SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
For the fiscal year ended December 31, 2011
(Exact name of Registrant as specified in its charter)
244 Fifth Avenue, Suite V235
New York, NY 10001
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
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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. £
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As of April 5, 2012 there were 31,254,332 shares of common stock issued and outstanding (29,274,332 Class A Common Stock outstanding and 1,980,000 Class B Common Stock outstanding).
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PROCEEDINGS DURING THE PRECEDING FIVE YEARS
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DOCUMENTS INCORPORATED BY REFERENCE
Some discussions in this Annual Report on Form 10-K (the “Annual Report”) contain forward-looking statements that involve assumptions, and describe our future plans, strategies, and expectations. Such statements are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.
Such forward-looking statements include statements regarding, among other things (a) the potential markets for our products, our potential profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operation” as well as in this Annual Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors and matters described in this Annual Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such further material information, if any, as may be necessary to ensure that the required statements, in light of the circumstances under which they are made, are not misleading.
Although forward-looking statements in this report reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission (“SEC”) which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
As used in this Annual Report, “we,” “us,” and “our” refer to Incoming, Inc., which is also sometimes referred to as the “Company,” unless the context otherwise requires.
Our Corporate History and Background
We were incorporated in the State of Nevada on December 22, 2006. Prior to July 31, 2009, the Company was engaged in the distribution of American Urban Street wear and Hip Hop clothing labels in the Eastern European market. Subsequent to July 31, 2009, the Company revised its business plan and became a development stage company engaged in the business of brand acceleration, identifying growth opportunities and innovative business models in private companies and transforming such companies into successful international brands. The decision to change the focus of the business was directly related to a change in control and the expertise of new management.
On September 30, 2009, the Company entered into a share exchange agreement with the National Association of Professional Minorities, LLC, a New Jersey limited liability company (“NAPM”). NAPM was engaged in the business of online social networking for professional minorities. As a result of that exchange agreement, NAPM became a wholly owned subsidiary of the Company. NAPM was subsequently dissolved by the Company on September 9, 2010.
On November 11, 2009, the Company entered into a Membership Interest Transfer Agreement with Pentrose, LLC (“Pentrose”), a limited liability company organized and existing under the laws of Florida, whereby we acquired 50% of the membership interests in Pentrose in exchange for the Company’s good faith effort to procure clients for Pentrose and to promote Pentrose’s goodwill. Mr. Taylor, our former Chief Executive Officer and President, agreed to contribute certain rights in intellectual property owned by him, for the benefit of the Company. No consideration was paid by the Company. Pentrose is engaged in the business of direct marketing services of motivational and religious products. Stanford Holdings, LLC, a Delaware limited liability company (“Stanford”), owns the remaining 50% membership interest in Pentrose. On March 16, 2010, Stanford notified the Company that it would be exercising its right to repurchase the Company’s membership interests in Pentrose and issued a check in the amount of $50 as payment of the repurchase price. The Company severed its business relationship and ceased all communication with Pentrose and Stanford in March 2010.
In November 2009, management identified a strong opportunity to enter the alternative energy industry by acquiring North American Bio-Energies LLC (“NABE”). After careful review of the industry and complimentary opportunities, management decided to focus the direction of the Company on the development and acquisition of commercial grade biodiesel facilities and the distribution and marketing of petroleum and biofuel products. In order to maximize profitability and better utilize the talents and abilities of the Company’s management team, the Board of Directors determined that it was in the best interest of stockholders to focus on NABE and the biodiesel sector, and to abandon its plans for further development of NAPM and Pentrose, the Company’s previous subsidiaries.
On August 18, 2010, the Company entered into a second amended and restated exchange agreement (the “Exchange Agreement”) with NABE, the NABE limited liability company members (“NABE Members”) and the Company, pursuant to which we acquired 100% of the membership interests in NABE held by the NABE Members in exchange for 2,970,000 shares of our common stock (the “Exchange Transaction”), of which 990,000 shares were designated as Class A Common Stock, par value $0.001 per share (“Class A Common Stock”) and 1,980,000 shares were designated as Class B Common Stock, par value $0.001 per share (“Class B Common Stock”). The Exchange Agreement amended, restated and superseded in its entirety the exchange agreement with NABE, the NABE Members and the Company dated June 18, 2010 (“Amended Exchange Agreement”), which amended, restated and superseded in its entirety the exchange agreement with NABE, the NABE Members and the Company dated February 9, 2010 (“Original Exchange Agreement”). The closing date of the Exchange Transaction was August 23, 2010.
NABE is a limited liability company organized and existing under the laws of the State of North Carolina. NABE was formed on February 28, 2006. In April 2007, two of the original partners sold their collective membership interests, totaling 66.67%, to R. Samuel Bell, Jr., our Chief Executive Officer and Chairman. Upon Mr. Bell becoming an NABE Member, Randy Keith Dellinger, one of the original NABE Members and 33.33% owner, became the sole manager of NABE. In connection with the Exchange Transaction, Mr. Dellinger and Mr. Bell transferred 100% of the outstanding membership interests in NABE to the Company. There were no other additional transfers of ownership prior to the Exchange Agreement. As a result of the acquisition of NABE, the Company ceased to be a shell company and active business operations were revived.
Overview of the Business
We are engaged in the business of wholesaling biodiesel to distributors in the Southeast region of the United States. In addition, we sell glycerin (a biodiesel by-product) to refiners and manufacturers.
Our focus is on commercial grade biodiesel produced from virgin agri-based feedstock that meets the standards for biodiesel established by The American Society of Testing and Materials (“ASTM”) and adopted by the Environmental Protection Agency (“EPA”). Management believes the resulting product is superior to biodiesel produced from recycled oils due to lower quantities of fatty acids, which allows for shorter processing times and less sulfur, and offers favorable conditions for machinery and engines.
The Company works with neighboring universities to provide research opportunities in the biofuel industry for students. While no formal arrangements or understandings currently exist between the Company and any University or College, the Company frequently invites students to tour the NABE facilities and educates students on the benefits of the biofuel industry. Students of North Carolina State University (NCSU) have been testing a new nozzle tip for the facility’s boiler that would allow the Company to use glycerin as a heating source (although there is no arrangement or understanding as to what extent the University or students will have rights to improvements or technologies resulting from work or tests performed by them). The facility currently uses natural gas, which is an additional cost in the production process. In the prior year, an NCSU engineer estimated the facility, at peak production, could utilize approximately 60% of the glycerol produced and offset 80-90% of the natural gas being utilized as a heating source. This would equate to an approximate natural gas savings of approximately $33,000 - $37,000 at those production levels. Based upon a peak production capacity of 5 million gallons/year this would equate to approximately $165,000 - $167,000 per year. The Company also continues to have glycerin available to sell on the open market. We believe in the benefits of maintaining a good relationship with the community in which our facilities are located and intend to continue with community initiatives and a focus on local feedstock, including the negotiation of feedstock contracts with farmers. In addition to partnering with nearby colleges and universities, we will continue to pursue grant opportunities from various state and federal supported programs.
The Company continues to explore business opportunities in Brazil, supporting management’s belief in the growing demand for biodiesel made apparent by the Brazilian government’s mandates and favorable tax incentives. The Brazilian market differs dramatically from the United States market; the Brazilian National Agency of Petroleum, Natural Gas and Biofuels, or Agencia Nacional de Petroleo (“ANP”), conducts purchase auctions in which licensed producers can participate and sell directly to Petróleo Brasileiro S.A (“Petrobras”), a semi-public Brazilian multinational energy company. The auctions play a major role in the overall National Program of Biodiesel Use in Brazil (PNPB) and will significantly decrease our dependency on the type of direct government subsidies and tax credits that have historically driven the U.S. biodiesel market.
Our primary product is biodiesel made from virgin agri-based feedstock that meets ASTM D6751 specifications. The National Biodiesel Board defines “biodiesel” as follows: “Biodiesel” is defined as mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats which conform to ASTM D6751 specifications for use in diesel engines. Biodiesel refers to the pure fuel before blending with diesel fuel. Biodiesel blends are denoted as “BXX” with “XX” representing the percentage of biodiesel contained in the blend (e.g., B20 is 20% biodiesel, 80% petroleum diesel).
Glycerin is a by-product of the chemical process in which biodiesel is produced and has a wide variety of uses in end products across multiple industries, including as an ingredient or processing aid in cosmetics, toiletries, personal care and drugs. Glycerin, also called glycerol, can also be found in food applications as a sugar substitute or in shortenings and margarine. It can also be found in soaps and foams or even nitroglycerin, which is used in dynamite.
Biodiesel is produced from animal fats, virgin agri-based oils or recycled waste fats and oils. The final product contains no petroleum, but can be blended at various levels for commercial use. Biodiesel is generally used as 100% pure or “neat”, 5%, 10% or 20% blend with petroleum (B5, B10 and B20 respectively). We typically sell neat biodiesel, but have made sales of biodiesel blends.
Overview of the Biodiesel Industry - Biodiesel
Biodiesel is a clean-burning alternative to petroleum-based diesel (“Petrodiesel”). The EPA has classified biodiesel as an advanced biofuel. Biodiesel can be purchased directly from producers, from distributors, or at the pump. Biodiesel is manufactured from renewable feedstocks such as soybean, palm, canola and sunflower oil, as well as from animal fats, fish oils, algae and recycled cooking oils. New feedstocks from which biodiesel is manufactured are being developed rapidly. Biodiesel is produced by reacting a feedstock with methanol in the presence of a catalyst, which yields biodiesel and glycerin as a co-product. Biodiesel can be a direct replacement for diesel and can be blended with diesel fuel in any ratio. Biodiesel blends are primarily used as fuel for trucks and automobiles. It can also be used as home heating oil and as an alternative fuel in a variety of other applications, including, without limitation, marine transportation, electricity generation, farming equipment and mining operations.
According to the National Biodiesel Board, among other environmental benefits, biodiesel:
Biodiesel has better lubricating properties and a much higher cetane rating (the diesel equivalent of octane) than today’s lower sulfur diesel fuels. The use of biodiesel in its neat form, B100, or in a blend with petroleum-based diesel, reduces fuel system wear and increases the life of the fuel injection equipment that relies on the fuel for its lubrication, including high pressure injection pumps, pump injectors and fuel injectors.
Biodiesel is twice as biodegradable as petroleum oil and is non-toxic. Tests sponsored by the United States Department of Agriculture confirm biodiesel is less toxic than table salt and biodegrades as quickly as sugar. Biodiesel may be used in existing tank, pump and pipeline infrastructure without modifications to the diesel engine. As a result, integration of biodiesel into the diesel fuel supply is cost effective as opposed to ethanol which requires substantial expenditure to retrofit existing tank, pump and pipeline infrastructure.
