Washington, D.C. 20549
Commission File No. 333-67174
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Company's common stock outstanding on August 15, 2008: 41,207,619
GEOBIO ENERGY, INC.
QUARTERLY REPORT ON FORM 10QSB
FOR THE PERIOD ENDED JUNE 30, 2008
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
GeoBio Energy, Inc’s (the “Company” or “GeoBio Energy”; or, at times when describing specific events occurring prior to the Company’s February 15, 2008 name change, referred to by its former name “Better Biodiesel”) 10QSB release contains “forward-looking statements.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology. These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements. The economic environment within which we operate could materially affect our actual results. Additional factors that could materially affect these forward-looking statements include, among other things, (1) our limited operating history; (2) our ability to pay down existing debt; (3) the Company’s ability to obtain contracts with suppliers of raw materials (for the Company’s production of biodiesel fuel) and distributors of the Company’s biodiesel fuel product; (4) the risks inherent in the mutual performance of such supplier and distributor contracts (including the Company’s production performance); (5) the Company’s ability to protect and defend the Company’s proprietary technology; (6) the Company’s ability to secure and retain management capable of managing growth; (7) the Company’s ability to raise necessary financing to execute the Company's business plan; (8) potential litigation with our shareholders, creditors and/or former or current investors; (9) the Company's ability to comply with all applicable federal, state and local government and international rules and regulations; and (10) other factors over which we have little or no control.
Our management has included projections and estimates in this Form 10QSB, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the Securities and Exchange Commission or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
| GEOBIO ENERGY, INC. |
| (A Development Stage Company) |
| Formerly BETTER BIODIESEL, INC |
| CONDENSED CONSOLIDATED BALANCE SHEET |
| June 30, 2008 |
| (Unaudited) |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | | $ | 459 | |
| Prepaid expenses | | | 37,500 | |
| Employee advances | | | 1,000 | |
| Total current assets | | | 38,959 | |
| Property and equipment, net | | | - | |
| Deposits | | | - | |
| Total assets | | $ | 38,959 | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | |
| Current Liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 864,113 | |
| Notes payable | | | 133,902 | |
| Advances payable | | | 66,142 | |
| Total current liabilities | | | 1,064,157 | |
| Stockholders' Deficit | | | | |
| Preferred stock, no par value, 5,000,000 shares authorized, none issued | | | - | |
| Common stock, no par value, 200,000,000 shares authorized, | | | | |
| 41,107,619, issued and outstanding | | | 18,539,378 | |
| Additional paid in capital | | | 1,620,309 | |
| Deficit accumulated during the development stage | | | (21,184,885 | ) |
| Total stockholders' deficit | | | (1,025,198 | ) |
| Total liabilities and stockholders' deficit | | $ | 38,959 | |
| | | | | |
| See Notes to Condensed Consolidated Financial Statements |
|
| (A Development Stage Company) |
| Formerly BETTER BIODIESEL, INC |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
| For the Three and Nine Month Periods Ended June 30, 2008 and June 30, 2007 and |
| For the Period from Inception (November 1, 2004) through June 30, 2008 |
| (Unaudited) |
| | | For the Three Months Ended June 30, 2008 | | | For the Three Months Ended June 30, 2007 | | | For the Nine Months Ended June 30, 2008 | | | For the Nine Months Ended June 30, 2007 | | | From Inception on November 1, 2004 Through June 30, 2008 | |
| Sales | | $ | - | | | $ | - | | | $ | - | | | $ | 11,925 | | | $ | 11,925 | |
| Cost of sales | | | - | | | | - | | | | 20,922 | | | | - | | | | 54,193 | |
| Gross profit (loss) | | | - | | | | - | | | | (20,922 | ) | | | 11,925 | | | | (42,268 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Expenses | | | | | | | | | | | | | | | | | | | | |
| Depreciation | | | - | | | | 30,392 | | | | 30,359 | | | | 102,885 | | | | 184,724 | |
| Marketing | | | - | | | | 13,005 | | | | 114 | | | | 85,784 | | | | 193,167 | |
| Research and development | | | - | | | | 356 | | | | (165 | ) | | | 36,158 | | | | 72,176 | |
| General and administrative | | | 57,407 | | | | 781,435 | | | | 16,625,323 | | | | 1,622,814 | | | | 18,856,213 | |
| Loss from write down of impaired assets | | | - | | | | - | | | | 1,584,858 | | | | - | | | | 1,584,858 | |
| Total operating expenses | | | 57,407 | | | | 825,188 | | | | 18,240,489 | | | | 1,847,641 | | | | 20,891,138 | |
| Loss from operations | | | (57,407 | ) | | | (825,188 | ) | | | (18,261,411 | ) | | | (1,835,716 | ) | | | (20,933,406 | ) |
| Interest (expense) | | | (28,247 | ) | | | (14,997 | ) | | | (82,992 | ) | | | (100,164 | ) | | | (201,113 | ) |
| Loss before extraordinary item | | | (85,654 | ) | | | (840,185 | ) | | | (18,344,403 | ) | | | (1,935,880 | ) | | | (21,134,519 | ) |
| Extraordinary item- loss of assets from fire | | | - | | | | - | | | | - | | | | - | | | | (50,366 | ) |
| Net loss | | $ | (85,654 | ) | | $ | (840,185 | ) | | $ | (18,344,403 | ) | | $ | (1,935,880 | ) | | $ | (21,184,885 | ) |
| Basic and diluted net loss per common share | | $ | (0.00 | ) | | $ | (0.03 | ) | | $ | (0.54 | ) | | $ | (0.06 | ) | | | | |
| Weighted average basic and diluted shares | | | | | | | | | | | | | | | | | | | | |
| outstanding | | | 41,107,619 | | | | 30,726,512 | | | | 34,111,571 | | | | 30,575,505 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| See Notes to Condensed Consolidated Financial Statements |
| GEOBIO ENERGY, INC. |
| (A Development Stage Company) |
| Formerly BETTER BIODIESEL, INC |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Nine Month Periods Ended June 30, 2008 and June 30, 2007, |
| and For the Period from Inception (November 1, 2004) through June 30, 2008 |
| (Unaudited) |
| | | For the Nine Months Ended June 30, 2008 | | | For the Nine Months Ended June 30, 2007 | | | From Inception on November 1, 2004 through June 30, 2008 | |
| Cash Flows From Operating Activities | | | | | | | | | |
| Net loss | | $ | (18,344,403 | ) | | $ | (1,935,880 | ) | | $ | (21,184,885 | ) |
| Adjustments to reconcile net loss to | | | | | | | | | | | | |
| net cash used in operating activities | | | | | | | | | | | | |
| Depreciation | | | 30,359 | | | | 105,559 | | | | 192,746 | |
| Amortization of debt discount | | | 8,302 | | | | 68,437 | | | | 79,214 | |
| Non-cash expense for consulting, director fees and other expenses | | | 16,096,100 | | | | 645,697 | | | | 16,760,199 | |
| Non-cash expense for bad debt reserve and carrying value of inventory | | | 24,922 | | | | - | | | | 58,691 | |
| Non-cash expense for extraordinary item - write down of assets lost in fire | | | - | | | | - | | | | 50,366 | |
| Non-cash expense for impairment of business operating assets | | | 1,584,808 | | | | - | | | | 1,584,808 | |
| Changes in operating assets and liabilities, net of effects of DEP transaction | | | | | | | | | |
| Change in accounts receivable | | | - | | | | (4,500 | ) | | | (4,500 | ) |
| Change in inventory | | | - | | | | (38,436 | ) | | | (79,497 | ) |
| Change in prepaid expenses | | | 57,958 | | | | (47,465 | ) | | | 37,500 | |
| Change in employee advances | | | 1,000 | | | | (8,000 | ) | | | (7,000 | ) |
| Change in deposits | | | 20,000 | | | | (20,000 | ) | | | (5,500 | ) |
| Change in accounts payable and | | | - | | | | | | | | | |
| accrued expenses | | | 356,847 | | | | 626,534 | | | | 1,164,842 | |
| Net cash used in operating activities | | | (164,107 | ) | | | (608,054 | ) | | | (1,353,016 | ) |
| Cash Flows From Investing Activity | | | | | | | | | | | | |
| Purchases of property and equipment | | | - | | | | (299,958 | ) | | | (477,373 | ) |
| Cash Flows From Financing Activities | | | | | | | | | | | | |
| Proceeds from related parties for company | | | | | | | | | | | | |
| expenses, net | | | 66,142 | | | | 75,000 | | | | 293,363 | |
| Proceeds from notes payble | | | - | | | | 282,485 | | | | 282,485 | |
