Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
———————
FORM
10-K
———————
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
Commission
file number: 000-51354
| AE BIOFUELS, INC. |
| (Exact name of registrant as specified in its charter) |
|
Nevada
|
26-1407544
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
20400
Stevens Creek Blvd., Suite 700
Cupertino,
California 95014
(Address
of principal executive offices)
Registrant’s
telephone number (including area code): (408) 213-0940
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, Par Value $.001
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No
o
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 þ
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large
accelerated filer
|
o
|
Accelerated
filer
o
|
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Non-accelerated
filer
(Do
not check if a smaller reporting company)
|
o
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Smaller
reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $9,265,234 as of June 30,
2009, the registrant’s most recently completed second fiscal quarter, based on
the average bid and asked price on the Over-The-Counter Bulletin Board reported
for such date. This calculation does not reflect a determination that certain
persons are affiliates of the registrant for any other purpose.
The
number of shares outstanding of the registrant’s Common Stock on March 3, 2010
was 86,181,532 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
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Page
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PART
I
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Special
Note Regarding Forward-Looking Statements
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1
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Item
1. Business
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1
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Item
1A. Risk Factors
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12
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Item
2. Properties
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23
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Item
3. Legal Proceedings
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23
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PART
II
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Item
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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24
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Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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25
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Item
8. Financial Statements and Supplementary Data
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35
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Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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35
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Item
9A(T). Controls and Procedures
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35
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Item
9B. Other Information
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37
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PART
III
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Item
10. Directors, Executive Officers and Corporate Governance
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38
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Item
11. Executive Compensation
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43
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Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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47
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Item
13. Certain Relationships and Related Transactions, and Director
Independence
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48
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Item
14. Principal Accounting Fees and Services
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49
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PART
IV
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Item
15. Exhibits and Financial Statement Schedules
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50
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Index
to Financial Statements
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52
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SIGNATURES
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80
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PART
I
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SPECIAL
NOTE REGARDING FORWARD—LOOKING
STATEMENTS
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On one or
more occasions, we may make forward-looking statements in this Annual Report on
Form 10-K regarding our assumptions, projections, expectations, targets,
intentions or beliefs about future events. Words or phrases such as
“anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,”
“intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,”
“will continue” or similar expressions identify forward-looking statements.
These forward-looking statements are only our predictions and involve numerous
assumptions, risks and uncertainties, including, but not limited to those
business risks and factors described in Part I, Item 1A-Risk Factors and
elsewhere in this report and our other Securities and Exchange Commission
filings.
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, your attention is directed to any further disclosures made on related
subjects in our subsequent annual and periodic reports filed with the Securities
and Exchange Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on
Schedule 14A.
We
obtained the market data used in this report from internal company reports and
industry publications. Industry publications generally state that the
information contained in those publications has been obtained from sources
believed to be reliable but their accuracy and completeness are not guaranteed
and their reliability cannot be assured. Although we believe market data used in
this 10-K is reliable, it has not been independently verified. Similarly, while
we believe internal company reports are reliable, we have not had the content of
these reports independently verified.
Unless
the context requires otherwise, references to “we,” “us,” “our,” and “the
Company” refer specifically to AE Biofuels, Inc. and its subsidiaries.
ITEM 1.
BUSINESS
General
We are an
international biofuels company focused on the development, acquisition,
construction and operation of next-generation fuel grade ethanol and biodiesel
facilities, and the distribution, storage, and marketing of biofuels. We
currently operate a biodiesel manufacturing facility with a nameplate capacity
of 55 million gallons per year (MGY) in Kakinada, India and have a
next-generation integrated cellulose and starch ethanol demonstration facility
in Butte, Montana. On
December 1, 2009, the Company and two of our wholly owned subsidiaries, AE
Advanced Fuels, Inc. and AE Advanced Fuels Keyes, Inc. entered into a Project
Agreement and Lease Agreement with Cilion, Inc. the owner of a 55 million gallon
per year (MGY) ethanol plant in Keyes, California. Under the Project Agreement,
the Company agreed to provide $1.6 million and Cilion, Inc. agreed to provide
$1.0 million to retrofit the Plant. Under the terms of the Lease
Agreement, AE Advanced Fuels Keyes, Inc. will lease the Plant for a term of up
to thirty-six (36) months commencing upon substantial completion of the retrofit
activities. The Company raised the $1.6 million in January 2010 and on March 15,
2010, received one-half of Cilion’s funds and took possession of the Keyes
plant. After we bring the Keyes plant back into production using traditional
feedstocks, we intend to utilize the plant to commercialize our proprietary,
patent pending enzyme technology. Our plan includes designing,
constructing and operating a next-generation integrated cellulose and starch
ethanol production facility at the Keyes plant to utilize available agricultural
waste feedstocks from the surrounding central valley region of California.
Our implementation of the enzyme technology is subject to approval by the
owners of the plant and will need to be financed through either cash flows from
the plant or from a debt or equity raise. There can be no assurances
that we will obtain the necessary approval by the owners of the plant or that we
will be successful in raising sufficient funds needed to finance the
implementation of the enzyme technology.
The
Company has 56 full-time equivalent employees in offices or plant sites in
Cupertino, California; Keyes, California; Butte, Montana; Kakinada, India and
Hyderabad, India.
Our
mailing address and executive offices are located at 20400 Stevens Creek Blvd.,
Suite 700, Cupertino, California 95014. Our telephone number is (408) 213-0940.
Our corporate website is www.aebiofuels.com. Our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, are available free of charge on our
website when such reports are available on the U.S. Securities and Exchange
Commission (“SEC”) website. The public may read and copy any materials we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
at www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
content of any website referred to in this Form 10-K is not incorporated by
reference into this filing. Further, our references to the URLs for these
websites are intended to be inactive textual references only.
1
Products
and Segments
We review
separate financial information for each geographic region of our business. We
currently have two regions that are operating: India and North America. The two
operating reporting segments and our Other segment are defined as
follows:
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The
“India” operating segment encompasses our 50 MGY nameplate capacity
biodiesel manufacturing plant in Kakinada, the administrative offices in
Hyderabad, and holding companies in Nevada and Mauritius. We currently
market and sell our biodiesel to customers in India and to Europe. We
employ our own sales force to sell biodiesel directly to end users and
through independent brokers. For the year ended December 31, 2009 and
2008, revenues from our Indian operations were 100% of total net revenues.
Indian revenues consist of domestic sales within India of biodiesel and
glycerin (a byproduct of biodiesel production) to industrial users,
brokers and local retailers. Export revenues consist of sales of biodiesel
to fuel blenders in Europe. The majority of our consolidated assets as of
December 31, 2009 were attributable to our Indian
operations.
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The
“North America” operating segment encompasses the commercialization of our
proprietary, patent-pending enzyme technology at our integrated cellulose
and starch ethanol demonstration facility in Butte, Montana, land held for
next-generation ethanol plant development in Sutton, Nebraska and our
operations at the ethanol plant in Keyes,
California.
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●
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The
“Other” segment encompasses our costs associated with new market
development, company-wide fund raising, executive compensation and other
corporate expenses.
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For
revenue and other information regarding the aforementioned segments and for
additional geographic information on our revenues and long-lived assets, see
Note 14 — “Segment Information,” of the Notes to Consolidated Financial
Statements, which is incorporated herein by reference. Also, for a discussion of
the risks attendant to our Indian operations, see “Part I, Item 1A-Risk
Factors,” which is incorporated herein by reference.
Biofuels
Market
Ethanol
Market in the United States
In the
United States ethanol is primarily used as a clean air additive, an octane
enhancer and a renewable fuel extender. Ethanol is blended with gasoline (i) as
an oxygenate to help meet fuel emission standards, (ii) to improve gasoline
performance by increasing octane levels and (iii) to extend fuel supplies. A
growing amount of ethanol is also sold as E85, a renewable fuels-driven blend
comprised of up to 85% ethanol, with the remainder being
gasoline. E85 fuel is sold for use in flexible fuel
vehicles.
Ethanol
is generally sold through short-term contracts. Today, the majority
of ethanol sold in the United States is priced based upon a spot index price at
the time of shipment. The price of ethanol has historically moved in relation to
the price of wholesale crude oil and refined gasoline and the value of the
Volumetric Ethanol Excise Tax Credit (“VEETC”). The price of ethanol
over the last two years has been largely driven by wholesale crude oil, refined
gasoline, and the price of corn.
The fuel
ethanol industry in the United States experienced rapid growth over the past
decade, increasing from 1.4 billion gallons produced in 1998 to approximately
10.6 billion gallons produced in 2009, reaching a record 761,000 barrels per day
in November 2009. In January 2010, operating ethanol production
capacity stood at 11.8 billion gallons annually, with an additional 1.4 billion
gallons of annual capacity under construction for a total of 14.4 billion
gallons. Ethanol blends accounted for approximately 6.3% of the U.S. gasoline
supply in 2008. U.S. ethanol industry supports nearly 400,000 jobs and
added $53.3 billion to the nation’s gross domestic product (GDP). The
combination of increased GDP and higher household income contributed $8.4
billion in tax revenue for the federal government and nearly $7.5 billion in tax
revenue for state and local governments'.
Factors Driving Increase in
Ethanol Usage
Renewable Fuel Standard
(RFS): The growth in the United States ethanol industry during the last
decade and the expected continued growth in the ethanol industry over future
decades is largely driven by laws mandating the use of renewable fuels,
including ethanol. For example, The Energy Independence and Security
Act of 2007, signed into law on December 19, 2007, mandated the use of 11.1
billion gallons of renewable fuels in 2009 increasing to 12.95 billion gallons
in 2010 and 36 billion gallons by 2022. The upper range mandate for corn based
ethanol is 15 billion gallons by 2022. In addition, the RFS mandate
for cellulosic biofuels in 2022 is 16 billion gallons per year.
The U.S.
Environmental Protection Agency (EPA) released its final rule for the expanded
Renewable Fuels Standard (RFS2) on February 3, 2010. Based on additional
internal analysis, public comments from stakeholders, and comments from peer
reviewers, the EPA made numerous modifications to the proposed regulations. Most
of the changes are minor in nature and the general complexion of the rule
remains unchanged (e.g., indirect land use change, renewable biomass
requirements, and other controversial elements remain largely intact), but
several modifications have notable implications for the ethanol industry.1
2
The
Renewable Fuel Standard's revised statutory requirements establish new specific
annual volume standards for cellulosic biofuel, biomass-based diesel, advanced
biofuel, and total renewable fuel that must be used in transportation fuel. The
revised statutory requirements also include new definitions and criteria for
both renewable fuels and the feedstocks used to produce them, including new
greenhouse gas (GHG) emission thresholds as determined by lifecycle analysis
(LCA). Central provision requires that all biofuels produced under the program
meet certain greenhouse gas performance thresholds in order to qualify for
generating Renewable Identification Numbers (RINs). In order to
qualify for the volume categories, fuels must demonstrate that their 'fuel
pathways' meet or exceed the respective required minimum lifecycle GHG
thresholds as compared to the baseline for gasoline and diesel. These
thresholds are: 20% for 'renewable fuel,' 50% for 'advanced biofuel,' 50% for
'Biomass-based diesel,' and 60% for 'cellulosic biofuel.' Compliance
with each threshold requires comprehensive evaluation of the renewable fuels
produced, on the basis of lifecycle emissions, including direct emissions and
indirect emissions such as emissions from indirect land use changes
(ILUC). The Final Rule contains improved GHG performance calculations
for corn ethanol, which include updated models, expanded satellite data, and
available land types, yielding an aggregate improvement effect of reducing by
half the emissions from ILUC as compared to earlier versions of the rule.2
Economics of ethanol
blending: As crude oil prices experienced extreme fluctuations in the
commodities marketplace from 2007 - 2009, the price of gasoline also experienced
volatility. The price per gallon of ethanol during this same time period,
although increasing, did not keep pace with the increase in the price of
gasoline. This phenomenon created an opportunity for refiners and blenders to
increase the profitability of the gasoline they sold by blending ethanol in
amounts in excess of mandated levels (although not in excess of 10%). This
discretionary blending was a driving force behind the rapid growth in the
consumption of ethanol in 2007 and the first half of 2008. The profitability of
blending ethanol was further enhanced by the VEETC, which was then $0.51 for
each gallon of ethanol blended. However, as the price of oil began to fall
rapidly in the second half of 2008 through the first half of 2009, discretionary
blending above mandated levels was no longer profitable and diminished
significantly. In the second half of 2009 and in early 2010, crude
oil prices increased, creating a more favorable discretionary blending
market for ethanol producers, again.
Renewable Identification
Number credits (“RINS”): Refiners, importers and blenders (other than
oxygen blenders) of gasoline are obligated parties under the Renewable Fuels
Standard (RFS). These obligated parties are allowed to meet their requirement to
consume renewable fuels through the accumulation or purchase of excess RINS,
instead of from the actual physical purchase of renewable fuels. As of February
2010, the U.S. EPA is still finalizing revisions to the National Renewable Fuel
Standard program (commonly known as the RFS program). This rule makes changes to
the Renewable Fuel Standard program as required by the Energy Independence and
Security Act of 2007 (EISA). The revised statutory requirements establish new
specific annual volume standards for cellulosic biofuel, biomass-based diesel,
advanced biofuel, and total renewable fuel that must be used in transportation
fuel. The revised statutory requirements also include new definitions and
criteria for both renewable fuels and the feedstocks used to produce them,
including new greenhouse gas emission (GHG) thresholds as determined by
lifecycle analysis. The regulatory requirements for RFS will apply to domestic
and foreign producers and importers of renewable fuel used in the
U.S.
Emission reduction:
Ethanol is an oxygenate which, when blended with gasoline, reduces
vehicle emissions. Ethanol’s high oxygen content burns more completely, emitting
fewer pollutants into the air. Ethanol demand increased substantially beginning
in 1990 when federal law began requiring the use of oxygenates (such as ethanol
or methyl tertiary butyl ether (“MTBE”)) in reformulated gasoline in cities with
unhealthy levels of air pollution on a seasonal or year round basis. Although
the federal oxygenate requirement was eliminated in May 2006 as part of the
Energy Policy Act of 2005, oxygenated gasoline continues to be used in order to
help meet separate federal and state air emission standards. Due to significant
environmental concerns involving groundwater contamination, the refining
industry has all but abandoned the use of MTBE, a competing product to ethanol,
making ethanol the primary clean air oxygenate currently used.
Octane Enhancer:
Ethanol, with an octane rating of 113, is used to increase the octane
value of gasoline with which it is blended. It is used as an octane enhancer
both for producing regular grade gasoline from lower octane blending stocks
(including both reformulated gasoline blendstock for oxygenate blending (“RBOB”)
and conventional gasoline blendstock for oxygenate blending (“CBOB”)), and for
upgrading regular gasoline to premium grades.
2 Source: EPA RFS2 summary.
3
Fuel stock extender:
According to the Energy Information Administration (EIA), while domestic
petroleum refinery output has increased by approximately 29% from 1980 to 2008,
domestic gasoline consumption has increased 36% over the same period. By
blending ethanol with gasoline, refiners are able to meet increased demand and
expand the overall volume and sale of gasoline.
Biodiesel
Market in India and
Europe
Indian Biodiesel
Market
India is
the world’s fifth largest consumer of energy, according to the Brookings
Institute, and by 2030 it is expected to become the third largest, overtaking
Japan and Russia. While global oil demand is expected to increase at an annual
average rate of 1.6%, India’s demand for oil is expected to increase at an
average rate of 2.9% annually over the next quarter century.
In India,
oil and its products are used in the transport, commercial, industrial, and
domestic sectors. As India’s power grids fail to provide a reliable and
consistent source of electricity, diesel is also being used in captive power
generation, as well as to power irrigation for agriculture. The gap between
India’s consumption and production of oil is widening. India imports
over 70% of its oil. India has only 0.4% of the world’s proven reserves and the
International Energy Agency (IEA) estimates that India’s oil production will
continue to decline. As a result, India’s dependence on foreign oil is projected
to grow to 90% over the next 15 or 20 years.
The
Indian government is becoming increasingly concerned about the country’s
consumption of fossil fuel and petroleum products because of (i) the huge export
of funds to pay for these oil imports, (ii) increasing pollution and
environmental hazards, and (iii) concerns over the declining state of the
country’s environment and the health of its citizens. The Indian government
views biofuels as good substitutes for oil in the transportation sector. As a
result, mandates have been instituted as a solution to the country’s
environmental problems, energy security, desire to reduce imports and increase
rural employment, and desire to improve the country’s agricultural
economy.
On
September 11, 2008, the Indian government approved a National Policy on
Biofuels. The National Policy on Biofuels in part:
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Establishes
a National Biofuel Coordination Committee, headed by the Prime Minister of
India and a Biofuel Steering Committee headed by a Cabinet
Secretary;
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Establishes
a biofuel blending target of 20% by 2017, including ethanol and
biodiesel;
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Encourages
biodiesel production from non-edible
sources;
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Recommends
establishing a minimum purchase price for biodiesel linked to the
prevailing retail diesel
price;
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Recommends
that biofuels be brought under the ambit of “Declared Goods” to ensure
unrestricted movement within and outside India;
and
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Recommends
that no taxes and duties should be levied on
biodiesel.
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India's
Minister of State for Petroleum & Natural Gas has informed the Council of
States in a written reply that under the terms of the Motor Spirit and High
Speed Diesel Order, 2005, all the State Governments/Union Territories have been
advised to take suitable action immediately in order to curb unauthorized
marketing of bio-diesel for use as transportation fuel, Indian Government News
reports.
The
Minister stated that his Ministry has formulated the Bio-diesel Purchase Policy
to lend support to the activities for blending of bio-diesel in diesel and
marketing of such blended fuel. As per Bio-diesel Purchase Policy, the Public
Sector Oil Marketing Companies (OMCs) shall purchase bio-diesel (B100), through
its selected twenty purchase centers, which meet the fuel quality standard
prescribed in the Bureau of Indian Standards specification at a price declared
by OMCs periodically. He also said that the present orders and policies do not
allow the manufactures of bio-diesel to resort to direct retail marketing of
B-100 product to automobile vehicles fitted with spark ignition engines or
compression ignition engines.3
European
Biodiesel Market
Europe is
the world’s largest producer and consumer of biodiesel, yet it consumes much
more that is able to produce and therefore imports biodiesel. Higher
blending obligations in some European countries (Bulgaria, Finland, France,
Germany, Hungary, Poland, Portugal, the Netherlands, Slovakia, Spain, Sweden,
United Kingdom) are expected to boost biodiesel consumption in 2010
and beyond. Industry experts forecast a double digit increase in consumption of
biodiesel in 2010 in Europe. Imports of biodiesel into Europe were expected to
reach over 50,000,000 gallons in 2009.
4
Imports
of Asian based biodiesel are expected to increase significantly in 2010 due
to the projected increase in biodiesel usage in Europe, combined with the
reduction of the amount of biodiesel imported from the United States. Imports
from the U.S. dropped significantly in early 2009 as a result
of antidumping duties implemented by place in March
2009. The duties are in place for five years.
Benefit
of Biodiesel
Biodiesel
is a biodegradable fuel produced from renewable sources such as vegetable oils
or animal fats. In the U.S., Europe and India, biodiesel is generally blended
with petroleum diesel, though it is also used in its pure form as a diesel
substitute. Biodiesel is gaining popularity as an alternative fuel in India
because it:
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is
more environmentally friendly than petroleum-based diesel fuel, as
biodiesel has been shown to reduce greenhouse gas, carbon monoxide,
particulate matter and hydrocarbon
emissions;·
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reduces
dependence on imported oil and extends diesel fuel supplies. The U.S.,
Europe and India are currently net importers of crude oil and other fuel
supplies;
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has
excellent engine lubrication characteristics, even when blended with
diesel fuel at low blend rates such as 1% or
2%;
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can
be used in existing diesel engines generally with no or minor engine
modifications;
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is
compatible with the existing diesel fuel distribution infrastructure;
and
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can
be produced from a wide variety of renewable feedstocks including
vegetable oils, such as soybean and palm, or animal
fats.
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Strategy
Our goal
is to be a leader in the production of next-generation fuels to meet the
increasing demand for renewable, high-octane transportation fuels, and to reduce
dependence on petroleum-based energy sources in an environmentally responsible
manner.
India
The
Company owns and operates a biodiesel production facility in Kakinada with a
nameplate capacity of 50 MGY. This facility is one of the largest biodiesel
production facilities in India on a nameplate capacity basis. Our objective is
to build on our leading market position in India and to continue to capitalize
on the substantial growth potential of the industry. Key elements of our
strategy include the following:
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Expand market demand for
biodiesel and its byproducts. We plan to create additional demand
for biodiesel by continuing to produce and market high quality biodiesel
and expand the awareness and acceptance of our product. We intend to
expand our sales channels into neighboring states and large population
centers within India. We also expect to increase sales by selling our
biodiesel into the international market during the summer months when
diesel and biodiesel use in Europe and the United States increases with
the onset of warmer weather.
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Diversify our
feedstocks. We designed our Kakinada plant with the capability of
producing biodiesel from multiple-feedstocks. In 2008 we produced
biodiesel from refined palm oil and in 2009 we began to produce biodiesel
from palm stearin. Being able to reliably produce, on a continuous-flow
basis, biodiesel from multiple feedstocks that meets our customers’
specifications will mitigate the effect of commodity price
volatility.
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Pursue strategic investment
opportunities. We believe that there will be opportunities to
expand our business as the biodiesel industry in India continues to grow,
either by acquisitions of other plants or additional capital investment.
We will continue to evaluate opportunities to acquire or invest in
additional biodiesel production and distribution facilities or biodiesel
or other renewable energy production and design technologies in India and
internationally.
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5
North
America
In 2007,
we acquired patent-pending enzyme technology that allows us to produce ethanol
from a combination of starch and cellulose, or from cellulose alone (“AE
Technology”). Our objective is to build on our position as a developer of
cellulosic ethanol technology and to expand the production of cellulosic ethanol
in the U.S. Key elements of our strategy is to deploy our proprietary,
patent-pending enzyme technology at existing corn ethanol plants or in
stand-alone, cellulose-only, ethanol plants in the U.S. Our unique
approach is to integrate our patent-pending enzyme technology with existing corn
ethanol plants to create integrated cellulose and starch ethanol facilities. We
believe this approach will enable existing producers to immediately reduce
operating expenses by lowering energy costs and water consumption, as well as
lowering feedstock costs by replacing up to 25% of the total feedstock with
cellulosic sources which may include wheat straw or corn stover. By employing
this flexible approach, the Company can address different segments of the same
market (legacy businesses and new businesses), therefore minimizing the risk of
becoming captive to a single approach or technology.
We
anticipate our first deployment of our technology will be at the 55 MGY ethanol
plant in Keyes, California. On December 1, 2009, the Company and two
of our wholly owned subsidiaries, AE Advanced Fuels, Inc. and AE Advanced Fuels
Keyes, Inc. entered into a Project Agreement and Lease Agreement with Cilion,
Inc. Under the terms of the Lease Agreement AE Advanced Fuels Keyes, Inc. will
lease the Plant for a term of up to thirty-six (36) months. The Lease
term and rental payments begin upon substantial completion of certain repair and
retrofit activities, determined by mutual agreement of the parties. Our project
company that will be operating the Keyes Plant during the lease term will have a
royalty-free, site specific license to the AE Technology that runs coterminous
with the term of the lease. We plan to use the AE Technology to design, engineer
and construct modifications to the Keyes plant to use our integrated cellulosic
ethanol enzyme technology to produce ethanol from both corn and cellulosic
feedstocks such as wheat straw or corn stover. Any modifications to the Keyes
plant are subject to Cilion’s approval. On March 15 2010, Cilion
delivered possession of the Keyes plant to the project company and we began the
repair and retrofit activities.
We also
own two potential ethanol or cellulosic ethanol plant sites in Danville,
Illinois and Sutton, Nebraska. The Company does not have any immediate plans to
construct stand alone corn ethanol or cellulosic ethanol plants at these
sites.
Current
Biodiesel Projects
Our
biodiesel production facility in Kakinada started commercial sales in November
2008 and is capable of producing biodiesel from multiple feedstocks. We
currently produce biodiesel from palm stearin, a non-edible feedstock, which we
source from suppliers in India. Our plant was originally established as an
export only unit to produce biodiesel for sale outside of India, which would
have allowed us to save on import duties. However, that original designation did
not permit us to buy feedstock and sell biodiesel into the India domestic
market. In 2008, during our construction and commissioning of the
plant, we found a market for our biodiesel product in India in addition to the
export market. In 2009, we obtained the necessary permits and
approvals to sell our biodiesel into the Indian domestic market on an ongoing
basis by receiving advance licenses for duty free import of feedstock. We can
also sell biodiesel into the export market.
The plant
was constructed by De Smet Chemfood Engineering Private Limited, a part of De
Smet Ballestra Groups, a leading biodiesel technology provider based in Belgium.
In addition to the equipment in the plant, De Smet Chemfood provided on-site
assistance during the construction and commissioning phase. De Smet Chemfood
provided us a non-exclusive perpetual royalty free license for the related
process technology.
Although
we primarily use palm stearin as feedstock, our plant has been designed to
permit us to use different types of feedstock for manufacturing biodiesel. We
believe this feature of our plant gives us flexibility, reduces our exposure to
commodity price fluctuations, and is in line with our strategy to shift to
non-edible feedstock for a portion of our biodiesel production when it becomes
available. In addition, we have plans to complete construction of a
pre-treatment facility and a glycerin refinery at our Kakinada plant. The
pre-treatment facility will enable us to use cheaper unrefined feedstock such as
crude palm oil and the glycerin refinery will enable us to refine the crude
glycerin produced as a byproduct of the biodiesel production process for sale to
end users including pharmaceutical and cosmetic companies.
Biodiesel
Production Process
Biodiesel
is produced by a process known as transesterification. Vegetable oil or animal
fat feedstock is reacted with methanol, in the presence of a catalyst, such as
sodium methoxide, and this chemical reaction produces biodiesel and crude
glycerin, which is then separated from the biodiesel. We intend to further
refine this crude glycerin for sale to end users such as pharmaceutical or
cosmetic companies.
The
multi-feedstock technology that we employ in our biodiesel production process
enables us to reduce our costs by utilizing different feedstocks based on
availability and price. Our Kakinada production facility has been designed, and
our additional planned production facilities will be designed, as
multi-feedstock facilities that can produce biodiesel from many kinds of animal
and vegetable oils.
6
Our
production process is set forth below:
Procurement
of raw material
The main
raw materials used in the production of biodiesel are palm oil or palm stearin
and methanol. Operating at 100% of our capacity, our feedstock requirement is
approximately 150,000 metric tons per year. We source palm oil from Indonesia,
which is one of the major producers of palm oil in the world and palm stearin
from the local Kakinada area. Methanol is readily available locally and can also
be imported and transported through port facilities next to our plant in
Kakinada.
Product
quality
Our
primary market for biodiesel is India. Our biodiesel complies with all European
(EN) standards other than the cold filter plugging point. Upon request, we
provide third-party testing analysis to ensure our biodiesel meets our
customers’ product quality standards.
Safety
and Controls
We have
an advanced fire prevention system to ensure the safety of the plant and our
employees. We have a system of water pumps that can deliver water up to 30
meters high to help extinguish a fire at the plant. In addition, we can disperse
foam and CO
2 . Fire extinguishers are also available throughout the facility. We
also conduct regular safety inspections.
The plant
is fully automated and operations can be controlled via our control room. The
control room monitors, among other things, temperatures, pressure, flow, vacuum
of the various liquids used during the processing of feedstock, as well as the
performance of all our equipment. From the control room, we can shut down any
piece of equipment or all the operations in the plant. We have an additional set
of controls in a different area of the facility that can shut down the plant in
the event of an emergency.
Infrastructure,
transportation and logistics
Power is
supplied to our plant by the Andhra Pradesh Electrical Board and by our own
diesel generators. We procure water from underground wells on the site.
Additionally, we recycle water and steam captured from the biodiesel production
process.
The plant
is approximately 7.5 kilometers from the Kakinada port from which raw materials
can be received and biodiesel can be shipped. The plant is connected to the port
via non-corrosive, mild steel pipes owned and operated by third-parties. When
palm oil is brought to the port at Kakinada, it is also transported through
third party pipes directly to our storage tanks. Similarly, refined biodiesel
can be transported from our storage tanks through the pipe network to the
port.
We have
separate storage tanks for crude palm oil, refined biodiesel and glycerin. Each
of these is connected with separate pipes to the plant. We have smaller storage
tanks for testing samples of biodiesel and glycerin. Once the samples are tested
and are found to be of acceptable quality, we transport the biodiesel and the
glycerin, as the case may be, to separate (larger) tanks for storage, where they
remain until sold.
We burn
rice husks to fire our boilers, which is available. Rice is a major crop grown
in Andhra Pradesh and there are several reliable low cost suppliers of rice husk
in and around Kakinada, although we have not entered into any long-term
contracts with suppliers of these products.
Current
Ethanol Projects
Ethanol
is produced by the fermentation of carbohydrates found in grains and other
biomass. Although ethanol can be produced from a number of different sources,
including grains such as corn, sorghum and wheat, sugar by-products, rice hulls,
cheese whey, potato waste, brewery waste, beverage waste, forestry by-products
and paper wastes, approximately 90% of ethanol in the U.S. today is produced
from corn. Corn is the primary source for ethanol because corn produces large
quantities of relatively cheap carbohydrates, which convert into glucose more
efficiently than other kinds of biomass. However, biomass inputs such as wheat
grass, switch grass, corn stover, and other non-food inputs are
increasingly being adopted, through various technologies, as alternatives to
corn.
7
On
December 1, 2009, the Company and two of our wholly owned subsidiaries, AE
Advanced Fuels, Inc. and AE Advanced Fuels Keyes, Inc. entered into a Project
Agreement and Lease Agreement with Cilion, Inc. the owner of a 55 MGY ethanol
plant in Keyes, California. Under the terms of the Lease Agreement
the Project Company will lease the Keyes plant for a term of up to thirty-six
(36) months at a monthly rental amount of $250,000. The Lease term and rental
payments begin upon substantial completion of certain repair and retrofit
activities, determined by mutual agreement of the parties. We took possession of
the Keyes plant, per the terms of the Project Agreement, on March 15, 2010 and
began the repair and retrofit activities. We expect to restart the
Keyes plant within 120 days of possession. At full production, the plant is
expected to produce 55 million gallons of ethanol annually. We
expect the plant will restart within 120 days of possession. The
plant is expected to produce 55 million gallons of ethanol annually.
In
February 2007, the Company acquired a majority interest in Energy Enzymes, Inc.,
a cellulosic technology company. Energy Enzymes has developed patent-pending
ambient temperature enzymes that can produce ethanol from traditional feedstock
such as corn, as well as other biomass which may include wheat straw, corn
stover and sugar cane bagasse. The technology can be immediately deployed at
existing corn ethanol plants to reduce the amount of natural gas and water used
in the process. The net result is lower operating costs and improved margins. In
addition, existing corn ethanol plants that use our technology can replace up to
25% of their traditional corn feedstock with cellulosic material, thereby
reducing costs.
In 2008,
the Company built and commissioned a 9,000 square foot integrated cellulose and
starch ethanol commercial demonstration facility located in Butte. At the Butte
plant we are able to evaluate various types of biomass, including wheat straw,
corn stover, and sugar cane bagasse, to optimize our proprietary, patent-pending
enzyme technology for the commercial production of next-generation
ethanol.
We
anticipate the first deployment of our technology will be at the ethanol plant
in Keyes, California, in the first half of 2011. We also expect to deploy our
proprietary, patent-pending enzyme technology at other corn ethanol plants
through acquisition, joint venture, or licensing agreements.
Ethanol
Byproducts
Distiller
Grains with Solubles (DGS) are a high protein, high-energy livestock and animal
feed supplement produced as a by-product of ethanol production. DGS are an
important source of revenue to ethanol producers. According to the Renewable
Fuels Association, the estimated market value of feed co-products from ethanol
production in 2009 was $3.5 billion (approximately 30.5 million metric
tons).
At the
Keyes, California ethanol plant, we anticipate selling non-dried or “wet”
distillers grains to the local dairy industry. By removing the drying
step and thus reducing the plant’s overall energy consumption, we expect to sell
the DGS at a slight premium over dried DGS.
Competition
North
America
In 2009,
according to the Renewable Fuels Association, there were over 200 commercial
corn ethanol production facilities in operation in the U.S. with a combined
production of nearly 10.6 billion gallons.
In 2009,
there were only a handful of operating cellulosic ethanol production facilities
in the U.S. with total production capacity well below 500,000 gallons per year
in total. In 2010, additional cellulosic ethanol facilities are
expected to become operational but will only increase capacity to approximately
6.5 million gallons.
India
We currently compete primarily on a
regional basis within the Indian State of Andhra Pradesh where our plant is
located. Our primary competitors (who are also potential customers) in this area
are the three state-controlled oil companies, including Indian Oil Corporation,
Bharat Petroleum and Hindustan Petroleum, and two private oil companies,
Reliance Petroleum and Essar Oil. Indian Oil Corporation together with its
subsidiaries holds 46% of the total petroleum products market in India and 34%
of the total Indian refining capacity. In addition, the Indian Oil Corporation
group of companies owns and operates 10 of India’s 19 refineries with a combined
refining capacity of 60.2 million metric tons per year. Indian Oil also operates
the largest and the widest network of fuel stations in the country, numbering
approximately 18,278.
4
The price
of our biodiesel is generally indexed to the price of petroleum diesel, which is
set by the Indian government. In addition, our competitors have significantly
larger market shares than us, and control a significant share of the
distribution network. If the Indian government were to significantly reduce
diesel prices, or if our oil company competitors were to significantly increase
production of petroleum diesel, our business, operating results and financial
condition could be adversely affected.
4 India
Oil Company presentation, March 4, 2010
8
We also
compete with other biodiesel producers in India, including Naturol Bioenergy
Limited, Cleancities Biodiesel India Limited, BioMax Fuels, Emami Biotech
Limited, Southern Online Bio Technologies Limited, and Coastal Energy Limited.
We believe that our ability to compete successfully in the biodiesel industry
depends on many factors, including the following principal competitive
factors:
|
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price;
and
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quality,
based on the reliability and consistency of our production
processes.
|
When we
complete our glycerin refinery, we will compete with other glycerin refiners. We
believe the principal competitive factors for sales of refined glycerin are
price, proximity to purchasers and product quality.
Customers
India
Segment
We began
selling biodiesel in November 2008. Our plant is capable of producing
approximately 425 metric tons of biodiesel per day. In 2009, we sold an average
of 37 metric tons per day or 9% of our daily capacity. In 2008, we sold an
average of 48 metric tons per day or 11% of our daily capacity. Our customers
include one European biodiesel distribution company who bought 4,125 metric tons
of biodiesel in August 2009, trucking and other transportation companies, marine
vessels and the Port of Kakinada. In 2009 and 2008 all of our revenues were from
sales to a total of 201 customers. In 2009, one customer, Masefield
AG, accounted for 31% of our consolidated revenues. In
2008, due to our limited sales, three of our customers, V.V.R. Engine Oils, SAF
Shipping Agencies, and SriDevi Manikanta Oil & Chemicals, accounted for
approximately 37%, 20%, and 16%, respectively, of our consolidated
revenue.
North
America Segment
We
currently have no active operations and no customers in North America. On March
15, 2010 we took possession of a 55 MGY ethanol plant in Keyes, California
pursuant to a project agreement with the owner of the plant, Cilion, Inc. When
we restart the Keyes plant, we expect to enter into an agreement with a leading
ethanol marketing company for the sale and distribution of ethanol produced at
the Keyes plant. The marketing company would sell product directly to companies
that blend ethanol with refined gasoline. We may also choose to sell a portion
of the ethanol we product directly to major oil refiners or into the spot
market. We also anticipate selling our distillers grains through a third party
marketer.
Pricing
and Backlog
India
Segment
To date,
we price our biodiesel based on the price of petroleum diesel which is set by
the Indian government or based on spot market prices for biodiesel for delivery
into Europe. We sell our biodiesel primarily to resellers, distributors and
refiners on an as-needed basis. We have no long term sales
contracts.
North
America Segment
When we
restart the Keyes plant we expect to sell the ethanol we produce to large
gasoline refiners and blenders on an as-needed basis at or near spot prices
quoted by either the Chicago Board of Trade (“CBOT”) or Oil Price Information
Service (“OPIS”). We currently have no short or long term sales
contracts.