Biodiesel is the only alternative fuel to pass Tier 1 and Tier 2 health effects testing required by the Clean Air Act of 1990. Harmful emissions (carbon monoxide, particulate matter and hydrocarbons) are reduced by more than 50% compared with Petrodiesel, and it has one of the highest energy content (BTU) of any alternative fuel.
Management believes that the United States is a favorable market place for biodiesel due to a strong desire for domestically produced petroleum products and both federal and state mandated clean energy initiatives aimed at reducing emissions.
Renewable Fuel Standards
On July 1, 2010, the EPA final regulations implementing revised renewable fuel standards (“RFS2”) set by Congress under the Energy Independence and Security Act of 2007 (“EISA”) went into effect. The original renewable fuel standards (“RFS”), were established by Congress under the Energy Policy Act of 2005 (“EPAct”), and mandated that transportation fuel sold in the United States contains a minimum volume of renewable fuel. EPAct rules were directed principally to blending ethanol into gasoline used as motor fuel and required approximately 7.5 billion gallons of renewable fuel to be blended into gasoline by 2012. Under the EISA, Congress expanded the RFS program to, among other things, include diesel and increase the volume of renewable fuels required to be blended into transportation fuel from nine billion gallons in 2008 to 36 billion gallons by 2022.
Under the RFS, obligated parties (i.e., petroleum refiners and importers of gasoline) were required to demonstrate that they complied with their percentage obligations over the gallons of gasoline they sold into the marketplace during a compliance period. The EPA developed a system of volume accounting and tracking of the credits associated with renewable fuels known as Renewable Identification Numbers (“RINs”). The system is based on the assignment of unique numbers to each batch of renewable fuel by the biodiesel producer or importer. The use of RINs allows the EPA to measure and track renewable fuel volumes at the point of their introduction into the national fuel supply rather than at the point when they are blended into conventional fuels, which provides more accurate measurements that can be easily verified. The RFS program requires RINs to be transferred with renewable fuel until the
point at which the renewable fuel is purchased by an obligated party or is blended into petroleum products by a blender. RINs are accumulated to allow an obligated party to satisfy its renewable volume obligations (“RVOs”). An RVO represents the volume of renewable fuel that the obligated party is required to ensure was used in the U.S. in a given calendar year. Obligated parties have an RVO under each of the four RFS2 renewable fuel categories: cellulosic biofuel, biomass-based diesel, advanced biofuel and total renewable fuel. Obligated parties calculate their RVO at the end of a calendar year based on the volume of gasoline or diesel fuel they produced during the year. Obligated parties are required to meet their RVOs through the accumulation of RINs. By acquiring RINs and applying them to their RVOs, obligated parties are deemed to have satisfied their obligation to cause the renewable fuel represented by the RINs to be consumed as transportation fuel in highway or non-road vehicles or engines. The RFS program contemplated that RINs would be sold among obligated parties so that a deficient party could acquire RINs from another obligated party that generated excess RINs to satisfy its requirements.
The EPA’s regulations implemented the RFS standards by establishing the four categories of renewable fuel, and set separate volume requirements for each new category, including biodiesel. The new standards are known commonly as “RFS2.” We believe the implementation of RFS2 will drive the advancement of the biofuel industry in the years to come. We believe that biodiesel production will begin to increase in response to regulations promulgated by the EPA that became effective on July 1, 2010 implementing the RFS2 standards established by Congress under the EISA. As of July 26, 2010, the EPA has confirmed we are in compliance with the new RFS2 regulations, making us eligible for participation in the RIN market. We anticipate additional revenues from the direct sale of RINs as we commence production and sales of biodiesel. In the absence of the biodiesel tax credit, the RIN market has soared as high as $1.80 per RIN.
Under the Clean Air Act as amended by the EISA, the EPA is required to set new renewable fuel standards, including cellulosic biofuel standards, each November for the following year. In connection with releasing the standards for the calendar year 2012, the EPA is proposing a change to the RFS2 regulations to permit certain renewable fuel producers using canola oil, grain sorghum, pulpwood or palm oil, subject to certain limitations, to generate delayed RINs after they have produced and sold renewable fuel. The EPA is also analyzing the greenhouse gas lifecycle impact of canola oil, grain sorghum, pulpwood and palm oil and may supplement the RFS2 final rules based on such analysis.
Despite the positive impact that the RIN market had on the Company’s biodiesel sales during 2011, the market abruptly halted during the latter part of 2011. In November of 2011, the EPA accused a Maryland man of transacting approximately $9 million in fraudulent RINs through his company, Clean Green Fuels LLC. EPA issued a separate violation notice to a Texas-based company, Absolute Fuel LLC, for transacting approximately $62 million in fraudulent RINs. In addition to the two major violators, EPA issued violation notices to at least two dozen companies that had purchased the fraudulent RINs. In light of the integrity issues that arose as a result of the fraudulent RINs, obligated parties have stopped purchasing RINs until a program is instituted that will ensure validity of the RINs. The National Biodiesel Board has established a task force for developing a plan to validate RINs and provide assurance that obligated parties can confidently transact in the RIN market without having to be concerned that the EPA will negate any RINs that they had purchased in good faith. Our CEO, R. Samuel Bell, Jr., is a representative on the NBB’s RIN task force.
Registration of Plant, Feedstock and Fuel
RFS2 imposes a complex set of compliance and reporting obligations to ensure that each obligated party satisfies its RVO for a particular compliance period, under the regulations. These regulations extend over the entire range of an obligated party’s operations. All producers of renewable fuel that produce more than 10,000 gallons of fuel annually must register with EPA’s fuels program prior to generating RINs. A biofuel producer will have to supply the EPA with extensive information concerning plant operations, processes and products, including the fuels produced, the feedstocks that may be used, co-products produced, the source of energy used to produce the biodiesel, compliance with clean air regulations and applicable air permits for permitted capacity and records that support the facility’s baseline volume. In addition, producers must provide the EPA with an independent process engineer’s report with respect to its plant upon initial registration and every three years thereafter or upon changing the feedstock from which it produces biodiesel. In certain cases, health-effects testing is required for a product to maintain its registration or before a new product can be registered. The EPA deems the information collected as essential to generating and assigning a certain category of RIN to a volume of fuel and to verifying the validity of RINs generated. In addition, a producer will have to demonstrate that the biodiesel produced is ASTM D6751 compliant. A producer also will have to register its renewable fuels as a motor vehicle fuel, which will subject it to additional reporting and other requirements. As part of the RFS2 rulemaking, the EPA is now proposing criteria regarding compliance with the renewable biomass verification provisions for foreign-grown feedstock, which could affect the market for feedstock.
Generation of Renewable Identification Numbers and Equivalence
Under RFS2, each RIN is generated by the producer or importer of the renewable fuel, as in the RFS1 program. In order to determine the number of RINs generated by and assigned to a batch of renewable fuel, the actual volume of the batch of renewable fuel must be multiplied by the appropriate equivalence value. The producer or importer must also determine the appropriate code to assign to the RIN to identify which of the four standards the RIN can be used to meet.
The equivalence value of a renewable fuel represents the number of gallons that can be claimed for compliance purposes for every physical gallon of renewable fuel. The EPA takes the position that the use of equivalence values based on energy content of a fuel is an appropriate measure of the extent to which a renewable fuel would replace or reduce the quantity of petroleum or other fossil fuel present in a fuel mixture. Under RFS1, ethanol was ascribed an equivalence value of 1.0. Under the EISA, additional credit was to be assigned to cellulosic and waste-derived renewable fuels, and the EPA was directed to establish appropriate credit for biodiesel and renewable fuel volumes in excess of the mandated volumes. Under RFS2, the EPA assigned an equivalence value to ethanol of 1.0, to butanol of 1.3, to biodiesel (mono alkyl ester) of 1.5, and for nonester renewable diesel of 1.7.
The producer or importer must also determine the appropriate code to assign to the RIN to identify which of the four standards the RIN can be used to meet and which equivalency value applies to determine the number of RINs generated. The fuel pathway of the product is determinative of the equivalence value and thus the quantity of RIN’s generated for each batch of finished product produced.
In 2007, the U.S. consumed approximately 64 billion gallons of diesel according to the Energy Information Administration. Biodiesel production in the U.S. peaked in 2008 at approximately 691 million gallons and was approximately 545 million gallons in 2009. Analysts attribute the decline in production in 2009 to poor economic conditions as a result of the recession. In 2010, production further declined to approximately 315 million gallons as a result of the failure of Congress to timely renew the biodiesel producers’ tax credit, which provides a $1 credit for each gallon of biodiesel produced. The National Biodiesel Board has not issued 2011 biodiesel production statistics as of March 2012.
According to the National Biodiesel Board, as of March 2012, there were 147 biodiesel production facilities in operation in the U.S. While it appears that overcapacity exists in the marketplace, a condition that will be exacerbated by new plants that may come online, we believe that the market potential for biodiesel remains significantly higher than current and projected production levels. The Energy Information Administration also predicts that the market will continue to absorb biodiesel supply for the foreseeable future.
In accordance with the EISA, RFS2 requires the domestic use of 1 billion gallons of biodiesel in 2012. RFS2 provides specific volume requirements for advanced biofuels due in large part to research demonstrating that biodiesel produced from recycled oils, animal fats and agri-based oils can reduce greenhouse gas emissions by as much as 86% compared to petroleum diesel.
While the European automobile industry already uses diesel engines in approximately 50% of all cars manufactured and sold, we believe the United States is beginning to follow suit as OEM warranty statements now support biodiesel blends of up to 20% without voiding any parts of workmanship warranties.
U.S. Tax Incentives
The American Jobs Creation Act of 2004 provided for a biodiesel fuel credit of $1.00 to a biodiesel fuel blender for each gallon of biodiesel produced by the taxpayer and sold to another person. Our customers are biodiesel blenders who purchase the biodiesel from us at a price of $1.00 in excess of the market price of petroleum and then our customers are reimbursed the $1.00 from the federal government. There is an additional $.10 per gallon tax credit for small producers (not to exceed 60 million gallons per year) using virgin vegetable oils and animal fats. Our facility has passed all necessary inspections and complied with the applicable regulations to be eligible for both programs.
The credit expired December 31, 2009 at the end of the tax year, severely cutting into biodiesel producer margins and forcing foreclosure of smaller plants across the nation. We were able to maintain a steady stream of revenue through the sale of glycerin and the occasional purchase of off-specification fuel from neighboring plants that we were able to refine further to meet ASTM-D6751 specifications, and then sell on the open market. As of November 30, 2010 legislation to renew the biodiesel tax credit had only been passed separately by the House of Representatives and Senate; Congress, however, had yet to reconcile the differences of each bill.