| Proceeds from sale of 377,500 units, consisting of 377,500 shares | | | | | | | | | | | | |
| and warrants to purchase 377,500 shares valued at $2.00 per unit, | | | | | | | | | | | | |
| excluding $75,500 in accrued financing fees | | | - | | | | 673,000 | | | | 755,000 | |
| Proceeds from related party notes payable | | | - | | | | - | | | | 500,000 | |
| Net cash provided by financing | | | | | | | | | | | | |
| activities | | | 66,142 | | | | 1,030,485 | | | | 1,830,848 | |
| Net Change In Cash and Cash Equivalents | | | (97,965 | ) | | | 122,473 | | | | 459 | |
| Cash and Cash Equivalents, beginning of period | | | 98,424 | | | | 173,816 | | | | - | |
| Cash and Cash Equivalents, end of period | | $ | 459 | | | $ | 296,289 | | | $ | 459 | |
| | | | | | | | | | | | | |
| Supplemental Cash Flow Information | | | | | | | | | | | | |
| Non-Cash Investing and Financing Activities | | | | | | | | | | | | |
| Contribution of airplane and other assets by related party | | $ | - | | | $ | - | | | $ | 138,825 | |
| Conversion of related party note payable and accrued | | | | | | | | | | | | |
| interest to common stock | | $ | - | | | $ | - | | | $ | 506,667 | |
| Conversion of contributions of cash and airplane | | | | | | | | | | | | |
| by related party to common stock | | $ | - | | | $ | - | | | $ | 291,046 | |
| Subscription receivable from related party on purchase of 41,000 units of private | | | | | | | | | |
| placement of units consisting of 41,000 shares and warrants to purchase 41,000 | | | | | | | | | |
| shares valued at $2.00 per unit | | | | | | $ | (82,000 | ) | | $ | (82,000 | ) |
| Accrued financing fees for private placement of 377,500 units consisting | | | | | | | | | |
| of 377,500 shares and warrants to purchase 377,500 share valued at | | | | | | | | | |
| $2.00 per unit | | $ | - | | | $ | (75,500 | ) | | $ | (75,500 | ) |
| Issuance of 28,491 warrants as financing fee on 377,500 units private | | | | | | | | | | | | |
| placement | | $ | - | | | $ | - | | | $ | (65,523 | ) |
| Contribution of inventory and assets in exchange for units | | | | | | | | | | | | |
| consisting of shares and warrants valued at $2.00 per unit | | $ | - | | | $ | 46,828 | | | $ | 46,828 | |
| Non-cash adjustment of assets and liabilities from impairment and | | | | | | | | | | | | |
| subsequent disposition: | | | | | | | | | | | | |
| Disposition of inventory | | $ | 36,411 | | | $ | - | | | $ | 36,411 | |
| Disposition of advances | | $ | 6,000 | | | $ | - | | | $ | 6,000 | |
| Disposition of deposits | | $ | 5,500 | | | $ | - | | | $ | 5,500 | |
| Disposition of property and equipment | | $ | 408,807 | | | $ | - | | | $ | 408,807 | |
| Settlement of payroll obligations | | $ | (260,750 | ) | | | | | | $ | (260,750 | ) |
| Settlement of related party payable | | $ | (79,910 | ) | | $ | - | | | $ | (79,910 | ) |
| Non cash adjustment of inventory to net realizable value | | $ | 20,922 | | | $ | - | | | $ | 20,922 | |
| Conversion of note payable to common stock | | $ | (220,000 | ) | | $ | - | | | $ | (220,000 | ) |
| Issuance of common stock for note payable extention fee recorded as a prepaid | | $ | (75,000 | ) | | $ | - | | | $ | (75,000 | ) |
| Shares issued for the payment of accounts payable | | $ | 50,000 | | | $ | - | | | $ | 50,000 | |
| | | | | | | | | | | | | |
| See Notes to Condensed Consolidated Financial Statements |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Note 1. BASIS OF FINANCIAL STATEMENT PRESENTATION
On February 15, 2008, Better Biodiesel, Inc. (the “Company“) changed its name to GeoBio Energy, Inc. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company 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 U.S. generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company's audited financial statements and notes thereto included in its Form 10-KSB filed on January 15, 2008. Operating results for the three month and nine month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2008.
Note 2. GOING CONCERN CONSIDERATIONS
The Company’s condensed financial statements are prepared consistent with accounting principles generally accepted in the United States applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. However, as shown in its Annual Report on Form 10-KSB for the year ended September 30, 2007, the Company has sustained losses and has relied on advances and loans from owners and sales of shares of its equity for operating capital. Additionally, the Company has sustained additional operating losses for the nine months ended June 30, 2008 of $18,344,403.
The Company is currently illiquid, is sustaining consistent losses and is insolvent. Company management intends to raise additional debt and equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be obtained in sufficient amounts necessary to meet the Company’s needs.
The condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the Company’s audited financial statements are disclosed in the notes to the Company’s audited annual financial statements for the fiscal year ended September 30, 2007 included in its Form 10-KSB. Updated disclosures regarding such policies are set forth below.
Accounts Receivable
Accounts receivable consisted of a net $4,500 due from the sale of fuel in March of 2007 and are associated with the tax rebate to be collected by the buyer and passed back to the Company. The Company has taken a $4,500 reserve in anticipation that the receivable will not be collectable. The net value of accounts receivable at June 30, 2008 is zero.
Inventory
Inventory carried at the lower of average cost or market of $57,333 at September 30, 2007 has been adjusted to zero value. Inventory of $36,411 was determined to be impaired and was transferred to Domestic Energy Partners LLC (DEP) under an Asset Purchase, Settlement and Mutual Release Agreement. The inventory that was transferred to DEP was determined to be impaired as part of the technology the Company moved away from. Inventory in the amount of $20,922 was written down to net realizable value of zero upon determination by the Company that it was unsalable. There was no inventory remaining at June 30, 2008.
Property and Equipment
As of June 30, 2008, the Company had no property and equipment.
Depreciation expense for the three and nine month periods ended June 30, 2008 was $0 and $30,359, respectively and from inception (November 1, 2004) through March 31, 2008 was $184,724.
Impairment of Assets
In response to management’s belief that the proprietary technology acquired in the September 2006 Exchange Agreement with Domestic Energy Partners, LLC would not be ready for large-scale commercial use in the near term, the Company recorded a loss from impairment of the assets related to such technology by adjusting their value to zero. The Company subsequently entered into an Asset Purchase, Settlement and Mutual Release Agreement with the former members of DEP for them to take back the technology and related assets. These members also agreed to assume certain related liabilities, which had the net affect of adjusting the loss from impairment to $116,108. The following table sets forth the calculation of this impairment loss. Subsequent to the impairment loss, the Company exchanged the technology including the impaired assets and liabilities for 14,255,500 shares of the Company’s common stock held by the members of DEP. No value was assigned for these shares which had no value assigned at the time of original issuance.
| Assets and liabilities impaired: | |
| | Cash | $ 50 |
| | Inventory | 36,411 |
| | Employee Advances | 6,000 |
| | Deposits | 5,500 |
| | Property and equipment | 408,807 |
| | Accrued payroll obligations | (260,750) |
| | Cash advance payable to former CEO | |
| | | including interest | (79,910) |
| Total expense for impairment of business | |
| | operating assets | $ 116,108 |
During the three month period ending March 31, 2008 the Company recorded an impairment loss of $1,468,750 in connection with the acquisition of GeoAlgae Technologies, Inc.(“GeoAlgae”) The Company allocated the entire purchase price of $1,468,750 to intangible assets and subsequently wrote off the intangible asset as impaired. See Note 11 - Acquisition of GeoAlgae for further explanation of this impairment of assets.
