Attached files
file | filename |
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EX-32.1 - CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Parabel Inc. | d331693dex321.htm |
EX-31.2 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Parabel Inc. | d331693dex312.htm |
EX-32.2 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Parabel Inc. | d331693dex322.htm |
EXCEL - IDEA: XBRL DOCUMENT - Parabel Inc. | Financial_Report.xls |
EX-31.1 - CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Parabel Inc. | d331693dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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 600 Melbourne, FL |
32901 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 321-409-7500
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
There were 106,920,730 shares of common stock with a par value of $0.001 per share outstanding at May 11, 2012.
Table of Contents
PART I. |
4 | |||||||||
ITEM 1. |
4 | |||||||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
20 | ||||||||
ITEM 3. |
25 | |||||||||
ITEM 4. |
26 | |||||||||
PART II. |
28 | |||||||||
ITEM 1. | 28 | |||||||||
ITEM 1A. |
28 | |||||||||
ITEM 2. |
28 | |||||||||
ITEM 3. |
28 | |||||||||
ITEM 4. |
28 | |||||||||
ITEM 5. |
28 |
2
Table of Contents
This quarterly report on Form 10-Q (this Form10-Q) contains forward-looking statements. All statements other than statements of historical facts contained in this Form10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words believe, may, will, estimate, continue, anticipate, intend, expect and similar expressions are intended to identify forward-looking statements. Parabel Inc. (the Company) has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Risk Factors. Moreover, the Company operates in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for the Companys management to predict all risks, nor can the Company assess the impact of all factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements it may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. The Company undertakes no obligation to update publicly any forward-looking statements for any reason after the date of this Form10-Q to conform these statements to actual results or to changes in its expectations.
You should read this Form10-Q with the understanding that the Company actual future results, levels of activity, performance and events and circumstances may be materially different from what it expects.
3
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS |
4
Table of Contents
Parabel Inc.
(A Development Stage Company)
Consolidated Balance Sheets
March
31, 2012 (Unaudited) |
December 31, 2011 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,398,236 | $ | 8,842,269 | ||||
Restricted cash |
75,033 | 75,286 | ||||||
Prepaid expenses |
97,065 | 116,672 | ||||||
Other current assets |
1,005,910 | 777,594 | ||||||
|
|
|
|
|||||
Total current assets |
7,576,244 | 9,811,821 | ||||||
Property and equipment |
3,106,594 | 3,066,217 | ||||||
Accumulated depreciation |
(2,113,619 | ) | (1,974,566 | ) | ||||
|
|
|
|
|||||
Net property and equipment |
992,975 | 1,091,651 | ||||||
Deposits |
256,377 | 256,015 | ||||||
|
|
|
|
|||||
Total assets |
$ | 8,825,596 | $ | 11,159,487 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 969,858 | $ | 948,375 | ||||
Accrued expenses |
1,171,184 | 1,195,374 | ||||||
Accrued expenses - related party |
13,119,879 | 11,294,885 | ||||||
Deferred revenue |
112,500 | 612,500 | ||||||
Current portion of notes payable - related party |
80,678,677 | 78,914,092 | ||||||
|
|
|
|
|||||
Total current liabilities |
96,052,098 | 92,965,226 | ||||||
Deferred rent |
32,333 | 32,280 | ||||||
|
|
|
|
|||||
Total liabilities |
96,084,431 | 92,997,506 | ||||||
|
|
|
|
|||||
Stockholders deficit: |
||||||||
Preferred stock - $.001 par value, 25,000,000 shares authorized; no shares issued or outstanding at March 31, 2012 and December 31, 2011 |
| | ||||||
Common stock - $.001 par value, 300,000,000 shares authorized; 106,920,730 shares issued and outstanding at March 31, 2012 and December 31, 2011 |
106,921 | 106,921 | ||||||
Paid in capital |
40,309,961 | 39,801,148 | ||||||
Deficit accumulated during the development stage |
(128,046,094 | ) | (122,887,794 | ) | ||||
|
|
|
|
|||||
Parabel Inc. stockholders deficit |
(87,629,212 | ) | (82,979,725 | ) | ||||
Non-controlling interest |
370,377 | 1,141,706 | ||||||
|
|
|
|
|||||
Total stockholders deficit |
(87,258,835 | ) | (81,838,019 | ) | ||||
|
|
|
|
|||||
Total liabilities and stockholders deficit |
$ | 8,825,596 | $ | 11,159,487 | ||||
|
|
|
|
See the accompanying notes to the consolidated financial statements.
