achieve successful results.
Most of the Companys planned production capacity will be in equatorial regions around the world, which could limit the number of prospective customer licensees willing to license the Companys technology, and the Companys business could be adversely affected if it does not operate effectively in those regions.
The operations of the Companys customer licensees generally should be within approximately 15 degrees of latitude from the equator for optimal performance. Notwithstanding that the overall profitability of the Companys technology is not limited to pursuing opportunities exclusively within equatorial regions, prospective customer licensees that do not have access to these regions may decline to license the Companys technology. Furthermore, the Company will be subject to risks associated with the concentration of its customer licensees operations in these regions. The occurrence of prolonged increases in temperature due to climate change or natural disasters, such as earthquakes or floods, localized extended outages of critical utilities or transportation systems or political, social or economic disruptions in these regions, could cause a significant interruption in the output and sales realized by the Companys customer licensees. Such interruptions could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company faces risks associated with its international operations, including unfavorable regulatory, political and tax conditions, which could harm the Companys business.
The Company faces risks associated with the international licensing activities it has engaged in and expects to engage in, including possible unfavorable regulatory, political and tax conditions, any of which could harm the Companys business. The Company expects that its future customer licensees will be based in various jurisdictions around the world, each of which is subject to the legal, political, regulatory and social requirements and economic conditions in these jurisdictions. In particular, the legal systems in these jurisdictions, particularly with respect to commercial matters and property rights, may be less developed than in the United States or more uncertain in their application. Laws can be subject to varying or unpredictable interpretations, and prior court decisions may have limited or no precedential value. In addition, the Companys ability to enforce its contractual rights in foreign jurisdictions might be limited, especially in relation to its customer licensees that are instrumentalities of foreign governments.
The Companys business relationships with international customer licensees are subject to foreign government taxes, regulations and permit requirements, and foreign tax and other laws. The Companys international licensee relationships are also subject to United States and foreign government trade restrictions, tariffs and price or exchange controls; the U.S. Foreign Corrupt Practices Act of 1977, as amended; preferences of foreign nations for domestic technologies; changes in diplomatic and trade relationships; political instability, natural disasters, war or events of terrorism; and the strength of international economies. Because the Company will rely on license fees and royalties from its customer licensees operations, any negative impact these factors have on its customer licensees could also have a material adverse effect on the Companys business, financial condition and results of operations.
The Company expects to be exposed to fluctuations in foreign exchange rates.
The Company expects that substantially all of its revenues will be from customer licensees located outside the United States and that, over the long term, at least a substantial majority of its revenues will come from non-U.S. customer licensees. Under the license agreements that the Company expects to enter into in the future with non-U.S. customer licensees, all or a portion of its license and royalty fee revenue may be denominated in currencies other than the U.S. dollar. Many of the Companys costs, however, including most of the costs of its employees who the Company expects to support the operations of its customer licensees, and the Companys research and development
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costs, will be denominated in U.S. dollars. The Company expects that fluctuations in the value of these revenues and expenses as measured in U.S. dollars will affect its results of operations, and adverse currency exchange rate fluctuations may have a material impact on its future financial results. In particular, to the extent that the U.S. dollar appreciates in value relative to the currencies in which the Company receives revenue, its revenues will be lower in U.S. dollar terms, while many of the Companys expenses will remain at the same level, resulting in a net negative impact on the Companys profitability.
The Companys quarterly operating results may fluctuate in the future, which may cause the Companys stock price to decline.
The Companys quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of the Companys control. The Companys fluctuations may be amplified by the uncertainty in timing of a relatively small number of large transactions it anticipates that it will consummate. Fluctuations in the Companys quarterly operating results could cause the Companys stock price to decline rapidly, may lead analysts to change their long-term model for valuing the Companys common stock, could cause the Company to face short-term liquidity issues, may impact the Companys ability to retain or attract key personnel, or cause other unanticipated issues. If the Companys quarterly operating results fail to meet or exceed the expectations of research analysts or investors, the price of the Companys common stock could decline substantially. The Company believes that its quarterly revenue and operating results may vary significantly in the future and that period-to-period comparisons of the Companys operating results may not be meaningful. The results of any quarterly or annual periods should not be relied upon as indications of the Companys future operating performance.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
ITEM 2. | PROPERTIES |
Melbourne Corporate Headquarters
The Companys corporate headquarters are located in Melbourne, Florida. The headquarters house the executive and administrative offices, as well as the finance, business development, operations and information technology departments. During 2011, the Company entered into a new lease which expires on January 31, 2014.
Fellsmere Field-Scale R&D Facility
The Company has constructed its primary field-scale development facility for its production process in Fellsmere, Florida (approximately 40 miles from the Companys headquarters in Melbourne, Florida). The facility provides demonstration-scale live processing of all portions of the Companys processes as well as indoor and outdoor empirical testing, and laboratory analysis. During 2011, the Company purchased this land for $130,000.
ITEM 3. | LEGAL PROCEEDINGS |
There are no material pending legal proceedings to which the Company is a party or any of its property is the subject.
ITEM 4. | (REMOVED AND RESERVED). |
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
As of December 31, 2011, the Companys common stock was quoted on the OTCQB tier of OTC Markets under the symbol PALG. In connection with its name change, the Company expects to change its ticker symbol in the near future subject to the approval of the Financial Industry Regulatory Authority, Inc.
As of March 27, 2012, the Company had 379 stockholders of record of its common stock.
The following table sets forth, for the quarters indicated, the high and low inter-dealer closing prices per share of the Companys common stock.
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Fiscal 2011: | High | Low | ||||||
First Quarter |
$ | 20.00 | $ | 10.25 | ||||
Second Quarter |
$ | 22.00 | $ | 14.00 | ||||
Third Quarter |
$ | 17.50 | $ | 11.00 | ||||
Fourth Quarter |
$ | 13.50 | $ | 2.50 | ||||
Fiscal 2010: | High | Low | ||||||
First Quarter |
$ | 23.95 | $ | 18.55 | ||||
Second Quarter |
$ | 26.00 | $ | 6.10 | ||||
Third Quarter |
$ | 26.00 | $ | 10.00 | ||||
Fourth Quarter |
$ | 14.49 | $ | 10.10 |
On March 27, 2012, the last reported sales price for the Companys common stock on the OTCQB tier of OTC Markets was $3.75 per share.
Dividends
The holders of shares of the Companys common stock are entitled to dividends out of funds legally available when and as declared by the Companys board of directors. The Company has never declared or paid cash dividends. The Companys board of directors does not anticipate declaring a dividend in the foreseeable future.
Equity Compensation Plan
The Companys 2009 Equity Compensation Plan permits the grant of up to four million share-based incentives to its employees. The following table summarizes information as of December 31, 2011, relating to the Companys equity compensation plan pursuant to which the Company may from time to time grant options, restricted stock, or other rights to acquire its shares.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans |
|||||||||
Equity Compensation plans approved by security holders (1) |
2,345,000 | $ | 5.50 | 1,655,000 | ||||||||
Equity Compensation plans not approved by security holders |
| | | |||||||||
Total |
2,345,000 | $ | 5.50 | 1,655,000 | ||||||||
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(1) | Represents the Parabel Inc. 2009 Equity Compensation Plan. |
Transfer Agent and Registrar
The transfer agent and registrar for the Companys common stock is Computershare, 4229 Collection Center Drive, Chicago, IL 60693.
Issuer Repurchases
Neither the Company nor any of its affiliates repurchased any of the Companys common stock during the fiscal year ended December 31, 2011.
ITEM 6. | SELECTED FINANCIAL DATA |
Not required.
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion contains forward-looking statements that involve numerous risks and uncertainties, such as statements of the Companys plans, objectives, expectations, and intentions. The Companys actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in this report under Risk Factors, as well as those discussed elsewhere in this report. You should read the following discussion and analysis in conjunction with the Companys consolidated financial statements and related notes, each included elsewhere in this report.
Overview
Parabel Inc. (the Company, formerly named PetroAlgae Inc.), provides renewable technology and solutions to address the global demand for new sources of feed, food and fuel. The Company has developed proprietary technology, which it believes will enable customer licensees to grow, harvest and process locally-available aquatic plants (micro-crops) to create products for agriculture and energy markets in a profitable manner. One customer licensee in South America and two prospective customer licensees in Asia are currently implementing this technology at pilot scale.
The Companys strategy is to license and provide management support for production facilities at locations with suitable climates for its technology to achieve maximum productivity, which are generally located within equatorial regions. To allow customer licensees to build out rapidly and efficiently, the Company has developed a scalable and flexible solution, based on modular growth units which enable phased construction and production operations. The Company intends to generate revenue from licensing fees and royalties primarily from customer licensees that are engaged in the global agriculture and energy markets, as well as from investment groups.
Using indigenous, non-genetically modified plants from the Lemnaceae family, the Companys technology platform enables the production of Lemna Protein Concentrate (LPC), Lemna Meal (LM) and Biocrude. In the near-term, the Company is positioning LPC and LM in animal feed markets, as fish meal and alfalfa meal alternatives, respectively. Third-party testing commissioned by the Company has indicated the value and viability of the products in these applications. The Company believes that both products could also potentially be applied in fertilizer applications. With further technology and product development, the Company expects LPC to be applied in human food markets and, with the development of third-party conversion technologies, the Company expects Biocrude to be used as a feedstock for renewable fuels.
To date, the Company has entered into a license agreement with Asesorias e Inversiones Quilicura S.A. (AIQ), a customer licensee in South America, with initial construction of a pilot-scale bioreactor (of less than one hectare) completed and testing ongoing. Due to the conditionality of this license agreement, there is no guarantee that AIQ will elect to proceed to the commercial phase of the license agreement. Because this is the first license agreement into which it has entered, the Company has agreed to construct the first commercial phase facility on a turnkey basis, which means that the Company will design, have constructed and equip the facility, in return for payments billed on a progress basis, not to exceed a prescribed limit. The pilot-scale bioreactor, which constitutes the preliminary phase of this license agreement, was constructed at AIQs expense and not on a turnkey basis. As future customer licensees implement the technology at commercial scale, the Company expects to incur minimal capital expenditures, since customer licensees will be expected to invest in the development and construction of the production facilities.
In addition, the Company is currently negotiating license agreements with, and funding and managing the construction and/or operation of pilot-scale projects for, the Salim Group, a prospective customer licensee in Indonesia, and China Energy Conservations and Environmental Protection Group CHONGOING INDUSTRY CO., LTD. (CECEP), a prospective customer licensee in China. The construction of these pilot-scale bioreactors, each of which comprises less than one hectare in size, was completed during the first quarter of 2012 and the Company expects these pilot-scale bioreactors to commence operations during the second quarter of 2012. These parties have expressed an intention to progress to commercial-scale operations, subject to successful pilot results, and have entered into non-binding agreements with the Company regarding their commercial use of the Companys technology.
Results of Operations
Twelve Months Ended December 31, 2011 Compared to Twelve Months Ended December 31, 2010
Revenue. The Company did not record any revenues in 2011 or 2010.
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Total costs and expenses. Total costs and expenses decreased by $16.0 million, or 35.9%, to $28.5 million in 2011 as compared to 2010, due to decreases in selling, general and administrative expenses and research and development expenses, slightly offset by an increase in interest expense as described below.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased $11.0 million, or 50.5%, to $10.8 million in 2011 as compared to 2010. The largest decrease, $9.0 million, was related to equity compensation expense. During 2010, the Company modified the terms of the restricted ownership units held by two executive officers (as described in more detail below under -Twelve Months Ended December 31, 2010 Compared to Twelve Months Ended December 31, 2009), resulting in additional equity compensation expense of $9.1 million in selling, general and administrative expenses for the year ended December 31, 2010. During 2011, as compared to 2010, compensation expenses decreased by $1.4 million within selling, general and administrative expenses due to selective personnel reductions as well as turnover in certain positions that management chose not to replace based upon the current business needs of the Company. As a result of these terminations, headcount within selling, general and administrative expenses decreased 36.7% from December 31, 2010 as compared to December 31, 2011.
Research and development expenses. Research and development expenses decreased $7.2 million, or 41.5%, to $10.2 million in 2011 as compared to 2010. The decrease was primarily driven by reductions in equity compensation expense (as described in more detail below under -Twelve Months Ended December 31, 2010 Compared to Twelve Months Ended December 31, 2009) and compensation expense. Compensation expense decreased $2.5 million in 2011 as compared to 2010 due to a 46.8% reduction in employee headcount within research and development as a result of consolidating our lab facilities and other functions. The Company also paid $1.4 million less to external consultants for outsourced research and development activities during 2011 as compared to 2010 and spent $0.6 million less on materials and supplies.
Interest expenserelated party. Interest expense on notes payablerelated party increased by $2.6 million, or 62.7%, to $6.6 million in 2011 as compared to 2010. The increase in 2011, as compared to 2010, was due to additional funding of the Companys operations through notes payable from related parties. The principal balance of these notes totaled $78.9 million at December 31, 2011 as compared to $51.7 million at December 31, 2010.
Depreciation expense. Depreciation expense decreased by $0.3 million, or 24.8%, to $0.8 million in 2011 as compared to 2010, primarily because certain assets with an original cost of $1.0 million became fully depreciated during 2011.
Non-controlling interest. As of December 31, 2011, non-controlling interest parties collectively owned approximately 13% of PA LLC and have been attributed their respective portion of the loss of PA LLC. The amount of loss assigned to non-controlling interests was $3.6 million in 2011 as compared to $6.5 million in 2010.
Twelve Months Ended December 31, 2010 Compared to Twelve Months Ended December 31, 2009
Revenue. The Company did not record any revenues in 2010 or 2009.
Total costs and expenses. Total costs and expenses increased by $7.7 million, or 20.8%, to $44.5 million in 2010 as compared to 2009, primarily due to an increase in selling, general and administrative expenses and research and development expenses for the reasons described below.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by $4.4 million, or 25.6%, to $21.8 million, in 2010 as compared to 2009. The increase in 2010, as compared to 2009, was due to a $9.1 million increase in equity compensation expense which was primarily related to a modification of terms of the restricted ownership units held by two executive officers who are included in selling, general and administrative departments. This modification was the removal of the right of the Company to repurchase the restricted ownership units (the Units). Previously, the Company had the right to repurchase the Units until certain business objectives were accomplished and, as a result, none of the compensation expense related to the grant of such units in 2008 had been recorded as an expense prior to 2010. In conjunction with certain changes in business strategy and expectations, the Company cancelled its right to repurchase the Units in the fourth quarter of 2010, which increased the value of the Units under applicable accounting rules and required the full compensation cost to be expensed in the period of this action. This increase was partially offset by a decrease in compensation expenses of $1.1 million due to certain employee salary reductions as well as a 21.1% decrease in employee headcount. Headcount related to certain functions was reduced and the related workload was absorbed into other functional
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areas where possible in order to streamline operations. Expenses related to external consultants decreased 41%, or $3.1 million, for the same period related to professional services provided for such things as public relations, recruiting fees and investor relations. The decrease in professional services resulted from changes in the business needs of the Company as well as ongoing efforts to improve the efficiency of its operations.
Research and development expenses. Research and development expenses increased by $2.3 million, or 15.5%, to $17.4 million, in 2010 as compared to 2009. Equity compensation expense increased by $2.5 million during 2010 as compared to 2009, primarily because the Company modified terms of the Units held by three of its officers who are included in research and development departments. This modification was the removal of the right of the Company to repurchase the Units. For a further discussion of this modification, see Selling, general and administrative expenses immediately above. Also, the Company recorded a $0.2 million impairment charge related to property and equipment. These increases were slightly offset by a $0.5 million decrease in spending as the Company needed less expensive materials and supplies for research and development efforts.
Interest expenserelated party. Interest expenserelated party increased by $0.9 million, or 27.5%, to $4.1 million in 2010 as compared to 2009. The increase was due to additional funding of the Companys operations during 2010 through notes payable from related parties. The balance of these notes totaled $51.7 million at December 31, 2010 as compared to $35.1 million at December 31, 2009.
Depreciation expense. Depreciation expense remained relatively consistent in 2010 as compared to 2009, decreasing by $9,000, or 0.8%, to $1.1 million in 2010. The Company purchased fewer new assets in 2010 as compared to 2009, which was offset by a number of assets becoming fully depreciated during 2010.
Non-controlling interest. As of December 31, 2010 and 2009, non-controlling interest parties collectively owned approximately 13% and 18%, respectively, of PA LLC and have been attributed their respective portion of the loss of PA LLC. The decrease in the non-controlling interest percentage during 2010 was due to the June 2, 2010 transaction with Arizona Science and Technology Enterprises, LLC, as discussed in the Notes to Consolidated Financial Statements. The amount of loss assigned to non-controlling interests was $6.5 million in 2010 as compared to $6.6 million in 2009.