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Weighted average shares were 41,107,619 and 34,111,571 for the three and nine month periods , respectively, ended June 30, 2008 and 30,726,512 and 30,575,505 for the three and nine month periods , respectively, ended June 30, 2007. Potential common shares are those issuable upon the conversion or exercise of other potentially dilutive securities such as preferred stock, convertible debt, options, and warrants. In these financial statements there were no potential common equivalent shares used in the calculation of weighted average common shares outstanding as the effect would be anti-dilutive because of the net losses.
Note 4. RELATED PARTY TRANSACTIONS
During the nine months ended March 31, 2008, Ron Crafts left the Company. Related party advances of $75,000 and interest thereon of $4,910 were settled in the Asset Purchase, Settlement and Mutual Release Agreement with the former members of DEP, effective December 20, 2007. See Impairment of Assets section of Note 3.
David M. Otto is general securities counsel and a director of the Company and a principal at The Otto Law Group, PLLC. For the three and nine month periods ended June 30, 2008, the Company expensed legal fees of $0 and $193,373, respectively to The Otto Law Group, PLLC and has paid fees of $34,696. For the three and nine month periods ended June 30, 2007, the Company expensed legal fees of $0 and $214,959, respectively, to The Otto Law Group, PLLC and paid no fees .
As of June 30, 2008, the Company’s former Chief Executive Officer advanced the Company $1,500, and a Director has advanced the Company a net amount of $2,848. Two other related parties made advances to the Company in the amounts of $27,098 from Joseph Martin, LLC and $34,696 from Cambridge Partners. All of these related party advances are included in advances payable and will bear interest at 8% per annum. The Company intends to repay the advances.
Note 5. NOTES PAYABLE
In November of 2006 the Company received an advance of $100,000 from Sausalito Capital Partners (a shareholder of the Company) in anticipation of negotiating and executing a promissory note. In February of 2007 a note payable was executed in exchange for the advance. The note, which was originally due in February 2008, was subsequently assigned by Sausalito to Henry Baer (“Baer”), an individual. In February of 2008, Baer granted a nine month extension of the due date in exchange for 125,000 shares of common stock of the Company, valued at $75,000. The extension fee was recorded as a prepaid expense and, is being amortized on a straight line basis over nine months. As of June 30, 2008 the prepaid balance is $37,500. Additionally, $6,000 of accrued interest was reclassified as part of the note to give effect to annual compounding of interest which is 10% per annum. At June 30, 2008 accrued interest on the note was $3,390. Since the note was originally due in February 2008, the remaining $6,394 of the related debt discount was written off at that time.
In March of 2008 the Company entered into a note payable with Tatum, LLC (“Tatum”) as settlement of $27,902 then owed to Tatum for employment related consulting services. The note is due at the earlier of one year or a Company financing of at least $1,500,000 and carries an interest rate of 10% compounded annually and payable upon maturity. At the election of Tatum, the note is convertible at any time into common stock of the Company at the lesser of $0.75 per share or the 10 day volume weighted average of the closing bid and ask prices. At June 30, 2008, interest accrued on the note was $726.
In December of 2006 the Company received an advance of $200,000 from National Real Estate Solutions Group (“National”) in anticipation of negotiating and executing a debt agreement. In February of 2007, pursuant to a subscription agreement between National and the Company, a convertible debenture was executed in exchange for the advance. The debenture matured at March 31, 2007 and had accrued interest of $20,000. At maturity the Company had the option to convert the debenture and accrued interest into shares of the Company’s common stock at a share price of $5.00. The Company provided notice to National to convert its subordinated convertible debenture, but National requested certain amendments to the agreement in lieu of conversion of the debenture. The Company has been in discussions with the debenture holder. In November of 2007 the Company issued the note holder, National, 44,000 shares of common stock, per the note agreement. The issuance of these 44,000 shares at $5.00 per share was treated as the conversion of the $220,000 note payable to National into common stock of the Company. Despite the stated terms of the above referenced subscription agreement and the convertible debenture, National took the position that the Company is obligated to repay the convertible debenture, in cash. In reliance on these documents, the Company disputed National’s position, but remained committed to reaching an agreement acceptable to both parties.
In March of 2008, the Company and National entered into a settlement agreement whereby the Company issued 450,000 shares of its common stock in settlement of all amounts asserted by National to be owed. These amounts were $220,000 for the prior note and $22,000 of interest for a total of $242,000 through March 31, 2008. National intends to sell the 450,000 shares and the 44,000 shares previously issued, in the stock market over approximately 18 months at share prices necessary to recover the entire $242,000 plus interest at 10% per annum until the entire $242,000 is recovered. The 450,000 common shares issued to National were recorded at a total value of $135,000 and included in General and Administrative expense as a loss on debt extinguishment. In connection with this settlement agreement, the Company accrued and expensed an additional $5,000 of interest for the three months ended March 31, 2008. The Company also reversed all previously accrued interest in the amount of $22,000 that is no longer owed under the previous note that was considered by the Company as settled upon the issuance of the 44,000 shares in November 2007. The Company is contingently obligated to issue more common shares in the future, if National is unable to sell shares for amounts necessary to obtain $242,000 plus interest.
Note 6. CONTINGENCIES
On January 29, 2007, the Company's board of directors resolved to issue 16,000 shares of the Company's common stock to two separate parties for services rendered. The value of these services was deemed to be $120,000 (based on the closing market price of the Company’s shares on the grant date). As of March 31, 2008, the $60,000 obligation to one of the parties, a former employee, has been assumed by Domestic Energy Partners, LLC as part of the December 20, 2007 Asset Purchase, Settlement and Mutual Release Agreement between DEP and the Company. See Note 3 – Property and Equipment. In March 2008, the Company issued 200,000 shares of common stock to that party as settlement of all claims and amounts owed. The stock was recorded at $60,000 as a General and Administrative expense which was off -set by a $23,000 net reduction of expense for specific amounts settled. As of March 31, 2008, the shares to the other party have not been issued and a liability of $60,000 has been recorded and is included in accounts payable and accrued expenses at that date. An additional $20,000 of expense has been recorded under the terms of an agreement with this party, resulting in a total recorded liability of $80,000 at March 31, 2008. The settlement of this liability continues to be in process.
During 2007 the board of directors resolved to issue Gary Crook, the Company’s former Chief Financial Officer, 305,000 options. On October 12, 2007, the board of directors adjusted the still unissued option grant to 500,000 options. The options have not been issued as of yet and no terms or conditions or the certainty of issuance have been determined.
Note 7. COMMON STOCK AND WARRANTS
In November of 2007 the Company issued 44,000 shares of common stock to National per the terms of the subscription agreement and subordinated convertible debenture (the “Securities Agreement”). The issuance of these 44,000 shares at $5.00 per share was treated as the conversion of the $220,000 Note Payable to National into common stock of the Company. In March 2008 the Company issued an additional 450,000 shares of common stock to National as part of a settlement. See Note 5 – Notes Payable.
As discussed in Note 3, on December 20, 2007, the Company entered into and closed an Asset Purchase, Settlement and Mutual Release Agreement with Ron Crafts, Chairman and Chief Executive Officer of the Company, John Crawford, President, Chief Technology Officer and a Director of the Company, Lynn Dean Crawford, Chief Operations Officer of the Company, James Crawford, Mary Crafts, and Culinary Crafts, LLC, under which Ron Crafts, John Crawford and Lynn Dean Crawford exchanged a total of 14,255,500 shares of common stock of the Company in exchange for all of the rights, title and interest held in the invention identified in the patent application assigned to the Company, along with certain other assets.
