FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (the "Report") of NexGen Biofuels Ltd., an
Israeli corporation (formerly known as Healthcare Technologies Ltd.) (the
"Company," "NexGen," "we," "us" and "our"), contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. This Report
includes statements regarding our plans, goals, strategies, intent, beliefs or
current expectations. These statements are expressed in good faith and based
upon a reasonable basis when made, but there can be no assurance that these
expectations will be achieved or accomplished. These forward looking statements
can be identified by the use of terms and phrases such "believe," "plan,"
"intend," "anticipate," "target," "estimate," "expect," and the like, and/or
future-tense or conditional constructions ("will," "may," "could," "should,"
etc.). Items contemplating or making assumptions about, actual or potential
future sales, market size, collaborations, and trends or operating results also
constitute such forward-looking statements.
Although forward-looking statements in this report reflect the good faith
judgment of management, forward-looking statements are inherently subject to
known and unknown risks, business, economic and other risks and uncertainties
that may cause actual results to be materially different from those discussed in
these forward-looking statements. Readers are urged not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. We assume no obligation to update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
report, other than as may be required by applicable law or regulation. Readers
are urged to carefully review and consider the various disclosures made by us in
our reports filed with the Securities and Exchange Commission ("SEC") which
attempt to advise interested parties of the risks and factors that may affect
our business, financial condition, results of operation and cash flows,
including the in the field of ethanol and bio-diesel fuel production under "Risk
Factors" in Item 1A of this Report. If one or more of these risks or
uncertainties materialize, or if the underlying assumptions prove incorrect, our
actual results may vary materially from those expected or projected.
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
NexGen is a development stage company that is currently seeking to develop
and/or acquire ethanol and bio-diesel plants, and blending terminal facilities,
in the United States. Prior to the closing of the Purchase Agreement (defined
below) on December 31, 2007, the Company's business consisted of the
development, manufacture and marketing of clinical diagnostic test kits and the
provision of services and tools to diagnostic and biotech research professionals
in laboratory and point of care sites in Israel and worldwide.
In accordance with that certain Purchase Agreement, dated as of January 16,
2007, as amended (the "Purchase Agreement"), by and among, the Company, NexGen
Biofuels, Inc., a Delaware corporation ("NexGen Bio"), MAC Bioventures Inc., a
Belize corporation ("MAC") and Gamida for Life B.V., a Netherlands corporation
("Gamida"), on December 31, 2007, the Company completed a Plan of Arrangement
(the "Plan") pursuant to which the Company transferred substantially all of its
existing business and assets in the field of biotechnology and medical devices
to Gamida and acquired NexGen Bio's principal assets in the field of ethanol and
bio-diesel fuel production.
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On January 28, 2008, the Company changed its name from Healthcare
Technologies Ltd. to NexGen Biofuels Ltd.
The Plan was treated as a reverse merger of the Company for financial
accounting purposes. Accordingly, the historical financial statements of the
Company before the Plan will be replaced with the historical financial
statements of NexGen Bio before the Plan in all future filings that the Company
makes with the SEC, including this Report.
On the Closing Date, all of the Company's existing directors other than
Elan Penn, Varda Rotter, and Israel Amir, resigned and Messrs. J. Ram Ajjarapu,
Bruce W. Wilkinson, Esq., Jim McAlinden, Roderick P. Morrow and Kenneth Hoyt
were appointed to fill the vacancies. Also on the Closing Date, the then-current
officers of the Company, other than Eran Rotem, resigned and new executive
officers designated by NexGen Bio were subsequently appointed. The current
officers and directors are identified in Item 10 under "Directors, Executive
Officers and Corporate Governance."
For additional information concerning the Purchase Agreement, see the
"Purchase Agreement" below.
We file annual, quarterly, current and other reports and information with
the SEC. These filings can be viewed and downloaded from the Internet at the
SEC's website at www.sec.gov. In addition, these SEC filings are available at no
cost as soon as reasonably practicable after the filing thereof on our website
at www@nexgenbiofuels.net . These reports are also available to be read and
copied at the SEC's public reference room located at Judiciary Plaza, 100 F
Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
DESCRIPTION OF BUSINESS
OVERVIEW
NexGen is currently in the process of raising capital to develop,
construct, and/or acquire, own, and operate ethanol and biodiesel plants, and
blending terminal facilities, in the United States.
NexGen is pursuing a vertically integrated strategy involving the blending
of ethanol and biodiesel through developing/acquiring of blending terminal and
production facilities. The Company plans to build the blending terminal
following the receipt of phase-I financing and has executed non binding letters
of intent ("LOI's") to acquire the majority interest in two separate ethanol
production facilities, which NexGen intends to acquire following receipt of
phase-II financing. In NexGen's view, controlling assets at both ends of the
ethanol and biodiesel value chains offer a highly effective means for buffering
the operating and financial impacts caused by ethanol and biodiesel price
volatility resulting from feedstock and production output supply/demand
imbalances. This reflects an evolution of NexGen's business strategy in response
to changing market conditions in the ethanol and biodiesel industries and in the
capital markets.
In addition, the Company plans to develop and own additional ethanol and
biodiesel plants with a capacity of approximately 100 million gallons for each
plant in a number of different states in the United States. It is contemplated
that the plants will be built on land over which NexGen, through its
wholly-owned subsidiaries, holds options. The proposed plant sites are located
in Iowa, Ohio, Indiana, Wisconsin and Arkansas. The size of each of the sites
ranges between 15-407 acres and are intended to accommodate rail loops and the
plant. All of the sites are located near existing grain production, roads, rail
transportation and livestock.
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In phase I, NexGen is looking to build a 10 million gallon storage and
blending terminal. We intend to blend 10% ethanol with gasoline and distribute
E-10 as well as blending 2% biodiesel with diesel and distribute B-2. This
blending terminal will provide a total throughput of 500 million gallons
capacity to per year, based on a weekly 10 million gallon turnover. The terminal
site is located in a strategic site with deep water access enabling the
transport of fuel on barges, tankers, rail and highways.
In phase II, NexGen intends to acquire majority control in two ethanol
plants that are located in the Midwest for an aggregate purchase price of
approximately $50 million in cash and ordinary shares. Each of the plants will
have a name plate capacity of more than 40 million gallons of ethanol. NexGen
has entered into non-binding LOI's with respect to the acquisition of such
plants. The closings of the acquisitions are subject to the completion of due
diligence, the negotiation of definitive purchase document and the receipt of
financing. The LOI's have an expiration date of May 1, 2008. Each party has the
right to terminate this LOI's upon 15 days written notice.
Ethanol is a type of alcohol that in the United States is produced
principally from corn. Bio-diesel is a type of mono-alkyl esters of long chain
fatty acids derived from vegetable oils or animal fats and is made in the United
States mostly from soybean oil. Ethanol/bio-diesel are used as a blend component
in the gasoline and diesel fuel markets. Refiners and marketers, including some
of the major integrated oil companies and a number of independent refiners and
distributors, have historically blended ethanol/bio-diesel with gasoline and
petroleum diesel to increase octane and reduce tailpipe emissions. According to
the Renewable Fuel Association (RFA), the ethanol/bio-diesel industry has grown
significantly over the last few years. NexGen believes that the fuel blends
composed of ethanol/bio-diesel will become increasingly important over time as
an alternative to petroleum based gasoline/diesel, as a result of its favorable
production economics relative to petroleum gasoline/diesel, ethanol/bio-diesel's
clean burning characteristics, a shortage of domestic petroleum refining
capacity, geopolitical concerns, and federally mandated renewable fuel usage.
BUSINESS STRATEGY
NexGen's objective is to meet the need for clean, economic, alternative
energy sources that achieve less dependence on hydrocarbons. NexGen expects to
capitalize on economic benefits and public policy drivers for renewable fuels
such as ethanol and bio-diesel and develop cost-competitive production
facilities. Owing to the commodity-like characteristics exhibited by biofuels,
particularly ethanol, NexGen has adopted a vertical integration business model
incorporating individual strategies for the production (upstream) and
distribution (downstream) ends of the ethanol and bio-diesel chain.
By operating as a vertically integrated entity NexGen looks to realize two
major competitive advantages: insuring downstream ethanol requirements are met
during periods of limited ethanol availability caused by distribution
bottlenecks, for example; and creating a dedicated end-user for upstream output.
However, in each case the separate business retain the flexibility allowing them
to opportunistically profit from abrupt or unexpected changes of a particular
local or alternative market.
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Key elements of NexGen's strategy to achieve this objective include:
o Adopting a vertical integration business model incorporating
individual strategies for the production (upstream) and
distribution (downstream) of the ethanol and bio-diesel chain.
o Building new biofuel plants in strategic locations.
o Acquiring currently producing plants.
o Establishing strategic alliances with procurement and marketing
partners.
o Achieving good economies of scale in the plants being built
and/or acquired.
o Monitoring the market dynamics in the market and adjusting its
operations to sustain in the market place for the long-term.
INDUSTRY BACKGROUND
o ETHANOL
American-made, renewable ethanol directly displaces the amount of crude oil
needed from imports, offering independence and security from foreign sources of
energy.
President Bush signed the Energy Policy Act establishing the Renewable
Fuels Standard, ("RFS") in 2005, which mandated annual use of 7.5 billion
gallons per year, ("BGY"), of renewable fuels in the U.S. fuel supply by the
year 2012. On December 19, 2007, President Bush signed the Energy Independence
and Security Act (the "2007 Act"), which increased the mandated minimum level of
use of renewable fuels in the RFS to 9.0 billion gallons per year in 2008,
further increasing to 36 billion gallons per year in 2022. The 2007 Act also
requires the increased use of "advanced" biofuels, which are alternative
biofuels produced without using corn starch such as cellulosic ethanol and
biomass-based diesel, with 21 billion gallons of the mandated 36 billion gallons
of renewable fuel required to come from advanced biofuels by 2022. Required RFS
volumes for both general and advanced renewable fuels in years to follow 2022
will be determined by a governmental administrator.
According to the Renewable Fuels Association in its outlook report for
2007, ethanol production capacity in the United States has grown in the last
twenty years from almost nothing to more then 7.8 billion gallons per year.
Plans to construct new plants or to expand existing plants have been announced.
The effect of this increase on the demand for, or price of, ethanol is
uncertain.
The ethanol industry has grown to over 130 production facilities in the
United States. The largest ethanol producers include Archer Daniels Midland,
Verasun, US BioEnergy, POET, LLC, Hawkeye Renewables, LLC, and Aventine
Renewable Energy Holdings, Inc .The top six producers accounted for more then
40% of the ethanol production capacity in the U.S. according to the RFA. The
industry is otherwise highly fragmented, with many small, independent firms and
farmer-owned cooperatives constituting the rest of the market.
