UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended JuneSeptember 30, 20082008.
¨o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______to _________.
Commission file number: 00-51354
AE BIOFUELS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 26-1407544 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer |
20400 Stevens Creek Blvd., Suite 700
Cupertino, CA 95014
(Address of principal executive offices)
(408) 213-0940
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noxþ
The number of shares outstanding of the registrant’s common stock as of August 4,October 28, 2008 was 84,956,02085,549,940 shares.
FORM 10-Q
Quarter Ended JuneSeptember 30, 2008
1
PART I - FINANCIAL INFORMATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 636,654 | $ | 720,402 | |||
Marketable securities | - | 2,635,892 | |||||
Accounts receivable | - | 3,447,039 | |||||
Accounts receivable - related party | - | 6,127,727 | |||||
Prepaid expenses | 120,029 | 58,872 | |||||
Other current assets | 1,235,837 | 674,235 | |||||
Total current assets | 1,992,520 | 13,664,167 | |||||
Property, plant and equipment, net | 22,354,249 | 19,585,087 | |||||
Intangible assets | 133,334 | 233,334 | |||||
Other assets | 483,193 | 68,488 | |||||
Total assets | $ | 24,963,296 | $ | 33,551,076 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Accounts payable and accrued liabilities | $ | 1,857,401 | $ | 9,985,639 | |||
Income taxes payable | 37,040 | 36,750 | |||||
Short term borrowings (related party) | 600,000 | - | |||||
Short term borrowings, net of discount | 3,788,962 | - | |||||
Other current liabilities | 3,745,060 | - | |||||
Total current liabilities | 10,028,463 | 10,022,389 | |||||
Commitments and contingencies (Notes 6, 7, 8, 13, 14 and 16) | |||||||
Stockholders' equity: | |||||||
Series B preferred stock, $0.001 par value - 40,000,000 authorized; 6,149,821 and 6,487,491 shares issued and outstanding, respectively (aggregate liquidation preference of $18,811,473 and $19,462,473) | 6,149 | 6,487 | |||||
Common Stock, $0.001 par value - 400,000,000 authorized; 84,916,020 and 84,557,462 shares issued and outstanding, respectively | 84,915 | 84,557 | |||||
Additional paid-in capital | 36,066,476 | 33,707,953 | |||||
Deficit accumulated during the development stage | (21,501,134 | ) | (11,995,395 | ) | |||
Accumulated other comprehensive income | 278,427 | 1,725,085 | |||||
Total stockholders' equity | 14,934,833 | 23,528,687 | |||||
Total liabilities and stockholders' equity | $ | 24,963,296 | $ | 33,551,076 |
|
| September 30, 2008 |
| December 31, 2007 |
| ||
|
| (Unaudited) |
|
|
| ||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 591,718 |
| $ | 720,402 |
|
Marketable securities |
|
| - |
|
| 2,635,892 |
|
Accounts receivable |
|
| - |
|
| 3,447,039 |
|
Accounts receivable - related party |
|
| - |
|
| 6,127,727 |
|
Inventories |
|
| 1,254,008 |
|
| - |
|
Prepaid expenses |
|
| 142,533 |
|
| 58,872 |
|
Other current assets |
|
| 334,162 |
|
| 674,235 |
|
Total current assets |
|
| 2,322,421 |
|
| 13,664,167 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 21,926,418 |
|
| 19,585,087 |
|
Intangible assets |
|
| 83,334 |
|
| 233,334 |
|
Other assets |
|
| 483,229 |
|
| 68,488 |
|
Total assets |
| $ | 24,815,402 |
| $ | 33,551,076 |
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 1,080,066 |
| $ | 9,985,639 |
|
Income taxes payable |
|
| 6,092 |
|
| 36,750 |
|
Short term borrowings, net of discount |
|
| 4,173,437 |
|
| - |
|
Other current liabilities |
|
| 3,673,760 |
|
| - |
|
Current portion of long-term debt |
|
| 538,213 |
|
| - |
|
Total current liabilities |
|
| 9,471,568 |
|
| 10,022,389 |
|
|
|
|
|
|
|
|
|
Long-term debt, net of discount |
|
| 3,633,709 |
|
| - |
|
Long-term debt (related party) |
|
| 1,300,495 |
|
| - |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 6, 7, 8, 13, 14, 15, 17 and 18) |
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Series B preferred stock, $0.001 par value – 7,235,402 authorized; 5,533,821 and 6,487,491 shares issued and outstanding, respectively (aggregate liquidation preference of $16,601,463 and $19,462,473) |
|
| 5,533 |
|
| 6,487 |
|
Common Stock, $0.001 par value - 400,000,000 authorized; 85,532,020 and 84,557,462 shares issued and outstanding, respectively |
|
| 85,531 |
|
| 84,557 |
|
Additional paid-in capital |
|
| 36,283,215 |
|
| 33,707,953 |
|
Deficit accumulated during the development stage |
|
| (25,152,218 | ) |
| (11,995,395 | ) |
Accumulated other comprehensive (loss) income |
|
| (812,431 | ) |
| 1,725,085 |
|
Total stockholders' equity |
|
| 10,409,630 |
|
| 23,528,687 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 24,815,402 |
| $ | 33,551,076 |
|
The accompanying notes are an integral part of the financial statements
2
AE BIOFUELS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended | For the three months ended | Period from November 29, 2005 (Date of Inception) to | ||||||||||||||
June 30, 2008 | June 30, 2007 | June 30, 2008 | June 30, 2007 | June 30, 2008 | ||||||||||||
Sales | $ | - | $ | - | $ | - | $ | - | $ | 744,450 | ||||||
Cost of Goods Sold | - | - | - | - | 735,000 | |||||||||||
Gross Profit | - | - | - | - | 9,450 | |||||||||||
Research and Development | 512,056 | 120,000 | 387,708 | 60,000 | 769,817 | |||||||||||
General and Administrative Expenses | 5,619,348 | 3,254,514 | 3,657,343 | 1,874,068 | 26,433,814 | |||||||||||
Operating Loss | (6,131,404 | ) | (3,374,514 | ) | (4,045,051 | ) | (1,934,068 | ) | (27,194,181 | ) | ||||||
Other Income (Expense) | ||||||||||||||||
Interest income | 32,486 | 6,170 | 18,945 | 2,640 | 130,235 | |||||||||||
Interest expense | (253,019 | ) | (55,060 | ) | (253,019 | ) | (13,394 | ) | (253,019 | ) | ||||||
Other income, net of expenses | 42,161 | 16,670 | 6,200 | 16,670 | 230,477 | |||||||||||
Gain from dissolution of joint venture | - | 1,491,742 | - | 637,047 | 9,061,141 | |||||||||||
Gain on foreign currency exchange | - | 52,116 | - | 52,116 | 497,954 | |||||||||||
Shareholder agreement cancellation payment | (900,000 | ) | - | - | - | (900,000 | ) | |||||||||
Registration rights payment | (2,274,402 | ) | - | - | - | (2,274,402 | ) | |||||||||
Income related to 50/50 joint venture | - | 155,626 | - | 155,626 | 182,923 | |||||||||||
Loss before income taxes | (9,484,178 | ) | (1,707,250 | ) | (4,272,925 | ) | (1,083,363 | ) | (20,518,872 | ) | ||||||
Income Taxes | (21,560 | ) | - | - | - | (100,145 | ) | |||||||||
Net Loss | $ | (9,505,738 | ) | $ | (1,707,250 | ) | $ | (4,272,925 | ) | $ | (1,083,363 | ) | $ | (20,619,017 | ) | |
Loss per common share | ||||||||||||||||
Basic and diluted | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.27 | ) | |
Weighted average shares outstanding | ||||||||||||||||
Basic and diluted | 84,717,979 | 74,611,093 | 84,870,320 | 74,354,167 | 76,480,633 |
The accompanying notes are an integral part of the financial statements
3
AE BIOFUELS, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended | Period from November 29, 2005 (Date of Inception) to | |||||||||
June 30, 2008 | June 30, 2007 | June 30, 2008 | ||||||||
Operating activities: | ||||||||||
Net loss | $ | (9,505,738 | ) | $ | (1,707,250 | ) | $ | (20,619,016 | ) | |
Adjustments to reconcile net loss to | ||||||||||
net cash provided by (used in) operating activities: | ||||||||||
Stock based compensation | 1,561,043 | 60,409 | 3,199,002 | |||||||
Expired land options | 124,536 | - | 569,660 | |||||||
Amortization and depreciation | 108,977 | - | 178,752 | |||||||
Amortization of debt discount | 165,317 | 165,317 | ||||||||
Registration rights payment | 2,274,402 | - | 2,274,402 | |||||||
Gain on sale of subsidiary | - | (854,695 | ) | (854,695 | ) | |||||
Loss on impairment of assets | - | - | 5,114,236 | |||||||
Gain on dissolution of joint venture | - | - | (8,206,446 | ) | ||||||
Gains on forward currency contracts | - | - | (436,154 | ) | ||||||
Changes in assets and liabilities: | ||||||||||
Accounts receivable | 9,490,481 | (105,290 | ) | 557,206 | ||||||
Prepaid expenses | (91,190 | ) | 163,500 | (151,987 | ) | |||||
Other assets | (1,586,041 | ) | (2,516,396 | ) | (1,169,274 | ) | ||||
Accounts payable | (8,924,355 | ) | 959,322 | 450,577 | ||||||
Other liabilities | 2,362,968 | 399,644 | 2,305,937 | |||||||
Income taxes payable | 290 | - | 37,040 | |||||||
Net cash used in operating activities | (4,019,310 | ) | (3,600,756 | ) | (16,585,443 | ) | ||||
Investing activities: | ||||||||||
Purchases of property, plant and equipment | (4,155,864 | ) | (5,936,212 | ) | (30,996,967 | ) | ||||
Purchases of marketable securities | - | - | (2,459,292 | ) | ||||||
Sales of marketable securities | 2,568,216 | - | 2,568,216 | |||||||
Cash restricted by letter of credit | 500,000 | - | - | |||||||
Purchase of Marwich II, Ltd., net of losses | - | - | (662,406 | ) | ||||||
Exchange rate gain | - | (46,820 | ) | (193,399 | ) | |||||
Additions to other assets and intangibles | - | - | (1,073,872 | ) | ||||||
Refund of property expenditures | - | - | 2,775,000 | |||||||
Return of assets from dissolution of joint venture | - | - | 8,206,446 | |||||||
Sale of Wahoo facility | - | 2,000,000 | 2,000,000 | |||||||
Net cash used in investing activities | (1,087,648 | ) | (3,983,032 | ) | (19,836,274 | ) | ||||
Financing activities: | ||||||||||
Proceeds from short term borrowings | 5,044,732 | - | 5,044,732 | |||||||
Payments of short term borrowings | (175,000 | ) | ||||||||
Proceeds from long-term debt | - | - | 250,000 | |||||||
Payments on long-term debt | - | (241,071 | ) | (250,000 | ) | |||||
Proceeds from settlement | - | - | 200,000 | |||||||
Refund of investment | - | - | (90,000 | ) | ||||||
Proceeds from sale of preferred stock, net of offering costs | 10 | 8,424,148 | 31,910,522 | |||||||
Net cash provided by financing activities | 5,044,742 | 8,008,077 | 37,065,254 | |||||||
Effect of exchange rate fluctuations on cash and cash equivalents | (21,532 | ) | - | (6,883 | ) | |||||
Net (decrease) increase in cash and cash equivalents for period | (83,748 | ) | 424,289 | 636,654 | ||||||
Cash and cash equivalents, beginning of period | 720,402 | 1,213,134 | - | |||||||
Cash and cash equivalents, end of period | $ | 636,654 | $ | 1,637,423 | $ | 636,654 |
|
| For the nine months ended |
| Period from November 29, 2005 (Date of Inception) to September 30, 2008 |
| |||||
|
| September 30, 2008 |
| September 30, 2007 |
|
| ||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (13,156,823 | ) | $ | (2,201,863 | ) | $ | (24,270,101 | ) |
Adjustments to reconcile net loss to |
|
|
|
|
|
|
|
|
|
|
net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
| 1,776,882 |
|
| 862,537 |
|
| 3,414,841 |
|
Expired land options |
|
| 124,536 |
|
| 248,340 |
|
| 569,660 |
|
Amortization and depreciation |
|
| 168,284 |
|
| 33,437 |
|
| 238,059 |
|
Inventory provision |
|