On January 16, 2008, the Company entered into nine individual consulting agreements for professional services in exchange for a sum total of 17,330,000 shares of common stock and 300,000 warrants for the purchase of common stock of the Company under Section 4(2) of the Securities Act of 1933. The closing price of the Company’s common stock on the over the counter bulletin board on January 16, 2008 was $0.89. The Company recorded these shares at $15,423,700. The fair value of the warrants was $266,400. The warrants were valued using the Black Scholes model with an issue price of $0.89, an exercise price of $1.00, volatility of 192%, a risk-free interest rate of 3.74%, a life of ten years and a dividend yield of 0% resulting in a value of $0.888 per warrant. The values recorded to equity were expensed as general and administrative expenses at the time the securities were issued. The shares were issued to the following individuals, for the following services:
Cambridge Partners, LLC (“Cambridge”) – In exchange for strategic management services to effect the implementation of the Company’s business plan, the Company agreed to issue to Cambridge 2,000,000 shares of common stock of the Company.
Joseph Martin, LLC (“Joseph Martin”) – In exchange for strategic management services to effect the implementation of the Company’s business plan, the Company agreed to issue to Joseph Martin 2,000,000 shares of common stock of the Company.
Shropshire Capital Holdings, LLC (“Shropshire”) – In exchange for strategic management services to effect the implementation of the Company’s business plan, the Company agreed to issue to Shropshire 2,000,000 shares of common stock of the Company.
18KT.TV, LLC (“18KT”) – In exchange for the creation of an investment profile for the Company and to provide investor relation services, the Company agreed to issue to 18KT, 100,000 shares of common stock of the Company and 300,000 10-year warrants with an exercise price of $1.00 per share.
Barry Davis (“Davis”) – In exchange for strategic marketing services the Company agreed to issue to Davis 1,200,000 shares of common stock of the Company
144Media, LLC (“144Media”) – In exchange for media and communication services, the Company agreed to issue to 144Media 4,000,000 shares of common stock of the Company.
Capital Group Communications (“CGC”) – In exchange for investor and market communication services, the Company agreed to issue to CGC 3,000,000 shares of common stock of the Company.
Focus Earth, Inc. (“FE”) - In exchange for green energy focused investor and market communication services, the Company agreed to issue to FE 3,000,000 shares of common stock of the Company.
Pentony Enterprises, LLC (“PE”) – In exchange for provision of web based investor and market communications services, the Company agreed to issue to PE 30,000 shares of common stock of the Company.
On February 20, 2008 the Company obtained a nine month loan extension of the Baer note in exchange for 125,000 shares of common stock valued at $0.60 per share totaling $75,000. See Note 5 – Notes Payable.
In March 2008 the Company issued 200,000 shares of common stock to a former employee in settlement of all amounts owed to either party by the other. The shares were valued at $0.30 per share totaling $60,000. See Note 6 – Contingencies.
In March 2008 the Company completed its acquisition of GeoAlgae in exchange for 5,875,000 common shares. The shares were valued at $0.25 per share for a total value of $1,468,750. The entire purchase price was allocated to intangible assets which in total constituted a business plan. The intangible assets were subsequently deemed to be impaired and expensed. The impairment was a result of the inability to conclude that there would be any future positive cash flow and therefore fair value, to be assigned to the business plan. See Note 11 - Acquisition of GeoAlgae Technologies, Inc.
In March 2008 the Company issued 100,000 shares of common stock to a consultant to compensate the consultant for expenses incurred creating and managing press releases on behalf of the Company. The shares were valued at $0.30 per share for a total of $30,000 which was expensed as General and Administrative expense.
Effective March 31, 2008 the Company issued to Thomas Lloyd, 294,118 shares of common stock as part of a settlement of amounts owed to Thomas Lloyd for financial services provided. The shares were valued at $0.17 per share for a total of $50,000. The Company also issued 715,627 warrants to Thomas Lloyd also at a fair value of $0.17 per warrant determined by using the Black-Scholes model.
In May 2007, pursuant to Section 4(2) of the Act, the Company issued 125,000 shares of common stock to Sausalito Capital Partners I, LLC (“Sausalito”) in exchange for Sausalito extending the maturity date of its February 15, 2007 loan, in the amount of $100,000 plus 6% annual interest, to the Company from February 15, 2008 to November 14, 2008.
Note 8. OPTIONS
The Company has granted 100,000 options to a director of the Company with a fair value totaling $219,000. On October 31, 2007 the option holder, Steve Nordaker, resigned his board seat. At the time of the resignation 33,333 options were vested and 66,667 options were not vested and were forfeited. The $93,712 compensation expense at September 30, 2007 consisted of $73,110 expense on vested options and $20,602 in accrued compensation amortized toward the next vesting period.
Note 9. CFO COMPENSATION
On January 18, 2008 the Company hired Allen Perron as its new CFO and filed an 8-K with the SEC on January 24, 2008. Mr. Perron was granted warrants for one percent of the then outstanding common stock or 152,390 shares at an exercise price equal to the closing price on the preceding day of $0.77 per share. These warrants were to have a life of three years and vest upon achievement of certain goals to be fully vested in one year. The Company estimated the fair value of these warrants to be approximately $105,000. The fair value of these warrants was never recorded and the warrants including a warrant agreement were never issued. This employment agreement was under negotiation during the quarter ended March 31, 2008 and a new agreement was reached in May 2008. Since this negotiation was under way prior to March 31, 2008 the resulting accounting effects are recorded as of March 31, 2008. Mr. Perron has reduced his billings for services by $10,000 and has delayed payment of $43,275 until the Company has a financing of $100,000 or more. The Company has issued to Mr. Perron 1,000,000 warrants at an exercise price of $0.13. The five day volume adjusted weighted average closing price of the shares on May 16, 2008 was $0.13. The Company has computed the fair value of the warrants using the Black Scholes model using a 10 year life, volatility of 214%, risk free interest of 3.83% and, dividends of zero, for a fair value of $0.13 per warrant or $130,000. The $130,000 has been charged to general and administrative expense.
On July 24, 2008, the Allen Perron resigned as Chief Financial Officer of the Company. All shares issuable to Allen Perron have been settled. See Note 13 – SUBSEQUENT EVENTS
Note 10. PLACEMENT AND ADVISORY SERVICES
The Company had an engagement letter with Thomas Lloyd Capital, LLC (Thomas Lloyd)(a financial advisor to the Company) to pay for Placement and Advisory services through the issuance of common stock, warrants and the payment of cash. In May-July 2007 Thomas Lloyd helped the Company sell stock and warrants for $755,000. For Placement services rendered the Company owed Thomas Lloyd a cash placement fee of $75,500 and warrants worth $75,500, for Advisory services rendered the Company owed Thomas Lloyd 200,000 warrants. The Company would also owe an additional 300,000 warrants at the completion of a $10 million, or higher, financing or upon termination of the underlying engagement neither of which has yet happened. In May-July 2007 the Company expensed and accrued the cash fee of $75,500, recorded warrants with a fair value of $65,523 as fulfillment of the $75,500 warrant obligation and recorded 200,000 warrants at a fair value of $482,215. The warrants were never issued and Thomas Lloyd and the Company have been in the process of negotiating a settlement ever since. On May 10, 2008, all of the provisions of a settlement were agreed to and the adjustments are reflected in the financial statements contained in this 10QSB.