5
Table of Contents
Parabel Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
For the Period (Inception) Through |
||||||||||||
Three Months Ended March 31, | March 31, | |||||||||||
2012 | 2011 | 2012 | ||||||||||
Revenues: |
||||||||||||
License fees |
$ | 500,000 | $ | | $ | 500,000 | ||||||
|
|
|
|
|
|
|||||||
Total revenues |
500,000 | | 500,000 | |||||||||
Costs and expenses: |
||||||||||||
Cost of sales |
39,792 | | 39,792 | |||||||||
Selling, general and administrative |
2,513,733 | 2,715,268 | 64,004,314 | |||||||||
Research and development |
1,635,253 | 3,726,981 | 60,302,727 | |||||||||
Interest expense - related party |
2,074,115 | 1,327,299 | 18,190,209 | |||||||||
Depreciation |
139,053 | 246,256 | 3,578,439 | |||||||||
|
|
|
|
|
|
|||||||
Total costs and expenses |
6,401,946 | 8,015,804 | 146,115,481 | |||||||||
|
|
|
|
|
|
|||||||
Net loss |
(5,901,946 | ) | (8,015,804 | ) | (145,615,481 | ) | ||||||
Net loss attributable to non-controlling interest |
743,646 | 1,038,293 | 17,569,387 | |||||||||
|
|
|
|
|
|
|||||||
Net loss attributable to Parabel Inc. |
$ | (5,158,300 | ) | $ | (6,977,511 | ) | $ | (128,046,094 | ) | |||
|
|
|
|
|
|
|||||||
Basic and diluted common shares outstanding |
106,920,730 | 106,920,730 | ||||||||||
|
|
|
|
|||||||||
Basic and diluted loss per share |
$ | (0.05 | ) | $ | (0.07 | ) | ||||||
|
|
|
|
See the accompanying notes to the consolidated financial statements.
6
Table of Contents
Parabel Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders Deficit
Period From Inception (September 22, 2006) to March 31, 2012
(Unaudited)
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 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - December 31, 2006 |
100,000,000 | $ | 100,000 | $ | 388,532 | $ | | $ | (1,410,724 | ) | $ | (922,192 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amortization of PA LLC interests to employees |
| | 276,986 | | | 276,986 | ||||||||||||||||||
Net loss |
| | | | (8,346,378 | ) | (8,346,378 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - December 31, 2007 |
100,000,000 | $ | 100,000 | $ | 665,518 | $ | | $ | (9,757,102 | ) | $ | (8,991,584 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
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 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - December 31, 2008 |
104,274,189 | $ | 104,274 | $ | 14,398,134 | $ | 37,600 | $ | (29,744,952 | ) | $ | (15,204,944 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
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 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - December 31, 2009 |
106,229,356 | $ | 106,229 | $ | 24,115,788 | $ | (4,529,206 | ) | $ | (60,012,830 | ) | $ | (40,320,019 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
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 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - December 31, 2010 |
106,933,230 | $ | 106,933 | $ | 37,823,248 | $ | 3,588,297 | $ | (98,022,859 | ) | $ | (56,504,381 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
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 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - December 31, 2011 |
106,920,730 | $ | 106,921 | $ | 39,801,148 | $ | 1,141,706 | $ | (122,887,794 | ) | $ | (81,838,019 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amortization of PA LLC interests to employees |
| | (263 | ) | (27,683 | ) | | (27,946 | ) | |||||||||||||||
Amortization of options issued to employees |
| | 28,170 | | | 28,170 | ||||||||||||||||||
Amortization of stock appreciation rights issued to executive |
| | 480,906 | | | 480,906 | ||||||||||||||||||
Net loss |
| | | (743,646 | ) | (5,158,300 | ) | (5,901,946 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance - March 31, 2012 |
106,920,730 | $ | 106,921 | $ | 40,309,961 | $ | 370,377 | $ | (128,046,094 | ) | $ | (87,258,835 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial statements.