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o BIO-DIESEL
When bio-diesel is blended with petroleum diesel it results in relatively
low start-up costs. Bio-diesel is positioned as a more environmentally friendly
fuel that can result in lower health and safety impacts than petroleum diesel
and while reducing American dependence on imported oil. Although bio-diesel can
achieve incremental reductions in smoke, unburned hydrocarbons and particulate
matter, several studies have shown that bio-diesel can result in slight NOx
increases. Other alternative fuels have demonstrated the ability to decrease all
regulated pollutants. Bio-diesel is domestically produced and renewable.
o TARGET MARKET
According to the National Corn Growers Association (NCGA), today's demand
of more than four billion gallons of ethanol per year is expected to grow to 7.5
billion gallons per year by the year 2012 under current law. If the use of
methyl tertiary butyl ether, or MTBE, is phased out on a national level in the
next few years and the regulatory requirements remain unchanged, the anticipated
growth may yield a doubling of ethanol demand much sooner. Recently, a bill
including provisions known as the Renewable Fuels Standard was signed by the
President. The new legislation is changing the use of fuel by determining the
specific volume of ethanol to be used in gasoline on a nationwide basis. NexGen
anticipates that the forecasted demand for ethanol will assist its future
plants' successful entry and continued operation in the industry. The dramatic
rise in ethanol utilization in the coming years predicted by the NCGA is
expected to require doubling present ethanol production capacity to supply the
demand.
o ETHANOL/BIO-DIESEL PRODUCTION PROCESS
Below is a description of the production process of ethanol and bio-diesel.
ETHANOL:
The ethanol plants will produce ethanol generally by processing corn. The
corn will be received by rail and by truck, then weighed and unloaded in a
receiving building into storage bins. Thereafter, the corn will be conveyed to a
scalper to remove rocks and debris before it is transported to a hammer mill or
grinder where it is grounded into a mash and conveyed into a slurry tank for
enzymatic processing. Water, heat and enzymes will be added to break the ground
grain into fine slurry which will be heated for sterilization and pumped to a
liquefaction tank where additional enzymes are added. Next, the grain slurry
will be pumped into fermenters, where yeast is added, to begin a batch
fermentation process. A vacuum distillation system will divide the alcohol from
the grain mash. Alcohol is then transported through a rectifier column, a side
stripper and a molecular sieve system where it is dehydrated. Two hundred-proof
alcohol is then pumped to farm shift tanks and blended with five percent
denaturant, usually gasoline, as it is pumped into storage tanks. The two
hundred-proof alcohol and five percent denaturant constitute ethanol.
Ethanol's by-products, mainly distillers grains, are made when corn mash
from the distillation stripper is pumped into one of several decanter type
centrifuges for dewatering. The water ("thin stillage") is then pumped from the
centrifuges to an evaporator where it is dried into thick syrup. The solids that
exit the centrifuge or evaporators ("the wet cake") are conveyed to the
distillers dried grains dryer system. Syrup is added to the "the wet cake" as it
enters the dryer, where moisture is removed. The distillers grains can be used
as animal feed.
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BIO-DIESEL:
Bio-diesel is made through a chemical process called transesterification
whereby glycerin is separated from animal fat or vegetable oil. The process
leaves behind two products -- methyl esters (the chemical name for bio-diesel)
and glycerin (a marketable by-product). There are three basic routes to produce
bio-diesel from oils and fats: (1) base catalyzed transesterification of the oil
with alcohol; (2) direct acid catalyzed esterification of the oil with methanol;
and (3) conversion of the oil to fatty acids, and then to Alkyl esters with acid
catalysis. The majority of the alkyl esters produced today are done with the
base catalyzed reaction because it is the most economic for several reasons: low
temperature (150(degree) F) and pressure (20 psi) processing, high conversion
(98%) with minimal side reactions and reaction time, direct conversion to methyl
ester with no intermediate steps and exotic materials of construction are not
necessary.
A fat or oil is reacted with an alcohol, like methanol, in the presence of
a catalyst to produce glycerine and methyl esters or bio-diesel. The methanol is
charged in excess to assist in quick conversion and recovered for reuse. The
catalyst is usually sodium or potassium hydroxide which has already been mixed
with the methanol.
o MARKETING ARRANGEMENTS
Most all ethanol/bio-diesel plants around the country, sell
ethanol/bio-diesel and their by-products (distillers grains, corn oil, glycerin
and CO2) through a strategic alliance partner or marketing firms. They do not
engage their own sales personnel in the process.
NexGen intends to transport ethanol/bio-diesel, corn oil, DDGS and glycerin
using rail cars, trucks, and other channels of distribution as needed. NexGen
has started discussions with certain rail car leasing companies to lease
sufficient tank cars and DDGS/Corn cars to be delivered before the production
starts at each plant.
Ethanol/bio-diesel pricing is highly volatile and driven by the crude oil
prices as well as gasoline and diesel prices. Its price is frequently
proportional to imported oil prices. Historically, ethanol/bio-diesel plants
sign long-term contracts with ethanol/bio-diesel marketing companies to mitigate
risk and avoid any major cash flow swings. Most ethanol/bio-diesel plants sell
80% of their production on long-term contracts and the remaining 20% on spot
markets to take advantage of upswing prices. NexGen's management currently
expects to follow these practices and to employ hedging futures and options to
protect against downturns.
DISTRIBUTION
NexGen's downstream strategy responds to the market inefficiencies and
risks caused by severe bottlenecks in the current ethanol distribution which
interferes with the market's price-setting mechanism and the ability to get
ethanol to reach intended end-users on a timely basis. The Company's vertical
integration business model and downstream strategy anticipates the acquisition
or construction of an ethanol bulk storage blending facility with annual
throughput capacity of 500,000,000 gallons, located in an East coast seaport
within a favorable end-user market.
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For a further discussion of NexGen's proposed plan of operations, see Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Plan of Operations."
EMPLOYEES
As of December 31, 2007, we had 8 employees. None of these employees are
covered by collective bargaining agreements.
COMPETITION
The market in which NexGen will sell its ethanol, bio-diesel and ancillary
products is highly competitive. NexGen believes that its ability to compete
successfully in the biofuel industry depends on many factors, including the
following principal competitive factors:
o vertical integration business model;
o price;
o reliability of its production processes and delivery schedule;
o volume of ethanol and bio-diesel produced and sold;
o proximity to ethanol and bio-diesel markets;
o management team; and
o facility size - economies of scale.
We will be in competition with numerous other ethanol/bio-diesel producers,
some of whom may have greater resources than we do. Additional
ethanol/bio-diesel producers may enter the market if the demand for
ethanol/bio-diesel increases and existing producers may increase the capacity of
their current plants or build new ethanol/bio-diesel production facilities. The
largest ethanol/bio-diesel producers in the United States include
Archer-Daniel-Midland Company, VeraSun Energy Corporation, Hawkeye Holdings,
Inc., Aventine, Cargill, Inc. and Abengoa Bioenergy Corp., all of which are
capable of producing as much or more ethanol/bio-diesel than we expect to
initially produce.
LEGISLATION
ENERGY POLICY ACT. The Energy Policy Act of 2005 established minimum annual
volumes of renewable fuel to be used by petroleum refiners in the fuel supply.
The Energy Policy Act removed the oxygenate requirements for reformulated
gasoline that were put in place by the Clean Air Act. The Energy Policy Act also
included anti-backsliding provisions, however, that require refiners to maintain
emissions quality standards in the fuels that they produce, thus providing a
source for continued need for ethanol. On December 19, 2007, President Bush
signed the Energy Independence and Security Act (the "2007 Act"), which
increased the mandated minimum level of use of renewable fuels in the RFS to 9
billion gallons per year in 2008 , further increasing to 36 billion gallons per
year in 2022. The 2007 Act also requires the increased use of "advanced"
biofuels, which are alternative biofuels produced without using corn starch such
as cellulosic ethanol and biomass-based diesel, with 21 billion gallons of the
mandated 36 billion gallons of renewable fuel required to come from advanced
biofuels by 2022.
THE FEDERAL BLENDERS' CREDIT. First implemented in 1979, the federal excise
tax incentive program allows gasoline distributors who blend ethanol with
gasoline to receive a federal excise tax rate reduction of $0.51 per gallon of
ethanol or $0.50 per gallon of bio-diesel. The incentive program is scheduled to
expire in 2010.
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THE FEDERAL CLEAN AIR ACT. The use of ethanol as an oxygenate is driven, in
part, by environmental regulations. The federal Clean Air Act requires the use
of oxygenated gasoline during winter months in areas with unhealthy levels of
carbon monoxide.
State legislation banning or significantly limiting the use of MTBE. In
recent years, due to environmental concerns, 25 states have banned, or
significantly limited, the use of MTBE, including California, Connecticut and
New York. Ethanol has served as a replacement for much of the discontinued MTBE
volumes and is expected to continue to replace future MTBE volumes that are
removed from the fuel supply.
FedERAL TARIFF ON IMPORTED ETHANOL. In 1980, Congress imposed a tariff on
foreign produced ethanol, made from sugar cane, to encourage the development of
a domestic, corn-derived ethanol supply. This tariff was designed to prevent the
federal tax incentive from benefiting non-U.S. producers of ethanol. The tariff
is $0.54 per gallon and is scheduled to expire on January 1, 2009.
Ethanol imports from 24 countries in Central America and the Caribbean
Islands are exempted from the tariff under the Caribbean Basin Initiative, which
provides that specified nations may export an aggregate of 7.0% of U.S. ethanol
production per year into the U.S., with additional exemptions from ethanol
produced from feedstock in the Caribbean region over the 7.0% limit. As a result
of new plants under development, we believe imports from the Caribbean region
will continue, subject to the limited nature of the exemption.
NAFTA also allows Canada and Mexico to export ethanol to the United States
duty-free. Canada and Mexico are exempt from duty under the current NAFTA
guidelines.
In addition, there is a flat 2.5% ad valorem tariff on all imported
ethanol.
The federal blenders' credits and tariffs, as well as other federal and
state programs benefiting ethanol, generally are subject to U.S. government
obligations under international trade agreements, including those under the
World Trade Organization Agreement on Subsidies and Countervailing Measures.
Consequently, they might be the subject of challenges thereunder, in whole or in
part.
ASTM BIO-DIESEL FUEL STANDARDS. The American Society of Testing and
Materials (ASTM) is the recognized standard-setting body for fuels and additives
in the United States. ASTM's specification for pure bio-diesel (to be used in
blends of up to 20% with diesel fuel), ASTM D 6751, has been adopted by the
Environmental Protection Agency, and compliance is required in order for our
bio-diesel to qualify as a legal motor fuel for sale and distribution. ASTM has
modified its D 6751 specification in the past, and is expected to continue to
modify the specification in the future as the use of and experience with
bio-diesel expands.