| 952.028 |
|
|
|
|
| 952,028 |
|
Loss on forward purchase contract |
|
| 532,500 |
|
| - |
|
| 532,500 |
|
Amortization of debt discount |
|
| 495,942 |
|
| - |
|
| 495,942 |
|
Registration rights obligation |
|
| 2,274,402 |
|
| - |
|
| 2,274,402 |
|
Gain on sale of subsidiary |
|
| - |
|
| (881,481 | ) |
| (854,695 | ) |
Loss on impairment of assets |
|
| - |
|
| 5,114,236 |
|
| 5,114,236 |
|
Gain on dissolution of joint venture |
|
| - |
|
| (8,206,446 | ) |
| (8,206,446 | ) |
Gains on forward currency contracts |
|
| - |
|
| - |
|
| (436,154 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 9,490,481 |
|
| - |
|
| 557,206 |
|
Inventory |
|
| (2,280,540 | ) |
| - |
|
| (2,280,540 | ) |
Prepaid expenses |
|
| (114,465 | ) |
| 258,869 |
|
| (175,262 | ) |
Other assets |
|
| (1,778,139 | ) |
| (1,019,064 | ) |
| (1,361,372 | ) |
Accounts payable |
|
| (8,637,365 | ) |
| (170,469 | ) |
| 737,567 |
|
Other liabilities |
|
| 2,882,172 |
|
| 85,087 |
|
| 2,825,141 |
|
Income taxes payable |
|
| (29,775 | ) |
| - |
|
| 6,973 |
|
Net cash used in operating activities |
|
| (7,299,880 | ) |
| (5,876,817 | ) |
| (19,866,014 | ) |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
| (5,918,939 | ) |
| (10,459,960 | ) |
| (32,760,043 | ) |
Purchases of marketable securities |
|
| - |
|
| - |
|
| (2,459,292 | ) |
Sales of marketable securities |
|
| 2,568,216 |
|
| - |
|
| 2,568,216 |
|
Cash payments to settle forward contracts |
|
| (198,213 | ) |
| - |
|
| (198,213 | ) |
Cash restricted by letter of credit |
|
| 500,000 |
|
|
|
|
| - |
|
Cash payment to settle forward purchase contract |
|
|
|
|
|
|
|
|
|
|
Purchase of Marwich II, Ltd., net of losses |
|
| - |
|
| - |
|
| (662,406 | ) |
Exchange rate contract settlements |
|
| - |
|
|
|
|
| (193,399 | ) |
Additions to other assets and intangibles |
|
| - |
|
| - |
|
| (1,073,872 | ) |
Refund of property expenditures |
|
| - |
|
| 2,775,000 |
|
| 2,775,000 |
|
Return of cash from dissolution of joint venture |
|
| - |
|
| 8,206,446 |
|
| 8,206,446 |
|
Sale of Wahoo facility |
|
| - |
|
| 2,000,000 |
|
| 2,000,000 |
|
Net cash provided by (used in) investing activities |
|
| (3,048,936 | ) |
| 2,521,486 |
|
| (21,797,562 | ) |
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings |
|
| 5,662,786 |
|
|
|
|
| 5,662,786 |
|
Payments of short-term borrowings |
|
| - |
|
| (1,250,000 | ) |
| - |
|
Proceeds from long-term debt |
|
| 4,469,547 |
|
|
|
|
| 4,719,547 |
|
Payments on long-term debt |
|
| - |
|
| (218,311 | ) |
| (250,000 | ) |
Proceeds from settlement |
|
| - |
|
| 200,000 |
|
| 200,000 |
|
Refund of investment |
|
| - |
|
| (90,000 | ) |
| (90,000 | ) |
Proceeds from sale of preferred stock, net of offering costs |
|
| 910 |
|
| 10,056,354 |
|
| 31,911,422 |
|
Net cash provided by financing activities |
|
| 10,133,243 |
|
| 8,698,043 |
|
| 42,153,755 |
|
Effect of exchange rate fluctuations on cash and cash equivalents |
|
| 86,890 |
|
| - |
|
| 101,539 |
|
Net (decrease) increase in cash and cash equivalents for period |
|
| (128,684 | ) |
| 5,342,712 |
|
| 591,718 |
|
Cash and cash equivalents, beginning of period |
|
| 720,402 |
|
| 1,212,934 |
|
| - |
|
Cash and cash equivalents, end of period |
| $ | 591,718 |
| $ | 6,555,646 |
| $ | 591,718 |
|
The accompanying notes are an integral part of the financial statements
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Activities
and Summary of Significant Accounting Policies.Nature of Activities. These consolidated financial statements include the accounts of AE Biofuels, Inc., a Nevada corporation, and its wholly-owned subsidiaries, American Ethanol, Inc. (“American”), a Nevada corporation;corporation and its subsidiaries; Sutton Ethanol, LLC (“Sutton”), a Nebraska limited liability company; Illinois Valley Ethanol, LLC (“Illinois Valley”), an Illinois limited liability company; Biofuels Marketing, Inc., a Delaware corporation; International Biodiesel, Inc., a Nevada corporation and its subsidiaries International Biofuels, Ltd, a Mauritius corporation and its subsidiary Universal Biofuels Private Ltd., an India company; Danville Ethanol, Inc., an Illinois corporation; AE Biofuels Americas,Energy Enzymes Inc., a Delaware corporation;corporation, and Energy Enzymes Inc.,AE Biofuels Americas, a Delaware corporation collectively, (“AE Biofuels” or “the Company”).
The Company’s purpose is to develop, acquire, construct, operate and sell fuel grade ethanol and biodiesel from advancednext-generation technology ethanol and biodiesel production facilities. The Company is a development stage company and as such, does not expect to generate significant revenue until its plants are constructed and operational, or operational plants have been acquired. Since inception, the Company has engaged in (i) fund raising funds through the sale of stock, (ii) purchasedpurchasing land or acquired options to purchase land for development of ethanol plants in the United States, (iii) soldselling an ethanol plant site in Wahoo, Nebraska, (iv) applied for and receivedreceiving permits for ethanol plant sites in Nebraska and Illinois, (v) developed, wrotedeveloping, drafting and submittedsubmitting three patents on cellulosic ethanol production technology, (vi) completed construction ofconstructing a biodiesel manufacturing facility in Kakinada, India through International Biodiesel, Inc., its wholly owned subsidiary, and Universal Biofuels Private, Ltd., a Mauritius corporation, (vii) startedstarting ground work for an ethanol facility in Sutton, Nebraska, (viii) began the construction ofconstructing a glycerin refining and vegetable oil pretreatmentpre-treatment facility at the Kakinada plant, and (ix) constructedconstructing a cellulosic ethanol commercial demonstration facility in Butte, Montana.
AE Biofuels was originally formed in California on September 12, 2001 as Great Valley Ventures LLC, however, no operating agreement was adopted and no capital was contributed until November 29, 2005. Between September 2001 and November 2005, the Company had no operations and engaged in no activities. From November 2005 through December 2005, the Company commenced development activities with the addition of key advisors, management, and additional founding shareholders. On January 12, 2006, the Company was renamed American Ethanol, LLC. On February 23, 2006, American Ethanol, LLC merged into American Ethanol, Inc., a Nevada corporation.
On June 23, 2006, American Ethanol acquired 88.3% of the outstanding common stock of Marwich II, Ltd. (“Marwich”). Marwich was a shell company with no operations. On December 7, 2007, American Ethanol merged with and into Marwich and (i) each issued and outstanding share of American Ethanol common stock (including common stock issued upon conversion of American Ethanol Series A Preferred Stock, which automatically converted into two common shares for each share of Series A Preferred Stock immediately prior to the closing of the Merger) and Series B Preferred Stock (also convertible into common stock at the holders discretion) converted into common stock and Series B Preferred Stock, respectively, of Marwich, and (ii) each issued and outstanding warrant and/or option exercisable for common stock or Series B preferred stock of American Ethanol was assumed and converted into a warrant and/or option exercisable for common stock ofor Series B preferred stock o f Marwich. Marwich then changed its name to AE Biofuels, Inc.
Basis of Presentation and Consolidation
. The consolidated financial statements include the accounts of the Company and itsAE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Activities and Summary of Significant Accounting Policies (contd.).
The accompanying unaudited interim consolidated financial statements as of JuneSeptember 30, 2008 and 2007 and for the three and sixnine months ended JuneSeptember 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim consolidated financial statements for the three and sixnine months ended JuneSeptember 30, 2008 and 2007 have been prepared on the same basis as the audited consolidated statements as of December 31, 2007 and reflect all adjustments, consisting primarily of normal recurring adjustments, necessary for the fair presentation of its statement of financial position, results of operations and cash flows. The results of operations for the three and sixnine months ended JuneSeptember 30, 2008 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.
Use of Estimates
. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of expenses during the reporting period. Significant estimates, assumptions and judgments made by management include the determination of impairment of long-lived assets, the valuation of equity instruments such as options and warrants, and the accrual for the payments under the Company's registration rights agreement with certain of its shareholders and management’s judgment about contingent liabilities. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.Fair Value of Financial Instruments.
Reclassifications.
Certain prior year amounts were reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported net loss or deficit accumulated during the development stage.Revenue recognition
Cost of Goods Sold. Cost of goods sold include those costs directly associated with the production of revenues., such as raw material purchases, factory overhead, and other direct production costs. For the three months ended September 30, 2008, cost of goods sold consists of a lower of cost or market adjustment taken against inventory.
General and Administrative. General and Administrative expenses include those costs associated with the general operations of our business such as: compensation, rent, consultants, travel related to executive, legal and financial functions.
Cash and Cash Equivalents
. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.Marketable Securities.
The Company’s short-term investmentsAE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Activities and Summary of Significant Accounting Policies (contd.).
Accounts Receivable. Accounts receivable consist of commodities purchased and resold either secured by letters of credit or made to large credit worthy customers. Peripheral or incidental purchases and subsequent sales of commodities are recorded as net other income.
Inventories. Inventories are stated at the lower of cost, using the first-in and first-out (FIFO) method, or market.
Property, Plant and Equipment
. Property, plant and equipment are carried at cost less accumulated depreciation after assets are placed in service and are comprised primarily of land acquired for development of production facilities, and the biodiesel plant in India. The estimated useful life of this plant is expected to be 20 years, once placed in service. The estimated useful life for office equipment and computers isIntangible Assets.