7
Table of Contents
Parabel Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
For the Period (Inception) |
||||||||||||
Three Months Ended March 31, | March 31, | |||||||||||
2012 | 2011 | 2012 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (5,901,946 | ) | $ | (8,015,804 | ) | $ | (145,615,481 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Amortization of original issue discount |
| | 1,453,000 | |||||||||
Amortization of Company options |
28,170 | 488,590 | 2,476,141 | |||||||||
Amortization of stock appreciation rights |
480,906 | | 1,522,870 | |||||||||
Amoritization of unearned services |
| | 3,150,000 | |||||||||
Amortization of PA LLC interests to employees |
(27,946 | ) | 943,768 | 18,771,774 | ||||||||
Expenses paid and interest added to notes payable - related party |
264,585 | 247,764 | 11,640,426 | |||||||||
Expenses paid by issuance of common stock |
| | 1,214,230 | |||||||||
Depreciation |
139,053 | 246,256 | 3,578,439 | |||||||||
Impairment loss |
| | 588,773 | |||||||||
Loss on disposition of equipment |
| 2,694 | 317,373 | |||||||||
Write-off of other non-current assets |
| | 1,286,764 | |||||||||
Decrease (increase) in restricted cash |
253 | 325,000 | (75,033 | ) | ||||||||
Decrease (increase) in prepaid expenses |
19,607 | (22,681 | ) | (116,679 | ) | |||||||
(Increase) in other current assets |
(169,488 | ) | | (583,764 | ) | |||||||
(Increase) in deposits |
(362 | ) | (50,000 | ) | (236,763 | ) | ||||||
(Increase) in other non-current assets |
| | (109,720 | ) | ||||||||
Increase (decrease) in accounts payable |
21,483 | (210,113 | ) | (338,072 | ) | |||||||
Increase in accrued expenses |
1,741,976 | 512,646 | 11,918,453 | |||||||||
(Decrease) increase in deferred revenue |
(500,000 | ) | | 112,500 | ||||||||
Increase in deferred rent |
53 | 10,780 | 32,333 | |||||||||
|
|
|
|
|
|
|||||||
Net cash used in operating activities |
$ | (3,903,656 | ) | $ | (5,521,100 | ) | $ | (89,012,436 | ) | |||
|
|
|
|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sale of asset |
| 400 | 86,320 | |||||||||
Acquisition of property and equipment |
(40,377 | ) | (255,709 | ) | (5,563,880 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
$ | (40,377 | ) | $ | (255,309 | ) | $ | (5,477,560 | ) | |||
|
|
|
|
|
|
|||||||
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 |
| | 27,980,000 | |||||||||
Borrowings under note payable - related party |
1,500,000 | 5,425,000 | 71,119,601 | |||||||||
PA LLC units returned for cash and surrendered technology license |
| | (600,000 | ) | ||||||||
Issuance of common stock and warrants for cash |
| | 2,000,000 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by financing activities |
$ | 1,500,000 | $ | 5,325,000 | $ | 100,888,232 | ||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in cash |
(2,444,033 | ) | (451,409 | ) | 6,398,236 | |||||||
Cash and cash equivalents - beginning of period |
8,842,269 | 1,140,882 | | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents - end of period |
$ | 6,398,236 | $ | 689,473 | $ | 6,398,236 | ||||||
|
|
|
|
|
|
|||||||
Non-cash investing and financing activities: |
||||||||||||
Liability incurred for other non-current asset |
$ | (47,598 | ) | $ | | $ | 315,720 | |||||
Stock and warrants issued for other liabilities, net |
$ | | $ | (100,000 | ) | $ | | |||||
Common stock issued for unearned services |
$ | | $ | | $ | 3,150,000 | ||||||
Issuance of shares for other current asset |
$ | | $ | | $ | 1,200,000 | ||||||
Return of common stock for other current asset |
$ | | $ | | $ | (342,000 | ) | |||||
Liability repaid with restricted cash |
$ | | $ | (2,000,000 | ) | $ | |
See the accompanying notes to the consolidated financial statements.
8
Table of Contents
Parabel Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2012
(Unaudited)
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 the sponsor and parent of PA LLC 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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and Rule 8-03 of Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management are necessary for the fair statement of the Companys results for the interim period presented. The consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2012 or any future period. For further information, refer to the consolidated financial statements of the Company included in the Companys Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the SEC) on March 30, 2012.
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 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 records 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 under a license agreement or such receipts are refundable at the customers option, these amounts will be reported as deferred revenue.
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Restricted Cash
As of March 31, 2012 and 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 March 31, 2012. 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.
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 the need to replace such assets. 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 assets 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.