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ENVIRONMENTAL MATTERS
NexGen's planned future operations will be subject to various federal,
state and local environmental laws and regulations, including those relating to
the discharge of materials into the air, water and ground; the generation,
storage, handling, use, transportation and disposal of hazardous materials; and
the health and safety of its employees. These laws, regulations and permits also
can require expensive pollution control equipment or operational changes to
limit actual or potential impacts to the environment. A violation of these laws
and regulations or permit conditions can result in substantial fines, natural
resource damage, criminal sanctions, permit revocations and/or facility
shutdowns. NexGen does not anticipate a material adverse effect on its business
or financial condition as a result of its efforts to comply with these
requirements.
There is a risk of liability for the investigation and cleanup of
environmental contamination at each of the properties that NexGen will own or
operate and at off-site locations where NexGen will arrange for the disposal of
hazardous substances. If these substances are disposed of or released at sites
that undergo investigation and/or remediation by regulatory agencies, NexGen may
be responsible under CERCLA or other environmental laws for all or part of the
costs of investigation and/or remediation and for damage to natural resources.
NexGen may also be subject to related claims by private parties alleging
property damage and personal injury due to exposure to hazardous or other
materials at or from these properties. Some of these matters may require NexGen
to expend significant amounts for investigation and/or cleanup or other costs.
In addition, new laws, new interpretations of existing laws, increased
governmental enforcement of environmental laws or other developments could
require NexGen to make additional significant expenditures. Continued government
and public emphasis on environmental issues can be expected to result in
increased future investments for environmental controls at NexGen's planned
ethanol and bio-diesel facilities. Present and future environmental laws and
regulations (and related interpretations) applicable to NexGen's planned future
operations, more vigorous enforcement policies and discovery of currently
unknown conditions may require substantial capital and other expenditures.
NexGen's air emissions will be subject to the federal Clean Air Act, the federal
Clean Air Act Amendments of 1990 and similar state and local laws and associated
regulations. The U.S. EPA has promulgated National Emissions Standards for
Hazardous Air Pollutants, or NESHAP, under the federal Clean Air Act that could
apply to facilities that NexGen owns or operates if the emissions of hazardous
air pollutants exceed certain thresholds. In addition to costs for achieving and
maintaining compliance with these laws, more stringent standards may also limit
NexGen's operating flexibility. Because other domestic ethanol and bio-diesel
producers will have similar restrictions, however, NexGen believes that
compliance with more stringent air emission control or other environmental laws
and regulations is not likely to materially affect its competitive position.
The hazards and risks associated with producing and transporting NexGen's
products, such as fires, natural disasters, explosions, abnormal pressures,
blowouts and pipeline ruptures also may result in personal injury claims or
damage to property and third parties. As protection against operating hazards,
NexGen maintains and plans to maintain insurance coverage against some, but not
all, potential losses. NexGen's coverage includes, or will, when appropriate,
include, physical damage to assets, employer's liability, comprehensive general
liability, automobile liability and workers' compensation. NexGen believes that
its insurance is and will be adequate and customary for its industry, but losses
could occur for uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. NexGen does not currently have pending material
claims for damages or liability to third parties relating to the hazards or
risks of our business.
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THE PURCHASE AGREEMENT
CLOSING TRANSACTIONS.
The closing of the Purchase Agreement took place on December 31, 2007 (the
"Closing Date"). At the closing, the following transactions, which together
comprise the Plan, occurred:
o NexGen Bio transferred its principal assets (the "NexGen Assets") in
the ethanol and bio-diesel fuel industry consisting of options to
purchase five Greenfield sites in the United States and permitting for
100 million gallons of annual ethanol or bio-diesel production per
site to NexGen 2007, Inc. ("Newco"), a wholly-owned subsidiary of the
Company;
o The Company issued to MAC and MAC's designees an aggregate of
38,280,000 ordinary shares, representing the $58 million appraised
value of the NexGen Assets divided by $1.50 (the agreed upon value of
the Company shares less 1%);
o The Company issued to Israel Amir an aggregate of 386,666 ordinary
shares; and
o The Company transferred substantially all of its existing assets to
Gamida, in consideration for 4,700,000 shares of the Company held by
Gamida.
The form of Purchase Agreement is filed as Exhibit 4.34 to this Report and
is incorporated herein by reference.
The Purchase Agreement was approved by the Audit Committee, Board of
Directors and the shareholders of the Company. In addition, the Plan was
approved by order of the Tel Aviv District Court dated December 31, 2007.
GUARANTEES OF PAYMENT BY MAC
The Purchase Agreement provides that in the event, following the Closing,
the Company is obligated to pay an amount on account of the Excluded Liabilities
(as defined), or liabilities created following the Closing, MAC shall provide
the Company with sufficient funds, either directly or pursuant to a service
agreement to be entered into, to ensure that the Company will be able to pay
such liabilities when due.
INDEMNIFICATION ARRANGEMENTS AMONG THE PARTIES TO THE PURCHASE AGREEMENT
The Purchase Agreement provides for the following Indemnification
arrangements:
o NexGen Bio shall indemnify, defend and hold harmless the Company and
NewCo for claims relating to the NexGen Assets, which exist as of
Closing or which arise thereafter, unless such claims relate to
unperformed obligations and liabilities of NexGen Bio which are
specifically assumed by NewCo. NewCo shall assume those unperformed
obligations and liabilities of NexGen Bio, arising under the contracts
transferred to NewCo but only from the date of Closing.
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o The Company shall indemnify, defend and hold harmless, NexGen Bio, MAC
and NewCo, for claims arising out of any breach of the Purchase
Agreement by the Company, including reach of representations or
warranties made by the Company.
o NexGen Bio, MAC and their affiliates shall indemnify, defend and hold
harmless, the Company and Gamida, for claims arising out of their
breach of the Agreement, including breach of representations or
warranties made by NexGen Bio.
o Gamida shall indemnify, defend and hold harmless: (1) NexGen Bio, MAC
and NewCo, for claims arising out of any breach of the Purchase
Agreement by Gamida, including breach of representations or warranties
made by the Company; and (2) MAC, during the 12 month period following
the Closing, for claims arising out of any breach of the Purchase
Agreement by the Company, including breach of representations or
warranties made by the Company, for damages of no less than $100,000,
and up to the maximum aggregate amount of $1,000,000; and (3) the
Company for any claims relating to the transfer by Gamida to the
Company of 10,132 shares of the Company (of the 4,700,000 shares
contemplated by the Arrangement).
o Under the terms of the Purchase Agreement, at the Closing, Gamida
delivered to MAC a personal guarantee in an amount of $100,000 from
Mr. Daniel Kropf, our former Chairman, and the controlling shareholder
of the parent company of Gamida, in respect of Gamida's
indemnification obligations described in (2) above.
AMERICAN APPRAISAL VALUATION
In connection with the Purchase Agreement, the Company retained American
Appraisal Associates, ("American Appraisal"), an independent financial
consulting firm, to assist the Company in its determination regarding the value
of the NexGen Assets. American Appraisal produced a written report dated May 4,
2007, which valued the NexGen Assets, on a net present value basis, as
represented by a 100% interest in NexGen Bio's common stock, at approximately
$58 million as of February 14, 2007 (the "AAA Valuation"). The AAA Valuation is
based on assumptions related to the future construction and operations of the
facilities, including inter alia, timing and costs of the construction, debt
incurred, and actual start-up of the proposed facilities. In producing the AAA
Valuation, American Appraisal relied on the accuracy and completeness of certain
financial projections and other data provided by the Company to American
Appraisal. American Appraisal did not independently verify or audit such
information, but assumed its accuracy for the purposes of the AAA Valuation. It
is noted that subsequent to the date of the AAA Valuation, an option on one of
the land sites held by NexGen Bio and mentioned therein was replaced with an
option on another site. In a letter dated, July 13, 2007, a copy of which is
filed as an exhibit hereto, American Appraisal stated that such does not affect
the assumptions and conclusions reached in the AAA Valuation. Forward looking
statements and any projections, forecasts and/or estimations contained in the
AAA Valuation should not be relied upon for any purpose. A copy of the AAA
Valuation is listed as an exhibit to this Report.
14
BOAS VALUATION REPORT
Prior to the approval of the Audit Committee and Board of Directors of the
Purchase Agreement, the Company received a valuation from David Boas Business
Consultant Ltd., an independent financial consulting firm, dated January 2007,
which established the value of the Company and the Company's holdings in its
subsidiaries, using the discounted cash flow method derived from the business
over five years (the "Boas Valuation"). The valuation was based on audited and
unaudited financial data, and on business estimates provided by the Company's
executives and directors. The value attributed to the Company's holdings in the
Company's Subsidiaries was $7.4-$7.8 million while the value attributed to the
Company itself, mainly based on the Company's shares trading on NASDAQ and
having carry forward losses for tax purposes was $1.1-$1.2 million, giving the
Company a total value of $8.5-$9 million. A copy of the Boas Valuation is listed
as an exhibit to this Report.
NEXGEN BIO'S OPTION
Pursuant to the Purchase Agreement, NexGen Bio may, subject to the
Company's written consent, until 180 days following the Closing, transfer to
NewCo an existing functional ethanol or bio-diesel plant or all of the shares
held by NexGen Bio of an entity which directly owns such a plant ("Option
Assets"), in consideration for such number of our ordinary shares equal to the
value of the Option Assets (based on a written valuation prepared by a
recognized independent firm acceptable to the Company) divided by $1.50 less 1 %
("Option Shares").
The aggregate number of Option Shares issuable by the Company, if any,
shall not exceed 80,000,000 Ordinary Shares.
PRO FORMA OWNERSHIP
Immediately after giving effect to the Plan, there were issued and
outstanding on a fully diluted basis (including ordinary shares underlying
outstanding options), 42,100,998 ordinary shares of the Company, as follows:
o MAC and MAC's designees received 38,280,000 ordinary shares,
approximately 91% of the Company's outstanding ordinary shares on a
fully-diluted basis;
o the existing stockholders of the Company retained 3,434,332 ordinary
shares , approximately 8.1% of the Company's outstanding ordinary
shares on a fully-diluted basis; and
o Israel Amir received 386,666 ordinary shares, approximately 0.9% of
the Company's outstanding ordinary shares on a fully-diluted basis.
15
ITEM 1A. RISK FACTORS
An investment in NexGen involves a high degree of risk, including the risks
and uncertainties described below.
RISKS RELATED TO THE CONSTRUCTION, DEVELOPMENT AND OPERATION OF THE PROPOSED FACILITIES
Our principal assets consist of options to own land sites on which we
propose to construct ethanol and/or bio-diesel production facilities. We may not
obtain the funding or the consents and approvals required to construct and
operate the proposed ethanol and/or bio-diesel production facilities.
The planning, construction and operation of ethanol and/or bio-diesel
production facilities is a complex undertaking that involves various elements
including engineering, design, procurement of equipment, construction and
obtaining financing and permits required therefor.