Liquidity and Capital Resources
Overview
To date, the Company has financed its operations primarily through loans from, and debt securities issued to, its principal stockholder. To a lesser extent, the Company has also raised funds by issuing equity securities to unrelated third parties. Since its inception through December 31, 2011, the Company has raised in the aggregate $108.8 million in debt and equity investments, with $98.9 million of this total raised from its principal stockholder and $9.9 million raised from unrelated third parties.
Cash and Cash Flow
At December 31, 2011, the Company had $8.8 million in unrestricted cash and cash equivalents.
Net cash used in operating activities was $17.8 million, $22.8 million, and $27.6 million, in 2011, 2010, and 2009, respectively. The decrease in cash usage from 2009 to 2010 was primarily attributed to cost savings of $3.8 million resulting from the Companys decreased use of external consultants during 2010 as compared to 2009. The decrease in cash used in operating activities from 2010 to 2011 was mostly driven by the $3.9 million reduction in current compensation expenses described above in Results of Operations.
Net cash used in investing activities, which consisted primarily of the purchase of capital assets, was $0.6 million, $1.0 million, and $2.4 million, for the years ended December 31, 2011, 2010, and 2009, respectively. The decline in expenditures from year to year reflects the purchase of less equipment during 2010 and 2011 than in 2009 because the Companys working demonstration facility had been completed in 2009.
Net cash provided by financing activities was $26.1 million, $22.3 million, and $22.3 million in 2011, 2010, and 2009, respectively, and consisted of advances from the Companys principal stockholder and the sale of common shares for cash. From 2009 to 2010, cash raised from issuance of common stock and warrants decreased by $4.6 million while borrowings under notes payable-related party increased by $5.2 million. During 2011 as compared to 2010, advances from the Companys principal stockholder increased by $11.0 million. No cash was raised from issuance of common stock during 2011.
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Senior Secured Debt Financing
All of the Companys borrowings have been provided by affiliates under a senior secured structure, as described in more detail below as of December 31, 2011:
As of December 31, 2011 |
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Note Payable to Valens U.S. SPV I, LLC |
$ | 417,512 | ||
- Interest accrues monthly, at 12% per annum |
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- Note is due on June 30, 2012 |
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Notes Payable to PetroTech |
48,647,089 | |||
- Interest accrues monthly, at 12% per annum |
||||
- Notes are due on June 30, 2012 |
||||
Convertible Note Payable to PetroTech |
10,000,000 | |||
- Interest accrues monthly at 12% per annum |
||||
- Note is due on June 30, 2012 if not converted to common shares as described below |
||||
Up to $25,000,000 Note Payable to PetroTech |
19,849,491 | |||
- Interest payable monthly and is drawn into note on a monthly basis at Prime + 2% (5.25% at December 31, 2011) |
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-Note is due on June 30, 2012 |
||||
- Permits additional draws only to fund interest. |
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Maximum balance of this note is limited to $25,000,000 |
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|
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Total Notes Payable - Related Party |
$ | 78,914,092 | ||
|
|
As of December 31, 2011, the principal balance of notes payable related party was classified as a current liability on the accompanying consolidated balance sheet as the maturity date of the full balance plus accrued interest of $10,406,329 is June 30, 2012. The notes payable related party are secured by all of the Companys assets. The convertible note payable allows the holder (at the holders option) to convert all or any portion of the issued and outstanding principal amount and/or accrued interest and fees then due into shares of the Companys common stock at a fixed conversion price of $5.43 per share.
Each note payable and the related master security agreement and equity pledge and corporate guaranty agreement contain provisions that specify events of default which could lead to acceleration of the maturity of the debt. These provisions prohibit the encumbrance or sale of the Companys assets and require maintenance and insurance of the Companys assets. The loan agreements do not contain any required financial ratios or similar debt covenants. Generally, an event of default would arise if the Company became insolvent, filed for bankruptcy, allowed a change in control or had unresolved judgments against its assets. As of December 31, 2011, none of these events had occurred.
Interest charged to operations on these notes, including amortization of original issue discount, was $6.6 million, $4.1 million, $3.2 million, and $16.1 million during the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively.
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The principal amount of debt obligations as of December 31, 2011 was $78.9 million, of which $19.8 million was outstanding at a floating rate of 2% over the prime interest rate and $59.1 million was outstanding at a fixed rate of 12%. Floating rate borrowings will lead to additional interest expense if interest rates increase.
Contractual Obligations
The following table discloses aggregate information about the Companys contractual obligations and the period in which payments are due as of December 31, 2011:
Payments due by Period | ||||||||||||||||||||
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
||||||||||||||||
Debt: principal |
$ | 78,914,092 | $ | 78,914,092 | $ | | $ | | $ | | ||||||||||
Debt: accrued interest to date (1) |
10,406,329 | 10,406,329 | | | | |||||||||||||||
Debt: estimated future interest (2) |
4,070,658 | 4,070,658 | | | | |||||||||||||||
Operating lease commitments |
822,901 | 446,384 | 376,517 | | | |||||||||||||||
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|
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Total contractual obligations |
$ | 94,213,980 | $ | 93,837,463 | $ | 376,517 | $ | | $ | | ||||||||||
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(1) | Represents the amount of interest that has been accrued through the balance sheet date on approximately $59.1 million of outstanding debt at an annual rate of 12%. This amount is due at the June 30, 2012 maturity date of the related debt. |
(2) | Estimated future interest represents the amount of interest expected to accrue until the maturity date of the related debt, which in all cases is June 30, 2012. The estimated amount is calculated from the current balance sheet date through maturity based upon the principal balance of each note and the applicable interest rate, which is compounded monthly at prime + 2% (assumed to be 5.25%) on approximately $19.8 million of debt and calculated on a non-compounded basis at 12% on the remaining principal amount. |
The Company is currently in the development stage and has not yet recognized any revenue. The Company anticipates accomplishing a transition from the development stage to operational status, depending upon the timing and extent of success achieved in accomplishing milestones, including:
| preparation of technology and related processes for commercial deployment; |
| securing profitable license agreements with global customer licensees, which in turn depends upon the demand for feed and renewable energy technologies and, consequently, the demand for and price of the ultimate products produced by the Companys technology; |
| the timing and cost of delivery of technology as required by license agreements with prospective customer licensees, which is expected to include the completion of design work specific to such customer licensees and oversight of the construction and successful operation of pilot plants at customer licensee locations; and |
| the ability and willingness of future customers to abide by the terms of the technology agreements and to pay license and royalties fees at agreed-upon rates. |
While the Company has a limited but growing list of prospective customer licensees, the Companys costs are mostly variable and the Company does not have significant commitments other than its debt and lease obligations. The Company estimates that its net loss from operations and net cash used in operations over the next 12 months will be similar to its recently reported results. The Company has never been profitable and has incurred significant losses and cash flow deficits since its inception. For the years ended December 31, 2011, 2010, and 2009, the Company reported net losses before non-controlling interest of $28.5 million, $44.5 million, and $36.8 million, respectively, and negative cash flows from operating activities of $17.8 million, $22.8 million, and $27.6 million, respectively. As of December 31, 2011, the Company had an aggregate accumulated deficit of $122.9 million. As a result of these net losses, cash flow deficits, and other factors, there is a substantial doubt about the Companys ability to continue as a going concern.
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The Company does not have a firm commitment from its principal stockholder or any third party for additional debt or equity funding. Therefore, the Company is carefully managing its cash resources, which totaled $8.9 million at December 31, 2011.
In the short-run, the Company believes that its principal stockholder will continue to fund the Companys operations and will extend the maturity of all of its debt, which is currently due on June 30, 2012. However, there is currently no agreement with the Companys principal stockholder to this effect.
In addition, the Company is exploring alternative private sources of financing and is currently in registration with the SEC for a potential public offering of its common shares. However, it is uncertain whether the Company will receive additional funding from the Companys principal stockholder, secure alternative private sources of financing or complete a public offering.
The Companys accompanying consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2011, these adjustments would likely include the substantial impairment of the carrying amount of the Companys non-cash assets of $2.2 million and potential contingent liabilities that may arise if the Company is unable to fulfill various operational commitments. In addition, the value of the Companys securities, including common stock and warrants, would likely be significantly impaired. The Companys ability to continue as a going concern is dependent upon it generating sufficient cash flow from operations and obtaining additional capital and financing.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Management Estimates
The SEC defines critical accounting policies as those that are, in managements view, important to the presentation of a companys financial condition and results of operations and demanding of managements judgment.
The Companys management discussion and analysis of financial condition and results of operation are based on the Companys consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires the Company to make estimates on experience and on various assumptions that it believes are 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 those estimates.
The Companys critical accounting polices include:
Revenue Recognition
The Company will record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. To the extent cash is received in advance of the Companys performance or the availability of rights under a license agreement or such receipts are refundable at the customers option, these amounts will be reported as deferred revenue.
Cash and Cash Equivalents and Cash Concentration
The Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. At December 31, 2011, the Company had approximately $8.9 million on deposit at a single financial institution.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2011. The respective carrying values of certain financial instruments approximate their fair values. These financial instruments include cash and cash equivalents, accounts payable, and accrued expenses. Carrying values are assumed to approximate fair values for these financial instruments because they are short-term in nature and their carrying amounts approximate the amounts expected to be received or paid.
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The carrying value of the Companys fixed-rate notes payable-related party approximate their fair value based on the current market conditions for similar debt instruments.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major improvements and additions are added to property and equipment, while replacements, maintenance and repairs which do not extend the useful lives are expensed.
Long- Lived Assets
The carrying value of long-lived assets is reviewed on a regular basis for the existence of facts and circumstances that suggest permanent impairment. Specifically, senior management of the Company considers in each reporting period the effectiveness of the Companys significant assets to determine if impairment indicators such as physical deterioration, process change or technological change have resulted in underperformance, obsolescence or a need to replace such assets. The Company groups its assets into three primary categories for this purpose. Due to the nature of the Companys business, cash flows are not derived from specific asset groups; therefore, this grouping is merely to aid the Companys analysis.
| Office equipment, including leasehold improvements |
| Demonstration system and engineering equipment |
| Computer software and hardware applications and networking |
The Company does not consider its net loss or cash outflow from operations to be an indicator of asset impairment as such financial results are typical for technology companies that are in the development stage. Rather, management evaluates the state of the technology, its process toward technical and business milestones, and relevant external market factors to ascertain whether a potential impairment has occurred. During 2011 and 2010, the Company identified certain changes in its process development plans that eliminated or changed the need or expected use of certain assets. As a result, during the years ended December 31, 2011 and 2010, impairment charges of $0.4 million and $0.2 million, respectively, were recorded as a reduction of property and equipment and an addition to research and development expense in order to reduce these assets to their estimated realizable value. No impairment indicators were noted during the year ended December 31, 2009 and the Companys process of monitoring these assets was unchanged during this period.
When the Company identifies an impairment indicator, it measures the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds its best internal estimate of the value of the asset while it remains in use, plus any proceeds expected from the eventual disposal of the impaired asset. Since the Company uses most of its property and equipment to demonstrate its technology to prospective customers and continue technology and product enhancement efforts and not to generate revenues or cash flows, a cash flow analysis of the categories above or the assets as a whole is not practicable. Instead, a depreciated replacement cost estimate is used for assets still in service and equipment secondary market quotes are obtained for assets planned for disposal. Depreciated replacement cost is determined by contacting vendors of the same or similar equipment or other assets to obtain an estimate of the market price of such assets, and then reducing this amount by a formula derived from the age of the equipment and the typical useful life of that equipment. For assets planned to be disposed, descriptions of the equipment are circulated to a number of purchasers of used machinery and equipment to solicit bids for such assets. The Companys best estimate of selling price based upon these purchasers responses is used to estimate the value of such assets, net of any costs to remove, recondition and/or ship the equipment to the buyer.
Research and Development
Research and development costs incurred in the discovery of new knowledge and the resulting translation of this new knowledge into plans and designs for new products, prior to the attainment of the related products technological feasibility, are recorded as expenses in the period incurred.
Income Taxes
The Company follows Accounting Standards Codification (ASC) 740, Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial
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statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
As required by ASC 740-10-05, Accounting for Uncertainty in Income Taxes, the Company recognizes the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates.
PA LLC is organized as a limited liability company under the state law of Delaware. As a limited liability company that has elected to be taxed as a partnership, the Companys earnings pass through to the members and are taxed at the member level. Accordingly, the income tax provision included in the accompanying consolidated financial statements represents the tax impact to the Company arising from its ownership interest in the operations related to PA LLC.
Loss Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock equivalents are not considered as their effect would be anti-dilutive.
The effect of 2,592,143, 2,598,629 and 481,703 weighted average warrants and 1,561,799, 1,083,475 and 626,151 weighted average options were not included for the years ended December 31, 2011, 2010 and 2009, respectively, as they would have had an anti-dilutive effect.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation. This Statement requires that the cost resulting from all stock-based transactions be recorded in the consolidated financial statements. The Statement establishes fair value as the measurement objective in accounting for stock-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for stock-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in stock-based payment transactions. (See Note 10 in the accompanying consolidated financial statements).
Recent Accounting Pronouncements
Adoption of New Accounting Standards
Revenue Recognition
In October 2009, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The adoption of this new guidance as of January 1, 2011 did not have a material effect on the Companys consolidated financial statements, nor does management expect it to have a material impact on the Companys expected future revenues.
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Fair Value
In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements (ASU 2010-6), which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on the Companys consolidated financial statements.
Accounting Standards Not Yet Effective
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU 2011-04) to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, mainly for level 3 fair value measurements. ASU 2011-04 is effective for the Companys fiscal year beginning January 1, 2012. Early adoption is not permitted. The Company is currently evaluating the impact of this new guidance, but does not expect it to have a material impact on the consolidated financial statements.
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the changes in stockholders equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 will only impact presentation and will not have any effect on the Companys consolidated financial statements or on its financial condition.
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. As part of this update, the FASB did not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. ASU 2011-12 is effective for annual periods beginning after December 15, 2011. The adoption of ASU 2011-12 will only impact presentation and will not have any effect on the Companys consolidated financial statements or on its financial condition.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
The Companys exposure to interest rate risk is related to its borrowings. The principal amount of the Companys debt obligations as of December 31, 2011 was $78.9 million, of which $19.8 million was outstanding at an annual floating rate of 2% over the prime interest rate and $59.1 million was outstanding at a fixed annual rate of 12%. Floating rate borrowings will lead to additional interest expense if interest rates increase. The Company enters into loan arrangements when needed and borrowings are subject to interest rate risk because changes in the prime interest rate will have an effect on interest rate expense.
If interest rates would have increased by 1.0%, the additional interest expense for the years ended December 31, 2011, 2010, and 2009 would have been $0.2 million per year for each of the three years.
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Exchange Rate Risk
The Company currently has very little foreign exchange risk as a result of exposures to changes in currency exchange rates. Under the license agreements that the Company expects to enter into in the future with non-U.S. customer licensees, a portion of its license and royalty fee revenue may be denominated in currencies other than the U.S. dollar. Many of the Companys costs, however, including most of the costs of its employees who the Company expects to support the operations of its customer licensees, and its research and development costs, will be denominated in U.S. dollars. The Company expects that fluctuations in the value of these revenues and expenses as measured in U.S. dollars will affect its results of operations, and adverse currency exchange rate fluctuations may have a material impact on its future financial results.
Commodity Price Risk
The Companys technology, once commercialized, will be used to produce protein for the agriculture market and biocrude for the energy market, each of which may directly or indirectly compete with existing commodities. In particular, the Company expects that the price its customer licensees will obtain from the sale of these products will most directly be impacted by market prices for protein, crude oil and petroleum-based fuels, respectively. These market prices, particularly for crude oil and petroleum-based fuels, can be volatile, and can be influenced by factors such as global demand, availability of supply, weather, political events and the market price of alternative forms of energy, all of which are factors beyond the Companys control.
Significant fluctuations in these commodity prices could impact the profitability of the Companys technology to its customer licensees, and therefore the demand for the Companys technology, and could also affect the amount of royalty revenues the Company receives from its customer licensees.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Parabel, Inc.
We have audited the accompanying consolidated balance sheets of Parabel, Inc. (a Development Stage Entity and a Delaware Corporation) and subsidiary as of December 31, 2011 and 2010, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 2011 and for the period from inception (September 22, 2006) to December 31, 2011 and the related consolidated statements of changes in stockholders deficit for each of the five years in the period ended December 31, 2011 and for the period from inception (September 22, 2006) to December 31, 2006. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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 Companys 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 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 audits provide 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 Parabel, Inc. (a Development Stage Entity) and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the each of the three years in the period ended December 31, 2011 and for the period from inception (September 22, 2006) to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of $28,504,562 during the year ended December 31, 2011, and, as of that date, the Companys current liabilities exceeded its current assets by $83,153,405 and its total liabilities exceeded its total assets by $81,838,019. These factors, among others, as discussed in Note 2 to the financial statements, raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Orlando, Florida
March 30, 2012
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Parabel Inc.