Raw Materials and Suppliers
India
Segment
We
require three key inputs for our biodiesel production: high quality vegetable
oil, methanol and chemical catalysts. In 2008, we produced all of our biodiesel
from refined palm oil. Refined palm oil can be obtained through numerous sources
as it is an internationally traded commodity. Typical sources for refined palm
oil for our plant are producers from Malaysia and Indonesia. Our plant in
Kakinada is situated on approximately 32,000 square meters of land located 7.5
kilometers from the local seaport having connectivity through a pipe line to the
port jetty. The pipe line facilitates the importing of raw materials and
exporting finished product.
9
In 2009,
due to favorable palm stearin prices, we began to manufacture biodiesel from
palm stearin. Our Kakinada plant is located near multiple palm oil refineries
which produce palm stearin as a by-product of the palm oil refinement process.
Palm stearin is trucked from nearby refiners to our plant, which significantly
reduces transportation costs. Palm stearin is also widely available in other
areas of India and we believe that we have ample access to palm stearin
suppliers. Our plant has ample storage capacity with the ability of rent
additional storage from a commercial tank farm located on adjacent property.
Although palm stearin can be obtained from multiple sources, and while
historically we have not suffered any significant limitations on our ability to
procure palm stearin, any delay or disruption in our suppliers’ ability to
provide us with the necessary palm stearin may significantly affect our business
operations and have a negative effect on our operating results or financial
condition.
In
November 2008, we entered into an agreement with Secunderabad Oils Limited.
Under this agreement Secunderabad agreed to provide us with working capital to
fund the purchase of feedstock and other raw materials for our Kakinada
biodiesel facility, as well as plant operational expertise on an as-needed
basis. In return, we agreed to pay Secunderabad monthly an amount equal to 30%
of the plant’s monthly net operating profit plus interest on working capital
advances at Secunderabad’s actual bank borrowing rate. The agreement can be
terminated by either party at any time without penalty. Secunderabad began
providing us with working capital under this agreement in the first quarter of
2009.
The key
elements of our procurement strategies are the assurance of a stable supply and
the avoidance, where possible, of exposures to price fluctuations. We believe
that our ability to produce biodiesel from multiple feedstock sources and, when
completed, our pretreatment facility helps to reduce our exposure to price
fluctuations.
We do not
have long-term or fixed-price contracts for methanol and chemical catalysts. We
purchase methanol and other chemicals on the open market at prevailing prices
from local suppliers.
North
America Segment
Initially
corn will be the primary feedstock utilized at the Keyes plant. We expect to
enter into a long-term agreement with a major grain supplier located in
California. We may also enter into contracts with suppliers of
denaturant, and various chemicals used in the ethanol production
process.
Sales
and Marketing
India
Segment
We began
selling biodiesel in November 2008. Our biodiesel is sold predominantly to
industrial users, resellers, blenders, distributors and refiners who typically
blend biodiesel with petroleum-based diesel fuel. We sell our biodiesel
both directly and through brokers. We intend to hire additional sales
personnel, initiate additional marketing programs and build additional
relationships with brokers and resellers as demand grows.
We also
market and sell the glycerin by-product from our facility.
North
America Segment
When we
restart the Keyes plant, we expect to enter into an agreement with a leading
ethanol marketing company for the sale and distribution of some or all of the
ethanol we produce. We expect that the marketing company would sell our product
directly to companies that blend ethanol with refined gasoline. We may also sell
ethanol directly to major oil refiners or directly into the spot market. We also
expect to enter into a marketing and distribution agreement with a third party
marketer to sell our distillers grains.
Risk Management Practices
India
& North America Segments
The
markets for feedstock, the largest expense in our India and North America
segments, and biodiesel and ethanol, our largest source of revenues, are
volatile and are generally uncorrelated. We are, therefore, exposed to
substantial commodity price risk in our business. Our risk management policies
are aimed at managing product margins. As noted above, we are focused on
utilizing lower-cost feedstock, as reflected in the multi-feedstock capability
of our production facilities. In addition, we have in the past, and expect in
the future, to use forward contracting and hedging strategies, including
strategies using futures and options contracts. However, the extent to which we
engage in these risk management strategies varies substantially from time to
time, depending on market conditions and other factors. In establishing our risk
management strategies, we draw from our own in-house risk management expertise.
We also use research conducted by outside firms to provide additional market
information and risk management strategies. We believe combining these sources
of knowledge, experience, and expertise gives us a more sophisticated and global
view of the fluctuating commodity markets for raw materials and energies, which
we then can incorporate into risk management strategies.
10
Our
ability to mitigate our risk of falling biodiesel prices is more limited. The
price of our biodiesel is generally indexed to the price of petroleum diesel
which is set by the Indian government. There is no established market for
biodiesel futures. Ethanol and corn are sold on an indexed basis, and futures
contracts exist for both. We expect that our efforts to hedge against
falling biodiesel prices will involve negotiating long-term fixed-price
contracts with our customers and offsetting these contracts with long-term fixed
price contracts for feedstock, although to date we have not entered into any
long-term agreements with our customers or suppliers. For ethanol
sales, we expect to largely sell product through index-based
contracts. For corn acquisition, the company intends to seek
favorable pricing through the use of opportunistic hedging strategies and
long-term contracts when prices are favorable.
Research
and Development
Our
research and development efforts consist of the development of our
next-generation ethanol technology and our integrated cellulosic and starch
ethanol production process and the prosecution of patents around this
technology. Our primary objective of this development activity is to optimize
the production of ethanol using our proprietary, patent-pending enzyme
technology for large scale commercial production. Research and development
expense was approximately $539,000 in 2009 and $1 million in 2008.
Patents
and Trademarks
We have
filed a number of trademark applications within the U.S. We do not consider the
success of our business, as a whole, to be dependent on these trademarks. In
addition, we have three patent applications pending in the United States in
connection with our cellulosic ethanol technology.
It is
possible that the Company will not receive patents for every application it
files. Furthermore, when patents are issued, the issued patents may not
adequately protect our technology from infringement or prevent others from
claiming that our products infringe the patents of third-parties. The Company’s
failure to protect our intellectual property could materially harm our business.
In addition, the Company’s competitors may independently develop similar or
superior technology or design around our patents. It is possible that litigation
may be necessary in the future to enforce the Company’s intellectual property
rights, to protect its trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation could result in substantial costs
and diversion of resources and could materially harm the Company’s
business.
The
Company may receive in the future, notice of claims of infringement of other
parties’ proprietary rights. Infringement or other claims could be asserted or
prosecuted against the Company in the future and it is possible that future
assertions or prosecutions could harm our business. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause delays in the development
of our products, or require the Company to develop non-infringing technology or
enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may require the Company to license back its
technology or may not be available on terms acceptable to the Company, or at
all. For these reasons, infringement claims could materially harm the Company’s
business.
Environmental
and Regulatory Matters
India
Segment
We are
subject to federal, state and local environmental laws, regulations and permits,
including with respect to the generation, storage, handling, use, transportation
and disposal of hazardous materials, and the health and safety of our employees.
These laws may require us to make operational changes to limit actual or
potential impacts to the environment. A violation of these laws, regulations or
permits can result in substantial fines, natural resource damages, criminal
sanctions, permit revocations and/or facility shutdowns. In addition,
environmental laws and regulations (and interpretations thereof) change over
time, and any such changes, more vigorous enforcement policies or the discovery
of currently unknown conditions may require substantial additional environmental
expenditures.
North
America Segment
We are
subject to extensive federal, state and local environmental laws, regulations
and permit conditions (and interpretations thereof), including those relating to
the discharge of materials into the air, water and ground, the generation,
storage, handling, use, transportation and disposal of hazardous materials, and
the health and safety of our employees. These laws, regulations, and permits
require us to incur significant capital and other costs, including costs to
obtain and maintain expensive pollution control equipment. They may also require
us to make operational changes to limit actual or potential impacts to the
environment. A violation of these laws, regulations or permit conditions can
result in substantial fines, natural resource damages, criminal sanctions,
permit revocations and/or facility shutdowns. In addition, environmental laws
and regulations (and interpretations thereof) change over time, and any such
changes, more vigorous enforcement policies or the discovery of currently
unknown conditions may require substantial additional environmental
expenditures.
11
We are
also subject to potential liability for the investigation and cleanup of
environmental contamination at each of the properties that we may own or operate
and at off-site locations where we arranged for the disposal of hazardous
wastes. If significant contamination is identified at our properties in the
future, costs to investigate and remediate this contamination as well as any
costs to investigate or remediate associated natural resource damages could be
significant. If any of these sites are subject to investigation and/or
remediation requirements, we may be responsible under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) or
other environmental laws for all or part of the costs of such investigation
and/or remediation, and for damages to natural resources. We may also be subject
to related claims by private parties alleging property damage or personal injury
due to exposure to hazardous or other materials at or from such properties.
While costs to address contamination or related third-party claims could be
significant, based upon currently available information, we are not aware of any
material contamination or such third party claims. We have not accrued any
amounts for environmental matters as of December 31, 2009. The ultimate costs of
any liabilities that may be identified or the discovery of additional
contaminants could adversely impact our results of operation or financial
condition.
In
addition, the hazards and risks associated with producing and transporting our
products (such as fires, natural disasters, explosions, and abnormal pressures)
may result in spills or releases of hazardous substances, or claims from
governmental authorities or third parties relating to actual or alleged personal
injury, property damage, or damages to natural resources. We maintain insurance
coverage against some, but not all, potential losses caused by our operations.
Our coverage includes, but is not limited to, physical damage to assets,
employer’s liability, comprehensive general liability, automobile liability and
workers’ compensation. We do not carry environmental insurance. We believe that
our insurance is adequate for our industry, but losses could occur for
uninsurable or uninsured risks or in amounts in excess of existing insurance
coverage. The occurrence of events which result in significant personal injury
or damage to our property, natural resources or third parties that is not
covered by insurance could have a material adverse impact on our results of
operations and financial condition.
Our air
emissions are subject to the federal Clean Air Act, and similar State laws which
generally require us to obtain and maintain air emission permits for our ongoing
operations as well as for any expansion of existing facilities or any new
facilities. Obtaining and maintaining those permits requires us to incur costs,
and any future more stringent standards may result in increased costs and may
limit or interfere with our operating flexibility. These costs could have a
material adverse affect on our financial condition and results of operations.
Because other ethanol manufacturers in the U.S. are and will continue to be
subject to similar laws and restrictions, we do not currently believe that our
costs to comply with current or future environmental laws and regulations will
adversely affect our competitive position with other U.S. ethanol producers.
However, because ethanol is produced and traded internationally, these costs
could adversely affect us in our efforts to compete with foreign producers not
subject to such stringent requirements.
New laws
or regulations relating to the production, disposal or emissions of carbon
dioxide and other green house gasses may require us to incur significant
additional costs with respect to ethanol plants that we build or acquire. In
particular, in 2007, Illinois and four other Midwestern States entered into the
Midwestern Greenhouse Gas Reduction Accord, which program directs participating
states to develop a multi-sector cap-and-trade mechanism to help achieve
reductions in greenhouse gases, including carbon dioxide. In addition, it is
possible that other states in which we conduct or plan to conduct business could
join this accord or require other costly carbon dioxide emissions
reductions. Climate Change legislation is being considered in
Washington, D.C. this year which may significantly impact the biofuels
industry's emissions regulations, as will the Renewable Fuel Standard,
California's Low Carbon Fuel Standard, and other potentially significant changes
in existing transportation fuels regulations.
Employees
At
December 31, 2009, we had a total of 56 full-time equivalent employees,
comprised of 12 full-time equivalent employees in the United States and 44
full-time equivalent employees in India. None of our employees are represented
by a union. We believe our relations with our employees are good. Employees are
currently located in the United States headquarters in Cupertino, California; an
integrated starch cellulosic ethanol commercial demonstration facility in Butte,
Montana; an administrative office in Hyderabad, India and a biodiesel plant in
Kakinada, India.
ITEM 1A. RISK FACTORS
Risks
Related to our Overall Business
We
have a limited operating history, which makes it difficult to evaluate our
financial position and our business plan.
We began
generating revenue in November 2008 and have limited business operations.
Accordingly, there is limited prior operating history by which to evaluate the
likelihood of our success or our ability to exist as a going concern. We may
never begin or complete construction of a cellulosic ethanol production facility
in the United States and although we have been producing and selling biodiesel
from our plant in Kakinada, our production and sales have not reached full
capacity and there is no assurance that our production and sales from this
facility will do so in the near future or at all and we may not be able to
generate sufficient revenues to become profitable.
We
are currently in default on our term loan with the State Bank of
India
On
October 7, 2009, UBPL received a demand notice from the State Bank of India
under the Agreement of Loan for Overall Limit dated as of June 26, 2008. The
notice informs UBPL that an event of default has occurred for failure to make an
installment payment on the loan due in June 2009 and demands repayment of the
entire outstanding indebtedness of 19.60 crores (approximately $4 million)
together with all accrued interest thereon and any applicable fees and expenses
by October 10, 2009. Upon the occurrence and during the continuance of an Event
of Default, interest accrues at the default interest rate of 2% above the State
Bank of India Advance Rate pursuant to the Agreement of Loan for Overall Limit.
If the entire principal and interest amount of indebtedness under the loan was
paid in full, we estimate that the amount would be approximately $4.4 million.
Interest continues to accrue at the default rate in the amount of approximately
$48,000 per month during the continuance of default.
12
Our
auditors’ opinion expresses substantial doubt about our ability to continue as a
“going concern.”
Our
independent auditors’ report on our December 31, 2009 and 2008 financial
statements included herein states that the Company has suffered recurring losses
and has a working capital deficit and total stockholders’ deficit and that these
conditions raise substantial doubt about our ability to continue as a going
concern. Should the Company not be able to raise enough equity or debt
financings it may be forced to sell all or a portion of its existing biodiesel
facility or other assets to generate cash to continue the Company’s business
plan or possibly discontinue operations. The Company’s consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
We
are a holding company, and there are significant limitations on our ability to
receive distributions from our subsidiaries.
We
conduct substantially all of our operations through subsidiaries and are
dependent on dividends or other intercompany transfers of funds from our
subsidiaries to meet our obligations. Our subsidiaries have not made significant
distributions to the Company and may not have funds legally available for
dividends or distributions in the future. In addition, we may enter into
credit or other agreements that would contractually restrict our subsidiaries
from paying dividends, making distributions or making intercompany loans to our
parent company or to any other subsidiary. In particular, our credit agreement
for the Kakinada refinery requires the prior consent of the lender for dividends
or other intercompany fund transfers. If the amount of capital we are able to
raise from financing activities, together with our revenues from operations that
are available for distribution, are not sufficient to satisfy our ongoing
working capital and corporate overhead requirements needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
We
are unable to execute on the Company’s business plan which may result in the
need to write down the carrying value of the Company’s long-lived
assets.
We value
our long lived assets based on our ability to execute our business plan,
principally in India, and generate sufficient cash flow to justify the carrying
value of this asset. Should we fall short of our cash flow
projections, we may be required to write down the value of these assets under
the accounting rules and further degrade the value of our
business. We can make no assurances that our future cash flows will
develop and provide us with sufficient cash to maintain the value of these
assets, thus avoiding future impairment to our asset carry values.
Risks
Relating to our U.S. Operations
We took
possession of the Keyes ethanol plant in 2010, we may encounter unanticipated
difficulties in repairing and restarting the plant.
In order to restart and operate the the Keyes plant we intend to implement a repair plan on this 55 million gallon per year nameplate capacity plant. The repair plan may cost significantly more than our estimate to complete. The plant may not operate at nameplate capacity once the repairs are complete. In addition, some of the technology utilized at the Keyes plant is currently not in use at any other corn ethanol plant. We are aware of certain plant design issues that may impede the reliable and continuous operation of the plant. We cannot assure you that the repair plan will fix all the design issues. If we are unable to get the plant repaired and restarted, we will not have revenues derived from the sale of ethanol and distillers grain from the plant in 2010. Therefore we would not be able to recover the costs incurred during the repair and restart of the plant. We may also encounter other factors that could prevent us from conducting operations as expected, resulting in decreased capacity or interruptions in production, including shortages of workers or materials, design issues relating to improvements, construction and equipment cost escalation, transportation constraints, adverse weather, unforeseen difficulties or labor issues, or changes in political administrations at the federal, state or local levels that result in policy change towards ethanol in general or our plants in particular. Furthermore, local water, electricity and gas utilities may not be able to reliably supply the resources that our facilities will need or may not be able to supply them on acceptable terms.
We
expect to start operating and making lease payments on the Keyes ethanol plant
in 2010. If the plant is restarted, we may encounter difficulties in running the
plant and may not be able to make our lease payments.
The Keyes
plant operations may be subject to significant interruption if it experiences a
major accident or is damaged by severe weather or other natural disasters. In
addition, our operations may be subject to labor disruptions, unscheduled
downtime or other operational hazards inherent in our industry. Some of these
operational hazards may cause personal injury or loss of life, severe damage to
or destruction of property and equipment or environmental damage, and may result
in suspension of operations and the imposition of civil or criminal penalties.
Our insurance may not be adequate to cover the potential operational hazards
described above and we may not be able to renew our insurance on commercially
reasonable terms or at all. Any cessation of operations due to any of the above
factors would cause our sales to decrease significantly, which would have a
material adverse effect on our results of operation and financial
condition.
13
Our
profit margins at the Keyes plant may be adversely affected by fluctuations in
the selling price and production cost of gasoline and margins may will be highly
dependent on commodity prices, which are subject to significant volatility and
uncertainty, and on the availability of raw materials supplies, so our results
of operations, financial condition and business outlook may fluctuate
substantially.
Ethanol
is marketed as a fuel additive to reduce vehicle emissions from gasoline, as an
octane enhancer to improve the octane rating of the gasoline with which it is
blended and, to a lesser extent, as a gasoline substitute. As a result, ethanol
prices are influenced by the supply of and demand for gasoline. Our results of
operations may be materially harmed if the demand for, or the price of, gasoline
decreases. Conversely, a prolonged increase in the price of, or demand for,
gasoline could lead the U.S. government to relax import restrictions on foreign
ethanol that currently benefit us.
Our
future results of ethanol plant operations will depend substantially on the
prices of various commodities, particularly the prices for ethanol, corn,
natural gas and unleaded gasoline. The prices of these commodities are volatile
and beyond our control. As a result of the volatility of the prices for these
and other items, our results may fluctuate substantially. We may experience
periods during which the prices of our products decline and the costs of our raw
materials increase, which in turn may result in operating losses or impairment
charges and hurt our financial condition. If a substantial imbalance occurred,
we may take actions to mitigate the effect of the imbalance, such as storing our
uncontracted
ethanol for a
period of time. These actions could involve additional costs and could have a
negative impact on our operating results.
The
domestic ethanol industry is highly dependent upon a myriad of federal and state
legislation and regulation and any changes in legislation or regulation could
adversely affect our results of operations and financial position.
The elimination of, or any
significant reduction in, the blenders' credit could have a material impact on
our future results of operations and financial position. The cost of
production of ethanol is made significantly more competitive as a result of
federal tax incentives. A federal excise tax incentive program is currently in
place to allow gasoline distributors that blend ethanol with gasoline to receive
a federal excise tax rate reduction for each blended gallon they sell. If the
fuel is blended with 10% ethanol, the refiner/marketer pays $0.045 per gallon of
ethanol sold less tax, which amounts to an incentive of $0.45 per gallon of
ethanol. The $0.45 per gallon incentive for ethanol is scheduled to expire on
December 31, 2011. It is possible that the blenders' credit will not be renewed
beyond 2011 or will be renewed on different terms. In addition, the blenders'
credit, as well as other federal and state programs benefiting ethanol (such as
tariffs), generally are subject to U.S. government obligations under
international trade agreements, including those under the World Trade
Organization Agreement on Subsidies and Countervailing Measures, and may be the
subject of challenges, in whole or in part.
Ethanol can be imported into the
United States duty-free from some countries, which may undermine the domestic
ethanol industry. Imported ethanol is generally subject to a $0.54 per
gallon tariff that was
designed to offset the "blender's
credit" ethanol incentive available under the federal excise tax incentive
program for refineries that blend ethanol in their gasoline. A special exemption
from the tariff exists for ethanol imported from 24 countries in Central America
and the Caribbean Islands, which is limited to a total of 7.0% of U.S.
production per year. In addition, the North American Free Trade Agreement, which
went into effect on January 1, 1994, allows Canada and Mexico to import ethanol
duty-free. Imports from the exempted countries may increase as a result of new
plants under development. The tariff is scheduled to expire on December 31,
2010. If it is not extended by Congress, imports of ethanol from non-exempt
countries may increase. Production costs for ethanol in these countries can be
significantly less than in the United States and the duty-free import of lower
price ethanol through the countries exempted from the tariff may reduce the
demand for domestic ethanol and the price at which we sell our ethanol. In 2009,
global ethanol production reached nearly 20 billion gallons. (Source:
RFA).
Waivers of the RFS minimum levels of
renewable fuels included in gasoline could have a material adverse affect on our
results of operations. Under the Energy Policy Act, the U.S. Department
of Energy, in consultation with the Secretary of Agriculture and the Secretary
of Energy, may waive the renewable fuels mandate with respect to one or more
states if the Administrator of the Environmental Protection Agency determines
that implementing the requirements would severely harm the economy or the
environment of a state, a region or the nation, or that there is inadequate
supply to meet the requirement. Any waiver of the RFS with respect to one or
more states would reduce demand for ethanol and could cause our results of
operations to decline and our financial condition to suffer.
14
Our
future ethanol plant operations may be adversely affected by environmental,
health and safety laws, regulations and liabilities.
If we
take possession of the plant and if we restart the plant in 2010, we will be
subject to various federal, state and local environmental laws and regulations,
including those relating to the discharge of materials into the air, water and
ground, the generation, storage, handling, use, transportation and disposal of
hazardous materials, access to and impacts on water supply, and the health and
safety of our employees. Some of these laws and regulations require our
facilities to operate under permits that are subject to renewal or modification.
These laws, regulations and permits can require expensive emissions testing and
pollution control equipment or operational changes to limit actual or potential
impacts to the environment. A violation of these laws and
regulations or permit conditions
can result in substantial fines, natural resource damages, criminal sanctions,
permit revocations and facility shutdowns. We may not be at all times in
compliance with these laws, regulations or permits or we may not have all
permits required to operate our business. We may be subject to legal actions
brought by environmental advocacy groups and other parties for actual or alleged
violations of environmental laws or permits. In addition, we may be required to
make significant capital expenditures on an ongoing basis to comply with
increasingly stringent environmental laws, regulations and permits.
We may be
liable for the investigation and cleanup of environmental contamination at the
Keyes plant and at off-site locations where we arrange for the disposal of
hazardous substances. If these substances have been or are disposed of or
released at sites that undergo investigation or remediation by regulatory
agencies, we may be responsible under CERCLA, or other environmental laws for
all or part of the costs of investigation and remediation, and for damage to
natural resources. We also may be subject to related claims by private parties
alleging property damage and personal injury due to exposure to hazardous or
other materials at or from those properties. Some of these matters may require
us to expend significant amounts for investigation, cleanup or other
costs.
New laws,
new interpretations of existing laws, increased governmental enforcement of
environmental laws or other developments could require us to make additional
significant expenditures. Continued government and public emphasis on
environmental issues can be expected to result in increased future investments
for environmental controls at our production facilities. Environmental laws and
regulations applicable to our operations now or in the future, more vigorous
enforcement policies and discovery of currently unknown conditions may require
substantial expenditures that could have a negative impact on our results of
operations and financial condition. For example, carbon dioxide is a co-product
of the ethanol manufacturing process and may be released into the atmosphere.
Emissions of carbon dioxide resulting from the manufacturing process are not
currently subject to applicable permit requirements. If new laws or regulations
are passed relating to the production, disposal or emissions of carbon dioxide,
we may be required to incur significant costs to comply with such new laws or
regulations.
The
hazards and risks, such as fires, natural disasters, explosions and abnormal
pressures and blowouts, associated with producing and transporting ethanol also
may result in personal injury claims or damage to property and third parties. We
could sustain losses for uninsurable or uninsured risks, or in amounts in excess
of our insurance coverage. Events that result in significant personal injury or
damage to our property or third parties or other losses that are not fully
covered by insurance could materially harm our results of operations and
financial condition.
We
plan to implement our proprietary, patent-pending enzyme technology at the Keyes
ethanol plant sometime during the term of the lease.
After we
design and engineer a specific integrated cellulose and starch ethanol plant
upgrade to the Keyes plant to allow the plant to produce up to 25% of its
ethanol from cellulosic (non-food) feedstock, we may not receive permission from
the plant owners to install the process at the Keyes plant. Additionally, even
if we are able to install and begin operations on the cellulosic and starch
ethanol plant, we cannot give assurance that our technology will work and
produce cost effective ethanol from cellulosic (non-food) feedstocks because we
have not designed, engineered nor built an integrated cellulosic and starch
ethanol plant before other than our commercial scale demonstration plant in
Butte, Montana.
15
Risks
Relating to Our India Operations
Our
manufacturing operations and our sales in India subject us to risks associated
with foreign laws, policies, and economies.
Our
biodiesel manufacturing plant is located in India and we may construct and
operate other biodiesel plants in other foreign countries in the future. In 2009
and 2008, approximately 73% and 100% of our biodiesel sales have been to
customers in India, respectively, and sales to Indian customers are expected to
continue to be an important component of our total sales. Our manufacturing
operations and international sales are subject to inherent risks, all of which
could have a material adverse effect on our financial condition or results of
operations. Risks affecting our international operations include:
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differences
or unexpected changes in regulatory
requirements;
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political
and economic instability;
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terrorism
and civil unrest;
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work
stoppages or strikes;
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interruptions
in transportation;
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restrictions
on the export or import of
technology;
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difficulties
in staffing and managing international
operations;
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variations
in tariffs, quotas, taxes and other market
barriers;
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longer
payment cycles;
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changes
in economic conditions in the international markets in which our products
are sold; and
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greater
fluctuations in sales to customers in developing
countries.
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Our
India segment is entirely dependent on the operations of the one biodiesel
production facility that we own. An operational disruption at this facility
could result in a reduction of our revenues.
All of
our revenues are, and in the near-term will continue to be, derived from the
sale of biodiesel and glycerine produced at our 50 MGY biodiesel production
facility in Kakinada. This facility may be subject to significant interruption
if it experiences a major accident or is damaged by severe weather or other
natural disasters. In addition, this facility may be subject to labor
disruptions and unscheduled downtime, or other operational hazards inherent in
our industry, such as equipment failures, fires, explosions, pipeline ruptures,
transportation accidents and natural disasters. Some of these operational
hazards may cause severe damage to, or destruction of, property and equipment or
environmental damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. Our insurance may not be adequate to
fully cover the potential operational hazards and resulting business
interruption described above or we may be unable to renew this insurance on
commercially reasonable terms or at all. Any suspension in our operations will
cause our revenues to decline.
Our
gross margins in our India segment are principally dependent on the spread
between feedstock prices and biodiesel prices. If the cost of feedstock
increases and the cost of biodiesel does not similarly increase or if the cost
of biodiesel decreases and the cost of feedstock does not similarly decrease,
our margins will decrease and results of operations will be harmed.
Our gross
margins depend principally on the spread between feedstock and biodiesel prices.
The spread between biodiesel prices and refined palm oil (RPO) or palm stearin
prices has fluctuated significantly in recent periods. RPO, which was our
principal feedstock in 2008 and 2009, comprised approximately 100% of total
costs of biodiesel sales for our Kakinada facility during the years then ended,
lacks a direct price relationship to the price of biodiesel. Palm stearin
purchases late in the year will be reflected in cost of goods sold for sales in
early 2010. The prices of RPO and palm stearin are influenced by general
economic, market and regulatory factors. Any conditions that negatively impact
the supply of RPO or palm stearin, such as decreased acres planted by farmers,
severe weather or crop disease, or factors that increase demand for RPO or palm
stearin, such as increasing biodiesel production or changes in governmental
policies or subsidies, will tend to increase prices. The price at which we sell
our biodiesel in India, however, is generally indexed to the price of petroleum
diesel, which is set by the Indian government. This lack of correlation between
production costs and product prices means that we are generally unable to pass
increased feedstock costs on to our customers. Any decrease in the spread
between biodiesel prices and feedstock prices, whether as a result of an
increase in feedstock prices or a reduction in biodiesel prices, would adversely
affect our financial performance and cash flow.
Our
business is dependent upon the availability and price of refined palm oil (RPO)
and palm stearin. Significant disruptions in the supply of RPO or palm stearin
will materially affect our operating results.
16
The
principal raw materials we use to produce biodiesel and biodiesel by-products
are RPO and palm stearin. From 2006 to the fall of 2008, prices for all
varieties of feedstock increased to record levels. The price of petroleum diesel
and biodiesel increased at approximately a similar pace. In the fall of 2008,
the global economic downturn created significant declines in prices for
petroleum diesel and biodiesel. In 2009, the prices have increased
slowly. Changes in the price of RPO and palm stearin will have an
impact on our business. In general, higher RPO and palm stearin prices produce
lower profit margins and, therefore, represent unfavorable market conditions.
This is especially true when market conditions do not allow us to pass along
increased feedstock costs to our customers. At certain levels, RPO or palm
stearin prices may make biodiesel uneconomical to produce. The price of RPO and
palm stearin is influenced by general economic, market and regulatory factors.
These factors include weather conditions, farmer planting decisions, government
policies and subsidies with respect to agriculture and international trade and
global demand and supply. The significance and relative impact of these factors
on the price of RPO and palm stearin is difficult to predict. Factors such as
severe weather or crop disease could have an adverse impact on our business
because we may be unable to pass on higher feedstock costs to our customers. Any
event that tends to negatively impact the supply of our chosen feedstock will
tend to increase prices and potentially harm our business. The increasing
biodiesel capacity could boost demand for RPO and palm stearin and result in
increased prices for RPO and palm stearin.
Consumer
acceptance of biodiesel may affect the demand for biodiesel, which could affect
our ability to market our product.
The
market in India for biodiesel has only recently begun to develop and is rapidly
evolving. Therefore the widespread acceptance of our biodiesel is not assured.
We are currently operating at approximately 11% of our daily capacity. Our
success depends upon the market acceptance of our biodiesel as an addition or an
alternative to, petroleum diesel or other petroleum products. Because this
market is new, it is difficult to predict its potential size or future growth
rate. In addition, the long-term customer base has not been adequately defined.
Our success in generating revenue in this emerging market will depend, among
other things, on our ability to educate potential customers, as well as
potential end-users, about the use of biodiesel as an additive or alternative to
petroleum diesel.
Unanticipated
problems or delays in operating our refinery or with product quality or product
performance could result in a decrease in customers and revenue, unexpected
expenses and loss of market share.
Our
current operating cash flow depends on our ability to timely and economically
operate our Kakinada biodiesel refinery. Refinery operations require significant
amounts of capital to procure feedstock before receiving payment for finished
biodiesel. If our biodiesel refining operations are disrupted for unexpected
reasons, our business may experience a substantial setback. Prolonged problems
may threaten the commercial viability of our refinery.
The
production of biodiesel is complex, and our product must meet stringent quality
requirements. Concerns about fuel quality may impact our ability to successfully
market our biodiesel to a larger market. If our biodiesel does not meet the
industry quality standard, our credibility and the market acceptance and sales
of our biodiesel could be negatively affected. In addition, actual or perceived
problems with quality control in the industry generally may lead to a lack of
consumer confidence in biodiesel and harm our ability to successfully market
biodiesel.
Our
business will suffer if we cannot maintain necessary permits or
licenses.
Our
operations require licenses, permits and in some cases renewals of these
licenses and permits from various governmental authorities. Our ability to
sustain, or renew such licenses and permits on acceptable, commercially viable
terms are subject to change, as, among other things, the regulations and
policies of applicable governmental authorities may change. Our inability to
extend a license or a loss of any of these licenses or permits may have a
material adverse effect on our operations and financial condition.
We
primarily sell our biodiesel through brokers, and if our relationships with one
or more of those brokers were to end, our operating results may be
harmed.
We market
and distribute a substantial portion of our biodiesel through independent
brokers. We do not have written agreements with these brokers and our brokers
are under no obligation to continue to distribute our biodiesel. Our operating
results and financial condition could be significantly disrupted by the loss of
one or more of our current brokers, pricing discounts that we may offer to
reward significant customers or to compete for sales, order cancellations, or
the failure of our brokers to successfully sell our biodiesel.
Our
business may be subject to seasonal fluctuations, which could cause our revenues
and operating results to fluctuate.
Our
operating results are influenced by seasonal fluctuations in the price of our
primary input, feedstocks, and the price of our primary product, biodiesel.
Historically, in the global market for biodiesel, sales tend to decrease during
the winter season due to concerns that biodiesel will not perform adequately in
colder weather. We do not have enough operating history in selling into the
domestic Indian market to be able to understand the seasonality of the biodiesel
market in India. Less demand in the winter may result in excess supplies and
lower biodiesel prices. As a result of seasonal fluctuations and the growth in
our business, we believe comparisons of operating measures between consecutive
quarters may be not as meaningful as comparisons between longer reporting
periods.
17
Our
operations are subject to hazards that may cause personal injury or property
damage, thereby subjecting us to liabilities and possible losses that may not be
covered by insurance and which could have a material adverse effect on our
results of operations and financial condition.
Our
workers are subject to the hazards associated with producing biodiesel.
Operating hazards can cause personal injury and loss of life, damage to, or
destruction of, property, plant and equipment and environmental damage. We also
maintain insurance coverage in amounts and against the risks that we believe are
consistent with industry practice. However, we could sustain losses for
uninsurable or uninsured risks, or in amounts in excess of existing insurance
coverage. Events that result in significant personal injury or damage to our
property or to property owned by third parties or other losses that are not
fully covered by insurance could have a material adverse effect on our results
of operations and financial position.
Insurance
liabilities are difficult to assess and quantify due to unknown factors,
including the severity of an injury, the determination of our liability in
proportion to other parties, the number of incidents not reported and the
effectiveness of our safety program. If we were to experience insurance claims
or costs above our coverage limits or that are not covered by our insurance, we
might be required to use working capital to satisfy these claims rather than to
maintain or expand our operations. To the extent that we experience a material
increase in the frequency or severity of accidents or workers’ compensation
claims, or unfavorable developments on existing claims, our operating results
and financial condition could be materially and adversely affected.
Exchange
rate fluctuations may adversely affect our results of operations.
One
hundred percent of our sales and expenses, including labor costs for our Indian
biodiesel plant, are denominated in the Indian rupee. Declines in the value of
the U.S. dollar relative to the Indian rupee could impact our revenue, cost of
goods sold and operating margins for our Indian operations and result in foreign
currency transaction gains and losses. The exchange rate between Rupee and U.S.
Dollar has been volatile in recent times.
Foreign
currency translation gains or losses are recorded in other comprehensive income,
a component of equity. In 2009 we had a foreign currency translation gain
of $126,491 compared to a foreign currency translation loss of $3,227,958 in
2008. Historically, we have not actively engaged in substantial exchange rate
hedging activities and do not intend to do so in the future. Further, dividend
payments by our subsidiaries to our Company will be subject to foreign currency
fluctuations.
In the
future, we may implement hedging strategies to mitigate these foreign exchange
risks. However, these hedging strategies may not completely eliminate our
exposure to foreign exchange rate fluctuations and may involve costs and risks
of their own, such as ongoing management time and expertise, external costs to
implement the strategies and potential accounting implications.
Financial
instability in Indian financial markets could materially and adversely affect
our results of operations and financial condition.
The
Indian financial market and the Indian economy are influenced by economic and
market conditions in other countries, particularly in Asian emerging market
countries and the United States. Financial turmoil in Asia, Russia and elsewhere
in the world in recent years has affected the Indian economy. Although economic
conditions are different in each country, investors’ reactions to developments
in one country can have adverse effects on the securities of companies in other
countries, including India. A loss in investor confidence in the financial
systems of other emerging markets may cause increased volatility in Indian
financial markets and, indirectly, in the Indian economy in general. Any
worldwide financial instability could also have a negative impact on the Indian
economy. Financial disruptions may occur again and could harm our results of
operations and financial condition.
Terrorist
attacks or war or conflicts could adversely affect the financial markets and
adversely affect our business.