In December of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 retroactively restored the biodiesel tax credit for all of 2010 and further extended it through December 31, 2011. Although Congress extended this credit on multiple occasions, it was not renewed prior to December 31, 2011. Congress has not indicated that the blender credit will be reinstated and lobbying groups, such as the National Biodiesel Board, hold little hope that the credit will either be extended or reinstated.
Our main customers are petroleum distributors in the Southeast region of the United States. However, we may seek out alternative markets to sell our biodiesel. Additional markets are emerging because of the biodiesel incentives, high energy prices and innovation. These may include sales to power generation facilities or by developing cogeneration power plants using biodiesel to provide electricity to power industrial plants (excess electricity would be sold back to power grids allowing electric companies to meet RFS). Further, a potential market exists for sales of biodiesel to customers as a cleaner burning heating oil replacement or additive.
We have no contractual relationship to sell our products. We determine the price and thereafter sell to our customers on a first come, first serve basis.
We sell a portion of our finished product to Verde Bio Fuels Inc (“Verde”), which is owned by R. Samuel Bell, Jr., one of our directors. Verde is a reseller of biodiesel in the Southeast. This relationship eliminates the need for an internal sales and marketing team while still giving us direct access to a diverse end-user base. Sales to Verde represent more than 10% of our consolidated revenues. Loss of this customer could have a material adverse effect on our business.
Renewable Identification Numbers
We generate RINs to support the RVO of obligated parties, but we do not currently have any renewable volume obligations. To the extent we begin to export biodiesel in the future, we may be subject to the RVO requirement. We do not currently charge any of our distributors for RINs generated from our production of biodiesel, but may do so in the future.
Our facility can produce biodiesel using a variety of virgin feedstock, including agricultural oils, such as soy bean and sunflower, and animal by-products (e.g., pork and chicken fat). This feedstock flexibility allows the plant to take advantage of the lowest cost and best yielding virgin feedstocks in the market at any particular time. The agricultural oils are purchased from various farmers in the region and the pork and chicken fat are purchased from various processors in the region (e.g., Tyson Farms, House of Raeford, American Skin, Carolina Byproducts, etc.).
Our current plant manager, Randy Keith Dellinger is one of the founding members of NABE. Mr. Dellinger has been responsible for the successful negotiation of various bargain purchases and feedstock agreements. Mr. Dellinger was raised in Lenoir, North Carolina where he remains an active member and advocate for local sustainability through several local organizations. Upon completing high school, Mr. Dellinger joined the United States Navy as an Ocean Systems Technician. After four years in the Navy, Mr. Dellinger went to work in the telecommunications field; first with Bell South as an engineer and then with MCI as a Project Manager. During this time he earned a Bachelor of Science degree from Dallas Baptist University. After MCI, Mr. Dellinger worked as a Senior Management Consultant for Cruces Consulting Services for six years. Upon returning to North Carolina, Mr. Dellinger founded NABE. Mr. Dellinger is on the Advisory Boards of Appalachian State University and A-B Technical College. He is also a member of the board of the North Carolina Biodiesel Association.
Research and Development
Research and development (“R&D”) is an on-going process performed in our laboratory and in conjunction with the state and technical colleges in the area. Costs associated with R&D are borne almost entirely by customers during the required biofuel testing process. Approximately 10-15% of the operating costs of our laboratory are attributable to R&D (e.g., purchase of specialized laboratory equipment, reagents and chemicals). A significant amount of time has been spent researching alternative uses for glycerin, a byproduct from the production of biodiesel. It is currently being tested as a feed for livestock and as a fuel source for the facility’s boiler. We currently use natural gas, which constitutes a significant cost in overall production. During fiscal years 2010 and 2011, NABE spent $8,458and $6,734, respectively, on research and development expenses. R&D efforts at NABE to date have been for process efficiencies and plant equipment optimization. None of the costs associated with the research and development activities of NABE have been borne by its customers.
We are 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 use of water supply, and the health and safety of our employees. Based upon information provided by the Company, the North Carolina Department of Environment and Natural Resources has issued a finding that our facility does not require an air permit to produce up to 5 million gallons of biodiesel per year. Our facility also operates under a stormwater discharge permit from the North Carolina Department of Environment and Natural Resources and held by the facility landlord. Discharges to the local sewer are monitored by the City of Lenoir Wastewater Division. These laws and regulations can require expensive 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 damage claims, criminal sanctions, permit revocations and/or facility shutdowns. In an effort to ensure that we secure all necessary environmental permits in a timely fashion and remain in compliance with environmental permits, regulations and laws, we may occasionally employ the services of qualified outside environmental consulting firms. We do not anticipate a material adverse impact on our business or financial condition as a result of our efforts to comply with these requirements.
There will be a risk of liability for the investigation and cleanup of environmental contamination at our plant and at any off-site locations where we arrange for the disposal of hazardous substances if we are deemed to be a responsible party. While biodiesel is biodegradable, we utilize certain hazardous substances in our production process. While we handle those substances in compliance with all applicable federal, state and local laws, it is possible that prior uses of our site or past operations may have caused contamination of our sites. 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 the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), or other environmental laws for all or part of the costs of investigation or remediation and for damage to natural resources. Liability under CERCLA or comparable state laws may be found without regard to fault or to the legality of the original conduct. 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 these properties. Some of these matters may require us to expend significant amounts for investigation and/or cleanup or other costs.
In addition, new environmental laws, new interpretations of existing laws, increased governmental enforcement of existing 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 as we operate our facility. Present and future environmental laws and regulations and related interpretations applicable to our operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial capital and other expenditures.
Our air emissions are subject to the federal Clean Air Act, the federal Clean Air Act Amendments of 1990 and similar state and local laws and associated regulations. We are currently in compliance with EPA requirements as well as applicable state guidelines. Other federal and state air emission limitations, such as New Source Performance Standards, may also apply to facilities we own or operate. More stringent laws relating to climate change and greenhouse gases (“GHGs”) may be adopted in the future and could reduce the demand for biodiesel. Because other domestic biodiesel manufacturers will have similar restrictions, however, we believe that compliance with stringent air emission control or other environmental laws and regulations is not likely to materially affect our competitive position.
Additional environmental laws and regulations which are applicable to us and our operations include, among others, the following United States federal laws and regulations:
The hazards and risks associated with producing and transporting our products, such as fires, natural disasters, explosions, abnormal pressures, blowouts and pipeline ruptures also may result in personal injury claims or damage to property and third parties. As protection against operating hazards, we will maintain insurance coverage against some, but not all, potential losses. Though we will seek to maintain insurance that is deemed adequate and customary for our industry, losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Our production facility is located at 815-D Virginia Street in Lenoir, North Carolina. The property is approximately 18,000 square feet and is leased from Neptune, Inc., a North Carolina corporation (“Neptune”). The Company executed the lease on April 1, 2007 and the lease expires on May 31, 2012. We may renew the lease, at our option, for subsequent five year terms on conditions that are mutually agreed to by the parties. Pursuant to the terms of the lease, we are obligated to pay only the real and personal property taxes on the facility as rental payments. Additionally, we have a right of first refusal to purchase the property from Neptune if Neptune chooses to sell the property at any time during term of the lease. Our property taxes for 2011 (which includes city and county taxes) were $4,453 and have been paid in full. The Company also owns certain lab equipment and tote systems utilized in the production of biodiesel. The foregoing description constitutes all of the material terms of the lease agreement and is qualified in its entirety by reference to Exhibit 10.7, which is incorporated herein by reference.
The Company currently owns the equipment utilized in its biodiesel plant to process biodiesel.
There are no known pending legal proceedings to which the Company or our management is a party or of which any of their property is subject, which the Company considers material.
Our Class A Common Stock is currently traded on the Over-the-Counter Bulletin Board (OTCBB) under the symbol "ICNN." Our Class B Common Stock is not registered under the Securities Exchange Act of 1934 and thus is not currently traded on any exchange or market.
Only a limited market exists for our securities. There is no assurance that a regular trading market will develop, or if developed, that it will be sustained. Therefore, a stockholder in all likelihood will be unable to resell his or her securities in the Company. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops.
As of April 5, 2012, the stock was trading at a market price of $0.025 per share; however, the Company’s Class A Common Stock is thinly traded with a limited market. The closing price of $0.025 was from the last reported sale date of April 3, 2012.
(1) The quotations set out herein reflect inter-dealer prices without retail mark-up, markdown or commission and may not necessarily reflect actual transactions.
At March 1, 2012, we had 39 shareholders of record of our common stock (38 shareholders of Class A Common Stock and one shareholder of Class B Common Stock), including shares held by brokerage clearing houses, depositories or otherwise unregistered form. Additionally, we have outstanding options for the purchase of up to Two Million (2,000,000) shares of the Company’s Class A Common Stock at an exercise price of Fifty Cents ($0.50) per share and an option to purchase up to Two Hundred and Fifty Thousand (250,000) shares of the Company’s Class A Common Stock at an exercise price of Forty Cents ($0.40) per share.
Within the holders of record of the Company's Class A Common Stock are depositories such as Cede & Co., a nominee for The Depository Trust Company (or DTC), that holds shares of stock for brokerage firms which, in turn, hold shares of stock for one or more beneficial owners. Accordingly, the Company believes there are many more beneficial owners of its Class A Common Stock whose shares are held in "street name", not in the name of the individual stockholder.
Holders of Class A Common Stock and Class B Common Stock are entitled to receive dividends on an equal basis out of funds legally available when and as declared by our board of directors. Pursuant to Section 78.196 of the Nevada Revised Statutes, our board of directors may declare dividends that are cumulative, noncumulative, or partially cumulative. Our board of directors has never declared any dividends and does not anticipate declaring any dividends in the foreseeable future. Should we decide in the future to pay dividends, our ability to do so and meet other obligations may depend upon the receipt of dividends or other payments from any subsidiaries and other holdings and investments. In the event of our liquidation, dissolution or winding up, holders of Class A Common Stock and Class B Common Stock are entitled to receive, ratably in proportion to the amount held by them, the net assets available to stockholders after payment of all creditors.
Securities authorized for issuance under equity compensation plans
We have no equity compensation plans and accordingly we have no shares authorized for issuance under an equity compensation plan.