(A Development Stage Company)
Consolidated Balance Sheets
December 31, 2011 |
December 31, 2010 |
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ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 8,842,269 | $ | 1,140,882 | ||||
Restricted cash |
75,286 | 2,325,000 | ||||||
Prepaid expenses |
116,672 | 102,016 | ||||||
Other current assets |
777,594 | | ||||||
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|
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Total current assets |
9,811,821 | 3,567,898 | ||||||
Property and equipment |
3,066,217 | 4,194,629 | ||||||
Accumulated depreciation |
(1,974,566 | ) | (2,292,952 | ) | ||||
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Net property and equipment |
1,091,651 | 1,901,677 | ||||||
Deposits |
256,015 | 24,814 | ||||||
Other non-current assets |
| 830,375 | ||||||
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|
|||||
Total assets |
$ | 11,159,487 | $ | 6,324,764 | ||||
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LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 948,375 | $ | 1,569,715 | ||||
Accrued expenses |
1,195,374 | 2,189,561 | ||||||
Accrued expenses - related party |
11,294,885 | 4,807,135 | ||||||
Deferred revenue |
612,500 | 500,000 | ||||||
Liabilities related to equity issuance |
| 100,000 | ||||||
Current portion of notes payable - related party |
78,914,092 | | ||||||
Other current liabilities |
| 2,000,000 | ||||||
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|
|
|||||
Total current liabilities |
92,965,226 | 11,166,411 | ||||||
Deferred rent |
32,280 | | ||||||
Notes payable - related party |
| 51,662,734 | ||||||
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|
|||||
Total liabilities |
92,997,506 | 62,829,145 | ||||||
Commitments and Contingencies (Note 9) |
||||||||
Stockholders deficit: |
||||||||
Preferred stock - $.001 par value, 25,000,000 shares authorized; no shares issued or outstanding at December 31, 2011 and 2010 |
| | ||||||
Common stock - $.001 par value, 300,000,000 shares authorized; 106,920,730 and 106,933,230 shares issued and outstanding at December 31, 2011 and 2010, respectively |
106,921 | 106,933 | ||||||
Paid in capital |
39,801,148 | 37,823,248 | ||||||
Deficit accumulated during the development stage |
(122,887,794 | ) | (98,022,859 | ) | ||||
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Parabel Inc. stockholders deficit |
(82,979,725 | ) | (60,092,678 | ) | ||||
Non-controlling interest |
1,141,706 | 3,588,297 | ||||||
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|
|||||
Total stockholders deficit |
(81,838,019 | ) | (56,504,381 | ) | ||||
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Total liabilities and stockholders deficit |
$ | 11,159,487 | $ | 6,324,764 | ||||
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See the accompanying notes to the consolidated financial statements.
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Parabel Inc.
(A Development Stage Company)
Consolidated Statements of Operations
For the Years Ended | For the Period September 22, (Inception) |
|||||||||||||||
December 31, 2011 |
December 31, 2010 |
December 31, 2009 |
December 31, 2011 |
|||||||||||||
Revenue |
$ | | $ | | $ | | $ | | ||||||||
Costs and expenses: |
||||||||||||||||
Selling, general and administrative |
10,824,152 | 21,849,915 | 17,400,801 | 61,490,581 | ||||||||||||
Research and development |
10,198,477 | 17,424,316 | 15,085,060 | 58,667,474 | ||||||||||||
Interest expense - related party |
6,633,036 | 4,076,905 | 3,198,642 | 16,116,094 | ||||||||||||
Depreciation |
848,897 | 1,128,249 | 1,137,733 | 3,439,386 | ||||||||||||
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Total costs and expenses |
28,504,562 | 44,479,385 | 36,822,236 | 139,713,535 | ||||||||||||
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|||||||||
Net loss |
(28,504,562 | ) | (44,479,385 | ) | (36,822,236 | ) | (139,713,535 | ) | ||||||||
Net loss attributable to non-controlling interest |
3,639,627 | 6,469,356 | 6,554,358 | 16,825,741 | ||||||||||||
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Net loss attributable to Parabel Inc. |
$ | (24,864,935 | ) | $ | (38,010,029 | ) | $ | (30,267,878 | ) | $ | (122,887,794 | ) | ||||
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Basic and diluted common shares outstanding |
106,920,730 | 106,731,469 | 104,866,065 | |||||||||||||
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Basic and diluted loss per share |
$ | (0.23 | ) | $ | (0.36 | ) | $ | (0.29 | ) | |||||||
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|
See the accompanying notes to the consolidated financial statements.
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Parabel Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders Deficit
Period From Inception (September 22, 2006) to December 31, 2011
Common Stock Shares |
Amount | Paid in Capital |
Non-Controlling Interest |
Deficit Accumulated During the Development Stage |
Total | |||||||||||||||||||
Shares issued at inception for cash |
100,000,000 | $ | 100,000 | $ | 388,532 | $ | | $ | | $ | 488,532 | |||||||||||||
Net loss |
| | | | (1,410,724 | ) | (1,410,724 | ) | ||||||||||||||||
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Balance - December 31, 2006 |
100,000,000 | $ | 100,000 | $ | 388,532 | $ | | $ | (1,410,724 | ) | $ | (922,192 | ) | |||||||||||
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Amortization of PA LLC interests to employees |
| | 276,986 | | | 276,986 | ||||||||||||||||||
Net loss |
| | | | (8,346,378 | ) | (8,346,378 | ) | ||||||||||||||||
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Balance - December 31, 2007 |
100,000,000 | $ | 100,000 | $ | 665,518 | $ | | $ | (9,757,102 | ) | $ | (8,991,584 | ) | |||||||||||
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Amortization of PA LLC interests to employees |
| | 2,240,041 | 200,000 | | 2,440,041 | ||||||||||||||||||
Shares issued for cash |
3,174,603 | 3,175 | 9,996,825 | | | 10,000,000 | ||||||||||||||||||
Shares issued for unearned services |
1,000,000 | 1,000 | (1,000 | ) | | | | |||||||||||||||||
Amortization of unearned services |
| | 43,750 | | | 43,750 | ||||||||||||||||||
Issuance of option as additional consideration for debt |
| | 1,453,000 | | | 1,453,000 | ||||||||||||||||||
Reverse merger |
99,586 | 99 | | | | 99 | ||||||||||||||||||
Net loss |
| | | (162,400 | ) | (19,987,850 | ) | (20,150,250 | ) | |||||||||||||||
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Balance - December 31, 2008 |
104,274,189 | $ | 104,274 | $ | 14,398,134 | $ | 37,600 | $ | (29,744,952 | ) | $ | (15,204,944 | ) | |||||||||||
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Shares issued for services |
160,524 | 160 | 537,652 | | | 537,812 | ||||||||||||||||||
Shares issued for cash |
500,000 | 500 | 3,999,500 | | | 4,000,000 | ||||||||||||||||||
Shares issued with purchase price guaranty |
937,500 | 938 | (938 | ) | | | | |||||||||||||||||
Shares and warrants issued for other current assets |
357,143 | 357 | 3,017,787 | | | 3,018,144 | ||||||||||||||||||
Amortization of PA LLC interests to employees |
| | | 1,987,552 | | 1,987,552 | ||||||||||||||||||
Amortization of options issued to employees |
| | 588,653 | | | 588,653 | ||||||||||||||||||
Amortization of unearned services |
| | 1,575,000 | | | 1,575,000 | ||||||||||||||||||
Net loss |
| | | (6,554,358 | ) | (30,267,878 | ) | (36,822,236 | ) | |||||||||||||||
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Balance - December 31, 2009 |
106,229,356 | $ | 106,229 | $ | 24,115,788 | $ | (4,529,206 | ) | $ | (60,012,830 | ) | $ | (40,320,019 | ) | ||||||||||
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Return of common stock for other current asset |
(106,126 | ) | (106 | ) | (341,620 | ) | | | (341,726 | ) | ||||||||||||||
Shares issued for cash |
810,000 | 810 | 6,479,190 | | | 6,480,000 | ||||||||||||||||||
Shares issued with put option or purchase price guaranty, net of purchase price guaranty expirations |
| | 7,400,000 | | | 7,400,000 | ||||||||||||||||||
Amortization of PA LLC interests to employees |
| | (794 | ) | 12,903,744 | | 12,902,950 | |||||||||||||||||
Amortization of options issued to employees |
| | 922,549 | | | 922,549 | ||||||||||||||||||
Amortization of unearned services |
| | 1,531,250 | | | 1,531,250 | ||||||||||||||||||
PA LLC units returned for surrendered technology license |
| | (2,283,115 | ) | 1,683,115 | | (600,000 | ) | ||||||||||||||||
Net loss |
| | | (6,469,356 | ) | (38,010,029 | ) | (44,479,385 | ) | |||||||||||||||
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Balance - December 31, 2010 |
106,933,230 | $ | 106,933 | $ | 37,823,248 | $ | 3,588,297 | $ | (98,022,859 | ) | $ | (56,504,381 | ) | |||||||||||
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Put option exercised by former executive |
(12,500 | ) | (12 | ) | 12 | | | | ||||||||||||||||
Amortization of PA LLC interests to employees |
| | (845 | ) | 1,193,036 | | 1,192,191 | |||||||||||||||||
Amortization of options issued to employees |
| | 936,769 | | | 936,769 | ||||||||||||||||||
Amortization of stock appreciation rights issued to executive |
| | 1,041,964 | | | 1,041,964 | ||||||||||||||||||
Net loss |
| | | (3,639,627 | ) | (24,864,935 | ) | (28,504,562 | ) | |||||||||||||||
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Balance - December 31, 2011 |
106,920,730 | $ | 106,921 | $ | 39,801,148 | $ | 1,141,706 | $ | (122,887,794 | ) | $ | (81,838,019 | ) | |||||||||||
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See the accompanying notes to the consolidated financial statements.
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Parabel Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
December 31, 2011 |
December 31, 2010 |
December 31, 2009 |
For the
Period From September 22, 2006 (Inception) Through December 31, 2011 |
|||||||||||||
Cash flows from operating activities: |
||||||||||||||||
Net loss |
$ | (28,504,562 | ) | $ | (44,479,385 | ) | $ | (36,822,236 | ) | $ | (139,713,535 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||||||
Amortization of original issue discount |
| 375,000 | 562,000 | 1,453,000 | ||||||||||||
Amortization of Company options |
936,769 | 922,549 | 588,653 | 2,447,971 | ||||||||||||
Amortization of stock appreciation rights |
1,041,964 | | | 1,041,964 | ||||||||||||
Amoritization of unearned services |
| 1,531,250 | 1,575,000 | 3,150,000 | ||||||||||||
Amortization of PA LLC interests to employees |
1,192,191 | 12,902,950 | 1,987,552 | 18,799,720 | ||||||||||||
Expenses paid and interest added to notes payable - related party |
1,026,358 | 973,638 | 2,723,313 | 11,375,841 | ||||||||||||
Expenses paid by issuance of common stock |
| | 1,214,230 | 1,214,230 | ||||||||||||
Depreciation |
848,897 | 1,128,249 | 1,137,733 | 3,439,386 | ||||||||||||
Impairment loss |
409,674 | 179,099 | | 588,773 | ||||||||||||
Loss on disposition of equipment |
127,777 | 62,766 | 126,830 | 317,373 | ||||||||||||
Write-off of other non-current assets |
830,375 | 456,389 | | 1,286,764 | ||||||||||||
Change in operating assets and liabilities: |
||||||||||||||||
Decrease (increase) in restricted cash |
249,714 | (325,000 | ) | | (75,286 | ) | ||||||||||
(Increase) decrease in prepaid expenses |
(14,656 | ) | 7,703 | (19,056 | ) | (136,286 | ) | |||||||||
(Increase) in other current assets |
(414,276 | ) | | | (414,276 | ) | ||||||||||
(Increase) in deposits |
(231,201 | ) | | (200 | ) | (236,401 | ) | |||||||||
(Increase) in other non-current assets |
| (109,720 | ) | | (109,720 | ) | ||||||||||
(Decrease) in accounts payable |
(860,973 | ) | (88,563 | ) | (506,957 | ) | (359,555 | ) | ||||||||
Increase (decrease) in accrued expenses |
5,369,878 | 3,179,571 | (169,150 | ) | 10,176,477 | |||||||||||
Increase in deferred revenue |
112,500 | 500,000 | | 612,500 | ||||||||||||
Increase in deferred rent |
32,280 | | | 32,280 | ||||||||||||
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Net cash used in operating activities |
(17,847,291 | ) | (22,783,504 | ) | (27,602,288 | ) | (85,108,780 | ) | ||||||||
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Cash flows from investing activities: |
||||||||||||||||
Proceeds from sale of assets |
42,820 | 7,500 | 36,000 | 86,320 | ||||||||||||
Acquisition of property and equipment |
(619,142 | ) | (1,042,416 | ) | (2,471,233 | ) | (5,523,503 | ) | ||||||||
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Net cash used in investing activities |
(576,322 | ) | (1,034,916 | ) | (2,435,233 | ) | (5,437,183 | ) | ||||||||
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Cash flows from financing activities: |
||||||||||||||||
Member contributions |
| | | 488,532 | ||||||||||||
Reverse merger |
| | | 99 | ||||||||||||
Exercise of put option |
(100,000 | ) | | | (100,000 | ) | ||||||||||
Common stock and warrants issued for cash |
| 6,480,000 | 11,500,000 | 27,980,000 | ||||||||||||
Borrowings under notes payable - related party |
26,225,000 | 15,200,000 | 10,000,000 | 69,619,601 | ||||||||||||
PA LLC units returned for cash and surrendered technology license |
| (600,000 | ) | | (600,000 | ) | ||||||||||
Issuance of common stock and warrants for cash |
| 1,200,000 | 800,000 | 2,000,000 | ||||||||||||
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Net cash provided by financing activities |
26,125,000 | 22,280,000 | 22,300,000 | 99,388,232 | ||||||||||||
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Net increase (decrease) in cash |
7,701,387 | (1,538,420 | ) | (7,737,521 | ) | 8,842,269 | ||||||||||
Cash and cash equivalents - beginning of period |
1,140,882 | 2,679,302 | 10,416,823 | | ||||||||||||
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Cash and cash equivalents - end of period |
$ | 8,842,269 | $ | 1,140,882 | $ | 2,679,302 | $ | 8,842,269 | ||||||||
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Non-cash investing and financing activities: |
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Liability incurred for other non-current asset |
$ | (357,682 | ) | $ | 721,000 | $ | | $ | 363,318 | |||||||
Stock and warrants issued for other liabilities, net |
$ | (100,000 | ) | $ | (7,400,000 | ) | $ | 7,500,000 | $ | | ||||||
Common stock issued for unearned services |
$ | | $ | | $ | | $ | 3,150,000 | ||||||||
Issuance of shares for other current asset |
$ | | $ | | $ | 1,200,000 | $ | 1,200,000 | ||||||||
Return of common stock for other current asset |
$ | | $ | (342,000 | ) | $ | | $ | (342,000 | ) | ||||||
Liability repaid with restricted cash |
$ | 2,000,000 | $ | | $ | 2,000,000 | $ | 4,000,000 |
See the accompanying notes to the consolidated financial statements.
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Table of Contents
Parabel Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 2011, 2010 and 2009
Note 1 Organization
Parabel Inc. (the Company, formerly named PetroAlgae Inc.) began its operations through its controlled subsidiary, PA LLC (formerly known as PetroAlgae LLC), on December 19, 2008, as a result of the reverse acquisition described below. PA LLC was formed by XL TechGroup, LLC (XL Tech, a related party and its sponsor and parent until December 19, 2008) on September 22, 2006 as a Delaware limited liability company to develop technologies to commercially grow, harvest and process locally-available aquatic plants (micro-crops). PA LLC is a technology development and licensing company that provides renewable technology and solutions to address the global demand for new sources of feed, food and fuel. The Company has developed proprietary technology, which it believes will enable customer licensees to grow, harvest and process micro-crops to produce Lemna Protein Concentrate (LPC), Lemna Meal (LM) and Biocrude. In the near-term, the Company is positioning LPC and LM in animal feed markets, as fish meal and alfalfa meal alternatives, respectively. With further technology and product development, the Company expects LPC to be applied in human food markets and, with the development of third-party conversion technologies, the Company expects Biocrude to be used as a feedstock for renewable fuels.