Terrorist
attacks and other acts of violence, war or conflicts, particularly those
involving India, may adversely affect Indian and worldwide financial markets.
Such acts may negatively impact business sentiment, which could adversely affect
our business and profitability. India has from time to time experienced, and
continues to experience, social and civil unrest, terrorist attacks and
hostilities with neighboring countries. Also, some of India’s neighboring
countries have experienced, or are currently experiencing internal unrest. Such
social or civil unrest or hostilities could disrupt communications and adversely
affect the economy of such countries. Such events could also create a perception
that investments in companies such as ours involve a higher degree of risk than
investments in companies in other countries. This, in turn, could have a
material adverse effect on the market for securities of such companies,
including our Shares. The consequences of any armed conflicts are unpredictable,
and we may not be able to foresee events that could have an adverse effect on
our business.
Natural
calamities could have a negative impact on the Indian and other economies and
harm our business.
India has
experienced natural calamities such as earthquakes, floods, droughts and a
tsunami in recent years. The extent and severity of these natural disasters
determines their impact on the economies in the Indian states that experience
these calamities. Our plant is located very near the ocean and prolonged spells
of abnormal rainfall and other natural calamities could subject our facility to
flooding or other damage which would have a negative effect on our business. In
addition, natural disasters could have an adverse impact on the economies in the
geographic regions in which we operate, which could adversely affect our
business.
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The
biodiesel production and marketing industry is extremely competitive. Many of
our competitors have greater financial and other resources than we do and one or
more of these competitors could use their greater resources to gain market share
at our expense.
The
primary type of fuel used in India is petroleum diesel. We compete with existing
oil companies as well as other biodiesel production companies. We currently
compete for the sale of our biodiesel primarily on a regional basis within the
Indian State of Andhra Pradesh where our plant is located and in the neighboring
states of Tamil Nadu and Maharashtra. Our primary competitors in these areas are
the three state-controlled oil companies, including Indian Oil Corporation,
Bharat Petroleum and Hindustan Petroleum, and two private oil companies,
Reliance Petroleum and Essar Oil. Indian Oil Corporation together with its
subsidiaries holds 47% of the total petroleum products market in India, 40% of
the total Indian refining capacity and 67% of the downstream sector pipeline
capacity in India. In addition, the Indian Oil Corporation group of companies
owns and operates 10 of India’s 19 refineries with a combined refining capacity
of 60.2 million metric tons per year. Indian Oil also operates the largest and
the widest network of fuel stations in the country, numbering approximately
17,606. These competitors have substantially greater production, financial,
personnel and marketing resources than we do. As a result, our competitors are
able to compete more aggressively than we can and sustain that competition over
a longer period of time. Our lack of resources relative to these competitors may
cause us to fail to anticipate or respond adequately to new developments and
other competitive pressures. This failure could reduce our competitiveness and
cause a decline in our market share, sales and profitability.
We also
face competition from other producers of biodiesel with respect to the
procurement of feedstock and selling biodiesel and related products. Such
competition could intensify, thus driving up the cost of feedstock and driving
down the price for our products. Competition will likely increase as the
commodities market prices of hydrocarbon-based energy, including petroleum and
biodiesel, rise as they have in recent years. Additionally, new companies are
constantly entering the market, thus increasing the competition. These companies
may have greater success in the recruitment and retention of qualified
employees, as well as in conducting their own refining and fuel marketing
operations, and may have greater access to feedstocks, market presence,
economies of scale, financial resources and engineering, technical and marketing
capabilities, which may give them a competitive advantage. In addition, actual
or potential competitors may be strengthened through the acquisition of
additional assets and interests. If we are unable to compete effectively or
adequately respond to competitive pressures, this may materially adversely
affect our results of operation and financial condition.
We
depend on Secunderabad Oils, Limited to provide us with working capital for our
plant in Kakinada.
Our
ability to identify and enter into commercial arrangements with feedstock
suppliers depends on maintaining our close working relationship with
Secunderabad Oils, Limited who is currently providing us with working capital
for our Kakinada facility. If we are unable to maintain this strategic
relationship, our business may be negatively affected. In addition, the ability
of Secunderabad to continue to provide us with working capital depends in part
on the financial strength of Secunderabad and its banking relationships. If
Secunderabad is unable or unwilling to continue to provide us with working
capital, our business may be negatively affected.
Risks
Relating to Our Overall Business
We
envision a period of rapid growth that may impose a significant burden on our
administrative and operational resources which, if not effectively managed,
could impair our growth.
Our
strategy envisions a period of rapid growth that may impose a significant burden
on our administrative and operational resources. The growth of our business, and
in particular, the construction of our planned ethanol and biodiesel production
facilities, will require significant investments of capital and management’s
close attention. In addition to our plans to construct ethanol and biodiesel
production facilities, we may seek to enter into significant marketing
agreements, and other similar agreements with companies that currently, or
expect to, produce ethanol or biodiesel. Our ability to effectively manage our
growth will require us to substantially expand the capabilities of our
administrative and operational resources and to attract, train, manage and
retain qualified management, technicians and other personnel; we may be unable
to do so. In addition, our failure to successfully manage our growth could
result in our sales not increasing commensurately with capital investments. If
we are unable to successfully manage our growth, we may be unable to achieve our
goals.
Our
10% Senior Notes mature on June 30, 2010, and we may be unable to repay or
refinance this indebtedness upon maturity.
On June
30, 2010, the $5 million aggregate principal amount and accrued and unpaid
interest and fees outstanding under our 10% Senior Notes will become due and
payable. We may not be able to extend the maturity of these notes and we may not
have sufficient cash available at the time of maturity to repay this
indebtedness. We cannot be certain that we will be able to extend the maturity
of these notes and also we cannot be certain that we will have sufficient assets
or cash flow available to support refinancing these notes at current market
rates or on terms that are satisfactory to us. If we are unable to extend the
maturity of the notes or refinance on terms satisfactory to us, we may be forced
to refinance on terms that are materially less favorable, seek funds through
other means such as a sale of some of our assets, or otherwise significantly
alter our operating plan, any of which could have a material adverse effect on
our business, financial condition and results of operation.
19
We
plan to fund a substantial majority of the construction costs of our planned
next generation ethanol and biodiesel production facilities through the issuance
of a significant amount of debt, resulting in substantial debt service
requirements that could harm our financial condition.
We plan
to fund a substantial portion of the construction costs of our planned next
generation ethanol and biodiesel production facilities through the issuance of a
significant amount of debt. As a result, our capital structure is expected to
contain a significant amount of debt. Debt levels and debt service requirements
could have important consequences to us, which could reduce the value of your
investment, including:
|
|
·
|
limiting
our ability to borrow additional amounts for operating capital or other
purposes and causing us to be able to borrow additional funds only on
unfavorable terms;
|
|
|
·
|
reducing
funds available for operations and distributions because a substantial
portion of our cash flow will be used to pay interest and principal on
debt;
|
|
|
·
|
making
us vulnerable to increases in prevailing interest
rates;
|
|
|
·
|
placing
us at a competitive disadvantage because we may be substantially more
leveraged than some of our
competitors;
|
|
|
·
|
subjecting
all or substantially all of our assets to liens, which means that there
may be no assets left for our shareholders in the event of a liquidation;
and
|
|
|
·
|
limiting
our ability to adjust to changing market conditions, which could increase
our vulnerability to a downturn in our business as a result of general
economic conditions.
|
If we are
unable to pay our debt service obligations, we could be forced to reduce or
eliminate dividends to our shareholders, if they were to commence, and/or reduce
or eliminate needed capital expenditures. It is possible that we could be forced
to sell assets, seek to obtain additional equity capital or refinance or
restructure all or a portion of our debt on substantially less favorable terms.
If we were unable to refinance all or a portion of our debt or raise funds
through asset sales, sales of equity or otherwise, we may be forced to
liquidate.
We
may be unable to protect our intellectual property, which could negatively
affect our ability to compete.
We rely
on a combination of trademark, trade name, confidentiality agreements, and other
contractual restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality agreements with our employees,
consultants, and corporate partners, and control access to and distribution of
our confidential information. These measures may not preclude the disclosure of
our confidential or proprietary information. Despite efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise obtain
and use our proprietary information. Monitoring unauthorized use of our
confidential information is difficult, and we cannot be certain that the steps
we take to prevent unauthorized use of our confidential information,
particularly in foreign countries where the laws may not protect proprietary
rights as fully as in the U.S., will be effective.
On
February 23, 2006, our wholly owned subsidiary American Ethanol, Inc. registered
as a corporation in the State of Nevada under the trade name American Ethanol,
Inc. On March 1, 2006, we filed an “Intent to Use” Trademark application for the
name American Ethanol with the U.S. Patent and Trademark Office (USPTO). Another
company in Santa Maria, California registered as a California corporation under
the name American Ethanol, Inc. in November 2005 and incorporated in the State
of Delaware under the name of American Ethanol, Inc. This company has also filed
“Use” trademark applications with the USPTO for the names American Ethanol and
America’s Ethanol. These trademark applications predate our trademark
application and therefore if upheld may prohibit us from using the trademark
American Ethanol. In addition, their use of the trade name American Ethanol,
Inc. in California predates our use of the trade name in Nevada. As a result, we
may be obligated to change our subsidiary’s trade name as well, and may be
subject to damages for trademark and trade name infringement.
We
will be required to hire and retain skilled technical and managerial
personnel.
Personnel
qualified to operate and manage ethanol and biodiesel plants are in demand. Our
success depends in large part on our ability to attract, train, motivate and
retain qualified management and highly-skilled employees, particularly
managerial, technical, sales and marketing personnel, technicians, and other
critical personnel. Any failure to attract and retain the required highly
trained managerial and technical personnel that are integral to production and
development and technical support teams may have a negative impact on the
operation of our plants, which would have a negative impact on revenues. There
can be no assurance that we will be able to attract and retain skilled persons
and the loss of skilled technical personnel would adversely affect
us.
We
are dependent upon our officers for management and direction and the loss of any
of these persons could adversely affect our operations and results.
We are
dependent upon our officers for implementation of our proposed expansion
strategy and execution of our business plan. The loss of any of our officers
could have a material adverse effect upon our results of operations and
financial position. We do not maintain “key person” life insurance for any of
our officers. The loss of any of our officers could delay or prevent the
achievement of our business objectives.
20
We
may be sued or become a party to litigation, which could require significant
management time and attention and result in significant legal expenses and may
result in an unfavorable outcome, which could have a material adverse effect on
our business, financial condition, results of operations and cash
flows.
We may be
subject to a number of lawsuits from time to time arising in the ordinary course
of our business. The expense of defending ourselves against such litigation may
be significant. The amount of time to resolve these lawsuits is unpredictable
and defending ourselves may divert management’s attention from the day-to-day
operations of our business, which could adversely affect our business, results
of operations and cash flows. In addition, an unfavorable outcome in such
litigation could have a material adverse effect on our business, results of
operations and cash flows.
Risks
related to regulation and governmental action
A
change in government policies favorable to ethanol or biodiesel may cause demand
for ethanol or biodiesel to decline.
Growth
and demand for ethanol and biodiesel is largely driven by federal and state
government policies, such as state laws banning Methyl Tertiary Butyl Ether
(MTBE) and the national renewable fuels standard as well as government
incentives to blend biofuels with petroleum based products in many countries
around the world, including the U.S. and India. The continuation of these
policies is uncertain, which means that demand for ethanol or biodiesel may
decline if these policies change or are discontinued.
Federal
tax incentives for ethanol and biodiesel production may be eliminated in the
future, which could hinder our ability to operate at a profit and adversely
affect our business.
The
ethanol and biodiesel industry and our business are assisted by various federal
tax incentives, including those included in the Energy Policy Act of 2005 and
the Energy Independence and Security Act of 2007. The Energy Independence and
Security Act of 2007 significantly increased the Renewable Fuels Standard’s
(RFS) mandated usage of renewable fuels originally established under the Energy
Policy Act of 2005 to 36 billion gallons by 2022. In addition, the 2007 Act
increases the quantity of ethanol produced from corn to 15 billion gallons by
2022 and increases the amount of renewable fuels, including cellulosic ethanol
and biodiesel, produced from non-food biomass to 21 billion gallons. The RFS
began at 4 billion gallons in 2006, increasing to 15.2 billion gallons by 2022.
The RFS helps support a market for ethanol that might disappear without this
incentive. The elimination or reduction of tax incentives to the ethanol
industry could increase ethanol prices and thereby reduce the market for
ethanol, which could reduce our revenues by making it more costly or difficult
for us to produce and sell ethanol. If the federal tax incentives are eliminated
or sharply curtailed, we believe that a decreased demand for ethanol will
result, which could result in the failure of our business.
Another
important provision involves an expansion in the definition of who qualifies as
a small ethanol producer. Historically, small ethanol producers were allowed a
10-cents-per-gallon production income tax credit on up to 15 million gallons of
production annually. The size of the plant eligible for the tax credit was
limited to 30 million gallons. Under the Energy Policy Act of 2005 the size
limitation on the production capacity for small ethanol producers increases from
30 million to 60 million gallons. This tax credit may foster additional growth
in ethanol plants of a size similar to our proposed plants and increase
competition in this particular plant size category.
Changes
in environmental regulations or violations of the regulations could be expensive
and reduce our ability to become profitable.
We are
and will continue to be subject to extensive air, water and other environmental
regulations and will need to obtain a number of environmental permits to
construct and operate our plants. In addition, it is likely that senior debt
financing will be contingent on our ability to obtain the various environmental
permits that we will require. If for any reason, any of these permits are not
granted, construction costs for the plants may increase, or the plants may not
be constructed at all. Additionally, any changes in environmental laws and
regulations, both at the federal and state level, could require us to invest or
spend considerable resources to comply with future environmental regulations.
The expense of compliance could be significant enough to reduce
profits.
Our
lack of business diversification could result in the devaluation of our
securities if we do not generate revenue from our primary products or such
revenues decrease.
Our
current business consists solely of the production and sales of biodiesel in
India. We expect that our business will consist of the production and sale of
ethanol, next generation cellulosic ethanol, biodiesel, distillers’ grains and
glycerin. Our lack of business diversification could cause you to lose all or
some of your investment if we are unable to generate revenues by the production
and sales of next generation cellulosic ethanol, since we do not have any other
lines of business or alternative revenue sources.
Risks
related to our stock
There
can be no assurance that a liquid public market for our common stock will
continue to exist.
Although
our shares of common stock are eligible for quotation on the OTC Bulletin Board
electronic over-the-counter trading system, a very limited number of shares
trade on a regular basis. There can be no assurance that a regular and
established market will be developed and maintained for our common stock. There
can also be no assurance as to the strength or liquidity of any market for our
common stock or the prices at which holders may be able to sell their
shares.
21
It
is likely that there will be significant volatility in the trading
price.
Market
prices for our common stock will be influenced by many factors and will be
subject to significant fluctuations in response to variations in our operating
results and other factors. Because our business is the operation of our
biodiesel plant and the future development and operation of next-generation
cellulosic ethanol plants, factors that could affect our future stock price, and
create volatility in our stock price, include the price and demand for ethanol
and biodiesel, the price and availability of oil and gasoline, the political
situation in the Middle East, U.S. energy policies, federal and state regulatory
changes that affect the price of ethanol or biodiesel, and the existence or
discontinuation of legislative incentives for renewable fuels. Our stock price
will also be affected by the trading price of the stock of our competitors,
investor perceptions of us, interest rates, general economic conditions and
those specific to the ethanol or biodiesel industry, developments with regard to
our operations and activities, our future financial condition, and changes in
our management.
Risks
relating to low priced stocks.
Although
our common stock currently is quoted and traded on the OTC Bulletin Board, the
price at which the stock will trade in the future cannot currently be estimated.
Since December 15, 2008, our common stock has traded below $5.00 per share. As a
result, trading in our common stock may be subject to the requirements of
certain rules promulgated under the Exchange Act of 1934, as amended (the
“Exchange Act”), which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price share of less
than $5.00 per share, subject to certain exceptions) and a two business day
“cooling off period” before broker and dealers can effect transactions in penny
stocks. For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser’s
written consent to the transaction before the sale. The broker-dealer also must
disclose the commissions payable to the broker-dealer, current bid and offer
quotations for the penny stock and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market. These, and the other burdens imposed upon
broker-dealers by the penny stock requirements, could discourage broker-dealers
from effecting transactions in our common stock which could severely limit the
market liquidity of our common stock and the ability of holders of our common
stock to sell it.
We
do not intend to pay dividends.
We have
not paid any cash dividends on any of our securities since inception and we do
not anticipate paying any cash dividends on any of our securities in the
foreseeable future.
Members
of our management hold a substantial amount of our common stock, which will
enable these shareholders to exercise influence over many matters requiring
shareholder approval and may have the effect of delaying, preventing or
deterring a change in control, which could deprive you of an opportunity to
receive a premium for your securities as part of a sale of the company and may
affect the market price of our stock.
Eric A.
McAfee, our Chief Executive Officer and Chairman of the Board, and Laird Q.
Cagan, a former board member, in the aggregate, beneficially own approximately
31.48% of our capital stock on a fully diluted, as converted basis. In addition,
the other members of our Board of Directors and management, in the aggregate,
beneficially own approximately 3.18% of our common stock. As a result, these
shareholders, acting together, will be able to influence many matters requiring
shareholder approval, including the election of directors and approval of
mergers and other significant corporate transactions. See “Security Ownership of
Certain Beneficial Owners and Management.” The interests of these shareholders
may differ from yours and this concentration of ownership may have the effect of
delaying, preventing or deterring a change in control, and could deprive you of
an opportunity to receive a premium for your securities as part of a sale of the
company and may affect the market price of our securities.
Rule
144 will not be available to holders of restricted shares during any period in
which the Company has failed to comply with its reporting obligations under the
Exchange Act.
All of
the shares of AE Biofuels issued to former shareholders of American Ethanol,
Inc. in connection with the merger of AE Biofuels, Inc. and American
Ethanol, Inc. were "restricted securities" within the meaning of Rule 144 under
the Securities Act of 1933, as amended. As restricted shares, these shares may
be resold only pursuant to an effective registration statement or pursuant to
Rule 144 or other applicable exemption from registration under the Securities
Act. However, Rule 144 is not available with respect to restricted shares
acquired from an issuer that is or was at any time in its past a shell company
if the former shell company has failed to file all reports that it is required
to file under the Exchange Act during the 12 months preceding the sale. If at
any time the Company fails to comply with its reporting obligations under the
Exchange Act, Rule 144 will not be available to holders of restricted shares
which may limit your ability to sell your restricted shares.
22
ITEM 2. PROPERTIES
U.S.
Segment
Corporate Office. Our
corporate headquarters is located at 20400 Stevens Creek Blvd., Suite 700,
Cupertino, California. The Cupertino facility office space consists of 9,238
rentable square feet. We occupy this facility under lease that commenced June
16, 2009 and ends on May 31, 2012 with an additional three year extension
option. The base rent for this facility is $21,247 per month for the first year,
$22,171 per month for the second year, and $23,095 per month for the third year,
plus 2.6 % a share of operating expenses of the property. Rent
includes 3,104 rentable square feet currently subleased to Solargen Energy,
Inc., for which Solargen Energy, Inc. reimburses us for their portions of rent
and operating expenses.
Butte Pilot Plant. We
lease approximately 9,000 square feet of industrial building space in Butte to
house our demonstration facility for a monthly rental of $4,500 plus property
taxes on a month to month basis.
Cilion Ethanol Plant
We lease a 55 million gallon per year name plate capacity ethanol plant in
Keyes, California for a monthly rental fee of $250,000 for a term up to 36
months with payments beginning in the second quarter of 2010.
Other Properties. We
also own one potential plant site in Sutton, Nebraska consisting of
approximately 200 acres, and one potential plant site in Danville, Illinois
consisting of approximately 175 acres.
India
Segment
India Plant. We own
approximately 32,000 square meters of land in Kakinada, India. The property is
located 7.5 kilometers from the local seaport having connectivity through a
third-party pipeline to the port jetty. The pipeline facilitates the importing
of raw materials and exporting finished product. On this site, we built a
biodiesel plant with a nameplate capacity of 50 MGY that was commissioned,
licensed to commence operations in October 2008, and began producing biodiesel
in November 2008.
India Administrative
Office. We lease approximately 1,000 square feet of office
space in Hyderabad, India for a monthly rent of approximately $500 per
month. This lease is a month to month rental
arrangement.
We
believe that our existing facilities are adequate for our current and reasonably
anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
On March 28, 2008, the Cordillera Fund, L.P. filed a complaint in the Clark County District Court of the State of Nevada against American Ethanol, Inc. and the Company. The complaint seeks a judicial declaration that Cordillera has a right to payment from the Company for its American Ethanol shares at fair market value pursuant to Nevada’s Dissenters’ Rights Statute, a judicial declaration that Cordillera is not a holder of Series B preferred stock in the Company under the provisions of the statute; and a permanent injunction compelling the Company to apply the Dissenters’ Rights Statute to Cordillera’s shares and reimburse Cordillera for attorneys fees and costs.
On June 2, 2008 the case was
transferred to the Second Judicial Court of the State of Nevada, located in
Washoe County, Nevada. On February 17, 2009, a jury trial commenced on the
sole issue of whether Cordillera timely delivered its notice of Dissenters’
Rights to the Company. On February 17, 2009, the jury delivered its verdict
in favor of Cordillera. The remaining issue in the lawsuit concerned the fair
market value of the shares of stock held by Cordillera. On or about October
7, 2009, the Court entered a judgment awarding damages to Cordillera for the
fair market value of the shares of stock. The amount of this
liability has been reflected in the Company’s financial statements. On
October 19, 2009, the Company filed a Notice of Appeal of the judgment.
This appeal is still pending. See Note 9 – Stockholders
Equity.
On May 1,
2009 our transfer agent, Corporate Stock Transfer, Inc., filed a Complaint for
Interpleader in the United States District Court for the District of Colorado.
The interpleader action is based on the Company’s and CST’s refusal to remove
the restrictive legend from a certificate representing 5,600,000 shares of the
Company's restricted common stock (the “Certificate”) held by Defendant Surendra
Ajjarapu and seeks a judicial determination as to whether the legend can be
lawfully removed from the Certificate. On July 1, 2009 Defendant Ajjarapu
answered the Complaint for Interpleader, and Cross-Claimants and
Counter-Claimants Surendra Ajjarapu and Sandhya Ajjarapu cross-claimed
against the Company for breach of fiduciary duty, conversion, violation of
Section 10(b) of the Exchange Act and Rule 10b-5 and injunctive relief. The
Ajjarapus also counter-claimed against CST for declaratory judgment. The Company
does not believe it has any liability for the matters described in this
litigation and intends to defend itself vigorously. However, there can be no
assurance regarding the outcome of the litigation. An estimate of possible loss,
if any, or the range of loss cannot be made and therefore we have not accrued a
loss contingency related to these actions.
23
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
The
following table sets forth the high and low bid prices for our common stock on
the OTC Bulletin Board over-the-counter market for each full quarterly period
within the two most recent fiscal years. The source of these quotations is
Yahoo.com/Finance. The bid prices are inter-dealer prices, without retail
markup, markdown or commission, and may not reflect actual
transactions.
|
Quarter
Ending
|
High
Bid
|
Low
Bid
|
||||||
|
March
31, 2008
|
$ | 12.00 | $ | 6.00 | ||||
|
June
30, 2008
|
$ | 9.85 | $ | 1.80 | ||||
|
September
30, 2008
|
$ | 9.00 | $ | 3.00 | ||||
|
December
31, 2008
|
$ | 6.50 | $ | 0.38 | ||||
|
March
31, 2009
|
$ | 0.50 | $ | 0.04 | ||||
|
June
30, 2009
|
$ | 0.40 | $ | 0.12 | ||||
|
September
30, 2009
|
$ | 0.30 | $ | 0.10 | ||||
|
December
31, 2009
|
$ | 0.34 | $ | 0.11 | ||||
Shareholders
of Record
As of
February 26, 2010, there were 284 holders of record of our common stock, not
including holders who hold their shares in street name and 72 holders of record
of our Series B preferred stock.
Dividends
We have
never paid cash dividends on our preferred or common stock. We intend to keep
future earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable future. Our
future payment of dividends will depend on our earnings, capital requirements,
expansion plans, financial condition and other factors deemed relevant by the
Board of Directors. Our retained earnings deficit currently limits our ability
to pay dividends.
Securities
Authorized for Issuance under Equity Compensation Plans
The
Company’s shareholders approved the Company’s Amended and Restated 2007 Stock
Plan at the Company’s 2008 Annual Shareholders Meeting. The following
table provides information about our Amended and Restated 2007 Stock Plan as of
December 31, 2009, which is the Company’s only equity compensation
plan:
|
Plan
category
|
Number
of
securities
to
be issued
upon
exercise
of
outstanding
options,
warrants
and
rights
(a)
|
Weighted
average
exercise
price
of
outstanding
options,
warrants
and
rights
(b)
|
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans (excluding
securities
reflected
in
column
(a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
4,697,000
|
$
|
1.37
|
185,410
|
||||||||
|
Equity
compensation plans not approved by security holders
|
0
|
$
|
0
|
0
|
||||||||
|
Total
|
4,697,000
|
$
|
1.37
|
185,410
|
||||||||
24
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operation (MD&A) is provided in addition to the accompanying consolidated
financial statements and notes to assist readers in understanding our results of
operations, financial condition, and cash flows. MD&A is organized as
follows:
|
|
●
|
Overview. Discussion of our
business and overall analysis of financial and other highlights affecting
the Company to provide context for the remainder of
MD&A.
|
|
|
●
|
Results of Operations. An
analysis of our financial results comparing 2009 to
2008.
|
|
|
●
|
Liquidity and Capital
Resources. An
analysis of changes in our balance sheets and cash flows, and discussion
of our financial condition.
|
|
|
●
|
Critical Accounting Estimates.
Accounting estimates that we believe are important to understanding the
assumptions and judgments incorporated in our reported financial results
and forecasts.
|
The
following discussion should be read in conjunction with the AE Biofuels, Inc.
consolidated financial statements and accompanying notes included elsewhere in
this report. The following discussion contains forward-looking statements that
reflect the plans, estimates and beliefs of AE Biofuels, Inc. The actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to these differences include those
discussed below and elsewhere in this Report, particularly in “Risk Factors.”
All references to years relate to the calendar year ended December 31 of the
particular year.
Overview
The
Company’s goal is to be a leader in the production of next-generation fuels to
meet the increasing demand for renewable, transportation fuels, and to reduce
dependence on petroleum-based energy sources in an environmentally responsible
manner. We produce and sell biodiesel and crude glycerin through our biodiesel
production facility located in Kakinada, India. In October 2008, we commenced
start-up of commercial operations and began to produce biodiesel at our plant
with a nameplate capacity of 50 million gallons per year (“MGY”). During the
remainder of 2008 and in 2009 we focused producing and selling biodiesel as well
as further developing sales channels and customers for our biodiesel both in
India and for the export market. We produce biodiesel from palm stearin, a
non-edible feedstock, which we source from suppliers in India. Our plant was
originally established as an export only unit (EOU) to produce biodiesel for
sale outside of India, which would have allowed us to save on import duties.
However, that original designation did not permit us to buy feedstock and sell
biodiesel into the India domestic market. In 2009, we obtained the necessary
permits and approvals to sell all of our biodiesel into the Indian domestic
market on an ongoing basis and we also obtained in 2009 advanced licenses
to allow us to export our biodiesel. With the seasonality of demand for
biodiesel, we plan to establish a base market domestically, and sell into the
European market during the summer months when this market is open for our
product.
In August
2008, we opened the first integrated cellulose and starch ethanol commercial
demonstration facility in the United States. This facility was opened to prove
our technology as an intermediate step between the laboratory and commercial
operations.Our 9,000 square foot demonstration plant is capable of demonstrating
the ethanol production process from a variety of feedstock sources, which may
include wheat straw, corn stover, switchgrass and sugar cane bagasse. Our
integrated technology addresses the immediate need for commercially viable uses
of non-food feedstocks to complement existing feedstock sources to meet the
worldwide demand for ethanol. We expect the market for next generation
cellulosic ethanol to continue to grow due to a focus toward reducing reliance
on petroleum based fuel and due to increased cellulosic ethanol mandates
specified by the RFS(2). We believe that we can begin generating revenues
through the commercialization of our cellulosic ethanol technology in 2010;
however, we have not been able to generate revenues from this technology thus
far. For the remainder of 2008 and during 2009 we executed on our strategy for
the commercialization of our integrated cellulose and starch process by signing
in December 2009 a Project and Lease Agreement with a 55 MGY ethanol plant in
Keyes, California. On
December 1, 2009, the Company and two of our wholly owned subsidiaries, AE
Advanced Fuels, Inc. and AE Advanced Fuels Keyes, Inc. entered into a Project
Agreement and Lease Agreement with Cilion, Inc. the owner of a 55 million gallon
per year (MGY) ethanol plant in Keyes, California. Under the Project Agreement,
the Company agreed to provide $1.6 million and Cilion, Inc. agreed to provide
$1.0 million to retrofit the Plant. Under the terms of the Lease
Agreement, AE Advanced Fuels Keyes, Inc. will lease the Plant for a term of up
to thirty-six (36) months commencing upon substantial completion of the retrofit
activities. The Company raised the $1.6 million in January 2010 and on March 15,
2010, received one-half of Cilion’s funds and took possession of the Keyes
plant. After we bring the Keyes plant back into production using traditional
feedstocks, we intend to utilize the plant to commercialize our proprietary,
patent pending enzyme technology. Our plan includes designing,
constructing and operating a next-generation integrated cellulose and starch
ethanol production facility at the Keyes plant to utilize available agricultural
waste feedstocks from the surrounding central valley region of California.
In addition to the possible Keyes plant implementation, we plan to
continue to pursue our strategy to implement our technology through (i)
establishing joint ventures with existing ethanol plants (including corn ethanol
plants in the U.S. and sugarcane ethanol plants in Brazil and India); (ii)
constructing and operating standalone cellulosic ethanol facilities; and (iv)
licensing our proprietary technology to ethanol plants in the U.S., Brazil and
India.
25
Going
Concern Uncertainty
In
connection with their year-end audit of our annual consolidated financial
statements, our independent auditors are required to assess whether an emphasis
should be included in their audit report regarding the existence of substantial
doubt related to our ability to continue as a going concern. Our auditors have
issued an opinion on our consolidated financial statements for the fiscal year
ended December 31, 2009, which is included with this report on Form 10-K, that
states that the factors discussed in Note 1 to the consolidated financial
statements raise substantial doubt about our ability to continue as a going
concern. As shown in the accompanying consolidated financial statements, the
Company incurred a loss of $11,335,452 in 2009 due to limited sales at our
biodiesel plant in India that did not produce enough gross profit to pay for our
expenses incurred for research and development, sales, marketing and general and
administrative activities. Additionally included in this 2009 net loss was a
$2,086,350 expense incurred due to our impairment of land assets held in
Illinois and Nebraska. Our cash and cash equivalents balance was
$52,178 as of December 31, 2009, of which $9,753 was held in our
domestic entities and $42,425 was held in offshore subsidiaries. We ended
2009 with limited working capital resources, specifically we had negative
working capital of 17,936,876 and a net stockholders’ deficit of 3,689,688 at
December 31, 2009. We will need to raise additional working capital
in 2010 in order to achieve our goals in India and the U.S.
We also
could provide the business with working capital if we are able to increase our
biodiesel sales from our India plant to either domestic India customers or
export customers in Europe or the U.S. If we are able to complete the repairs
and restart of the California ethanol plant and operate it at a positive gross
profit, this will also provide us with needed working capital to operate our
business and pay down our debt. However there can be no assurance that we will
be successful in achieving any of these objectives or, if successfully
implemented, that these initiatives will be sufficient to address our lack of
liquidity. If the Company is unable to generate sufficient liquidity from its
operations to satisfy its obligations, we could potentially be forced to sell
all or a portion of our existing biodiesel facility or other assets to generate
cash to continue our business plan. A continued lack of liquidity from biofuel
plant operations in 2010 may have a material adverse effect on our liquidity and
may result in our inability to continue as a going concern, and or force us to
seek relief from creditors through a filing under the U.S. Bankruptcy
Code. Our consolidated financial statements do not include any
adjustments to the classification or carrying values of our assets or
liabilities that might be necessary as a result of the outcome of this
uncertainty.
Recoverability
of Our Long-Lived Assets
Property,
plant and equipment, net, represent more than 90% of the carrying value of our
total assets. We are required to evaluate these long-lived assets for
impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. With respect to our
biodiesel facility in India, which comprises more than 80% of the carrying value
of our total assets, we develop various assumptions to estimate the future cash
flows that will be generated from this facility in order to test the
recoverability of this asset. The determination of estimated future
cash flows is highly uncertain in the current economic
environment. Further, as our biodeisel facility in India has been in
operation for less than 18 months and to date has operated at only about 10% of
its daily capacity, we believe that our assumptions regarding future cash flows
and in turn the carrying value of our biodiesel facility represent a significant
estimate in the preparation of our consolidated financial statements, and, that
it is at least reasonably possible that our estimate regarding the
recoverability of the carrying value of our long-lived assets including our
biodeisel facility will change in the near term. Included in our
estimate, we have factored in the increasing demand for biodiesel in Europe and
in India based on government regulations requiring the use of renewable fuels by
the Government of India and many of the European Union member
states. We have noted the increasing blending obligations in 2010 in
some European counties including Bulgaria, France, Germany, Hungary, Poland,
Portugal, the Netherlands, Slovakia, Spain, Sweden and the United
Kingdom. We have also made our forecast based on the current prices
of fuel and feedstock commodities which currently are forecasted to provide
gross production margins; however, our gross margins depend principally on the
spread between feedstock and biodiesel prices and this spread has fluctuated
significantly in recent periods. The impact to our consolidated financial
statements of changes in our estimates of the future cash flows from, and in
turn the recoverability of the carrying value of, our biodiesel facility will
likely be material to such consolidated financial statements.
Revenues
Our sales
transactions consist of multiple sales of biodiesel to retail distributors of
biodiesel in India, one export shipment of biodiesel into Europe and several
sales transactions of crude glycerin (the by-product of our biodiesel
manufacturing process) to customers in India. We generally receive the order and
payment on the sale either before distribution of the product or at the time of
transfer of title. We sell our product primarily through outside sales brokers
and partially through an inside sales force. We have not sold products on a
consignment basis or to any international customers. We have the ability to
generate additional revenue through the sale of glycerin, the by-product from
the biodiesel production process. Glycerin can be sold in crude or refined
form.
Cost
of goods sold and gross profit (loss)
Our gross
profit (loss) is derived from our sales less our cost of goods sold. Our cost of
goods sold is affected primarily by the cost of palm stearin and palm oil, which
are the main feedstocks used to produce biodiesel. On an ongoing basis our cost
of goods sold will also be affected by the price of corn and natural gas as they
are key inputs into our California ethanol plant. The prices of palm stearin,
palm oil, corn and natural gas can vary as a result of a wide variety of
factors, including weather, market demand, regulation and general economic
conditions, all of which are outside of our control. Depending upon
the costs of these feedstock products in comparison to the sales price of the
biodiesel or ethanol, on a going forward basis, our gross margins can vary
significantly as a percentage of revenue and can even go from positive to
negative. Commodity prices were highly volatile in 2008 and, as a result, many
biofuels manufacturers were not profitable. Our gross margin was negative in
2008 due to this volatility.
Additionally
direct labor and factory overhead costs are included in the cost of goods sold.
Factory overhead expenses include direct and indirect costs associated with the
biodiesel production at our Kakinada plant, plant utilities, maintenance,
insurance, depreciation and freight.
26
Research
and development expenses
Principal
areas of spending for research and development are for the operations of our
integrated cellulose and starch ethanol commercial demonstration facility in
Butte. In 2008 certain costs of the construction of the plant were included as
well.