The new agreement requires the Company to pay (1) $50,000 of common stock, (2) 500,000 warrants to purchase common stock, (3) warrants valued at $75,500, and, (4) $52,679 payable in Cash upon closing a placement in excess of $2,000,000. The common stock and the warrants are valued at the 10 day trailing volume weighted average closing price immediately prior to May 10, 2008 which is $0.17. The warrants are valued using the Black-Scholes model with an issue price of $0.17, an exercise price of $0.17, volatility of 213%, a risk-free interest rate of 2.99%, a life of five years and a dividend yield of 0% resulting in a value of $0.17 per warrant.
In accounting for this settlement, the existing accounts payable balance of $102,679 and the number of warrants previously accounted for were taken into consideration.. The dollar amounts of previously issued warrants were not adjusted. The net effect of the settlement is an increase in consultant fees expense of $51,000, a decrease in accounts payable of $50,000, a decrease in the common stock account of $20,657 and an increase in additional paid-in capital of $121,657. The agreement also provides for a one-time reset of the $0.17 measurement price on the common stock and warrants to a price equal to the lower of (A) the 10 day trailing volume weighted average closing price at the closing of a placement in excess of $5,000,000 or (B) the 10 day trailing volume weighted average closing price on the date that is six months from the date of the agreement. Any reset election must be made within six months from the date of the agreement. There is no accounting current effect of this reset provision because it is not known if the reset will happen or at what stock price.
This agreement supersedes all previous agreements between the Company and Thomas Lloyd Capital. Under this Agreement placement fees will be a percentage, determined by funds raised. The fees will be payable in cash and warrants. Placement fees and Advisory fees for prior services provided are settled in this agreement and were recorded in the period ended March 31, 2008.
Note 11. ACQUISITION OF GEOALGAE TECHNOLOGIES, INC.
On March 18, 2008, the board of directors of the Company approved the Company’s entry into an amendment, dated March 12, 2008 (“the Amendment”), to its share exchange agreement with GeoAlgae, dated January 10, 2008 (the “Share Exchange”).
The Amendment increases the amount of common stock that the Company will issue to the shareholders of GeoAlgae in exchange for 100% of the issued and outstanding capital stock of GeoAlgae, (i) from 3,300,000 shares of common stock of the Company at closing to 5,875,000 shares and (ii) the Company’s commitment to make up to 6,700,000 additional shares of common stock available, issuable subject to certain performance based criteria (the “GeoBio Performance Shares”), to 5,875,000, as well. The Amendment modifies the criteria for awarding the GeoBio Performance Shares such that 80% of GeoAlgae’s contribution to the GeoBio’s EBITDA arising from GeoAlge’s biofuel growth and production technology and/or fuel distribution generated revenue shall be paid in GeoBio Performance Shares at a rate of one (1) GeoBio Performance Share per each $1.25 of GeoAlgae’s contribution to GeoBio Energy’s EBITDA arising during the five (5) year period following the Closing (i.e.> a $1,000,000 contribution to GeoBio Energy’s EBIDTA would result in the issuance of 800,000 GeoBio Performance Shares). The GeoBio Performance shares are contingent upon future performance and will be recorded when and if issued over the five year period.
On March 18, 2008, the Company completed its Share Exchange with GeoAlgae, pursuant to the terms of the Amendment described above and as a result, the Company acquired GeoAlgae as a wholly owned subsidiary. The Company issued 5,875,000 shares of common stock, under Section 4(2) of the Securities Act, to shareholders of GeoAlgae, as described below, and named Kenneth R. Bennett, who was recently appointed to the position of Chief Executive Officer of the Company, to the Board of Directors.
The 5,875,000 shares of the Company’s common stock were valued at $0.25 per share based on an average of closing market price for the Company’s common stock for three days before and three days after the effective date of March 18, 2008, for a total purchase price of $1,468,750. GeoAlgae was a recently formed company and its net assets at the date of acquisition were nil. The entire purchase price was allocated to intangible assets which in total constituted a business plan. The intangible assets were subsequently deemed to be impaired and expensed. The impairment was a result of the inability to conclude that there would be any future positive cash flow and therefore fair value, to be assigned to the business plan. No pro forma results of operations has been presented related to this business acquisition as GeoAlgae had no operations since its inception
The 5,875,000 Acquisition Shares were issued to GeoAlgae shareholders as follows:
| • | Kenneth R. Bennett | 1,468,750 shares |
| • | Hydro Safe, Inc. | 1,468,750 shares |
| • | Resource Capital Development, Inc. | 2,937,500 shares |
| | | Total | 5,875,000 shares |
The Company is currently seeking to raise capital through debt or equity financing to fund the activity of GeoAlgae. It is likely that this activity will remain idle until such time as the funds are raised.
Note 12. LETTERS OF INTENT
Effective March 26, 2008, the Company signed a letter of intent (“LOI”) to acquire a mid size fuel haulage company providing service throughout the Company’s target region for growth, the Southwest. The LOI contemplates a $6,000,000 purchase price subject to a more detailed valuation. Completion of this acquisition is subject to successful completion of due diligence and availability of adequate financing. Also, effective April 17, 2008, the Company signed an LOI to acquire another mid size fuel haulage company providing service throughout the Southwest. The LOI contemplates a $5,000,000 purchase price subject to a more detailed valuation. Completion of this acquisition is subject to successful completion of due diligence and availability of adequate financing.
The Company has failed to meet the conditions contained in both of the above-referenced letters of intent. Therefore, neither deal is expected to be consummated.
Note 13. SUBSEQUENT EVENTS
On July 24, 2008, the Kenneth Bennett resigned as Director and Chief Executive Officer of the Company. The Company is currently searching for a Chief Executive Officer to fill the vacancy.
On July 24, 2008, the Allen Perron resigned as Chief Financial Officer of the Company.
On July 28, 2008 the Board of Directors of the Company appointed Alan Chaffee as its interim Chief Financial Officer. Mr. Chaffee has been a director of the company since January 14, 2008.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS CAUTIONARY
This Item 2 and the report on Form 10QSB for the quarterly period ended June 30, 2008 may contain "forward-looking statements." In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources. Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements. Changes in the circumstances upon which we base our predictions and/or forward-looking statements could materially affect our actual results. Additional factors that could materially affect these forward-looking statements and/or predictions include, among other things: (1) our limited operating history; (2) our ability to pay down existing debt; (3) the Company’s ability to obtain contracts with suppliers of raw materials (for the Company’s production of biodiesel fuel) and distributors of the Company’s biodiesel fuel product; (4) the risks inherent in the mutual performance of such supplier and distributor contracts (including the Company’s production performance); (5) the Company’s ability to protect and defend the Company’s proprietary technology; (6) the Company’s ability to secure and retain management capable of managing growth; (7) the Company’s ability to raise necessary financing to execute the Company's business plan; (8) potential litigation with our shareholders, creditors and/or former or current investors; (9) the Company's ability to comply with all applicable federal, state and local government and international rules and regulations; and (10) other factors over which we have little or no control.
Organization and Business – GeoBio Energy, Inc. (“GeoBio” or the “Company”; f/k/a Better Biodiesel, Inc., successor to Mountain States Holdings, Inc. (“Mountain States”)) was incorporated as a Colorado corporation in November 1990 under the name Slam Dunk Enterprises, Inc, was inactive until May 1998 when it started engaging in the business of providing first and second mortgage financing under the name of Mountain States Lending, Inc. During January 2001, the corporation filed articles of amendment with the Colorado Secretary of State, changing the corporation’s name to Mountain States Lending, Inc., and during September 2002 changed the name again, to Mountain States Holdings, Inc. During September 2002, the corporation formed a wholly-owned subsidiary named Mountain States Lending, Inc. (“Mountain States Lending”) and on December 31, 2002, it transferred all of its assets and liabilities related to the mortgage lending business to this new subsidiary. In August 2006, all of the Company’s assets and liabilities resided in two wholly-owned subsidiaries that were spun-off to two stockholders, one of whom was the former CEO of the Company, in exchange for 325,000 pre-split (162,500 post-split) shares of the Company’s common stock. In September 2006, the Company entered into the Exchange Agreement with Domestic Energy Partners, LLC, a Utah limited liability company (“DEP”), pursuant to which it acquired all of the equity interests in DEP. On September 20, 2006 prior to the closing of its Exchange Agreement with DEP, a majority of the shareholders of the Company at a special meeting of the shareholders approved amendments to the Company’s Articles of Incorporation to change the Company’s name to Better Biodiesel, Inc., and to reverse split its shares of common stock on the basis of one share for each two shares issued and outstanding with all fractional shares rounded up to the nearest whole share. The foregoing amendments were effective September 21, 2006.