Reverse Acquisition
In August 2008, XL Tech exchanged certain of its assets, including the equity it held in PA LLC, for the outstanding debt of XL Tech that was held by our principal stockholder. Subsequent to that exchange, our principal stockholder transferred the equity it received and certain related debt to PetroTech Holdings Corp. (PetroTech), a holding company controlled by our principal stockholder. In December 2008, PetroTech acquired a shell company that traded on the OTC Bulletin Board and assigned its interest in PA LLC to this shell company, which it then renamed PetroAlgae Inc. As a result of the acquisition, PetroTech became the owner of 100,000,000 shares of common stock of PetroAlgae Inc. which, at the time, represented 99.9% of the total issued and outstanding common stock of PetroAlgae Inc. As the former members of PA LLC controlled PetroAlgae Inc. after the transaction, the merger was accounted for as a reverse acquisition under which, for accounting purposes, PA LLC was deemed to be the acquirer and PetroAlgae Inc., the legal acquirer, was deemed to be the acquired entity. No goodwill was recognized as PetroAlgae Inc. was a shell company. The former shareholders of PetroAlgae Inc. retained an aggregate of 99,586 shares of common stock, which were recorded at par value of $99. PetroAlgae Inc. changed its name to Parabel Inc. on February 7, 2012.
Note 2 Going Concern
As of December 31, 2011, the Company was in the development stage as it continues to develop its products and has not yet recognized any revenues. The Company intends to transition from the development stage to operational status depending upon the timing and its success in achieving its business development milestones. The Companys consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The Company has never been profitable and has incurred significant losses and cash flow deficits. For the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, the Company reported net losses of $28.5 million, $44.5 million, $36.8 million, and $139.7 million, respectively, and negative cash flows from operating activities of $17.8 million, $22.8 million, $27.6 million, and $85.0 million, respectively. As of December 31, 2011, the Company has an aggregate accumulated deficit of $122.9 million. The Company anticipates that it will continue to report losses and negative cash flows during 2012. As a result of these net losses, cash flow deficits, and substantial debt that is due on June 30, 2012, there is a substantial doubt about the Companys ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Companys ability to continue as a going concern is dependent upon generating sufficient cash flows from operations and obtaining additional capital and financing. The Company has been, and
35
Table of Contents
continues to be, wholly dependent on funding from its principal shareholder. The principal amount of debt obligations as of December 31, 2011 was $78.9 million. The principal balance of notes payable related party and the $10.4 million of interest payable thereon is due June 30, 2012. The Company has cash and cash equivalents of $8.9 million as of December 31, 2011 and anticipates having sufficient working capital to continue in business through June 30, 2012. However, if the Companys ability to generate cash flows from operations is delayed beyond June of 2012 and it is unable to raise additional funding (including from its principal shareholder) and/or amend the term of its notes payable related party, the Company will be unable to continue its business beyond that date.
Note 3 Basis of Presentation
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiary, PA LLC. Non-controlling interests are accounted for based upon the value or cost attributed to their investment adjusted for the share of income or loss that relates to their percentage ownership of the entire Company. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense. Actual results may differ from these estimates.
Revenue Recognition
The Company will begin to record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. To the extent cash is received in advance of the Companys performance or the availability of rights under a license agreement or such receipts are refundable at the customers option, these amounts will be reported as deferred revenue.
Cash and Cash Equivalents and Cash Concentration
Cash and cash equivalents include unsecured money market funds and other liquid financial instruments with a maturity of three months or less at the date of purchase. At December 31, 2011 and 2010, the Company had approximately $8.9 million and $1.1 million, respectively, on deposit at a single financial institution. Accounts at this institution are insured by the Federal Deposit Insurance Corporation up to $0.25 million. The Company has not experienced any losses in such accounts.
Restricted Cash
Restricted cash as of December 31, 2010 consisted of $2.0 million received by the Company related to an agreement for the right to market and sell sub-licenses in Egypt and Morocco. In January 2011, the Company received timely notice from the Licensee of its election to surrender these licensing rights and to comply with related provisions of the original contract in exchange for the return of the $2.0 million it had paid, which the Company had placed in escrow. Accordingly, the $2.0 million was disbursed from escrow to the Licensee in January 2011.
Also included in restricted cash as of December 31, 2010, was $0.3 million escrowed in accordance with the employment agreement for an executive, all of which was disbursed from escrow during 2011.
As of December 31, 2011, restricted cash consisted of $0.1 million that was held in escrow per a credit card arrangement with the Companys financial institution.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2011. The respective carrying values of certain financial instruments approximate their fair values. These financial instruments include cash and cash equivalents, accounts payable, and accrued expenses. Carrying values are assumed to approximate fair values for these financial instruments because they are short term in nature and their carrying amounts approximate the amounts expected to be received or paid.
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The carrying value of the Companys fixed-rate notes payable-related party approximate their fair value based on the current market conditions for similar debt instruments.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major improvements and additions are added to property and equipment, while replacements, maintenance and repairs which do not extend the useful lives are expensed. Leasehold improvements are amortized over the shorter of the assets useful life or the remaining lease term.
Long- Lived Assets
The carrying value of long-lived assets is reviewed on a regular basis for the existence of facts and circumstances that suggest permanent impairment. Specifically, senior management of the Company considers in each reporting period the effectiveness of the Companys significant assets to determine if impairment indicators such as physical deterioration, process change or technological change have resulted in underperformance, obsolescence or a need to replace such assets. The Company groups its assets into three primary categories for this purpose. Due to the nature of the Companys business, cash flows are not derived from specific asset groups; therefore, this grouping is merely to aid the Companys analysis.
| Office equipment, including leasehold improvements |
| Demonstration system and engineering equipment |
| Computer software and hardware applications and networking |
The Company does not consider its net loss or cash outflow from operations to be an indicator of asset impairment as such financial results are typical for technology companies that are in the development stage. Rather, management evaluates the state of the technology, its process toward technical and business milestones, and relevant external market factors to ascertain whether a potential impairment has occurred. During 2011 and 2010, the Company identified certain changes in its process development plans that eliminated or changed the need or expected use of certain assets. As a result, during the years ended December 31, 2011 and 2010, impairment charges of $0.4 million and $0.2 million, respectively, were recorded as a reduction of property and equipment and an addition to research and development expense in order to reduce these assets to their estimated realizable value. No impairment indicators were noted during the year ended December 31, 2009 or any prior period and the Companys process of monitoring these assets was unchanged during these periods.
When the Company identifies an impairment indicator, it measures the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds its best internal estimate of the value of the asset while it remains in use, plus any proceeds expected from the eventual disposal of the impaired asset. Since the Company uses most of its property and equipment to demonstrate its technology to prospective customers and not to generate revenues or cash flows, a cash flow analysis of the categories above or the assets as a whole is not practicable. Instead, a depreciated replacement cost estimate is used for assets still in service and equipment secondary market quotes are obtained for assets planned for disposal. Depreciated replacement cost is determined by contacting vendors of the same or similar equipment or other assets to obtain an estimate of the market price of such assets, and then reducing this amount by a formula derived from the age of the equipment and the typical useful life of that equipment. For assets planned to be disposed, descriptions of the equipment are circulated to a number of purchasers of used machinery and equipment to solicit bids for such assets. The Companys best estimate of selling price based upon these purchasers responses is used to estimate the value of such assets, net of any costs to remove, recondition and/or ship the equipment to the buyer.
Research and Development
Research and development costs incurred in the discovery of new knowledge and the resulting translation of this new knowledge into plans and designs for new products, prior to the attainment of the related products technological feasibility, are recorded as expenses in the period incurred.
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Income Taxes
The Company follows Accounting Standards Codification (ASC) 740, Income Taxes, for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
As required by ASC 740-10-05, Accounting for Uncertainty in Income Taxes, the Company recognizes the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates.
PA LLC is organized as a limited liability company under the state law of Delaware. As a limited liability company that has elected to be taxed as a partnership, the Companys earnings pass through to the members and are taxed at the member level. Accordingly, the income tax provision included in the accompanying consolidated financial statements represents the tax impact to the Company arising from its ownership interest in the operations related to PA LLC.
Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock equivalents are not considered as their effect would be anti-dilutive.
The effect of 2,592,143, 2,598,629 and 481,703 weighted average warrants and 1,561,799, 1,083,475 and 626,151 weighted average options were not included for the years ended December 31, 2011, 2010 and 2009, respectively, as they would have had an anti-dilutive effect.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation. This Statement requires that the cost resulting from all stock-based transactions be recorded in the consolidated financial statements. The Statement establishes fair value as the measurement objective in accounting for stock-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for stock-based payment transactions with employees. The Statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in stock-based payment transactions. (See Note 10).
Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
Revenue Recognition
In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. The selling price for each deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The adoption of this new guidance as of January 1, 2011 did not have a material effect on the Companys consolidated financial statements, nor does management expect it to have a material impact on the Companys expected future revenues.
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Fair Value
In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements (ASU 2010-6), which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on the Companys consolidated financial statements.
Accounting Standards Not Yet Effective
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU 2011-04) to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, mainly for level 3 fair value measurements. ASU 2011-04 is effective for the Companys fiscal year beginning January 1, 2012. Early adoption is not permitted. The Company is currently evaluating the provisions of ASU 2011-04 and assessing the impact, if any, it may have on the financial position and results of operations.
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the changes in stockholders equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-05 will only impact presentation and will not have any effect on the Companys consolidated financial statements or on its financial condition.
In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. As part of this update, the FASB did not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. ASU 2011-12 is effective for annual periods beginning after December 15, 2011. The adoption of ASU 2011-12 will only impact presentation and will not have any effect on the Companys consolidated financial statements or on its financial condition.
Note 4 Other Assets
During 2010, other non-current assets consisted of legal and accounting costs associated with the Companys filing of a registration statement with the Securities and Exchange Commission (SEC). These costs were capitalized with the intent of reclassifying them as a reduction of the resulting proceeds when the securities offering was successfully completed. During the fourth quarter of 2010, the Company reduced the originally incurred and capitalized costs by $0.5 million with a charge to selling, general and administrative costs. As of June 30, 2011, over 90 days had passed without substantive progress on the planned offering. As a result, based upon the application of SEC Staff Accounting Bulletin 99-1, topic 5A, the remaining offering costs of $0.8 million were charged to expense during the period and classified as selling, general and administrative costs during the second quarter of 2011.
In December 2011, the Company filed an amendment to its registration statement with the SEC and capitalized the associated legal and accounting costs of $0.6 million which are included in other current assets on the accompanying December 31, 2011 consolidated balance sheet. If a resulting securities offering is successfully completed, these costs will be reclassified as a reduction of the resulting proceeds when added to paid in capital; otherwise, the costs will be expensed.
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Note 5 Property and Equipment
As of December 31, | Estimated | |||||||||||
2011 | 2010 | useful lives | ||||||||||
Leasehold improvements |
$ | 358,257 | $ | 618,740 | 2-5 years | |||||||
Furniture and fixtures |
84,702 | 89,915 | 3-7 years | |||||||||
Automobiles |
29,749 | 49,842 | 2-4 years | |||||||||
Computer and office equipment |
186,588 | 268,426 | 1-5 years | |||||||||
Engineering equipment |
2,070,492 | 2,757,086 | 2-7 years | |||||||||
Land |
130,202 | | ||||||||||
Software and networking |
206,227 | 410,620 | 1-5 years | |||||||||
|
|
|
|
|||||||||
Total cost basis |
3,066,217 | 4,194,629 | ||||||||||
Less accumulated depreciation |
(1,974,566 | ) | (2,292,952 | ) | ||||||||
|
|
|
|
|||||||||
Total Property and Equipment |
$ | 1,091,651 | $ | 1,901,677 | ||||||||
|
|
|
|
Depreciation expense was $0.8 million, $1.1 million, $1.1 million, and $3.4 million for the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively. For the years ended December 31, 2011 and 2010, impairment charges of $0.4 million and $0.2 million, respectively, were recorded as a reduction of property and equipment and an addition to research and development expense. No impairment charges were recorded for the year ended December 31, 2009 or any prior period. Leasehold improvements are amortized over the shorter of the assets useful life or the remaining lease term.
Note 6 Accrued Expenses
Accrued expenses are comprised of the following components:
As of December 31, | ||||||||
2011 | 2010 | |||||||
Accrued payroll and bonus |
$ | 761,557 | $ | 806,860 | ||||
Accrued vacation compensation |
$ | 231,094 | $ | 579,810 | ||||
Accrued legal, accounting and engineering fees |
$ | 129,382 | $ | 497,265 | ||||
Other accruals |
$ | 73,341 | $ | 305,626 | ||||
|
|
|
|
|||||
Total Accrued Expenses |
$ | 1,195,374 | $ | 2,189,561 | ||||
|
|
|
|
Note 7 Other Current Liabilities
In December 2009, the Company entered into an agreement with Green Science Energy, LLC (the Licensee) pursuant to which it received $2.0 million in exchange for the Licensees right to market and sell sub-licenses in Egypt and Morocco. In January 2011, the Company received timely notice from the Licensee of its election to surrender these licensing rights and to comply with related provisions of the original contract in exchange for the return of the $2.0 million it had paid, which the Company had placed in escrow. Accordingly, the $2.0 million was disbursed from escrow to the Licensee in January 2011.
Note 8 Notes Payable Related Party
During 2007 and 2008, the Company received funding from XL Tech in the form of a note with an interest rate of prime + 2%, with the interest drawing into the note after each month. In January 2008, an option to acquire 2,029,337 membership interests in PA LLC for 30 years at a price of less than one cent each was issued to XL Tech as additional consideration for funding under the note. The issuance of this option has been accounted for as an original issue discount on the related debt in the initial amount of approximately $1.5 million and has been
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amortized over the original term of the debt. The amortization of this discount of $0.0 million, $0.4 million, $0.6 million, and $1.5 million for the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively, has been included in interest expense in the accompanying consolidated statements of operations.
In August 2008, the note and related option to acquire PA LLC membership interests that was held by XL Tech was acquired by PetroTech.
On July 24, 2009, the Company entered into agreements with its principal stockholder to restructure all of the Companys loans. The Company, PA LLC, PetroTech, and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech, fully executed an Omnibus Amendment, Joinder and Reaffirmation Agreement, which amended (i) the demand notes issued by PA LLC to PetroTech dated August 21, 2008, September 3, 2008, September 18, 2008 and September 25, 2008 in the aggregate principal amount of $7,222,089, (ii) the convertible demand notes issued by PA LLC to PetroTech dated April 24, 2009 and May 11, 2009 in the aggregate principal amount of $10,000,000, (iii) the demand note issued by PA LLC to Valens US SPV I, LLC in the principal amount of $417,512 dated August 8, 2008, (iv) the promissory note dated June 12, 2008 issued by PA LLC in favor of XL Tech and assigned to PetroTech in the principal amount of $25,000,000 and (v) a master security agreement dated August 21, 2008 by PA LLC in favor of LV Administrative Services, Inc. on behalf of PetroTech. The Company also delivered an equity pledge agreement and a corporate guaranty in connection with the Omnibus Amendment, Joinder and Reaffirmation Agreement. Principally, the maturity of the loans was changed to the dates below.
During the year ended December 31, 2011, PetroTech funded a total of $26.2 million to PA LLC pursuant to the terms of 15 separate senior secured term notes, all of which are included in the $48.6 million notes payable in the following table. Notes payable consist of the following at December 31, 2011 and 2010:
As of December 31, 2011 |
As of December 31, 2010 |
|||||||
Note Payable to Valens U.S. SPV I, LLC |
$ | 417,512 | $ | 417,512 | ||||
- Interest accrues monthly, at 12% per annum |
||||||||
- Note is due on June 30, 2012 |
||||||||
Notes Payable to PetroTech |
48,647,089 | 22,422,089 | ||||||
- Interest accrues monthly, at 12% per annum |
||||||||
- Notes are due on June 30, 2012 |
||||||||
Convertible Note Payable to PetroTech |
10,000,000 | 10,000,000 | ||||||
- Interest accrues monthly at 12% per annum |
||||||||
- Note is due on June 30, 2012 if not converted to common shares as described below |
||||||||
Up to $25,000,000 Note Payable to PetroTech |
19,849,491 | 18,823,133 | ||||||
- Interest payable monthly and is drawn into note on a monthly basis at Prime + 2% (5.25% at December 31, 2011) |
||||||||
- Note is due on June 30, 2012 |
||||||||
- Permits additional draws only to fund interest. Maximum balance of this note is limited to $25,000,000 |
||||||||
|
|
|
|
|||||
Total Notes Payable - Related Party |
$ | 78,914,092 | $ | 51,662,734 | ||||
|
|
|
|
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During 2011, the principal balance of notes payable - related party was reclassified to current liabilities on the accompanying consolidated balance sheets as the maturity date is within one year. The notes payable - related party are collectively secured by all of the Companys assets. The convertible note payable to PetroTech allows the holder (at the holders option) to convert all or any portion of the issued and outstanding principal amount and accrued interest then due ($13.2 million as of December 31, 2011) into shares of the Companys common stock at a fixed conversion price of $5.43 per share.