Intangible assets are carried at initial fair value less accumulated amortization over the estimated useful life. Amortization is computed over the estimated useful lives of the underlying assets using a method that reflects their utilization pattern.Stock Splits
. On February 28, 2006 andResearch and Development.
Research and development costs are expensed asIncome Taxes.
The Company recognizes income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“SFAS 109”), using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of enacted tax law.SFAS 109 provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur. Otherwise, a valuation allowance is established for the deferred tax assets which may not be realized. As of December 31, 2007, the Company recorded a full valuation allowance against its net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance.
The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation on FASB Statement No. 109” ("FIN 48"), which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on its tax return. To the extent that the Company’s assessment of such tax position changes, the change in estimate is recorded in the period in which the determination is made. With the adoption of FIN 48, the Company also began reporting tax-related interest and penalties as a component of income tax expense.
Long-Lived Assets.
The Company evaluates the recoverability of long-lived assets with finite lives in accordance with Statement of Financial Accounting Standards No. 144,"Accounting for the Impairment or Disposal ofLong-Lived Assets"AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Activities and Summary of Significant Accounting Policies (contd.).
Basic and Diluted Net Loss Perper Share.
The following table shows the weighted-average number of potentially dilutive shares excluded from the diluted net loss per share calculation for Junethe three months ended September 30, 2008 and 2007 and on a cumulative basis:
| For the three months ended September 30, 2007 |
| For the three months ended September 30, 2008 |
| Period from November 29, 2005 (Date of Inception) to September 30, 2008 |
Series A preferred stock | 9,999,999 |
| - |
| 5,887,919 |
Series B preferred stock | 6,320,498 |
| 5,880,104 |
| 3,845,509 |
Series B warrants | 732,501 |
| 718,908 |
| 425,263 |
Common stock options and warrants | 2,627,174 |
| 5,575,750 |
| 2,346,353 |
Unvested restricted stock | 1,100,000 |
| 250,000 |
| 1,574,193 |
Total weighted average number of potentially dilutive shares excluded from the diluted net loss per share calculation | 20,780,172 |
| 12,424,762 |
| 14,079,237 |
Series A preferred stock was converted to common stock on a 1:1 basis was 12,490,236, 17,070,476 and 9,019,669, respectively.
Comprehensive Income.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources. The Company’s other comprehensive income consists solely of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiaries. The tax effects on the foreign currency translation adjustments have not been significant.Foreign Currency Translation/Transactions.
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date; with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income. Income and expense accounts are translated at average exchange rates during the year. Gains and losses from foreign currency transactions are recorded in other income (loss), net. The functional currency is the local currency for all non-U.S. subsidiaries.Restricted Stock.
The Company has granted restricted stock awards, restricted by a service condition, with vesting periods of up toStock-Based Compensation Expense.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”), requiring us to recognize expense related to the fair value of our stock-based compensation awards adjusted to reflect only those shares that are expected to vest. Our implementation of SFAS 123(R) used the modified-prospective-transitionWe made the following estimates and assumptions in determining fair value:
·
Valuation and Amortization Method — We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
·
Expected Term — The expected term represents the weighted-average period that our stock-based awards are expected to be outstanding. We applied the “Simplified Method” as defined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 and 110.
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Activities and Summary of Significant Accounting Policies (contd.).
·
Expected Volatility — The expected volatility is calculated by considering, among other things, the expected volatilities of public companies engaged in similar industries.
·
Expected Dividend — The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect to pay dividends in the foreseeable future.
·
Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent remaining term.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, “
Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used in measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice. On January 1, 2008, the Company adopted SFAS 157 and the adoption of this statement had no material effect on the Company’s financial statements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. 157-2,In February 2007, the FASB issued SFAS No. 159, “
The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” ("SFAS 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. On January 1, 2008, the Company adopted SFAS 159 and the adoption of this statement had no material effect on the Company’s financial statements.In December 2007, the FASB issued SFAS No. 141(R), “
Business Combinations” (“SFAS 141R”). This statement changes the accounting for acquisition transaction costs by requiring them to be expensed in the period incurred, and also changes the accounting for contingent consideration, acquired contingencies and restructuring costs related to an acquisition. Also in December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”). This statement will change the accounting and reporting for minority interests, which will be re-characterized as non controlling interests, classified as a component of equity and accounted for at fair value. SFAS 141(R) and SFAS 160 are effective for the Company’s 2009 financial statements. Early adoption is prohibited. The effect the adoption of SFAS 141(R) and SFAS 160 will have on the Company’s financial statements will depend on the nature and size of acquisitions we complete after we adopt SFAS 141(R) and SFAS 160.In May 2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and faced criticism because it was directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted AccountingIn May 2008, the FASB issued Staff Position No. APB 14-1, “
Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied retrospectively to all periods presented. The Company is currently evaluating the impact that FSP APB 14-1 will have on its consolidated financial statements.AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Nature of Activities and Summary of Significant Accounting Policies (contd.).
In April 2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141, "Business Combinations." We are required to adopt FSP FAS 142-3 in the first quarter of 2009 and will apply it prospectively to intangible assets acquired after the effective date. We do not currently believe that adopting FSP FAS 142-3 wil l have a material impact on our Consolidated Financial Statements.
In June 2008, the FASB ratified EITF Issue 07-5,“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-5”). Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”)specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified instockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model tobe applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133paragraph 11(a) scope exception. EITF 07-5 will be effective for the first annual reporting perio d beginning after December 15, 2008, and early adoption isprohibited. The Company is evaluating the impact that this standard will have on its consolidated financial statements.
2.
Ability to Continue as a Going Concern.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses and negative cash flow since inception and currently has an accumulated deficit.deficit and negative working capital. These factors raise substantial doubt about its ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on several factors.
The Company has had minimal revenues and has incurred losses due to start up costs from inception through JuneSeptember 30, 2008. The Company has raised approximately $31.8 million dollars to date through the sale of preferred stock (net of placement fees). An additional $8 million of cash was generated through the dissolution of the Sutton Ethanol joint venture. The Company obtained an additional $11 million in debt from senior secured notes and a term loan. The Company will have to raise significantly more capital andor secure a significant amount of debt to complete its business plan and continue as a going concern. The Company had no ethanol or biodiesel plantsManagement completed the commissioning of the facility in operation as of June 30, 2008. ManagementIndia on October 1, 2008 and plans to begin operations of this biodiesel facility during the fourth quarter of 2008.
The Company will need significantly more cash to implement its plan to build next-generation ethanol plants, to continue to develop biodiesel facilities in India, to consummate the proposed acquisition of an ethanol plant and distribution business in Wyoming and to develop biodiesel facilities in South America. The Company intends to raise these funds through the sale of additional equity either in AE Biofuels or one of our subsidiaries, joint ventures, construction loans, long-term debt financings and operating cash flows. We estimate that the cost to develop a biodiesel facility in India.
The Company today is spending approximately $645,000 per month for its general and debt financings. Theadministrative and research and development costs. Funds available at September 30, 2008 are sufficient to cover less than one month of our domestic operating costs. During the nine months ended September 30, 2008, we borrowed $650,000 under the credit facility established with a former member of the Company’s goal isboard of directors and significant shareholder, in order to raisemeet our funding obligations with respect to our Energy Enzymes subsidiary and meet current obligations. Subsequent to September 30, 2008, we borrowed an additional$500,000 under this credit facility. Due to the risk factors discussed in our annual report on form 10-K and in this quarterly report on form 10-Q, there can be no assurance that we will be successful in raising the additional funds needednecessary to construct and operatecarry out management’s plans for the future. Management estimates that it will need to obtain additional debt or equity funds for each ethanol and biodiesel facilities through stock offerings and debt financings.facility it builds, plus cash to continue its development efforts.
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
Inventory.
Inventory consists of the following:
|
| September 30, 2008 |
| December 31, 2007 |
| ||
|
|
|
|
|
|
|
|
Raw Materials |
| $ | 65,208 |
| $ | - |
|
Finished Goods |
|
| 1,188,800 |
|
| - |
|
Total inventory |
| $ | 1,254,008 |
| $ | - |
|
For the three months ended September 30, 2008, the Company expensed $952,028 in connection with the write-down of inventory to reflect market value below cost.
4.
Property, Plant and Equipment.
Property, plant and equipment consist of the following:
June 30, 2008 | December 31, 2007 | ||||||
Land | $ | 3,745,285 | $ | 3,734,623 | |||
Furniture and fixtures | 52,890 | 52,747 | |||||
Construction in progress | 18,567,920 | 15,800,752 | |||||
Total gross property, plant and equipment | 22,366,095 | 19,588,122 | |||||
Less accumulated depreciation | (11,826 | ) | (3,035 | ) | |||
Total net property, plant and equipment | $ | 22,354,249 | $ | 19,585,087 |
|
| September 30, 2008 |
| December 31, 2007 |
| ||
|
|
|
|
|
|
|
|
Land |
| $ | 3,682,547 |
| $ | 3,734,623 |
|
Furniture and fixtures |
|
| 52,747 |
|
| 52,747 |
|
Machinery and equipment |
|
| 410,103 |
|
| - |
|
Construction in progress |
|
| 17,802,126 |
|
| 15,800,752 |
|
Total gross property, plant and equipment |
|
| 21,947,523 |
|
| 19,588,122 |
|
Less accumulated depreciation |
|
| (21,105 | ) |
| (3,035 | ) |
Total net property, plant and equipment |
| $ | 21,926,418 |
| $ | 19,585,087 |
|
Components of construction in progress include $15,748,177 related to our India biodiesel production facility (expected to be placed in service during the fourth quarter of 2008) and $2,053,949 related to the development of our Sutton property (held for future development of an ethanol facility).
5.
Other Assets.
Other assets consistsconsist of payments for land options for possible future ethanol plants, Web domain names purchased by the Company, purchased customer lists, prepaid expenses, deposits and contract lease prepayments.following:
|
| September 30, 2008 |
| December 31, 2007 |
| ||
Current |
|
|
|
|
|
|
|
Letter of credit securing material purchases |
| $ | - |
| $ | 500,000 |
|
Short term deposits |
|
| 234,419 |
|
| - |
|
Land options |
|
| 40,000 |
|
| 164,536 |
|
Other |
|
| 59,743 |
|
| 9,699 |
|
|
| $ | 334,162 |
| $ | 674,235 |
|
Long Term |
|
|
|
|
|
|
|
Domain names |
|
| 46,098 |
|
| 46,098 |
|
Deposits |
|
| 437,131 |
|
| 22,390 |
|
|
| $ | 483,229 |
| $ | 68,488 |
|
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2008 | December 31, 2007 | ||||||
Current | |||||||
Letter of credit securing material purchases | $ | - | $ | 500,000 | |||
Short term deposits | 1,050,000 | - | |||||
Purchased commodity | 110,231 | - | |||||
Land options | 40,000 | 164,536 | |||||
Other | 35,606 | 9,699 | |||||
$ | 1,235,837 | $ | 674,235 | ||||
Long Term | |||||||
Domain names | 46,098 | 46,098 | |||||
Deposits | 437,095 | 22,390 | |||||
$ | 483,193 | $ | 68,488 |
6.
Intangible Assets.
Intangible assets consist of purchased customer lists (acquired in 2007 in connection with the Biofuels Marketing acquisition discussed in Note 11)12) which are being amortized over an estimated useful life of 18 months. Intangible assets had a net carrying amount of $133,334$83,334 and $233,334 as of JuneSeptember 30, 2008 and December 31, 2007, respectively.