We are entirely dependent on obtaining debt and equity financing from third
parties to fund the construction and development and/or acquisition of our
production facilities. NexGen estimates that it will cost approximately $200
million per ethanol site and $100 million per bio-diesel site, to develop and
construct such facilities. We do not have any definitive agreements or
understandings at this time to obtain this financing and there can be no
assurance that we will be successful in doing so.
If we are not successful obtaining the necessary permits and approvals or
raising the necessary funds, in a timely manner, or at all, in order to plan,
construct or operate the production facilities, you could lose all or a
substantial part of the value of your shares in our company.
WE WELL NEED TO RAISE ADDITIONAL FUNDS TO ACHIEVE OUR CURRENT BUSINESS
STRATEGY. OUR NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE WILL LIKELY INVOLVE
THE ISSUANCE OF ADDITIONAL ORDINARY SHARES, WHICH COULD DILUTE THE VALUE OF YOUR
INVESTMENT. THERE IS NO ASSURANCE, HOWEVER, THAT WE WILL BE ABLE TO RAISE
ADDITIONAL MONIES IN THE FUTURE.
At December 31, 2007, we had a negative working capital of $247,000.
Subsequent to December 31, 2007, we raised approximately $225,000 through cash
generated by the sale of stock via a private offering. Additionally, we have a
line of credit available through a controlling shareholder for $500,000. We
believe these funds will be sufficient to fund our current operations until we
obtain the third-party financing to fund the first phase of our business plan.
However, additional funding may not be available when required or it may not be
available on favorable terms. Without adequate funds, we may need to
significantly reduce or refocus our plan of operations or obtain funds through
arrangements that may require us to relinquish rights to certain or potential
markets, either of which could have a material adverse effect on our business,
financial condition and results of operations. Failure to secure additional
financing in a timely manner and on favorable terms when needed will have a
material adverse effect on the Company's ability to continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business.
16
THE REPORT OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONTAINS AN
EXPLANATORY PARAGRAPH QUESTIONING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of our independent registered public accounting firm on our
consolidated financial statements as of December 31, 2007 and 2006, and for the
year ended December 31, 2007 and for the period beginning August 10, 2006
(inception of development stage) through December 31, 2006 and for the period
beginning August 10, 2006 (inception of development stage) through December 31,
2007, includes an explanatory paragraph questioning our ability to continue as a
going concern. This paragraph indicates that we have not yet commenced revenue
producing operations and have a retained a net loss of $2,125 thousands since
August 10, 2006 (inception of development stage) through December 31, 2007,
which conditions raise substantial doubt about our ability to continue as a
going concern. Our consolidated financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
NEXGEN HOLDS OPTIONS TO PURCHASE THE LAND SITES BUT DOES NOT OWN THEM.
NexGen's principal assets are options to purchase land sites in the United
States on which we propose to construct our production facilities. In order to
obtain ownership of the land sites, we will need to exercise these options under
the terms of the option agreements. The timing of the exercise of these options
will depend, in part, on our prospects for raising funds and prevailing and
forecasted market conditions. If we do not exercise the options prior to their
expiration dates, we may have to seek alternative sites in order to implement
our business plan, which may not be available on reasonable terms or at all.
WE MAY NEVER BECOME PROFITABLE.
We expect to incur significant losses until we successfully complete
construction and commence operations of one or more of the planned blending
terminal, ethanol/bio-diesel production facilities or otherwise acquire one or
more functional ethanol/bio-diesel production facilities that operate at
sufficient profit levels. NexGen estimates that it will take approximately 18 to
24 months to develop and construct each ethanol facility, approximately 12
months to construct blending terminal after receiving the permits and,
approximately 12 to 18 to develop and construct the bio-diesel facility, but it
may take longer. We may not be successful in our efforts to build and operate
the facilities. In addition, we may not be successful in securing financing
necessary to build and operate our terminal/ethanol/bio-diesel production
facilities or to fund our ongoing general and administrative expenses. Even if
we successfully meet all of these objectives and begin operations, we may be
unable to operate profitably. In addition, we expect to record significant
depreciation and amortization expenses which will add to our losses.
WE HAVE NO OPERATING HISTORY OF ETHANOL/BIO-DIESEL PRODUCTION FACILITIES,
WHICH COULD RESULT IN ERRORS IN MANAGEMENT AND OPERATIONS, CAUSING A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
NexGen has no history of operating a bio-fuels production facility. While
Mr. Ram Ajjarapu has extensive experience and knowledge within the
ethanol/bio-diesel industry in carrying out projects involving 100 million
gallons per year production facilities, NexGen does not have experience in
constructing, developing or operating an ethanol or bio-diesel production
facility.
17
We may be unable to manage the start-up of our facilities in a timely and
cost-effective manner, and any failure by us to do so would delay our ability to
begin producing and selling ethanol or bio-diesel. A delay in start-up
operations is likely to further delay our ability to generate revenue and
satisfy our debt obligations and our financial condition and results of
operations could be materially adversely affected.
We anticipate a period of significant growth, involving the construction
and start-up of operations of several production facilities. This period of
growth and the start-up of our facilities are likely to be a substantial
challenge to us. If we fail to manage this start-up effectively, you could lose
all or a substantial part of the value of your shares.
WE MAY BE UNABLE TO MEET THE ADMINISTRATIVE AND OPERATIONAL NEEDS OF OUR
DEVELOPMENT AND GROWTH EFFECTIVELY, WHICH COULD RESULT IN OUR INABILITY TO
ADEQUATELY INCREASE OUR SALES OR TO EFFICIENTLY OPERATE OUR BUSINESS.
Our strategy envisions a period of rapid growth and that may impose a
significant burden on our administrative and operational resources. The
completion of construction of our facilities and growth of our business, will
require significant investments of capital and management's close attention. Our
ability to effectively manage our growth will require us to substantially expand
the capabilities of our administrative and operational resources and to attract,
train, manage and retain qualified management, technicians and other personnel.
We may be unable to retain and hire the number of qualified persons necessary to
operate our facilities effectively.
WE ARE DEPENDENT UPON OUR OFFICERS AND DIRECTORS, AND OUR FAILURE TO HIRE
OR THE LOSS OF ANY OF THESE PERSONS COULD ADVERSELY AFFECT OUR operations anD
RESULTS.
We are dependent upon our officers and directors for execution of our
business plan. The assembly of our management team is still not complete. Our
failure to hire or the loss of any of our officers or directors could adversely
affect the execution of our business plan and have a material adverse effect
upon our results of operations and financial position. We do not intend to
maintain "key person" life insurance for any of our officers or directors.
OUR MANAGEMENT'S TIME AND ATTENTION WILL BE DIVIDED AMONG OUR PLANTS, AND
EACH OF OUR PLANTS WILL BE MANAGED UNDER A SIMILAR MANAGEMENT MODEL, WHICH MAY
PREVENT US FROM ACHIEVING A MAXIMUM RETURN FROM ANY ONE PLANT.
We have established a U.S. subsidiary, NexGen 2007, Inc., that wholly-owns
separate business entities which in turn will each own one of our plants;
however each of such entities will be managed by a centralized management team.
The demands on our management's time from one plant may, from time to time,
compete with the time and attention required for the operation of the other
plants. This division of our management's time and attention among our plants
may make it difficult for us to realize the maximum return from any one plant.
IF OUR PRINCIPAL AGREEMENTS ARE TERMINATED OR BECOME UNFAVORABLE, OUR
PROJECTS MAY FAIL OR BE HARMED IN WAYS THAT SIGNIFICANTLY REDUCE THE VALUE OF
YOUR SHARES.
We will be dependent on various contractors, suppliers, lenders and other
third parties for the implementation and financing of each project. If
agreements with such parties are terminated or if the terms are amended
unfavorably to us, our projects may be harmed or even fail. Because we will be
dependent on the success of several large-scale projects, the impairment or
failure of any of these projects could significantly reduce our production and
revenues.
18
GIVEN THAT ALL OF OUR REVENUE WILL BE PRIMARILY DERIVED FROM THE PRODUCTION
AND MARKETING OF ETHANOL AND BIO-DIESEL AND THEIR CO-PRODUCTs, ANY DISRUPTION IN
OUR OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Assuming we will successfully construct and bring some or all of the
proposed facilities to operation, our primary source of revenues will be from
the sale of ethanol and bio-diesel and related co-products that we will produce
at our facilities. We will not have an alternative line of business in the event
that we are unable to operate our facilities for any reason. Any delay or
stoppage in our anticipated production would substantially reduce our revenues
and adversely affect our results of operations.
OUR DEPENDENCY ON KEY SUPPLIERS TO DESIGN AND BUILD OUR FACILITIES AND
SUPPLY NECESSARY EQUIPMENT MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We are highly dependent upon general contractors and key vendors to design,
engineer and build the proposed facilities. We do not have any definitive
agreements or understandings with any such contractors or vendors at this time.
If one of our future contractors or vendors were to terminate its relationship
with us, there is no assurance that we would be able to obtain a replacement
contractor or vendor or that a replacement would be able to complete
construction within the originally contracted time frame and at the same or a
lower price. Any delay in the planning, construction or commencement of
operations of our facilities or problems in the design or engineering of our
facilities could have a material adverse effect on our production and results of
operations and could force us to abandon our business plan.
OUR GENERAL CONTRACTORS, SUPPLIERS AND VENDORS MAY HAVE CONFLICTING
INTERESTS THAT COULD CAUSE THEM TO PUT THEIR FINANCIAL INTERESTS AHEAD OF OURS,
WHICH MAY HAVE A MATERIAL ADVERSE EFFECT OUR BUSINESS.
Our contractors, suppliers and vendors may experience conflicts of interest
that cause them to put their financial interests ahead of our best interests.
Our contractors, suppliers and vendors may also have conflicts of interest due
to the fact that they are involved in the design and construction of other
ethanol/bio-diesel plants. Although schedule and performance guarantees may
motivate our contractors, suppliers and vendors to perform their agreements with
respect to our facilities, we cannot ultimately require them to devote their
full time or attention to our activities. As a result, they may come to have, a
conflict of interest in allocating personnel, materials and other resources to
our facilities which could result in inefficiencies and delays in our
production, which could materially adversely affect our business. Such conflicts
of interest may reduce our profitability and the value of our shares.
THE COST AND TIME TO CONSTRUCT OUR FACILITIES AND COMMENCE OPERATIONS MAY
BE MORE THAN WE ANTICIPATE.
The cost to construct our facilities and commence operations may be higher
than expected and the construction of any of our facilities could take longer
than anticipated. For example, in order to commence construction of our
facilities, we will need to obtain numerous governmental and regulatory permits,
including the consent of municipal authorities to change the zoning regarding
some of our proposed facilities. It may take us significantly more time than
anticipated to obtain the necessary permits and consents for us to commence
construction.