The share exchange of the Company and DEP was accounted for as a reverse merger, which is equivalent to a recapitalization of the Company.
Until recently the Company focused almost exclusively on the development of proprietary technology to enable the production of biodiesel fuel from all types of animal fats as well as virgin oils derived from vegetative sources such soybeans, rapeseed, palm and switch grass, for example. GeoBio’s prior production process (when operating as Better Biodiesel), focused on eliminating the use of the caustic chemical catalyst and thereby limiting the “washing process” in favor of a streamlined, continuous flow production method. Eliminating the “washing process” also eliminated the need for outdoor evaporation ponds which require several acres of land devoted to the removal of caustic chemical through the evaporation of the water used in the washing process.
The Company and its advisors continued to develop and evaluate the proprietary technology during, and subsequent to, the fiscal year ended 2007. Based on its evaluation, on December 20, 2007, the Company entered into and closed an Asset Purchase, Settlement and Mutual Release Agreement with Ron Crafts, Chairman and Chief Executive Officer of the Company, John Crawford, President, Chief Technology Officer and a Director of the Company, Lynn Dean Crawford, Chief Operations Officer of the Company, James Crawford, Mary Crafts, and Culinary Crafts, LLC, under which Ron Crafts, John Crawford and Lynn Dean Crawford exchanged a total of 14,255,500 shares of common stock of the Company in exchange for all of the rights, title and interest held in the invention identified in the patent application assigned to the Company, along with certain other assets.
Seven shareholders of the Company beneficially owning a total of 24,751,000 shares of the Company’s 30,945,001 total issued and outstanding shares of common stock consented to the Asset Sale Agreement, in accordance with Section 7-107-104 and Section 7-112-102 of the Colorado Revised Statutes. Excluding shareholders with a direct interest in the assets sold in the Asset Sale Agreement, three shareholders beneficially owning a total of 9,001,000 consented out of the remaining 15,154,001 total shareholders that are considered disinterested in the assets of the transaction.
On December 20, 2007, the Company accepted the resignations of Ron Crafts from his positions as Chairman of the Board of Directors and Chief Executive Officer, John Crawford, from his positions as Director and as President and Chief Technology Officer, and Lynn Dean Crawford from his position as Chief Operations Officer. The resignations were the result of the Board of Director’s and management’s decision to broaden its business plan, as described in the following paragraph, and the resulting Asset Sale Agreement, in response to management’s belief that the proprietary technology included in the Asset Sale Agreement would not be ready for large-scale commercial use in the near term, requiring the Company to modify its business plan and to identify new revenue opportunities for in the biodiesel industry.
The remaining management of the Company continues to focus on the Company’s operations in the biodiesel industry, while shifting its business plan, from a singular focus on biodiesel production through proprietary technology, to a broader business plan including, in addition to research and development of biodiesel fuel technology, the supply of biodiesel raw materials vertically integrated with the marketing and distribution of biodiesel fuel products. The Company intends to appoint additional management and directors during the first half of 2008.
In order to reflect the Company’s revised business plan, on January 14, 2008, in reflection of the Company’s developing business strategy, the Company and a majority of its shareholders consented to an amendments to the Company’s Articles of Incorporation to change the Company name to “GeoBio Energy, Inc” effective February 15, 2008. The new trading symbol is GBOE.OB.
On March 6, 2008, GeoBio announced the appointment of Ken Bennett as Chief Executive Officer of the Company. A former Arizona State Senator, Mr. Bennett has more than twenty years of experience in the fuel and oil distribution industry having previously served as the CEO of a third generation oil company, including expertise and experience in management, marketing, finance, and government affairs.
On March 18, 2008, GeoBio completed a share exchange with GeoAlgae Technologies, Inc. (“GeoAlgae”), and named CEO Ken Bennett to the Board of Directors. Mr. Bennett was the CEO of GeoAlgae at the time of Geo Bio’s entry into the share exchange agreement on January 10, 2008, as amended March 18, 2008 (the “Share Exchange”). In accordance with the Share Exchange, GeoBio issued 5,875,000 shares of common stock to shareholders of GeoAlgae. Additionally, the Share Exchange provides the opportunity for GeoAlgae’s former shareholders (now shareholders of GeoBio) to obtain performance-based common stock based on GeoAlgae’s contribution to GeoBio’s EBITDA at a rate of one (1) share of GeoBio common stock per each $1.25 of GeoAlgae’s contribution to GeoBio Energy’s EBITDA during the five (5) year period following March 18, 2008.
Subsequent Events
On July 24, 2008, the Kenneth Bennett resigned as Director and Chief Executive Officer of the Company. The Company is currently searching for a Chief Executive Officer to fill the vacancy.
On July 24, 2008, the Allen Peron resigned as Chief Financial Officer of the Company.
On July 28, 2008 the Board of Directors of the Company appointed Alan Chaffee as its interim Chief Financial Officer. Mr. Chaffee has been a director of the company since January 14, 2008. See ITEM 5 for additional details.
PLAN OF OPERATION
During the next 12-month period the Company intends to focus on (1) the commercial development of its proprietary bio-fuel feedstock growth, synthetic fuels and carbon sequestration technology and (ii) the procurement and supply of biodiesel in facilitation of distribution activities, (2) the acquisition of a, (3) obtaining contracts to enable validation of its fuel production technology (4) the vertical integration of these strategies, (5) the acquisition of complimentary alternative energy technologies, and (6) raising additional capital through debt or equity financing.
Management believes that the key to profitability in the bio-fuel industry is to control raw material acquisition and production costs. Rising commodity prices have caused many bio-fuel producers to suspend or close operations while concurrently leading to a tightening of available investment capital. Through a combination of indentifying and acquiring alternative feedstock sources and vertical integration of the business, GeoBio intends to become a “plant-to-pump” solution to the current pursuit for cost-effective, energy independence and a cleaner environment. The company’s business model emphasizes the investment into, and acquisition of alternative raw materials and production technologies and the acquisition of existing, profitable points of distribution, with the goal of increasing profitability through economies of scale and introducing currently available, alternative fuels to a wider range of available customers.
The Company is working to develop, grow and produce alternative sources for the production of low cost, alternative fuels that will not compete with acreage or other resources dedicated to food crop production or other resources currently in high demand.
Having strong stable earnings from distribution as an integral part of a vertically integrated company providing a complete plant-to-production-to-distribution solution addressing the core issues of the 21st century- clean, economical, renewable fuels and energy independence can not be over emphasized and reflects on GeoBio Energy, Inc.'s business model.
We had a net loss of $85,654 for the quarter ended June 30, 2008, and a net loss of $840,185 for the same period a year ago.
We had a net loss of $18,344,403 for the nine months ended June 30, 2008, and a net loss of $1,935,880 for the same period a year ago.
For the three months ended June 30, 2008 operating expenses were $57,407 compared to $825,188 the same period last year, a decrease of $767,781. For the nine months ended June 30, 2008 operating expenses were $18,240,489 compared to $1,847,641 for the same period last year, an increase of $16,392,848. We have financed our operations through various private equity and debt transactions.
Going concern presentation - The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has incurred recurring losses from operations and has a net working capital deficiency and net capital deficiency that raises substantial doubt about its ability to continue as a going concern. The Report of Independent Registered Public Accounting Firm included in our Annual Report on Form 10-KSB stated that these conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Company management intends to raise additional debt and equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be obtained in sufficient amounts necessary to meet the Company’s needs. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of this uncertainty.