No impairment indicators were noted during the three months ended March 31, 2012 or 2011 and the Companys process of monitoring these assets was unchanged during this period.
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, including enhancements to the products that it has demonstrated to date, are recorded as expenses in the period incurred.
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 and 2,592,143 weighted average warrants and 1,242,168 and 1,569,806 weighted average options were not included for the three months ended March 31, 2012 and 2011, respectively, as they would have had an antidilutive effect.
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Reverse Acquisition
On December 19, 2008, a reverse acquisition was completed 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 before the acquisition. The former stockholders 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.
Recently Issued Accounting Pronouncements
Adoption of New Accounting Standards
Fair Value
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. The adoption of ASU 2011-04 did not have an impact on the consolidated financial statements.
Comprehensive Income
In June 2011, the 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 did not impact the Companys consolidated financial statements or its financial condition.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), to indefinitely defer the effective date of the requirement to present reclassification adjustments from other comprehensive income to net income under ASU 2011-05. The adoption of ASU 2011-12 did not impact the Companys consolidated financial statements or its financial condition.
Note 2 Going Concern
As of March 31, 2012, the Company was in the development stage as it continues to develop its products and 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 three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, the Company reported net losses of $5.9 million, $8.0 million, and $145.6 million, respectively, and negative cash flows from operating activities of $3.9 million, $5.5 million, and $89.0 million, respectively. As of March 31, 2012, the Company had an aggregate accumulated deficit of $128.0 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.
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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 continues to be, wholly dependent on funding from its principal stockholder. The principal amount of debt obligations as of March 31, 2012 was $80.7 million. The principal balance of notes payable related party and the $12.2 million of interest payable thereon is due June 30, 2012. The Company had cash and cash equivalents of $6.5 million as of March 31, 2012; however, if the Company is unable to extend the maturity of its notes payable related party or to raise additional funding (including from its principal stockholder), the Company will be unable to continue its business beyond June 30, 2012.
Note 3 Other Current Assets
Other current assets consist of the following components:
March 31, 2012 |
December 31, 2011 |
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Materials and supplies inventory |
$ | 225,037 | $ | 164,020 | ||||
Capitalized offering costs |
780,873 | 613,574 | ||||||
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|
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Total Other Current Assets |
$ | 1,005,910 | $ | 777,594 | ||||
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Materials and supplies inventory consists of various components purchased by the Company to be used in the construction of pilot-scale bioreactors for prospective customer licensees. Materials and supplies inventory will be reclassed to cost of sales as bioreactor construction and related testing is completed.
In December 2011, the Company filed an amendment to its registration statement on Form S-1 with the SEC and capitalized the associated legal and accounting costs. 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. The Company is also pursuing private sources of funding and has capitalized $0.3 million associated with the private capital raise process.
Note 4 Accrued Expenses
Accrued expenses are comprised of the following components:
March 31, 2012 |
December 31, 2011 |
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Accrued payroll and bonus |
$ | 622,524 | $ | 761,557 | ||||
Accrued vacation compensation |
232,430 | 231,094 | ||||||
Accrued legal, accounting and engineering fees |
221,474 | 129,382 | ||||||
Other accruals |
94,756 | 73,341 | ||||||
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|
|
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Total Accrued Expenses |
$ | 1,171,184 | $ | 1,195,374 | ||||
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|
|
Note 5 Deferred Revenue
During the fourth quarter of 2011, the Company completed the construction of its pilot-scale bioreactor for its customer licensee in South America, Asesorias e Inversiones Quilicura S.A. (AIQ). On March 31, 2012, the testing period during which the Company monitored and evaluated growth within the bioreactor was concluded and AIQ concurred with the Companys report declaring the success of the preliminary phase. As a result, the Company recognized $0.5 million of previously deferred revenue in its consolidated statement of operations during the three months ended March 31, 2012.