7.
Debt.
Debt consists of the following:
|
| September 30, 2008 |
| December 31, 2007 |
| ||
|
|
|
|
|
|
|
|
Secured term loan, net of discount |
|
| 4,171,922 |
|
| - |
|
Revolving line of credit (related party) |
|
| 1,300,495 |
|
| - |
|
Less: current portion |
|
| (538,213 | ) |
| - |
|
Long term debt |
|
| 4,934,204 |
|
| - |
|
Senior secured note, net of discounts |
|
| 4,173,437 |
|
|
|
|
Current portion of long term debt |
|
| 538,213 |
|
| - |
|
Total debt |
| $ | 9,645,854 |
| $ | - |
|
On May 16, 2008, Third Eye Capital ABL Opportunities Fund (“Purchaser”) purchased a total10% senior secured note in the amount of $5 million of our 10% Senior Secured Notes along with warrants exercisable for 250,000 shares of common stock at an exercise price of $3.00 per share. Senior Secured Notes areThe Note is secured by first-lien deeds of trust on real property located in Nebraska and Illinois, and by a first priority security interest in the equipment located in Montana, as well asand a $1m guarantee of $1 million by McAfee Capital LLC (owned by Eric McAfee and his wife). Interest on the Senior Secured NotesNote accrues on the unpaid principal balance and is payable on the first business day of each quarter beginning on JuneJuly 1, 2008. We may prepay all or any portion of the outstanding principal amount of the Senior Secured NotesNote at any time. The Notes matureNote matures on May 15, 2009, and at that time the outstanding principal amount of the Senior Secured NotesNote together with all accrued and unpaid interest thereon will become due. At JuneSeptember 30, 2008 the Company was not in complianceco mpliance with the current ratio covenant for the month of September under the loan agreement and is working with the lender to obtain a waiver or modificationof this covenant. While we expect to obtain a waiver, in the event we are unable to do so, the interest rate under this facility increases by 8% and, at the option of the loan agreement relatedlender, the indebtedness may become immediately due and payable. The Company has no cross default provisions in this or any other debt agreement. As a result, our inability to obtain a waiver will have no adverse impact on our other debt obligations. Nevertheless, the failure to obtain a waiver or the acceleration of this covenant.
A discount to the NotesNote was recorded based on the relative fair value of the 250,000 warrants issued with the notes.Note. For purposes of the relative fair value allocation, the Warrantswarrants were valued using a Black-Scholes valuation andwith the following inputs:assumptions: five year term, volatility of 57.8%58.7%, no dividends and a risk free interest rate of 3.66% and the. The fair value of the Note was estimated using a discounted cash flow analysis. The resulting discount of $822,500, combined with a discount of $500,000 related to cash issuance costs, will be amortized over one year, the term of the Notes, which is one year. Discount amortization recordedNote. Amortization of this discount for the three and nine months ended JuneSeptember 30, 2008 was $165,312.
On July 17, 2008, Universal Biofuels Private Limited (“UBPL”), a wholly-owned subsidiary entered into a five year secured term loan with the State Bank of India in the amount of approximately $6 million. The term loan matures in July 2013 and is secured by UBPL’s assets, consisting of the biodiesel plant and land in Kakinada, India. Repayments begin June 2009 with quarterly payments in the amount of approximately $275,000. In addition, Suren Ajjarapu, a former officer and member of the Company’s board of directors, entered into a Deed of Overall Guarantee on October 16, 2008. Borrowings under this facility generally bear interest at 12.75% and the rate is subject to adjustment after two years.
D
uring theAE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.
Operating Leases.
The Company, through its subsidiaries, has non-cancelable operating leases for office space in various worldwide locations and athe property housing our cellulosic demonstration facility in Butte, Montana. These leases expire at various dates through October 14, 2009.April 26, 2010. The operating lease for the Butte, Montana facility grants the Company the right to purchase the underlying land and building underlying the lease at the end of each lease year.
Future minimum operating lease payments as of JuneSeptember 30, 2008 are:
|
| Rental Payments |
| |
|
|
|
| |
2008 (remainder of 2008) |
|
| 63,855 |
|
2009 |
|
| 201,575 |
|
2010 |
|
| 4,348 |
|
|
| $ | 269,778 |
|
9.
Stockholders Equity.
The Company is authorized to issue up to 400,000,000 shares of common stock, $0.001 par value per share and 65,000,000 shares of preferred stock, $0.001 par value per share.
Our Articles of Incorporation authorize our board to issue up to 65,000,000 shares of preferred stock, $0.001 par value per share, in one or more classes or series within a class upon authority of the board without further stockholder approval.approval, of which 7,235,402 shares were designated Series B preferred stock. There were 6,149,8215,533,821 and 6,487,491 shares of Series B preferred stock issued and outstanding as of JuneSeptember 30, 2008 and December 31, 2007, respectively.
Significant terms of the designatedSeries B preferred stock are as follows:
Voting.
Holders of our Series B preferred stock are entitled to the number of votes equal to the number of shares of Common Stock into which the shares of preferred stock held by such holder could be converted as of the record date. Cumulative voting with respect to the election of directors is not allowed. Currently, each share of Series B preferred stock is entitled to one vote per share. In addition, without obtaining the approval of the holders of a majority of the outstanding preferred stock, the Company cannot:·
Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series B preferred stock;
·
Effect an exchange, reclassification, or cancellation of all or a part of the Series B preferred stock, including a reverse stock split, but excluding a stock split;
·
Effect an exchange, or create a right of exchange, of all or part of the shares of another class of shares into shares of Series B preferred stock; or
·
Alter or change the rights, preferences or privileges of the shares of Series B preferred stock so as to affect adversely the shares of such series.
Dividends
. Holders ofAE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
Stockholders Equity (contd.).
Liquidation Preference.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series B preferred stock are entitled to receive, prior and in preference to any payment to the holders of the common stock, $3.00 per share plus all declared but unpaid dividends (if any) on the Series B preferred stock. If the Company’s assets legally available for distribution to the holders of the Series B preferred stock are insufficient to permit the payment to such holders of their full liquidation preference, then the Company’s entire assets legally available for distribution are distributed to the holders of the Series B preferred stock in proportion to their liquidation preferences. After the payment to the holders of the Series B preferred stock of their liquidation preference, the Company’s remaining assets legally available for distribution are distributed to the holders of the commonConversion.
Holders of Series B preferred stock have the right, at their option at any time, to convert their shares of Series B preferred stock into common stock at the then effective conversion rate, initially and currently at a one for one rate. The conversion rate is subject to adjustment from time to time in the event of certain dilutive issuances and events, such as stock splits, stock dividends, stock combinations, reclassifications, exchanges and the like. In addition, at such time as a registration statement covering the resale of the shares of common stock issuable upon conversion of the Series B preferred stock has been declared effective by the Securities and Exchange Commission ("SEC"), all outstanding Series B preferred stock shall be automatically converted into common stock at the then effective conversion rate.The registration rights granted by the Company require the Company to pay to the holders of these rights an amount equal to 0.5% of the aggregate dollar amount of securities purchased by such investors for each month or portion thereof after January 6, 2007 if the Company fails to file a registration statement with the SEC. The payments are treated as liquidated damages and not as a penalty and are full compensation to the investors, and shall constitute the investor's exclusive remedy for such events. At the Company’s option, the amounts payable as liquidated damages may be paid in cash or in shares of the Company's common stock.
The securities with registration rights described above may be sold under Rule 144, beginning December 12,15, 2008, at which time the payment obligation shall cease. The Company has elected to pay the Registration Rights Payment in shares of its common stock. The Company expects to issue shares of its common stock for the 12 month period ending December 12, 2008 with an aggregate value of $2,274,402, which were expensed as a Registration Rights PaymentObligation and reflected as a component of Other income/expenseIncome/Expense in the Statement of Operations for the three months ended June 30, 2008.
In connection with the sale of our Series A and B preferred stock, we issued to our placement agent warrants to purchase a number of shares of our common, Series A, and Series B stock representing up to 8% of the shares of Series A and Series B preferred stock sold. The warrants are exercisable for a period of seven years from the date of issuance, have a net exercise provision and are transferable. The shares of the Company’s common stock issuable upon exercise of the warrants must be included in any registration statement filed by the Company with the SEC. Further, subject to certain conditions, the Company has indemnified the placement agents and affiliated broker-dealers against certain civil liabilities, including liabilities under the Securities Act.
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.
Private Placement of Preferred Stock and Warrants. (contd.)
A summary of warrant activity for placement agent warrants for 2008 and 2007 is as follows:
Number of Warrants | Weighted- Average Exercise Price | Warrants Exercisable | Remaining Term (years) | ||||||||||
Outstanding, December 31, 2007 | 1,548,074 | $ | 2.22 | 1,548,074 | 6.1 | ||||||||
Exercised | (29,166 | ) | 3.00 | (29,166 | ) | ||||||||
Outstanding, June 30, 2008 | 1,518,908 | 2.21 | 1,518,908 | 5.6 |
The warrants are considered equity instruments. Since they were issued as a cost of the issuance of the Series A and B preferred stock, the fair value of these warrants has effectively been netted against the preferred stock sale proceeds.
A former member of AE Biofuels’the Company’s board of directors and a significant shareholder of the Company is a registered representative of the placement agent. He received a portion of the compensation paid to the placement agent and received 976,721 of the warrants issued pursuant to the Series A and B financings (discussed in(see Note 14)15).
Warrants
In February 2007, we issued five year warrants exercisable for 5,000 warrantsshares at $3.00 per share of the Company’s common stock to a consultant as compensation for services rendered. These warrants are immediately exercisable at $3.00 per share.
Common Stock Reserved for Issuance
AE Biofuels authorized the issuance of 4,000,000 shares under its 2007 Stock Plan for stock option awards, which includes both incentive and non-statutory stock options. These options generally expire five years from the date of grant and are exercisable at any time after the date of the grant, subject to vesting. Shares issued upon exercise prior to vesting are subject to a right of repurchase, which lapses according to the vesting schedule of the original option.
The following is a summary of options granted under the 2007 Stock Plan:
Shares | Options Outstanding | |||||||||
Available | Number | Weighted-Average | ||||||||
For Grant | Of Shares | Exercise Price | ||||||||
Balance as of December 31, 2007 | 2,016,000 | 1,984,000 | $ | 3.00 | ||||||
Authorized | - | |||||||||
Granted | (1,105,000 | ) | 1,105,000 | 3.70 | ||||||
Exercised | - | - | - | |||||||
Cancelled | 8,250 | (8,250 | ) | 3.00 | ||||||
Balance as of June 30, 2008 | 919,250 | 3,080,750 | $ | 3.25 |
|
| Shares Available For Grant |
| Options Outstanding |
| |||||
|
|
| Number Of Shares |
| Weighted-Average Exercise Price |
| ||||
|
|
|
|
| ||||||
Balance as of December 31, 2007 |
|
| 2,016,000 |
|
| 1,984,000 |
| $ | 3.00 |
|
Authorized |
|
| - |
|
|
|
|
|
|
|
Granted |
|
| (1,122,000 | ) |
| 1,122,000 |
|
| 3.75 |
|
Exercised |
|
| - |
|
| - |
|
| - |
|
Cancelled |
|
| 20,250 |
|
| (20,250 | ) |
| 3.00 |
|
Balance as of September 30, 2008 |
|
| 914,250 |
|
| 3,085,750 |
| $ | 3.27 |
|
At September 30, 2008, the weighted average remaining contractual term is 4.88 years at June 30, 2008.4.64 years. The aggregate intrinsic value of the shares outstanding at JuneSeptember 30, 2008 is $17,711,000.$6,872,875. The aggregate intrinsic value represents the total pretax intrinsic value, based on the excess of the Company’s closing stock price of $9.00$5.50 as of JuneSeptember 30, 2008 over the option holders’ strike price, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted average grant date fair value of these awards is $3.07.$3.27.