19
Any significant increase in the estimated construction cost of, or in the
estimated length of time for, one or more of our facilities could hinder our
ability to complete construction and would delay our ability to generate
revenues and as a result could have a material adverse effect on our business
and results of operations or even force us to abandon our business plan.
Moreover, our failure to receive any of the required permits or consents could
have a material adverse effect on our business and results of operations or even
force us to abandon our business plan.
WE MAY ENCOUNTER DEFECTIVE MATERIAL AND WORKMANSHIP OR PROCESS ENGINEERING
THAT COULD CAUSE SIGNIFICANT DELAYS IN THE COMMENCEMENT OF OUR OPERATIONS.
Any defects in material or workmanship may cause substantial delays in the
commencement of operations of our facilities. If defects are discovered after
commencement of operations, or if our facilities fail to meet the performance
criteria, substantial delays in the commencement of operations could occur which
may have a material adverse effect on our business and results of operations.
WE WILL BE SUBJECT TO THE RISK OF LOSS DUE TO FIRE BECAUSE ETHANOL AND
BIO-DIESEL AND THE MATERIALS TO BE USED TO PRODUCE OUR PRODUCTS ARE HIGHLY
FLAMMABLE.
Ethanol and bio-diesel, and products such as natural gas and/or propane
which are used in the production thereof, are highly flammable materials and we
are therefore subject to the risk of loss arising from fires. The risk of fire
associated with these materials cannot be completely eliminated. We intend to
maintain insurance policies to reduce losses caused by fire, including business
interruption insurance. If any of our production facilities were to be damaged
or cease operations as a result of a fire, or if our insurance proves to be
inadequate, it would harm our manufacturing capacity and adversely effect our
results of operations.
THE CONDITION OF OUR CONSTRUCTION SITES MAY DIFFER FROM WHAT WE EXPECT.
If we encounter concealed or unknown conditions at our facility sites, it
could result in an increase in the cost of construction of our facilities and
may result in time delays and alternatives may not be available on reasonable
terms or at all. Concealed or unknown conditions include any concealed physical
conditions at each site that materially differ from the conditions contemplated.
Although the sites have undergone limited inspection by NexGen, concealed or
unknown conditions are often difficult to detect and there can be no assurance
that we will not encounter them. There is no assurance that after full
investigation some or all of the sites will be determined to be suitable for the
plants. We have not inspected the sites and are relying on NexGen's judgment as
to the suitability thereof for the construction and operation of the proposed
production facilities.
AS PART OF OUR BUSINESS STRATEGY, WE MAY SEEK TO ACQUIRE EXISTING ETHANOL
AND BIO-DIESEL PRODUCTION FACILITIES, WHICH ENTAIL A NUMBER OF RISKS.
As part of our business strategy, we may seek to acquire existing ethanol
and bio-diesel production facilities. There are numerous risks involved in
making acquisitions, including:
o possible decreases in capital resources or dilution to existing
stockholders;
o difficulties and expenses incurred in connection with an acquisition;
20
o the difficulties of operating an acquired business;
o the diversion of management's attention from other business concerns;
o a limited ability to predict future operating results of an acquired
business; and
o the potential loss of key employees of an acquired business.
In the event that the operations of an acquired business do not meet
expectations, we may be required to restructure the acquired business or
write-off the value of some or all of the assets of the acquired business. We
cannot assure you that any acquisition will be successfully integrated into our
operations or will have the intended financial or strategic results.
In addition, acquisitions entail an inherent risk that we could become
subject to contingent or other liabilities in connection with the acquisitions,
including liabilities arising from events or conduct pre-dating our acquisition
and that were not known to us at the time of acquisition. Although we intend to
conduct due diligence in connection with each of our acquisitions, this does not
mean that we will necessarily identify all potential problems or issues in
connection with any given acquisition, some of which could be significant.
Our failure to successfully complete future acquisitions or to integrate
and successfully manage completed acquisitions could have a material adverse
effect on our business, financial condition and results of operations.
RISKS RELATED TO FINANCING THE CONSTRUCTION AND DEVELOPMENT OF THE FACILITIES
OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE
RISKS ASSOCIATED WITH ACQUISITIONS OF FUNCTIONAL PLANTS. IN PARTICULAR, WE MAY
NOT SUCCEED IN EFFECTIVELY INTEGRATING SUCH ACQUISITIONS.
As part of our business strategy, we may make acquisitions of existing
functional plants or of companies owning such plants. We evaluate the tactical
or strategic opportunity available related to acquiring existing renewable fuel
plants or companies owning such plants. The process of integrating an acquired
company's business into our operations, may result in unforeseen operating
difficulties and large expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business. Other risks commonly encountered with acquisitions include the effect
of the acquisition on our financial and strategic position and reputation, the
failure of the acquired business to further our strategies, the inability to
successfully integrate or commercialize acquired production facilities or
otherwise realize anticipated synergies or economies of scale on a timely basis,
and the potential impairment of acquired assets. Moreover, there can be no
assurance that the anticipated benefits of any acquisition or investment will be
realized. Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities, and
amortization expenses related to intangible assets, any of which could have a
material adverse effect on our operating results and financial condition.
21
WE WILL HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS, WHICH MAY ADVERSELY
AFFECT OUR CASH FLOW AND OUR ABILITY TO OPERATE OUR BUSINESS.
In order to implement our business plan, we expect to have a substantial
amount of indebtedness which will result in substantial debt service
requirements, which could have important adverse consequences that could hinder
our ability to conduct our operations, including our ability to: (i) incur
additional indebtedness; (ii) make capital expenditures; (iii) make
distributions to shareholders, or redeem or repurchase shares; (iv) make certain
types of investments or acquisitions; (v) create liens on our assets; and (vi)
merge or consolidate or dispose of assets.
A large amount of indebtedness will reduce the funds available to us for
operations because a substantial portion of our operating cash flow will be used
to pay interest and principal on debt subject all or substantially all of our
operating subsidiaries' assets to liens, limit our ability to adjust to changing
market conditions, which could make us more vulnerable to a downturn in the
economy, the ethanol/bio-diesel industry or our business. We cannot be certain
that our earnings will be sufficient to allow us to pay the principal and
interest on our debt and meet our other obligations. If we do not have enough
money to service our debt, we may be unable to refinance all or part of our
debt, sell assets, borrow more money or raise equity on terms acceptable to us,
if at all, in order to meet our obligations. Furthermore, if we breach any of
the covenants or undertakings in our loan agreements, a lender could require us
to immediately repay all loans made by them to us, plus penalties, and they
would be entitled to exercise the remedies available to them under our loan
agreements, which may include the enforcement of liens against all of our
assets. This would have a material adverse effect on our company and may cause
us to cease our operations.
OUR INABILITY TO OBTAIN THE DEBT FINANCING NECESSARY TO CONSTRUCT AND
OPERATE OUR PLANNED PRODUCTION FACILITIES COULD RESULT IN THE FAILURE OF THOSE
PROJECTS.
Our financing plan requires a significant amount of debt financing. The
amount and nature of the debt financing that we will be seeking will be subject
to fluctuating interest rates and an ever-evolving credit environment as well as
general economic factors and other factors over which we have no control. The
construction and start-up of each facility is contingent on our ability to
arrange debt financing from third party financing sources. If the debt financing
we need is not available for any reason, we could be forced to abandon one or
more of our projects which singularly or in the aggregate could adversely impact
our business and could force us to abandon our business plan.
RISKS RELATED TO OWNERSHIP OF OUR SHARES
THE PRICE OF OUR SHARES HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH
COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL SHAREHOLDERS.
The market price of the Company's ordinary shares during 2007 ranged
between a high sales price of $ 2.03 and a low sales price of $ 0.80 and may
continue to be highly volatile and subject to wide fluctuations in response to
factors including the following, some of which are beyond the Company's control:
o actual or anticipated variations in the Company's quarterly operating
results;
o announcements or new pricing practices by the Company or its
competitors;
22
o changes in government regulations relating to the construction of our
production facilities and the production of our products;
o results of regulatory inspections;
o changes in earnings estimates or recommendations by research analysts
who might follow us or other companies in our industry;
o announcements by the Company or its competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o additions or departures of key personnel; and
o sales of additional ordinary shares.
In addition, the stock market in general has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of the Company's ordinary shares, regardless
of the Company's actual operating performance.
OUR ISSUING OF ADDITIONAL SHARES WILL DILUTE OR OTHERWISE LIMIT YOUR VOTING
OR ECONOMIC RIGHTS.
To enable us to plan, construct, develop and/or operate each of the
production facilities, we expect to seek additional equity financing, which
would cause dilution to the holders of our shares, and a reduction in their
voting and equity interests. It is currently anticipated that in the first two
phases of our business plan, in which we intend to construct a blending terminal
and acquire the majority interest in two separate ethanol production facilities,
we will seek to raise approximately $73 million through equity. Shareholders do
not have any preemptive rights with regard to shares to be issued by us in the
future in connection with any such additional equity financing. If we sell
additional shares, the sale price of those shares could be higher or lower than
the price per share of the Company's shares prior to the Arrangement. In
addition, it is likely that we will issue in the future options to purchase
additional shares of the Company, to attract, retain and reward our key
directors, managers, employees, consultants and service providers, an act that
would be dilutive to all existing shareholders. We may also decide to pay in
kind all or a portion of the purchase price of the land underlying our land
options by issuing shares or other securities.
CONCENTRATION OF OWNERSHIP OF THE COMPANY'S SHARES MIGHT LOWER THEIR
TRADING VOLUME.
MAC, the Company's principal shareholder, owns approximately 84% of our
outstanding shares and the shares held by MAC are restricted securities under
U.S. securities laws. This concentration of ownership may result in low trading
volumes of our shares which could adversely affect our shareholders' ability to
sell their shares in the short term period or at all.
23
MAC, THE COMPANY'S PRINCIPAL SHAREHOLDER, EXERTS SIGNIFICANT INFLUENCE OVER
US AFTER THE CONSUMMATION OF THE ARRANGEMENT. ITS INTERESTS MAY NOT COINCIDE
WITH YOURS AND IT MAY MAKE DECISIONS WITH WHICH YOU MAY DISAGREE.
MAC, the Company's principal shareholder owns approximately 84% of our
outstanding shares. As a result, MAC controls substantially all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change in control of our company and make some
transactions more difficult or impossible without the support of MAC. The
interests of MAC may not always coincide with our interests as a company or the
interest of other shareholders. Accordingly, MAC could cause us to enter into
transactions or agreements that you would not approve or make decisions with
which you may disagree.
OUR ORDINARY SHARES ARE TRADED OVER THE COUNTER, WHICH MAY DEPRIVE
STOCKHOLDERS OF THE FULL VALUE OF THEIR SHARES.