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Note 6 Notes Payable - Related Party
During the three months ended March 31, 2012, PetroTech Holdings Corp. (PetroTech), a holding company controlled by the Companys principal stockholder, funded a total of $1.5 million to PA LLC pursuant to the terms of separate senior secured term notes, all of which are included in the $50.1 million notes payable in the following table. Notes payable - related party consist of the following as of:
March 31, 2012 |
December 31, 2011 |
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Note Payable to Valens U.S. SPV I, LLC |
$ | 417,512 | $ | 417,512 | ||||
- Interest accrues monthly at an annual rate of 12% |
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- Note is due on June 30, 2012 |
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Notes Payable to PetroTech |
50,147,089 | 48,647,089 | ||||||
- Interest accrues monthly at an annual rate of 12% |
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- Notes are due on June 30, 2012 |
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Convertible Note Payable to PetroTech |
10,000,000 | 10,000,000 | ||||||
- Interest accrues monthly at an annual rate of 12% |
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- Note is due on June 30, 2012 unless converted to common shares as described below |
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Up to $25,000,000 Note Payable to PetroTech |
20,114,076 | 19,849,491 | ||||||
- Interest payable monthly and is drawn into note on a monthly basis at Prime + 2% (5.25% at March 31, 2012 and December 31, 2011) |
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-Note is due on June 30, 2012 |
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- Permits additional draws to fund interest. Maximum balance of this note is limited to $25,000,000 |
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Total |
$ | 80,678,677 | $ | 78,914,092 | ||||
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|
|
The notes payable - related party are 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/or accrued interest then due ($13.5 million as of March 31, 2012) 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 the 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 quarterly report, none of these events have occurred.
As of March 31, 2012 and December 31, 2011, interest in the amount of $12.2 million and $10.4 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 the three months ended March 31, 2012 and 2011, additional accrued interest of $0.3 million and $0.2 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.
During the three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, interest charged to operations on these notes was $2.1 million, $1.3 million, and $18.2 million, respectively. No interest was capitalized during any of these periods.
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Note 7 Stockholders Deficit
The Companys equity consists of 300,000,000 shares of $.001 par value common stock, of which 106,920,730 and 106,920,730 shares had been issued and were outstanding as of March 31, 2012 and December 31, 2011, 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. |
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 stockholder. 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.
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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.
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
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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.
No shares were issued during 2011 or 2012.
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.
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 March 31, 2012 and December 31, 2011, the granted Interests, net of Interests forfeited and repurchased by the Company, totaled 2,726,921 and 2,753,171, respectively, or 12.6% and 12.7%, 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 an annual discount rate of 60% 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 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 three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, compensation expense related to these Interests was $0.0 million, $0.9 million, and $18.8 million, respectively. 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
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selling, general and administrative expense were $0.0 million, $0.0 million, and $12.3 million for the three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, respectively. Amounts recognized as research and development expense were $0.0 million, $0.9 million, and $6.5 million for the three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, respectively. Unrecognized compensation cost related to 9,481 Interests which remain restricted totaled approximately $0.1 million as of March 31, 2012 and is expected to be expensed during the remainder of 2012. An aggregate of 26,000, 29,000, and 764,000 of these Interests were forfeited during the three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, 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.
As of March 31, 2012 and December 31, 2011, non-controlling interests collectively owned approximately 12.6% and 12.7%, respectively, of PA LLC, and have absorbed their respective portion of the loss of PA LLC. The amount of loss absorbed was $0.7 million, $1.0 million and $17.6 million, for three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, respectively.
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 Staff Accounting Bulletin (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.
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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 (SARs) 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 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.
The weighted average period over which options not vested through March 31, 2012 are expected to vest is 35 months. During the three months ended March 31, 2012 and 2011, approximately $0.0 million and $0.5 million, respectively, was charged to operations related to all of the outstanding options. The fair value related to unexercisable stock options as of March 31, 2012 totaled approximately $3.1 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 | |||||||
Forfeited |
(194,000 | ) | $ | (5.50 | ) | $ | (3.22 | ) | ||||
|
|
|||||||||||
Balance at March 31, 2012 |
1,151,000 | $ | 5.50 | $ | 3.54 |
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The weighted average grant date fair value for vested options as of March 31, 2012 and 2011 was $3.09 and $2.63, respectively. The weighted average grant date fair value for unvested options as of March 31, 2012 and 2011 was $3.71 and $2.88, respectively.
The weighted average contractual life of stock options at March 31, 2012 and 2011 was as follows:
2012 | 2011 | |||||||
Vested |
7.9 yrs | 8.5 yrs | ||||||
Unvested |
9.0 yrs | 9.1 yrs | ||||||
Total outstanding |
8.7 yrs | 9.0 yrs |
As of March 31, 2012, a total of 316,250 of the options granted were exercisable and the fair value of such options was $0.9 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 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 March 31, 2012, 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 March 31, 2012.