Selling,
general and administrative expenses
Principal
areas of spending for selling, general and administrative spending are in the
areas of employee compensation, professional services, travel, rent,
depreciation and office expenses, including certain expenses associated with
being a public company, such as costs associated with our annual audit and
quarterly reviews, listing and transfer agent fees.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
In 2009,
$9,175,349 or 100% of our revenue was derived from the sale of biodiesel and
crude glycerin. We sold approximately $5,910,000 of biodiesel and approximately
$401,000 of crude glycerin domestically in to India and we sold approximately
$2,875,000 of biodiesel, in one shipment, to Europe in August 2009. In 2008,
approximately $815,655 or 100% of our revenue was derived from the sale of
biodiesel into the Indian domestic market. All revenue in both 2009 and 2008 is
considered a part of our India geographic segment. We recognize revenue upon
shipment of product as collection is assured because payments are generally made
in advance and we do not offer any right of return. We had $ 32,032 and $0 of
accounts receivable as of December 31, 2009 and 2008, respectively. Our average
sales transaction consists of a customer taking delivery of several metric tons
of biodiesel by loading it into their tanker truck at our plant site. We have
several customers who take delivery of biodiesel on a daily basis. As a result,
it is difficult to predict timing or size of product sales on a quarterly basis.
As part of our one biodiesel export shipment in August 2009, we delivered the
4,125 metric tons of biodiesel to the port of Kakinada, India and payment terms
were FOB, Kakinada and payment was secured by a letter of credit deliverable at
our bank in India.
We only
produced 13,071 metric tons and sold 13,349 metric tons of biodiesel in 2009,
which is approximately 8.7% of our 150,000 metric ton per year plant production
capacity. We produced, as a by product of biodiesel production 1,597 and sold
1,693 metric tons of glycerin in 2009. In 2008, due to the fact that our plant
was not commissioned until October 2008, we produced 1,792 metric tons of
biodiesel and sold 1,251 metric tons which was 11% of our total plant capacity
during the period of operation from November through December
2008.
Our gross
profit for 2009 was $128,683. We were able to maintain a gross profit for the
year due to the fact that we increased sales to a level where our operating
profits were large enough to cover the biodiesel plant’s direct and overhead
expenses. Additionally we purchased feedstocks on the spot market when we were
able to secure a gross profit based on the corresponding selling price of
biodiesel base on customer orders or the current spot market price of
biodiesel. For the sales we made in November and December of 2008 (after
our plant was commissioned in October 2008), we had purchased the feedstock in
July 2008, which was near an all time high for palm oil. During the period
between July and December, the prices of palm oil ranged from a high of
approximately $1,200 per metric ton to a low of $450 per metric ton and the
prices for palm based biodiesel ranged from $1,290 to $525 per metric ton. We
experienced significant negative gross margins of $1,398,709 in 2008 due to the
timing of the inventory purchases in July and our subsequent biodiesel sales in
November and December. All of our cost of revenues was located in our India
geographic segment.
Expenses
Research and Development
Expenses. The largest component of expense in fiscal 2009 was the
$213,377 we spent on salary and wages for our employees who worked on developing
our technology and projects associated with the commercialization of our
technology. We did not allocate any salary and wage expenses to research and
development in 2008. Additional expenses of $132,565 in 2009 were
incurred for professional services primarily related to the salaries for the
small team of scientists working at the Butte facility. We spent $291,891 on
professional services in 2008. The balance of the research and development
expenses in both 2009 and 2008 were for rent, insurance, utilities, feedstock,
lab chemicals, office expenses and travel.
27
Selling, General and Administrative
Expenses.
We
summarize our spending into eight components as follows:
|
|
For
the Year Ended December 31,
|
||||
|
2009
%
|
2008
%
|
||||
|
Salaries,
wages and compensation
|
39
|
|
45
|
||
|
Supplies
and services
|
2
|
|
6
|
||
|
Repair
and maintenance
|
1
|
|
—
|
||
|
Taxes,
insurance, rent and utilities
|
13
|
|
8
|
||
|
Professional
services
|
32
|
|
31
|
||
|
Depreciation
and amortization
|
8
|
|
5
|
||
|
Travel
and entertainment
|
2
|
|
5
|
||
|
Miscellaneous
expense
|
3
|
|
--
|
||
|
Total
|
100
|
|
100
|
||
The
single largest component of selling, general and administrative expense is
employee compensation, including related non-cash stock compensation. Our
compensation expense was reduced from approximately $4,376,171 in 2008 to
approximately $2,224,134 for 2009. The two principal reasons for this reduction
was the number of employees and the non-cash stock compensation. The number of
selling, general and administrative employees in the United States decreased
from 13 at the start of 2008 to nine at the end of 2009. Our sales,
general and administrative staff grew in India from approximately 4 at the start
of 2008 to 12 at the end of 2009; however, the growth did not have a significant
impact on compensation expenses due to the significantly lower wages in India as
compared to the United States. The decrease was also driven by the
reduction in the non-cash, stock compensation expense of approximately $694,149
during 2009 as compared to non-cash, stock compensation of $1,761,857 recorded
during 2008. The higher stock compensation expenses in 2008 was
primarily attributable to an expense of $800,000 related to the accelerated
vesting of restricted stock in connection with the termination of one of our
officers, which is treated for accounting purposes as a new award and revalued
at the market value of the stock on the date of termination.
The
second largest component of selling, general and administrative expense is
professional services, which include legal, accounting, financial advisory,
board compensation, security filings, and transfer agent fees along with
associated non-cash stock compensation expense. For the year ended December 31,
2009, we spent approximately $1,802,837 on professional services including a
non-cash stock compensation charge of approximately $23,568 for stock grants to
key consultants and advisors. For the year ended December 31, 2008, we spent
approximately $3,065,794 on professional services including a non-cash stock
compensation charge of approximately $219,667 for stock grants to key
consultants and advisors. Overall, the reduction from 2008 was due to a reduced
amount of legal and advisory services retained in 2009 due to our limited cash
and working capital available during the year.
The third
largest component of selling, general and administrative expense is taxes,
insurance, rent and utilities. These expenses remained relatively consistent and
were $739,674 and $787,094 in 2009 and 2008, respectively. We did not
make any significant changes to our facilities in 2009 as compared to 2008 that
support our selling, general and administrative functions.
At the
end of fiscal 2008 we began selling biodiesel and incurred some selling and
marketing expenses, which consisted primarily of salaries, commissions and
benefits related to one sales and marketing person; travel and other
out-of-pocket expenses, and the amortization of intangible assets related to our
acquisition of Biofuels Marketing, Inc. Commissions on biodiesel sales are
typically accrued and expensed or paid when the respective products are sold.
During 2009 we did not hire additional sales personnel nor did we initiate
additional marketing programs, so our sales and marketing expenses remained
minimal. We expect that our sales and marketing expenses will increase for the
foreseeable future in absolute dollars if our biodiesel plant sales dramatically
increase and if we begin ethanol production and sales from the Keyes Plant in
2010.
Loss
on forward purchase commitments
We did
not enter into any forward purchase commitments in fiscal 2009 because we only
purchased feedstock for our India plant at spot market prices. In fiscal 2008 we
entered into two forward contracts for crude palm oil. We took delivery of the
crude palm oil under the first contract and elected not to take delivery under
the second contract by selling our position. Upon selling our position of the
second contract, we booked a loss on the forward contract of $532,500 due to the
declining price of crude palm.
28
Other
Income (Expense)
Other
income (expense) in 2009 consisted of the following items:
|
|
·
|
Interest
expense is the result of debt facilities acquired by both the Company and
its India subsidiary. These debt facilities included warrant coverage and
discount fees which are amortized as part of interest expense. We incurred
interest expense of $2,675,403 which was higher than the $614,426 incurred
in the prior year due to the fact that our Third Eye Capital debt and
State Bank of India facilities were outstanding during only a portion of
2008 and were outstanding for the entire fiscal 2009 year. Additionally
our related party loan balance was higher during 2009 as compared to
2008.
|
|
|
·
|
Interest
income is earned on excess cash. Due to the decrease in our cash balances
over the year, as compared to fiscal 2008, our interest income decreased
from $50,691 in fiscal 2008 to $23,327 in fiscal
2009.
|
Other
income (expense) in 2008 consisted of the following items:
|
|
·
|
Pursuant
to the terms of its Amended and Restated Registration Rights Agreement,
beginning in January 2008 the Company was obligated to file a registration
statement to register shares of common stock issued or issuable upon
conversion of the Company's Series A and B preferred stock or pay in cash
or shares of stock to these investors an amount equal to 0.5% per month of
their investment amount. The liquidated damages ceased accruing in
December 2008 when the Series B preferred shares became available for
trading in compliance with Rule 144. The Company elected to pay these
liquidated damages through the issuance of 406,656 shares of common stock
to the holders of shares of our Series B preferred stock. The liquidated
damages penalty resulted in an expense of $1,807,746, classified in other
income/expense for the year ended December 31, 2008. The Company issued
the 406,656 shares of its common stock to eligible stockholders on or
about February 12, 2009.
|
|
|
·
|
On
January 23, 2008, we agreed to end the joint venture with Acalmar Oils and
Fats, Ltd. (“Acalmar”) including termination of Acalmar’s right to own or
receive any ownership interest in the joint venture. The total
cancellation price of $900,000 is reflected in our Statement of Operations
as a shareholder agreement cancellation
payment.
|
|
|
·
|
Interest
expense is the result of debt facilities acquired by both the Company and
its India subsidiary. These debt facilities included warrant coverage and
discount fees which are amortized as part of interest expense. We incurred
interest expense of $614,426 and capitalized interest of $929,058 into the
cost of our biodiesel plant in
India.
|
|
|
·
|
Other
income, net of expenses includes $104,810 of income resulting from a
purchase and re-sale of glycerin. Additionally we earned other income from
renting portions our land holdings in Sutton and Danville to local
farmers.
|
Liquidity
and Capital Resources
Contractual
Obligations
Our
contractual obligations include long-term debt, operating lease obligations,
employment agreements, and construction purchase obligations. We had the
following contractual obligations at December 31, 2009:
|
Payments
Due by Period
|
||||||||||||||||||||||
|
Total
|
Less
Than
1 Year
|
1
- 3
Years
|
3
- 5
Years
|
More
Than
5
Years
|
||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||
|
Debt(a)
|
$
|
15,051,493
|
$
|
10,801,462
|
$
|
4,250,031
|
$
|
--
|
$
|
—
|
||||||||||||
|
Operating
lease obligations(b)
|
632,471
|
263,846
|
368,625
|
—
|
—
|
|||||||||||||||||
|
Construction
purchase obligations(c)
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Total
contractual cash obligations
|
$
|
15,683,964
|
$
|
11,065,308
|
$
|
4,618,656
|
$
|
—
|
$
|
—
|
||||||||||||
———————
|
(a)
|
See
Note 7 – Debt of the Notes to Consolidated Financial Statements. The
amounts included in the table above represent principal maturities
only.
|
|
(b)
|
See
Note 8 – Operating Leases of the Notes to Consolidated Financial
Statements.
|
|
(c)
|
Consists
of firm purchase commitments under construction contracts and commitments
under purchase orders and other short term contracts related to the
construction of the glycerin refinery and pre-treatment plant. See Note 13
— Commitments of the Notes to Consolidated Financial
Statements.
|
Currently,
we do not have any material off-balance sheet arrangements.
29
Liquidity
Cash and
cash equivalents, time deposits and debt at the end of each period were as
follows:
|
|
|
December
31,
2009
|
December
31,
2008
|
|
||||
|
Cash
and cash equivalents and time deposits
|
|
$
|
52,178
|
|
$
|
377,905
|
|
|
|
Short
and long term debt
|
|
$
|
15,051,493
|
|
$
|
10,539,766
|
|
|
The
Company has experienced losses and continued to have negative cash flow through
the fiscal year ending December 31, 2009, and, as of December 31, 2009, has
negative working capital of $17,936,876 and a net stockholders’ deficit of
$3,689,688. Although our operating biodiesel plant has operated at a positive
gross margin for the year and can and did provide us cash flow, it will likely
be insufficient to allow for the completion of our business plan in 2010. Due to
the poor condition of the worldwide credit and equity markets, we were unable to
raise additional equity or debt capital to complete the glycerin refinery in
India. We are actively pursuing additional working capital through both debt and
equity offerings in order to have funds to execute on our business strategy in
India and in the United States. Funds available at December 31, 2009 are
sufficient to cover less than one month of our domestic operating
costs.
The
foregoing matters raise substantial doubt about our ability to continue as a
going concern. In order for us to continue as a going concern, we
require a significant amount of additional working capital to fund our ongoing
operating expenses and future capital requirements. The use of additional
working capital is primarily for the operation of our biodiesel plant in India,
the repair and retrofit of our California ethanol plant, for general and
administrative expenses, the purchase of feedstock and other raw materials to
operate our existing facilities and debt interest and principal payments. Our
ability to identify and enter into commercial arrangements with feedstock
suppliers in India depends on maintaining our operations agreement with
Secunderabad Oil, Limited, who is currently providing us with working capital
for our Kakinada facility. If we are unable to maintain this
strategic relationship, our business may be negatively affected. In
addition, the ability of Secunderabad to continue to provide us with working
capital depends in part on the financial strength of Secunderabad and its
banking relationships. If Secunderabad is unable or unwilling to
continue to provide us with working capital, our business may be negatively
affected. Our ability to enter into commercial arrangements with feedstock
suppliers in California depends on finalizing corn purchase agreement or
agreements with corn suppliers who will be providing us with favorable payment
terms for our California ethanol plant. If we are unable to negotiate and
execute on these corn purchase agreements, our ethanol production business will
not begin. In addition to obtaining favorable payment terms from a corn
supplier, we will likely negotiate a working capital line of credit with a
commercial bank once the ethanol plant becomes operational in 2010 in order to
provide us with additional working capital security in addition to or instead of
obtaining the favorable vendor payment terms.
With
regards to our senior secured note held by Third Eye Capital the note was in
default for most of 2009 due to non-compliance with the financial covenants.
Accordingly the default interest rate of 18% was accrued until December 2009. In
December 2009, the Company entered into an amendment extending the note maturity
date until June 30, 2010 and waiving covenant defaults. The Company evaluated
the loan modification under ASC 470-50 and ASC 470-60 and determined that the
amendment represented a non-troubled debt modification under ASC 470- 50, in
which the original and new debt instrument are not substantially different,
accordingly, fees between the debtor and creditor have been reflected as a
reduction to the carrying value of the debt and will amortized ratably over the
seven month term of the debt. Fees of $350,000 were incurred to
extend the maturity and fees of $300,000 were incurred to waive the financial
covenant defaults. At December 31, 2009, the outstanding balance of
principal, interest and fees on the note was $6,670,858. We
plan to pay the note through the cash flows from our biodiesel plant in India
and our ethanol plant in California, once it becomes operational in the
first half of 2010.
There is
no assurance that the Company will be able to obtain alternative funding in the
event this debt obligation is accelerated. Immediate acceleration would have a
significant adverse impact on the Company’s near term liquidity. Our
consolidated financial statements do not include any adjustments to the
classification or carrying values of our assets or liabilities that might be
necessary as a result of the outcome of this uncertainty.
30
On
October 7, 2009, UBPL received a demand notice from the State Bank of India. The
notice informs UBPL that an event of default has occurred for failure to make an
installment payment on the loan due in June, 2009 and demands repayment of the
entire outstanding indebtedness of 19.60 crores (approximately $4 million)
together with all accrued interest thereon and any applicable fees and expenses
by October 10, 2009. As of December 31, 2009, UBPL was in default on four months
of interest. Additional provisions of default include the bank having the
unqualified right to disclose or publish our company name and our directors
names as defaulter in any medium or media. At the bank’s option, it may also
demand payment of the balance of the loan since the principal payments are in
default in June 2009. As a result we have classified the entire loan amount as
current. We are currently in discussions with the bank with regards to an
amendment to the Agreement of Loan for Overall Limit for the modification of
terms and plant to pay the principal and interest on the loan through either
cash flows from our biodiesel plant operations or through a debt or equity raise
at the parent Company level.
There is
no assurance that UBPL or the Company will be able to obtain alternative funding
in the event the State Bank of India demands payment and immediate acceleration
would have a significant adverse impact on UBPL or the Company’s near term
liquidity and our ability to operate our biodiesel plant. Our
consolidated financial statements do not include any adjustments to the
classification or carrying values of our assets or liabilities that might be
necessary as a result of the outcome of this uncertainty.
Planned
capital expenditures in 2010 include an expected $500,000 to complete the
glycerin refinery at our Kakinada plant. Commitments for
approximately $60,654 under construction contracts, purchase orders and other
short term contracts were outstanding at December 31, 2009. We anticipate that
the cash flow from our India operations will fulfill the current commitments and
we expect to obtain an additional line of credit in India to provide us with the
$500,000 required to complete our glycerin refinery.
We may
continue to deploy our management team’s combined industry, technical, merger
and acquisition (“M&A”), restructuring and corporate finance expertise to
target and acquire undervalued and/or distressed assets, and then apply our
technology to improve the performance of those assets. We believe that our
strategy offers substantial opportunity to build capital value in the current
climate, particularly given (a) the present opportunity to acquire undervalued
and/or underperforming assets and improve them; and (b) the medium to longer
term outlook for ethanol and cellulosic ethanol as an alternative form of energy
supply and the relatively weak state of the ethanol and cellulose ethanol market
which is likely to lead to under supply in 2010. To effect the planned M&A
strategy in full, the Company requires access to substantial further acquisition
and development finance and it is currently working with advisers with a view to
securing additional financing. This may be made available through industry
and/or financial partnerships and joint ventures, special purpose financing
vehicles, structured acquisition finance arrangements, private placements of
equity, debt and blended debt and equity instruments. In addition, the Company
anticipates that it may issue share and/or loan capital to vendors as a means of
securing target acquisitions and to fund development.
We intend
to raise additional working capital in 2010 through some of all of the
following: operating cash flows, working capital lines of credit, long-term debt
facilities, joint venture arrangements and the sale of additional equity by the
Company or its subsidiaries. We continue to explore different funding
sources, but because of the continued unsettled state of the capital markets
around the globe, the Company lacks any defined capital raising projects or
specific sources of capital or commitments for the required
capital. The Company, in common with most enterprises that require
capital to develop and implement their strategy, are challenged by the impact
the crisis in the global capital markets is having on its ability to finance its
plans. To a significant degree, our business success will depend on
the state of the capital markets, and investors in our securities should take
into account the macro-economic impact of the availability of credit and capital
funding when assessing the business development plans of the
Company. On
January 30, 2010, our wholly owned entity, AE Advanced Fuels Keyes raised
$1,600,000 through a non-interest bearing, unsecured promissory note from Laird
Cagan with repayment in whole or in part at any time at our option. As a
form of consideration for the promissory note, we will issue Mr. Cagan 600,000
shares of common stock. The receipt of the funding satisfied the
financing provision of the project agreement and has allowed us to ask to take
possession of the Keyes plant. Subsequent to December 31, 2009, we
drew down short term borrowings from our line of credit with Laird Cagan
totaling $500,000 to meet some of our 2010 operating costs, however, to continue
operations the Company needs to secure additional near term equity or debt
financing.
Historical
Sources and Uses of Cash
Operating
Activities
Net cash
used in operating activities in fiscal 2009 was $2,356,223 primarily to operate
our business, including general and administrative and research and development
costs. Offsetting our expenses was a contribution from our biodiesel operations
of $302,077. Net cash used in operating activities decreased from $8,680,285 in
the prior year primarily as a result of reducing our spending in research &
development and corporate activities to reflect our limited cash and constrained
working capital in 2009. Primary uses of cash in 2009 consist of our net loss of
$11,335,452, partially offset by noncash charges, including impairment of long
lived assets ($2,086,350), and by increases to accrued interest ($1,480,170) and
other liabilities ($1,618,027). An additional reduction of cash used in
operations in 2009 was the implementation of an employee payroll deferral
program in February 2009 which reduced cash outlay for payroll of approximately
$600,000. The increase in accounts payable and accrued liabilities as
compared to 2008 further reduced the cash used in operating activities in 2009.
The increase is due to the fact that we continued to delayed payments to vendors
and employees during the fiscal year ended December 31, 2009.
31
Net cash
used in operating activities in fiscal 2008 was $8,680,285 primarily to develop
our business, including general and administrative and research and development
costs. Net cash used in operating activities increased from $7,087,263 in the
prior year primarily as a result of an increase in spending on operations
related to interest expense of $614,426 and the addition of inventory of
$2,137,500 purchased in connection with the commencement of production at our
biodiesel plant in India. The increase in cash used in operating activities
would have been even higher if it were not for the increase in accounts payable
and accrued liabilities in fiscal 2008, as compared to fiscal 2007. The increase
in accounts payable and accrued liabilities offsets the increased use in cash
due to the fact that we delayed payments to vendors at the end of the fiscal
year December 31, 2008.
Investing
Activities
Net cash
used by investing activities in fiscal 2009 was $49,515, which consisted of
purchases of property, plant and equipment relating to the repairs and upgrades
to our biodiesel facility in India. Net cash used by investing activities in
fiscal 2008 was $2,518,913, which consisted primarily of $5,192,124 in purchases
of property, plant and equipment relating to the construction of our biodiesel
facility in India and our demonstration facility in Montana. Offsetting this
amount was the $2,373,326 provided by the sale of time deposits in
2008.
Financing
Activities
Net cash
provided by financing activities in fiscal 2009 was $2,220,905, which consisted
primarily of the proceeds from our working capital line of credit with
Secunderabad Oil and proceeds from our related party revolving line of credit
facility, offset by the payments made in 2009 against this working capital line
of credit and the previous related party debt facility. On August 17, 2009,
International Biodiesel, Inc., a wholly owned subsidiary of AE Biofuels, Inc.,
entered into a Revolving Line of Credit Agreement with Mr. Cagan, (the
“Lender”), for $5,000,000. The $5,000,000 Revolving Line of Credit
bears interest at the rate of 10% per annum and matures on July 1, 2011. We used
the new Revolving Line of Credit Agreement to satisfy the unsecured revolving
line of credit facility with a limit of $3,500,000 in August 2009. At
December 31, 2009, a total of $4,250,031, including accrued interest, was
outstanding under the $5,000,000 Revolving Line of Credit, dated August 17,
2009. All outstanding principal and accrued interest is due and payable on
July1, 2011.
On May
16, 2008, Third Eye Capital ABL Opportunities Fund (“Purchaser”) purchased a 10%
senior secured note in the amount of $5 million along with 5 year warrants
exercisable for 250,000 shares of common stock at an exercise price of $3.00 per
share. The note is secured by first-lien deeds of trust on real property located
in Nebraska and Illinois, by a first priority security interest in equipment
located in Montana, and a guarantee of $1 million by McAfee Capital LLC (owned
by Eric McAfee and his wife). Prior to the note maturing on May 15, 2009, the
Company entered into an amendment and limited waiver (the “Amendment”) with
Third Eye Capital Corporation (“Agent”) on behalf of itself and the Purchaser
dated March 31, 2009. The Amendment did not become effective as we were unable
to meet the conditions of effectiveness set forth in the Amendment. Accordingly,
the interest rate under this facility has been accrued at the default interest
rate, which is 18%, during the period of default. On December 10,
2009, the Company entered into an effective amendment extending the note
maturity date until June 30, 2010 and waiving financial covenant
defaults. The amended note bears interest at 10%. Fees of $350,000
were incurred to extend the maturity and fees of $300,000 were incurred to waive
the financial covenant defaults. At December 31, 2009, the
outstanding balance of principal, interest and fees on the note were
$6,083,716.
Net cash
provided by financing activities in fiscal 2008 was $10,906,620, which consisted
primarily of the proceeds from short and long term debt, offset by the payments
made in 2008 against this debt. As of December 31, 2008, the Company’s long-term
debt included $2,044,691 outstanding under a credit facility provided by a
related party (a former director and significant shareholder). In 2008 this
credit facility was amended to convert the facility into a revolving line of
credit with a credit limit of $2,500,000. The maturity date of the
credit facility was extended to January 31, 2011.On July 17, 2008, the Company’s
subsidiary, Universal Biofuels Pvt. Ltd. entered into a secured term loan in the
amount of approximately $6,000,000 of which $4,504,062 was outstanding at
December 31, 2008.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of net sales and expenses for
each period. The following represents a summary of our critical accounting
policies, defined as those policies that we believe are the most important to
the portrayal of our financial condition and results of operations and that
require management’s most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.
32
Impairment
of Intangible and Long-Lived Assets
Our
intangible asset was derived from the acquisition of Biofuels Marketing on
September 1, 2007. In accordance with SFAS No. 141, “Business Combinations”, we
allocated the respective purchase prices to the tangible assets, liabilities and
intangible asset acquired based upon their estimated fair values. The principal
asset was an intangible asset consisting of a customer list. All of the
capitalizable costs of this acquisition were allocated to this customer list as
the value of the remaining tangible and intangible assets were negligible. This
customer list is being amortized over 18 months, its estimated useful
life.
Our
long-lived assets are primarily associated with our plant in Kakinada, India. In
fiscal 2008, we began operation of our biodiesel plant and we continued the
construction of our glycerin refinery and pre-treatment plant. The refinery and
pre-treatment plant are expected to be fully operational by the third quarter of
2009. Costs for building them remained in construction-in-progress at December
31, 2008, and will be reclassified once the refinery and pre-treatment plant are
fully operational and placed in service.
Additional
long-lived assets consist of our two land sites in Illinois and Nebraska. The
land and land improvements are held for development of production
facilities.
We
evaluate impairment of long-lived assets in accordance with ASC Subtopic 360-10
(formerly SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”). We assess the impairment of long-lived
assets, including property and equipment and purchased intangibles subject to
amortization, when events or changes in circumstances indicate that these assets
have been impaired and we accordingly write them down to their new fair value.
Forecasts of future cash flows are critical judgments in this process and are
based on our experience and knowledge of our operations and the industries in
which we operate and are critical to our impairment assessments. These forecasts
could be significantly affected by future changes in market conditions, the
economic environment, and capital spending decisions of our customers and
inflation and are significantly dependent on our ability to secure additional
working capital to allow us to achieve our forecasted results.
With
respect to our biodiesel facility in India, which comprises more than 80% of the
carrying value of our total assets, we develop various assumptions to estimate
the future cash flows that will be generated from this facility in order to test
the recoverability of this asset. As our biodeisel facility in India
has been in operation for less than 18 months and to date has operated at only
about 10% of its daily capacity, we believe that our assumptions regarding
future cash flows and in turn the carrying value of our biodiesel facility
represent a significant estimate in the preparation of our consolidated
financial statements, and, that it is at least reasonably possible that our
estimate regarding the recoverability of the carrying value of our long-lived
assets including our biodeisel facility will change in the near
term. The impact to our consolidated financial statements of changes
in our estimates of the future cash flows from, and in turn the recoverability
of the carrying value of, our biodiesel facility will likely be material to such
consolidated financial statements.
With
respect to our idle landholdings in Illinois and Nebraska within our North
American segment we considered whether these assets were impaired by looking at
the undiscounted cash flows compared to our carrying values in accordance with
ASC Subtopic 360-10 and concluded that these assets were impaired. As a result,
we charged $2,086,350 to expense to recognize the difference between the
estimated fair value as determined by management after considering available
information including appraisals of the respective properties and the current
capitalized carrying value. The determination of estimated future undiscounted
cash flows is highly uncertain in the current economic environment. Our
estimated undiscounted cash flows considered principally the current value of
the underlying land assuming a near-term sale in an orderly market, as well as
anticipated cash flows from executing our planned development activities
(development of cellulosic ethanol plants). These cash flow estimates, while
they represent our best estimate of future undiscounted cash flows, are highly
uncertain and could be negatively affected by the continued erosion of the
capital markets, availability of capital negating the company’s ability to
generate cash flows as planned from the development and operation of ethanol
facilities at these locations or forcing the Company to liquidate these assets
to generate working capital in a manner that is not consistent with an orderly
sale. As of
September 30, 2009, the Company, influenced in party by the recent default of
the loans by the senior lender, which could force us to sell these properties
rather than to execute on our planned development activities, determined that
the landholdings were impaired because of our revise estimate of future
undiscounted cash flows was less than the landholdings’ carrying
values. As a result, we computed the amount of impairment by
comparing their estimated fair values assuming an orderly sale to their
respective carrying values. Based thereon, as asset impairment
charge of $2,086,350 was recorded in the three months ended September 30, 2009.
As of December 31, 2009, the default was cured. No further impairment
charges were recorded during the three months ended December 31,
2009. No impairment losses were recorded for the year ended December
31, 2008. We will continue to assess the factors above and their impact on the
cash flow estimates. Upon continued degradation of the economic factors
effecting cash flow estimates, knowledge of other prevalent indicators, or
actions that we believe would force liquidation, we will reassess the value of
these assets in accordance with ASC Subtopic 360-10.
Inventories
Inventories
are stated at the lower of cost, using the first-in and first-out (FIFO) method,
or market. In assessing the ultimate realization of inventories, we perform a
periodic analysis of market prices and compare that to our weighted-average FIFO
cost to ensure that our inventories are properly stated at the lower of cost or
market
33
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of ASC 718
(formerly SFAS No.123 (Revised 2004), “Share-Based Payment ”
).
We make
the following estimates and assumptions in determining fair value of stock
options as prescribed by ASC 718:
|
|
·
|
Valuation and amortization
method — We estimate the fair value of stock options granted using
the Black-Scholes-Merton option-pricing formula and a single option award
approach. This fair value is then amortized on a straight-line basis over
the requisite service periods of the awards, which is generally the
vesting period.
|
|
|
·
|
Expected Term — The
expected term represents the weighted-average period that our stock-based
awards are expected to be outstanding. We applied the “Simplified Method”
as defined in the Securities and Exchange Commission’s Staff Accounting
Bulletin No. 107.
|
|
|
·
|
Expected Volatility —
The Company’s expected volatilities are based on the historical volatility
of comparable public companies’ stock for a period consistent with our
expected term.
|
|
|
·
|
Expected Dividend — The
Black-Scholes-Merton valuation model calls for a single expected dividend
yield as an input. The Company currently pays no dividends and does not
expect to pay dividends in the foreseeable
future.
|
|
|
·
|
Risk-Free Interest Rate
— The Company bases the risk-free interest rate on the implied yield
currently available on United States Treasury zero-coupon issues with an
equivalent remaining term.
|
Given the
absence of an active market for our common stock as a private company before the
Reverse Merger, our board of directors, the members of which we believe had
extensive business, finance or venture capital experience, were required to
estimate the fair value of our common stock for purposes of determining exercise
prices for the options it granted. Our board of directors determined the
estimated fair value of our common stock, based in part on an analysis of
relevant metrics, including the following:
|
|
·
|
the
prices for our convertible preferred stock sold to outside investors in
arm’s-length transactions;
|
|
|
·
|
the
rights, preferences and privileges of that convertible preferred stock
relative to those of our common
stock;
|
|
|
·
|
our
operating and financial
performance;
|
|
|
·
|
the
hiring of key personnel;
|
|
|
·
|
the
introduction of new products;
|
|
|
·
|
our
stage of development and revenue
growth;
|
|
|
·
|
the
fact that the option grants involved illiquid securities in a private
company;
|
|
|
·
|
the
risks inherent in the development and expansion of our operations;
and
|
|
|
·
|
the
likelihood of achieving a liquidity event, such as an initial public
offering or a sale of us, for the shares of common stock underlying the
options given prevailing market
conditions.
|
Recently
Issued Accounting Pronouncements
The
Company adopted the provisions of ASC 820-10, Fair Value Measurements and
Disclosures (formerly SFAS No. 157, Fair Value Measurements), with respect to
non-financial assets and liabilities effective January 1, 2009. This
pronouncement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. The adoption of ASC
820-10 did not have an impact on the Company’s consolidated financial
statements.
The
Company adopted ASC 805 (formerly SFAS No. 141(R), “Business Combinations”) for
business combinations. This topic changes the accounting for acquisition
transaction costs by requiring them to be expensed in the period incurred, and
also changes the accounting for contingent consideration, acquired contingencies
and restructuring costs related to an acquisition. The Company also adopted ASC
810-10-65, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51
(formerly SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51”). This statement changes the
accounting and reporting for minority interests, which are re-characterized as
non-controlling interests, classified as a component of equity and accounted for
at fair value. ASC 805 and ASC 810-10-65 are effective for the Company’s 2009
financial statements. Early adoption is prohibited. The effect the adoption of
ASC 805 has had and will have on the Company’s financial statements will depend
on the nature and size of acquisitions we complete after adoption. We adopted
ASC 810-10-65-1 as of January 1, 2009. As a result, we reclassified the 49%
non-controlling interest in our subsidiary Energy Enzymes, Inc., prospectively.
Had we continued to apply the prior method of accounting for non-controlling
interests, losses incurred by this entity would have been fully attributed to
us.
34
The
Company adopted ASC 825-10 (formerly the Financial Accounting Standards Board
(FASB) issued Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial
Instruments”). ASC 825-10 amends FASB Statement No. 107, “Disclosures about Fair
Values of Financial Instruments,” to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. APB 28-1 amends APB Opinion No. 28, “Interim Financial
Reporting,” to require those disclosures in all interim financial statements.
ASC 825-10 is effective for interim periods ending after June 15, 2009. Adoption
of this statement did not have a material effect on the Company’s financial
statements. See Note 19 Fair Value Measurement.
The
Company adopted ASC 320-10 (formerly Staff Position SFAS 115-2 and SFAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments”. ASC 320
provides guidance in determining whether impairments in debt securities are
other than temporary, and modifies the presentation and disclosures surrounding
such instruments. ASC 320 is effective for interim periods ending after June 15,
2009. Adoption of this statement did not have a material effect on the Company’s
financial statements.
In June
2009, the FASB issued ASC 105 (formerly SFAS No. 168, "The FASB Accounting
Standards Codification (TM) ("Codification") and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No. 162"). ASC
105 establishes the Codification as the single official source of authoritative
United States accounting and reporting standards for all non-governmental
entities (other than guidance issued by the SEC). The Codification changes the
referencing and organization on financial standards and is effective for interim
and annual periods ending on or after September 15, 2009. ASC 105 is not
intended to change the existing accounting guidance and its adoption did not
have an impact on our financial statements.
In
October, the FASB issued EITF Issue no. 2009-13, Revenue Recognition (Topic
605), Multiple Deliverable Revenue Arrangements, which applies to
multiple-deliverable revenue arrangements that are currently within the scope of
FASB ASC 605-25 (previously included in EITF Issue no. 00-21, Revenue
Arrangements with Multiple Deliverables). The EITF will be effective on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. The Company has not fully
assessed the impact of this guidance, but at this time believes it will not have
an impact on our financial statements.
In August
2009, the FASB issued Accounting Standard Update (“ASU”) ASU 2009-5, “Fair Value
Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value”
(“ASU 2009-5”). This update provides clarification of the fair value measurement
of financial liabilities when a quoted price in an active market for an
identical liability (Level 1 input of the valuation hierarchy) is not available.
ASU 2009-5 is effective in the fourth quarter of 2009. The adoption of this
update did not have a material impact on its financial statements or
disclosures.
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements,”
which requires additional disclosures on transfers in and out of Level I and
Level II and on activity for Level III fair value measurements. The new
disclosures and clarifications on existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures on Level III activity, which are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. We do not expect the adoption of ASU No. 2010-06 to have a material
impact on our consolidated financial condition or results of operations.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Financial
Statements are listed in the Index to Consolidated Financial Statements on page
51 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A(T). CONTROLS AND
PROCEDURES
Management’s
Annual Report on Internal Control over Financial Reporting.
35
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)
under the Exchange Act). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles (GAAP). The Company’s internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the consolidated financial
statements.
Evaluation
of Disclosure Controls and Procedures.
Management
(with the participation of our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO)), carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act). Based on this evaluation, our principal executive officer
and principal financial officer concluded that, as of the end of the period
covered in this report, our disclosure controls and procedures were effective to
provide reasonable assurance that the information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009, based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control — Integrated Framework. Our management concluded that our
internal control over financial reporting was effective as of December 31,
2009.
This
Annual Report does not include an attestation report for our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the registered public
accounting firm pursuant to the fact that we were a non-accelerated filer
(defined by the SEC to have a public float below $75 million) for the annual
period ended December 31, 2009 due to our market capitalization falling below
the $50 million level required to maintain the accelerated filer status which we
maintained for the annual period ended December 31, 2008.
Remediation
of Material Weaknesses
In
connection with our audit of our financial statements as of December 31, 2008,
we and auditors, BDO Seidman, LLP concluded that we had material weaknesses in
internal control over financial reporting with respect to (i) performance of
competent and timely reviews of significant non-routine transactions, accounting
estimates and other adjustments.