Our ordinary shares are quoted via the Over The Counter Bulletin Board
(OTCBB). As such, our ordinary shares may have fewer market makers, lower
trading volumes and larger spreads between bid and asked prices than securities
listed on an exchange such as the New York Stock Exchange or the NASDAQ Stock
Market. These factors may result in higher price volatility and less market
liquidity for the ordinary shares.
A LOW MARKET PRICE MAY SEVERELY LIMIT THE POTENTIAL MARKET FOR OUR ORDINARY
SHARES.
Our ordinary shares are currently trading at a price substantially below
$5.00 per share, subjecting trading in the stock to certain SEC rules requiring
additional disclosures by broker-dealers. These rules generally apply to any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions (a "penny stock"). Such rules require the delivery, prior to
any penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and institutional or wealthy investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. The broker-dealer also must disclose the
commissions payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Such information must be provided to the customer orally or in
writing before or with the written confirmation of trade sent to the customer.
Monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stock. The additional burdens imposed upon broker-dealers by such requirements
could discourage broker-dealers from effecting transactions in our ordinary
shares.
WE MAY NOT EVER DISTRIBUTE DIVIDENDS.
The Company has not paid cash dividends on its ordinary shares in the past
and has no plans to pay such dividends in the future. However, the Company does
not rule out the possibility of paying such dividends in the future in the
appropriate circumstances. An investor should not rely on an investment in the
Company if such investor requires dividend income; the only return that such
investor may receive may come from the appreciation, if any, in the value of the
Company's ordinary shares. In determining whether to pay dividends, the
Company's Board of Directors will consider many factors, including its earnings,
capital requirements and financial condition. In addition, under Israeli law,
the Company may only pay cash dividends from its retained earnings, if any, as
calculated under Israeli law.
24
RISKS RELATED TO GOVERNMENT REGULATION
THE UNITED STATES RENEWABLE FUELS INDUSTRY IS HIGHLY DEPENDENT UPON A
MYRIAD OF FEDERAL AND STATE LEGISLATION AND REGULATIONS, AND ANY CHANGES IN
LEGISLATION OR REGULATIONS COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The elimination of or significant reduction in federal ethanol and
bio-diesel tax incentives could have a material adverse effect on our results of
operations and financial condition. The cost of production of ethanol and
bio-diesel is made significantly more competitive with regular gasoline by
federal tax incentives. Before January 1, 2005, the federal excise tax incentive
program allowed gasoline distributors who blended ethanol with gasoline to
receive a federal excise tax rate reduction for each blended gallon they sold
while there was no credit for bio-diesel blends. If the fuel was blended with
10% ethanol, the refiner/marketer paid $0.052 less tax per gallon of blended
fuel, which equated to an incentive of $0.52 per gallon of ethanol. The $0.52
per gallon incentive for ethanol was reduced to $0.51 per gallon in 2005 and a
refund system was created for bio-diesel, allowing an incentive of $0.50 per
gallon of bio-diesel. Unless otherwise extended, the refund system for ethanol
and bio-diesel will expire at the end of 2010 (2008 in the case of bio-diesel).
We cannot provide you with any assurance that the federal tax incentives will be
renewed in 2010, or if renewed, on what terms they will be renewed. The
elimination or any significant reduction in the federal tax incentives may have
a material adverse effect on our results of operations and financial condition.
The effect of the Renewable Fuels Standard, or RFS, in the recent U.S.
Energy Policy Act of 2005 is uncertain. The use of fuel oxygenates, including
ethanol, was mandated through government regulations, and much of the forecasted
growth in demand for ethanol was expected to result from additional mandated use
of oxygenates. The Energy Policy Act of 2005, or the Energy Policy Act, however,
eliminated the mandated use of oxygenates and established minimum nationwide
levels of renewable fuels, including ethanol to be included in gasoline. The
Energy Policy Act also included provisions for trading of credits for use of
renewable fuels. We can provide no assurance that the favorable ethanol
provisions in the Energy Policy Act will not be adversely affected by
regulations or the enactment of additional legislation in the future.
FEDERAL REGULATIONS CONCERNING TAX INCENTIVES COULD EXPIRE OR CHANGE WHICH
COULD REDUCE OUR REVENUES.
The U.S. federal government presently encourages ethanol and bio-diesel
production by taxing it a lower rate. This currently equates to a $0.51 per
gallon subsidy of ethanol and $0.50 per gallon subsidy of bio-diesel. Some
states and cities provide additional incentives. The Energy Policy Act of 2005
effectively mandates increases in the amount of annual ethanol and bio-diesel
consumption in the United States. The result is that the ethanol/bio-diesel
industry's economic structure is highly dependent on government policies.
Although current policies are favorable factors, any major change in federal
policy, including a decrease in ethanol/bio-diesel production incentives, would
have significant adverse effects on our proposed plan of operations and cause us
to discontinue our ethanol/bio-diesel business.
There is disagreement in the scientific community about the wisdom of
policies encouraging ethanol/bio-diesel production, which could result in
changes in governmental policies concerning ethanol.
Some past studies have challenged whether ethanol is an appropriate source
of fuel and fuel additives because of concerns about energy efficiency,
potential health effects, cost and impact on air quality. Federal energy policy,
as set forth in the Energy Policy Act of 2005, strongly supports ethanol
production. If a consensus develops that ethanol production does not enhance the
U.S. overall energy policy, our ability to produce and market ethanol could be
materially and adversely affected.
25
THE COST OF COMPLIANCE AND/OR NON-COMPLIANCE WITH THE EXTENSIVE
ENVIRONMENTAL LAWS AND REGULATIONS THAT APPLY COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We will be subject to various federal, state and local environmental laws
and regulations, with regards, inter alia, to the construction of the
facilities, and operation of the plants, such as, discharge of materials into
the air, water and ground, the generation, storage, handling, use,
transportation and disposal of hazardous materials. We are required to obtain
permits that must be renewed from time to time to operate our business.
Additionally, compliance with new or amended environmental laws, regulations
and/or permits, or new interpretations of such laws, regulations and/or permits,
could require us to incur significant expense. Such changes in laws, regulations
and/or permits, or increased enforcement by governmental authorities, may have a
material adverse effect on our financial condition. These laws, regulations and
permits may limit our operations, require us to alter our production process or
purchase pollution control equipment, any of which could negatively impact our
business. We may not at all times be in complete compliance with these laws,
regulations and/or permits and we cannot guarantee that we will be successful in
obtaining all permits required to operate our business. A violation of these
laws and regulations or permits can result in significant fines, criminal
sanctions, permit revocations, damages and/or operational shutdowns, all or any
of which may adversely affect our business.
WE MAY BE SUBJECT TO LEGAL ACTIONS BROUGHT BY THIRD PARTIES FOR ACTUAL OR
ALLEGED VIOLATIONS OF CERTAIN OF OUR ENVIRONMENTAL PERMITS OR ENVIRONMENTAL LAWS
AND REGULATIONS.
We also may be subject to legal actions from third parties alleging that we
have an obligation to remediate or respond to an environmental condition or
alleging property damage and/or personal injury resulting from the handling,
producing, storing, transporting, and/or using our raw materials and/or
products. Ethanol and bio-diesel production may produce an odor which may be
objectionable to surrounding residents, and may increase dust in the vicinity of
the plant due to our operations and the transportation of grain to our
facilities and transportation of ethanol, bio-diesel, glycerin and distillers
grains from our facilities. Such activities could subject us to nuisance,
trespass or similar claims by employees of our facilities or property owners or
residents in the vicinity of the plant. The occurrence of events which result in
significant personal injury or damage to property or third parties that is not
fully covered by insurance could have a material adverse impact on our results
of operations and financial condition.
We may be subject to liability for the investigation and cleanup of
environmental contamination at our facilities and/or at off-site properties
where we arrange for the disposal of hazardous materials. If such materials are
disposed of or released at sites that undergo investigation and/or remediation,
we may be responsible under environmental laws for all or part of the costs of
such investigation and/or remediation, and for damages to natural resources. We
may also be subject to related claims by private parties alleging property
damage and/or personal injury due to exposure to hazardous or other materials
at, on, under or from such properties. Some of these matters may require us to
expend significant amounts of money for investigation and/or cleanup or other
costs.
26
AS A RESULT OF THE CLOSING OF THE PLAN WE ARE NO LONGER CONSIDERED A
FOREIGN PRIVATE ISSUER UNDER U.S. SECURITIES LAWS, AND ARE SUBJECT TO BROADER
REPORTING REQUIREMENTS, WHICH MAY PUT A STRAIN ON OUR ACCOUNTING, INTERNAL AUDIT
AND OTHER MANAGEMENT SYSTEMS AND RESOURCES, AND MAY SUBJECT OUR SHAREHOLDERS TO
ADDITIONAL LEGAL REQUIREMENTS.
As a result of the closing of the Plan we are required to comply with
reporting requirements for a domestic company rather than a foreign private
issuer under U.S. securities laws. As a domestic reporting company, the Company
is required to file more detailed reports with the SEC. Furthermore, the
Company's officers and directors will also be subject to certain liabilities
such as the reporting and "short swing" profit recovery provisions contained in
Section 16 of the U.S. Securities Exchange Act, and reporting requirements to
which they are currently exempted, such as the requirement to report their
holdings of the Company's shares.
Since NexGen Bio was a privately held company, we anticipate that we will
need to implement additional financial and management controls, reporting
systems and procedures, implement an internal audit function and hire additional
accounting, internal audit and finance staff in order to prepare our new
management to comply with the financial reporting and other requirements to
which we are or may become subject. If we are unable to accomplish these
objectives in a timely and effective fashion, our ability to comply with our
financial reporting requirements and other rules that apply to reporting
companies could be impaired. Any failure to maintain effective internal controls
could have a material adverse effect on our business, operating results and
share price.
RISKS RELATED TO THE ETHANOL AND BIO-DIESEL INDUSTRY
THE MARKET PRICE OF ETHANOL/BIO-DIESEL IS VOLATILE AND SUBJECT TO
SIGNIFICANT FLUCTUATIONS WHICH MAY CAUSE OUR PROFITABILITY TO FLUCTUATE
SIGNIFICANTLY.