Stock Appreciation Rights
In November 2010, the Company issued one million 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 of the Company 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 three months ended March 31, 2012, and the period from September 22, 2006 (inception) to March 31, 2012, compensation expense related to these SARs of $0.5 million and $1.5 million, respectively, was charged to selling, general and administrative expense. No compensation expense related to these SARs was recorded during the first three months of 2011.
Note 8 Related Party Transactions
As described in Note 6, the Companys principal stockholder 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 $12.2 million and $10.4 million, of such accrued interest is included in accrued expenses-related party as of March 31, 2012 and December 31, 2011, respectively. In addition, the Companys principal stockholder has invoiced the
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Company for loan and corporate oversight expenses as well as out-of-pocket costs related to strategic and capital markets assistance. The total amount of such accrued expenses as of March 31, 2012 and December 31, 2011 was $0.9 million and $0.9 million, respectively, and is included in accrued expenses-related party on the accompanying consolidated balance sheet. The Companys principal stockholder has indicated that it will not require repayment of these accrued amounts until significant new funding is obtained from an unaffiliated source.
Note 9 Subsequent Events
On April 18, 2012, PA LLC entered into a master framework agreement with China Energy Conservation and Environment Protection Group (CECEP)Chongquing Industry Co., Ltd., an absolute holding subsidiary of CECEP. The agreement became effective on May 1, 2012 upon approval by the boards of directors of both parties. The agreement provides for the construction and operation of a micro-crop scientific research program in Hainan Province, China and a framework, subject to the achievement of certain milestones, for the subsequent build-out of ten commercial-scale license units of approximately 5,000 hectares in a phased approach at locations to be determined around the world.
On April 23, 2012, PetroTech funded $1.5 million to PA LLC pursuant to the terms of a senior secured term note. The note provides for interest at an annual rate of 12%, which is accrued as a payment-in-kind amount, and is due on June 30, 2012.
ITEM 2. | 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 (as defined below) plans, objectives, expectations, and intentions. Actual results could differ materially from those anticipated in the forward-looking statements. The following discussion and analysis should be read in conjunction with the Companys consolidated financial statements and related notes, each included elsewhere in this report.
Business
Parabel Inc. (the Company) provides renewable technology and solutions to address the global demand for new, economical 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 one customer licensee in Asia are implementing this technology at pilot scale, and both parties have entered into agreements which provide frameworks for commercial-scale build-out.
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 or tropical 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.
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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 and operation of a pilot-scale bioreactor (of less than one hectare) completed. 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, PA LLC, the Companys operating subsidiary, entered into a master framework agreement with China Energy Conservation and Environment Protection Group (CECEP)Chongquing Industry Co., Ltd., an absolute holding subsidiary of CECEP. The agreement became effective on May 1, 2012 upon approval by the boards of directors of both parties. The agreement provides for the construction and operation of a micro-crop scientific research program in Hainan Province, China and a framework, subject to the achievement of certain milestones, for the subsequent build-out of ten commercial-scale license units of approximately 5,000 hectares in a phased approach at locations to be determined around the world. The Company believes this is a positive development, but the master framework agreement with CECEP does not currently provide for obligations that are material to the Company or PA LLC.
Results of Operations
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Revenue. During the three months ended March 31, 2012, the Company recognized $0.5 million of previously deferred licensing revenue as a result of the completion of the construction and successful testing of a pilot-scale bioreactor for its customer licensee in South America, AIQ. No revenue was recognized during the three months ended March 31, 2011.
Total costs and expenses. Total costs and expenses decreased by $1.6 million, or 20.1%, to $6.4 million in the three months ended March 31, 2012 as compared to the same period in 2011. The decrease between comparable quarters was attributable to a decrease in research and development expenses, partially offset by an increase in interest expense.
Selling, general and administrative expenses. Selling, general and administrative expenses include senior management and overhead costs, business development expenditures, system infrastructure support costs, finance and accounting costs, and intellectual property management costs. Selling, general and administrative expenses decreased $0.2 million, or 7.4%, to $2.5 million in the three months ended March 31, 2012 as compared to the same period in 2011. The decrease in selling, general and administrative expenses was largely attributable to a 37.5% reduction in headcount 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. These personnel reductions resulted in $0.7 million in compensation cost savings, partially offset by $0.4 million of increases in travel expenses and the utilization of external consultants associated with the Companys increased activities related to business development, purchasing and other administrative functions in international locations during the quarter ended March 31, 2012 as compared to the same period in 2011.