Recent Sales of Unregistered Securities
On October 18, 2011 the Company issued 250,000 shares of Class A Common Stock for a purchase price of $100,000 or $0.40 per share, to Mr. Don Nelson, which shares are exempt from the registration requirements under the Securities Act pursuant to Section 4(2) and/or Regulation D thereunder. The shares issued to Mr. Nelson have not been registered under the Securities Act and may not be offered or sold in the United States absent the registration of the resale of the shares or an applicable exemption from the registration requirements of the Securities Act.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
The following discussion and analysis of the results of operations and financial condition of the Company is an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance and gives effect to the acquisition of NABE by the Company, and should be read in conjunction with the financial statements included in this Annual Report on Form 10-K, and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors described throughout this Annual Report.
NABE is a refiner and producer of commercial-grade biodiesel as specified by the American Society of Testing and Materials (ASTM D6751). Our refining and production facility is located in Lenoir, North Carolina with a nameplate annual capacity of five million gallons. Our facility produces biodiesel from virgin, agri-based feedstock using commercial specifications. The biodiesel we produce is sold throughout North Carolina, South Carolina and Virginia directly or through wholesale distributors. During 2011, we also refined and sold crude glycerin, a byproduct of our biodiesel production.
Our production process starts with purchasing the most cost effective and suitable agri-based feedstock (e.g., soy, canola, sunflower, cotton seed and chicken/pork fat). A sample of every feedstock is then tested by our in-house laboratory in order to develop the proper recipe of catalysts for the transesterification process. Glycerin, a byproduct, is then separated from the biodiesel and any excess methanol is recovered. The recovered methanol is reused in the production process and the glycerin is sold on the open market. While biodiesel is our main product, glycerin is a popular chemical used in pharmaceutical and hygiene applications and serves as an additional source of revenue, about 1% of annual gross revenue.
Our facility is capable of producing biodiesel from a wide range of agri-based feedstocks: soy, canola, sunflower, cottonseed and chicken/pork fat. Biodiesel production costs are highly dependent on the cost of feedstock, and we believe the ability to utilize a variety of feedstocks efficiently and interchangeably is imperative to gaining a competitive advantage in the biodiesel production market.
The Company occasionally works on an informal basis with neighboring universities and technical colleges to find alternative uses for our glycerin byproduct. Particularly, students of North Carolina State University (“NCSU”) have been testing a new nozzle tip for our facility’s boiler that would allow us to use glycerin as a heating source. The facility currently uses natural gas, which is an additional cost in the production process. The NCSU engineer estimated the facility, at peak production, could utilize approximately 60% of the glycerol produced and offset 80-90% of the natural gas being utilized as a heating source. This equates to an approximate natural gas savings of approximately $33,000 - $37,000 at those production levels. Based upon a peak production capacity of 5 million gallons/year this would equate to approximately $165,000 - $167,000 per year. The Company needs to attain additional grant funding to continue the research with the NCSU testing team. We will also continue to have glycerin available to sell on the open market.
Our goal is to become one of the leading, diversified energy companies with divisions in production, blending, marketing and distribution. Building on over 30 years of relationships and the experience of our CEO, R. Samuel Bell, Jr., we have adopted an action plan that includes the expansion into Brazil’s renewable energy market.
Government mandates, strong tax incentives and an auction-based selling platform make Brazil, in management’s view, a potentially profitable climate for clean energy.
The financial statements presented in this Annual Report have been prepared on a going-concern basis. As of December 31, 2011, the Company has a working capital deficiency of $192,239, and has an accumulated deficit of $5,532,978. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These factors raise substantial doubt that the Company will be able to continue as a going concern.
The Company to date has funded its initial operations through the issuance of capital stock and common stock options, loans from related parties, and revenue generated in the normal course of business. Management plans to continue to provide for the Company’s capital needs by the issuance of common stock and related party loans. However, no assurance can be given that financing on the same or similar favorable terms and conditions will be available to the Company in the future. The financial statements presented in this Annual Report do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
The financial statements presented in this Annual Report do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
We derive the majority of our revenue from the sale of biodiesel and the balance is derived from the sale of glycerin. Revenue may be affected by the following factors:
Price volatility of petroleum diesel. Biodiesel is primarily used in blends with petroleum diesel as a fuel for trucks, automobiles, heating oil and marine transportation. Biodiesel can be mixed at any level with petroleum diesel to create a biodiesel blend. Unlike ethanol, where engines need to be modified to handle blend ratios above 10%, biodiesel blends can be used in diesel engines without modifications. Petroleum diesel is a traded commodity and subject to daily pricing swings. The price that we can charge our customers for biodiesel needs to be competitive with the price of petroleum diesel fuel, regardless of our cost to produce.
Price volatility of RINs. Under certain circumstances, the EPA allows producers to separate RINs from the biodiesel to which it was initially assigned. The production facility in Lenoir, NC has successfully registered with EPA to generate RINs (type: D-Code = 4) along with the biodiesel it produces. For those RINs that NABE is able to separate and sell, the selling price is subject to factors affecting the RIN market, which performs much like a commodity market with daily price swings.
Government incentives . Initiatives and incentives at the federal, state and local government levels that benefit our blending and retail customers have played a major role in the demand for our product. The primary federal economic incentive was the biodiesel blenders excise tax credit, which was available to registered blenders of biodiesel and petroleum diesel. Our customers are registered biodiesel blenders; they purchase the biodiesel from us at a price of $1.00 in excess of the market price of petroleum diesel and then our customers were reimbursed the $1.00 from the federal government. In December of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 retroactively restored the biodiesel tax credit for all of 2010 and further extended it through December 31, 2011. Although Congress has extended this credit on multiple occasions, it has not been further extended and no assurance can be given that the tax incentive will be reinstated by Congress.
Additionally, the State of South Carolina has an incentive in place for retailers of biodiesel. The retailer receives 25 cents per gallon for every gallon of biodiesel that they blend with petroleum diesel at their stores. The existence of government incentives affects the price our customers are willing to pay. The absence of the biodiesel tax credit adversely affects our ability to generate revenue.
Processing capacity . Our current annual maximum (assuming the facility is running 24 hours a day, 350 days per year) or “nameplate” capacity is 5.0 million gallons; however, our highest production output was 914,000 gallons in 2009.
Market demand. The growth potential of our revenue depends on the market demand for our products. We believe there is high growth potential for our sales given the increase of national “green” initiatives, the cooperation of U.S. auto manufacturers and the mandate by the EPA to require the use of 1 billion gallons of biodiesel in 2012.
Cost of Sales
The cost of sales is composed of the following items: raw materials, blending materials, labor and overhead. Raw materials refer to feedstock, which accounts for approximately 70% of the total cost of sales. Blending materials refer to methanol and catalyst, which combined account for approximately 12% of the total cost of sales. Labor cost is low and only makes up a small portion of the cost of sales. Overhead includes utilities, maintenance costs, and inspections, and accounts for approximately 16% of the total cost of sales.
Cost of sales is, directly or indirectly, determined by the following factors:
- The availability and pricing of feedstock; and
- Operating efficiency of the production facility.
The availability and pricing of feedstock. Our ability to produce or refine biodiesel from a variety of agri-based feedstocks allows us to shift production to the highest yielding feedstocks based on market prices. While this diversity limits exposure to volatile markets, feedstock remains the major cost of sales and its fluctuation will have a material impact on our total cost. Transportation costs also affect the overall feedstock cost, but are minimized due to the location of our facility in North Carolina. There is a readily available supply of local feedstocks including soy oil, and poultry/pork fat. We are currently working with vendors in Georgia, South Carolina and North Carolina to source used cooking oil as a cost competitive feedstock. Competition with the food and animal feed industries may keep feedstock prices high even while biodiesel prices fall.
Operating efficiency of the production facility. Our onsite laboratory saves us significant time and expense during the biodiesel production and refining process and it also allows us to ensure a high quality finished product. All feedstocks are tested for quality and for their fatty acid levels upon receipt, allowing us to adjust the mix of catalysts and methanol in a quick and efficient manner. At multiple times during the refining process, additional samples are taken and tested for quality on site. The finished product is ultimately tested to ensure that it meets the ASTM-D6751 standards. With the frequency of testing needed, an onsite laboratory saves money and time that would have been spent sending samples off and waiting for results. We are continuing to search for process improvements to increase the efficiency of our production plant.
Operating expenses consist of selling expenses and general and administrative expenses. Generally, operating expenses are only a small portion of total costs and expenses.
Selling expenses are nominal as we have no advertising expenses and no sales staff due to our verbal off-take agreements with related party distributors.
General and administrative expenses consist of payroll for our plant manager and clerical staff in addition to professional fees, telephone, tax, and licenses and related fees. Professional fees include consultants and service providers necessary for compliance with SEC reporting requirements.
Results of Operations
The following is a discussion and analysis of our results of operations for the twelve-month period ended December 31, 2011, and the factors that could affect our future financial condition. This discussion and analysis should be read in conjunction with our audited
financial statements and the notes thereto included elsewhere in this report. Our financial statements are prepared in accordance with United States generally accepted accounting principles. All references to dollar amounts in this section are in United States dollars unless expressly stated otherwise.
The Successor generated revenues of $2,114,158 for the period January 1, 2011 through December 31, 2011. Revenue was generated during the period through biodiesel sales, through RIN sales, through recovered methanol sales, and through the sale of methylated glycerin. During the period January 1, 2011 through December 31, 2011, our biodiesel sales to third parties totaled approximately $788,467 and our sales to related parties amounted to $441,653. Sales of RINs to third parties totaled $855,519 during the period January 1, 2011 through December 31, 2011. During the period under consideration, sales of recovered methanol totaled $6,527 while methylated glycerin sales amounted to $21,992.
The Predecessor generated revenues of $442,123 during the period January 1, 2010 through August 23, 2010. Revenue generated during the period was generated through biodiesel sales, through toll processing and through de-methylated glycerin sales. During the period January 1, 2010 through August 23, 2010, biodiesel sales to third parties totaled approximately $62,159 and our sales to related parties amounted to $379,964. Of the total revenue, $63,745 was attributable to sales of biodiesel produced through an arrangement with a local soy farmer (toll-blending). Toll blended sales to third parties totaled $23,400 while toll blended sales to related parties totaled $40,345 during the period under consideration. De-methylated glycerin sales totaled $35,655 for the period January 1, 2010 through August 23, 2010.
The Successor generated $35,649 in revenues for the period August 24 through November 30, 2010. Revenue for the Successor during the period under consideration was generated primarily through the biodiesel sales to related parties totaling $11,700 and de-methylated glycerin sales to third parties amounting to $16,070. Most of the remaining revenue was generated through the sale of RINs to third parties.