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.
Private Placement of Preferred Stock and Warrants (contd.).
Included in the table above are 467,000449,000 options issued to consultants in November 2007 and JuneSeptember 2008. These options had an exercise price of $3.00 and $3.70 and generally vest over three years. At JuneSeptember 30, 2008 the weighted average remaining contractual term was 4.474.22 years. The Company recorded a (credit)/charge to expense of $224,117($80,839) and $468,878$410,772 for the three and sixnine months ended JuneSeptember 30, 2008, respectively, and $8,541 for the three and sixnine months ended JuneSeptember 30, 2007 which reflects the fair value valuation and periodic fair value remeasurement of outstanding consultant options under Emerging Issues Task Force, or EITF, No. 96-18, “Accounting for Equity Instruments That are Issued to Other Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” (“EITF 96-18”). The valuation using the Black-Scholes model is based upon the current market value of our common stock and other current assumptions, includingincludi ng the expected term (contractual term for consultant options). The Company records the expense related to consultant options using the accelerated expense pattern prescribed in EITF 96-18.
Options vested and exercisable at JuneSeptember 30, 2008 and December 31, 2007 were 1,222,2501,267,167 and 817,000, with weighted average exercise prices of $2.56 and $2.85,$3.06, respectively.
Non-Plan Stock Options
In 2006, the Company issued 290,000 stock options to employees outside of any stock option plan, all of which 60,000 and 50,000 were forfeited during the sixnine month period ended JuneSeptember 30, 2008 and fiscal 2007, respectively. For the remaining 180,000 options outstanding as of June 30, 2008, the weighted average remaining contractual term is 0.25 years. The grant date fair value of this award is $0.25.
11.
Stock Based Compensation.
The Company incurred non-cash, stock compensation expensecharges of $1,196,580$216,739 and $1,536,043$1,777,722 in the three and sixnine months ended JuneSeptember 30, 2008, respectively and $15,000$855,995 and $60,409$924,945 in the three and sixnine months ended JuneSeptember 30, 2007, respectively forin connection with options granted to our general and administrative employees and consultants. Included inOf the non-cash stock compensation ischarges for the nine months ended September 30, 2008, $800,000 was incurred as a result of expenses related to modificationthe accelerated vesting of arestricted stock agreementin connection with the termination of one of our executives. Therefore, all stock option expense was classified as general and administrative expense.
As of JuneSeptember 30, 2008 and December 31, 2007, there was $3,836,796$3,057,623 and $2,585,196, respectively, of total unrecognized compensation expense under SFAS 123R, net of estimated forfeitures, related to stock options that the Company will amortize over the next four fiscal years.
E85 Joint Venture
. On January 17, 2007, American Ethanol, Inc. received a $5 million advance from E85, Inc., a Delaware corporation pursuant to a signed Memorandum of Understanding between the parties. E85, Inc. is an entity primarily owned by Mr. C. Sivasankaran, the founder and Chairman of Siva Limited, Sterling Infotech, and other businesses.Subsequently, on March 1, 2007, American Ethanol entered into various agreements, including a Joint Development Agreement, with E85, Inc. The transactions caused no dilution to American Ethanol shareholders, and no shares or warrants were issued. Terms of the agreement included binding terms related to funding the expected $200 million construction of American Ethanol’s Sutton, Nebraska ethanol plant, as well as non-binding terms related to funding three additional ethanol plants.
On August 14, 2007, by mutual agreement of the parties, American Ethanol and E85 dissolved their joint venture. American Ethanol purchased E85’s 50% interest in the Sutton Joint Venture for $16 million in cash which they borrowed on a short term basis from the Joint Venture. As part of this repurchase, American Ethanol terminated its design contract with Delta T and wrote off approximately $5.2 million in design work previously performed by Delta T and its contractors. This $5.2 million is included as an expense of the Company as of December 31, 2007. American Ethanol retained the remaining $8 million invested in the JV by E85. This $8 million gain has been included in the Statement of Operations as a gain from sale of subsidiary. All previous agreements between American Ethanol and E85, including the loan facilities with Siva Limited, were terminated as of the date of the repurchase of the interest in Sutton.
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.
Acquisitions, Divestitures and Joint Ventures (contd.).
Public Company Acquisition
. On June 23, 2006, American Ethanol acquired approximately 88.3% of the outstanding common stock of Marwich II, Ltd. from three principal shareholdersOn December 7, 2007, the Merger was completed and the former shareholders of American Ethanol were issued 84,114,998 shares of AE Biofuels, Inc. common stock in exchange for all of the outstanding shares of American Ethanol common stock, 6,487,491 shares of AE Biofuels, Inc. Series B preferred stock in exchange for all of the issued and outstanding shares of American Ethanol’s Series B preferred stock, and AE Biofuels, Inc. assumed options and warrants exercisable for 4,229,000 shares of common stock and 748,074 shares of Series B preferred stock, respectively. For accounting purposes, the Merger was treated as a reverse acquisition with American Ethanol as the acquirer and the Company as the acquired party.
Marketing Company Acquisition.
On September 1, 2007, American Ethanol acquired Biofuels Marketing, Inc., a Nevada corporation, in exchange for 200,000 shares of American Ethanol common stock valued at $3.00 per share. Of the shares issued, 50% are contingent upon the continued employment of the President of Biofuels Marketing through August 31, 2009, and will be accounted for as compensation expense as earned. Of the purchase price, $300,000 was assigned to the primary asset acquired, which was a customer list, which is being amortized over 18 months.The acquisitions of Wahoo Ethanol, LLC, Sutton Ethanol, LLC, Illinois Valley Ethanol, LLC, were treated as capital transactions. We accounted for the acquisition of Biofuels Marketing, Inc. using purchase accounting. Subsequent to the acquisition, the financial results of these entities were consolidated.
Technology Company Formation:
India Company Formation.
On July 14, 2006, the Company, through a wholly owned subsidiary, International Biofuels, Inc. and its wholly-owned subsidiary, International Biodiesel, Ltd., LLC, a Mauritius company, entered into a joint ventureOn January 23, 2008, International Biofuels, Ltd agreed to terminate the amended shareholder agreementjoint venture with Acalmar Oils and Fats, Ltd. including termination of Acalmar’s right to own or receive any ownership interest in the joint venture biodiesel project.venture. The total cancellation price payable by International Biofuels was $900,000 and is classified in our Statement of Operations as a shareholder agreement cancellation payment. This joint venture has contributed income of $13,373 and $0 toFor the consolidated income for the sixthree months ended JuneSeptember 30, 2008, and 2007, respectively, principally from foreign currency exchange gains and interest income. This income is not subject$300,000 was paid to U.S. federal taxation until it is repatriated.
Argentina Project Company
. On June 9, 2008, AE Biofuels Americas, Inc., a subsidiary of AE Biofuels, Inc. entered into an agreement to develop a biodiesel plant with a nameplate capacity of 75 million gallons per year located in San Lorenzo, Argentina, subject to certain closing conditions, and signed a preliminary engineering agreement. To date,AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13.
Land optionsOptions and purchases.
The Company and its subsidiary, American Ethanol, Inc., have acquired optionsan option to purchase land in various locations in Nebraska and Illinois. The terms of these options are typically from one to two years and provide thatoption gives the Company has the right to acquire the land for a set price per acre subject to the satisfaction,$934,000. This option expires in the Company's sole discretion, of its due diligence.
14.
Commitments.
The Company contracted with Desmet Ballestra India Pvt. Ltd. to build a glycerin refinery and pretreatmentpre-treatment plant at our existing biodiesel plant in Kakinada, India. At JuneSeptember 30, 2008 and December 31, 2007, commitments under construction contracts were outstanding for approximately $1,230,000$128,000 and $1,850,000, respectively that will be funded with cash currently held in our India subsidiaryrespectively. Commitments under purchase orders and throughother short term construction contracts were $321,998 at September 30, 2008.
15.
Related Party Transactions.
During the nine month period ended September 30, 2008, Laird Cagan, a term loan obtained in July 2008 from the State Bank of India (see note 17).
Chadbourn Securities acted as one of the Company’s placement agents with respect to the Company’s Series B preferred stock offering in 2007. OneLaird Cagan, a former member of the Company’sboard of directors and shareholdersa significant shareholder is an agent of Chadbourn and received payments from Chadbourn related to the sale of stock along with other non-related parties.
The Company and Eric A. McAfee, the Company's Chief Executive Officer and Chairman of the Board,board of directors, are parties to an agreement pursuant to which the Company pays Mr. McAfee a monthly feesalary of $10,000 per month for services rendered to the Company as a directorits President and officer.CEO. For the three and sixnine months ended JuneSeptember 30, 2008 and 2007, the Company paid Mr. McAfee $30,000 and $60,000,$90,000, respectively, pursuant to this agreement.
The Company and CM Consulting are parties to an agreement pursuant to which the Company reimbursesreimbursed CM Consulting for a minimum of 20 hours per month of time on an aircraft owned by CM Consulting until February 2008. The Company paid an upfront fee of $360,000 starting February 2006 for 24 months of usage. The contract expired in February 2008 and has neither been extended nor renewed. For the six months ended June 30, 2008, the2008. The Company expensed $15,000 for the six months ended June 30, 2007, the Company expensed $90,000and $135,000 of this rental fee for the nine months ended September 30, 2008 and 2007, respectively. CM Consulting is 50% owned by Eric A. McAfee, a director, officer and significant shareholder of the Company.
The Company and Cagan McAfee Capital Partners is owned by two directors of the Company andare parties to an agreement pursuant to which Cagan McAfee Capital Partners provides office servicesadministrative and advisory services under an advisory agreement withfor a monthly fee of $15,000 plus expense reimbursement to the Company. For the sixnine months ended JuneSeptember 30, 2008 and 2007, the Company paid Cagan McAfee Capital Partners $89,327$245,174 and $123,856, for advisory services, office servicesrespectively. Eric A. McAfee, an officer and travel expenses. The Company engagedmember of the Company’s board of director and Laird Cagan, a former of the Company’s board of directors, together own 100% of Cagan McAfee Capital Partners in January 2006 for administrative, paralegal and staff support for $15,000 a month for three years.
TIC - The Industrial Company (TIC) and Delta-T are companies involved in the design and construction of ethanol plants in the United States. In 2006 the Company paid TIC and Delta-T approximately $7.5 million for services related to the design and initial construction work on the Company’s Sutton Ethanol, LLC ethanol plant facility. In August 2007, the Company and TIC terminated their relationship, and the company wrote off approximately $5.2 million in design work and construction in progress.
During October and December 2007, the Company sold $6,127,727 of commoditiescrude palm oil to Acalmar Oils and Fats, Ltd. Amounts due from Acalmar Oils and Fats, Ltd. have been presented on the balance sheet as Accounts receivable - related party. These sales were made at prevailing market rates.