Critical Accounting Policies and Estimates - The preparation of financial statements included in this Quarterly Report on Form 10QSB requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experiences and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The more significant accounting estimates inherent in the preparation of the Company's financial statements include estimates as to the valuation of equity related instruments issued and valuation allowance for deferred income tax assets. Our accounting policies are described in the notes to financial statements included in our Annual Report on Form 10-KSB. The more critical accounting policies are as described below.
Accounting for Derivatives - As of June 30, 2008, the Company has convertible debt, options, warrants with derivative characteristics. The Company has evaluated these instruments to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under Statement of Financial Accounting Standards 133 “Accounting for Derivative Instruments and Hedging Activities” and related interpretations including EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. None of the instruments have qualified as derivatives. If the instruments met the criteria of the derivative the result would have been that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under SFAS 133 are reclassified to liability at the fair value of the instrument on the reclassification date.
Revenue recognition - The Company recognizes revenue when the product has been delivered or the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured.
Income taxes - The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts expected to be realized. The provision for income taxes represents the tax payable for the period and change during the period in net deferred tax assets and liabilities.
Share-based payments- The Company did not issue options or warrants to employees prior to 2005. Effective January 1, 2006, the Company accounts for all options and warrant grants to employees and consultants in accordance with SFAS 123R, which requires recording an expense over the requisite service period for the fair value of all options or warrants granted employees and consultants. As of June 30, 2008, there were 1,700,443 warrants outstanding, of which 800,000 were for consulting services and there were 33,333 vested options outstanding to an independent director.
Results of Operations
Sales. There were no sales for the three month or nine month periods ended June 30, 2008 and sales for the three and nine month periods ended June 30, 2007 were $11,925. These sales came in 2007 from the delivery of 4,500 gallons of fuel in March of 2007 to a potential customer to be used by the buyer for testing in their laboratory and in actual use. There have been no sales since that time.
Cost of Sales for the three and nine month periods ended June 30, 2008 was $20,922 and was the result of inventory adjustments to reduce the carrying value for unsalvageable fuel to net realizable value of $0. There was no cost of sales for the three and nine month periods ended June, 30, 2007. Cost of sales from inception on November 1, 2004 through June 30, 2008 was $54,193, $33,271 of which was incurred prior to the nine months ended June 30, 2008. This prior cost of sales in 2007 was inventory adjustments to reduce the carrying value to net realizable value. The write down consisted of $16,532 for out of specification and unsalvageable fuel in process and $16,739 to adjust other additional work in process to net realizable value. There was no cost of sales associated with the sales, since that fuel was produced from feedstock that had been expensed for research and development purposes.
Depreciation decreased from $102,885 for the nine months ended June 30, 2007 to $30,359 for the nine months ended June 30, 2008. The $72,526 decrease comes because in December 2007, all of the net book value of the property and equipment, amounting to $408,807 was deemed to be impaired and was written off. The impaired assets were subsequently exchanged for Company shares of common stock held by DEP members in connection with the Asset Purchase, Settlement and Mutual Release Agreement. See Loss from write down of impaired assets below.
Marketing decreased to $0 and $114 for the three and nine month periods, respectively, ended June 30, 2008 from $13,005 and $85,784 in the three and nine month periods, respectively, ended on June 30, 2007. The decrease was the result of the reduction of marketing activities in the three and nine month periods ended June 30, 2008 resulting from the Company’s current focus on its revised plan of operations.
Research and Development decreased to $0 and ($165), respectively, for the three and nine month periods ended June 30, 2008 from $356 and $36,158 in the three and nine month periods, respectively, ended on June 30, 2007. The decrease was the result of the reduction of research and development activities in the three and nine month periods ended June 30, 2008 resulting from the Company’s current focus on its revised plan of operations.
General and administrative expenses amounted to $57,407 for the quarter ended June 30, 2008 compared to $781,435 for the same period in 2007, a decrease of $724,028. These changes occurred as a result of the Company’s current focus on its revised plan of operations.
General and administrative expenses amounted to $16,625,323 for the nine months ended June 30, 2008 compared to $1,622,814 for the same period in 2007, an increase of $15,002,509. The increase is primarily attributed to shares issued to consultants for investor and market communications services, valued at $9,312,000, shares issued to consultants for services for the implementation of the Company’s revised business plan, valued at $6,408,000, shares issued for settlement of prior disagreements, approximately $236,000, a decrease of payroll of approximately $420,000, and a decrease of other fees and expenses of approximately $533,000. These changes occurred as a result of the Company’s current focus on its revised plan of operations.
Loss from write down of impaired assets was $0 and $1,584,858 for the three and nine month periods, respectively, ended June 30, 2008. There were no write downs for impaired assets for the three or nine months ended June 30, 2007. There was an impairment loss in the first quarter of 2008 of $116,108 and an impairment loss in the second quarter of 2008 of $1,468,750, with no impairment loss in the third quarter of 2008. These impairments are discussed below.
In response to management’s belief that the proprietary technology acquired in the September 2006 Exchange Agreement with Domestic Energy Partners, LLC would not be ready for large-scale commercial use in the near term, the Company recorded a loss from impairment of the assets related to such technology by adjusting their value to zero. The Company subsequently entered into an Asset Purchase, Settlement and Mutual Release Agreement with the former members of DEP for them to take back the technology and related assets. These members also agreed to assume certain related liabilities, which had the net affect of adjusting the loss from impairment to $116,108. The following table sets forth the calculation of this impairment loss in the first quarter of 2008. Subsequent to the impairment loss, the Company exchanged the technology including the impaired assets and liabilities for 14,255,500 shares of the Company’s common stock held by the members of DEP. No value was assigned for these shares which had no value assigned at the time of original issuance. As of June 30, 2008 the Company has no property and equipment.
| Assets and liabilities impaired: | | | |
| Cash | | $ | 50 | |
| Inventory | | | 36,411 | |
| Advances | | | 6,000 | |
| Deposits | | | 5,500 | |
| Property and equipment | | | 408,807 | |
| Accrued payroll obligations | | | (260,750 | ) |
| Cash advance payable to former CEO | | | | |
| including interest | | | (79,910 | ) |
| Total expense for impairment of business | | | | |
| operating assets | | $ | 116,108 | |
In March of 2008 the Company acquired GeoAlgae Technologies, Inc.(GeoAlgae) in exchange for 5,875,000 shares of the Company’s common stock valued at $1,468,750. At the time of the acquisition the assets of GeoAlgae were nil and the entire purchase price was allocated to intangible assets which in total constituted a business plan. The intangible assets were subsequently deemed to be impaired and expensed. The impairment was a result of the inability to conclude that there would be any future positive cash flow and therefore fair value, to be assigned to the business plan.
Liquidity and Capital Resources - Historically, our cash needs have been satisfied primarily through proceeds from private placements of our equity securities and debt instruments including debt instruments convertible into our equity securities and related party advances. We expect to continue to be required to raise capital in the future, but cannot guarantee that such financing activities will be sufficient to fund our current and future projects and our ability to meet our cash and working capital needs.
The Company’s working capital was a deficit of $1,025,198 at June 30, 2008 compared to a working capital deficit of $779,612 at June 30, 2007.
Net cash used in operating activities amounted to $164,107 for the nine months ended June 30, 2008 compared to $608,054 net cash used in operating activities for the same period in 2007.
Cash used in investing activities amounted to $0 for the nine months ended June 30, 2008 compared to $299,958 for the same period in 2007.
Cash provided from financing activities for the nine months ended June 30, 2008 was $66,142 compared to $1,030,485 for the same period in 2007.
Off-Balance Sheet Arrangements - We do not have any off-balance sheet arrangements that have or are likely to have a material current or future effect on the Company’s financial condition, or changes in financial condition, liquidity or capital resources or expenditures.