Each note payable and the related master security agreement and equity pledge and corporate guaranty agreement contain provisions that specify events of default which could lead to acceleration of the maturity of the debt. These provisions prohibit the encumbrance or sale and require maintenance and insurance of the Companys assets. The loan agreements do not contain any required financial ratios or similar debt covenants. Generally, an event of default would arise if the Company became insolvent, filed for bankruptcy, allowed a change in control or had unresolved judgments against its assets. Through the date of this annual report, none of these events have occurred.
As of December 31, 2011 and 2010, interest in the amount of $10.4 million and $4.8 million, respectively, was accrued related to the notes payable - related party and is recorded in accrued expenses - related party on the accompanying consolidated balance sheets. During 2011 and 2010, additional accrued interest of $1.0 million and $1.0 million, respectively, was added to the principal balance of the floating-rate note and is recorded in notes payable-related party on the accompanying consolidated balance sheets.
Interest charged to operations on these notes was $6.6 million, $4.1 million, $3.2 million, and $16.1 million during the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively. No interest was capitalized during these periods.
Note 9 Leases
On March 23, 2011, the Company entered into a lease with an unrelated third-party for 24,000 square feet of headquarters office space in Melbourne, Florida. This three-year lease provides for monthly payments that increase from $20,000 to $28,000 over its term plus an allocated share of any increase in real estate tax, insurance and building maintenance costs. The cost of this lease is being evenly allocated over its 36-month term.
During 2011, the Company terminated its month-to-month leases for laboratory space at its Gateway location as well as its Kennedy Space Center location. The laboratory testing that previously took place at each of these facilities has now been partially absorbed at the Companys Fellsmere laboratory and partially outsourced, depending on the nature of the test and the equipment and type of facility required to perform the test.
During 2011, the Company also purchased the land on which its field-scale demonstration facility is operating in Fellsmere, Florida. The Company leased this land prior to its decision to purchase the site for $130,000 during the third quarter of 2011.
Rental expense for all operating leases during 2011, 2010, 2009 and since inception was $0.5 million, $0.8 million, $0.8 million, and $2.6 million, respectively.
Note 10 Stockholders Deficit
The Companys equity consists of 300,000,000 shares of $.001 par value common stock, of which 106,920,730 and 106,933,230 shares had been issued and were outstanding as of December 31, 2011 and 2010, respectively. In addition, the Company may issue up to 25,000,000 shares of preferred stock. No preferred stock is outstanding.
Estimation of Common Stock Fair Value
In each reporting period, the Company has determined its best estimate of the fair value of its common stock by considering the following indicators of value:
| Level 3 valuations based upon a discounted cash flow analysis using inputs which were not externally observable, in this case the Companys estimate of future cash flows from the Companys business; and |
| Prices paid in cash for shares of stock or securities units comprised of equity shares and five-year warrants to purchase equity shares; and |
| Over-The-Counter (OTC) quotation closing price and related statistics such as trading volume, volatility and recent price ranges. |
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Level 3 estimated cash flow valuations. The Level 3 fair value estimate of the Companys equity value applied discounted cash flow valuation techniques to expected future cash flows from the Companys business as of each valuation date. Key assumptions utilized in determining this fair value estimate include the expected amount and timing of revenue from expected future sales of the Companys technology along with the associated cost of sales and other operating cash outflows. These cash flows are discounted back to present value using an interest rate consistent with development stage technology companies and the resulting enterprise value is converted to an equity value per outstanding share.
The most significant uncertainty inherent in these calculations is the risk of obtaining and performing the contracts necessary to produce the estimated future revenues. In addition, the risk of collection of amounts that are expected to be due under projected contracts, the risk of unanticipated product development or delivery costs and the risk of increased operating and overhead costs may each cause the estimates of future revenues to vary from the assumptions that are made in these projections, and these variations may be material. Since the Company has not obtained or performed any commercial contracts to date, it does not have historical data on which to base its estimate of future revenues.
The fair value of the warrants was estimated using the Black-Scholes valuation model, based on the estimated fair value of the common stock on the valuation date, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates published by the U.S. Federal Reserve applicable to the remaining term of the instruments, an expected life equal to the remaining term of the instruments and an estimated volatility of 75.2%. Because the Level 3 indications of value were able to take into account important information pertaining to the amount, timing and risk of Company cash flows, they were given the most weight in our estimate of share value.
Third party transactions. The Company has completed several private sales of equity shares and securities units comprised of both equity shares and warrants to purchase additional equity shares over the reporting periods. The transactions were completed with both related and unrelated parties in exchange for cash. Given the size of these transactions and the sophisticated nature of the parties involved in their negotiation, these indications of value were given significant weight in the Companys estimate of share value. However, because most of these transactions were with affiliates, sole or primary reliance was not placed on these values.
OTC Values. The Companys common stock is currently traded on the OTCQB tier of OTC Markets Group. A very small percentage of the issued and outstanding shares are available for active trading since approximately 94% of the Companys outstanding shares are held by its controlling shareholder. Due to the very limited size of the Companys public float and the resulting low trading volume in the Companys common stock, its public shares are susceptible to very large swings in price based on very few trades. As a result of these considerations, value indications provided by the OTC price quotation service were given the least weight of the three factors in the Companys estimate of share value.
Issuance of Common Stock and Warrants
On January 15, 2009, the Company entered into a Stock Purchase Agreement with Engineering Automation and Design Inc., a Nebraska corporation (EAD), pursuant to which it issued 151,057 shares of common stock as partial consideration, in advance, for certain services relating to the design, engineering, and construction of facilities for the growth, harvesting and processing of micro-crops for demonstration of the Companys technology to potential customers. In February 2010, EAD returned 106,126 shares of common stock to the Company, which were canceled. The shares earned and retained by EAD under the related agreements were accounted for at their estimated fair value at issuance of approximately $144,678 (44,931 shares at $3.22 fair value per share) and charged to research and development expense.
During December 2009, the Company issued approximately 9,500 shares of common stock valued at an estimated fair value of $5.50 per share for legal services.
During December 2009, the Company issued 357,143 units consisting of one share of common stock and a warrant to purchase a share of common stock at $15.00 for a period of five years in exchange for a 30% interest in Green Sciences Energy, LLC, a subsidiary of Congoo, LLC. The units were valued at $8.00 per unit or $2.9 million. The $8.00 fair value per unit was determined based upon contemporaneous issuances of identical units for $8.00 in cash. In addition, the Company used its fair value estimate to allocate the value of the units issued between the fair values of the common stock and warrants of $2.0 million ($5.66 per share) and $0.9 million ($2.34 per warrant), respectively. This allocation indicated that a very small premium (less than 5%) should be attributed to the allocated share price compared to its fair value.
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In addition, during December 2009, the Company issued an additional 250,000 warrants exercisable at $8.00 per share for a period of six months and 250,000 warrants exercisable at $15.00 per share for a period of six months. The Company estimated the fair value of the 500,000 additional warrants using the Black-Scholes option pricing model and the same assumptions stated above, resulting in an estimated fair value of the options of $0.2 million. The sum of the estimated fair value of the securities issued was approximately $3.0 million.
From February 12, 2010 to August 6, 2010, the Company sold 797,500 units, each unit consisting of one share of common stock and a warrant to purchase a share of common stock at $15.00 for a period of five years, for $8.00 per unit or $6.4 million as follows:
| 687,500 units to an affiliate; and |
| 110,000 units to third parties. |
The proceeds of the 797,500 units issued were allocated between the common stock and the warrants based upon their respective estimated fair values on the date of the issuance. This allocation attributed $4.5 million (or $5.52 to $5.60 per share) to the common stock issued and $1.9 million to the warrants issued (or $2.40 to $2.48 per warrant). For the warrants, the Company estimated the fair value using the Black-Scholes valuation model, based on the estimated fair value of the common stock on each valuation date ($5.89 to $6.67 per share), an expected dividend yield of 0%, a risk-free interest rate based on the yield of 5-year U.S. Treasury securities on each valuation date (1.78% to 2.62%), an expected life of five years and an estimated volatility of 75.2%.
The 687,500 units sold to the affiliate contained share price and warrant exercise price guarantees. The purchase price of the common stock and the exercise price of the warrants would have been adjusted in the event that the Company issued common stock or warrants at a price below $8.00 for common shares or a $15.00 exercise price for warrants for a period of six months from the purchase date. All of the aforementioned share price guaranty periods expired during 2010 and no adjustments were necessary.
On November 1, 2010, in anticipation of Mr. Rob Harris impending employment as President and Chief Operating Officer, the Company issued and sold 12,500 shares of its common stock to Mr. Harris at a price of $8.00 per share. Mr. Harris also received a put option which gave him the option to sell any or all of the shares back to the Company for a purchase price of $8.00 at any time within one year of the original transaction. In accordance with Accounting Standards Codification (ASC) 480-10-25-8, the proceeds were recorded as liabilities related to equity issuance on the accompanying consolidated balance sheet as of December 31, 2010. During January 2011, Mr. Harris exercised his option and the Company repurchased all 12,500 shares of common stock for $100,000.
Non-controlling Interest and PA LLC Equity Incentive Plan
During 2006, the Company issued 5% of the Class A voting units (1,000,000 units) of PA LLC as partial consideration for a license to certain technology from Arizona Technology Enterprises, LLC (AzTE). AzTE was granted anti-dilution rights and was entitled to 5% of the fully diluted capitalization of PA LLC.
On June 2, 2010, the Company entered into an agreement with AzTE that provided for recovery of the 1,000,000 Class A voting units of PA LLC and the cancellation of all existing and future obligations and agreements between the Company and AzTE, in exchange for the return of certain AzTE-licensed technology and a payment of $0.6 million. The Company remitted the payment to AzTE on June 3, 2010 and the units of PA LLC were received and cancelled on June 3, 2010. The return of the Class A voting units of PA LLC effectively nullified the anti-dilution rights that were previously granted to AzTE.
The transaction with AzTE was accounted for as a return or repurchase of equity interests of PA LLC. The Company followed the guidance of ASC 810-10-45-23 and handled changes in the parents ownership by adjusting the carrying amount of the controlling and non-controlling interests based on the change in their respective ownership share in the subsidiary. This transaction increased the parent or controlling interest from approximately 82% to approximately 87%, which gave rise to a debit of $1.7 million to paid in capital attributable to Parabel Inc., since PA LLC had a large deficit accumulated during the development stage. In addition, the amount paid of $0.6 million was also recorded in paid in capital since it represents the cost to the controlling interest of acquiring a portion of the interest in the subsidiary that it did not previously own. The net effect of this transaction increased shareholders deficit attributable to Parabel Inc. by $2.3 million.
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PA LLC has an equity compensation plan which allows it to grant employees and consultants awards of profits interests in restricted Class B ownership units (the Interests) and is limited to 14% of the total outstanding units.
The Company granted 2,816,471 and 674,500 Interests during 2008 and 2007, respectively, to the majority of its employees as of the date that they began employment with the Company. As of December 31, 2011 and 2010, the granted Interests, net of Interests forfeited and repurchased by the Company, totaled 2,753,171 and 2,837,691, respectively, or 12.7% and 13.0%, respectively, of total outstanding units. These Interests give the recipient the right to participate in the income of PA LLC and any distribution that may arise from a liquidity event to the extent that such realized amounts exceed the ownership unit fair value at the date of grant.
The Company determined the fair value of these grants by estimating the proceeds that it may obtain from a range of possible future liquidity events such as a public equity offering or a Company sale. The timing of such liquidity events and the likelihood of their achievement was estimated based upon the information that existed as of the grant or valuation date. The weighted average future cash value was then discounted using a 60% per annum discount rate and the weighted average time from grant or valuation date to the liquidity event. This estimated cash present value was converted to a per share cash value and, based on the structure of the grant, the carrying amount per LLC unit was subtracted to determine the fair value of each of the Interests.
The grants of Interests contain restrictions that allow the Company to repurchase the units for $0.01 per unit until a service period or other condition is met. This restriction is removed over a service period (generally four years) with regard to approximately 2.15 million Interests. On March 4, 2011, the Company modified the terms of the Interests granted to a former employee, causing the Interests to be immediately vested. This decision required a revaluation of the Interests and immediate recognition of additional compensation cost in the amount of $0.8 million, recorded as research and development expense, based upon the nature of the former employees role with the Company.
For the years ended December 31, 2011, 2010, and 2009, compensation expense related to these Interests was $1.2 million, $1.5 million, and $2.0 million, respectively. For the period from September 22, 2006 (inception) to December 31, 2011, compensation expense related to these Interests was $7.4 million. The related compensation expense is recognized as selling, general and administrative expense or research and development expense depending upon the recipients role in the Company. Amounts recognized as selling, general and administrative expense were $0.0 million, $0.6 million, $1.1 million, and $3.2 million for the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively. Amounts recognized as research and development expense were $1.2 million, $0.9 million, $0.9 million, and $4.2 million for the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively. Unrecognized compensation cost related to 23,344 Interests which remain restricted totaled approximately $0.2 million as of December 31, 2011 and is expected to be expensed during 2012. An aggregate of 85,000, 111,000, 258,000, and 738,000 of these Interests were forfeited during the years ended December 31, 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, respectively.
Five senior officers were granted an aggregate 1.34 million Interests that were subject to repurchase for $0.01 per unit until a significant liquidity event occurred. Because that condition had not yet been met, these grants were considered contingent and had not been amortized. The amount and nature of the liquidity event was changed in July 2009 from a requirement to obtain $150.0 million of distributions and/or debt repayments to the Companys principal stockholder to a requirement to obtain $25.0 million of new liquidity for the Company. This change resulted in a $4.6 million increase in the unrecognized compensation expense to $6.0 million.
During the fourth quarter of 2010, the Companys principal stockholder modified the terms of the grant to remove the right of the Company to repurchase the Interests held by all five officers, causing these grants to be immediately vested. This decision required a revaluation of the Interests held by the officers and immediate recognition of the calculated expense. Based upon current estimates and applying the same discounted cash flow methodology used as of the prior valuation dates, the compensation cost was increased to $11.4 million during the fourth quarter of 2010 and recognized as selling, general and administrative expense ($9.1 million) or research and development expense ($2.3 million) depending upon each officers role in the Company.
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As of December 31, 2011 and 2010, non-controlling interests collectively owned approximately 12.7% and 13.0%, respectively, of PA LLC, and have absorbed their respective portion of the loss of PA LLC. The amount of loss absorbed was $3.6 million, $6.5 million and $6.6 million, for the years ended December 31, 2011, 2010, and 2009, respectively. The amount of loss absorbed for the period from September 22, 2006 (inception) to December 31, 2011 was $16.8 million.
Stock Options
On June 17, 2009, the Company adopted the 2009 Equity Compensation Plan (the 2009 Plan). The 2009 Plan is intended to provide employees, consultants and others the opportunity to receive incentive stock options and is limited to 4,000,000 shares of the Companys common stock. The exercise price shall be equal to or greater than the fair value of the underlying common stock on the date the option is granted and its term shall not exceed 10 years. Awards shall not vest in full prior to the third anniversary of the award date.
On January 1, 2011, the Company granted its employees 623,000 options, in the aggregate, to purchase common shares at an exercise price of $8.00 per share. The options generally vest over a period of four years from the grant date and expire 10 years from the grant date. The grant date fair value of the options aggregated to $1.9 million and was calculated using the following assumptions determined as of the date of grant: estimated fair value of the common stock of $5.10, expected term of 6.25 years, risk free interest rate of 2.0%, an estimated volatility of 75.2%, and a dividend yield of 0%. The expected term of options granted to employees was based upon the simplified method allowed for plain vanilla options as described by SEC SAB No. 110. The fair value will be charged to operations over the remaining vesting periods commencing on the employees hire date or the grant date, depending upon terms of individual grants.
On June 30, 2011, the Companys board of directors authorized the re-pricing of all outstanding stock options, changing the exercise price from $8.00 or $8.50 to $5.50 per option. In accordance with ASC 718-20-35-3, the Company computed the additional compensation cost as the fair value of the new awards in excess of the fair value of the original awards immediately before their terms were modified, using the Black-Scholes pricing model. This calculation used the following assumptions determined as of June 30, 2011: estimated fair value of the common stock of $5.10, remaining terms ranging from 4.75 years to 5.89 years (depending on the date of the original grant), risk free interest rate of 1.76%, an estimated volatility of 96.5%, and a dividend yield of 0%. The modification affected 1,240,000 options and resulted in aggregate additional compensation cost of $0.4 million. Of the total additional compensation cost, $0.2 million was expensed immediately as it related to options which were vested as of June 30, 2011, and $0.2 million will be expensed through 2014.