During
2009, we implemented a remediation plan to address these material weakness,
including: (i) improving the knowledge, experience and training of our staff to
improve our financial reporting process in India; (iii) increasing the
level of preparation and review of our quarterly and annual financial
statements; (iv) identifying and evaluating non-routine and complex
transactions on a regular basis; and (v) researching, identifying,
analyzing, documenting, and reviewing applicable accounting principles in
accordance with GAAP.
Inherent
Limitations on Effectiveness of Controls
Our
management, including the Chief Executive Officer (“CEO”) and Chief Financial
Officer (“CFO”), does not expect that our disclosure controls or our internal
control over financial reporting will prevent or detect all error and all fraud.
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met. Our controls and procedures are designed to provide reasonable assurance
that our control system’s objective will be met and our CEO and CFO have
concluded that our disclosure controls and procedures are effective at the
reasonable assurance level. The design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of the effectiveness of
controls in future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.
36
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
fourth quarter of 2009, that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
37
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
Information
about the Directors
Set forth
below is information regarding our directors:
|
Name
|
Age
|
Position
|
Director
Since
|
|||
|
Eric
A. McAfee
|
47
|
Chief
Executive Officer and Chairman of the Board
|
2006
|
|||
|
John
R. Block
|
75
|
Director
|
2008
|
|||
|
Michael
Peterson
|
48
|
Director
|
2006
|
|||
|
Harold
Sorgenti
|
75
|
Director
|
2007
|
Eric A. McAfee co-founded AE
Biofuels, Inc. in 2005 and has served as its Chairman of the Board since
February 2006. Mr. McAfee was appointed Chief Executive Officer of the Company
in February 2007. Mr. McAfee has been an entrepreneur, merchant banker, venture
capitalist and farmer/dairyman for more than 20 years. Since 1995, Mr. McAfee
has been the Chairman of McAfee Capital and since 1998 has been a principal of
Berg McAfee Companies, an investment company. Since 2000, Mr. McAfee has been a
principal of Cagan McAfee Capital Partners (“CMCP”) through which Mr. McAfee has
founded or acquired twelve energy and technology companies. In 2003, Mr. McAfee
co-founded Pacific Ethanol, Inc. (Nasdaq PEIX), a West Coast ethanol producer
and marketer. Mr. McAfee received a B.S. in Management from Fresno State
University in 1986 and served as Entrepreneur in Residence of The Wharton
Business School MBA Program in 2007. Mr. McAfee is a graduate of the Harvard
Business School Private Equity and Venture Capital Program, and is a 1993
graduate of the Stanford Graduate School of Business Executive
Program.
John R. Block has served as a
member of the Company’s Board of Directors since October 16, 2008. From
1981 to 1986, Mr. Block served as Secretary of Agriculture for the U.S.
Department of Agriculture under President Ronald Reagan. He is currently an
Illinois farmer and a Senior Policy Advisor to Olsson Frank Weeda Terman Bode
Matz PC, an organization that represents the food industry, a position Mr. Block
has held since January 2005. From January 2002 until January 2005, he served as
Executive Vice President at the Food Marketing Institute, an organization
representing food retailers and wholesalers. From February 1986 until January
2002, Mr. Block served as President of Food Distributors International. Mr.
Block is currently a member of the board of directors of Digital Angel
Corporation and Metamorphix, Inc. During the past five years, Mr.
Block has served on the board of directors of Deere and Co., Hormel Foods
Corporation and Blast Energy Services, Inc. Mr. Block received his B.A. from the
U.S. Military Academy.
Michael Peterson has served as
a member of the Company’s Board of Directors since February 2006. Mr. Peterson
has worked in the securities industry in various capacities for approximately 19
years. From 1989 to 2000, he was employed by Goldman Sachs & Co. including
as a vice president with responsibility for a team of professionals that advised
and managed over $7 billion in assets for high net worth individuals and
institutions. Mr. Peterson joined Merrill Lynch in 2001 to form and help launch
its Private Investment Group and was with Merrill Lynch until July 2004. From
July 2004 until January 2005, Mr. Peterson was a self-employed financial
consultant. In January 2005, Mr. Peterson joined American Institutional
Partners, L.L.C. as a managing partner. On December 31, 2005, Mr. Peterson
founded his own investment firm, Pascal Management LLC. Mr. Peterson received a
B.S. in Computer Science and Statistics from Brigham Young University in 1985
and an M.B.A. from the Marriott School of Management at Brigham Young University
in 1989. Mr. Peterson is currently a member of the board of directors
of Blast Energy, Inc. and Solargen Energy, Inc.
Harold Sorgenti was appointed
to the Company’s Board of Directors in November 2007. Since 1998, Mr. Sorgenti
has been the principal of Sorgenti Investment Partners, a company engaged in
pursuing chemical investment opportunities. Sorgenti Investment Partners
acquired the French ethanol producer Societè d'Ethanol de Synthëse (SODES) in
partnership with Donaldson, Lufkin & Jenrette in 1998. Prior to forming
Sorgenti Investment Partners, Mr. Sorgenti served a distinguished career that
included the presidency of ARCO Chemical Company, including leadership of the
1987 initial public offering of the company. Mr. Sorgenti is also the founder of
Freedom Chemical Company. Mr. Sorgenti is a former member of the board of
directors of Provident Mutual Life Insurance Co. and Crown Cork & Seal. Mr.
Sorgenti received his B.S. in Chemical Engineering from City College of New York
in 1956 and his M.S. from Ohio State University in 1959. Mr. Sorgenti is the
recipient of honorary degrees from Villanova, St. Joseph's, Ohio State, and
Drexel Universities.
The Board
of Directors held ten (10) meetings during fiscal year 2009, eight (8) of which
were regularly scheduled meetings and two (2) of which were special meetings.
The Board also acted one (1) time by unanimous written consent. Each of the
foregoing directors attended at least 75% of the aggregate number of meetings of
our Board of Directors and the committees on which each director served during
fiscal year 2009 and was eligible to attend. No family relationship
exists between any of the directors or executive officers of the
Company.
38
Information
about the Executive Officers
Set forth
below is information regarding our executive officers (other than Eric A.
McAfee) as of December 31, 2009.
|
Name
|
Age
|
Position
|
||
|
Andrew
B. Foster
|
44
|
Executive
Vice President and Chief Operating Officer
|
||
|
Sanjeev
Gupta
|
50
|
Managing
Director, Chairman and President (Universal Biofuels Private,
Ltd.)
|
||
|
Scott
A. Janssen
|
40
|
Executive
Vice President and Chief Financial
Officer
|
Eric A. McAfee Chief Executive
Officer and Chairman of the Board (See Information About the Directors
above).
Andrew B. Foster (44) joined
American Ethanol in March 2006 and currently serves as Executive Vice President
of AE Biofuels, Inc. and President and Chief Operating Officer of American
Ethanol, Inc. a wholly owned subsidiary. Prior to joining the Company, Mr.
Foster served as Vice President of Corporate Marketing for Marimba, Inc. an
enterprise software company, which was acquired by BMC Software in July 2004.
From July 2004, until April 2005, Mr. Foster served as Vice President of
Corporate Marketing for the Marimba product line at BMC. In April 2005, Mr.
Foster was appointed Director of Worldwide Public Relations for BMC and served
in that capacity until December 2005. From May 2000 until March 2003, Mr. Foster
served as Director of Corporate Marketing for eSilicon Corporation, a fabless
semiconductor company. Mr. Foster also served as Associate Director of Political
Affairs at the White House from 1989 to 1992, and Deputy Chief of Staff to
Illinois Governor Jim Edgar from 1995 to 1998. Mr. Foster holds a B.A. in
Political Science from Marquette University in Milwaukee,
Wisconsin.
Sanjeev Gupta (50) joined AE
Biofuels, Inc. in September 2007 as an executive with the Company’s marketing
subsidiary, Biofuels Marketing, Inc. and managed the completion of construction
of the Company’s biodiesel production facility in Kakinada, India. Mr. Gupta is
currently serving as the Managing Director, Chairman and President of the
Company’s wholly-owned Indian biodiesel subsidiary, Universal Biofuels Private,
Ltd. (“UBPL”). Previously, Mr. Gupta was the president of a $250 million
revenues globally specialized chemicals company and a manager with Nabisco in
India.
Scott A Janssen (40) began
consulting with the Company in March 2008 and in June 2008 was engaged as the
Company’s Senior Vice President of Finance. Mr. Janssen assumed the office of
Executive Vice President and Chief Financial Officer of AE Biofuels, Inc., on
January 12, 2009, and is serving as a Director of several of the Company’s
wholly-owned subsidiaries. From December 2005 to March 2008, Mr. Janssen was a
financial consultant with Level Path Consulting and Kranz & Associates in
Silicon Valley, California where he acted as Interim Chief Financial Officer or
financial advisor to several high technology companies, including three IPO’s.
From July 2004 to December 2005, Mr. Janssen was a Senior Manager with Ernst
& Young, a global public accounting firm in San Jose, California. From June
2002 to July 2004, Mr. Janssen was Controller and acting Chief Financial Officer
with Barcelona Design Software, an enterprise software company in Newark,
California. Mr. Janssen received a Bachelors’ of Science in Mathematics/Applied
Science form the University of California, Los Angeles in 1991 and is an
inactive licensed Certified Public Accountant.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors and persons who own more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership of our common stock and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and
greater than 10% shareholders are required by the Securities and Exchange
Commission regulations to furnish our Company with copies of all Section 16(a)
reports they file. One late report was filed for each of Messrs. Sorgenti,
Block, Janssen and Foster reflecting an option grant each of these individuals
received in 2009 and two late reports were filed for Mr. Peterson reflecting (1)
shares received as liquidated damages pursuant to the Company’s Amended and
Restated Registration Rights Agreement, and (2) an option
grant. Except as set forth above, we believe that, during fiscal
2009, our directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements. In making this statement, we have relied upon
examination of the copies of Forms 3, 4 and 5, and amendments thereto, provided
to AE Biofuels, Inc. and the written representations of its directors and
executive officers.
Committees
of the Board of Directors
The Board
of Directors has the following standing committees: (1) Audit and (2)
Governance, Compensation and Nominating. The Board of Directors has adopted a
written charter for each of these committees, copies of which can be found on
our website at www.aebiofuels.com in the Investor Relations section of our
website. All members of the committees appointed by the Board of Directors are
non-employee directors and are independent directors within the meaning set
forth in the NASDAQ rules, as currently in effect. In addition, the
Board of Directors adopted a Code of Business Conduct and Ethics, and an Insider
Trading Policy, which apply to all of the Company’s employees, including its
principal executive officer, principal financial officer, and principal
accounting officer. Copies of these policies are available on our corporate web
site at www.aebiofuels.com .
We will disclose amendments to, or waivers from, our policies on our corporate
web site at
www.aebiofuels.com.
39
The
following chart details the current membership of each committee.
|
Name
of Director
|
Audit
|
Governance,
Compensation and
Nominating
|
||
|
Michael
Peterson
|
C
|
M
|
||
|
Harold
Sorgenti
|
M
|
C
|
||
|
M
= Member
|
||||
|
C
= Chair
|
Audit
Committee
The Audit
Committee (i) oversees our accounting, financial reporting and audit processes;
(ii) appoints, determines the compensation of, and oversees, the independent
auditors; (iii) pre-approves audit and non-audit services provided by the
independent auditors; (iv) reviews the results and scope of audit and other
services provided by the independent auditors; (v) reviews the accounting
principles and practices and procedures used in preparing our financial
statements; and (vi) reviews our internal controls.
The Audit
Committee works closely with management and our independent auditors. The Audit
Committee also meets with our independent auditors without members of management
present, on a quarterly basis, following completion of our auditors’ quarterly
reviews and annual audit and prior to our earnings announcements, to review the
results of their work. The Audit Committee also meets with our independent
auditors to approve the annual scope and fees for the audit services to be
performed.
Each of
the Audit Committee members is an independent director within the meaning set
forth in the rules of the SEC, as currently in effect. In addition, the Board of
Directors has determined that Mr. Peterson is an “audit committee financial
expert” as defined by SEC rules.
A copy of
the Audit Committee’s written charter is available in the Investor Relations
section of our website at www.aebiofuels.com. The Audit
Committee held four (4) meetings during fiscal year 2009, three (3) of which
were regularly scheduled meetings and one (1) of which was a special meeting.
The Audit Committee also acted one (1) time by unanimous written consent. Each
director who is a member of the Audit Committee attended at least 75% of the
aggregate number of meetings of the Audit Committee during fiscal year
2009.
AUDIT
COMMITTEE REPORT
The
following is the report of the Audit Committee of the Board of Directors. The
Audit Committee has reviewed and discussed our audited financial statements for
the fiscal year ended December 31, 2009 with our management. In addition, the
Audit Committee has discussed with BDO Seidman LLP, our independent auditors,
the matters required to be discussed by Statement on Auditing Standards No. 61,
as amended (Communications with Audit Committee). The Audit Committee also has
received the written disclosures and the letter from BDO Seidman LLP as required
by the Public Company Accounting Oversight Board Rule 3526 “Communications with
Audit Committees Concerning Independence” and the Audit Committee has discussed
the independence of BDO Seidman LLP with that firm.
Based on
the Audit Committee’s review of the matters noted above and its discussions with
our independent auditors and our management, the Audit Committee recommended to
the Board of Directors that the financial statements be included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009.
Respectfully
submitted by:
Michael
Peterson (Chair)
Harold
Sorgenti
40
Governance,
Compensation and Nominating Committee
The
Governance, Compensation and Nominating Committee consists of two members --
Michael Peterson and Harold Sorgenti who serves as Chairman of the
Committee. The Governance, Compensation and Nominating Committee (i)
reviews and approves corporate goals and objectives relevant to the CEO’s
compensation, evaluates the CEO’s performance relative to goals and objectives
and sets the CEO’s compensation annually; (ii) makes recommendations annually to
the Board of Directors with respect to non-CEO compensation; (iii) considers and
periodically reports on matters relating to the identification, selection and
qualification of the Board of Directors and candidates nominated to the Board of
Directors and its committees; (iv) develops and recommends governance principles
applicable to the Company; (v) oversees the evaluation of the Board of Directors
and management from a corporate governance perspective; and (vi) oversees,
considers and approves related party transactions.
Each
current member of the Governance, Compensation and Nominating Committee is an
independent director within the meaning set forth in the rules of the Nasdaq
Stock Market, as currently in effect.
The
Governance, Compensation and Nominating Committee considers properly submitted
stockholder recommendations for candidates for membership on the Board of
Directors as described below under “Identification and Evaluation of Nominees
for Directors.” In evaluating such recommendations, the Governance, Compensation
and Nominating Committee seeks to achieve a balance of knowledge, experience and
capability on the Board of Directors and to address the membership criteria set
forth under “Director Qualifications.” Any stockholder recommendations proposed
for consideration by the Governance, Compensation and Nominating Committee
should include the candidate’s name and qualifications for membership on the
Board of Directors and should be addressed to the attention of our Corporate
Secretary — re: stockholder director recommendation.
Director
Qualifications. The Governance, Compensation and Nominating
Committee does not have any specific, minimum qualifications that must be met by
a Governance, Compensation and Nominating Committee-recommended nominee, but
uses a variety of criteria to evaluate the qualifications and skills necessary
for members of our Board of Directors. Under these criteria, members of the
Board of Directors should have the highest professional and personal ethics and
values. A director should have broad experience at the policy-making level in
business, government, education, technology or public interest. A director
should be committed to enhancing stockholder value and should have sufficient
time to carry out their duties, and to provide insight and practical wisdom
based on their past experience. A director’s service on other boards of public
companies should be limited to a number that permits them, given their
individual circumstances, to perform their director duties responsibly. Each
director must represent the interests of AE Biofuels stockholders.
In
addition to the foregoing, prior to any meeting of stockholders at which
directors will be elected, as a condition to re-nomination, incumbent directors
will be required to submit a resignation of their directorships in writing to
the Chairman of the Governance, Compensation and Nominating Committee of the
Board. The resignation will become effective only if the director fails to
receive a sufficient number of votes for re-election at the meeting of
stockholders, as described in the Company’s bylaws as recently amended and the
Board accepts the resignation.
Identification and
Evaluation of Nominees for Directors. The Governance, Compensation
and Nominating Committee utilizes a variety of methods for identifying and
evaluating nominees for director. The Governance, Compensation and Nominating
Committee regularly assesses the appropriate size of the Board of Directors, and
whether any vacancies on the Board of Directors are expected due to retirement
or otherwise. In the event that vacancies are anticipated, or otherwise arise,
the Governance, Compensation and Nominating Committee considers various
potential candidates for director. Candidates may come to the attention of the
Governance, Compensation and Nominating Committee through current members of the
Board of Directors, professional search firms, stockholders or other persons.
These candidates are evaluated at regular or special meetings of the Governance,
Compensation and Nominating Committee, and may be considered at any point during
the year. The Governance, Compensation and Nominating Committee considers
properly submitted stockholder recommendations for candidates for the Board of
Directors. In evaluating such recommendations, the Governance, Compensation and
Nominating Committee uses the qualifications standards discussed above and seeks
to achieve a balance of knowledge, experience and capability on the Board of
Directors.
A copy of
the Committee’s written charter is available in the Investor Relations section
of our website at www.aebiofuels.com.
The
Governance, Compensation and Nominating Committee held five (5) meetings during
fiscal year 2009, one (1) of which was a regularly scheduled meetings and four
(4) of which were special meetings. Each director who is a member of the
Governance, Compensation and Nominating Committee attended at least 75% of the
aggregate number of meetings of the Committee during fiscal year
2009.
Code of Ethics. A
Code of Business Conduct and Ethics is a written standard designed to deter
wrongdoing and to promote (a) honest and ethical conduct, (b) full, fair,
accurate, timely and understandable disclosure in regulatory filings and public
statements, (c) compliance with applicable laws, rules and regulations, (d) the
prompt reporting violation of the code and (e) accountability for adherence to
the Code. We are not currently subject to any law, rule or regulation requiring
that we adopt a Code of Ethics. However, we have adopted a code of ethics that
applies to our principal executive officer, chief financial officer, principal
accounting officer or controller, or persons performing similar functions. Such
code of ethics will be provided to any person without charge, upon request, a
copy of such code of ethics by sending such request to us at our principal
office.
41
Legal
Proceedings
Mr.
McAfee is a founding shareholder or principal investor in 12 publicly traded
companies and approximately 20 private companies. Mr. McAfee served as the vice
chairman of the Board of Directors of Verdisys, Inc., a publicly traded company,
in 2003. To resolve potential litigation and to provide resolution of any
issues, on July 28, 2006 Mr. McAfee and the SEC entered into a settlement
agreement under which Mr. McAfee neither admitted nor denied causing any action
by Verdisys, Inc. to fail to comply with Section 10(b) of the Exchange Act and
Rule 10b-5 and agreed to a payment of $25,000.
Annual
Meeting Attendance
We do not
have a formal policy regarding attendance by members of the Board of Directors
at our annual meetings of stockholders although directors are encouraged to
attend annual meetings of AE Biofuels’ stockholders. AE Biofuels did not hold
an annual meeting of shareholders during 2009.
Communications
with the Board of Directors
Although
we do not have a formal policy regarding communications with the Board of
Directors, stockholders may communicate with the Board of Directors by
submitting an email to investor-relations@aebiofuels.com or by writing to us at
AE Biofuels, Inc., Attention: Investor Relations, 20400 Stevens Creek Blvd.,
Cupertino, California 95014. Stockholders who would like their submission
directed to a member of the Board of Directors may so specify. All
communications will be reviewed by the General Counsel and Director of Investor
Relations. All appropriate business-related communications as reasonably
determined by the General Counsel or Director of Investor Relations will be
forwarded to the Board of Directors or, if applicable, to the individual
director.
Code
of Business Conduct and Ethics Policy
Our board
of directors adopted a code of ethics that applies to all of our directors,
officers and employees, including our principal executive officer, principal
financial officer, and principal accounting officer. The code of ethics
addresses, among other things, honesty and ethical conduct, conflicts of
interest, compliance with laws, regulations and policies, including disclosure
requirements under the federal securities laws, confidentiality, trading on
inside information, and reporting of violations of the code.
Insider
Trading Policy
Our board
of directors adopted an insider trading policy that applies to all of its
directors, officers and employees including our principal executive officer,
principal financial officer, and principal accounting officer that applies to
all trading except the exercise of stock options for cash under our stock option
plan and the purchase of shares under an employee stock purchase plan, should we
adopt such a plan. The insider trading policy addresses trading on material
nonpublic information, tipping, confidentiality, 10b5-1 programs, disciplinary
actions, trading windows, pre-clearance of trades, prohibition against short
swing profits and individual responsibilities under the policy.
Compensation Committee
Interlocks and Insider Participation
During
fiscal year 2009, Messrs. Sorgenti and Peterson served as members of the
Governance, Compensation and Nominating Committee. No member of the
Governance, Compensation and Nominating Committee was an officer or employee of
the Company. In addition, no member of the Governance, Compensation and
Nominating Committee or executive officer of the Company served as a member of
the Board of Directors or Compensation Committee of any entity that has an
executive officer serving as a member of our Board of Directors or Governance,
Compensation and Nominating Committee.
42
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to (i) all individuals serving as the
Company’s principal executive officer or acting in a similar capacity during the
last completed fiscal year, regardless of compensation level, and (ii) the
Company’s other three most highly compensated executive officers serving at the
end of the last completed fiscal year.
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards(1) ($)
|
Total
Compensation
($)
|
|||||||||||||
|
Eric
A. McAfee, Chief Executive Officer
|
2009
|
120,000 | –– | –– | 120,000 | |||||||||||||
|
2008
|
120,000 | –– | –– | 120,000 | ||||||||||||||
|
2007
|
120,000 | –– | –– | 120,000 | ||||||||||||||
|
William
J. Maender, Former Chief Financial Officer and
Secretary(2)
|
2009
|
17,033 | –– | –– | 17,033 | |||||||||||||
|
2008
|
180,000 | –– | –– | 194,332 | ||||||||||||||
|
2007
|
180,000 | –– | 43,002 | 181,393 | ||||||||||||||
|
Andrew
B. Foster, Executive Vice President
|
2009
|
180,000 | 40,123 | 259,915 | ||||||||||||||
|
2008
|
180,000 | 535,054 | 451,475 | |||||||||||||||
|
2007
|
180,000 | 50,000 | 569,409 | 550,989 | ||||||||||||||
|
Sanjeev
Gupta, Executive Vice President
|
2009
|
180,000 | –– | 41,759 | 263,245 | |||||||||||||
|
2008
|
180,000 | –– | 71,340 | 202,305 | ||||||||||||||
|
2007
|
58,038 | –– | 28,668 | 67,594 | ||||||||||||||
|
Scott
A. Janssen, Executive Vice President and Chief Financial
Officer(3)
|
2009
|
180,000 | –– | 33,436 | 246,596 | |||||||||||||
|
2008
|
141,197 | –– | 356,702 | 236,813 | ||||||||||||||
|
2007
|
–– | –– | –– | –– | ||||||||||||||
———————
|
|
(1)
|
These
amounts reflect the value determined by the Company for accounting
purposes for these awards with respect to the current fiscal year and do
not reflect whether the recipient has actually realized a financial
benefit from the awards (such as by exercising stock options). This column
represents the aggregate grant date fair value of stock options granted
during fiscal year 2009 to each of the named executive officers, in
accordance with ASC Topic 718. Pursuant to SEC rules, the amounts shown
exclude the impact of estimated forfeitures related to service-based
vesting conditions. Stock option awards representing 90,000 shares were
forfeited by Mr. Maender who resigned effective January 12, 2009. For
additional information, see Note 11 of our financial statements in the
Form 10-K for the year ended December 31, 2009, as filed with the SEC. For
information on the valuation assumptions for grants made prior to fiscal
year 2009, see the notes in our financial statements in the Form 10-K for
the respective year.
|
|
|
(2)
|
Mr.
Maender resigned effective January 12, 2009. His resignation
resulted in the forfeiture of 90,000 shares subject to stock
options.
|
|
|
(3)
|
Mr.
Janssen was appointed Executive Vice President and Chief Financial Officer
effective January 12, 2009. Mr. Janssen resigned effective March 12, 2010.
His resignation resulted in the forfeiture of 175,000 shares subject to
stock options.
|
43
Outstanding
Equity Awards at 2009 Fiscal Year End
The
following table shows all outstanding equity awards held by the named executive
officers at the end of fiscal year 2009.
|
Option
Awards
|
Stock
Awards
|
||||||||||||||||
|
Name
|
Award
Date
|
No.
of
Securities
underlying
unexercised
options
(#) exercisable
|
No.
of
securities
underlying unexercised
options
(#) unexercisable
|
Equity
incentive
plan
awards:
#
of securities underlying unexercised
unearned
options
(#)
|
Option
exercise
price
($)
|
Option
expiration date
|
Number
of shares or
units
of
stock
that
have
not
vested
(#)
|
Market
value
of
shares
or
units of stock that
have
not vested ($)(1)
|
|||||||||
|
Andrew
B. Foster
|
5/21/09
|
280,000 | (4) | 0.16 |
5/20/14
|
||||||||||||
|
7/17/07
|
275,000 | (2) | 3.00 |
7/16/17
|
|||||||||||||
|
11/26/07
|
67,500 | (3) | 3.00 |
11/26/12
|
|||||||||||||
|
Sanjeev
Gupta
|
5/21/09
|
291,667 | (4) | 0.16 |
5/20/14
|
||||||||||||
|
11/26/07
|
45,000 | (2) | 3.00 |
11/26/12
|
|||||||||||||
|
6/17/08
|
20,000 | (2) | 3.70 |
6/16/13
|
|||||||||||||
|
Scott
Janssen
|
5/21/09
|
233,333 | (4) | 0.16 |
5/20/14
|
||||||||||||
|
6/17/08
|
150,000 | (5) | 3.70 |
6/16/13
|
|||||||||||||
———————
|
|
(1)
|
The
market value of the unvested shares was determined by multiplying the
closing market price of AE Biofuel’s stock at December 31, 2008, the end
of its last completed fiscal year ($0.19), by the number of shares of
stock.
|
|
|
(2)
|
Fifty
percent (50%) of the shares subject to the option were exercisable on the
date of grant and twenty-five percent (25%) of the shares subject to the
option vest on the anniversary of the date of
grant.
|
|
|
(3)
|
One-twelfth
(1/12) of the shares subject to the option vest every three months from
the date of grant.
|
|
|
(4)
|
Fifty
percent (50%) of the shares subject to the option were exercisable on the
date of grant and one-twelfth (1/12) of the shares subject to the option
vest every three months from the date of
grant.
|
|
|
(5)
|
One-eighth
(1/8) of the shares subject to the option vest every three months from the
date of grant.
|
EMPLOYMENT
CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We are
party to the following agreements with our named executive
officers:
Eric
A. McAfee
On
January 29, 2006, we entered into an Executive Chairman Agreement, pursuant to
which we pay Mr. McAfee $10,000 per month and reimburse Mr. McAfee for
business-related expenses incurred with respect to the Company. This agreement
is for a term of three years expiring January 29, 2009, however, either party
may terminate the agreement at any time upon written notice to the other party;
provided, however, that if we terminate the agreement we agree to pay Mr. McAfee
an amount equal to the amount Mr. McAfee would have earned had he continued to
be paid for an additional 6 months after termination. In addition, we agreed to
indemnify Mr. McAfee for any damages arising out of Mr. McAfee’s services under
this agreement.
In May
2007, the Company entered into a three year Executive Employment Contract with
Mr. Foster to serve as the Company’s Executive Vice President and Chief
Operating Officer. Under Mr. Foster’s employment contract, Mr. Foster receives
an annual salary of $180,000 and a discretionary annual bonus of up to $50,000.
On July 17, 2007, Mr. Foster was granted an option for 300,000 shares of the
Company’s common stock at an exercise price of $3.00 per share. Fifty percent
(50%) of the shares subject to the option vested on the date of grant and the
25% of the shares subject to the option vest on each anniversary of the date of
grant. On November 26, 2007, Mr. Foster was granted an option for 90,000 shares
of the Company’s common stock at an exercise price of $3.00 per share.
One-twelfth (1/12 th )
of the shares subject to the option vest every three months from the date of
grant.
44
If, prior
to a Change in Control (as defined in the agreement), Mr. Foster is terminated
other than for Cause or as a result of his death or total disability or is
Constructively Terminated (as defined in the agreement), then provided he signs
a release of claims, Mr. Foster is entitled to severance benefits of (i) cash
payments equal to his monthly base salary for a period of three months, and (ii)
company-paid health, dental, and vision insurance coverage for him and his
dependents until the earlier of three (3) months or until such time as Mr.
Foster is covered under another employer’s group policy for such benefits. If,
following a Change of Control, Mr. Foster is terminated other than for Cause or
as a result of his death or total disability or is Constructively Terminated,
then provided he signs a release of claims, in addition to the severance
benefits provided above, all of his then unvested restricted stock or stock
options shall be immediately vested.
Scott
A. Janssen
On June
17, 2008, the Company entered into a three year Executive Employment Contract
with Mr. Janssen to serve as the Company’s Executive Vice President. Under Mr.
Janssen’s employment contract, Mr. Janssen receives an annual salary of $180,000
and a discretionary annual bonus of up to $50,000. On June 17, 2008, Mr. Janssen
was granted an option for 200,000 shares of the Company’s common stock at an
exercise price of $3.70 per share. Twenty-five thousand (25,000) of the shares
subject to the option become exercisable on the last day of each calendar
quarter beginning September 30, 2008.
If, prior
to a Change in Control (as defined in the agreement), Mr. Janssen is terminated
other than for Cause or as a result of his death or total disability or is
Constructively Terminated (as defined in the agreement), then provided he signs
a release of claims, Mr. Janssen is entitled to severance benefits of (i) cash
payments equal to his monthly base salary for a period of three months, and (ii)
company-paid health, dental, and vision insurance coverage for him and his
dependents until the earlier of three (3) months or until such time as Mr.
Janssen is covered under another employer’s group policy for such benefits. If,
following a Change of Control, Mr. Janssen is terminated other than for Cause or
as a result of his death or total disability or is Constructively Terminated,
then provided he signs a release of claims, in addition to the severance
benefits provided above, all of his then unvested restricted stock or stock
options shall be immediately vested.
Sanjeev
Gupta
In
September 2007, the Company entered into a three year Executive Employment
Contract with Mr. Gupta to serve as the Company’s Executive Vice President and
Chief Operating Officer. Under Mr. Gupta’s employment contract, Mr. Gupta
receives an annual salary of $180,000 and a discretionary annual bonus of up to
$50,000. On July 17, 2007, Mr. Gupta was granted an option for 200,000 shares of
the Company’s common stock at an exercise price of $3.00 per share. Fifty
percent (50%) of the shares subject to the option vested on the date of grant
and the 25% of the shares subject to the option vest on each anniversary of the
date of grant. On November 26, 2007, Mr. Gupta was granted an option for 90,000
shares of the Company’s common stock at an exercise price of $3.00 per share.
One-twelfth (1/12th) of the shares subject to the option vest every three months
from the date of grant.
If, prior
to a Change in Control (as defined in the agreement), Mr. Gupta is terminated
other than for Cause or as a result of his death or total disability or is
Constructively Terminated (as defined in the agreement), then provided he signs
a release of claims, Mr. Gupta is entitled to severance benefits of (i) cash
payments equal to his monthly base salary for a period of three months, and (ii)
company-paid health, dental, and vision insurance coverage for him and his
dependents until the earlier of three (3) months or until such time as Mr. Gupta
is covered under another employer’s group policy for such benefits. If,
following a Change of Control, Mr. Gupta is terminated other than for Cause or
as a result of his death or total disability or is Constructively Terminated,
then provided he signs a release of claims, in addition to the severance
benefits provided above, all of his then unvested restricted stock or stock
options shall be immediately vested.
45
Director
Compensation
The
following table provides information regarding all compensation awarded to,
earned by or paid to each person who served as a director of AE Biofuels, Inc.
for some portion or all of 2009. Other than as set forth in the table and
described more fully below, AE Biofuels, Inc. did not pay any fees, made any
equity or non-equity awards, or paid any other compensation, to its non-employee
directors. All compensation paid to its employee directors is set forth in the
tables summarizing executive officer compensation below.
|
Name
|
Fees
Earned
or
Paid in
Cash
($)*
|
Option
Awards(1)
($)
|
Total
($)
|
|||||||||
|
Michael
Peterson (2)
|
112,250 | 16,718 | 145,548 | |||||||||
|
Harold
Sorgenti (3)
|
83,750 | 16,718 | 117,048 | |||||||||
|
John
R. Block(4)
|
78,000 | 16,718 | 111,298 | |||||||||
———————
|
|
(1)
|
The
amounts in this column represent the aggregate grant date fair value under
ASC Topic 718. The assumptions made when calculating the amounts in this
table are found in Note 11 to AE Biofuels’ consolidated financial
statements included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31,
2009.
|
|
|
(2)
|
On
May 21, 2009, the Company granted Mr. Peterson an option to purchase
200,000 shares of the Company’s common stock at an exercise price of $0.16
per share in consideration for his services on the Company’s Board of
Directors. Fifty percent (50%) of the shares subject to the option were
exercisable on the date of grant and one-twelfth (1/12) of the shares
subject to the option vest every three months from the date of grant
subject to Mr. Peterson’s continuing service on the Company’s Board of
Directors. At December 31, 2009, Mr. Peterson held 300,000 stock options
awards.
|
|
|
(3)
|
On
May 21, 2009, the Company granted Mr. Sorgenti an option to purchase
200,000 shares of the Company’s common stock at an exercise price of $0.16
per share in consideration for his services on the Company’s Board of
Directors. Fifty percent (50%) of the shares subject to the option were
exercisable on the date of grant and one-twelfth (1/12) of the shares
subject to the option vest every three months from the date of grant
subject to Mr. Sorgenti’s continuing service on the Company’s Board of
Directors. At December 31, 2009, Mr. Sorgenti held 300,000 stock option
awards.
|
|
|
(4)
|
On
May 21, 2009, the Company granted Mr. Block an option to purchase 200,000
shares of the Company’s common stock at an exercise price of $0.16 per
share in consideration for his services on the Company’s Board of
Directors. Fifty percent (50%) of the shares subject to the option were
exercisable on the date of grant and one-twelfth (1/12) of the shares
subject to the option vest every three months from the date of grant
subject to Mr. Block’s continuing service on the Company’s Board of
Directors. At December 31, 2009, Mr. Block held 300,000 stock option
awards.
|
In 2007,
the Board of Directors of the Company adopted a director compensation policy
pursuant to which each non-employee director is paid an annual cash retainer of
$75,000 and a cash payment of $250 per Board or committee meeting attended
telephonically and a cash payment of $500 per Board or committee meeting
attended in person. In addition, each non-employee director is initially granted
an option exercisable for 100,000 shares of the Company’s common stock, which
vests quarterly over two years subject to continuing services to the Company.
In addition, an annual cash retainer of $10,000 is paid to the chairman of
the Governance, Compensation and Nominating Committee and an annual cash
retainer of $20,000 is paid to the chairman of the Audit Committee.
46
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth information as of March 3, 2010, regarding the
beneficial ownership of each class of our voting stock, including (a) each
stockholder who is known by the Company to own beneficially in excess of 5% of
each class of our voting stock; (b) each director; (c) the Company’s named
executive officers; and (d) the Company’s named executive officers and directors
as a group. Except as otherwise indicated, all persons listed below have (i)
sole voting power and investment power with respect to their shares of stock,
except to the extent that authority is shared by spouses under applicable law,
and (ii) record and beneficial ownership with respect to their shares of stock.