During the one month period ended December 31, 2010, the Successor generated $2,493 in revenues. For the one month period ended December 31, 2010, the Successor’s revenues were derived from the sale of de-methylated glycerin. Crude glycerin, which is created as a by-product of the biodiesel reaction, contains trace amounts of methanol. Removing the methanol (“de-methylating”) results in a methanol suitable for sale in other markets.
Comparing the activity for the period January 1, 2011 through December 31, 2011 to the activity for the period January 1, 2010 through December 31, 2010, there was an increase in revenue of $1,633,893 from $480,265 to $2,114,158. The period-over-period increase was due primarily to increased biodiesel sales and the sale of RINs. Biodiesel sales experienced an increase of approximately 262,100 gallons sold during the period January 1, 2011 through December 31, 2011 compared to the period January 1, 2010 through December 31, 2010. Also impacting the increased revenue was the increase in selling price from an average of about $2.19 per gallon during the period under consideration in 2010 to an average of about $2.93 per gallon during the period under consideration in 2011. The Company had RIN sales of $6,039 during the period January 1, 2010 through December 31, 2010, but transacted $855,519 in RIN sales during the period January 1, 2011 through December 31, 2011.
Cost of Revenue
The Successor’s cost of revenue was $1,986,341 during the period January 1, 2011 through December 31, 2011. For the same period, cost of revenue consisted of raw materials, labor, overhead, and costs associated with processing glycerin. Offsetting the cost of revenue was the filing for tax credits available to biodiesel blenders, which amounted to $261,324 during the period, net of the establishment of a valuation allowance on the tax credits receivable of $224,059 during the period. Total cost of revenue for the period January 1, 2011 through December 31, 2011 includes $1,721,364 from third party activity and $264,977 in related party activity.
Cost of revenue for the Predecessor totaled $366,712 during the period January 1, 2010 through August 23, 2010. For the same period, cost of revenue consisted of raw materials, labor, overhead, and costs associated with processing glycerin. Offsetting the cost of revenue was the filing for tax credits available to biodiesel blenders, which amounted to $18,672 during the period January 1, 2010 through August 23, 2010. Total cost of revenue for the period January 1, 2010 through August 23, 2010 includes $76,790 from third party activity and $289,922 in related party activity.
The Successor’s cost of revenue was $122,794 for the period August 24 through November 30, 2010. During the period under consideration, cost of revenue consisted of costs associated with raw material (feedstocks, methanol, and catalyst) purchases, labor and overhead. Total cost of revenue for the period August 24, 2010 through November 30, 2010 includes $107,240 from third party activity and $15,554 in related party activity.
The Successor’s cost of revenue was $12,768 for the one month period ended December 31, 2010. Cost of revenue for the one month period ended December 31, 2010 was associated with minimal labor and overhead costs due to the lack of feedstock available for processing. Total cost of revenue for the period December 1, 2010 through December 31, 2010 includes $12,768 from third party activity and no cost due to related party activity.
Comparing the activity for the period January 1, 2011 through December 31, 2011 to the activity for the period January 1, 2010 through December 31, 2010, there was an increase in cost of revenues of $1,484,067 as the cost of revenues rose from $502,274 to $1,986,341. The period-over-period increase was primarily due to an increase in the cost of raw materials. Prior year results included activity associated with re-processing distressed material for which the Company paid approximately $2.20 per gallon. Current year activity during the period under consideration included purchasing raw feedstocks for which the Company approximately paid $0.497 per pound (or $3.73 per gallon based on a density of 7.5 pounds per gal).
Depreciation expense for the Successor totaled $72,676 for the period January 1, 2011 through December 31, 2011.
Depreciation expense for the Predecessor totaled $34,899 for the period January 1, 2010 through August 23, 2010.
The Successor had depreciation expense of $17,294 for the period August 24, 2010 through November 30, 2010.
During the one month ended December 31, 2010, the Company had depreciation expense equal to $5,815.
Gross profit for the Successor totaled $55,141 for the period January 1, 2011 through December 31, 2011. The primary reason for the gross profit during the period under consideration was the sale of RINs to third parties amounting to $855,519. Also impacting the gross profit was the fact that the cost to produce was reduced by $261,324 during the period, net of the establishment of a valuation allowance on the tax credits receivable of $224,059, as NABE filed for biodiesel blending credits with the IRS.
Gross profit for the Predecessor totaled $40,512 for the period January 1, 2010 through August 23, 2010. During the period under consideration, biodiesel sold for more than the cost to produce due to favorable market conditions. No RIN sales were made during the period under consideration.
The Successor’s gross profit was a loss of ($104,439) for the period August 24 through November 30, 2010. The loss during the period under consideration was primarily due to rising feedstock costs coupled with declining biodiesel prices.
During the one month period ended December 31, 2010, the Successor had a gross loss equal to ($16,090). The Successor’s gross loss for the one month period ended December 31, 2010 was attributable to part-time labor costs, utilities, and depreciation expense.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses for the Successor totaled $1,507,565 for the period January 1, 2011 through December 31, 2011. During the period under consideration, the Successor’s SG&A expenses were primarily comprised of payroll, auditing and accounting fees ($154,640), legal fees ($21,781), travel expenses ($13,888), consulting fees ($1,243,375), and fees associated with filing financial reports in XBRL format ($15,175).
SG&A expenses for the Predecessor totaled $95,794 for the period January 1, 2010 through August 23, 2010. During the period under consideration, the Predecessor’s SG&A expenses were primarily comprised of payroll, accounting fees, and fees paid to an outside engineer for consulting services.
On a post-merger basis, the Successor had SG&A expenses of $241,309 for the period August 24 through November 30, 2010. SG&A expenses during the period under consideration were primarily related to legal and accounting fees associated with the acquisition of NABE.
During the one month period ended December 31, 2010, the Successor had SG&A expenses of $13,253. The primary contributors to the Successor’s SG&A expenses for the one month period were payroll, consulting expenses paid to Bauhaus Capital Partners (fundraising group with presence in Brazil), and charges associated with filings resulting from being a publicly traded company.
Comparing the activity for the period January 1, 2011 through December 31, 2011 to the activity for the period January 1, 2010 through December 31, 2010, there was an increase in SG&A expenses of $1,157,209 as SG&A rose from $350,356 to $1,507,565. The period-over-period increase was due in large part to expenses recognized as part of operating as a publicly traded company and to expenses paid for business development and consulting services. During the period January 1, 2010 through August 23, 2010, the Predecessor operated as a stand-alone biodiesel producer with no reporting requirements. For the period January 1, 2011 through December 31, 2011, the Successor was responsible for all charges associated with a public company that submits consolidated financial reports, which amounted to approximately $154,640. The Company continued developing business opportunities in Brazil during the first three quarters of 2011. Fundraising and consulting fees accounted for approximately $1,243,375 of the total SG&A expense for the period January 1, 2011 December 31, 2011.
Other Income for the Successor totaled $74,794 for the period January 1, 2011 through December 31, 2011. The primary sources of Other Income for the Successor included $49,878 in funding provided by the North Carolina Green Business Fund grant and $24,876 in funding provided by the USDA’s Biofuel Program.
The Predecessor had Other Income of $46,141 for the period January 1, 2010 through August 23, 2010. The primary reason for the balance in the Other Income account was $41,571 provided by funding from the Carolina Land and Lakes grant and $4,500 that was provided by funding from a North Carolina Department of Energy and Natural Resources grant.
For the period August 24, 2010 through November 30, 2010, the Successor had Other Income of $7,137. Other Income for the period under consideration was primarily provided by the USDA’s Rural Development Program, which allocates funds based on actual production throughput volumes as part of its Biofuel Program.
During the one month ended December 31, 2010, the Company had Other Income equal to $1,829. The source of the Other Income during the period was Rural Development Program grant funding provided by the USDA Biofuel Program.
The Successor had interest income of $1,203 for the period January 1, 2011 through December 31, 2011.
The Predecessor had no interest income for the period January 1, 2010 through August 23, 2010.
The Successor had interest income of $1,617 for the period August 24, 2010 through November 30, 2010.
During the one month ended December 31, 2010, the Company had interest income equal to $580.
Interest expense for the Successor was $12,592 for the period January 1, 2011 through December 31, 2011.
The Predecessor had interest expense of $8,529 for the period January 1, 2010 through August 23, 2010.
The Successor had interest expense of $5,328 for the period August 24, 2010 through November 30, 2010.
During the one month ended December 31, 2010, the Company had interest expense equal to $53.
Net Income (Loss)
The Company had a net loss of ($1,389,019) for the period January 1, 2011 through December 31, 2011.
The Predecessor had a net loss of ($17,670) for the period January 1, 2010 through August 23, 2010.
On a post-merger basis, the Company had a net loss of ($342,322) for the period August 24 through November 30, 2010.
Net income for the Successor was a loss of ($26,987) for the period December 1, 2010 through December 31, 2010.
Debt Obligations and Commitments
(1) Variable rate term loan dated November 7, 2006 in the original principal amount of $250,000 payable to BB&T Bank by NABE in monthly principal and interest installments of $4,805. Interest is calculated at a variable rate equal to prime plus one percent. For purposes of calculating total obligations due under this term loan, the prime rate, as of December 31, 2011, the date of calculation, was five and a quarter percent (5.25%). This note matures on April 25, 2015, is secured, and contains a cross default provision that will result in the imposition of a default interest rate equal to the lender’s prime rate plus 5% in the event of default of any loan agreement. This note was amended on April 27, 2010 to convert it from a line-of-credit loan to a term loan. The proceeds from this note were used to purchase additional processing equipment. The information presented regarding this term loan is as of December 31, 2011. The foregoing description constitutes all of the material terms of this loan and is qualified in its entirety by reference to Exhibit 4.3, which is incorporated herein by reference.
(2) NABE entered into a term note in April 2011 that will mature in February 2012. The note is payable in monthly principal and interest installments of $1,102. Interest is payable monthly at a rate of 10.73%. The balance outstanding at December 31, 2011 was $2,100.
(3) Unsecured non-interest bearing demand loan payable to Echols Oil Company, Inc., a related party. For additional information regarding this loan, please refer to "Certain Relationships and Related Transactions and Director Independence." The information presented regarding this loan is as of December 31, 2011.
Liquidity and Capital Resources
As of December 31, 2011, our current assets totaling $739,112 consisted of cash, accounts receivable, inventory, tax credits receivable, other current assets and prepaid expenses. Our accounts payable and accrued liabilities and current portion of amounts due to related parties and third parties were $931,351 as of December 31, 2011. As a result we had a working capital deficiency of $192,239 at December 31, 2011.