Due to the significant number of equity transactions that occurred during June of 2011, including the stock option modification discussed above and the stock option and the stock appreciation rights issuances discussed below, the Company re-examined its volatility estimate and consequently increased it from 75.2% to 96.5% on a prospective basis. The Company estimates volatility in accordance with SEC Staff Accounting Bulletin (SAB) No. 107, Share-based Payment based on an analysis of expected volatility of share trading prices for a peer group of companies. Over a period of time similar to that of the expected option life, the volatility in share price of these alternative energy and clean-tech companies averaged 70.4%. To account for the fact that the Company is in the development stage and can be expected to have a higher volatility at its present stage than the average of the comparable companies, the Company adjusted upward its volatility estimate. Specifically, the Company estimated its share volatility by calculating the average volatility of those members of its peer group that exhibited volatility measures in the top quartile of the group. Using this approach, the Company determined that a volatility estimate of 96.5% is appropriate in its fair value calculations.
On June 30, 2011, the Companys board of directors authorized the grant of 616,000 options to employees, in the aggregate, to purchase common shares at an exercise price of $5.50 per share. Of the 616,000 options authorized, 351,000 were granted on June 30, 2011 and the remaining 265,000 were granted on July 21, 2011. The options generally vest over a period of four years from the grant date and expire 10 years from the grant date. The fair value of the options when granted aggregated to $2.4 million and was calculated using the Black-Scholes pricing model with the following assumptions determined as of the date of grant: estimated fair value of the common stock of $5.10, expected term of 6.25 years, risk free interest rate of 1.76%, an estimated volatility of 96.5%, and a dividend yield of 0%. The expected term of options granted to employees was based upon the simplified method allowed for plain vanilla options as described by SEC SAB No. 110. The fair value will be charged to operations over the remaining vesting periods commencing on the employees hire date or the grant date, depending upon terms of individual grants.
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The weighted average period over which options not vested through December 31, 2011 are expected to vest is 37 months. During the years ended December 31, 2011 and 2010, approximately $0.9 million and $0.9 million, respectively, was charged to operations related to all of the outstanding options. The fair value related to unexercisable stock options as of December 31, 2011 totaled approximately $3.3 million and is expected to be expensed over the next three years.
A summary of stock option activity is as follows:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Fair Value |
||||||||||
Balance at December 31, 2008 |
| $ | | $ | | |||||||
Granted June 2009 |
1,072,500 | $ | 5.50 | $ | 2.70 | |||||||
Granted July 2009 |
45,000 | $ | 5.50 | $ | 2.83 | |||||||
Forfeited |
(200,000 | ) | $ | (5.50 | ) | $ | (2.70 | ) | ||||
|
|
|||||||||||
Balance at December 31, 2009 |
917,500 | $ | 5.50 | $ | 2.37 | |||||||
Granted January 2010 |
322,000 | $ | 5.50 | $ | 3.80 | |||||||
Forfeited |
(247,750 | ) | $ | (5.50 | ) | $ | (2.95 | ) | ||||
|
|
|||||||||||
Balance at December 31, 2010 |
991,750 | $ | 5.50 | $ | 2.68 | |||||||
Granted January 2011 |
623,000 | $ | 5.50 | $ | 3.27 | |||||||
Granted June 2011 |
351,000 | $ | 5.50 | $ | 3.96 | |||||||
Granted July 2011 |
265,000 | $ | 5.50 | $ | 3.96 | |||||||
Forfeited |
(885,750 | ) | $ | (5.50 | ) | $ | (3.11 | ) | ||||
|
|
|||||||||||
Balance at December 31, 2011 |
1,345,000 | $ | 5.50 | $ | 3.49 |
The weighted average grant date fair value for vested options as of December 31, 2011 and 2010 was $3.12 and $2.59, respectively. The weighted average grant date fair value for unvested options as of December 31, 2011 and 2010 was $3.68 and $2.73, respectively.
The weighted average contractual life of stock options at December 31, 2011 and 2010 was as follows:
2011 | 2010 | |||||||
Vested |
5.8 yrs | 3.1 yrs | ||||||
Unvested |
9.3 yrs | 5.5 yrs | ||||||
Total outstanding |
8.1 yrs | 8.7 yrs |
As of December 31, 2011, a total of 455,667 of the options granted were exercisable and the fair value of such options was $1.4 million. Because the Company has very little history from which to estimate forfeiture of options or grants, it accounts for such forfeitures prospectively, that is, in the period in which they actually occur.
Inputs to both the Interest fair value calculation and the stock option Black-Scholes model are subjective and generally require significant judgment to determine. If, in the future, the Company determines that another method
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for calculating the fair value of its stock-based compensation is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for stock-based compensation could change significantly. Regarding stock options, higher volatility and longer expected terms generally result in an increase to stock-based compensation expense determined at the date of grant.
As of December 31, 2011, the aggregate intrinsic value of all stock options outstanding and expected to vest was $0.00 and the aggregate intrinsic value of currently exercisable stock options was $0.00. The intrinsic value of each option share is the difference between the estimated fair value of the Companys stock and the exercise price of such option.
No stock options have been exercised as of December 31, 2011.
Stock Appreciation Rights
In November 2010, the Company issued one million Stock Appreciation Rights (SARs) to Mr. Harris, its President and Chief Operating Officer, under the 2009 Plan. The vesting of these SARs was tied to continued employment with the Company and the accomplishment of certain milestones. Mr. Harris resigned from the Company during the first quarter of 2011, forfeiting all such SARs. The impact on all periods presented was not material.
In June 2011, the board of directors authorized the grant of one million SARs at a base grant price of $5.50 per share to its newly appointed Chief Executive Officer under the 2009 Plan. The SARs have a ten-year term and will vest in equal quarterly installments over a two-year period. In the event of a change of control (as defined in the 2009 Plan) or a qualified public offering (as defined in the executives employment agreement), the SARs will become 100% vested. The grant date fair value of the SARs aggregated to $3.8 million and was calculated using the Black-Scholes pricing model with the following assumptions determined as of the date of grant: estimated fair value of the common stock of $5.10, expected term of 5.75 years, risk free interest rate of 1.55%, an estimated volatility of 96.5%, and a dividend yield of 0%. The fair value will be charged to operations over the remaining vesting periods commencing on the grant date. For the year ended December 31, 2011, compensation expense related to these SARs of $1.0 million was charged to selling, general and administrative expense. No compensation expense related to SARs was recorded during the years ended December 31, 2010 or 2009.
Note 11 Retirement Plan
Employees of PA LLC may participate in a 401k retirement plan sponsored by the Company. PA LLC will match the contribution made by participating employees up to 4% of their eligible salaries. Matching contributions were $0.1 million, $0.2 million, and $0.2 million during 2011, 2010, and 2009, respectively.
Note 12 Income Taxes
The Company has not recorded any income tax expense or benefit for the years ended December 31, 2011 and 2010 primarily due to its history of operating losses. Because the Company was a limited liability company and passed through its losses to its owners before the reverse acquisition (December 19, 2008), no federal or state tax benefit or provision was reported by the Company for periods before that date.
The reconciliation of income tax benefit at the statutory federal income tax rate of 35% to net income tax benefit for the years ended December 31, 2011 and 2010 is as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
U.S. federal benefit at statutory rate |
$ | (9,691,551 | ) | $ | (13,383,330 | ) | ||
State income taxes, net of federal benefit |
(917,772 | ) | (1,126,723 | ) | ||||
Nondeductible equity compensation |
1,078,401 | 4,516,310 | ||||||
Other items |
16,941 | 20,215 | ||||||
Prior year estimate to tax return adjustment |
1,677,807 | (1,545,110 | ) | |||||
Increase in valuation allowance |
7,836,174 | 11,518,638 | ||||||
|
|
|
|
|||||
Income tax expense |
$ | | $ | | ||||
|
|
|
|
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The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows:
December 31, | ||||||||
2011 | 2010 | |||||||
Deferred tax assets |
||||||||
Net operating loss and research and development credit carryforwards |
$ | 32,405,018 | $ | 24,422,274 | ||||
Intangibles and fixed assets |
7,357,256 | 8,784,445 | ||||||
Accruals and other items |
4,240,847 | 2,377,281 | ||||||
Stock-based compensation |
| 582,947 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
44,003,121 | 36,166,947 | ||||||
Less: valuation allowance |
(44,003,121 | ) | (36,166,947 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
$ | | $ | | ||||
|
|
|
|
At December 31, 2011 and 2010 the Company had net operating loss carryforwards of approximately $82.3 million and $60.4 million, respectively, available to reduce future taxable income, if any, for federal and state income tax purposes. The net operating loss carryforwards expire between 2028 and 2031, and valuation allowances equal to the full amounts have been provided.
Utilization of the net operating loss carryforwards may be subject to an annual limitation if the Company experiences a tax code defined change in ownership in excess of percentage change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of the net operating loss before utilization.
The Company reviews its deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of deferred tax liabilities, projections of future taxable income, and tax planning strategies that it might employ to utilize such assets, including net operating loss carryforwards. Based on the positive and negative evidence of recoverability, the Company establishes a valuation allowance against the net deferred assets unless it is more likely than not that it will recover such assets through the above means. In the future, the Companys evaluation of the need for the valuation allowance will be significantly influenced by its ability to achieve profitability and its ability to predict and achieve future projections of taxable income.
As required by ASC 740-10-05, Accounting for Uncertainty in Income Taxes, the Company recognizes the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. Actual results could differ from these estimates.
The Company was assessed late filing penalties by the Internal Revenue Service related to the returns for PA LLC for the tax years ended December 31, 2009 and 2008. The Company paid approximately $50,000 during 2011 for penalties related to 2009. The charge was recorded in selling, general and administrative expenses for the year ended December 31, 2011. The penalties related to 2008 were waived by the Internal Revenue Service. As of December 31, 2011, the Company did not have any liability for uncertain tax positions.
The Company files U.S. and state income tax returns with varying statutes of limitations. Tax years 2008 and forward remain open to examination.
Note 13 Related Party Transactions
During 2011, 2010, and 2009, the Company incurred rent expense of $0.0 million, $0.5 million, and $0.5 million, respectively, in connection with office space sub-leased from XL Tech on a month-to-month basis.
During December 2008, the Company issued 1,000,000 shares of common stock for consulting services to be performed by a company owned by a board member through December 2010. These consulting services consist of
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general business and financial consulting and assistance in negotiating sales, financing, and other agreements. The fair value of the shares issued was $3.2 million which was initially recorded as unearned services, a reduction of paid in capital. During 2011, 2010, 2009, and the period from September 22, 2006 (inception) to December 31, 2011, $0.0 million, $1.5 million, $1.6 million, and $3.2 million, respectively, was amortized as selling, general and administrative expense.
As described in Note 9, the Companys principal shareholder has funded notes payable in support of the Companys operations. These notes payable provide for the accrual of interest through their June 30, 2012 maturity date and $10.4 million and $4.8 million, of such accrued interest is included in accrued expenses-related party as of December 31, 2011 and 2010, respectively. In addition, the Companys principal shareholder has invoiced the Company for loan and corporate oversight expenses as well as out-of-pocket costs related to strategic and capital markets assistance. During 2011, the amount of such reimbursable costs invoiced to the Company was $0.8 million, which the Company has recorded as selling, general and administrative expense. The total amount of such accrued expenses as of December 31, 2011 was $0.9 million and is included in accrued expenses-related party on the accompanying consolidated balance sheet. The Companys principal shareholder has indicated that it will not require repayment of these accrued amounts until significant new funding is obtained from an unaffiliated source.
Note 14 Subsequent Events
Name Change
On February 7, 2012, the Company amended its certificate of incorporation to change the name of the Company from PetroAlgae Inc. to Parabel Inc.. The Company also amended its bylaws to reflect the name change. The Companys ticker symbol continues to be PALG.
Resignation of Chairman
On February 9, 2012, John Scott, Ph.D., resigned from the board of directors of the Company. Dr. Scott founded the Company and served as non-executive Chairman since June 2011. Anthony John Phipps Tiarks, the Companys Chief Executive Officer, accepted the role of Chairman.
Resignation of Chief Financial Officer
On March 13, 2012, James P. Dietz advised the Company of his decision to resign from his position as the Companys Chief Financial Officer in order to pursue other opportunities. Mr. Dietz will remain with the Company as Chief Financial Officer to oversee the fiscal year-end accounting close and annual audit process, and the filing of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The Company is currently searching for a Chief Financial Officer.
Debt Financing
On February 16, 2012 and March 12, 2012, PetroTech funded $1.0 million and $0.5 million, respectively, to PA LLC pursuant to the terms of separate senior secured term notes. The notes provide for interest at 12%, which is accrued as a payment-in-kind amount, and is due on June 30, 2012.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of its disclosure controls, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Such system of controls and procedures was designed to obtain reasonable assurance of achieving its control objective. The Companys management, including its principal executive officer and principal financial officer, has determined that as of December 31, 2011, the Companys disclosure controls and procedures were effective at a reasonable assurance level.
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Internal Control over Financial Reporting
Managements Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. The Companys internal control over financial reporting is a process designed under the supervision of the Companys principal executive officer and principal financial officer to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of the Companys consolidated financial statements for external reporting purposes in accordance with GAAP, and (iii) compliance with applicable laws and regulations. Under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of its 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. Based on that evaluation, management concluded that its internal control over financial reporting was effective as of December 31, 2011.
This annual report does not include an attestation report of the Companys independent registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only managements report in this Form 10-K.
Changes in Internal Controls
During 2011, there have been no changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Inherent Limitations Over Internal Controls
The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. The Companys internal control over financial reporting includes those policies and procedures that:
(i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Companys assets; |
(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that the Companys receipts and expenditures are being made only in accordance with authorizations of the Companys management and directors; and |
(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the consolidated financial statements. |
The Companys management, including its principal executive officer and principal financial officer, does not expect that internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following identifies each of the directors and executive officers of Parabel Inc. *
Name |
Age |
Positions | ||||
Anthony John Phipps Tiarks |
56 | Chief Executive Officer and Chairman | ||||
James P. Dietz |
47 | Chief Financial Officer and Secretary | ||||
Peter Sherlock |
55 | Chief Operating Officer | ||||
Isaac D. Szpilzinger |
63 | Director | ||||
Sayan Navaratnam |
37 | Director |
* | John S. Scott resigned as Non-Executive Chairman of the Board of the Company on February 9, 2012. On March 13, 2012, James P. Dietz advised the Company of his decision to resign as Chief Financial Officer. |
Set forth below is biographical information with respect to each of the aforementioned individuals.
Anthony John Phipps Tiarks has been the Companys Chief Executive Officer since June 2011 and Chairman since February 2012. Prior to joining the Company, Mr. Tiarks was President and Chief Executive Officer of Liberty Aerospace, Inc., which he established in the United States in 2000 with the purpose of developing, certifying and delivering an entry level aircraft. Prior to starting Liberty Aerospace, Mr. Tiarks was the Managing Director in London of Donaldson, Lufkin & Jenrette, a U.S. investment bank, Chairman of Tide Brokers Limited, a wholesale money broker, and Managing Director of Tide (U.K.) Limited, an international foreign exchange fund management group. Mr. Tiarks has a BSc in Systems and Management from City University, London, United Kingdom.
James P. Dietz has been the Companys Chief Financial Officer since July 2011, and served as Vice President of Finance and Accounting from May 2010 to July 2011. From May 2009 through April 2010, Mr. Dietz served as Chief Financial Officer of U.S. Capital Holdings, LLC, an international private equity investor and developer, whose parent company is Tangshan Ganglu Iron & Steel Co., Ltd., a Chinese industrial company. Mr. Dietz also serves on the board of Global Income Trust (formerly known as MacQuarie CNL Global Income Trust, Inc.) a non-traded public real estate investment company, since his appointment as an independent director in November 2009. From May 2008 until May 2009, Mr. Dietz served as Vice President Finance and Business Development for PACT, LLC, a real estate development company. From 1995 until December 2007, Mr. Dietz was with residential community developer WCI Communities, Inc., or WCI, and various predecessor firms, as its Chief Financial Officer. In August 2007, shareholders at WCI approved a new composition for WCIs board of directors which had been submitted to them for vote at their annual meeting pursuant to an agreement between WCI and affiliates of Carl Icahn that resulted from a proxy contest. Mr. Dietz resigned as WCIs Chief Financial Officer in December 2007. WCI filed a voluntary petition under Chapter 11 of the federal bankruptcy laws on August 4, 2008, from which it emerged on August 31, 2009. From 1993 to 1995, Mr. Dietz managed asset-backed financing originations for GTE Leasing Corporation (a subsidiary of GTE, a predecessor to Verizon Communications). He began his professional career in December 1986 joining Arthur Andersen & Co where he advanced to manager, providing audit and financial consulting services to clients in the construction, real estate, healthcare and legal industries. Mr. Dietz earned a BA in accounting and economics from the University of South Florida in 1986. Mr. Dietz is a certified public accountant.