The market prices of ethanol/bio-diesel are influenced by many factors,
including the price of gasoline and diesel and crude oil and the supply of
ethanol/bio-diesel in the market. Oil prices are highly volatile and difficult
to forecast due to frequent changes in global politics and the world economy and
the demand for petroleum-derived products. The supply and demand for oil
throughout the world is affected by incidents in unstable political
environments, the demand for oil from rapidly developing countries such as China
and India, weather conditions, drilling, extraction and refinery technology,
success in exploration, decisions made by OPEC and its member countries,
industrial output and many other factors. We cannot predict the future price of
crude oil or gasoline. Although the market price of ethanol/bio-diesel has
historically tracked the market price of gasoline and diesel, we cannot provide
any assurance that this will continue to occur. Low prices for crude oil,
gasoline and diesel and the relationship between ethanol/bio-diesel supply and
demand may reduce the price of ethanol/bio-diesel to a level that makes it
unprofitable to produce. In recent years, the prices of crude oil, gasoline and
diesel and ethanol/bio-diesel have all reached historically high levels. If the
prices of crude oil, gasoline or diesel were to decline, our revenues and
ultimately our profitability may be adversely affected. Fluctuations in the
market price of ethanol or bio-diesel may cause our profitability to fluctuate
significantly.
27
OUR BUSINESS WILL BE HIGHLY SENSITIVE TO CORN, SOYBEAN OIL AND OTHER
FEEDSTOCK PRICES AND WE GENERALLY WILL NOT BE ABLE TO PASS ON INCREASES IN CORN,
SOYBEAN OIL AND OTHER FEEDSTOCK PRICES TO OUR FUTURE CUSTOMERS.
The principal raw materials we will use to produce ethanol and bio-diesel
and co-products, including dry and wet distiller grains in ethanol plants and
glycerin in bio-diesel plants, will be corn, soybean oil, animal fats and palm
oil or other vegetable oils. We may also use other feedstock. As a result,
changes in the prices of our feedstock can significantly affect our business. In
general, rising feedstock prices result in lower profit margins. For example,
because ethanol and bio-diesel compete with non-corn-based fuels, we generally
will be unable to pass on increased corn costs to our future customers. At
certain levels, feedstock prices may make ethanol and bio-diesel uneconomical to
use in fuel markets. The prices of feedstock are influenced by many factors
including world supply and demand, weather conditions, crop yields, farmer
planting decisions and general economic, market and regulatory factors and
subsidies with respect to agriculture. The significance and relative effect of
these factors on the price of our feedstock is difficult to predict. Any event
that tends to negatively affect the supply of our feedstock, such as adverse
weather or crop disease, could increase our feedstock prices and potentially
harm our future business. In addition, we may also have difficulty, from time to
time, in physically sourcing feedstock on economical terms due to supply
shortages. Such a shortage could require us to suspend operations until
feedstock is available at economical terms, which would have a material adverse
effect on our business, results of operations and financial position. If an
additional ethanol/bio-diesel production facility is built in the same general
vicinity as where we intend to build our facilities, the price we pay for our
feedstock at a facility could increase and the local supply of the feedstock be
reduced, which may result in increased costs and reduced profits.
THE SPREAD BETWEEN ETHANOL/BIO-DIESEL AND THE PRICES OF DOMESTIC RENEWABLE
RESOURCES CAN VARY SIGNIFICANTLY AND WE DO NOT EXPECT THE SPREAD TO REMAIN AT
RECENT HIGH LEVELS WHICH COULD MATERIALLY ADVERSELY IMPACT OUR GROSS MARGINS.
Our gross margins will be principally dependent on the spread between
ethanol/bio-diesel and the prices of the renewable resources used in their
production (such as corn, soybean, animal fats and palm oils). In the past, this
spread fluctuated widely and we cannot provide any assurance that fluctuations
in this spread will not continue to occur. In recent periods, the spread between
ethanol/bio-diesel and the renewable resources prices reached historical levels.
Any reduction in the spread between ethanol/bio-diesel and renewable resources
prices, whether as a result of an increase in corn, soybean, animal fats or palm
oil prices or a reduction in ethanol/bio-diesel prices, would adversely affect
our results of operations and financial condition.
WE MAY ENGAGE IN HEDGING TRANSACTIONS WHICH INVOLVE RISKS THAT CAN HARM OUR
BUSINESS.
In an attempt to partially offset the effects of the volatility of
ethanol/bio-diesel prices and feedstock costs, we may take hedging positions in
order to limit our exposure to commodity price fluctuations. These may include
(i) purchasing feedstock through spot cash, fixed-price forward and delayed
pricing contracts, (ii) utilizing hedging positions in the corn, soybean oil,
animal fats and palm oil futures and options markets on the Chicago Board of
Trade, or CBOT, to manage the risk of corn, soybean oil, animal fats or palm oil
price fluctuations, (iii) entering into contracts to supply a portion of our
ethanol or bio-diesel production on a forward basis and, in connection with our
feedstock hedging positions, to lock in specific "crush" margins for a portion
of our feedstock requirements, and (iv) establishing from time to time an
unleaded gasoline/NYMEX RBOB/diesel hedge position using futures to reduce our
exposure to unleaded gasoline and diesel price risk. The financial impact of
these activities is dependent upon, among other things, the commodity futures
prices involved and our ability to sell sufficient products to use all of the
feedstock for which we have futures contracts. Hedging arrangements also expose
us to the risk of financial loss in situations where the other party to the
hedging contract defaults or, in the case of physical contracts, where there is
a change in expected differential of an open position and the underlying price
in the hedging agreement affecting the actual prices paid or received by us.
Hedging activities can themselves result in losses when a position is purchased
in a declining market or a position is sold in a rising market. A hedge position
often settled in the same time frame as the physical commodity, is either
purchased, as in the case of corn, soybean oil, animal fats or palm oil, and
natural gas, or sold as in the case of ethanol or bio-diesel. Hedging losses may
be offset by a decreased cash price for corn, soybean oil, animal fats and palm
oil, and an increased cash price for ethanol and bio-diesel. We may also vary
the amount of hedging or other risk mitigation strategies we undertake, and we
may choose not to engage in hedging transactions at all. Our hedging activities
may cause us to forego additional future profits or result in our making cash
payments.
28
SINCE THE PRODUCTION OF ETHANOL/BIO-DIESEL REQUIRES A SIGNIFICANT SUPPLY OF
WATER AND ELECTRICITY, OUR BUSINESS WILL BE MATERIALLY HARMED IF WE ARE UNABLE
TO OBTAIN AN ADEQUATE QUALITY AND QUANTITY OF WATER AND ELECTRICITY.
Our facilities will require a significant and uninterrupted supply of water
and electricity to operate. We anticipate that we will enter into arrangements
with local electric companies and municipalities to provide our supply of
electricity and water. However, there can be no assurances that, with respect to
water, we will be able to reach definitive agreements for our water supply. In
the event that we do not reach definitive agreements for our water supply, we
may be required to expend significant amounts to drill wells and to provide for
the necessary infrastructure for such well water to reach our planned
facilities. In addition, there are no assurances that such water will be of an
adequate quality. If the water quality from any of these sources is not
adequate, we may, at greater cost to us, need to treat the water or find other
sources. In addition, there can be no assurances that the water and electricity
companies will be able to reliably supply the water and electricity that we need
at any of our facilities or that back-up water wells that we may build will be
adequate to sustain production over an extended period of time. If there is an
interruption in the supply of water or electricity for any reason, which may
include natural disasters, we might be required to halt production. If
production is halted for an extended period of time, or there is any
interruption in the quantity or quality of our water or electricity, it may have
a material adverse effect on our operations, cash flows and financial
performance.
THE TRANSPORTATION OF FEEDSTOCK TO US AND OF ETHANOL/BIO-DIESEL TO OUR
CUSTOMERS WILL BE AFFECTED BY BUSINESS RISKS THAT ARE LARGELY OUT OF OUR
CONTROL, ANY OF WHICH COULD SIGNIFICANTLY REDUCE OUR REVENUES AND OPERATING
MARGINS.
The operation of our facilities will depend on our ability to receive
adequate amounts of feedstock (over and above our storage capability) in a
timely manner and our failure to receive sufficient feedstock could have a
material adverse effect on our production, revenues and results of operations.
We anticipate purchasing corn, soybean oil, animal fats and other feedstock from
states in the U.S. Midwest, to be delivered to us by rail and truck. We will
rely on third parties to transport feedstock to us and our ethanol/bio-diesel to
our customers. The transportation companies with whom we contract may be subject
to risks that are largely out of their and our control, including weather,
limitations on capacity in the transportation industry, security measures, fuel
prices, taxes, license and registration fees, and insurance premiums. In
addition, to the extent we will rely upon delivery by trains and trucks of
feedstock to us and ethanol/bio-diesel to our customers, we may be affected by
any overall shortage of rail road service or truck drivers caused by the Hazmat
Threat Assessment Program implemented under the US Patriot Act or any other
security measures instituted as a result of the threat of terrorism. This
shortage may result in increased shipping costs or delays in transport, which
could adversely affect our production and profits.
29
WORK STOPPAGES AND OTHER LABOR RELATIONS ISSUES COULD RESULT IN DECREASED
SALES OR INCREASED COSTS, EITHER OF WHICH WOULD NEGATIVELY IMPACT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATION.
We do not anticipate that our employees will be unionized. However, while
we believe that our relations with employees will be satisfactory, any prolonged
work stoppage or strike could have a negative impact on our business, financial
condition or results of operations. In addition, our suppliers, contractors or
other third parties associated with the construction of our facilities or the
operation of our business may have unionized work forces. A labor strike, work
stoppage or slowdown by unionized employees could halt or slow the construction
of our facilities or the production, transportation or sale of our products,
which could increase our costs and have a significant adverse impact on our
operations.
NATURAL DISASTERS, SUCH AS FIRES, HURRICANES, FLOODS, UNUSUALLY HEAVY OR
PROLONGED RAIN AND DROUGHTS MAY CAUSE FLUCTUATIONS IN THE PRICE, AVAILABILITY
AND QUALITY OF SUPPLIES, LABOR AND RAW MATERIALS WHICH COULD RESULT IN
PRODUCTION DELAYS AND INCREASE COSTS CAUSING A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Fluctuations in the price, availability and quality of supplies, labor, and
raw materials that we need in order to produce, transport and sell
ethanol/bio-diesel could have a material adverse effect on our construction,
cost of sales or ability to meet our customers' demands. The price and
availability of such supplies, labor, and raw materials may fluctuate
significantly, depending on many factors, including natural disasters, such as
fires, hurricanes, floods, unusually heavy or prolonged rain, and droughts
natural resources. These events can also cause increased freight costs.
OUR BUSINESS WILL BE SUBJECT TO SEASONAL FLUCTUATIONS, WHICH COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION.
Our operating results will be influenced by seasonal fluctuations in the
price of our primary operating inputs such as corn, soybean oil, animal fats and
palm oil, and the price of our primary products, ethanol and bio-diesel. In
addition, ethanol and bio-diesel prices are substantially correlated with the
price of unleaded gasoline and diesel. The price of unleaded gasoline and diesel
tends to be highest in the summer and winter months. Given our lack of operating
history, we do not know yet how these seasonal fluctuations will affect our
results over time.