AE BIOFUELS, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16.
Income Tax.
The Company files a consolidated federal income tax return. This return includes all corporate companies 80% or more owned by the Company as well as the Company’s pro-rata share of taxable income from pass-through entities in which Company holds an ownership interest. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its subsidiaries.
We do not provide for U.S. income taxes on the undistributed earnings of our foreign subsidiaries, as we consider these to be permanently reinvested in the operations of such subsidiaries. At December 31, 2007, these undistributed earnings totaled approximately $598,000. If some of these earnings were distributed, some countries may impose withholding taxes. In addition, as foreign taxes have previously been paid on these earnings, we would expect to be entitled to a U.S. foreign tax credit that would reduce the U.S. taxes owed on such distribution. As such, it is not practicable to determine the net amount of the related unrecognized U.S. deferred tax liability.
We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007, and there was no impact to our financial statements. FIN 48 clarifies the accounting for uncertainty in income tax positions. FIN 48 provides that the tax affects from an uncertain tax position can be recognized in our financial statements only if the position is more-likely-than-not of being sustained on audit, based on the technical merits of the position. Tax positions that meet the recognition threshold are reported at the largest amount that is more-likely-than-not to be realized. This determination requires a high degree of judgment and estimation. We periodically analyze and adjust amounts recorded for our uncertain tax positions, as events occur to warrant adjustment, such as when the statutory period for assessing tax on a given tax return or period expires or if tax authorities provide administrative guidance or a decision is rendered in the courts. Most of our unrecognized tax benefits would affect our effective tax rate if recognized. Furthermore, we do not reasonably expect the total amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months.
As of JuneSeptember 30, 2008 and December 31, 2007, our unrecognized tax benefits were not significant.
On March 28, 2008, the Cordillera Fund, L.P. (“Cordillera”) filed a complaint in the Clark County District Court of the State of Nevada against American Ethanol, Inc. and the Company. The complaint seeks a judicial declaration that Cordillera has a right to payment from the Company for its American Ethanol shares at fair market value pursuant to Nevada’s Dissenters’ Rights Statute, a judicial declaration that Cordillera is not a holder of Series B preferred stock in the Company under the provisions of that statute; and a permanent injunction compelling the Company to apply the Dissenters’ Rights Statute to Cordillera’s shares and reimburse Cordillera for its attorneys fees and costs.
On April 29, 2008, we filed a Motion to Transfer Venue, seeking a transfer to the Second Judicial District Court of the State of Nevada, located in Washoe County, Nevada. The Motion was granted on or about June 2, 2008 and the case is now pending in Washoe County.
The Company intends to vigorously defend this disputed claim of entitlement under the Nevada Dissenters’ Rights Statute. The Company believes based upon their interpretation of the facts surrounding this matter and Nevada law that they have meritorious defenses against any claims by Cordillera for dissenters’ rights. However, any ultimate outcome of this matter is highly uncertain and difficult to predict at this early stage.
18.
Subsequent Events.
In October 2008, the Company borrowed an aggregate additional borrowing in$500,000 under the amount of $400,000 was drawn against the project financing loan betweencredit facility provided by Laird Cagan, a former director (See Notes 7 and Energy Enzymes.
On July 17,October 6, 2008, Universal Biofuels Private Limited (“UBPL”), a wholly-owned subsidiary executed a five year secured term loan with the State Bank of India in the amount of approximately
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differdif fer materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled “Risk Factors” in Item 1A of Part II and elsewhere, and in other reports the Company files with the Securities and Exchange Commission (“SEC”), specifically the most recent Annual Report on Form 10-K. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
The following discussion is based upon our unaudited Consolidated Financial Statements included elsewhere in this report, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. Actual results may differ from these estimates under different assumptions or conditions.
Company Overview
We design, develop, build, ownacquire, construct and plan to operate biodieselnext-generation fuel grade ethanol and next-generation ethanolbiodiesel production facilities in the U.S. and abroad. As of June 30, 2008, weWe own and operate a biodiesel production facility in Kakinada, State of Andra Pradesh, India, with a nameplate capacity of 50 million gallons per year. In addition, on June 12, 2008, we announced that our wholly-owned subsidiary, AE Biofuels Americas, Inc. acquired a 90% ownership interest in a permitted 75 million gallon biodiesel site in San Lorenzo, Argentina, through a Joint Development Agreement with DS Development SA, a subsidiary of DS Group, a Belgian holding company globally active in the agro-industrial sector for the development, construction, ownership and operation of a new biodiesel plant. We expect that our production facilities in India will produce biodiesel primarily for export to the U.S. and Europe and the Argentina production facility will produce biodiesel primarily for export to Europe. We continue to evaluate sites for additional production facilities in India and South America.
Finally, in the secondthird quarter of 2008, we also substantially completed construction of our cellulosic ethanol demonstration facility in Butte, Montana and continued to fund the optimization of our cellulosic ethanol technology for large-scale commercial implementation. This facility was officially opened on August 11, 2008.
Company Organization
AE Biofuels, Inc., through its wholly-owned subsidiary American Ethanol, Inc., owns operating subsidiaries. Through our subsidiary International Biodiesel, Inc., we own International Biofuels, Ltd, a Mauritius corporation and its subsidiary Universal Biofuels Private Ltd, an India company. Universal Biofuels Private Ltd. holds as its primary asset a biodiesel plant with the nameplate capacity of 50 million gallons annuallyMGY in Kakinada, India. Two other subsidiaries of American Ethanol, Sutton Ethanol, LLC and Danville Ethanol, Inc, hold future plant development assets including approximately 375 acres of land. Biofuels Marketing, Inc., a Delaware corporation was acquired by us on September 1, 2007, as a marketing organization whose purpose is to acquire feedstock and sell the commodities related to our ethanol and biodiesel plants. Energy Enzymes, Inc. is held as a 51% owned joint venture for the development of next-generation cellulosic ethanol. The other 49% interest in Energy Enzymes is held by Renewable Technology Corporation. UnderCompany has the joint venture agreement, the Company acquiresri ght to acquire the remaining 49% ownership inof Energy Enzymes for consideration of one million shares of the Company’s common stock upon the completion of certain project milestones. AE Biofuels Americas was formed to hold South and Central American assets.
Nine Months Ended JuneSeptember 30, 2008 Compared To SixNine Months Ended JuneSeptember 30, 2007
Revenues
We had no revenues in either the sixnine months ended JuneSeptember 30, 2008 or JuneSeptember 30, 2007.
Expenses
For the period from November 29, 2005 (inception) through JuneSeptember 30, 2008, the Company was considered a development stage enterprise under Statement of Financial Accounting Standards (“SFAS”) No. 7
Research and Development Expenses
During 2007, we formed a joint venture with Renewable Technology Corporation for the purpose of developing next-generation ethanol production processes. Under this joint venture agreement in 2007, we acquired 51% of Energy Enzymes, Inc. and have subsequently funded the operating expenses of Energy Enzymes and its team to optimize cellulosic ethanol technology for large-scale commercial implementation. For the sixnine months ended JuneSeptember 30, 2008, we funded operating expenses of $512,056$828,458, consisting of expenses to build a demonstration facility of $570,341, consulting services of $120,000$182,786, and the balance in lab supplies, lab equipment and travelmiscellaneous expenses. For the sixnine months ended JuneSeptember 30, 2007, we funded operating expenses of $120,030$186,583 principally for the services of the key scientists.
Principal areas of spending for general and administrative expenses are in the areas of employee compensation and professional services. We summarize our spending into eight components as follows:
Six Months Ended | Six Months Ended | ||||||
June 30, 2008 | June 30, 2007 | ||||||
% | % | ||||||
Salaries, wages and compensation | 40 | % | 43 | % | |||
Supplies and services | 6 | % | 7 | % | |||
Repair and maintenance | 0 | % | 0 | % | |||
Taxes, insurance, rent and utilities | 6 | % | 2 | % | |||
Professional services | 41 | % | 35 | % | |||
Depreciation and amortization | 2 | % | 0 | % | |||
Travel and entertainment | 5 | % | 12 | % | |||
Miscellaneous expense | 0 | % | 1 | % | |||
Total | 100 | % |
|
| Nine Months Ended September 30, 2008 % |
| Nine Months Ended September 30, 2007 % |
| ||
|
|
|
| ||||
|
|
|
| ||||
|
|
|
|
|
|
|
|
Salaries, wages and compensation |
|
| 39 | % |
| 24 | % |
Supplies and services |
|
| 6 | % |
| 6 | % |
Repair and maintenance |
|
| - |
|
| - |
|
Taxes, insurance, rent and utilities |
|
| 5 | % |
| 1 | % |
Professional services |
|
| 34 | % |
| 21 | % |
Depreciation and amortization |
|
| 2 | % |
| - |
|
Travel and entertainment |
|
| 4 | % |
| 5 | % |
Miscellaneous expense |
|
| 10 | % |
| 43 | % |
Total |
|
| 100 |
| 100 | % |
The number of employees grew as a result of hiring in India. Compensation expense grew from approximately $582,305$2,787,682 for the sixnine months ended JuneSeptember 30, 2007 to approximately $2,297,392$3,219,279 for the sixnine months ended JuneSeptember 30, 2008. The increase was principally driven by the non-cash, stock compensation of approximately $1,067,165$1,364,743 for the sixnine months ended JuneSeptember 30, 2008 compared to the stock compensation of $60,408$916,403 for the sixnine months ended JuneSeptember 30, 2007. The increase in stock compensation expense is due to the modificationvesting acceleration of an option plana restricted stock grant for a departing executive. On an inception-to-date basis, we spent $6,217,680$7,088,658 on employee compensation, including approximately $2,220,860$2,518,438 of stock compensation.
For the sixnine months ended JuneSeptember 30, 2008, we purchasedspent $2,803,757 in professional services including a non-cash stock compensation charge of $413,039, legal fees of $622,514, accounting fees of $369,148, professional fees of $311,006, financial advisory fees of $198,578 and resold glycerin. These sales resultedindependent board member fees of $212,000. For the nine months ended September 30, 2007, we spent $2,470,796 in profitsprofessional services of $26,534which $8,541 was for non-cash stock based compensation, legal fees of $1,245,050, accounting fees of $224,197, financing fees of $200,000, and other advisor and consultant fees. On an inception-to-date basis, we spent $8,525,263 on salesprofessional services, including $559,751 of $205,270. At June 30, 2008, we held $110,231 of glycerin as a purchased commodity in other current assets, which we plannon-cash stock compensation for stock and options issued to resell.consultants.
Other Income (Expense)
Pursuant to the terms of its Amended and Restated Registration Rights Agreement, beginning in January 2008 the Company was obligated to file a registration statement to register shares of common stock issued or issuable upon conversion of the Company's for Series A and B preferred stock or pay in cash or shares of stock to these investors an amount equal to 0.5% per month of their investment amount. The expense related to this payment from the period from January through December 2008 of $2,274,402 is reflected in our Statement of Operations as a registration rights payment.
On January 23, 2008, International Biofuels, Ltdwe agreed to terminate the amended shareholder agreementjoint venture with Acalmar Oils and Fats, Ltd. including termination of Acalmar’s right to own or receive any ownership interest in the joint venture biodiesel project.venture. The total cancellation price payable by IBL of $900,000 is reflected in our Statement of Operations as a shareholder agreement cancellation payment.