Current assets for the Company totaled $675,769 as of December 31, 2010. Current liabilities for the Company totaled $924,333 as of December 31, 2010. As a result the Company had a working capital deficiency of $248,564 at December 31, 2010.
To December 31, 2011, the Company has funded its initial operations through the issuance of 30,754,332 shares of capital stock (28,774,332 shares of Class A stock and 1,980,000 shares of Class B stock), loans from the former director, loans from related parties, and loans from third parties.
During the twelve months ended December 31, 2011, the Company repaid $87,500 in debt due to related parties. As of December 31, 2011, the Company still has related party debt due primarily to the NABE’s liabilities to related parties.
We expect to incur losses as the business continues to develop. To date, our cash flow requirements have been primarily met by equity financings and cash advances from the Company's former Director and related parties. Management expects to keep operational costs to a minimum until cash is available through financing or operating activities. Management plans to continue to seek other sources of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if at all. If we are unable to generate sufficient profits or are unable to obtain additional funds for our working capital needs, we may need to cease or curtail operations. Moreover, there is no assurance that the net proceeds from any successful financing arrangement will be sufficient to cover cash requirements during the initial stages of the Company's operations. For these reasons, our independent registered auditors believe that there is substantial doubt that we will be able to continue as a going concern.
Cash Provided By (Used In) Operating Activities
During the period January 1, 2011 through December 31, 2011, the Successor’s cash used in operating activities totaled $150,240. Cash used in operating activities was primarily attributable to the net effect of making credit sales and an increasing balance in the tax credits receivable from blending activities. Overall receivables increased $167,200 and $180,753 of this net amount was associated with receivables on RIN sales, which were made at year end. Inventories increased $66,036 over the prior year. NABE’s tax credits receivable decreased $127,483 during the period under consideration due to a valuation allowance that was placed on the credits available as tax offsets to biodiesel producers. Overall payables increased $94,755 for the same period.
During the period January 1, 2010 through August 23, 2010, the Predecessor’s cash provided by operating activities totaled $71,290. For the Predecessor during the period under consideration, cash provided by operating activities was primarily attributable to profitably re-processing and selling out-of-specification biodiesel that had been purchased from neighboring plants.
During the period August 24, 2010 through November 30, 2010, the Successor’s cash used in operating activities totaled $31,321. For the same period, the Successor’s cash used in operating activities was primarily for professional fees (accounting and legal services) associated with regulatory filings involved with the acquisition of NABE.
During the one month period ended December 31, 2010, the Successor’s cash used in operating activities totaled $59,535. For the one month ended December 31, 2010, the Successor's cash used in operations was generally due to making payments to service providers for work performed in connection with having a listed company and with making payments for reimbursable expenses to Bauhaus Capital Partners, the firm engaged to perform fund-raising on behalf of the Company.
Cash Provided By (Used In) Investing Activities
During the period January 1, 2011 through December 31, 2011, the Successor’s cash used in investing activities totaled $68,899. This amount primarily represents plant-wide efforts to improve operating efficiency through insulating equipment and piping and through replacing outdated, less efficient pumps at the biodiesel production facility in Lenoir, NC.
During the period January 1, 2010 through August 23, 2010, the Predecessor’s cash used in investing activities totaled $22,434. For the Predecessor during the period under consideration, cash used in investing activities was chiefly the result of making payments on filtration equipment, which was recorded as construction in progress.
During the period August 24, 2010 through November 30, 2010, the Successor’s cash used in investing activities totaled $29,049. For the same period, the Successor’s cash used in investing activities was used to purchase fixed assets for our facility.
During the one month period ended December 31, 2010, the Successor’s cash used in investing activities totaled $4,729. For the one month ended December 31, 2010, the Successor's cash used in investing activities represented capitalized labor associated with the continued installation of a process chiller.
Cash Provided By (Used In) Financing Activities
During the period January 1, 2011 through December 31, 2011, the Successor’s cash provided by financing activities totaled $150,594. This amount represents repayment of $87,500 in related party debt, proceeds from the sale of stock of $300,000 and payments, net of borrowings, totaling $61,906 on long-term debt to third-party creditors.
During the period January 1, 2010 through August 23, 2010, the Predecessor’s cash used in financing activities totaled $24,827. For the Predecessor during the period under consideration, cash used in financing activities represented payments, net of borrowings, on long-term debt obligations to third-party creditors.
During the period August 24, 2010 through November 30, 2010, the post-merger Company’s cash provided by financing activities totaled $278,802. For the period August 24, 2010 through November 30, 2010, the post-merger Company's cash provided by financing activities was primarily a result of selling shares of stock.
During the one month period ended December 31, 2010, the Successor’s cash used in financing activities totaled $2,071. For the one month ended December 31, 2010, the Successor's cash used in financing activities was a result of making payments on debt obligations.
We anticipate that additional funding will be required in the form of equity financing from the sale of our common stock in order to proceed with our acquisition and expansion plan. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our marketing and acquisition plans. At this time, we do not have any arrangements in place for any future equity financing. In maintaining our current operations, we will continue to rely on related party loans to compensate for any shortcoming in sales revenue. However, no assurance can be given that such related parties will provide such financing at all or on the same favorable terms and conditions as past financing to the Company.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Recent Accounting Pronouncements
Management does not expect any financial statement impact from any recently-issued pronouncements.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
New York, New York
We have audited the accompanying consolidated balance sheet of Incoming, Inc. (“the Company” or “Successor”) as of December 31, 2011 and 2010, the related consolidated statements of operations for the period from January 1, 2011 through December 31, 2011, the period from January 1, 2010 through August 23, 2010, the period from August 24, 2010 through November 30, 2010, the period from December 1, 2010 through December 31, 2010, the related consolidated statements of cash flows for the same periods and the related consolidated statements of stockholders’ deficit for the period from August 24, 2010 through November 30, 2010, the period from December 1, 2010 through December 31, 2010 and the period from January 1, 2011 through December 31, 2011. 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and the consolidated results of its operations and its cash flows for the period from January 1, 2011 through December 31, 2011 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 discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
April 16, 2012
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the Period from August 24, 2010 to December 31, 2011
STATEMENT OF MEMBERS’ EQUITY
For the period from January 1, 2010 to August 23, 2010
The accompanying notes are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 Nature and Continuance of Operations
We were incorporated in Nevada on December 22, 2006. Our fiscal year end is December 31, after changing it from November 30 a year ago. On August 23, 2010, we acquired an existing biodiesel production facility in Lenoir, NC from North American Bio-Energies, LLC (“NABE”). NABE has December 31 as its fiscal year end.
The financial statements presented in this document have been prepared on a going-concern basis. As of December 31, 2011, the Company has a working capital deficiency of $192,239, and has an accumulated deficit of $5,532,978. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These factors raise substantial doubt that the Company will be able to continue as a going concern. The Company to date has funded its initial operations through the issuance of capital stock and common stock options, loans from related parties, and revenue generated in the normal course of business. Management plans to continue to provide for the Company’s capital needs by the issuance of common stock and related party loans. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
Note 2 Summary of Significant Accounting Policies
Use of Estimates
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates, which have been made using careful judgment. Actual results may vary from these estimates.
We have reclassified certain prior-year amounts to conform to the current year’s presentation.
The accompanying successor consolidated financial statements represent the consolidated operations of Incoming, Inc. and its wholly-owned subsidiary North American Bio-Energies, LLC (“NABE”). Intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation – Predecessor
The accompanying predecessor financial statements have been prepared to present the statements of the financial position of NABE and statements of operations and cash flows of NABE for inclusion in the Company’s Form 10-K for purposes of complying with the rules and regulations of the SEC as required by S-X Rule 8-02. These statements include only those assets, liabilities and related operations of NABE. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America using NABE-specific information where available.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. As of December 31, 2011 the Company had cash of $122,727 held in FDIC insured accounts. At December 31, 2010 the Company had cash of $191,272 held in FDIC insured accounts.
Incoming derives all of its revenue from operations of the NABE biodiesel plant in Lenoir, North Carolina, which was acquired in August of 2010. Through NABE, the Company’s operations are focused 100% on biodiesel production and sales. Currently, we derive the majority of our revenue from the sale of biodiesel and the sale of glycerin, a by-product from bio-diesel production. Revenues from biodiesel and glycerin sales are recognized when the product has been delivered and collectability is reasonably assured.
Revenue Recognition – Renewable Identification Numbers (“RINs”)
As a means for ensuring renewable fuels were being blended with petroleum products for consumption in the United States, the Environmental Protection Agency (“EPA”) created a mechanism for holding obligated parties (refiners and importers) accountable. This mechanism requires that obligated parties annually demonstrate they have met the EPA's minimum renewable fuel blending limits, which are established annually and referenced as the renewable volume obligation (“RVO”). Companies demonstrate compliance with the RVO by accumulating and submitting RIN-gallons annually to the EPA. RINs may be generated at renewable fuel production facilities and essentially function as commodities capable of being "separated" from the fuel and traded on an active market.
NABE typically transfers RINs to its customers at the time of biodiesel sale. Transferring RINs takes place through the EPA Moderated Transaction System (“EMTS”). It is through the EMTS that the EPA is ultimately capable of tracking the RIN transfer activity. As RINs are separated from their respective gallons, they may be re-sold multiple times before finally arriving in the possession of an obligated party. For those customers who do not wish to participate in the EPA's renewable fuel program, NABE offers the option for separating the RINs and handling all of the required EMTS administration.
Once RINs have been separated from biodiesel, NABE has the option of selling the commodities directly to obligated parties or selling them to brokers. To date, all of NABE's RIN sales have been to brokers due to the smaller quantities that have been available. Brokers will often aggregate RINs from multiple parties and then sell them to obligated parties. RIN market values fluctuate daily and are readily determinable from online sources. NABE offers buyers a 10-day return policy. NABE recognizes revenue from sales of RINs after the parties have established a sales price, the RINs have been transferred to the buyer through the EMTS, the related revenue is deemed realizable and the return period has expired.
Accounts receivable represent valid claims against customers and are recognized when products are sold or services are rendered. We extend credit terms to certain customers based on historical dealings and to other customers after review of various credit indicators, including the customer’s credit rating. Outstanding customer receivable balances are regularly reviewed for possible non-payment indicators and allowances for doubtful accounts are recorded based upon management’s estimate of collectability at the time of their review. Accounts receivable are written off when the account is deemed uncollectible.
Inventories consist primarily of raw materials, work-in-process and production by-products that are valued at the lower of cost, determined by the first-in, first-out method, or market.