Peter Sherlock has been the Companys Chief Operating Officer since July 2011. Between 1999 and 2011, Mr. Sherlock held the positions of Vice President, Product Development and Vice President/Chief Technology Officer at AuthenTec, Inc., a semiconductor, biometrics and security company. From 1996 until 1999, Mr. Sherlock established and directed the Raleigh (NC) Design Center for Integrated Device Technologies (IDT, California), a semiconductor electronics company. From 1990 until 1996, Mr. Sherlock held the positions of Vice President, Operations and Senior Vice President Business Development at IVEX Corporation, a real time visual simulation systems company, where he was recruited from the United Kingdom to work in the Atlanta, USA based operation. From 1977 until 1990, Mr. Sherlock spent his early career with Ferranti Computer Systems in the United Kingdom. Mr. Sherlock holds a First Class BSc in Electrical Engineering from the University of Salford, United Kingdom.
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Isaac D. Szpilzinger has been a member of the Companys board of directors since December 2008. He is an attorney in solo private practice licensed in the state of New York. From 1987 to 2006, Mr. Szpilzinger practiced with the law firm of Herzfeld & Rubin, P.C., where he was named a partner in 1994. He began his legal career in 1985 with a clerkship in the New York State Supreme Court, Appellate Division, Second Judicial Department. Mr. Szpilzinger holds a B.S. in Chemistry, cum laude, from Brooklyn College, and an M.A. in Chemistry and an Advanced Certificate in Educational Administration and Supervision from Brooklyn College. He also holds a J.D., cum laude, from New York Law School. Mr. Szpilzingers legal expertise and his academic background in the sciences enables him to provide valuable insight and guidance to the Companys board of directors.
Sayan Navaratnam has been a member of the Companys board of directors and served on the board of PA LLC since December 2008. Since March 2009, Mr. Navaratnam has been a Senior Managing Director of Laurus Capital Management, LLC (Laurus Capital) and a Senior Managing Director of Valens Capital Management, LLC (Valens Capital), entities affiliated with our principal stockholders. Since 2004, he has been the Chairman of Creative Vistas, Inc., which installed and serviced broadband services to consumers and currently integrates security systems for commercial customers in Canada. From 2000 to 2003, Mr. Navaratnam was the Chief Operating Officer of ASPRO Technologies Ltd. ASPRO Technologies Ltd., which provided printer circuit boards to manufacturers of digital video recorders in the security industry and was sold in 2002 to private investors. He currently serves on the board of a number of other privately-held companies. Mr. Navaratnam holds an Honors Double Specialist degree in economics and political science from the University of Toronto. Mr. Navaratnams extensive background in technology, finance, operations, expertise in workout situations and experience as the chairman of a public company enables him to make a valuable contribution to the Companys board of directors.
The directors and executive officers of PA LLC are identical to the directors and executive officers of Parabel Inc.
Board of Directors and Officers
Seven meetings of the board of directors were held in the last fiscal year. Each director is elected until the next annual meeting of the registrant and until his or her successor is duly elected and qualified or until his or her earlier resignation or removal in accordance with our certificate of incorporation and by-laws. Officers are elected by, and serve at the discretion of, the board of directors. The board of directors may also appoint additional directors up to the maximum number permitted under the Companys by-laws. A director so chosen or appointed will hold office until the next annual meeting of stockholders.
Committees of the Board of Directors
The Company does not have standing audit, nominating or compensation committees, or committees performing similar functions. The Companys board of directors believes that it is not necessary to have standing audit, nominating or compensation committees at this time because the functions of such committees are adequately performed by its board of directors. Therefore, all directors participate in nominations and decisions relating to determination of compensation.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics for all directors, officers and employees. The Code of Business Conduct and Ethics is available under the investor section of the Companys website at www.parabel.com. A copy of the Code of Business Conduct and Ethics may also be obtained at no charge by written request to the attention of the Investor Relations Department at Parabel Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901, telephone: 321-409-7272, email: investorrelations@parabel.com.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information concerning all cash compensation awarded to, earned by or paid to all individuals serving as PA LLCs principal executive officers during the last three completed fiscal years, and all non-cash compensation awarded to those same individuals as of December 31, 2011.
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Name and Principal Position |
|
Fiscal year |
|
Salary | Bonus (11) | Stock Awards |
|
Option Awards (3) |
|
|
All Other Compensation |
|
|
Total Compensation |
| |||||||||||||
Anthony J. Tiarks (5) |
2009 | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||
Chief Executive Officer and Chairman |
2010 | | | | | | | |||||||||||||||||||||
2011 | 235,385 | 30,000 | 3,847,253 | (10) | | | 4,112,638 | |||||||||||||||||||||
Peter E. Sherlock (6) |
2009 | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||
Chief Operating Officer |
2010 | | | | | | | |||||||||||||||||||||
2011 | 94,769 | 10,000 | | 792,000 | | 896,769 | ||||||||||||||||||||||
James P. Dietz (8) |
2009 | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||||||
Chief Financial Officer |
2010 | 126,923 | | | | | 126,923 | |||||||||||||||||||||
2011 | 200,000 | | | 654,215 | | 854,215 | ||||||||||||||||||||||
Stefanie Lattner |
2009 | $ | 185,000 | $ | | $ | | $ | 40,521 | $ | | $ | 225,521 | |||||||||||||||
Vice President - Operations |
2010 | 185,000 | | | | | 185,000 | |||||||||||||||||||||
2011 | 195,962 | | | 524,266 | | 720,228 | ||||||||||||||||||||||
John Kinney (9) |
2009 | $ | 46,731 | $ | | $ | | $ | | $ | | $ | 46,731 | |||||||||||||||
Vice President - Corporate Development |
2010 | 135,000 | 5,600 | | 190,144 | | 330,744 | |||||||||||||||||||||
2011 | 166,500 | | | 163,554 | 33,025 | (9) | 363,079 | |||||||||||||||||||||
John S. Scott (4) |
2009 | $ | 477,404 | (1) | $ | | $ | | $ | | $ | | $ | 477,404 | ||||||||||||||
Chairman of the Board and Chief Executive Officer |
2010 | 485,592 | (1) | | 3,252,920 | (2) | | | 3,738,512 | |||||||||||||||||||
2011 | 110,577 | | | | | 110,577 | ||||||||||||||||||||||
David P. Szostak (7) |
2009 | $ | 225,000 | (1) | $ | | $ | | $ | | $ | | $ | 225,000 | ||||||||||||||
Chief Financial Officer |
2010 | 225,298 | (1) | | 1,097,861 | (2) | | | 1,323,159 | |||||||||||||||||||
2011 | 165,385 | | | | | 165,385 |
The following table sets forth information with respect to equity awards in PA LLC as of December 31, 2011 held by PA LLCs principal executive officers.
Name |
Unvested Units | Vested Units (12) |
Total Unit Awards (2) |
|||||||||
Anthony J. Tiarks |
| | | |||||||||
Peter E. Sherlock |
| | | |||||||||
James P. Dietz |
| | | |||||||||
Stefanie Lattner |
| | | |||||||||
John Kinney |
| | | |||||||||
John S. Scott |
| 800,000 | 800,000 | |||||||||
David P. Szostak |
| 270,000 | 270,000 |
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(1) | Includes certain amounts that, upon mutual agreement between PA LLC and the executive officers, have been withheld. The aggregate amount is approximately $60,000 and $220,000 for 2009 and 2010, respectively, for the officers referenced above. |
(2) | Incentive equity awards in PA LLC are in the form of restricted units. As of December 31, 2010, the Companys principal stockholder modified the terms of restricted units that were originally granted to these former executives in 2008 to remove the right of the Company to repurchase the units, causing these units to be immediately vested and requiring a revaluation of the units. Based upon current estimates and applying the same discounted cash flow methodology used as of the prior valuation dates, the compensation cost was increased during 2010 by the amounts shown. |
(3) | On June 30, 2011, the Companys board of directors authorized the re-pricing of all outstanding stock options, changing the exercise price from $8.00 or $8.50 to $5.50 per option. The Company computed the additional compensation cost as the fair value of the new awards in excess of the fair value of the original awards immediately before their terms were modified, using the Black-Scholes pricing model. The compensation amounts listed in this table for all periods reflect the revised values based upon the re-pricing. |
(4) | Dr. Scott resigned as Chief Executive Officer on June 16, 2011, and he resigned as Chairman of the Board on February 9, 2012. |
(5) | Mr. Tiarks joined the Company on June 15, 2011 and was named Chairman on February 9, 2012. |
(6) | Mr. Sherlock joined the Company on July 21, 2011. |
(7) | Mr. Szostak separated from the Company during 2011. |
(8) | Mr. Dietz joined the Company on May 10, 2010 as its Vice President of Finance and Accounting. On July 26, 2011, the Board of Directors of the Company appointed Mr. Dietz as the Chief Financial Officer of the Company. |
(9) | Mr. Kinney joined the Company on August 24, 2009. During 2011, Mr. Kinney was reimbursed approximately $33,000 for his lodging and commuting expenses in addition to his salary. |
(10) | In June 2011, the board of directors authorized the grant of one million SARs at a base grant price of $5.50 per share to Mr. Tiarks. The SARs have a ten-year term and will vest in equal quarterly installments over a two-year period. In the event of a change of control (as defined in the 2009 Plan) or a qualified public offering (as defined in the executives employment agreement), the SARs will become 100% vested. |
(11) | The Company currently does not have a bonus plan; however, certain individuals have bonus potential based upon specific criterion per their individual employment offers. |
(12) | Employees holding Class B Membership Units that are not subject to repurchase by the Company will be able to exchange their equity interests for Parabel Inc. common stock. |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table shows the number and percentage of shares of the Companys common stock owned of record and beneficially by each director, officer and named executive officer of the Company, and by each person beneficially owning more than five (5%) percent of any class of the common stock, as of December 31, 2011. Except as otherwise noted, the address of the referenced individual is c/o Parabel Inc., 1901 S. Harbor City Boulevard, Suite 300, Melbourne, FL 32901.
As used in the table below, the term beneficial ownership means the sole or shared power to vote or direct the voting, or to dispose or direct the disposition, of any security. A person is deemed as of any date to have beneficial ownership of any security that such person has a right to acquire within 60 days after such date. Except as otherwise indicated, the stockholders listed below have sole voting and investment powers with respect to the shares indicated.
Name | Title of Stock Class |
Beneficial Ownership |
Percent of Class (5) |
|||||||||
5% Holders |
||||||||||||
PetroTech Holdings Corp. (1) c/o Laurus Capital Management, LLC 875 Third Avenue 3rd Floor New York, New York 10022 |
Common Stock | 100,000,000 | 93.5 | % | ||||||||
Officers and Directors |
||||||||||||
Anthony John Phipps Tiarks (3) |
Common Stock | | | |||||||||
Peter Sherlock (3) |
Common Stock | | | |||||||||
James P. Dietz (3) |
Common Stock | 50,000 | 0.05 | % | ||||||||
Stefanie Lattner (4) |
Common Stock | 15,000 | 0.01 | % | ||||||||
John Kinney (4) |
Common Stock | 68,752 | 0.06 | % | ||||||||
Sayan Navaratnam (2) |
Common Stock | 1,000,000 | 0.94 | % | ||||||||
Isaac Szpilzinger (2) |
Common Stock | | | |||||||||
John S. Scott (4) |
Common Stock | | | |||||||||
David P. Szostak (4) |
Common Stock | | | |||||||||
All Directors and Officers as a Group (9 persons) |
Common Stock | 1,133,752 | 1.06 | % |
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(1) | PetroTech Holdings Corp. (PetroTech) is owned by Valens U.S. SPV I, LLC, a Delaware limited liability company (Valens U.S.), Valens Offshore SPV I, Ltd., a Cayman Islands limited company (Valens SPV I), Valens Offshore SPV II, Corp., a Delaware corporation (Valens SPV II), Laurus Master Fund, Ltd. (In Liquidation), a Cayman Islands limited company (the Fund), Calliope Capital Corporation, a Delaware corporation (CCC) and PSource Structured Debt Limited, a Guernsey company (PSource). The Fund, CCC and PSource are each managed by Laurus Capital Management, LLC, a Delaware limited liability company (LCM). Valens U.S., Valens SPV I and Valens SPV II are each managed by Valens Capital Management, LLC (VCM). Eugene Grin and David Grin, through other entities, are the controlling principals of LCM and VCM and share sole voting and investment power over all securities of the Company held by PetroTech. Eugene Grin and David Grin disclaim beneficial ownership of the securities of the Company held by PetroTech, except to the extent of such persons pecuniary interest in PetroTech, if any. |
(2) | Indicates director. |
(3) | Indicates officer. |
(4) | Indicates named executive officer. |
(5) | The percentage of common stock is calculated based upon 106,920,730 shares issued and outstanding as of December 31, 2011. |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
1. Consulting Agreement with Board Director
During December 2008, the Company issued 1,000,000 shares of common stock to Nationwide Solutions, Inc. (Nationwide Solutions), a Canadian corporation of which Sayan Navaratnam is the sole shareholder, in exchange for consulting services. These consulting services consist of general business and financial consulting and assistance with the negotiation of sales, financing and other agreements. The fair value of the shares issued was $3.2 million which was initially recorded as unearned services, a reduction of paid in capital, and amortized as selling, general and administrative expense.
As of March 1, 2009, Sayan Navaratnam accepted a position with both Laurus Capital and Valens Capital. In addition, Nationwide Solutions has entered into a consulting agreement with both Laurus Capital and Valens Capital.
2. Issuance of Shares to Entities Affiliated with Principal Shareholder
On May 6, April 7, and March 1, 2010, in private placement transactions exempt from the registration requirements of the Securities Act pursuant to the exemption afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder, the Company issued and sold, in the aggregate (i) 686,625 shares of common stock to Valens U.S. SPV I, LLC for the purchase price of $8.00 per share, and warrants to purchase 686,625 shares of the Companys common stock at an exercise price of $15.00 per share and (ii) 563,375 shares of common stock to Valens Offshore SPV I, Ltd. for the purchase price of $8.00 per share, and warrants to purchase 563,375 shares of the Companys common stock at an exercise price of $15.00 per share. The Company used the proceeds of these private placements to fund the working capital needs of PA LLC.
3. Notes Payable to Principal Shareholder
During 2011, the Companys principal shareholder funded a total of $26.2 million to PA LLC in support of the Companys operations, pursuant to the terms of 15 separate senior secured term notes. These notes payable provide for the accrual of interest at an annual rate of 12% through their June 30, 2012 maturity date. The Company has not paid any principal or interest on these notes during 2011. The outstanding amount of principal on these notes as of March 30, 2012 is $26.2 million. In addition, the Companys principal shareholder has invoiced the Company for loan and corporate oversight expenses as well as out-of-pocket costs related to strategic and capital markets assistance. During 2011, the amount of such reimbursable costs invoiced to the Company was $0.8 million, which the Company has recorded as selling, general and administrative expense. The Companys principal shareholder has indicated that it will not require repayment of these accrued amounts until significant new funding is obtained from an unaffiliated source.
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4. Employment Agreements with Officers
The Company entered into the following employment agreements with the following executives: (i) Anthony John Phipps Tiarks as Chief Executive Officer of the Company, effective as of June 15, 2011 and (ii) Peter Sherlock as Chief Operating Officer of the Company, effective as of July 21, 2011.
Each employment agreement has an initial term of one year and will continue on a year-to-year basis thereafter until the executives employment is not renewed or otherwise terminated as set forth therein.
Mr. Tiarks will receive the following compensation and benefits: (i) an annual base salary of $300,000 (subject to increase, but not decrease, in the sole discretion of the Companys board of directors); (ii) a one-time signing bonus (before taxes) of $30,000; (iii) eligibility to receive an annual performance bonus based upon the achievement of targets established in the Companys sole discretion; (iv) a grant of SARs on a base number of 1,000,000 of the Companys shares at a base grant price of $5.50 per share; (v) eligibility to receive a special cash bonus upon the achievement of certain milestones; (vi) participation in a commission plan and (vii) a one-time bonus of $100,000 if the Company completes a total capital raise of at least $25,000,000. Mr. Sherlock will receive the following compensation and benefits: (i) an annual base salary of $220,000 (subject to increase, but not decrease, in the sole discretion of the Companys board of directors); (ii) eligibility to receive an annual performance bonus based upon the achievement of targets established in the Companys sole discretion; (iii) a grant of stock options on a base number of 200,000 of the Companys shares at a base grant price of $5.50 per share; (iv) eligibility to receive a special cash bonus four times per year, each in the amount of $5,000, upon the achievement of certain milestones and (v) a one-time bonus of $100,000 if the Company complete a total capital raise of at least $25,000,000.