The percentage of beneficial ownership of common stock is based upon 86,181,532
shares of common stock outstanding as of March 3, 2010. The percentage of
beneficial ownership of Series B preferred stock is based upon 3,320,725 shares
of Series B preferred stock outstanding as of March 3, 2010. Unless otherwise
identified, the address of the directors and officers of the Company is 20400
Stevens Creek Blvd., Suite 700, Cupertino, CA 95014.
|
Common
Stock
|
Series
B Preferred Stock
|
|||||||||||||||
|
Name
and Address
|
Amount
and
Nature
of Beneficial
Ownership
|
Percentage
of
Class
|
Amount
and
Nature
of
Beneficial
Ownership
|
Percentage
of
Class
|
||||||||||||
|
Officers
& Directors
|
||||||||||||||||
|
Eric
A. McAfee (1)
|
13,000,000 | 15.08 | % | |||||||||||||
|
John
R. Block (2)
|
200,000 | * | ||||||||||||||
|
Michael
L. Peterson (3)
|
836,233 | * | ||||||||||||||
|
Harold
Sorgenti (4)
|
225,000 | * | ||||||||||||||
|
Andrew
Foster (5)
|
875,000 | * | ||||||||||||||
|
Sanjeev
Gupta (6)
|
585,833 | * | ||||||||||||||
|
Scott
A. Janssen (7)
|
425,000 | * | ||||||||||||||
|
All
officers and directors as a group (7 Persons)
|
16,147,066 | 18.28 | % | |||||||||||||
|
5%
or more Holders
|
||||||||||||||||
|
Laird
Cagan (8)
|
14,165,069 | 16.44 | % | |||||||||||||
|
20400
Stevens Creek Blvd., Suite 700
|
||||||||||||||||
|
Cupertino,
CA 95014
|
||||||||||||||||
47
|
Liviakis
Financial Communications, Inc.
|
4,400,000 | 5.11 | % | |||||||||||||
|
655
Old Redwood Hwy, #395
|
||||||||||||||||
|
Mill
Valley, CA 94941
|
||||||||||||||||
|
Surendra
Ajjarapu
|
6,900,000 | 8.01 | % | |||||||||||||
|
8604
Button Bush Court
|
||||||||||||||||
|
Tampa,
FL 33647
|
||||||||||||||||
|
Michael
C Brown Trust dated June 30, 2000
|
599,999 | 18.07 | % | |||||||||||||
|
34
Meadowview Drive
|
||||||||||||||||
|
Northfield,
IL 60093
|
||||||||||||||||
|
Mahesh
Pawani
|
400,000 | 12.05 | % | |||||||||||||
|
Villa
No. 6, Street 29, Community 317, Al Mankhool,
|
||||||||||||||||
|
Dubai,
United Arab Emirates
|
||||||||||||||||
|
Frederick
WB Vogel
|
408,332 | 12.30 | % | |||||||||||||
|
1660
N. La Salle Drive, Apt 2411
|
||||||||||||||||
|
Chicago,
IL 60614
|
||||||||||||||||
|
Fred
Mancheski
|
300,000 | 9.03 | % | |||||||||||||
|
1060
Vegas Valley Dr
|
||||||||||||||||
|
Las
Vegas, NV 89109
|
||||||||||||||||
|
David
J. Lies
|
200,000 | 6.02 | % | |||||||||||||
|
1210
Sheridan Road
|
||||||||||||||||
|
Wilmette,
IL 60091
|
||||||||||||||||
|
Crestview
Capital, LLC
|
166,667 | 5.02 | % | |||||||||||||
|
95
Revere Dr., Ste A
|
||||||||||||||||
|
Northbrook,
IL 60062
|
||||||||||||||||
|
———————
|
|
|
*Less
than 1%
|
|
|
(1)
|
Includes
(i) 12,200,000 shares held by McAfee Capital, LLC, a company owned by Mr.
McAfee and his wife; and (ii) 800,000 shares owned by P2 Capital, LLC, a
company owned by Mr. McAfee's wife and
children.
|
|
|
(2)
|
Includes
200,000 shares issuable pursuant to options exercisable within 60 days of
March 3, 2010.
|
|
|
(3)
|
Address:
17 Canary Court, Danville, California 94526. Includes 583,818 shares
held by the Michael L Peterson and Shelly P. Peterson Family Trust dtd
8/16/00, and 225,000 shares issuable to Mr. Peterson pursuant to options
exercisable within 60 days of March 3,
2010.
|
|
|
(4)
|
Includes
225,000 shares issuable pursuant to options exercisable within 60 days of
March 3, 2010.
|
|
|
(5)
|
Includes
(i) 200,000 shares held by the Andrew B. Foster and Catherine H. Foster
Trust; and (ii) 675,000 shares issuable pursuant to options exercisable
within 60 days of March 3, 2010.
|
|
|
(6)
|
Includes
385,832 shares issuable pursuant to options exercisable within 60 days of
March 3, 2010.
|
|
|
(7)
|
Includes
404,166 shares issuable pursuant to options exercisable within 60 days of
March 3, 2010.
|
|
|
(8)
|
Includes
(i) 12,907,000 shares held by Cagan Capital, LLC, a company owned by Mr.
Cagan; (ii) 400,000 shares owned by the KRC Trust and 400,000 owned by the
KQC Trust, trusts for Mr. Cagan's daughters for which Mr. Cagan is trustee
and (iii) 458,069 held by Mr. Cagan
individually.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except
for the compensation agreements and other arrangements that are described under
“Employment Contracts and Termination of Employment and Change-in-Control
Arrangements”, and except as set forth below, there was not during fiscal year
2009 nor is there currently proposed, any transaction or series of similar
transactions to which AE Biofuels was or is to be a party in which the amount
involved exceeds $120,000 and in which any director, executive officer, five
percent stockholder or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material
interest.
The
Governance, Compensation and Nominating Committee is responsible for reviewing
and approving in advance any proposed related person transactions. The
Governance, Compensation and Nominating Committee is also responsible for
reviewing the Company’s policies with respect to related person transactions and
overseeing compliance with such policies. Those transactions described below
entered into prior to the appointment of the Governance, Compensation and
Nominating Committee were approved by the entire Board of
Directors.
Eric A.
McAfee and Laid Cagan are the Managing Directors of Cagan McAfee Capital
Partners (“CMCP”) and each own 50% of CMCP. On January 30, 2006, we entered into
an Advisory Services Agreement with CMCP pursuant to which CMCP provides the
Company with certain administrative, financial modeling, merger and acquisition,
executive travel coordination and board of directors support services. We pay
CMCP an advisory fee equal to $7,500 per payroll period plus CMCP’s actual and
reasonable expenses for travel, printing, legal or other services. The term of
the agreement is three years. For the fiscal year ended December 31, 2009, we
paid CMCP $32,606 under this agreement. As of December 31, 2009, the Company
owed CMCP $29,866 for services rendered during the term of the
agreement.
48
We are
billed by McAfee Capital for certain expense reimbursements, principally in
connection with services provided by Eric A. McAfee and his administrative
personnel. For the year ended December 31, 2009, we paid McAfee
Capital $24,906. Eric A. McAfee, an officer and member of our board
of directors, owns 100% of McAfee Capital. The company owes McAfee
Capital $24,906 under the terms of this agreement.
The
Company and CM Consulting were parties to an agreement pursuant to which the
Company reimbursed CM Consulting for a minimum of 20 hours per month of time on
an aircraft owned by CM Consulting until February 2008. The Company paid an
upfront fee of $360,000 starting February 2006 for 24 months of usage. The
contract expired in February 2008. The Company expensed $30,000of this rental
fee for the year ended December 31, 2008. Eric A. McAfee, a director, officer
and significant shareholder of the Company owns 50% of CM
Consulting.
Revolving line of credit –
related party.
On
November 16, 2006, the Company entered into a short-term loan agreement with a
former member of the Company’s board of directors. In 2008 this short-term
unsecured loan agreement was amended to convert the facility into an unsecured
revolving line of credit with a credit limit of $2,500,000. In addition, the
maturity date of the credit facility was extended to January 31, 2011. At
December 31, 2008, a total of $2,044,690 was outstanding under this credit
facility which accrues interest at 10% interest per annum. All outstanding
principal and accrued interest is due and payable on January 31, 2011. During
2009 this credit facility was increased to $3,500,000.
On August
17, 2009, International Biodiesel, Inc., a wholly owned subsidiary of AE
Biofuels, Inc., entered into a Revolving Line of Credit Agreement with Mr.
Cagan, (the “Lender”), for $5,000,000. The $5,000,000 Revolving Line of Credit
is secured by accounts, investments, intellectual property, securities and other
collateral of AE Biofuels, Inc. excluding the collateral securing the Company’s
obligations under the Note and Warrant Purchase Agreement with Third Eye Capital
Corporation and Third Eye Capital ABL Opportunities Fund and the collateral
securing the Company’s obligations under the Secured Term Loan with the State
Bank of India. The $5,000,000 Revolving Line of Credit bears interest at the
rate of 10% per annum and matures on July 1, 2011, at which time the outstanding
advances under the Revolving Line of Credit together with any accrued interest
and other unpaid charges or fees will become due. Upon certain events, one of
which is the default on any other debt facility, the Lender may declare a
default upon 10 days prior written notice. Upon an event of default, the Lender
may accelerate the outstanding indebtedness together with all accrued interest
thereon and demand immediate repayment. The Company used the new Revolving Line
of Credit Agreement to satisfy the outstanding balance under the unsecured
revolving line of credit facility with a limit of $3,500,000 in August
2009.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
Auditor Fees and Services in Our 2009 and 2008 Fiscal Years
Our
registered independent public accounting firm is BDO Seidman, LLP. The fees
billed by BDO Seidman, LLP in 2009 and 2008 were as follows:
|
2009
|
2008
|
|||||||
|
Audit
Fees
|
$ | 254,587 | $ | 344,380 | ||||
|
Audit-Related
Fees
|
–– | –– | ||||||
|
Total
Audit and Audit-Related Fees
|
254,587 | 344,380 | ||||||
|
Tax
Fees
|
35,308 | 47,085 | ||||||
|
All
Other Fees
|
–– | –– | ||||||
|
Total
for independent public audit firms
|
$ | 289,895 | $ | 391,465 | ||||
Audit
Fees consist of fees billed for and expected to be billed for professional
services rendered for the audit of the Company's consolidated annual financial
statements, and review of the interim consolidated financial statements included
in quarterly reports and services that are normally provided by BDO Seidman, LLP
in connection with statutory and regulatory filings or engagements.
Tax Fees
include tax compliance, tax advice and tax planning services. These services
related to the preparation of various state and federal tax returns and review
of Section 409A compliance.
49
PART
IV
Audit
Committee's Pre-Approval Policies and Procedures
Consistent
with policies of the SEC regarding auditor independence and the Audit Committee
Charter, the Audit Committee has the responsibility for appointing, setting
compensation and overseeing the work of the registered independent public
accounting firm (the “Firm”). The Audit Committee's policy is to pre-approve all
audit and permissible non-audit services provided by the Firm. Pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The Audit Committee may also pre-approve
particular services on a case-by-case basis. In assessing requests for services
by the Firm, the Audit Committee considers whether such services are consistent
with the Firm’s independence, whether the Firm is likely to provide the most
effective and efficient service based upon their familiarity with the Company,
and whether the service could enhance the Company's ability to manage or control
risk or improve audit quality.
In fiscal
year 2009 and 2008, all fees identified above under the captions “Audit Fees,”
“Audit-Related Fees,” “Tax Fees” and “All Other Fees” that were billed by BDO
Seidman, LLP were approved by the Audit Committee in accordance with SEC
requirements.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
The
exhibit list in the Index to Exhibits is incorporated herein by reference as the
list of exhibits required as part of this report.
50
AE
BIOFUELS, INC.
|
Consolidated
Financial Statements
|
|
I
ndex To Financial Statements
|
Page
Number
|
|||
|
|
|
|||
|
Report
of Independent Registered Public Accounting Firm
|
52 | |||
|
|
||||
|
Consolidated
Financial Statements
|
||||
|
|
||||
|
Consolidated Balance Sheets
|
53 | |||
|
|
||||
|
Consolidated Statements of Operations and
Comprehensive Loss
|
54 | |||
|
|
||||
|
Consolidated Statements of Cash
Flows
|
55 | |||
|
|
||||
|
Consolidated Statements of Stockholders' (Deficit)
Equity
|
56 | |||
|
|
||||
|
Notes to Consolidated Financial
Statements
|
57 | |||
51
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
AE
Biofuels, Inc.
Cupertino,
CA
We have
audited the accompanying consolidated balance sheets of AE Biofuels, Inc. as of
December 31, 2009 and 2008 and the related consolidated statements of operations
and comprehensive loss, stockholders’ (deficit) equity, and cash flows for each
of the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for
our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AE Biofuels, Inc. at
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note 2
to the consolidated financial statements, the Company’s recurring losses,
working capital deficit and total stockholders’ deficit raise substantial doubt
about its ability to continue as a going concern. Management’s plan
in regard to these matters is also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO
Seidman, LLP
San Jose,
California
March 15,
2010
52
CONSOLIDATED
BALANCE SHEETS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 52,178 | $ | 377,905 | ||||
|
Accounts
receivable
|
32,032 | - | ||||||
|
Inventories
|
593,461 | 1,049,583 | ||||||
|
Prepaid
expenses
|
21,660 | 110,581 | ||||||
|
Other
current assets
|
369,668 | 438,703 | ||||||
|
Total
current assets
|
1,068,999 | 1,976,772 | ||||||
|
Property,
plant and equipment, net
|
18,447,875 | 21,236,604 | ||||||
|
Intangible
assets
|
- | 33,333 | ||||||
|
Other
assets
|
49,344 | 289,990 | ||||||
|
Total
assets
|
$ | 19,566,218 | $ | 23,536,699 | ||||
|
Liabilities
and stockholders' (deficit) equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 3,137,480 | $ | 2,829,117 | ||||
|
Short
term borrowings, net of discount
|
6,409,950 | 4,504,062 | ||||||
|
Registration
rights liability
|
- | 1,807,748 | ||||||
|
Mandatorily
redeemable Series B Preferred stock
|
1,750,002 | 1,750,002 | ||||||
|
Other
current liabilities
|
3,316,931 | 1,616,259 | ||||||
|
Current
portion of long term debt
|
4,391,512 | 816,738 | ||||||
|
Total
current liabilities
|
19,005,875 | 13,323,926 | ||||||
|
Long
term debt, net of discount
|
- | 3,174,275 | ||||||
|
Long
term debt (related party)
|
4,250,031 | 2,044,691 | ||||||
|
Commitments
and contingencies (Notes 2,4,7,8,9,14,16 and 18 )
|
||||||||
|
Stockholders'
(deficit) equity:
|
||||||||
|
AE
Biofuels, Inc. stockholders (deficit) equity
|
||||||||
|
Series
B Preferred Stock - $.001 par value - 7,235,565 authorized; 3,320,725 and
3,451,892 shares issued and outstanding, respectively (aggregate
liquidation preference of $9,992,175 and $10,355,676,
respectively)
|
3,321 | 3,452 | ||||||
|
Common
Stock - $.001 par value 400,000,000 authorized; 86,181,532 and 85,643,709
shares issued and outstanding, respectively
|
86,181 | 85,643 | ||||||
|
Additional
paid-in capital
|
36,763,984 | 34,238,925 | ||||||
|
Accumulated
deficit
|
(38,804,417 | ) | (27,831,340 | ) | ||||
|
Accumulated
other comprehensive income
|
(1,376,382 | ) | (1,502,873 | ) | ||||
|
Total
AE Biofuels, Inc. stockholders (deficit) equity
|
(3,327,313 | ) | 4,993,807 | |||||
|
Noncontrolling
interest
|
(362,375 | ) | - | |||||
|
Total
stockholders' (deficit) equity
|
(3,689,688 | ) | 4,993,807 | |||||
|
Total
liabilities and stockholders' (deficit) equity
|
$ | 19,566,218 | $ | 23,536,699 | ||||
53
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR
THE YEARS ENDED DECEMBER 31, 2009, AND 2008
|
For
the year ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Sales
|
$ | 9,175,346 | $ | 815,655 | ||||
|
Cost
of goods sold
|
9,046,663 | 2,214,364 | ||||||
|
Gross
profit
|
128,683 | (1,398,709 | ) | |||||
|
Research
and development
|
538,912 | 1,036,948 | ||||||
|
Selling,
general and administrative expenses
|
6,259,527 | 9,730,022 | ||||||
|
Loss
on forward purchase commitments
|
- | 532,500 | ||||||
|
Impairment
of long lived assets
|
2,086,350 | - | ||||||
|
Operating
loss
|
(8,756,106 | ) | (12,698,179 | ) | ||||
|
Other
income / (expense)
|
||||||||
|
Interest
income
|
23,327 | 50,691 | ||||||
|
Interest
expense
|
(2,675,403 | ) | (614,426 | ) | ||||
|
Other
income, net of expenses
|
72,730 | 148,793 | ||||||
|
Share
agreement cancellation payment
|
- | (900,000 | ) | |||||
|
Registration
rights payment
|
- | (1,807,748 | ) | |||||
|
Loss
before income taxes
|
(11,335,452 | ) | (15,820,869 | ) | ||||
|
Income
taxes
|
- | (15,076 | ) | |||||
|
Net
loss
|
(11,335,452 | ) | (15,835,945 | ) | ||||
|
Less:
Net loss attributable to the noncontrolling interest
|
(362,375 | ) | - | |||||
|
Net
loss attributable to AE Biofuels, Inc.
|
$ | (10,973,077 | ) | $ | (15,835,945 | ) | ||
|
Other
comprehensive loss, net of tax
|
||||||||
|
Foreign
currency translation adjustment
|
126,491 | (3,227,958 | ) | |||||
|
Comprehensive
loss, net of tax
|
(11,208,961 | ) | (19,063,903 | ) | ||||
|
Comprehensive
loss attributable to the noncontrolling interest
|
- | - | ||||||
|
Comprehensive
loss attributable to AE Biofuels, Inc.
|
$ | (10,846,586 | ) | $ | (19,063,903 | ) | ||
|
Loss
per common share attributable to AE Biofuels, Inc.
|
||||||||
|
Basic
and dilutive
|
$ | (0.13 | ) | $ | (0.19 | ) | ||
|
Weighted
average shares outstanding
|
||||||||
|
Basic
and dilutive
|
86,110,932 | 84,641,642 | ||||||
The
accompanying notes are an integral part of the financial statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009, AND 2008
|
For
the year ended December 31,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Operating
activities:
|
|||||||||
|
Net
loss
|
$ | (11,335,452 | ) | $ | (15,835,945 | ) | |||
|
Adjustments
to reconcile net loss to
|
|||||||||
|
net
cash used in operating activities:
|
|||||||||
|
Stock
based compensation
|
717,718 | 1,981,524 | |||||||
|
Expired
land options
|
40,000 | 124,536 | |||||||
|
Amortization
and depreciation
|
800,588 | 425,033 | |||||||
|
Inventory
provision
|
863,065 | 1,365,682 | |||||||
|
Amortization
of debt discount
|
571,572 | 532,500 | |||||||
|
Registration
rights obligation
|
- | 1,807,748 | |||||||
|
Impairment
of long lived assets
|
2,086,350 | - | |||||||
|
Changes
in assets and liabilities:
|
|||||||||
|
Accounts
receivable
|
(31,376 | ) | 8,621,006 | ||||||
|
Inventory
|
(371,638 | ) | (2,537,088 | ) | |||||
|
Prepaid
expenses
|
89,318 | (54,996 | ) | ||||||
|
Other
current assets and other assets
|
849,976 | (652,809 | ) | ||||||
|
Accounts
payable
|
265,459 | (6,480,203 | ) | ||||||
| Accrued interest expense | 1,480,170 | 826,562 | |||||||
|
Other
liabilities
|
1,618,027 | 1,230,257 | |||||||
|
Income
taxes payable
|
- | (34,092 | ) | ||||||
|
Net
cash used in operating activities
|
(2,356,223 | ) | (8,680,285 | ) | |||||
|
Investing
activities:
|
|||||||||
|
Purchase
of property, plant and equipment
|
(49,515 | ) | (5,192,124 | ) | |||||
|
Sales
of time deposits
|
- | 2,373,326 | |||||||
|
Cash
payments to settle forward contracts
|
- | (200,115 | ) | ||||||
|
Cash
restricted by letter of credit
|
- | 500,000 | |||||||
|
Net
cash used in investing activities
|
(49,515 | ) | (2,518,913 | ) | |||||
|
Financing
activities:
|
|||||||||
|
Proceeds
from borrowings under related party credit facility
|
1,985,500 | 4,500,000 | |||||||
|
Payments
of borrowings under related party credit facility
|
(80,000 | ) | - | ||||||
|
Proceeds
under working capital facility
|
3,048,903 | - | |||||||
|
Payments
under working capital facility
|
(2,733,498 | ) | - | ||||||
|
Proceeds
from long term debt
|
8,374,313 | ||||||||
|
Payments
under long term debt facility
|
- | (1,967,693 | ) | ||||||
|
Net
cash provided by financing activities
|
2,220,905 | 10,906,620 | |||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(140,894 | ) | (49,919 | ) | |||||
|
Net
cash decrease for period
|
(325,727 | ) | (342,497 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
377,905 | 720,402 | |||||||
|
Cash
and cash equivalents at end of period
|
$ | 52,178 | $ | 377,905 | |||||
|
Supplemental
disclosures of cash flow information, cash paid:
|
|||||||||
|
Interest
|
395,883 | 534,729 | |||||||
|
Income
taxes, net of refunds
|
- | 51,829 | |||||||
|
Supplemental
disclosures of cash flow information, non-cash
transactions:
|
|||||||||
|
Settlement
of registration rights liability through issuance of stock
|
1,807,748 | - | |||||||
|
Issuance
of warrants in connection with debt facility
|
- | 822,500 | |||||||
|
Borrowings
under related party credit facility
|
3,850,819 | - | |||||||
|
Settlement
of borrowings under related party credit facility
|
(3,850,819 | ) | - | ||||||
The accompanying notes are an integral part of the financial statement
55
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009, AND 2008
| AE Biofuels, Inc. | ||||||||||||||||||||||||||||||||||
|
Paid-in
Capital
|
Accum.
Other
|
|||||||||||||||||||||||||||||||||
|
Series
B Preferred Stock
|
Common
Stock
|
in
excess
|
Accumulated
|
Comprehensive
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||||
|
Shares
|
Dollars
|
Shares
|
Dollars
|
of
Par
|
Deficit
|
Income
|
Interest
|
Dollars
|
||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
6,487,491 | $ | 6,487 | 84,557,462 | $ | 84,557 | $ | 33,707,953 | $ | (11,995,395 | ) | $ | 1,725,085 | $ | 23,528,687 | |||||||||||||||||||
|
Stock
based employee compensation
|
1,956,524 | 1,956,524 | ||||||||||||||||||||||||||||||||
|
Series
B to Common conversion
|
(2,461,695 | ) | (2,461 | ) | 2,461,695 | 2,461 | - | |||||||||||||||||||||||||||
|
Warrant
exercise
|
9,430 | 9 | 504,552 | 505 | (514 | ) | - | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(3,227,958 | ) | ||||||||||||||||||||||||||||||||
|
Debt
issuance discount
|
822,500 | 822,500 | ||||||||||||||||||||||||||||||||
|
Repurchase
of common stock
|
(1,880,000 | ) | (1,880 | ) | (498,119 | ) | (499,999 | ) | ||||||||||||||||||||||||||
|
Reclass
of Series B to a liability
|
(583,334 | ) | (583 | ) | (1,749,419 | ) | (1,750,002 | ) | ||||||||||||||||||||||||||
|
Net
loss
|
(15,835,945 | ) | (15,835,945 | ) | ||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
3,451,892 | $ | 3,452 | 85,643,709 | $ | 85,643 | $ | 34,238,925 | $ | (27,831,340 | ) | $ | (1,502,873 | ) | $ | 4,993,807 | ||||||||||||||||||
|
Stock
based employee compensation
|
717,718 | 717,718 | ||||||||||||||||||||||||||||||||
|
Series
B to Common conversion
|
(131,167 | ) | (131 | ) | 131,167 | 131 | - | |||||||||||||||||||||||||||
|
Penalty
Share Issuances
|
406,656 | 407 | 1,807,341 | 1,807,748 | ||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
126,491 | 126,491 | ||||||||||||||||||||||||||||||||
|
Net
loss
|
(10,973,077 | ) |
(362,375)
|
(11,335,452 | ) | |||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
3,320,725 | $ | 3,321 | 86,181,532 | $ | 86,181 | $ | 36,763,984 | $ | (38,804,417 | ) | $ | (1,376,382 | ) | $ |
(362,375)
|
$ | (3,689,688 | ) | |||||||||||||||
The
accompanying notes are an integral part of the financial
statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Activities and Summary of Significant Accounting Policies
Nature of Activities. These
consolidated financial statements include the accounts of AE Biofuels, Inc., a
Nevada corporation, and its wholly owned subsidiaries: (i) American Ethanol,
Inc. (“American”), a Nevada corporation and its subsidiaries; Sutton Ethanol,
LLC (“Sutton”), a Nebraska limited liability company, Illinois Valley Ethanol,
LLC (“Illinois Valley”), an Illinois limited liability company; Danville Ethanol
Inc, an Illinois corporation; AE Biofuels, Inc., (“AEB-DE”), a Delaware
corporation and its subsidiary AE Renova, LLC (“AE Renova”), a Delaware limited
liability company, (ii) Biofuels Marketing, a Delaware corporation; (iii)
International Biodiesel, Inc., a Nevada corporation and its subsidiary AE
International Biofuels, Ltd., a British Virgin Islands company, AE DAABON, Ltd.,
a British Virgin Islands company, International Biofuels, Ltd, a Mauritius
corporation and its subsidiary Universal Biofuels Private Ltd, an India
company; (iv) AE Biofuels Americas, a Delaware corporation, and (v)
AE Biofuels Technologies, Inc., a Delaware corporation and its subsidiary Energy
Enzymes LLC, a Delaware limited liability company, collectively, (“AE Biofuels”
or the “Company”), AE Advanced Fuels, Inc., a Delaware corporation, and AE
Advanced Fuels – Keyes, Inc., a Delaware corporation.
The
Company is an international biofuels company focused on the development,
acquisition, construction and operation of next-generation fuel grade ethanol
and biodiesel facilities, and the distribution, storage, and marketing of
biofuels. The Company began selling fuel grade biodiesel from its production
facility in Kakinada in November 2008 and opened and began operating a
cellulosic ethanol commercial demonstration facility in Butte, Montana in August
2008.
Development Stage Enterprise.
The Company prepared its statements in accordance with the Development Stage
Enterprise guidance as specified in Accounting Standards Codification (“ASC”)
915 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 7
“Accounting and Reporting by Development Stage Enterprises”) until October 1,
2008, when planned principal operations commenced.
Principles of Consolidation.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material inter-company accounts and transactions are
eliminated in consolidation.
Use of Estimates. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting period.
Significant estimates, assumptions and judgments made by management include the
determination of impairment of long-lived assets, the valuation of equity
instruments such as options and warrants, the recognition and measurement of
current taxes payable and deferred tax assets or liabilities, and the accrual
for the payments under the Company’s registration rights agreement with certain
of its shareholders and management’s judgment about contingent liabilities.
Management believes that the estimates and judgments upon which they rely are
reasonable based upon information available to them at the time that these
estimates and judgments are made. To the extent there are material differences
between these estimates and actual results, the Company’s consolidated financial
statements will be affected. Refer to additional disclosures
regarding the use of estimates below under the caption Long-Lived
Assets.
Reclassifications. Certain
prior year amounts were reclassified to conform to current year presentation.
These reclassifications had no impact on previously reported net loss or
accumulated deficit.
Revenue recognition. The
Company recognizes revenue when there is persuasive evidence of an arrangement,
delivery has occurred, the price is fixed or determinable and collection is
reasonably assured.
Cost of Goods Sold. Cost of
goods sold include those costs directly associated with the production of
revenues, such as raw material purchases, factory overhead, and other direct
production costs.
Research and Development.
Research and development costs are expensed as incurred, unless they have
alternative future uses to the Company.
General and Administrative.
General and administrative expenses include those costs associated with the
general operations of our business such as: compensation, rent, consultants, and
travel related to executive, legal and financial functions.
Cash and Cash Equivalents.
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company maintains cash balances
at various financial institutions domestically and abroad. Domestic accounts are
insured by the FDIC. The Company’s accounts at these institutions may at times
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
Accounts Receivable. Accounts
receivable consist of product sales made to large credit worthy
customers.
Inventories. Inventories are
stated at the lower of cost, using the first-in and first-out (FIFO) method, or
market.
57
Property, Plant and
Equipment. Property, plant and equipment are carried at cost less
accumulated depreciation after assets are placed in service and are comprised
primarily of land acquired for development of production facilities, and the
biodiesel plant in India. The estimated useful life of this plant is 20 years.
The estimated useful life for office equipment and computers is three years and
the useful life of machinery and equipment is seven years. Depreciation is
provided using the straight line method over the assets useful
life.
Intangible Assets. Intangible
assets are carried at initial fair value less accumulated amortization over the
estimated useful life. Amortization is computed over the estimated useful lives
of the underlying assets using a method that reflects their utilization
pattern. As of December 31, 2009, our intangible assets were
fully amortized.
Income Taxes. The
Company recognizes income taxes in accordance with ASC 740 (formerly SFAS No.
109, “Accounting for Income Taxes”), using an asset and liability approach. This
approach requires the recognition of taxes payable or refundable for the current
year and deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company’s consolidated
financial statements or tax returns. The measurement of current and deferred
taxes is based on provisions of enacted tax law.
ASC 740
provides for recognition of deferred tax assets if the realization of such
assets is more likely than not to occur. Otherwise, a valuation allowance is
established for the deferred tax assets which may not be realized. As of
December 31, 2009, the Company recorded a full valuation allowance against its
net deferred tax assets due to operating losses incurred since inception.
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the net deferred tax
assets were fully offset by a valuation allowance.
The
Company is subject to income tax audits by the respective tax authorities in all
of the jurisdictions in which it operates. The determination of tax liabilities
in each of these jurisdictions requires the interpretation and application of
complex and sometimes uncertain tax laws and regulations. The recognition and
measurement of current taxes payable or refundable and deferred tax assets and
liabilities requires that the Company make certain estimates and judgments.
Changes to these estimates or a change in judgment may have a material impact on
the Company’s tax provision in a future period.
Long - Lived Assets. The
Company evaluates the recoverability of long-lived assets with finite lives in
accordance with ASC Subtopic 360-10-35 (formerly SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”) which requires recognition of
impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable based on estimated undiscounted cash flows, the
impairment loss would be measured as the difference between the carrying amount
of the assets and its fair value based on the present value of estimated future
cash flows.
With
respect to the Company’s biodiesel facility in India, which comprises more than
80% of the carrying value of total assets, management develops various
assumptions to estimate the future cash flows that will be generated from this
facility in order to test the recoverability of this asset. The
determination of estimated future cash flows is highly uncertain in the current
economic environment. Further, as the Company’s biodeisel facility in
India has been in operation for less than 18 months and to date has operated at
only about 10% of its daily capacity, management believes that its assumptions
regarding future cash flows and in turn the carrying value of its biodiesel
facility represent a significant estimate in the preparation of the Company’s
consolidated financial statements, and, that it is at least reasonably possible
that management’s estimates regarding the recoverability of the carrying value
of its long-lived assets including its biodeisel facility will change in the
near term. The impact to the Company’s consolidated financial
statements of changes in its estimates of the future cash flows from, and in
turn the recoverability of the carrying value of, its biodiesel facility will
likely be material to such consolidated financial statements.
Basic and Diluted Net Loss per
Share. Basic loss per share is computed by dividing loss attributable to
common shareholders by the weighted average number of common shares outstanding
for the period, net of shares subject to repurchase. Diluted loss per share
reflects the dilution of common stock equivalents such as options, convertible
preferred stock and warrants to the extent the impact is dilutive. Basic loss
per share includes the vested portion of restricted stock grants. The unvested
restricted stock grants are included only in the fully diluted net loss per
share calculation. As the Company incurred net losses for the years ended
December 31, 2009, and 2008, potentially dilutive securities have been excluded
from the diluted net loss per share computations as their effect would be
anti-dilutive.
58
The following table shows the weighted-average number of potentially dilutive shares excluded from the diluted net loss per share calculation for the year ended December 31, 2009, and 2008:
|
|
For
the year ended December 31
|
|||||||
|
|
2009
|
2008
|
||||||
|
Series
B preferred stock
|
3,336,257
|
5,876,301
|
||||||
|
Series
B warrants
|
443,853
|
702,990
|
||||||
|
Common
stock options and warrants
|
4,136,478
|
4,291,853
|
||||||
|
Unvested
restricted stock
|
8,219
|
375,068
|
||||||
|
Total
weighted average number of potentially dilutive shares
excluded
from the diluted net loss per share calculation
|
7,924,807
|
11,246,212
|
||||||
Comprehensive
Income. ASC 220 (formerly SFAS No. 130, "Reporting Comprehensive
Income"), requires that an enterprise report, by major components and as a
single total, the change in its net assets from non-owner sources. The Company’s
other comprehensive income consists solely of cumulative currency translation
adjustments resulting from the translation of the financial statements of its
foreign subsidiaries. The investment in this subsidiary is considered
indefinitely invested overseas, and as a result, deferred income taxes are not
recorded related to the currency translation adjustments.
Foreign Currency
Translation/Transactions. Assets and liabilities of non-U.S. subsidiaries
that operate in a local currency environment, where that local currency is the
functional currency, are translated into U.S. dollars at exchange rates in
effect at the balance sheet date; with the resulting translation adjustments
directly recorded to a separate component of accumulated other comprehensive
income. Income and expense accounts are translated at average exchange rates
during the year. Gains and losses from foreign currency transactions are
recorded in other income (loss), net. The functional currency is the local
currency for all non-U.S. subsidiaries.
Restricted Stock. The Company
has granted restricted stock awards, restricted by a service condition, with
vesting periods of up to 3 years. Restricted stock awards are valued using the
fair market value of the Company’s common stock as of the date grant. The
Company recognizes compensation expense on a straight line basis over the
requisite service period of the award. The remaining unvested shares are subject
to forfeitures and restrictions on sale, or transfer, up until the vesting
date.
Fair Value of Financial
Instruments. The Company’s financial instruments include cash and cash
equivalents, mandatorily redeemable series B preferred stock, short and
long-term debt and long term debt (related party). Cash and cash
equivalents are carried at fair value as discussed in Note 19.The Company is
unable to estimate the fair value of the mandatorily redeemable Series B
preferred stock due to the contingent nature of the ultimate settlement of this
liability. The carrying value of the Company’s short-term debt approximates fair
value due to the short-term maturity of this instrument, which absent an
amendment to the existing loan agreement, matures in June 2010. The
Company’s long-term debt carrying value approximates fair value based upon the
borrowing rates currently available to the Company for bank loans in India with
similar terms and maturities. The Company is also unable to estimate the fair
value of the long term debt (related party) due to the lack of comparable
available credit facilities.
Stock-Based Compensation
Expense. Effective January 1, 2006, we adopted the fair value recognition
provisions of ASC 718 (formerly SFAS No. 123 (Revised 2004), “Share-Based
Payment”), requiring us to recognize expense related to the fair value of our
stock-based compensation awards adjusted to reflect only those shares that are
expected to vest. Our implementation of ASC Section 715-20-50 used the
modified-prospective-transition method.
We made
the following estimates and assumptions in determining fair value of stock
options as prescribed by ASC 718:
|
|
·
|
Valuation and amortization
method — We estimate the fair value of stock options granted using
the Black-Scholes-Merton option-pricing formula and a single option award
approach. This fair value is then amortized on a straight-line basis over
the requisite service periods of the awards, which is generally the
vesting period.
|
|
|
·
|
Expected Term — The
expected term represents the weighted-average period that our stock-based
awards are expected to be outstanding. We applied the “Simplified Method”
as defined in the Securities and Exchange Commission’s Staff Accounting
Bulletin No. 107 and 110.
|
|
|
·
|
Expected Volatility —
The Company’s expected volatilities are based on the historical volatility
of comparable public companies’ stock for a period consistent with our
expected term.
|
59
|
|
·
|
Expected Dividend — The
Black-Scholes-Merton valuation model calls for a single expected dividend
yield as an input. The Company currently pays no dividends and does not
expect to pay dividends in the foreseeable
future.
|
|
|
·
|
Risk-Free Interest Rate
— The Company bases the risk-free interest rate on the implied yield
currently available on United States Treasury zero-coupon issues with an
equivalent remaining term.
|
Commitments and
Contingencies. The Company records
and/or discloses commitments and contingencies in accordance with ASC 450,
“Contingencies”, (ASC 450). ASC 450 applies to an existing condition, situation,
or set of circumstances involving uncertainty as to possible loss that will
ultimately be resolved when one or more future events occur or fail to occur. As
of December 31, 2009, the Company is not aware of any material commitments or
contingencies other than those disclosed in Note 18. Contingent
Liabilities.