Interest expense increased as a result of debt facilities acquired by both the Company and its India subsidiary. These debt facilities included warrant coverage and discount fees which are amortized as part of interest expense. For the nine months ended September 30, 2008, we incurred interest expense of $846,513 partially offset by interest earned on excess cash of $32,544.
During the nine months ended September 30, 2008, we purchased and resold glycerin resulting in profits of $78,276 which were recorded as net other income.
Three Months Ended JuneSeptember 30, 2008 Compared to Three Months Ended JuneSeptember 30, 2007
Revenues
We had no revenues for the three months ended JuneSeptember 30, 2008 or JuneSeptember 30, 2007.
Cost of Goods Sold
For the three months ended JuneSeptember 30, 2008, the Company expensed $952,028 in connection with the write-down of inventory.
Expenses
Research and Development Expenses
For the three months ended September 30, 2008, we funded the operating expenses of Energy Enzymes, Inc. in the amount of $387,708,$316,402 consisting of consulting services of $60,000$62,596 and the balance in various componentsassociated with costs of building of a commercial demonstration plant.
Principal areas of spending for general and administrative expenses are in the areas of employee compensation and professional services. We summarize our spending into eight components as follows:
|
| Three Months Ended September 30, 2008 % |
| Three Months Ended September 30, 2007 % |
| ||
|
|
|
| ||||
|
|
|
| ||||
Salaries, wages and compensation |
|
| 36 | % |
| 16 | % |
Supplies and services |
|
| 4 | % |
| 5 | % |
Repair and maintenance |
|
| - |
|
| - |
|
Taxes, insurance, rent and utilities |
|
| 5 | % |
| - |
|
Professional services |
|
| 27 | % |
| 16 | % |
Depreciation and amortization |
|
| 2 | % |
| 1 | % |
Travel and entertainment |
|
| 4 | % |
| 2 | % |
Miscellaneous expense |
|
| 22 | % |
| 60 | % |
Total |
|
| 100 | % |
| 100 | % |
Three Months Ended | Three Months Ended | ||||||
June 30, 2008 | June 30, 2007 | ||||||
% | % | ||||||
Salaries, wages and compensation | 44 | % | 44 | % | |||
Supplies and services | 8 | % | 7 | % | |||
Repair and maintenance | 0 | % | 0 | % | |||
Taxes, insurance, rent and utilities | 6 | % | 2 | % | |||
Professional services | 37 | % | 35 | % | |||
Depreciation and amortization | 1 | % | 0 | % | |||
Travel and entertainment | 4 | % | 12 | % | |||
Miscellaneous expense | 0 | % | 0 | % | |||
Total | 100 | % | 100 | % |
Compensation expense grew from approximately $824,922 for the three months ended JuneSeptember 30, 2007 to $1,646,1222008 was $870,978, a decrease of 509,476 from $1,380,454 for the three months ended JuneSeptember 30, 2008.2007. The increasedecrease was principally driven by non-cash, stock compensation of $947,463$297,578 for the three months ended JuneSeptember 30, 2008, compared to non-cash stock compensation of $15,000$855,995 for the three months ended JuneSeptember 30, 2007. This increase was due2007 driven by the issuance of stock options to the acceleration ofexecutives with immediate vesting of restricted Stock in connection with the termination of one of the Company's executives.
Professional services which include legal, accounting, financial advisory, board compensation, security filings, and transfer agent fees along with associated non-cash stock compensation expense. Fordecreased to $680,885 for the three months ended JuneSeptember 30, 2008 we spent $1,275,944 on professionalfrom $1,340,083 for the three months ended September 30, 2007. Professional services including aincluded non-cash stock compensation chargecredit of $249,117$80,839 for stock and option grants to key consultants and advisors. advisors during the three months ended September 31, 2008 and none for the three months ended September 30, 2007. Changes in stock compensation were driven by the change in our stock price and its impact on the stock compensation charges calculated under EITF 96-18. In addition, we purchased lower levels of financial and marketing advisory services during the three months ended September 30, 2008.
For the three months ended JuneSeptember 30, 2007, we spent $652,778 on professional services of which none was for stock based compensation.
Other Income (Expense)
For the three months ended September 30, 2008 the Company borrowed an aggregateincurred interest expense of $2,675,000 under$593,494 for interest, bond discount and warrant coverage costs.
Liquidity
The Company today is spending approximately $645,000 per month primarily on general and administrative and research and development costs. Funds available at September 30, 2008 are sufficient to cover less than one month of our domestic operating costs. Subsequent to the filing of this report, we incurred short term borrowings to meet operating costs. The Company will require significant cash to fund its operating expenses and working capital requirements primarily for general and administrative expenses, and the purchase of feedstock and other raw materials to operate its existing and future production facilities.
We intend to fund ongoing operations through operating cash flows, working capital lines of credit, facilityconstruction loans, long-term debt, the sale of additional equity by the Company or its subsidiaries and joint ventures. However, the impact on financial institutions from the current global credit and liquidity crisis may adversely affect the availability and cost of credit to the Company. There can be no assurance that governmental responses to the disruptions in the financial markets will stabilize the markets or increase liquidity and the availability of credit. We cannot assure you that we will be able to secure such financing on terms acceptable to us or the, or at all, any of which $600,000 was outstanding ascould harm our business.
Historical Sources and Uses of June 30, 2008. At JuneCash
Operating Activities
Through September 30, 2008, we had approximately $423,000net cash used in operating activities was $19,866,013 primarily to develop our business, including general and administrative and research and development costs. Net cash used in operating activities increased from $5,876,817 in the nine months ended September 30, 2007 to $7,299,880 in the nine months ended September 30, 2008 primarily as a result of an increase in inventory of $2,116,080 purchased in connection with the commissioning of our biodiesel plant in India.
Investing Activities
Through September 30, 2008, net cash used in investing activities was $21,797,562, which consisted primarily of $32,760,042 in purchases of property, plant and cash equivalents held in our domestic entities. The funds that we have raisedequipment relating to date have been used for the developmentconstruction of our biodiesel facility in India, (approximately $15,900,000), a land acquisitionour demonstration facility in Illinois for developmentButte, MT and the purchase of an ethanol facility (approximately $2,300,000), and a land acquisition and improvementspotential plant sites in Nebraska and Illinois, offset by $2,775,000 provided by overpayment refunds, $8,206,000 provided as a result of the dissolution of our joint venture with E85 in August 2007 and $2,000,000 provided by the sale of our ethanol plant site in Wahoo, Nebraska.
Financing Activities
Through September 30, 2008, we have raised $42,153,755 from financing activities, including $31,911,422 from the sale of equity (net of expense) and $10,382,333 in debt, of which $4,719,547 is proceeds from long-term debt and $5,662,786 is proceeds from short-term debt. At September 30, 2008, the Company’s long-term debt included $1,300,495 outstanding under a credit facility provided by a former director and
significant shareholder. On September 5, 2008 this credit facility was amended which converted the facility into a revolving line of credit with a credit limit of $2,000,000. In addition, the maturity date of the credit facility was extended to January 31, 2011. As a result, during the quarter we reclassified this facility from short-term to long-term debt. On July 17, 2008, the Company entered into a secured term loan in the amount of approximately $6,000,000 of which $4,171,922 was outstanding at September 30, 2008. At September 30, 2008 the Company was not in compliance with the current ratio covenant for developmentthe month of September under the Third Eye Capital ABL Opportunities Fund loan agreement and is working with the lender to obtain a waiver of this covenant. While we expect to obtain a waiver, in the event we are unable to do so, the interest rate under this facility increases by 8% and, at the opt ion of the lender, the indebtedness may become immediately due and payable. The Company has no cross default provisions in this or any other debt agreement. As a result, our inability to obtain a waiver will have no adverse impact on our other debt obligations. Nevertheless, the failure to obtain a waiver or the acceleration of this debt obligation as a result of this breach may have an ethanol facility (approximately $11,000,000), four land optionsadverse impact on our ability to obtain additional borrowings. There is no assurance that the Company will be able to obtain alternative funding in Illinoisthe event this debt obligation is accelerated. Immediate acceleration would have a significant adverse impact on the Company’s near term liquidity.
Other Factors Affecting Liquidity and Nebraska for possible future development of ethanol facilities (approximately $610,000), and operating expenses.
We will need significantly more cash to implement our plan to build our next-generation ethanol plants, to continue to develop biodiesel facilities in India and elsewhere in the world, to develop biodiesel facilities in Argentina. We intendconsummate planned acquisitions, and to raise these funds through the sale of additional equity either in AE Biofuels or one of our subsidiaries, joint ventures, construction loans, long-term debt financings and operating cash flows.fund ongoing operations. We estimate that the cost to develop a biodiesel facility in India or ArgentinaSouth America is approximately $30 million to $50 million with an additional $6 million to $10 million required for working capital.
The Company contracted with Desmet Ballestra India Pvt. Ltd.expects to build aspend an additional $1,000,000 to complete the pre-treatment facility and glycerin refinery inat its Kakinada India. At June 30, 2008plant of which commitments for approximately $450,000 under purchase orders and December 31, 2007,other short term construction contracts which were outstanding for approximately $1,230,000 and $1,850,000, respectively that we will fund with cash currently held in our India subsidiary and through a term loan facility from the State Bank of India.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Impairment of Intangible and Long-Lived Assets
Our intangible asset was derived from the acquisition of Biofuels Marketing on September 1, 2007. In accordance with SFAS No. 141, “
Business Combinations,” we allocated the purchase price to the tangible assets, liabilities and intangible asset acquired based upon their estimated fair values. The principal asset was an intangible asset consisting of a customer list. All of the capitalizable costs of this acquisition were allocated to this customer list as the value of the remaining tangible and intangible assets were negligible. This customer list is being amortized over 18 months, its estimated useful life.Our long-lived assets are primarily associated with our plant in Kakinada, India. This production facility was constructed in conjunction with our former partner, Acalmar Oils and Fats, during 2007. The first phase of the plant is currently operational and we are evaluating various feedstock agreements in order to fully utilize the facility. We are constructing a glycerin refinery and pretreatmentpre-treatment plant at our Kakinada facility, which is expected to be fully operational by the fourth quarter of 2008. Costs for building the plant remained in construction-in-progress at JuneSeptember 30, 2008, and will be reclassified once the plant is fully operational and placed in service.
We evaluate impairment of long-lived assets in accordance with SFAS No. 144, “
Accounting for the Impairment or Disposal of Long-Lived Assets.” We assess the impairment of long-lived assets, including property and equipment and purchased intangibles subject to amortization, when events or changes in circumstances indicate that these assets have been impaired and we accordingly write them down to their new fair value. Forecasts of future cash flows are critical judgments in this process and are based on our experience and knowledge of our operations and the industries in which we operate and are critical to our impairment assessments. These forecasts could be significantly affected by future changes in market conditions, the economic environment, and capital spending decisions of our customers and inflation. For the year ended December 31, 2007 we recognized an impairment of approximately $5,114,000 due to non-recoverable engineering costsStock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No.123 (Revised 2004), “
Share-Based Payment” (“SFAS 123(R)”), where the fair value of each option is adjusted to reflect only those shares that are expected to vest. Our implementation of SFAS 123(R) used the modified-prospective-transition method where the compensation cost related to each unvested option as of January 1, 2006 was recalculated and any necessary adjustment was reported in the first quarter of adoption.We made the following estimates and assumptions in determining fair value:
·
Valuation and amortization method — We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
·
Expected Term — The expected term represents the weighted-average period that our stock-based awards are expected to be outstanding. We applied the “Simplified Method” as defined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107.