Each of the executives will also receive (i) eligibility to participate in all employee benefit plans and programs maintained from time to time for the Companys employees and (ii) four weeks of annual paid vacation.
In the event the executives employment is terminated for any reason (including by expiration of the term of his employment agreement), the executive will be paid the following through the date of termination: (i) any accrued but unpaid base salary; (ii) reimbursement for any business expenses properly incurred; and (iii) vested benefits, if any, to which he may be entitled under the Companys employee benefit plans or stock option plans, or, collectively, the Accrued Benefits. If the executives employment is terminated by the Company for cause, then he shall not be entitled to any further compensation or benefits other than the Accrued Benefits. If the executives employment is terminated by the Company other than for cause, then the executive shall be entitled to the Accrued Benefits and (subject to signing a mutual release) a lump sum amount equal to the number of days (at the base salary date) between the date of termination and the next anniversary of the execution of the his employment agreement. If the executives employment is terminated by him for good reason, then he shall be entitled to the Accrued Benefits and (subject to signing a mutual release) a lump sum amount equal to the number of days (at the base salary rate) between the date of termination and the next anniversary of the execution of his employment agreement. Each executive can voluntarily resign his employment at any time, effective 31 days following the date on which a written notice to such effect is delivered to the Company. If the executives employment is terminated through a voluntary resignation and for no other reason, he shall be entitled to payment of the Accrued Benefits. In the event of termination of employment by reason of the executives death, his beneficiary or estate, as applicable, shall be entitled to the payment of the Accrued Benefits. Following a termination by the Company for cause or voluntary resignation by the executive, each executive will be subject to a two-year non-competition and non-solicitation agreement. In addition, following termination of employment, each executive will be subject to a covenant not to disparage the Company.
In addition, in the event Mr. Tiarks employment is terminated by the Company through non-renewal of the term of his employment agreement, then Mr. Tiarks shall be entitled to the Accrued Benefits and (subject to signing a mutual release) a lump sum amount equal to the number of days (at the base salary rate) between the date of termination and the next anniversary of the execution of his employment agreement.
5. List of Parents of Company
The information set forth in Item 12 herein is incorporated by reference herein.
6. Director Independence
None of the Companys directors are independent pursuant to the New York Stock Exchange Listed Company Manual.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit and Non-Audit Fees
The following table presents fees for professional services rendered by Grant Thornton LLP, the independent registered public accounting firm engaged by the Company in 2011 to audit its consolidated financial statements.
2011 | 2010 | |||||||
Audit fees (1) |
$ | 349,177 | $ | 582,290 | ||||
Audit-related fees (2) |
| | ||||||
Tax fees (2) |
| | ||||||
All other fees (2) |
| | ||||||
|
|
|
|
|||||
Total |
$ | 349,177 | $ | 582,290 |
(1) | Audit fees were principally for audit work performed on the annual consolidated financial statements as well as review of the Companys interim consolidated financial statements included in Form 10-Q. |
(2) | Grant Thornton LLP did not provide any services in this category during the periods presented. |
Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
The Board of Directors of the Company has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Board of Directors has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm.
Prior to the engagement of the independent registered public accounting firm for next years audit, management will submit a list of services and related fees expected to be rendered during that year within each of four categories of services to the Board of Directors for approval.
1. Audit services include audit and review services performed on the consolidated financial statements, including work performed in connection with registration statements such as issuance of comfort letters.
2. Audit-Related services are for assurance and related services that are traditionally performed by the independent registered public accounting firm, including employee benefit plan audits and due diligence related to mergers and acquisitions.
3. Tax services include all services, except those services specifically related to the audit of the consolidated financial statements, performed by the independent registered public accounting firms tax personnel, including tax analysis; assisting with the coordination of execution of tax-related activities, primarily in the area of corporate development; and tax compliance and reporting.
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4. All Other services are those services not captured in the audit, audit-related or tax categories. The Company generally does not request such services from the independent registered public accounting firm.
Prior to any engagement, the Board of Directors of the Company pre-approves independent public accounting firm services within each category and the fees for each category are budgeted. The Board of Directors of the Company requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval categories. In those instances, the Board of Directors of the Company requires specific pre-approval before engaging the independent registered public accounting firm.
The Board of Directors of the Company may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Board of Directors of the Company at its next scheduled meeting.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15(a)(1) Financial Statements. The following consolidated financial statements, related notes, report of independent registered public accounting firm and supplementary data are incorporated by reference into Item 8 of Part II of this Form 10-K:
| Report of Independent Registered Public Accounting Firm |
| Consolidated Balance Sheets |
| Consolidated Statements of Operations |
| Consolidated Statements of Changes in Stockholders Deficit |
| Consolidated Statements of Cash Flows |
| Notes to Consolidated Financial Statements |
15(a)(2) Financial Statement Schedules. Schedules are omitted because they are not required or because the information is provided elsewhere in the consolidated financial statements.
15(a)(3) Exhibits. These exhibits are available upon request. Requests should be directed to the Investor Relations Department at Parabel Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901, telephone: 321-409-7500, email: investorrelations@parabel.com. All other exhibit numbers indicate exhibits filed by incorporation by reference.
3.1 | Restated Certificate of Incorporation of PetroAlgae Inc. (incorporated by reference to Exhibit 3.1 to the registrants annual report on Form 10-K, filed March 31, 2009) | |
3.2 | Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the registrants current report on Form 8-K, filed February 10, 2012) | |
3.3 | Restated Bylaws of Parabel Inc. (incorporated by reference to Exhibit 3.2 to the registrants current report on Form 8-K, filed February 10, 2012) | |
4.1 | Form of Warrant (incorporated by reference to Exhibit 4.1 to the registrants annual report on Form 10-K, filed March 31, 2011) | |
4.2 | Warrant, dated June 29, 2010, with CNW Investment Company LLC (incorporated by reference to Exhibit 4.2 to the registrants annual report on Form 10-K, filed March 31, 2011) | |
4.3 | Warrant, dated May 5, 2010, with Valens Offshore SPV I, Ltd. (incorporated by reference to Exhibit 4.6 to the registrants quarterly report on Form 10-Q, filed May 17, 2010) | |
4.4 | Warrant, dated May 5, 2010, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 4.5 to the registrants quarterly report on Form 10-Q, filed May 17, 2010) | |
4.5 | Warrant, dated April 7, 2010, with Valens Offshore SPV I, Ltd. (incorporated by reference to Exhibit 4.4 to the registrants quarterly report on Form 10-Q, filed May 17, 2010) | |
4.6 | Warrant, dated April 7, 2010, with Valens U.S. SPV I, LLC. (incorporated by reference to Exhibit 4.3 to the registrants quarterly report on Form 10-Q, filed May 17, 2010) |
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4.7 | Warrant, dated March 1, 2010, with Valens Offshore SPV Ltd. (incorporated by reference to Exhibit 4.1 to the registrants annual report on Form 10-K, filed March 31, 2010) | |
4.8 | Warrant, dated March 1, 2010, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 4.2 to the registrants annual report on Form 10-K, filed March 31, 2010) | |
4.9 | Warrant, dated March 10, 2010, with Crale Realty LLC (incorporated by reference to Exhibit 4.9 to the registrants annual report on Form 10-K, filed March 31, 2011) | |
4.10 | Warrant, dated December 24, 2009, with Green Science Energy LLC (incorporated by reference to Exhibit 4.3 to the registrants annual report on Form 10-K, filed March 31, 2010) | |
4.11 | Warrant, dated October 9, 2009, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.6 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.12 | Warrant, dated October 9, 2009, with Valens Offshore SPV Ltd. (incorporated by reference to Exhibit 10.8 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.13 | Warrant, dated October 9, 2009, with Green Alternative Energy USA, LLC (incorporated by reference to Exhibit 10.4 to the registrants quarterly report on Form 10-Q, filed November 15, 2009) | |
4.14 | Warrant, dated September 29, 2009, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.10 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.15 | Warrant, dated September 29, 2009, with Valens Offshore SPV I, Ltd. (incorporated by reference to Exhibit 10.12 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.16 | Warrant, dated September 14, 2009, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.14 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.17 | Warrant, dated September 14, 2009, with Valens Offshore SPV I, Ltd. (incorporated by reference to Exhibit 10.16 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.18 | Warrant, dated September 4, 2009, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.18 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.19 | Warrant, dated September 4, 2009, with Valens Offshore SPV I, Ltd. (incorporated by reference to Exhibit 10.20 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.20 | Warrant, dated August 28, 2009, with Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.22 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
4.21 | Warrant, dated August 28, 2009, with Valens Offshore SPV I, Ltd. (incorporated by reference to Exhibit 10.24 to the registrants quarterly report on Form 10-Q, filed November 16, 2009) | |
10.1 | 2009 Equity Compensation Plan (incorporated by reference to Exhibit 4 of the registrants registration on Form S-8 filed with the Securities and Exchange Commission on June 17, 2009) | |
10.2 | Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.2 to the registrants annual report on Form 10-K, filed March 31, 2011) |
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10.3 | Master License Agreement, dated December 24, 2009, between PA LLC and Congoo, LLC (incorporated by reference to Exhibit 10.5 to the registrants annual report on Form 10-K, filed March 31, 2010) | |
10.4 | Amended and Restated Master Security Agreement, dated July 28, 2009, among PA LLC and PetroAlgae Inc. in favor of LV Administrative Services, Inc. for the benefit of PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.5 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.5 | Joinder Agreement, dated July 28, 2009, by PetroAlgae Inc. and PA LLC and delivered to LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.6 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) |
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10.6 | Equity Pledge Agreement, dated July 28, 2009, among PetroAlgae Inc. and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.7 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.7 | PetroAlgae Inc. Guaranty, dated July 28, 2009 (incorporated by reference to Exhibit 10.8 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.8 | Omnibus Amendment, Joinder and Reaffirmation Agreement, dated July 28, 2009, among PetroAlgae Inc., PA LLC and LV Administrative Services, as administrative and collateral agent for Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.9 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.9 | Second Amended and Restated Term Note, dated July 28, 2009, in the principal amount of $417,511.92, issued by PA LLC to Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.10 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.10 | Amended and Restated Master Security Agreement, dated July 28, 2009, among PA LLC and PetroAlgae Inc. in favor of LV Administrative Services, Inc. for the benefit of Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.11 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.11 | Joinder Agreement, dated July 28, 2009, by PetroAlgae Inc., PA LLC and PetroTech Holdings Corp. and delivered to LV Administrative Services, Inc., as administrative and collateral agent for Valens U.S. SPV I, LLC (incorporated by reference to Exhibit 10.12 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.12 | Second Amended and Restated Secured Term Note, dated July 28, 2009, in the principal amount of $7,222,089, issued by PA LLC to PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.2 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.13 | Omnibus Amendment, Joinder and Reaffirmation Agreement, dated July 28, 2009, by and among PetroAlgae Inc., PA LLC and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.1 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.14 | Amended and Restated Secured Convertible Note, dated July 28, 2009, in the principal amount of $10,000,000, issued by PA LLC to PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.3 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.15 | Letter Agreement, dated May 12, 2009, with PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.7 to the registrants quarterly report on Form 10-Q, filed May 15, 2009) | |
10.16 | Amendment One to Master License Agreement, dated April 30, 2009, by and between PA LLC and GTB Power Enterprise, Ltd. (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (incorporated by reference to Exhibit 10.5 to the registrants quarterly report on Form 10-Q, filed May 15, 2009) | |
10.17 | Side Letter to Master License Agreement, dated March 5, 2009, between PA LLC and GTB Power Enterprise, Ltd. (incorporated by reference to Exhibit 10.3 to the registrants quarterly report on Form 10-Q, filed May 15, 2009) | |
10.18 | Master License Agreement, dated March 5, 2009, by and between PA LLC and GTB Power Enterprise, Ltd. (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (incorporated by reference to Exhibit 10.2 to the registrants quarterly report on Form 10-Q, filed May 15, 2009) |
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10.19 | Demand Note, dated December 26, 2008, in the principal amount of $10,000,000, issued by PA LLC to PetroAlgae Inc. (incorporated by reference to Exhibit 10 to the registrants current report on Form 8-K, filed January 6, 2009) | |
10.20 | Consulting Agreement, dated December 19, 2008, between PetroAlgae Inc. and Nationwide Solutions Inc. (incorporated by reference to Exhibit 10.3 to the registrants current report on Form 8-K, filed December 29, 2008) | |
10.21 | Substitute Membership Agreement, dated December 19, 2008, between PetroTech Holdings Corp. and PetroAlgae Inc. (incorporated by reference to Exhibit 10.4 to the registrants current report on Form 8-K, filed December 29, 2008) | |
10.22 | Promissory Note, dated June 12, 2008, in the principal amount of $25,000,000, issued by PA LLC to XL TechGroup, Inc. and assigned to PetroTech Holdings Corp., as amended by the Omnibus Amendment, Joinder and Reaffirmation Agreement, dated July 28, 2009, by and among PetroAlgae Inc., PA LLC and LV Administrative Services, Inc., as administrative and collateral agent for PetroTech Holdings Corp. (incorporated by reference to Exhibit 10.4 to the registrants quarterly report on Form 10-Q, filed August 14, 2009) | |
10.23 | Form of Secured Term Note (incorporated by reference to Exhibit 10.1 to the registrants quarterly report on Form 10-Q, filed November 14, 2011) |
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10.24 | Separation Agreement, dated March 8, 2011, by and among Robert Harris, PA LLC and PetroAlgae Inc. (incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K, filed March 14, 2011) | |
10.25 | Amended and Restated Limited Liability Company Agreement of PA LLC, dated February 16, 2007 (incorporated by reference to Exhibit 10.5 to the registrants current report on Form 8-K, filed December 29, 2008) | |
*10.26 | Lease Agreement, dated February 1, 2011, between One Harbor Financial Limited Company and PA LLC | |
10.27 | Employment Agreement, dated as of June 15, 2011, by and among PetroAlgae Inc., PA LLC and Anthony John Phipps Tiarks (incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K, filed June 16, 2011) | |
10.28 | Employment Agreement, dated as of July 6, 2011, by and among PetroAlgae Inc., PA LLC and Peter Sherlock (incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K, filed August 3, 2011) | |
10.29 | Amended and Restated License Agreement, dated as of October 25, 2011, by and between PA LLC and Asesorias e Inversiones Quilicura S.A. (incorporated by reference to Exhibit 10.1 to the registrants current report on Form 8-K, filed December 12, 2011) | |
*10.30 | Joint Testing and Evaluation Agreement, dated July 11, 2011, by and between PA LLC and CRI Catalyst Company LP | |
14.1 | Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the registrants annual report on Form 10-K, filed March 31, 2009) | |
21 | Subsidiary of the Registrant (incorporated by reference to Exhibit 21 to the registrants annual report on Form 10-K, filed March 31, 2010) | |
*23.1 | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm | |
*31.1 | Rule 13a-14(a) Certification by the Principal Executive Officer | |
*31.2 | Rule 13a-14(a) Certification by the Principal Financial Officer | |
*32.1 | Certification by the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
*32.2 | Certification by the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1 | Letter Agreement, dated August 15, 2008, between PetroTech Holdings Corp. and XL TechGroup, Inc. (incorporated by reference to Exhibit 99.1 to the registrants annual report on Form 10-K, filed March 31, 2010) | |
**101 | The following materials from Parabel Inc.s Annual Report on Form 10-K for the year ended December 31, 2011 are formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010; (ii) Consolidated Statements of Operations for the twelve months ended December 31, 2011, December 31, 2010 and December 31, 2009 and the 64 months ended December 31, 2011; (iv) Consolidated Statements of Changes in Stockholders Deficit as of December 31, 2011; (v) Consolidated Statements of Cash Flows for the twelve months ended December 31, 2011, December 31, 2010, December 31, 2009 and the 64 months ended December 31, 2011; and (vi) the Notes to the Consolidated Financial Statements. |
| Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request. |
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These exhibits are available upon request. Requests should be directed to the Investor Relations Department at Parabel Inc., 1901 S. Harbor City Blvd., Suite 300, Melbourne, FL 32901, telephone: 321-409-7500, email: investorrelations@petroalgae.com. The exhibit numbers followed by an asterisk (*) indicate exhibits filed with this Form 10-K. The exhibit numbers followed by two asterisks (**) indicate exhibits included pursuant to Rule 406T of Regulation S-T and are deemed not filed for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
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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.
Date: March 30, 2012
PARABEL INC. | ||
By: | /s/ ANTHONY JOHN PHIPPS TIARKS | |
Name: | Anthony John Phipps Tiarks | |
Title: | Chief Executive Officer | |
(Principal Executive Officer) | ||
By: | /s/ JAMES P. DIETZ | |
Name: | James P. Dietz | |
Title: | Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) |
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