Recent Accounting
Pronouncements.
The
Company adopted the provisions of ASC 820-10, Fair Value Measurements and
Disclosures (formerly SFAS No. 157, Fair Value Measurements), with respect to
non-financial assets and liabilities effective January 1, 2009. This
pronouncement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. The adoption of ASC
820-10 did not have an impact on the Company’s consolidated financial
statements.
The
Company adopted ASC 805 (formerly SFAS No. 141(R), “Business Combinations”) for
business combinations. This topic changes the accounting for acquisition
transaction costs by requiring them to be expensed in the period incurred, and
also changes the accounting for contingent consideration, acquired contingencies
and restructuring costs related to an acquisition. The Company also adopted ASC
810-10-65, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51
(formerly SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51”). This statement changes the
accounting and reporting for minority interests, which are re-characterized as
non-controlling interests, classified as a component of equity and accounted for
at fair value. ASC 805 and ASC 810-10-65 are effective for the Company’s 2009
financial statements. Early adoption is prohibited. The effect the adoption of
ASC 805 has had and will have on the Company’s financial statements will depend
on the nature and size of acquisitions we complete after adoption. We adopted
ASC 810-10-65-1 as of January 1, 2009. As a result, we reclassified the 49%
non-controlling interest in our subsidiary Energy Enzymes, Inc., prospectively.
Had we continued to apply the prior method of accounting for non-controlling
interests, losses incurred by this entity would have been fully attributed to
us.
The
Company adopted ASC 825-10 (formerly the Financial Accounting Standards Board
(FASB) issued Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial
Instruments”). ASC 825-10 amends FASB Statement No. 107, “Disclosures about Fair
Values of Financial Instruments,” to require disclosures about fair value of
financial instruments in interim financial statements as well as in annual
financial statements. APB 28-1 amends APB Opinion No. 28, “Interim Financial
Reporting,” to require those disclosures in all interim financial statements.
ASC 825-10 is effective for interim periods ending after June 15, 2009. Adoption
of this statement did not have a material effect on the Company’s financial
statements. See Note 19 Fair Value Measurement.
The
Company adopted ASC 320-10 (formerly Staff Position SFAS 115-2 and SFAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments”. ASC 320
provides guidance in determining whether impairments in debt securities are
other than temporary, and modifies the presentation and disclosures surrounding
such instruments. ASC 320 is effective for interim periods ending after June 15,
2009. Adoption of this statement did not have a material effect on the Company’s
financial statements.
In June
2009, the FASB issued ASC 105 (formerly SFAS No. 168, "The FASB Accounting
Standards Codification (TM) ("Codification") and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No. 162"). ASC
105 establishes the Codification as the single official source of authoritative
United States accounting and reporting standards for all non-governmental
entities (other than guidance issued by the SEC). The Codification changes the
referencing and organization on financial standards and is effective for interim
and annual periods ending on or after September 15, 2009. ASC 105 is not
intended to change the existing accounting guidance and its adoption did not
have an impact on our financial statements.
In
October, the FASB issued Accounting Standard Update (“ASU”) 2009-13, Revenue
Recognition (Topic 605), Multiple Deliverable Revenue Arrangements, which
applies to multiple-deliverable revenue arrangements that are currently within
the scope of FASB ASC 605-25 (previously included in EITF Issue no. 00-21,
Revenue Arrangements with Multiple Deliverables). The EITF will be effective on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. The Company has not fully
assessed the impact of this guidance, but at this time believes it will not have
an impact on our financial statements.
In August
2009, the FASB issued ASU 2009-5, “Fair Value Measurements and Disclosures
(Topic 820) – Measuring Liabilities at Fair Value” (“ASU 2009-5”). This update
provides clarification of the fair value measurement of financial liabilities
when a quoted price in an active market for an identical liability (Level 1
input of the valuation hierarchy) is not available. ASU 2009-5 is effective in
the fourth quarter of 2009. This update did not have a material impact on our
financial statements or disclosures.
60
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements,”
which requires additional disclosures on transfers in and out of Level I and
Level II and on activity for Level III fair value measurements. The new
disclosures and clarifications on existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures on Level III activity, which are effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. We do not expect the adoption of ASU No. 2010-06 to have a material
impact on our consolidated financial condition or results of
operations.
2.
Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared on the going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The Company has experienced losses and negative
cash flow since inception and currently has a working capital deficit and total
stockholders’ deficit. These factors raise substantial doubt about its ability
to continue as a going concern. The Company’s ability to continue as a going
concern is dependent on several factors, including the ability to raise a
significant amount of capital for operating expenses, capital expenses , current
liabilities and debt service.
The
Company has produced minimal gross profit, has less than one month of operating
cash, has incurred losses from inception through December 31, 2009 and has
negative working capital (current assets less current liabilities) of
$17,936,876. The Company has raised approximately $31.8 million to date through
the sale of preferred stock and approximately $13 million through debt
facilities. An additional $2 million of cash has been generated through the sale
of its subsidiary, Wahoo Ethanol, LLC, with an additional $8 million through the
dissolution of the Sutton Ethanol Joint venture. The Company will have to raise
significantly more capital and secure a significant amount of debt to complete
its business plan and continue as a going concern. The Company has one biodiesel
production facility in operation that began selling biodiesel into the domestic
Indian market in November 2008. Although the biodiesel plant provides some cash
flow to the Company it will likely be insufficient to allow for the completion
of our business plan in fiscal 2010.
Management
believes that it will be able to raise additional capital through equity
offerings and debt financings. Should the Company not be able to raise enough
capital it may be forced to sell all or a portion of its existing biodiesel
facility or other assets at a discount to market value and may incur additional
impairment related to these assets to generate cash to continue the Company’s
business plan or possibly discontinue operations. Until such additional capital
is raised, the Company is dependent on financing from a related party. The
Company has also arranged extended terms with its trade creditors. The Company’s
goal is to raise additional funds needed to construct and operate next
generation ethanol and biodiesel facilities through stock offerings and debt
financings. There can be no assurance that additional financing will be
available on terms satisfactory to the Company. The accompanying financial
statements do not include any adjustments to the classification or carrying
values of our assets or liabilities that may result should the Company be unable
to continue as a going concern.
3.
Inventory
Inventory
consists of the following:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$
|
389,442
|
$
|
674,069
|
||||
|
Work-in-progress
|
77,123
|
53,251
|
||||||
|
Finished
goods
|
126,896
|
322,263
|
||||||
|
Total
inventory
|
$
|
593,461
|
$
|
1,049,583
|
||||
For the
year ended December 31, 2009 and 2008, the Company expensed $863,065 and
$1,365,682, respectively, in connection with the write-down of inventory to
reflect market value below cost.
61
4.
Property, Plant and Equipment
Property,
plant and equipment consist of the following:
| December 31, | ||||||||
|
|
2009
|
2008
|
||||||
|
Land
|
$
|
3,358,569
|
$
|
3,656,676
|
||||
|
Buildings
|
11,828,545
|
12,445,883
|
||||||
|
Furniture
and fixtures
|
552,849
|
73,983
|
||||||
|
Machinery
and equipment
|
498,833
|
618,487
|
||||||
|
Construction
in progress
|
3,155,001
|
4,648,149
|
||||||
|
Total
gross property, plant & equipment
|
19,393,797
|
21,443,178
|
||||||
|
Less
accumulated depreciation
|
(945,922
|
)
|
(206,574
|
)
|
||||
|
Total
net property, plant & equipment
|
$
|
18,447,875
|
$
|
21,236,604
|
||||
For the
years ended December 31, 2009 and 2008, the Company recorded $580,010 and
$219,571, respectively, in depreciation. Interest in the amount of $929,058 was
capitalized during 2008. No interest was capitalized in 2009.
Components
of construction in progress include $2,847,407 related to our India biodiesel
pretreatment and glycerin facility, $287,594 related to the development of our
Sutton property (held for future development of a next generation cellulosic
ethanol facility) and $20,000 related to our Cilion facility. The estimated cost
to complete construction of the pretreatment and glycerin facility is
$1,000,000. Commitments for approximately $16,278 under construction contracts,
purchase orders and other short term contracts were outstanding at December 31,
2009.
The
Company’s property, plant and equipment represent more than 90% of the carrying
value of total assets. Management is required to evaluate these
long-lived assets for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. With
respect to the Company’s biodiesel facility in India, which comprises more than
80% of the carrying value of total assets, management has developed various
assumptions to estimate the future cash flows that will be generated from this
facility in order to test the recoverability of this asset. The
determination of estimated future cash flows is highly uncertain in the current
economic environment. Further, as the biodeisel facility in India has
been in operation for less than 18 months and to date has operated at only about
10% of its daily capacity, management believes that its assumptions regarding
future cash flows and in turn the carrying value of its biodiesel facility
represent a significant estimate in the preparation of the Company’s
consolidated financial statements, and, that it is at least reasonably possible
that management’s estimates regarding the recoverability of the carrying value
of the Company’s long-lived assets including its biodeisel facility will change
in the near term. Included in our estimate, we have factored in the
increasing demand for biodiesel in Europe and in India based on government
regulations requiring the use of renewable fuels by the Government of India and
many of the European Union member states. We have noted the
increasing blending obligations in 2010 in some European counties including
Bulgaria, France, Germany, Hungary, Poland, Portugal, the Netherlands, Slovakia,
Spain, Sweden and the United Kingdom. We have also made our forecast
based on the current prices of fuel and feedstock commodities which
currently are forecasted to provide gross production margins; however, our
gross margins depend principally on the spread between feedstock and biodiesel
prices and this spread has fluctuated significantly in recent months. The impact
to the Company’s consolidated financial statements of changes in its estimates
of the future cash flows from, and in turn the recoverability of the carrying
value of, its biodiesel facility will likely be material to such consolidated
financial statements.
An
impairment charge of $2,086,350 was taken during 2009 related to the Sutton and
Danville land holdings within our North American segment. The Company
believes that in light of the default on the senior debt facility and the
collateralization of these properties under the term of the loan agreement, the
Company is required to reevaluate the potential future development of these
properties. The impairment charge is the difference between the estimated fair
value as derived from appraisals of the respective properties (based on Level 2
inputs) and the current carrying value.
62
5.
Other Current Assets, Other Assets and Other Current
Liabilities
Other
current assets and other assets consists of foreign input tax credits,
restricted cash, payments for land options for possible future ethanol plants,
supplier deposits and other prepayments.
|
|
December
31,
2009
|
December
31,
2008
|
||||||
|
Current
|
||||||||
|
Short
term deposits
|
$
|
56,221
|
$
|
235,119
|
||||
|
Foreign
input credits
|
256,124
|
112,925
|
||||||
|
Land
options
|
—
|
40,000
|
||||||
|
Other
|
57,323
|
50,659
|
||||||
|
|
$
|
369,668
|
$
|
438,703
|
||||
|
Long Term
|
||||||||
|
Restricted
cash
|
$
|
10,744
|
$
|
267,600
|
||||
|
Deposits
|
38,600
|
22,390
|
||||||
|
|
$
|
49,344
|
$
|
289,990
|
||||
The
Company acquired options to purchase land in various locations in Nebraska and
Illinois. These options gave the Company the right to buy specific property for
a set price per acre and typically ended in one to two years. As of
December 31, 2008, the Company had one option to purchase land in Illinois
for $934,000. This option expired in May 2009, and was expensed during the
three months ended March 31, 2009 upon management’s determination not to
renew. For the year ended December 31, 2009, and 2008 the Company expensed
options that ended or were released in the amount of $40,000 and $124,536,
respectively.
Foreign
input and custom duty credits represent payment of tax to governmental agencies
where the Company expects to receive reimbursement upon the filing of returns or
the application of these funds to reduce the payment of future
taxes.
Other current liabilties consist of accrued:
|
|
2009
|
2008
|
||||||
|
Vacation
and wages
|
$ | 655,821 | $ | 75,018 | ||||
|
Duty
and service tax
|
660,571 | - | ||||||
|
Termination
fee
|
600,000 | 600,000 | ||||||
|
Legal
fees
|
425,475 | - | ||||||
|
Repurchase
obligations
|
265,581 | 256,581 | ||||||
|
Other
|
709,483 | 940,599 | ||||||
| $ | 3,316,931 | $ | 1,616,259 | |||||
6. Intangible Assets
Intangible
assets consist of purchased customer lists (acquired in 2007 in connection with
the acquisition of Biofuels Marketing, Inc. discussed in Note 12 below), which
have been amortized over an estimated useful life of 18 months. The intangible
assets have a cost basis of $300,000 and a net carrying amount of $0 and $33,334
at December 31, 2009 and 2008, respectively. For the years ended
December 31, 2009 and 2008, the Company recorded amortization of $33,334
and $200,000, respectively.
7.
Debt
Debt
consists of the following:
|
|
December
31,
|
|||||||
|
|
2009
|
2008
|
||||||
|
Revolving
line of credit (related party)
|
$ | 4,250,031 | 2,044,691 | |||||
|
Secured
term loan
|
- | 3,991,013 | ||||||
|
Less:
current portion
|
- | (816,738 | ) | |||||
|
Total
long term debt
|
4,250,031 | 5,218,966 | ||||||
|
Senior
secured note, including accrued interest of $1,017,701 and $0 less unamortized
discount of $583,985 and $43,200
|
6,083,716 | 4,504,062 | ||||||
|
Unsecured
working capital loan
|
326,234 | - | ||||||
|
Current
portion of secured term loan
|
4,391,512 | 816,738 | ||||||
|
Total
current debt
|
10,801,462 | 5,320,800 | ||||||
|
Total
debt
|
$ | 15,051,493 | $ | 10,539,766 | ||||
63
Scheduled debt repayments as of December 31, 2009, are:
|
|
|
Debt
Repayments
|
|
|
|
2010
|
|
$
|
10,801,462
|
|
|
2011
|
|
|
4,250,031
|
|
|
Total
|
|
$
|
15,051,493
|
|
Senior
secured note. On May 16,
2008, Third Eye Capital ABL Opportunities Fund (“Purchaser”) purchased a 10%
senior secured note in the amount of $5 million along with 5 year warrants
exercisable for 250,000 shares of common stock at an exercise price of $3.00 per
share. The note is secured by first-lien deeds of trust on real property located
in Nebraska and Illinois, by a first priority security interest in equipment
located in Montana, and a guarantee of $1 million by McAfee Capital LLC (owned
by Eric McAfee and his wife). Interest on the note accrues on the unpaid
principal balance and is payable on the first business day of each quarter
beginning on July 1, 2008. Prior to the note maturing on May 15,
2009, the Company entered into an amendment and limited waiver (the “Amendment”)
with Third Eye Capital Corporation (“Agent”) on behalf of itself and the
Purchaser dated March 31, 2009. The Amendment did not become effective as we
were unable to meet the conditions of effectiveness set forth in the Amendment.
Accordingly, the interest rate under this facility has been accrued at the
default interest rate, which is 18%, during the period of default. The Company
has no cross default provisions in this or any other debt agreement. As a
result, our inability to execute the conditions of effectiveness of the
effective Amendment did not have any adverse impact on our other debt
obligations. On December 10, 2009, the Company entered into an
amendment to the note with Third Eye Capital Corporation
extending the note maturity date
until June 30, 2010 and waiving covenant defaults. The amended note
bears interest at 10%. The Company evaluated the loan modification under ASC
470-50 and ASC 470-60 and determined that the amendment represented a
non-troubled debt modification under ASC 470- 50, in which the original and new
debt instrument are not substantially different, accordingly, fees between the
debtor and creditor have been reflected as a reduction to the carrying value of
the debt and will amortized ratably over the seven month term of the
debt. Fees of $350,000 were incurred to extend the maturity and
fees of $300,000 were incurred to waive the financial covenant
defaults. At December 31, 2009, the Company recorded deferred
issuance costs of $583,985.
Secured term loan. On
July 17, 2008, Universal Biofuels Private Limited (“UBPL”), a wholly-owned
subsidiary, entered into a six year secured term loan with the State Bank of
India in the amount of approximately $6 million. The term loan matures in March
2014 and is secured by UBPL’s assets, consisting of the biodiesel plant and land
in Kakinada.
In July
2008 we drew approximately $4.6 million against the secured term loan. The loan
principal amount is repayable in 20 quarterly installments of approximately
$270,000, using exchange rates on December 31, 2009, with the first installment
due in June 2009 and the last installment payment due in March 2014. The
interest rate under this facility is subject to adjustment every two years,
based on 0.25% above the Reserve Bank of India advance rate and is currently
12.00%.
The
principal payment scheduled for June, September and December 2009 were not made
and in the event of default of payment of any installment of principal payments,
the term loan provides for liquidating damages at a rate of 2% per annum for the
period of default.
On
October 7, 2009, UBPL received a
demand notice from the State Bank of
India. The notice informs UBPL that an event of default has occurred for failure
to make an installment payment on the loan due in June, 2009 and demands
repayment of the entire outstanding indebtedness of 19.60 crores (approximately
$4 million) together with all accrued interest thereon and any applicable fees
and expenses by October 10, 2009. As of December 31, 2009, UBPL was in default
on four months of interest. Additional provisions of default include the bank
having the unqualified right to disclose or publish our company name and our
directors names as defaulter in any medium or media. At the bank’s option, it
may also demand payment of the balance of the loan since the principal payments
are in default in June 2009. As a result we have classified the entire loan
amount as current. We are currently in discussions with the bank with regards to
an amendment to the Agreement of Loan for Overall Limit for the modification of
terms.
Revolving line of credit –
related party. On November 16, 2006, the Company entered into a
short-term loan agreement with a former member of the Company’s board of
directors and current stockholder of the Company. In 2008 this short-term
unsecured loan agreement was amended to convert the facility into an unsecured
revolving line of credit with a credit limit of $2,500,000. In addition, the
maturity date of the credit facility was extended to January 31, 2011. At
December 31, 2008, a total of $2,044,690 was outstanding under this credit
facility which accrues interest at 10% interest per annum. All outstanding
principal and accrued interest is due and payable on January 31, 2011. During
2009 this credit facility was increased to $3,500,000.
64
On August
17, 2009, International Biodiesel, Inc., a wholly owned subsidiary of AE
Biofuels, Inc., entered into a Revolving Line of Credit Agreement with Mr.
Cagan, (the “Lender”), for $5,000,000. The $5,000,000 Revolving Line of Credit
is secured by accounts, investments, intellectual property, securities and other
collateral of AE Biofuels, Inc. excluding the collateral securing the Company’s
obligations under the Note and Warrant Purchase Agreement with Third Eye Capital
Corporation and Third Eye Capital ABL Opportunities Fund and the collateral
securing the Company’s obligations under the Secured Term Loan with the State
Bank of India. The $5,000,000 Revolving Line of Credit bears interest at the
rate of 10% per annum and matures on July 1, 2011, at which time the outstanding
advances under the Revolving Line of Credit together with any accrued interest
and other unpaid charges or fees will become due. Upon certain events, one of
which is the default on certain other debt facilities, the Lender may
declare a default upon 10 days prior written notice. Upon an event of default,
the Lender may accelerate the outstanding indebtedness together with all accrued
interest thereon and demand immediate repayment.
The Company used the new Revolving
Line of Credit Agreement to satisfy the outstanding balance under the unsecured
revolving line of credit facility with a limit of $3,500,000 in August
2009. At December 31, 2009, a total of $4,250,031, including accrued
interest, was outstanding under the $5,000,000 Revolving Line of Credit, dated
August 17, 2009. All outstanding principal and accrued interest is due and
payable on July1, 2011.
Operating
Agreement. In
November 2008, the Company entered into an operating agreement with Secunderabad
Oils Limited (“Secunderabad”). Under this agreement Secunderabad agreed to
provide the Company with working capital, on an as needed basis, to fund the
purchase of feedstock and other raw materials for our Kakinada biodiesel
facility. Working capital advances bear interest at the actual bank borrowing
rate of Secunderabad, currently at 15%. During the years ended December 31, 2009
and 2008, the Company paid Secunderabad approximately $59,456 and $0,
respectively, in interest for working capital funding. At December 31, 2009 and
2008 the Company had $326,234 and $0 outstanding under this agreement,
respectively, and included as current short term borrowings on the balance
sheet.
8.
Operating Leases
The
Company, through its subsidiaries, has non-cancelable operating leases for
office space in Cupertino and India as well as the property housing
our cellulosic demonstration facility in Butte. These leases expire at various
dates through May 31, 2012. The Company records rent expense on a straight line
basis.
Future
minimum operating lease payments as of December 31, 2009, are:
|
|
|
Rental
Payments
|
|
|
|
2010
|
|
$
|
263,846
|
|
|
2011
|
260,206
|
|||
|
2012
|
|
108,419
|
|
|
|
Total
|
|
$
|
632,471
|
|
For the
year ended December 31, 2009 and 2008, the Company paid rent under operating
leases of $229,313 and $276,442, respectively.
In July,
2009, the Company entered into a sublease agreement with Solargen Energy, Inc.
for approximately 3,000 square feet of leased space. For the year ended December
31, 2009, the Company invoiced, collected and offset as rent expense $70,698
under this agreement. The future minimum lease payments above exclude
collections of rent under this sublease agreement. See Note 16. Related Party
Transactions.
On
December 1, 2009, the Company entered into a lease for a 55 million gallon
nameplate ethanol facility located in Keyes, California for a term of 36 months
at a monthly lease payment of $250,000. Lease term and rental begin
upon substantial completion of the repair and retrofit activities, determined by
the mutual agreement of the parties.
65
9.
Stockholder’s Equity
The
Company is authorized to issue up to 400,000,000 shares of common stock, $0.001
par value and 65,000,000 shares of preferred stock, $0.001 par
value.
Convertible
Preferred Stock
The
following is a summary of the authorized, issued and outstanding convertible
preferred stock:
|
|
Authorized
|
Shares
Issued and
Outstanding
December 31,
|
||||||||||
|
Shares
|
2009
|
2008
|
||||||||||
|
Series
B preferred stock
|
7,235,565
|
3,320,725
|
3,451,892
|
|||||||||
|
Undesignated
|
57,764,435
|
—
|
—
|
|||||||||
|
|
65,000,000
|
3,320,725
|
3,451,892
|
|||||||||
Our
Articles of Incorporation authorize our board to issue up to 65,000,000 shares
of preferred stock, $0.001 par value, in one or more classes or series within a
class upon authority of the board without further stockholder
approval.
Significant
terms of the designated preferred stock are as follows:
Voting. Holders of our Series
B preferred stock are entitled to the number of votes equal to the number of
shares of Common Stock into which the shares of Series B preferred stock held by
such holder could be converted as of the record date. Cumulative voting with
respect to the election of directors is not allowed. Currently each share of
Series B preferred stock is entitled to one vote per share of Series B preferred
stock. In addition, without obtaining the approval of the holders of a majority
of the outstanding preferred stock, the Company cannot:
|
|
·
|
Increase
or decrease (other than by redemption or conversion) the total number of
authorized shares of Series B preferred
stock;
|
|
|
·
|
Effect
an exchange, reclassification, or cancellation of all or a part of the
Series B preferred stock, including a reverse stock split, but excluding a
stock split;
|
|
|
·
|
Effect
an exchange, or create a right of exchange, of all or part of the shares
of another class of shares into shares of Series B preferred stock;
or
|
|
|
·
|
Alter
or change the rights, preferences or privileges of the shares of Series B
preferred stock so as to affect adversely the shares of such
series.
|
Dividends. Holders of all of
our shares of Series B preferred stock are entitled to receive non-cumulative
dividends payable in preference and before any declaration or payment of any
dividend on common stock as may from time to time be declared by the board of
directors out of funds legally available for that purpose at the rate of 5% of
the original purchase price of such shares of preferred stock. No dividends may
be made with respect to our common stock until all declared dividends on the
preferred stock have been paid or set aside for payment to the preferred stock
holders. To date, no dividends have been declared.
Liquidation Preference. In
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the Company, the holders of the Series B preferred stock are entitled to
receive, prior and in preference to any payment to the holders of the common
stock, $3.00 per share plus all declared but unpaid dividends (if any) on the
Series B preferred stock. If the Company’s assets legally available for
distribution to the holders of the Series B preferred stock are insufficient to
permit the payment to such holders of their full liquidation preference, then
the Company’s entire assets legally available for distribution are distributed
to the holders of the Series B preferred stock in proportion to their
liquidation preferences. After the payment to the holders of the Series B
preferred stock of their liquidation preference, the Company’s remaining assets
legally available for distribution are distributed to the holders of the common
stock in proportion to the number of shares of common stock held by them. A
liquidation, dissolution or winding up includes (a) the acquisition of the
Company by another entity by means of any transaction or series of related
transactions to which the Company is party (including, without limitation, any
stock acquisition, reorganization, merger or consolidation but excluding any
sale of stock for capital raising purposes) that results in the voting
securities of the Company outstanding immediately prior thereto failing to
represent immediately after such transaction or series of transactions (either
by remaining outstanding or by being converted into voting securities of the
surviving entity or the entity that controls such surviving entity) a majority
of the total voting power represented by the outstanding voting securities of
the Company, such surviving entity or the entity that controls such surviving
entity, or (b) a sale, lease or other conveyance of all or substantially all of
the assets of the Company.
66
Conversion. Holders of Series
B preferred stock have the right, at their option at any time, to convert any
shares into common stock. Each share of preferred stock will convert into one
share of common stock, at the current conversion rate. The conversion ratio is
subject to adjustment from time to time in the event of certain dilutive
issuances and events, such as stock splits, stock dividends, stock combinations,
reclassifications, exchanges and the like. In addition, at such time as the
Registration Statement covering the resale of the shares of common stock is
issuable, then all outstanding Series B preferred stock shall be automatically
converted into common stock at the then effective conversion rate. For the year
ended December 31, 2009, holders of 131,167 shares of Series B preferred stock
elected to convert their shares of Series B preferred stock into 131,167 shares
of common stock.
Registration Rights Agreement
liquidated damages for certain common and Series B preferred stock
holders. Certain holders of shares of our common stock and holders of
shares of our Series B preferred stock were entitled to have their shares of
common stock (including common stock issuable upon conversion of Series B
preferred stock) registered under the Securities Act within but no later than 30
days after the Reverse Merger Closing date, December 7, 2007, pursuant to the
terms and subject to the conditions set forth in a Registration Rights Agreement
entered into among the Company and such holders. Registration of these shares
under the Securities Act would result in these shares becoming freely tradable
without restriction under the Securities Act.
The
Company is required to make pro rata payments to each eligible stock investor as
liquidated damages and not as a penalty, in the amount equal to 0.5% of the
aggregate purchase price paid by such investor for the preferred stock for each
thirty (30) day period or pro rata for any portion thereof following the date by
which or on which such Registration Statement should have been filed or
effective, as the case may be. Payments shall be in full compensation to the
investors, and shall constitute the investor's exclusive remedy for such events.
The amounts payable as liquidated damages shall be paid in cash or shares of
common stock at the Company’s election. In lieu of registering the securities,
the Company elected to issue shares of its common stock to eligible stockholders
in full compensation to such stockholders. The liquidated damages ceased
accruing in December 2008 when the shares became available for trading in
compliance with Rule 144. The Company elected to pay these liquidated damages
through the issuance of 406,656 shares of common stock to the holders of shares
of our Series B preferred stock.
In
February 2009, in full settlement of the $1,807,748 registration right
liability, the Company issued a total of 406,656 shares of its common stock to
eligible shareholders resulting in a reduction of the liability and a
corresponding increase in additional paid in capital and common
stock.
Mandatorily Redeemable Series B
preferred stock. In connection with the election of dissenters’ rights by
the Cordillera Fund, L.P., at December 31, 2008 the Company reclassified 583,334
shares with an original purchase price of $1,750,002 out of shareholders’ equity
to a liability called “mandatorily redeemable Series B preferred stock” and
accordingly reduced stockholders equity by the same amount to reflect the
Company’s estimate of its obligations with respect to this matter. See Note 18 –
Contingent Liabilities.
Common
Stock
On
October 6, 2008, the Company and TIC cancelled their Strategic Alliance
Agreement and TIC agreed to return 4,000,000 shares of the Company’s common
stock for a total payment of $500,000 by the Company of which $234,419 was paid
to TIC upon the parties’ entry into the agreement and $265,581 was payable on or
before December 30, 2008. Upon cancellation of the agreement, TIC returned
1,880,000 shares and will return the remaining 2,120,000 shares upon the receipt
of the final payment. In the event the final payment is not received on or
before December 30, 2009, interest shall begin to accrue at the annual rate of
18% until paid in full. At December 31, 2009, the Company had not made the
payment required under the agreement.
10.
Private Placement of Preferred Stock and Warrants
In
connection with the sale of our Series A and B preferred stock, we issued to our
placement agent warrants to purchase a number of shares of our Common Stock
representing up to 8% of the shares of Series A and Series B preferred stock
sold. The warrants are exercisable for a period of seven years from the date of
issuance, have a net exercise provision and are transferable. The shares of the
Company’s common stock issuable upon exercise of the warrants must be included
in any Registration Statement filed by the Company with the Securities and
Exchange Commission. Further, subject to certain conditions, the Company has
indemnified the placement agents and affiliated broker-dealers against certain
civil liabilities, including liabilities under the Securities Act.
67
A summary
of warrant activity for placement warrants for 2009 and 2008 is as
follows:
|
|
Number
of
Warrants
|
Weighted-
Average
Exercise
Price
|
Warrants
Exercisable
|
Remaining
Term
(years)
|
||||||||||||
|
Outstanding,
December 31, 2007
|
1,548,074
|
$
|
3.00
|
1,548,074
|
6.1
|
|||||||||||
|
Granted
|
—
|
—
|
—
|
|||||||||||||
|
Exercised
|
(881,487
|
)
|
3.00
|
(881,487
|
)
|
|||||||||||
|
Outstanding,
December 31, 2008
|
666,587
|
3.00
|
666,587
|
3.45
|
||||||||||||
|
Granted
|
—
|
—
|
—
|
|||||||||||||
|
Exercised
|
—
|
—
|
—
|
|||||||||||||
|
Outstanding,
December 31, 2009
|
666,587
|
3.00
|
666,587
|
2.56
|
||||||||||||
The
warrants are considered equity instruments. Since they were issued as a cost of
the issuance of the Series A and B preferred stock, the fair value of these
warrants has effectively been netted against the preferred stock sale
proceeds.
One
former member of the Company’s board of directors and a significant shareholder
of the Company is a registered representative of the placement agent. He
received a portion of the compensation paid to the placement agent and received
976,721 of the warrants issued from the Series A and B financing. During 2008,
he net exercised the warrant for 881,487 shares of common stock resulting in the
issuance of 504,552 shares of common stock and transferred 175,000 warrants to
another individual.
Warrants
In May
2008, we issued 250,000 common stock warrants to Third Eye Capital in connection
with our sale of a 10% senior secured note. These warrants are immediately
exercisable at $0.12 per share.
In
February 2007, we issued 5,000 warrants to a consultant as compensation for
services rendered. These warrants are immediately exercisable at $3.00 per
share.
11.
Stock-Based Compensation
Common
Stock Reserved for Issuance
AE
Biofuels authorized the issuance of 4,000,000 shares under the 2007 Stock Plan
for stock option awards, which includes both incentive and non-statutory stock
options. These options generally expire five years from the date of grant and
are exercisable at any time after the date of the grant, subject to vesting.
Shares issued upon exercise before vesting are subject to a right of repurchase,
which lapses according to the vesting schedule of the original
option.
The
following is a summary of options granted under the 2007 Stock
Plan:
|
Shares
Available
For
Grant
|
Number
of
Shares
|
Weighted-Average
Exercise
Price
|
||||||||||
|
Balance
as of December 31, 2007
|
2,016,000 | 1,984,000 | $ | 3.00 | ||||||||
|
Granted
|
(1,222,000 | ) | 1,222,000 | $ | 3.85 | |||||||
|
Exercised
|
— | — | — | |||||||||
|
Forfeited
|
696,500 | (696,500 | ) | — | ||||||||
|
Balance
as of December 31, 2008
|
1,490,500 | 2,509,500 | $ | 3.24 | ||||||||
|
Authorized
|
882,410 | |||||||||||
|
Granted
|
(2,884,000 | ) | 2,884,000 | 0.16 | ||||||||
|
Exercised
|
— | — | — | |||||||||
|
Forfeited
|
691,625 | (696,500 | ) | 3.14 | ||||||||
|
Balance
as of December 31, 2009
|
180,535 | 4,697,000 | 1.37 | |||||||||
68
The
weighted average remaining contractual term at December 31, 2009 and 2008 is
4.25 and 5.09 years, respectively. The aggregate intrinsic value of the shares
outstanding at December 31, 2009 and 2008 is $0. The aggregate intrinsic value
represents the total pretax intrinsic value, based on the excess of the
Company’s closing stock price at December 31, 2009 and 2008 of $0.19 and $0.38,
respectively, over the options holders’ strike price, which would have been
received by the option holders had all option holders exercised their options as
of that date. The weighted average grant date fair value of these awards issued
during the year ended December 31, 2009 and 2008 is $0.64 and $1.59,
respectively.
Included
in the table above are 727,000 options issued to consultants in
November 2007, June 2008, May 2009 and August 2009. These
options had an exercise price of $3.00, $3.70, $0.16 and $0.15, respectively,
and generally vest over 3 years. At December 31, 2009 the weighted average
remaining contractual term was 3.35 years. At December 31, 2008 the weighted
average remaining contractual term was 3.97 years. The Company recorded an
expense for the years ended December 31, 2009 and 2008 in the amount of $23,569
and $219,669, respectively, which reflects periodic fair value remeasurement of
outstanding consultant options under ASC 505-50-30 (formerly Emerging Issues
Task Force, or EITF, No. 96-18, “Accounting for Equity Instruments that are
issued to Other Employees for Acquiring, or in Conjunction with Selling, Goods
or Services,”). The valuation using the Black-Scholes-Merton model is based upon
the current market value of our common stock and other current assumptions,
including the expected term (contractual term for consultant options). The
Company records the expense related to consultant options using the accelerated
expense pattern prescribed in ASC 505-50-30.Options outstanding that have vested
or are unvested of December 31, 2009 are as follows:
|
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
Remaining
Contractual
Term
(In
Years)
|
Aggregate
Intrinsic
Value1
|
||||||||||||
|
Vested
|
3,190,500
|
$
|
1.60
|
3.64
|
$
|
—
|
||||||||||
|
Unvested
|
1,506,500
|
$
|
0.88
|
2.82
|
—
|
|||||||||||
|
Total
|
4,697,000
|
$
|
1.37
|
3.53
|
$
|
—
|
||||||||||
———————
|
(1)
|
Based
on the $0.19 closing price of AE Biofuels stock on December 31, 2009, as
reported on the Over the Counter Bulletin Board, options had no
aggregate intrinsic
value.
|
Non-Plan
Stock Options
In 2006,
the Company issued 290,000 stock options to employees outside of any stock
option plan. None of the options were exercised and all have been forfeited as
of December 31, 2008.
Valuation
and Expense Information
The
weighted-average fair value calculations for options granted within the period
are based on the following weighted average assumptions:
|
Fiscal
Year Ended
December
31,
|
||||||||
|
|
2009
|
2008
|
||||||
|
Risk-free
interest rate
|
2.58
|
%
|
3.66
|
%
|
||||
|
Expected
volatility
|
58.88
|
%
|
57.77
|
%
|
||||
|
Expected
life (years)
|
5.00
|
3.96
|
||||||
|
Weighted
average fair value per share of common stock
|
$
|
0.08
|
$
|
1.77
|
||||
The
Company incurred non-cash stock compensation expense of $717,718
and $1,956,524 in fiscal 2009 and 2008, respectively, for options
granted to our general & administrative employee and consultants. The
Company's total compensation expenses for the year ended December 31, 2008
include $25,000 in connection with our acquisition of Biofuels Marketing, Inc.
Of the non-cash stock compensation expense for the year ended December 31, 2008,
$800,000 was incurred as a result of the accelerated vesting of restricted stock
in connection with the termination of one of our officers, which is treated for
accounting purposes as a new award and revalued at the market value of the stock
on the day of termination, and $150,000 was attributable to stock granted to an
officer pursuant to the acquisition of Biofuels Marketing, Inc. discussed in
Note 12 – Acquisitions, Divestitures and Joint Ventures below. Therefore all
stock option expense was classified as general and administrative
expense.