Research and development expenses. Research and development costs include the research and experimentation of the various system components and the design and construction of the commercial-scale pilot system for customer demonstration. These expenses decreased by $2.1 million, or 56.1%, to $1.6 million in the three months ended March 31, 2012 as compared to the same period in 2011. The decrease was partially attributable to a $1.0 million decrease in compensation expenses in the first quarter of 2012 as compared to the same period in 2011 due to a 37.0% reduction in employee headcount within research and development as a result of consolidating the
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Companys lab facilities and other functions. Equity compensation expense decreased $1.1 million during the first three months of 2012 as compared to the same period in 2011, which was primarily related to the accelerated vesting during the first quarter of 2011 of restricted ownership units previously issued to an employee of the Company as well as termination-related forfeitures of employees whose roles were classified as research and development. These decreases in equity compensation expense were partially offset by the amortization of stock options that were issued during 2011.
Interest expense related party. Interest expense on notes payable related party increased by $0.7 million, or 56.3%, to $2.1 million in the three months ended March 31, 2012 as compared to the same period in 2011. The increase was due to additional funding of the Companys operations through notes payable from its principal stockholder over the last year. The balance of these notes totaled $80.7 million at March 31, 2012 and $57.3 million at March 31, 2011.
Depreciation expense. Depreciation expense decreased by $0.1 million, or 43.5%, to $0.1 million in the three months ended March 31, 2012 from $0.2 million in the same period in 2011. The decrease during 2012 as compared to the same period in 2011 was due to assets which were fully depreciated or impaired over the last year, offset partially by the depreciation of new capital assets.
Non-controlling interest. As of March 31, 2012 and 2011, non-controlling interests collectively owned approximately 12.6% and 12.9% of PA LLC, respectively, and have been attributed their respective portion of the loss of PA LLC. The amount of loss assigned to non-controlling interests was $0.7 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively.
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 March 31, 2012, the Company has raised in the aggregate $110.6 million in debt and equity investments, with $100.7 million of this total raised from its principal stockholder and $9.9 million raised from unrelated third parties.
Sources and Uses of Cash
At March 31, 2012, the Company had unrestricted cash and cash equivalents of $6.4 million, compared to $8.8 million at December 31, 2011.
Net cash used in operating activities was $3.9 million and $5.5 million, during the three months ended March 31, 2012 and 2011, respectively. The decrease in cash usage from 2011 to 2012 was primarily attributed to cost savings of $1.7 million resulting from the Companys year-over-year headcount and associated compensation reductions described above in Results of Operations.
Net cash used in investing activities, which consisted primarily of the purchase of capital assets, was $0.0 million and $0.3 million, for the three months ended March 31, 2012 and 2011, respectively. The decline in expenditures from period to period reflects the purchase of less equipment during 2012 than in 2011 because the Companys ongoing improvements to its processing methods have recently been focused on rental of potential replacement equipment, some of which was purchased in the prior period.
Net cash provided by financing activities was $1.5 million and $5.3 million during the three months ended March 31, 2012 and 2011, respectively, and consisted of advances from the Companys principal stockholder.
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Senior Secured Credit Financings
Affiliates of the Company have provided borrowings under a senior secured structure, as described in more detail below:
As of March 31, 2012 |
||||
Note Payable to Valens U.S. SPV I, LLC |
$ | 417,512 | ||
- Interest accrues monthly at an annual rate of 12% |
||||
- Note is due on June 30, 2012 |
||||
Notes Payable to PetroTech |
50,147,089 | |||
- Interest accrues monthly at an annual rate of 12% |
||||
- Notes are due on June 30, 2012 |
||||
Convertible Note Payable to PetroTech |
10,000,000 | |||
- Interest accrues monthly at an annual rate of 12% |
||||
- Note is due on June 30, 2012 unless converted to common shares as described below |
||||
Up to $25,000,000 Note Payable to PetroTech |
20,114,076 | |||
- Interest payable monthly and is drawn into note on a monthly basis at Prime + 2% (5.25% at March 31, 2012 and December 31, 2011) |
||||
-Note is due on June 30, 2012 |
||||
- Permits additional draws to fund interest. Maximum balance of this note is limited to $25,000,000 |
||||
|
|
|||
Total Notes Payable - Related Party |
$ | 80,678,677 | ||
|
|
As of March 31, 2012, 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 $12,215,877) 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 March 31, 2012, none of these events had occurred.