Property and equipment
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets (which range from 1 to 20 years) using the straight-line method. Repair and maintenance expenditures, which do not result in improvements, are charged to expense as incurred.
Construction in Progress
Construction in progress is stated at cost, which includes the costs incurred to third parties for construction of plant assets. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use. Construction in progress at December 31, 2011 and 2010 represents plant assets under construction and prepayments on assets being purchased.
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation of recoverability is performed using undiscounted estimated net cash flows generated by the related asset. If an asset is deemed to be impaired, the amount of impairment is determined as the amount by which the net carrying value exceeds discounted estimated net cash flows.
Net Loss per Share
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260, “Earnings per Share”, basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. Under ASC 260, diluted net income/(loss) per share is computed by dividing the net income/(loss) for the period by the weighted average number of common and common equivalent shares, such as stock options and warrants, outstanding during the period. Such common equivalent shares have not been included in the computation of net loss per share as their effect would be anti-dilutive.
The Company accounts for stock-based compensation in accordance with FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors based on estimated fair values. Share-based payments awarded to consultants are accounted for in accordance with ASC 505-50, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Connection with Selling, Goods or Services.”
Income taxes are recorded in accordance with FASB ASC 740, “Accounting for Income Taxes”. This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
For financial reporting purposes, the Company has incurred a loss in each period since its inception. Based on the available objective evidence, including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2011 and December 31, 2010.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments consisting of cash, accounts payable and accrued liabilities, agreement payable and due to related party approximate their carrying value due to the short-term maturity of such instruments. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments.
Recent Accounting Pronouncements
The Company does not expect any recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
Note 3 Change in Fiscal Year
On February 14, 2011, the Company changed its fiscal year end from November 30th to December 31st. Notice of the election of a change in fiscal year was made on Form 8-K, filed on February 16, 2011.
Presented below are unaudited pro-forma consolidated statements of operations for the twelve-month period ending December 31, 2010.
CONSOLIDATED PRO-FORMA STATEMENTS OF OPERATIONS
Note 4 Inventory
Inventories consisted of the following as of December 31, 2011 and 2010:
Note 5 Tax Credit Receivable
The Company is considered a small agri-biodiesel producer and therefore is eligible for biodiesel and renewable diesel fuels tax credits. The Company is eligible for a $1 per gallon blender’s credit, which is a refundable credit based on the Company’s production and sale of qualified agri-biodiesel in a given tax year, and a $0.10 per gallon producer’s credit, which
is applicable against earnings when determining income tax liabilities. The estimated total tax credit receivable as of December 31, 2011 and 2010 was $80,412 and $176,988. Tax credit income for 2011 and 2010 was $485,383 and $12,798, respectively, and are recorded as a reduction to the Company’s production costs.
Since the Company has not been profitable to date, and the $0.10 per gallon producer’s credit can only be realized against earnings, a valuation allowance of $224,059 was placed on the tax credit receivables as of December 31, 2011. The net tax credit receivable of $80,412 in the Company’s balance sheet as of December 31, 2011 represents the amount management expects to realize.
Note 6 Property, Plant and Equipment and Construction in Progress
Property, plant and equipment consisted of the following as of December 31, 2011 and 2010:
As of December 31, 2011 and 2010, NABE was in the process of paying third parties to construct a biodiesel resin purification system and other biodiesel production equipment. The amounts associated with these projects are included in construction in progress in the balance sheet. NABE expects additional funding amounting to $99,300 will be required for completion of these projects. NABE is currently in the process of preparing grant applications for securing the balance of the funding necessary to complete the projects. If the Company is unable to secure the additional funding for the purification system, we may consider selling the components that have been received to date.
Note 7 Bank Line of Credit and Notes Payable
At December 31, 2009, NABE had available a $250,000 revolving credit agreement with a bank. Interest was paid monthly at a variable rate of prime plus one percent (4.25 percent at December 31, 2009). On April 27, 2010, this line was modified into a five-year term loan with 59 monthly principal and interest installments of $4,805 with one final payment on April 25, 2015. The balances outstanding at December 31, 2011 and 2010 were $171,917 and $222,806, respectively.
In addition, NABE had a variable rate term note, originally loaned in November of 2006, payable to the same bank in monthly principal and interest installments of $2,125. Interest was payable monthly at a variable rate of prime plus 1 percent. The note, which had been collateralized by accounts receivable, inventory, and various pieces of equipment, matured on November 10, 2011. The balances outstanding at December 31, 2011 and 2010 were $0 and $13,116, respectively.
NABE also entered into a term note in April 2011 that will mature in February 2012. The note is payable in monthly principal and interest installments of $1,102. Interest is payable monthly at a rate of 10.73%. The balance outstanding at December 31, 2011 was $2,100.
Future maturities of long-term debt as of December 31, 2011 are as follows:
Note 8 Related Party Transactions
a) During the year ended 2009, NABE received loan advances from Echols Oil Company (related party) totaling $97,500. As of December 31, 2011, $87,500 had been repaid, which left a remaining balance of $10,000 due to Echols Oil Company. The Company’s current Chairman and CEO, R. Samuel Bell, Jr. is the owner of Echols Oil Company.
b) NABE sells a portion of its finished goods to and purchases product for processing from Verde Bio Fuels, Inc. and Echols Oil Company, companies owned by Incoming, Inc’s CEO, R. Samuel Bell, Jr. During 2011 and 2010, sales to the related companies were $441,653 and $391,664, respectively. During 2011, purchases from the related companies were $264,977. As of December 31, 2011 and 2010, the Company had outstanding receivables from these companies of $235,280 and outstanding payables of $321,540. The amount of related party payables at December 31, 2010 included payables to Green Valley Bio-Fuels in the amount of $274,916.
Note 9 Acquisition of NABE
On August 23, 2010, Incoming acquired NABE, a biodiesel plant in Lenoir, North Carolina, for 990,000 Class A common shares and 1,980,000 Class B common shares valued at $593,934 on the date of acquisition. NABE is engaged in the business of wholesaling biodiesel to distributors in the Southeast region of the United States; as well as selling glycerin (a biodiesel by-product) to refiners and manufacturers. The plant’s focus is on commercial grade biodiesel produced from virgin agri-based feedstock that meets the standards for biodiesel established by The American Society of Testing and Materials and adopted by the Environmental Protection Agency. NABE is the Company’s sole subsidiary. The purchase price allocation is summarized as follows:
On the date of acquisition, Incoming determined that the fair value of the assets and liabilities acquired was more readily determinable than the fair value of the equity interests transferred and therefore used these values for the purchase price allocation. The fair value of the equity interests transferred was not readily determinable because (1) the Class A common shares are thinly traded and (2) there is no active market for the Class B common shares. Prior to the acquisition, Incoming, Inc. had de minimis operations. As a result, predecessor financial statements are provided in accordance with S-X Rule 8-02.
Note 10 Equity Transactions
During the twelve months ended December 31, 2011, Incoming, Inc. consummated the following equity transactions:
Holders of Class A common stock are entitled to one vote for each share of Class A common stock outstanding, are entitled to receive the assets of the Company ratably in proportion to the number of shares held by them, and are entitled to receive dividends for each share held as declared by the Board of Directors. Holders of Class B common stock are entitled to two votes for each share of Class B common stock outstanding, can convert their shares into Class A common stock at a ratio of 1:1, are entitled to receive the assets of the Company ratably in proportion to the number of shares held by them, and are entitled to receive dividends for each share held as declared by the Board of Directors.
Note 11 Income Taxes
The Company uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes.
During fiscal years 2011 and 2010, the Company incurred net losses and, therefore, had no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward (Successor basis) is approximately $1,021,000 and $828,000 at December 31, 2011 and 2010 and will expire beginning in 2027.
At December 31, 2011 and 2010 deferred tax assets consisted of the following:
Note 12 Major Customers and Vendors
During 2011, two related party customers accounted for 21% of total revenue, one third-party customer accounted for 42% of total revenue, two related party vendors accounted for 15% of total cost of revenues and a third party vendor accounted for 53% of total cost of revenues.
During 2010, two related party customers accounted for 77% of total revenue, one related party vendor accounted for 73% of total cost of revenues and a third party vendor accounted for 13% of total cost of revenues.
Note 13 Other Income
During 2011, NABE received a grant from various grants from funding organization within the State of North Carolina. The North Carolina Green Business Fund provided $49,878 in grant funds toward efficiency improvement efforts throughout the biodiesel production plant in North Carolina. The USDA Biofuel Program provided $24,876 in grant funding based on production at the plant utilizing agri-based feedstock materials.
During 2010, NABE received a grant from various grants from funding organization within the State of North Carolina. The Carolina Land and Lakes Grant provided grant monies totaling $41,571 that assisted with implementing procedures for reducing the amount of waste that the plant sent to landfills. The North Carolina Department of Environment and Natural Resources provided $4,500 in connection with improving efficiency of the plant. The USDA Biofuel Program provided $2,927 in grant funding based on production at the plant utilizing agri-based feedstock materials.
Note 14 Subsequent Events
On March 9, 2012, the Company issued 500,000 Class A common shares for consulting services.
On November 6, 2009, the Company engaged MaloneBailey, LLP as the Company’s independent registered public accounting firm. There has been no change in the Company’s accounting firm since that time.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Principal Financial Officer (“PFO”) of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the CEO and PFO concluded that, because of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2011. The Company has taken the steps described below to remediate such material weaknesses.
(b) Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"). The Company’s internal controls over financial reporting include policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’ assets that could have a material effect on our financial statements. Under the supervision and with the participation of our management, including our CEO, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2011. In its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and the criteria described above, management has concluded that, as of December 31, 2011, our internal control over financial reporting was not effective. We have noted the following deficiencies in our control environment:
1. Deficiencies in Our Control Environment. Our control environment did not sufficiently promote effective internal control over financial reporting throughout the organization. This material weakness exists because of the aggregate effect of multiple deficiencies in internal control which affect our control environment, including: a) the lack of an effective risk assessment process for the identification of fraud risks; b) the lack of an internal audit function or other effective mechanism for ongoing monitoring of the effectiveness of internal controls; c) deficiencies in our accounting system and controls; d) and insufficient documentation and communication of our accounting policies and procedures as of December 31, 2011.
2. Deficiencies in the staffing of our financial accounting department. The number of qualified accounting personnel with experience in public company SEC reporting and GAAP is limited. This weakness does not enable us to maintain adequate controls over our financial accounting and reporting processes regarding the accounting for non-routine and non-systematic transactions. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, by this shortage of qualified resources.