·
Expected Volatility — The Company’s expected volatilities are based on historical volatility of comparable companies’ stock.
·
Expected Dividend — The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect to pay dividends in the foreseeable future.
·
Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent remaining term.
Given the absence of an active market for our common stock as a private company prior to the Merger with American Ethanol, our board of directors, the members of which we believe have extensive business, finance or venture capital experience, were required to estimate the fair value of our common stock for purposes of determining exercise prices for the options it granted. Our board of directors determined the estimated fair value of our common stock, based in part on an analysis of relevant metrics, including the following:
·
the prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;
·
the rights, preferences and privileges of that convertible preferred stock relative to those of our common stock;
·
our operating and financial performance;
·
the hiring of key personnel;
·
the introduction of new products;
·
our stage of development and revenue growth;
·
the fact that the option grants involved illiquid securities in a private company;
·
the risks inherent in the development and expansion of our operations; and
·
the likelihood of achieving a liquidity event, such as an initial public offering or a sale of the Company, for the shares of common stock underlying the options given prevailing market conditions.
Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, “
Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used in measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair valueIn February 2007, the FASB issued SFAS No. 159, “
The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” ("SFAS 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. On January 1, 2008, the Company adopted SFAS 159 and the adoption of this statement had no material effect on the Company’s financial statements.In December 2007, the FASB issued SFAS No. 141(R), “
BusinessIn May 2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). The current GAAP hierarchy was established by the American Institute of Certified Public Accountants, and faced criticism because it was directed to auditors rather than entities. The issuance of this statement corrects this and makes some other hierarchy changes. This statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The FASB does not expect that this statement will result in a change to current practice.In May 2008, the FASB issued Staff Position No. APB 14-1, “
Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied retrospectively to all periods presented. The Company is currently evaluating the impact that FSP APB 14-1 will have o n its consolidated financial statements.In April 2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141, "Business Combinations." We are required to adopt FSP FAS 142-3 in the first quarter of 2009 and will apply it prospectively to intangible assets acquired after the effective date. We do not currently believe that adopting FSP FAS 142-3 will have a material impact on our Consolidated Financial Statements.
In June 2008, the FASB ratified EITF Issue 07-5,“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-5”). Paragraph 11(a) of Statement of Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”)specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified instockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model tobe applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133paragraph 11(a) scope exception. EITF 07-5 will be effective for the first annual reporting period beginnin g after December 15, 2008, and early adoption isprohibited. The Company is evaluating the impact this standard will have on its consolidated financial statements.
Interest Rate Sensitivity
We had cash, cash equivalents and marketable securities totaling $636,654$591,718 and $720,402$3,356,294 at JuneSeptember 30, 2008 and December 31, 2007, respectively. These amounts were invested primarily in money market funds and short term time deposits. The unrestricted cash and cash equivalents and marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.
At September 30, 2008 and June 30, 2008, we had $4,173,437 and March 31,$5,600,000 of fixed-rate, short-term and long-term debt outstanding, respectively. During the three months ended September 30, 2008, we had $5,600,000entered into two forward contracts for crude palm oil. We took delivery of the crude palm oil under the first contract and $1,712,508elected not to take delivery under the second contract by selling our position. As of fixed- rate, short-term debt outstanding, respectively.
Item 4T. Controls Andand Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that is designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of JuneSeptember 30, 2008 our disclosure controls and procedures were not effective. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, includingincludin g its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except those discussed below with respect to our remediation efforts.
Remediation Efforts to Address Material Weakness in Internal Control over Financial Reporting
Throughout the three and sixnine months ended JuneSeptember 30, 2008, we began the implementation of a remediation plan to address the material weaknesses identified during the audit of our fiscal year ended December 31, 2007. The control deficiencies that gave rise to the material weaknesses related to the fact that our accounting resources did not include enough people with the detailed knowledge, experience and training in the selection and application of certain accounting principles generally accepted in the United States of America (GAAP) to meet our financial reporting needs. These control deficiencies contributed to material weaknesses in internal control with respect to segregation of duties, controls over financial reporting at the India subsidiary, stockholders equity and share-based compensation, acquisitions as well as financial statement presentation and disclosures. We have hired two employees with the necessary accounting knowledge, experience and training to meet the needs of our organization. We will continue to implement process changes and hire employees or consultants to address the material weaknesses noted in the internal controls over financial reporting for fiscal 2007. Once placed in operation for a sufficient period of time, we will evaluate the overall effectiveness of these new process changes to determine if they are operating effectively.
Inherent Limitations of Internal Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II—II — OTHER INFORMATION
On March 28, 2008, the Cordillera Fund, L.P. ("Cordillera") filed a complaint in the Clark County District Court of the State of Nevada against American Ethanol, Inc. and the Company. The complaint seeks a judicial declaration that Cordillera has a right to payment from the Company for its American Ethanol shares at fair market value pursuant to Nevada's Dissenters' Rights Statute, a judicial declaration that Cordillera is not a holder of Series B preferred stock in the Company under the provisions of the statute; and a permanent injunction compelling the Company to apply the Dissenters' Rights Statute to Cordillera's shares and reimburse Cordillera for attorneys fees and costs.
On April 29, 2008, we filed a Motion to Transfer Venue, seeking a transfer to the Second Judicial Court of the State of Nevada, located in Washoe County, Nevada. The Motion was granted on or about June 2, 2008 and the case is now pending in Washoe County.
The Company intends to vigorously defend this disputed claim of entitlement under the Nevada Dissenters' Rights Statute.
Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to Part I,Item1A. “Risk Factors” in the Company's risk factors as previously disclosed in the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC on April 1, 2008. In addition, please consider the following:
We will need to obtain a significant amount of additional debt and equity capital to complete the development and completion of our planned ethanol and biodiesel plants, which we may not be able to obtain on acceptable terms or at all.
As of September 30, 2008, we had $133,666 in cash on hand in our domestic entities and $458,052 held in offshore subsidiaries including marketable securities. We will require a significant amount of capital to meet our existing and future cash needs. For example, until our biodiesel production facility in India generates sufficient positive cash flow, we will require a significant amount of working capital to purchase feedstock, operate the plant and pay overhead, and additional funding will be needed to meet ongoing obligations with respect to the completion of construction of our glycerin refinery and pre-treatment facility. In addition, we will need to borrow an estimated $31 million to fund the acquisition of Renova Energy, Inc. and Wyoming Ethanol, LLC and ongoing working capital requirements. Finally, we require substantial funds to fund the Company’s general and administrative costs. The impact on financial institutio ns from the current global credit and liquidity crisis may adversely affect the availability and cost of credit to the Company. There can be no assurance that governmental responses to the disruptions in the financial markets will stabilize the markets or increase liquidity and the availability of credit. We cannot assure you that we will be able to secure such financing on terms acceptable to us or the, or at all, any of which could harm our business.
Our results of operations, financial position and business will be highly dependent on commodity prices, which are subject to significant volatility and uncertainty, and the availability of supplies, so our respective results could fluctuate substantially.
With the commencement of production at our India biodiesel production facility expected in the fourth quarter of 2008, our results will be substantially dependent on commodity prices, especially prices for palm oil and other feedstock, and petroleum. The commodity markets are experiencing extreme volatility and disruption. In recent weeks, the volatility and disruption in the commodity markets have reached unprecedented levels. As a result of the volatility of the prices for these items, our results may fluctuate substantially and we may experience periods of declining prices for our products and increasing costs for our raw materials, which could result in operating losses. Although we may attempt to offset a portion of the effects of fluctuations in prices by entering into forward contracts to supply feedstock or other items or by engaging in transactions involving exchange-traded futures contracts, the amount and duration of these hedging and other risk mitigation activities may vary substantially over time and these activities also involve substantial risks.
There are risks inherent in international operations that could hinder our international growth strategy.
Our ability to achieve future success will depend in part on the successful operation of our facilities outside the U.S. We currently own and operate a biodiesel production facility in India and we expect to generate significant revenues from our operations in India and elsewhere in the world. There are difficulties and risks inherent in doing business on an international level that could adversely affect our international operations, including, among other things, the following:
·
burdensome regulatory requirements and unexpected changes in these requirements;
·
tariffs and other trade barriers;
·
difficulties in staffing and managing international operations;
·
accounting (including managing internal control over financial reporting in our non-U.S. subsidiaries), tax and legal complexities arising from international operations;
·
longer accounts receivable payment cycles and collection difficulties;
·
political and economic instability;
·
fluctuations in currency exchange rates;
·
potential difficulties in transferring funds generated overseas to the U.S. in a tax efficient manner;
·
seasonal reductions in business activity during the summer months in Europe and other parts of the world; and
·
potentially adverse tax consequences.
Operations in foreign countries also present risks associated with currency exchange and convertibility, inflation and repatriation of earnings. In some countries, economic and monetary conditions and other factors could affect our ability to convert our cash distributions to U.S. dollars or other freely convertible currencies, or to move funds from our accounts in these countries. Furthermore, the central bank of any of these countries may have the authority to suspend, restrict or otherwise impose conditions on foreign exchange transactions or to approve distributions to foreign investors.
Item 2.
Unregistered Sales Ofof Equity Securities Andand Use Ofof Proceeds
None
Item 3.
Defaults Uponupon Senior Securities
At September 30, 2008 the Company was not in compliance with the current ratio covenant for stockholder votethe month of September under the Third Eye Capital ABL Opportunities Fund loan agreement and is working with the lender to obtain a waiver of this covenant. While we expect to obtain a waiver, in the event we are unable to do so, the interest rate under this facility increases by 8% and, at the Company's annual meeting of stockholders held on May 8, 2008: (1) election of 6 members to our board of directors, each to serve until our annual meeting in 2009, and until their respective successors are qualified and elected or earlier resignation or removal; (2) ratificationoption of the appointmentlender, the indebtedness may become immediately due and payable. The Company has no cross default provisions in this or any other debt agreement. As a result, our inability to obtain a waiver will have no adverse impact on our other debt obligations. Nevertheless, the failure to obtain a waiver or the acceleration of this debt obligation as a result of this breach may have an adverse impact on our ability to obtain additional borrowings. There is no assurance that the Company will be ab le to obtain alternative funding in the event this debt obligation is accelerated. Immediate acceleration would have a significant adverse impact on the Company’s independent registered public accounting firm for the fiscal year ended on December 31, 2008; and (3) the approvalnear term liquidity.
Item 4.
Submission of the Company’s Amended and Restated 2007 Stock Plan. The respective votesMatters to a Vote of each matter were indicated as follows:
Name of Director | For | Withhold Authority |
Eric A. McAfee | 57,153,189 | 1,150 |
Surendra Ajjarapu | 57,153,189 | 1,150 |
Harold Sorgenti | 57,153,289 | 1,050 |
Michael DeLong | 57,153,289 | 1,050 |
Laird Cagan | 57,153,189 | 1,150 |
Michael Peterson | 57,153,289 | 1,050 |
For | Against | Abstain |
57,153,504 | 635 | 200 |
For | Against | Abstain |
56,741,770 | 69,575 | 300 |
None
Item 6.
Exhibits
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 13,November 11, 2008
AE Biofuels, Inc. | |
By: | /s/ Eric A. McAfee |
Eric A. McAfee | |
Chief Executive Officer (Principal Executive Officer) |
31