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions in accordance with the required "disclosure controls and procedures" as defined in Rule 13a-15(e). The Company’s disclosure and control procedures are designed to provide reasonable assurance of achieving their objectives, and the principal executive officer and principal financial officer of the Company concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
At the end of the period covered by this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based of the foregoing, the principal executive officer and principal financial officer of the Company concluded that the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management including the Company’s principal executive officer and principal financial officer to allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
GeoBio is not currently subject to any legal proceedings. From time to time, the Company may become subjected to litigation or proceedings in connection with its business, as either a plaintiff or defendant. The Company is currently not aware of any pending legal proceedings to which the Company may become a party that is likely to have a material adverse effect on the Company’s business, financial condition or results of operations.
In November of 2007 the Company issued 44,000 shares of common stock to National Real Estate Solutions Group (“National Real Estate”) per the terms of the subscription agreement and subordinated convertible debenture (the “Securities Agreement”) after National Real Estate and the Company failed to reach an agreement on an amendment to the Securities Agreement. The issuance of these 44,000 shares at $5.00 per share was treated as the conversion of the $220,000 Note Payable to National Real Estate into common stock of the Company. Despite the Securities Agreement, National Real Estate continued to take the position that the Company was obligated to repay the convertible debenture in cash. After continued negotiations, the Company agreed to issue, and on March 18, 2008 did issue, 450,000 shares of common stock, in satisfaction of National Real Estate’s remaining claims.
On March 18, 2008, the GeoBio completed a Share Exchange agreement, dated January 10, 2008, with GeoAlgae, In accordance with the Share Exchange, as amended on March 18, 2008, GeoBio issued 5,875,000 shares of common stock (the “Acquisition Shares”) to GeoAlgae. The shares were valued at $0.25 for a total of $1,468,750. Additionally, the Share Exchange provides the opportunity for GeoAlgae’s former shareholders (now shareholders of GeoBio) to obtain an additional 5,875,000 performance –based shares of common stock based on GeoAlgae’s contribution to the GeoBio’s EBITDA at a rate of one (1) share of GeoBio common stock per each $1.25 of GeoAlgae’s contribution to GeoBio Energy’s EBITDA during the five (5) year period following March 18, 2008. The 5,875,000 Acquisition Shares were issued to GeoAlgae shareholders as follows:
| · | Kenneth R. Bennett 1,468,750 shares |
| · | Hydro Safe, Inc. 1,468,750 shares |
| · | Resource Capital Development, Inc. 2,937,500 shares |
On January 16, 2008, the Company entered into nine individual consulting agreements for professional services in exchange for a sum total of 17,330,000 shares of common stock and 300,000 warrants for the purchase of common stock of the Company under Section 4(2) of the Securities Act of 1933. The closing price of the Company’s common stock on the over the counter bulletin board on January 16, 2008 was $0.89. The Company recorded these shares at $15,423,700. The fair value of the warrants was $266,400 The warrants were valued using the Black Scholes model with an issue price of $0.89, an exercise price of $1.00, volatility of 192%, a risk-free interest rate of 3.74%, a life of ten years and a dividend yield of 0% resulting in a value of $0.888 per warrant. The values recorded to equity were expensed as general and administrative expenses at the time the securities were issued. The shares are to be issued to the following individuals, and for the following services:
Cambridge Partners, LLC (“Cambridge”) – In exchange for strategic management services to effect the implementation of the Company’s business plan, the Company agreed to issue to Cambridge 2,000,000 shares of common stock of the Company
Joseph Martin, LLC (“Joseph Martin”) – In exchange for strategic management services to effect the implementation of the Company’s business plan, the Company agreed to issue to Joseph Martin 2,000,000 shares of common stock of the Company.
Shropshire Capital Holdings, LLC (“Shropshire”) – In exchange for strategic management services to effect the implementation of the Company’s business plan, the Company agreed to issue to Shropshire 2,000,000 shares of common stock of the Company.
18KT.TV, LLC (“18KT”) – In exchange for the creation of an investment profile for the Company and to provide investor relation services, the Company agreed to issue to 18KT, 100,000 shares of common stock of the Company and 300,000 10-year warrants with an exercise price of $1.00 per share.
Barry Davis (“Davis”) – In exchange for strategic marketing services the Company agreed to issue to Davis 1,200,000 shares of common stock of the Company.
144Media, LLC (“144Media”) – In exchange for media and communication services, the Company agreed to issue to 144Media 4,000,000 shares of common stock of the Company.
Capital Group Communications (“CGC”) – In exchange for investor and market communication services, the Company agreed to issue to CGC 3,000,000 shares of common stock of the Company.
Focus Earth, Inc. (“FE”) - In exchange for green energy focused investor and market communication services, the Company agreed to issue to FE 3,000,000 shares of common stock of the Company.
Pentony Enterprises, LLC (“PE”) – In exchange for provision of web based investor and market communications services, the Company agreed to issue to PE 30,000 shares of common stock of the Company.
On February 20, 2008 the Company obtained a nine month loan extension of the Baer note in exchange for 125,000 shares of common stock valued at $0.60 per share totaling $75,000.
In March 2008 the Company issued 200,000 shares of common stock to a former employee in settlement of all amounts owed to either party by the other. The shares were valued at $0.30 per share totaling $60,000.
In March 2008 the Company issued 100,000 shares of common stock to a consultant to compensate the consultant for expenses incurred creating and managing press releases on behalf of the Company. The shares were valued at $0.30 per share for a total of $30,000 which was expensed as General and Administrative expense.
Effective March 31, 2008 the Company issued to Thomas Lloyd, 294,118 shares of common stock as part of a settlement of amounts owed to Thomas Lloyd for financial services provided. The shares were valued at $0.17 per share for a total of $50,000. The Company also issued 715,627 warrants to Thomas Lloyd also at a fair value of $0.17 per warrant determined by using the Black-Scholes model.
In May 2007, pursuant to Section 4(2) of the Act, the Company issued 125,000 shares of common stock to Sausalito Capital Partners I, LLC (“Sausalito”) in exchange for Sausalito extending the maturity date of its February 15, 2007 loan, in the amount of $100,000 plus 6% annual interest, to the Company from February 15, 2008 to November 14, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 5. OTHER INFORMATION.
Resignation of Chief Executive Officer;
On July 24, 2008, the Board accepted the resignation of Kenneth Bennett as Director and Chief Executive Officer of the Company. Mr. Bennett had served as Director and Chief Executive Officer since March 6, 2008. The Company is currently searching for a Chief Executive Officer to fill the vacancy.
Resignation of Chief Financial Officer; Appointment of Chief FInancial Officer
On July 24, 2008, the Board of Directors (the “Board”) of the Company accepted the resignation Allen Perron as Chief Financial Officer of the Company. Mr. Perron had served as Chief Financial Officer January 18, 2008.
On July 28, 2008 the Board of Directors of the Company appointed Alan Chaffee as its interim Chief Financial Officer. Mr. Chaffee has been a director of the company since January 14, 2008. Mr. Chaffee currently serves as Chief Financial Officer of SARS Corporation, a publically traded asset tracking technology company, having been appointed in November 2007 and Iverson Genetic Diagnostics, Inc., a private genetics testing company. Mr. Chaffee, a CPA, has over 15 years of professional experience in public accounting and private industry. He is also the Managing Partner at Goff Chaffee Geddes, PLLC (“GCG”), a CFO consulting firm. As a CFO consultant, Mr. Chaffee has assisted development stage companies make the transition to public companies. He has also assisted $1B companies meet their SEC reporting and Sarbanes-Oxley requirements. Mr. Chaffee earned a BS in Business and Accounting from the University of Oregon in 1992.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB.
(a) Exhibits.
During the quarter ended June 30, 2008 and for the subsequent period through the date of this report, the Company filed the following reports on Form 8-K:
* Previously filed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GEOBIO ENERGY, INC.
David M. Otto