Interest charged to operations on these notes, including amortization of original issue discount, was $2.1 million, $1.3 million, and $18.2 million during the three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, respectively. The principal amount of debt obligations as of March 31, 2012 was $80.7 million, of which $20.1 million was outstanding at a floating rate of 2% over the prime interest rate and $60.6 million was outstanding at a fixed rate of 12%. Floating rate borrowings will lead to additional interest expense if interest rates increase.
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The following table discloses aggregate information about the Companys contractual obligations and period in which payments are due as of March 31, 2012:
Payments due by Period | ||||||||||||||||||||
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
||||||||||||||||
Debt: principal |
$ | 80,678,677 | $ | 80,678,677 | $ | | $ | | $ | | ||||||||||
Debt: accrued interest to date (1) |
12,215,877 | 12,215,877 | | | | |||||||||||||||
Debt: estimated future interest (2) |
2,082,092 | 2,082,092 | | | | |||||||||||||||
Operating lease commitments |
705,731 | 416,610 | 289,121 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual obligations |
$ | 95,682,377 | $ | 95,393,256 | $ | 289,121 | $ | | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Represents the amount of interest that has been accrued through the balance sheet date on approximately $60.6 million of outstanding debt at a fixed 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 $20.1 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 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 will be similar to its recently reported results over the next 12 months. The Company has never been profitable and has incurred significant losses and cash flow deficits. For the three months ended March 31, 2012 and 2011, and the period from September 22, 2006 (inception) to March 31, 2012, the Company reported net losses of $5.9 million, $8.0 million, and $145.6 million, respectively, and negative cash flows from operating activities of $3.9 million, $5.5 million, and $89.0 million, respectively. As of March 31, 2012, the Company has an aggregate accumulated deficit of $128.0 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 the approximately $92.9 million of debt and accrued interest that is currently scheduled to mature on June 30, 2012, there is a substantial doubt about the Companys ability to continue as a going concern.
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 $6.4 million at March 31, 2012.
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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 March 31, 2012, these adjustments would likely include the substantial impairment of the carrying amount of the Companys non-cash assets of $2.4 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
As of March 31, 2012, the Company did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
ITEM 3. | 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 March 31, 2012 was $80.7 million, of which $20.1 million was outstanding at an annual floating rate of 2% over the prime interest rate and $60.6 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 three months ended March 31, 2012 and 2011 would have been less than $0.1 million for each three-month period.
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 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Under the supervision and with the participation of the Companys management, including the Companys principal executive officer and principal financial officer, the Company conducted an evaluation of its disclosure controls and procedures, 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). Based on this evaluation, the Companys management, including the Companys principal executive officer and principal financial officer, concluded that the Companys disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be disclosed in its periodic reports filed with the SEC.
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Changes in Internal Control over Financial Reporting
During the most recent fiscal quarter, 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.
ITEM 1. | LEGAL PROCEEDINGS |
Not applicable.
Item 1A. | RISK FACTORS |
Information concerning certain risks and uncertainties appears in Part I, Item IA Risk Factors of the Companys Annual Report on Form 10-K for the year ended December 31, 2011 (the 10-K).
Since the filing of the 10-K, there have been no material changes to the Companys risk factors.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | OTHER INFORMATION |
Not applicable.
ITEM 5. | EXHIBITS |
31.1* | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certification by the Chief 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 | |
101** | The following materials from Parabel Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, are formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011; (ii) Consolidated Statements of Operations for the three months ended March 31, 2012, the three months ended March 31, 2011 and the 66 months ended March 31, 2012; (iv) Consolidated Statement of Changes in Stockholders Deficit as of March 31, 2012, and the years ended December 31, 2011, 2010, 2009 and 2008; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 and the 66 months ended March 31, 2012; and (vi) Notes to the Consolidated Financial Statements. |
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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 600, Melbourne, FL 32901, telephone: 321-409-7500, email: investorrelations@parabel.com. The exhibit numbers followed by an asterisk (*) indicate exhibits physically filed with this Form 10-Q. 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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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PARABEL INC. | ||||
Date: May 14, 2012 | By: | /s/ ANTHONY JOHN PHIPPS TIARKS | ||
Name: | Anthony John Phipps Tiarks | |||
Title: | Chief Executive Officer |
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