69
As of
December 31, 2009, and 2008, we held $469,162 and $1,814,128,, respectively, of
total unrecognized compensation expenses under ASC Section 715-20-50 , net of
estimated forfeitures, related to stock options that the Company will amortize
over the next four fiscal years.
In
January 2006, the Company issued certain employees 4,400,000 shares of common
stock at $0.0025 per share in the form of restricted stock awards in connection
with employment agreements under restricted unit purchase agreements. These
shares were issued as an incentive to retain key employees and officers and will
vest over 3 years.
The
following table summarizes the Company’s repurchase rights under these
agreements:
|
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||
|
Repurchasable
shares as of January 1, 2008
|
1,100,000
|
0.0025
|
||||||
|
Vested
|
(750,000
|
)
|
(0.0025
|
)
|
||||
|
Forfeited
|
(100,000
|
)
|
(0.0025
|
)
|
||||
|
Repurchasable
shares as of December 31, 2008
|
250,000
|
$
|
0.0025
|
|||||
|
Vested
|
(250,000
|
)
|
(0.0025
|
)
|
||||
|
Repurchasable
shares as of December 31, 2009
|
-
|
$
|
-
|
|||||
12.
Acquisitions, Divestitures and Joint Ventures
Marketing Company
Acquisition. On September 1, 2007, we acquired Biofuels Marketing, Inc.,
a Nevada corporation, in exchange for 200,000 shares of common stock valued at
$3.00 per share. Of the shares issued, 50% were contingent upon the continued
employment of the President of Biofuels Marketing through August 31, 2009, and
are accounted for as compensation expense as earned. Of the purchase price,
$300,000 was assigned to the primary asset acquired, which was a customer list,
which was amortized over 18 months.
Technology Company Formation.
On February 28, 2007, we acquired a 51% interest in Energy Enzymes, Inc. We have
the right to acquire the remaining 49% for 1,000,000 shares of our common stock
upon the fulfillment of certain performance milestones. The performance
milestones had not been met as of December 31, 2009. In accordance with ASC
Section 810-10-65, we attributed net loss to Energy Enzymes, Inc. beginning at
the date of adoption of ASC Section 810-10-65 in our consolidated statement of
operations and recorded the minority interest to non-controlling interest in the
stockholders equity section of our balance sheet. The equity attributable to the
Company and to the non-controlling interest in Energy Enzymes, Inc. for the
years ended December 31, 2009 and 2008 are as follows:
|
2009
|
2008
|
|||||||||||||||||||||
|
Parent
|
Noncontrolling
Interest
|
Consolidated
|
Parent
|
Noncontrolling
Interest
|
Consolidated
|
|||||||||||||||||
|
December
31,
Accumulated
deficit
|
$
|
(1,426,633
|
)
|
$
|
––
|
$
|
(1,426,633
|
)
|
$
|
(257,760
|
)
|
$ |
––
|
$ |
(257,760
|
)
|
||||||
|
Attributable
net loss
|
(377,166
|
)
|
(362,375
|
)
|
(739,540
|
)
|
(1,168,873
|
)
|
––
|
(1,168,873
|
)
|
|||||||||||
|
December
31,
Accumulated
deficit
|
$
|
(1,803,799
|
)
|
$
|
(362,375
|
)
|
$
|
(2,166,174
|
)
|
$
|
(1,426,633
|
)
|
$ |
––
|
$ |
(1,426,633
|
)
|
|||||
Operating Agreement. In
November 2008, we entered into an operating agreement with Secunderabad Oils
Limited (“Secunderabad”). Under this agreement Secunderabad agreed to provide us
with plant operational expertise on an as-needed basis and working capital, on
an as needed basis, to fund the purchase of feedstock and other raw materials
for our Kakinada biodiesel facility. Working capital advances bear interest at
the actual bank borrowing rate of Secunderabad. In return, we agreed to pay
Secunderabad an amount equal to 30% of the plant’s monthly net operating profit.
In the event that our biodiesel facility operates at a loss, Secunderabad owes
the Company 30% of the losses. The agreement can be terminated by either party
at any time without penalty. During the years ended December 31, 2009 and 2008,
the Company paid Secunderabad approximately $186,351 and $0, respectively, under
the agreement and approximately $73,797 and $0, respectively, in interest for
working capital funding. At December 31, 2009 and
2008 the Company had $326,234 and $0 outstanding under this agreement,
respectively, and included as current short term borrowings on the balance
sheet.
70
On
January 23, 2008, International Biofuels, Ltd agreed to end the joint venture
with Acalmar Oils and Fats, Ltd. including termination of Acalmar’s right to own
or receive any ownership interest in the joint venture. The total cancellation
price payable by International Biofuels was $900,000 and is classified in our
Statement of Operations as a shareholder agreement cancellation payment. For the
year ended December 31, 2008, $300,000 was paid to Acalmar by the Company,
reducing the remaining balance due to Acalmar to $600,000 at December 31,
2008. The balance remained at $600,000 at December 31,
2009.
13.
Commitments
The
Company contracted with Desmet Ballestra India Pvt. Ltd. to build a glycerin
refinery and pre-treatment plant at our existing biodiesel plant in Kakinada. At
December 31, 2009 and 2008, commitments under construction contracts were
outstanding for approximately $60,654 and $57,637, respectively. Commitments
under purchase orders and other short term construction contracts were $16,278
at December 31, 2009.
14.
Segment Information
Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker (“CODM”), or decision-making group, in deciding how to
allocate resources and in assessing performance. Currently, the CODM is the
Chief Financial Officer. In the prior year the Company considered itself to
operate within a single operating segment. The commencement of operations in
India as well as the opening of the demonstration facility in Butte, MT resulted
in the Company’s reevaluation of its management structure and reporting around
business segments
AE
Biofuels recognized three reportable geographic segments: “India”, “North
America” and “Other.”
|
|
·
|
The
“India” operating segment encompasses the Company’s 50 MGY nameplate
capacity biodiesel manufacturing plant in Kakinada, the administrative
offices in Hyderabad, India, and the holding companies in Nevada and
Mauritius. The Company’s biodiesel is marketed and sold primarily to
customers in India through brokers and by the Company directly. For the
year ended December 31, 2008, revenues from our Indian operations were
100% of total net revenues. Indian revenues consist of sales of biodiesel
produced by our plant in Kakinada to customers in India. The majority of
the Company’s assets as of December 31, 2008 were attributable to its
Indian operations.
|
|
|
·
|
The
“North America” operating segment includes the Company’s cellulosic
ethanol commercial demonstration facility in Butte, and the land held for
future ethanol plant development in Sutton, NE and in Danville, IL. The
Company is utilizing the Montana demonstration facility to commercialize
its proprietary enzymatic and cellulosic technology. As our technology
gains market acceptance, this business segment will include our domestic
commercial application of the cellulosic technology, our plant
construction projects and any acquisitions of ethanol or ethanol related
technology facilities in North
America.
|
|
|
·
|
The
“Other” segment encompasses the Company’s costs associated with new market
development, company-wide fund raising, formation, executive compensation
and other corporate expenses.
|
71
Summarized
financial information by reportable segment for the years ended December 31,
2009 and 2008, based on the internal management system, is as
follows:
|
Statement
of Operations Data
|
Year
Ended
December
31,
|
|||||||
|
|
2009
|
2008
|
||||||
|
Revenues
|
||||||||
|
India
|
$ | 9,175,346 | $ | 815,655 | ||||
|
North
America
|
— | — | ||||||
|
Other
|
— | — | ||||||
|
Total
revenues
|
$ | 9,175,346 | $ | 815,655 | ||||
|
|
||||||||
|
Cost
of goods sold
|
||||||||
|
India
|
$ | 9.046,663 | 2,214,364 | |||||
|
North
America
|
— | — | ||||||
|
Other
|
— | — | ||||||
|
Total
cost of goods sold
|
$ | 9,046,663 | $ | 2,214,364 | ||||
|
|
||||||||
|
Gross
profit
|
||||||||
|
India
|
$ | 128,683 | $ | (1,398,709 | ) | |||
|
North
America
|
— | — | ||||||
|
Other
|
— | — | ||||||
|
Total
gross profit
|
$ | 128,683 | $ | (1,398,709 | ) | |||
In 2009
all of our revenues were from sales to external customers in our India segment.
During 2009, one customer accounted for approximately 31% of our consolidated
2009 revenue. In 2008 all of our revenues were from sales to external customers
in our India segment. Because of our limited sales in 2008, three of our
customers accounted for approximately 37%, 20%, and 16%, respectively, of our
consolidated 2008 revenue. No other single customers accounted for
more than 10% of our consolidated revenues.
Sales into the European market (Romania) represented 31% and 0% of
our sales in 2009 and 2008, respectively. All other sales were made withing the
domestic India market.
|
Balance
Sheet Data
|
Year
Ended
December
31
|
|||||||
|
2009
|
2008
|
|||||||
|
Total
Assets
|
||||||||
|
India
|
$
|
16,224,300
|
$
|
17,764,708
|
||||
|
North
America (United States)
|
3,250,827
|
5,416,705
|
||||||
|
Other
|
91,091
|
355,286
|
||||||
|
Total
Assets
|
$
|
19,566,218
|
$
|
23,536,699
|
||||
72
15.
Quarterly Financial Data
The
following is a summary of the unaudited quarterly results of operations for the
years ended December 31, 2009 and 2008:
| 2009 |
March
31
|
June
30
|
September
30
|
December
31
|
||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Net
sales
|
$
|
2,503
|
$
|
994
|
$
|
4,055
|
$
|
1,623
|
||||||||
|
Gross
profit (loss)
|
185
|
(103
|
)
|
370
|
(323
|
)
|
||||||||||
|
Operating
loss
|
(1,709
|
)
|
(1,874
|
)
|
(3,131
|
)
|
(2,042
|
)
|
||||||||
|
Net
income (loss)
|
$
|
(2,528
|
)
|
$
|
(2,460
|
)
|
$
|
(3,785
|
)
|
$
|
(2,562
|
)
|
||||
|
Loss
per common share, basic and fully diluted:
|
$
|
(.03
|
)
|
$
|
(.03
|
)
|
$
|
(.04
|
)
|
$
|
(.03
|
)
|
||||
|
2008
|
||||||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||
|
Net
sales
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
816
|
||||||||
|
Gross
profit (loss)
|
—
|
—
|
(952
|
)
|
(447
|
)
|
||||||||||
|
Operating
loss
|
(2,086
|
)
|
(4,045
|
)
|
(3,722
|
)
|
(2,845
|
)
|
||||||||
|
Net
income (loss)
|
$
|
(5,233
|
)
|
$
|
(4,273
|
)
|
$
|
(3,651
|
)
|
$
|
(2,679
|
)
|
||||
|
Loss
per common share, basic and fully diluted:
|
$
|
(.06
|
)
|
$
|
(.05
|
)
|
$
|
(.04
|
)
|
$
|
(.04
|
)
|
||||
16. Related party transactions
Laird
Cagan, a former member of the Company’s board of directors and a significant
stockholder, provides us with a $5,000,000 secured revolving line of credit. The
secured revolver line of credit was entered into on August 17, 2009 and the
initial draw was made to pay off the previous unsecured revolving line of
credit. At December 31, 2009 and 2008, a total of $3,842,992 and
$1,950,000, respectively, plus accrued interest of $407,039 and $94,690,
respectively, was outstanding under these credit facilities which accrues
interest at 10% interest per annum. All outstanding principal and accrued
interest under the secured revolving line of credit is due and payable on July
1, 2011.
The
Company and Eric A. McAfee, the Company’s Chief Executive Officer and Chairman
of the board of directors, are parties to an agreement pursuant to which the
Company pays Mr. McAfee a monthly salary of $10,000 per month for services
rendered to the Company as its President and CEO. For each of the years ended
December 31, 2009, and 2008, the Company paid or accrued Mr. McAfee $120,000,
pursuant to this agreement. As of December 31, 2009, the Company owed Mr. McAfee
$160,000 under the terms of this agreement.
The
Company and CM Consulting are parties to an agreement pursuant to which the
Company reimbursed CM Consulting for a minimum of 20 hours per month of time on
an aircraft owned by CM Consulting until February 2008. The Company paid an
upfront fee of $360,000 starting February 2006 for 24 months of usage. The
contract expired in February 2008. The Company expensed $30,000of this rental
fee for the year ended December 31, 2008. Eric A. McAfee, a director, officer
and significant shareholder of the Company owns 50% of CM
Consulting.
The
Company and Cagan McAfee Capital Partners are parties to an agreement pursuant
to which Cagan McAfee Capital Partners provides administrative and advisory
services for a monthly fee of $15,000 plus expense reimbursement to the Company.
For the years ended December 31, 2009 and 2008, the Company paid Cagan McAfee
Capital Partners $32,606 and $321,547, respectively. Eric A. McAfee, an officer
and member of the Company’s board of director and Laird Cagan, a former member
of the Company’s board of directors, together own 100% of Cagan McAfee Capital
Partners. As of December 31, 2009, the Company owed CMCP $29,866 under the terms
of this agreement.
We are
billed by McAfee Capital for certain expense reimbursements, principally in
connection with services provided by Eric A. McAfee and his administrative
personnel. For the year ended December 31, 2009, we paid McAfee
Capital $24,906. Eric A. McAfee, an officer and member of our board
of directors, owns 100% of McAfee Capital. The Company owes McAfee
Capital $24,906 under the terms of this agreement.
73
In July,
2009, we entered into a sublease agreement with Solargen Energy, Inc. for
approximately 3,000 square feed of leased space. Eric McAfee is also
a member of the Board of Directors and a significant shareholder of Solargen,
Energy, Inc. Michael Peterson, a member of our Board of Directors is
also the Chief Executive Officer of Solargen, Energy, Inc. For the
year ended December 31, 2009, we invoiced, collected and offset as rent expense
$70,698 under this agreement. The future minimum
lease payments above exclude collections of rents under this sublease
agreement. See Note 8 Operating Leases.
17.
Income Tax
The
Company files a consolidated federal income tax return. This return includes all
corporate companies 80% or more owned by the Company as well as the Company’s
pro-rata share of taxable income from pass-through entities in which Company
holds an ownership interest. Energy Enzymes, Inc. is 51% owned by the Company,
files a separate federal income tax return and is 100% consolidated for
financial reporting. State tax returns are filed on a consolidated, combined or
separate basis depending on the applicable laws relating to the Company and its
subsidiaries.
Components
of tax expense consist of the following:
|
|
Year
Ended December 31,
|
|||||||
|
|
2009
|
2008
|
||||||
|
Current:
|
||||||||
|
Federal
|
$ | — | $ | 4,738 | ||||
|
State
and local
|
— | 4,008 | ||||||
|
Foreign
|
— | 6,330 | ||||||
|
|
15,076 | |||||||
|
|
||||||||
|
Deferred:
|
— | — | ||||||
|
Federal
|
— | — | ||||||
|
State
and local
|
— | — | ||||||
|
Foreign
|
— | — | ||||||
|
Income
tax expense
|
$ | — | $ | 15,076 | ||||
U.S. loss
and foreign loss before income taxes are as follows:
|
Year
Ended December 31,
|
||||||||
|
|
2009
|
2008
|
||||||
|
United
States
|
$
|
(8,776,324
|
)
|
$
|
(12,526,682
|
)
|
||
|
Foreign
|
(2,559,128
|
)
|
(3,294,187
|
)
|
||||
|
Income
before income taxes
|
$
|
(11,335,452
|
)
|
$
|
(15,820,869
|
)
|
||
74
Income tax expense differs from the amounts computed by applying the statutory U.S. federal income tax rate (34%) to income before income taxes as a result of the following:
|
|
Year
Ended December 31,
|
|||||||
|
|
2009
|
2008
|
||||||
|
Income
tax expense at the federal statutory rate
|
$ | (3,670,892 | ) | $ | (5,379,095 | ) | ||
|
Increase
(decrease) resulting from:
|
||||||||
|
State
tax
|
(427,551 | ) | (626,506 | ) | ||||
|
Stock-based
compensation
|
272,446 | 704,066 | ||||||
|
Foreign
loss (income)
|
766,950 | 1,250,473 | ||||||
|
Registration
rights
|
— | 686,221 | ||||||
|
Joint
venture termination fee
|
— | 341,640 | ||||||
|
Other
|
1,138 | 57,146 | ||||||
|
Valuation
allowance
|
3,057,909 | 2,981,131 | ||||||
|
Income
tax expense
|
$ | — | $ | 15,076 | ||||
|
|
||||||||
|
Effective
tax rate
|
(0.00 | )% | (0.10 | )% | ||||
The
components of the net deferred tax asset or (liability) are as
follows:
|
|
December
31,
|
|||||||
|
|
2009
|
2008
|
||||||
|
Deferred
tax assets (liabilities):
|
||||||||
|
Organization
and start-up costs
|
$
|
8,106,179
|
$
|
7,351,996
|
||||
|
Stock-based
compensation
|
738,496
|
738,496
|
||||||
|
Property,
plant and equipment
|
(141,710
|
)
|
(933,688
|
)
|
||||
|
Net
operating loss carryforward
|
1,920,009
|
446,101
|
||||||
|
Other,
net
|
57,786
|
112,924
|
||||||
|
Total
deferred tax assets (liabilities)
|
10,680,760
|
7,715,829
|
||||||
|
Less
valuation allowance
|
$
|
(10,680,760
|
)
|
(7,715,829
|
)
|
|||
|
Deferred
tax assets (liabilities)
|
—
|
—
|
||||||
Based on
our evaluation of current and anticipated future taxable income, we believe it
is more likely than not that insufficient taxable income will be generated to
realize the net deferred tax assets, and accordingly, a valuation allowance has
been set against these net deferred tax assets.
We do not
provide for U.S. income taxes for any undistributed earnings of our foreign
subsidiaries, as we consider these to be permanently reinvested in the
operations of such subsidiaries and have a cumulative foreign
loss. At December 31, 2009 and 2008, these undistributed earnings
(losses) totaled approximately ($4,441,753), and ($2,696,187), respectively. If
any earnings were distributed, some countries may impose withholding taxes.
However, due to the Company’s overall deficit in foreign cumulative earnings and
its U.S. loss position, we do not believe a material net unrecognized U.S.
deferred tax liability exists.
We recognize
the tax benefits from uncertain tax positions in our financial statements
only if the position is more-likely-than-not of being sustained on audit, based
on the technical merits of the position. Tax positions that meet the recognition
threshold are reported at the largest amount that is more-likely-than-not to be
realized. This determination requires a high degree of judgment and estimation.
We periodically analyze and adjust amounts recorded for our uncertain tax
positions, as events occur to warrant adjustment, such as when the statutory
period for assessing tax on a given tax return or period expires or if tax
authorities provide administrative guidance or a decision is rendered in the
courts. We do not reasonably expect the total amount of uncertain tax positions
to significantly increase or decrease within the next 12 months. As of December
31, 2009, our uncertain tax positions were not significant.
75
We
conduct business globally and, as a result, one or more of our subsidiaries file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. In the normal course of business, we are subject to
examination by taxing authorities throughout the world, including such major
jurisdictions as India, Mauritius, and the United States. With few exceptions,
we incorporated in 2006 and we are no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations for years before 2006.
The
following describes the open tax years, by major tax jurisdiction, as of
December 31, 2009:
|
United
States — Federal
|
|
2006
- present
|
|
|
United
States — State
|
|
2005
- present
|
|
|
India
|
|
2006
- present
|
|
|
Mauritius
|
|
2006
- present
|
|
We file a
U.S. federal income tax return and tax returns in nine U.S. states, as well as
in two foreign jurisdictions. Currently, our U.S. federal income tax returns
dating back to 2006 are open to possible examination. Penalties and interest are
classified as general and administrative expenses.
As of
December 31, 2009, the Company had federal net operating loss carryforwards of
$4,970,466 and state net operating loss carryforwards of $5,809,399. The federal
net operating loss and other tax credit carryforwards expire on various dates
between 2027 and 2029. The state net operating loss carryforwards expire on
various dates between 2014 through 2030. Under the current tax law, net
operating loss and credit carryforwards available to offset future income in any
given year may be limited by statute or upon the occurrence of certain events,
including significant changes in ownership interests.
18.
Contingent Liabilities
On March
28, 2008, the Cordillera Fund, L.P. (“Cordillera”) filed a complaint in the
Clark County District Court of the State of Nevada against American Ethanol,
Inc. and the Company. The complaint seeks a judicial declaration that Cordillera
has a right to payment from the Company for its American Ethanol shares at fair
market value pursuant to Nevada’s Dissenters’ Rights Statute, a judicial
declaration that Cordillera is not a holder of Series B preferred stock in the
Company under the provisions of the statute; and a permanent injunction
compelling the Company to apply the Dissenters’ Rights Statute to Cordillera’s
shares and reimburse Cordillera for attorneys fees and costs.
On June 2, 2008 the case was
transferred to the Second Judicial Court of the State of Nevada, located in
Washoe County, Nevada. On February 17, 2009, a jury trial
commenced on the sole issue of whether Cordillera timely delivered its notice of
Dissenters’ Rights to the Company. On February 17, 2009, the jury delivered
its verdict in favor of Cordillera. The remaining issue in the lawsuit concerned
the fair market value of the shares of stock held by Cordillera. On or
about October 7, 2009, the Court entered a judgment awarding damages to
Cordillera for the fair market value of the shares of stock. On October
19, 2009, the Company filed a Notice of Appeal of the judgment. This
appeal is still pending. The amount of the judgement was accrued at
December 31, 2009. See Note 9 – Stockholders Equity.
On May 1,
2009 our transfer agent, Corporate Stock Transfer, Inc. (“CST”), filed a
Complaint for Interpleader in the United States District Court for the District
of Colorado.
The interpleader action is
based on the Company’s and CST’s refusal to remove the restrictive legend from a
certificate representing 5,600,000 shares of the Company's restricted common
stock (the “Certificate”) held by Defendant Surendra Ajjarapu and seeks a
judicial determination as to whether the legend can be lawfully removed from the
Certificate.
On July 1, 2009 Defendant
Ajjarapu answered the Complaint for Interpleader, and Cross-Claimants and
Counter-Claimants Surendra Ajjarapu and Sandhya Ajjarapu (the “Ajjarapus”)
cross-claimed against the Company for breach of fiduciary duty, conversion,
violation of Section 10(b) of the Exchange Act and Rule 10b-5 and injunctive
relief. The Ajjarapus also counter-claimed against CST for declaratory judgment.
The Company does not believe it has any liability for the matters described in
this litigation and intends to defend itself vigorously. However, there can be
no assurance regarding the outcome of the litigation. An estimate of possible
loss, if any, or the range of loss cannot be made and therefore we have not
accrued a loss contingency related to these actions.
76
19.
Fair Value of Financial Instruments and Related Measurement
Fair
value, as defined in ASC Topic 820-10, is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of an asset should
reflect its highest and best use by market participants, whether using an in-use
or an in-exchange valuation premise. The fair value of a liability should
reflect the risk of nonperformance, which includes, among other things, the
Company’s credit risk.
Valuation
techniques are generally classified into three categories: the market approach;
the income approach; and the cost approach. The selection and application of one
or more of the techniques requires significant judgment and are primarily
dependent upon the characteristics of the asset or liability, the principal (or
most advantageous) market in which participants would transact for the asset or
liability and the quality and availability of inputs. Inputs to valuation
techniques are classified as either observable or unobservable within the
following hierarchy:
Level 1
Inputs
These
inputs come from quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2
Inputs
These
inputs are other than quoted prices that are observable, for an asset or
liability. This includes: quoted prices for similar assets or liabilities in
active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are observable
for the asset or liability; and inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
Level 3
Inputs
These are
unobservable inputs for the asset or liability which require the Company’s own
assumptions.
As
required by SFAS 157, financial assets and liabilities are classified based on
the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy
levels. Our only financial asset carried at fair value is cash held in
commercial bank accounts with short term maturities. We consider the statement
we receive from the bank as a quoted price (Level 1 measurement) for cash and
measure the fair value of these assets using the bank statements.
As
required by ASC Topic 820-10, financial assets and liabilities are classified
based on the lowest level of input that is significant to the fair value
measurement. Our assessment of the significance of a particular input to the
fair value measurement requires judgment, and may affect the valuation of the
fair value of assets and liabilities and their placement within the fair value
hierarchy levels.
Our Level
1 financial asset reflect fair value of cash held in commercial bank
accounts with short term maturities. Our Level 2 financial assets reflect fair
value of cash, carrying a withdraw restriction, held in commercial bank
accounts. We consider the statement we receive from the bank as a quoted price
for cash and measure the fair value of these assets using the bank
statement.
The
carrying amounts and fair values of the Company’s financial instruments at
December 31, 2009, are as follows:
Fair Value Measurement - Recurring
Basis
|
|
Fair
Value Measurements
|
||||||||||||
|
Carrying
Amount
at
December 31,
2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||
|
Assets
|
|||||||||||||
|
Cash
and time deposits
|
$
|
52,178
|
$
|
52,178
|
$
|
––
|
$
|
––
|
|||||
|
Other
assets - restricted cash
|
10,744
|
––
|
10,744
|
––
|
|||||||||
|
Total
|
$
|
62,922
|
$
|
52,178
|
$
|
10,744
|
––
|
||||||
77
Fair Value Measurement - Nonrecurring
Basis
The
Company performs impairment tests under the guidance of ASC 360-10, Property,
Plant, and Equipment, whenever there are indicators of impairment. The Company
would recognize an impairment loss only if the carrying value of a long-lived
asset or group of assets is not recoverable from undiscounted cash flows, and
would measure an impairment loss as the difference between the carrying value
and fair value of the assets based on discounted cash flows projections. The
Company estimated the fair value of its idle land holdings in Illinois and
Nebraska by using available market prices based on recent market appraisals
(level 2 inputs).
During
the year ended December 31, 2009, certain long lived assets consisting of idle
landholdings in Illinois and Nebraska were written down to their fair value of
$2,885,000, resulting in an asset impairment charge of $2,086,350.
|
|
Fair
Value Measurements
|
||||||||||||
|
Carrying
Amount
at
December 31,
2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||
|
Assets
|
|||||||||||||
|
Landholdings
in Illinois and Nebraska
|
$
|
2,885,000
|
$
|
––
|
$
|
2,885,000
|
$
|
––
|
|||||
20. Subsequent Events
On
January 30, 2010, our wholly owned entity, AE Advanced Fuels Keyes raised
$1,600,000 through a non-interest bearing, unsecured promissory note from Laird
Cagan with repayment in whole or in part at any time at our option. As a form of
consideration for the promissory note, we will issue Mr. Cagan 600,000 shares of
our common stock. The receipt of the funding satisfied the financing
provision of the project agreement and has allowed us to take possession of
the Keyes plant, subject to the owner remitting $500,000 to the project
company. We received $500,000 into AE Advanced Fuels Keyes, Inc. on
March 15, 2010.
Revolving
line of credit – related party. During January, February and March, 2010, the
Company borrowed an additional $500,000 under the $5,000,000 revolving line of
credit facility provided by Laird Cagan, a former director and significant
shareholder. See Notes 7 and 16 above.
78
|
SIGNATURES
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
Date:
March 15, 2010
|
|
|
|
|
|
AE
Biofuels, Inc.
|
|
|
|
|
|
|
|
/s/ ERIC A. MCAFEE
|
|
|
|
Eric
A. McAfee
|
|
|
|
Chief
Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Eric A. McAfee and Scott A. Janssen, and each of them,
his true and lawful attorneys-in-fact, each with full power of substitution, for
him in any and all capacities, to sign any amendments to this report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
|
|
|
|
|
|
|
|
Title
|
|
Date
|
|
/s/ ERIC A. MCAFEE
|
|
Chairman/Chief
Executive Officer
|
|
March
10, 2010
|
|
Eric
A. McAfee
|
|
(Principal
Executive Officer and Director)
|
|
|
|
|
|
|
|
|
|
/s/TODD
WALTZ
|
|
Chief
Financial Officer
|
|
March
15, 2010
|
|
Todd
Waltz
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL PETERSON
|
|
Director
|
|
March
12, 2010
|
|
Michael
Peterson
|
|
|
|
|
|
|
|
|
|
|
|
/s/ HAROLD SORGENTI
|
|
Director
|
|
March
10, 2010
|
|
Harold
Sorgenti
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN R. BLOCK
|
|
Director
|
|
March
10, 2010
|
|
John
R. Block
|
|
|
|
|
79
|
INDEX
TO EXHIBITS
|
||||||||||||||||||
|
Incorporated
by Reference
|
|
|||||||||||||||||
|
Exhibit
No.
|
Description
|
Form
|
File
No.
|
Exhibit
|
Filing
Date
|
Filed Herewith | ||||||||||||
| 2.1 |
Amended
and Restated Agreement and Plan of Merger By and Among Marwich II, Ltd., a
Colorado corporation, Marwich II Ltd., a Nevada corporation, AE Biofuels,
Inc., a Nevada corporation and wholly-owned subsidiary of Marwich II
Nevada, and American Ethanol, Inc., a Nevada corporation dated as of July
19, 2007
|
8-K | 000-51354 | 2.1 |
July
20, 2007
|
|||||||||||||
| 2.2 |
Agreement
and Plan of Merger by and between Marwich II, Ltd., a Colorado
corporation, and Marwich II, Ltd., a Nevada corporation dated July 19,
2007
|
8-K | 000-51354 | 2.2 |
July
20, 2007
|
|||||||||||||
| 2.3 |
Articles
of Merger between Marwich II, Ltd., a Colorado corporation as the merging
entity and Marwich II, Ltd., a Nevada corporation as the surviving entity
filed with the Nevada Secretary of State on December 6,
2007
|
X | ||||||||||||||||
| 2.4 |
Articles
of Merger between AE Biofuels, Inc., a wholly-owned subsidiary of Marwich
II, Ltd. , as the merging entity and American Ethanol, Inc., a Nevada
corporation as the surviving entity filed with the Nevada Secretary of
State on December 7, 2007
|
X | ||||||||||||||||
| 3.1 |
Articles
of Incorporation of Marwich II, Ltd., a Nevada corporation (renamed AE
Biofuels, Inc.) filed with the Nevada Secretary of State on October 24,
2006
|
10-Q | 000-51354 | 3.1 |
Nov.
14, 2008
|
|||||||||||||
| 3.2 |
Certificate
of Amendment to Articles of Incorporation of Marwich II, Ltd., a Nevada
corporation (renamed AE Biofuels, Inc.) filed with the Nevada Secretary of
State on October 11, 2007
|
10-Q | 000-51354 | 3.1.1 |
Nov.
14, 2008
|
|||||||||||||
| 3.3 |
Certificate
of Designation of Series B Preferred Stock filed with the Nevada Secretary
of State on December 6, 2007
|
8-K | 000-51354 | 3.2 |
Dec.
13, 2007
|
|||||||||||||
| 3.4 |
Certificate
of Amendment to Articles of Incorporation to change the name of the
Company to AE Biofuels, Inc. filed with the Nevada Secretary of State on
December 7, 2007
|
8-K | 000-51354 | 3.3 |
Dec.
13, 2007
|
|||||||||||||
| 3.5 |
Bylaws
|
8-K | 000-51354 | 3.4 |
Dec.
13, 2007
|
|||||||||||||
| 4.1 |
Specimen
Common Stock Certificate
|
8-K | 000-51354 | 4.1 |
Dec.
13, 2007
|
|||||||||||||
| 4.2 |
Specimen
Series B Preferred Stock Certificate
|
8-K | 000-51354 | 4.2 |
Dec.
13, 2007
|
|||||||||||||
| 4.3 |
Form
of Common Stock Warrant
|
8-K | 000-51354 | 4.3 |
Dec.
13, 2007
|
|||||||||||||
| 4.4 |
Form
of Series B Preferred Stock Warrant
|
8-K | 000-51354 | 4.4 |
Dec.
13, 2007
|
|||||||||||||
| 10.1 |
Amended
and Restated 2007 Stock Plan
|
14 | A | 000-51354 |
April
15, 2008
|
|||||||||||||
| 10.2 |
Amended
and Restated 2007 Stock Plan form of Stock Option Award
Agreement
|
14 | A | 000-51354 |
April
15, 2008
|
|||||||||||||
| 10.3 |
Amended
and Restated Registration Rights Agreement, dated February 28,
2007
|
8-K | 000-51354 | 10.3 |
Dec.
13, 2007
|
|||||||||||||
| 10.4 |
Executive
Chairman Agreement, dated January 30, 2006 with Eric A.
McAfee
|
8-K | 000-51354 | 10.4 |
Dec.
13, 2007
|
|||||||||||||
| 10.7 |
Executive
Employment Agreement, dated May 22, 2007 with Andrew
Foster
|
8-K | 000-51354 | 10.7 |
Dec.
13, 2007
|
|||||||||||||
| 10.10 |
Executive
Employment Agreement, dated June 17, 2008 with Scott A.
Janssen
|
10-K | 000-51354 | 10.10 |
May
20, 2009
|
|||||||||||||
| 10.11 |
Executive
Employment Agreement, dated September 1, 2007 with Sanjeev
Gupta
|
10-K | 000-51354 | 10.11 |
May
20, 2009
|
|||||||||||||
| 10.12 |
Agreement
of Loan for Overall Limit
|
10-Q | 000-51354 | 10.12 |
August
14, 2008
|
|||||||||||||
| 10.13 |
Deed
of Guarantee for Overall Limit
|
10-Q | 000-51354 | 10.13 |
August
14, 2008
|
|||||||||||||
| 10.14 |
$5
million Note and Warrant Purchase Agreement dated May 16, 2008 among Third
Eye Capital Corporation, as Agent; the Purchasers; and AE Biofuels, Inc.,
including the form of Note
|
8-K | 000-51354 | 10.1 |
May
21, 2008
|
|||||||||||||
| 10.16 |
Revolving
Line of Credit Agreement between International Biodiesel, Inc., a wholly
owned subsidiary of AE Biofuels, Inc. and Laird Q. Cagan
|
X | ||||||||||||||||
| 10.17 |
Project
Agreement entered into 1st day of December 2009, by and among Cilion,
Inc., a Delaware corporation, AE Biofuels, Inc., a Nevada corporation, AE
Advanced Fuels, Inc., a Delaware corporation and AE Advanced Fuels Keyes,
Inc., a Delaware corporation.
|
8-K | 000-51354 | 10.1 |
Dec.
2, 2009
|
|||||||||||||
| 10.18 |
Lease
Agreement for Keyes, California Ethanol Production Facility entered into
1st day of December, 2009, by and between Cilion, Inc., a Delaware
corporation, AE Advanced Fuels Keyes, Inc., a Delaware corporation and AE
Advanced Fuels, Inc., a Delaware corporation, each of which are
wholly-owned subsidiaries of AE Biofuels, Inc., a Nevada
corporation.
|
8-K | 000-51354 | 10.2 |
Dec.
2, 2009
|
|||||||||||||
| 10.19 |
Amendment
No. 4 and Limited Waiver to Note and Warrant Purchase Agreement dated
December 10, 2009, between AE Biofuels, Inc. and Third Eye Capital
Corporation
|
8-K | 000-51354 | 10.1 |
Dec.
22, 2009
|
|||||||||||||
| 10.20 |
Assignment
of Proceeds Agreement dated as of December 10, 2009, between AE Biofuels,
Inc. and Third Eye Capital Corporation
|
8-K | 000-51354 | 10.2 |
Dec.
22, 2009
|
|||||||||||||
| 10.21 |
Guaranty
Agreement dated as of December 10, 2009, between AE Advanced Fuels Keyes,
Inc. and Third Eye Capital Corporation
|
8-K | 000-51354 | 10.3 |
Dec.
22, 2009
|
|||||||||||||
| 14 |
Code
of Ethics
|
10-K | 000-51354 | 14 |
May
20, 2009
|
|||||||||||||
| 21.1 |
Subsidiaries
of the Registrant
|
000-51354 | X | |||||||||||||||
| 24.1 |
Power
of Attorney (see signature page)
|
000-51354 | X | |||||||||||||||
| 31.1 |
Rule
13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer
|
000-51354 | X | |||||||||||||||
| 31.2 |
Rule
13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
000-51354 | X | |||||||||||||||
| 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.
|
000-51354 | X | |||||||||||||||
| 32.2 |
Rule
13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
000-51354 | X |