3. Deficiencies in Segregation of Duties. The limited number of qualified accounting personnel results in an inability to have independent review and approval of financial accounting entries. Furthermore, management and financial accounting personnel have wide-spread access to create and post entries in our financial accounting system. There is a risk that a material misstatement of the
financial statements could be caused, or at least not be detected in a timely manner, due to insufficient segregation of duties. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our financial accounting staff is actively attending and receiving training. Management is still determining additional measures to remediate deficiencies related to staffing.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurring during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
We believe that a controls system, no matter how well designed and operated, cannot provide absoluter assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
At this time the Company has no other information to disclose.
The following table sets forth our directors and executive officers, their ages and all offices and positions with our company. Other employees will serve at the will of the Board of Directors:
R. Samuel Bell, Jr. Mr. Bell has served as a director of the Company since August 24, 2010. Previous experience includes: President and majority owner of Verde Bio Fuels, Inc. ("Verde"), a marketer and producer of biofuels, from 2006-present; President and owner of Fred H. Wood Oil Company, Inc. ("Wood Oil"), a fuel oil dealer, from 2004 to the present; President and owner of Echols Oil Company ("Echols Oil"), a fuel oil dealer, from 1997 to the present; and President and owner of Global Petroleum Services LLC ("Global"), an investment banking firm that specializes in the oil industry, from 1988 to the present. Verde, Echols Oil, Wood Oil, and Global are affiliates of the Company. Mr. Bell is also a member of the Executive Board for the South Carolina Petroleum Marketers Association and the Board of Directors for the National Oil-Heat Research Alliance. He also serves as an Executive Board Member, National PAC Chairman and Southeast Vice Chairman of the Petroleum Marketers of America Association. Mr. Bell attended Ferrum College where he pursued a degree in Business. Mr. Bell's experience in the biodiesel industry along with his other qualifications, skills and attributes led the Company to the conclusion that he should serve as a director of the Company in light of the Company's business. Mr. Bell devotes approximately 25 hours a week to fulfilling his duties as Chief Executive Officer and Chairman of the Board of Directors.
Victor AbiJaoudi II. Mr. AbiJaoudi has served as a director of the Company since July 23, 2010. Previous experience includes: Founder and Brand Manager of Reset Creative, Inc., a creative marketing and production agency, from 2008 until July 2010; Engineer and Project Manager at Bad Boy Entertainment Worldwide, a multinational entertainment company, from 2005 to 2008; Founder and CEO of TradeMark Entertainment, LLC, an entertainment company, from 2002 to 2008; and Founder and CEO of Shao Studios, Inc., a new media design company, from 2002 to 2005. Mr. AbiJaoudi graduated in 2003 from Duke University with a degree in Economics. Mr. AbiJaoudi’s experience, qualifications, skills and attributes led the Company to the conclusion that he should serve as a director of the Company in light of the Company’s business.
Frank Aaron Gay Mr. Gay currently serves as CEO and majority owner of Green Valley Bio-Fuels, a biodiesel company established in Warrenville, SC in 2009. In addition to his duties associated with the biodiesel production company, Mr. Gay concurrently holds positions with three other companies. Since 1996, he has held the title of CEO of Quality Plus Services, Inc., an engineering and construction. He is Vice-President of Roberts Energy Company, a fuel distribution company, and has served in this role since 2010. Starting in 2010, Mr. Gay also accepted the role of CEO of SSG – Systems Support Group, a government contracting company that performs IT service and military support.
The directors will serve as directors until our next annual shareholder meeting or until a successor is elected who accepts the position. Directors are elected for one-year terms. Officers hold their positions at the will of the Board of Directors, absent any employment agreement. There are no arrangements, agreements or understandings between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of the Company’s affairs.
Involvement in Certain Material Legal Proceedings During the Last Ten Years
To the best of our knowledge, none of our directors or executive officers, during the past ten years, has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that has resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions, and Director Independence,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to SEC rules or regulations.
No family relationships exist among any of the executive officers, directors or director nominees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent shareholders are required by the rules and regulations of the SEC to furnish the Company with copies of all forms they file pursuant to Section 16(a). Below is the information with respect to failures of directors, officers and/or beneficial owners of more than ten percent of any class of equity securities of the Company to timely file reports under Section 16(a):
Code of Ethics
We have previously adopted a code of ethics that applies to our employees. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
Audit Committee and Charter
Currently, we have no independent audit committee nor have we adopted an audit committee charter. In lieu of an audit committee, our full Board of Directors assumes the responsibilities that would normally be those of an audit committee. None of our directors or officers has the qualifications or experience to be considered an audit committee financial expert. We believe the cost related to retaining an audit committee financial expert at this time is prohibitive. Further, given our limited operations to date, we believe the services of an audit committee financial expert are not warranted.
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No executive officer received total annual salary, bonus compensation, stock awards, option awards, non-equity incentive plan compensation, or non-qualified deferred compensation earnings in excess of $100,000.
(1) The Company issued Mr. Bell 4,000,000 shares of the Company's Class A common stock on July 22, 2011 for certain consulting services to the Company. The fair value of the shares (as determined by the Company) on the date of issuance was a price equal to $0.11 per share.
(2) On October 5, 2011, Mr. Victor AbiJaoudi II tendered his resignation as the Company’s President and Chief Operating Officer and the Company’s Board of Directors accepted the resignation effective immediately.
(3) The Company previously issued Mr. AbiJaoudi 250,000 shares of the Company's Class A common stock on September 10, 2009 for certain consulting services to the Company. The fair value of the shares (as determined by the Company) on the date of issuance was a price equal to $0.01 per share.
(4) The Company previously issued Mr. AbiJaoudi 2,250,000 shares of the Company's Class A common stock on July 1, 2010 for certain consulting services to the Company. The fair value of the shares (as determined by the Company) on the date of issuance was a price equal to $0.51 per share.
(5) The Company issued Mr. AbiJaoudi 1,000,000 shares of the Company's Class A common stock on July 22, 2011 for certain consulting services to the Company. The fair value of the shares (as determined by the Company) on the date of issuance was a price equal to $0.11 per share.
(6) The Company issued Mr. Norris 1,500,000 shares of the Company's Class A common stock on July 22, 2011 for certain consulting services to the Company. The fair value of the shares (as determined by the Company) on the date of issuance was a price equal to $0.11 per share.
(7) On June 9, 2011, the Company granted 2,000,000 shares of Class A Common Stock to Mr. Gay with a fair value of $300,000. 250,000 of the shares vested immediately and 250,000 shares vest every 90 days through March 2012. As of December 31, 2011, the Company had issued 1,500,000 Class A Common shares in conjunction with this grant and recognized $283,833 of stock-based compensation during the twelve months ended December 31, 2011.
We currently do not have employment agreements with any of our directors or executive officers.
Outstanding Equity Awards at Fiscal Year End
For the fiscal year ended December 31, 2011, no director or executive officer has received compensation from us pursuant to any compensatory or benefit plan and there is no plan or understanding, express or implied, to pay any compensation to any director or executive officer pursuant to any compensatory or benefit plan. We anticipate that we will compensate our officers and directors in the future for services to us with stock or options to purchase common stock, in lieu of cash.
Compensation of Directors
No member of our board of directors received any compensation for their services as a director during the year ended December 31, 2011 and currently no compensation arrangements are in place for the compensation of directors.
The Company does not currently have a compensation committee or adopted a compensation committee charter. The Board of Directors performs the required functions of a compensation committee, as permitted under applicable laws. Our management believes that it is premature to establish a compensation committee given our early stage of development. Our management will consider adopting a compensation committee charter and forming a compensation committee as circumstances warrant.
The following table sets forth information with respect to the beneficial ownership of the Company’s outstanding common stock by: (i) each person who is known by the Company to be the beneficial owner of five percent (5%) or more of the Company’s common stock; (ii) the Company’s chief executive officer, its other executive officers, and each director; and (iii) all of the Company’s directors and officers as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, 244 Fifth Avenue, Suite V235, New York, New York 10001. Except as indicated in the footnotes to this table and subject to applicable community property laws, the persons named in the table to our knowledge have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The information in this table is as of March 2, 2011 based upon: (i) 28,774,332 shares of Class A Common Stock outstanding; and (ii) 1,980,000 shares of Class B Common Stock outstanding. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.
(1) In accordance with the terms of the Exchange Transaction, the holder of Class B Common Stock is entitled to two votes per share on all matters and votes with holders of Class A Common Stock together on all matters as one class.
Certain Relationships and Related Transactions
The following includes a summary of transactions since the beginning of the 2011 fiscal year of the Company, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in an arm’s length transaction.
In 2011 the Company’s subsidiary, NABE, sold $199,416.82 of product to Echols Oil Company. In the same period NABE sold $257,274.10 to Verde Bio Fuels Inc. The Company’s current Chairman and CEO, R. Samuel Bell, Jr., is the majority owner of Echols Oil Company and Verde Bio Fuels Inc.
Except for the foregoing, neither our directors and officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to all of our outstanding shares, nor any promoter, nor any relative or spouse of any of the foregoing persons has any material interest, direct or indirect, in any transaction since our incorporation or in any presently proposed transaction which, in either case, has or will materially affect us.
Our management is involved in other business activities and may, in the future become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between our business and their other business interests. In the event that a conflict of interest arises at a meeting of our directors, a director who has such a conflict will disclose his interest in a proposed transaction and will abstain from voting for or against the approval of such transaction.
We currently do not have any independent directors as the term “independent” is defined by the rules of the Nasdaq Stock Market.
The following table shows the audit fees that were billed or are expected to be billed by Malone Bailey LLP ("MB") for fiscal years 2011 and 2010:
Audit fees consist of the aggregate fees billed for services rendered for the audit of our annual financial statements, the reviews of the financial statements included in our Forms 10-Q and for any other services that are normally provided by our independent auditors in connection with our statutory and regulatory filings or engagements.
Audit related fees consist of the aggregate fees billed for professional services rendered for assurance and related services that reasonably related to the performance of the audit or review of our financial statements that were not otherwise included in Audit Fees.
Tax fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
All other fees consist of the aggregate fees billed for products and services provided by our independent auditors and not otherwise included in Audit Fees, Audit Related fees or Tax Fees.
* Filed herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 16, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Each of the undersigned, being a director or officer of Incoming, Inc. (the “Company”), hereby constitutes and appoints R Samuel Bell and Eric Norris, and each of them (with full power to each of them to act alone), his or her true and lawful attorney-in-fact and agent for him or her and in his or her name, place and stead in any and all capacities, to sign the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under the Securities Exchange Act of 1934, as amended, and any and all amendments thereto, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission and any other appropriate authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing required and necessary to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he or she might or could do if personally present, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.