WE WILL BE DEPENDENT ON OTHERS FOR THE SALE OF OUR PRODUCTS.
As is customary in the ethanol/bio-diesel industry, we intend to sell
ethanol/bio-diesel and their by-products through strategic alliance partners or
marketing firms as opposed to maintaining our own sales force. As such, we will
be highly dependent on third parties to sell our products. Such third parties
may not have exclusive contracts with us and therefore may put the interests of
their other customers, which may be competitors to us, ahead of our interests.
30
WE WILL OPERATE IN A COMPETITIVE INDUSTRY AND COMPETITION MAY NEGATIVELY
IMPACT OUR PROFITABILITY.
We will be in competition with numerous other ethanol/bio-diesel producers,
some of whom may have greater resources than we do. Additional
ethanol/bio-diesel producers may enter the market if the demand for
ethanol/bio-diesel increases and existing producers may increase the capacity of
their current plants or build new ethanol/bio-diesel production facilities. The
largest ethanol/bio-diesel producers in the United States include
Archer-Daniel-Midland Company, VeraSun Energy Corporation, Hawkeye Holdings,
Inc., Aventine, Cargill, Inc. and Abengoa Bioenergy Corp., all of which are
capable of producing as much or more ethanol/bio-diesel than we expect to
initially produce.
We also face increasing competition from international suppliers of
ethanol/bio-diesel. According to the Renewable Fuel Association, or RFA, Brazil
is currently the world's second largest producer and exporter of
ethanol/bio-diesel. In Brazil, ethanol/bio-diesel is produced primarily from
sugarcane, which is also used to produce food-grade sugar. Brazil experienced a
dramatic increase in ethanol/bio-diesel production and trade in 2006, exporting
several million gallons to the U.S. alone. Ethanol/bio-diesel imported from
Brazil may be a less expensive alternative to U.S. domestically produced
ethanol, which is primarily made from corn. For example, the current $0.54 per
gallon import duty imposed on Brazilian ethanol may be reduced in the future.
Competition from ethanol/bio-diesel imported from Brazil may affect our ability
to sell our ethanol/bio-diesel profitably, which would reduce the value of your
shares.
Lastly, ethanol/bio-diesel is not the only product that can be added to
gasoline to reduce emissions and increase octane levels. Oil companies have
historically used methyl tertiary butyl ether, or MTBE, as a fuel additive to
reduce emissions, and although the use of MTBE has been limited or banned in 25
states in the U.S. due to potentially adverse environmental effects from its
production, it is still used by several major oil companies in some markets.
Alternatives to ethanol/bio-diesel and MTBE are continually under development
and existing alternatives, such as alkylates and ethyl tertiary butyl ether, or
ETBE, may become more cost effective. Our competitors may be able to
successfully develop and market alternatives to ethanol/bio-diesel which could
adversely affect our business and results of operations.
NEW PLANTS UNDER CONSTRUCTION OR DECREASES IN THE DEMAND FOR ETHANOL OR
BIO-DIESEL MAY RESULT IN EXCESS PRODUCTION CAPACITY IN OUR INDUSTRY CAUSING A
MATERIAL ADVERSE EFFECT ON OUR REVENUES AND PROFITABILITY.
According to the Renewable Fuels Association of the U.S. Energy Information
Administration, domestic ethanol production capacity has increased steadily from
1.77 BGY (or billion gallons per year) in 2001 to an annualized rate of
approximately 7.8 BGY in 2007. In addition, 2007 closed with 68 bio-refineries
under construction or expending in the U.S.that are expected to add 4 billion
gallons of new production capacity by 2008. According to the U.S. National
Bio-diesel Board, there are 101 bio-diesel production plants under construction
or expansion as of June 2007 representing a total potential production of 1.89
BGY. Excess capacity in the ethanol and bio-diesel industries would have an
adverse impact on our results of operations, cash flows and financial condition.
In a manufacturing industry with excess capacity, producers have an incentive to
manufacture additional products for so long as the price exceeds the marginal
cost of production. This incentive can result in the reduction of the market
price of ethanol/bio-diesel to a level that is inadequate to generate sufficient
cash flow to cover our costs. In addition, increased production of
ethanol/bio-diesel could result in increased demand for corn, soybean oil,
animal fats, palm oil or other feedstock. This could result in higher prices for
corn, soybean oil, animal fats, palm oil and other feedstock and cause higher
ethanol/bio-diesel production costs and, in the event that we are unable to pass
increases in the price of corn or other feedstock to our customers, would result
in lower profits. Excess capacity may also weaken pricing for wet distiller
grains with solubles, known as WDGS, or dry distiller grains with solubles,
known as DDGS, an ethanol co-product we intend to produce and sell to local
feedyards and feed lots. Any material decline in the price of ethanol, WDGS or
DDGS will adversely affect our revenues and results of operations.
31
Excess capacity may result or intensify from increases in capacity coupled
with insufficient demand. Demand could be impaired due to a number of factors,
including regulatory developments and reduced U.S. gasoline and diesel
consumption. Reduced gasoline and diesel consumption could occur as a result of
increased prices for gasoline and diesel or crude oil.
For example, price increases could cause businesses and consumers to reduce
driving or acquire vehicles with more favorable gasoline mileage. There is some
evidence that this has occurred in the recent past as U.S. gasoline prices have
increased.
DEVELOPMENT OF ALTERNATIVE ETHANOL OR BIO-DIESEL PRODUCTION SYSTEMS OR
ALTERNATIVE FUELS COULD AFFECT OUR RESULTS OF OPERATIONS.
Alternative fuels and gasoline and diesel oxygenates production methods are
continually under development. A number of automotive, industrial and power
generation manufacturers are developing more efficient engines, hybrid engines
and alternative clean power systems using fuel cells or clean burning gaseous
fuels. Vehicle manufacturers are working to develop vehicles that are more fuel
efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology,
which powers vehicles by engines that utilize both electric and conventional
gasoline fuel sources. The emerging fuel cell industry may offer a technological
option to address increasing worldwide energy costs, the long-term availability
of petroleum reserves and environmental concerns. Fuel cells have emerged as a
potential alternative to certain existing power sources because of their higher
efficiency, reduced noise and lower emissions. Fuel cell industry participants
are currently targeting the transportation, stationary power and portable power
markets in order to decrease fuel costs, lessen dependence on crude oil and
reduce harmful emissions. If the fuel cell and hydrogen industries continue to
expand and gain broad acceptance, and hydrogen becomes readily available to
consumers for motor vehicle use, we may not be able to compete effectively. This
additional competition could reduce the demand for ethanol or bio-diesel, which
would negatively impact our profitability.
In addition, many of our competitors invest heavily in research and
development of alternative ethanol or bio-diesel production systems and
alternative fuels. Our inability to meet the substantial capital investments
required to remain technologically competitive could result in our competitors
being able to produce ethanol or bio-diesel more cost effectively or produce
less expensive alternative fuels, which could adversely affect the demand for
our production. These events could have a material adverse effect on our
business.
CORN-BASED ETHANOL MAY COMPETE WITH CELLULOSE-BASED ETHANOL IN THE FUTURE,
WHICH COULD MAKE IT MORE DIFFICULT FOR US TO PRODUCE ETHANOL ON A COST-EFFECTIVE
BASIS AND COULD REDUCE THE VALUE OF YOUR INVESTMENT.
Most ethanol is currently produced from corn and other raw grains, such as
milo or sorghum (especially in the United States Midwest). The current trend in
ethanol production research is to develop an efficient method of producing
ethanol from cellulose-based biomass such as agricultural waste, forest residue,
municipal solid waste, and other biomass material. This trend is driven by the
fact that cellulose-based biomass is generally cheaper to obtain than corn and
that the use of cellulose-based biomass to produce ethanol would create
opportunities to locate plants and produce ethanol in areas that are not
suitable to grow corn in significant amounts. Although the current technology
for converting cellulose-based biomass to ethanol is not sufficiently efficient
to be competitive with ethanol produced from corn, a report by the U.S.
Department of Energy entitled "Outlook for Biomass Ethanol Production and
Demand" indicates that new conversion technologies may be developed in the
future. If an efficient method of producing ethanol from cellulose-based biomass
is developed, we may not be able to compete effectively. Our facilities will not
be equipped to convert cellulose-based biomass into ethanol, and to convert our
facilities to be able to process cellulose-based ethanol would require
significant additional capital investments. If we are unable to produce ethanol
as cost-effectively as cellulose-based producers, our ability to generate
revenue will be negatively impacted and your shares could lose value.
32
CONSUMER RESISTANCE TO THE USE OF ETHANOL OR BIO-DIESEL, WHICH MAY BE BASED
ON THE BELIEFS THAT ETHANOL IS EXPENSIVE, ADDS TO AIR POLLUTION, HARMS ENGINES
OR TAKES MORE ENERGY TO PRODUCE THAN IT CONTRIBUTES, MAY AFFECT THE DEMAND FOR
ETHANOL AND BIO-DIESEL.
Certain individuals believe that the use of ethanol/bio-diesel will
increase consumer gasoline prices such as at gas stations. Some also believe
that ethanol/bio-diesel adds to air pollution and harms car and truck engines.
Still other consumers believe that the process of producing ethanol/bio-diesel
actually uses more fossil energy, such as oil and natural gas, in relation to
the amount of ethanol/bio-diesel that is produced and its benefits. These
consumer beliefs could potentially be wide-spread. If consumers choose not to
buy ethanol/bio-diesel, it would affect the demand for our products and
negatively affect our profitability and financial condition.
THE EXPANSION OF DOMESTIC ETHANOL AND BIO-DIESEL PRODUCTION IN COMBINATION
WITH STATE BANS ON MTBE AND/OR STATE RENEWABLE FUELS STANDARDS MAY BURDEN RAIL
AND TERMINAL INFRASTRUCTURE, RAISING THE COST OF OUR SHIPMENT TO BLENDING
TERMINALS.
If the volume of ethanol/bio-diesel shipments continues to increase and
blenders switch from MTBE to ethanol and bio-diesel, there may be weaknesses in
infrastructure such that our ethanol/bio-diesel cannot reach its target markets.
Many terminals may need to make infrastructure changes to blend
ethanol/bio-diesel instead of MTBE. If the blending terminals do not have
sufficient capacity or the necessary infrastructure to make the switch, there
may be an oversupply of ethanol/bio-diesel in the market, which could depress
ethanol/bio-diesel prices and negatively impact our financial performance. In
addition, rail infrastructure may be inadequate to meet the expanding volume of
ethanol/bio-diesel shipments, which could prevent us from shipping our products
to our target markets.
Substantial development of infrastructure will be required for our
operations and the ethanol/bio-diesel industry generally, to grow. Areas
requiring expansion include, but are not limited to additional rail capacity,
additional storage facilities for ethanol/bio-diesel, increases in truck fleets
capable of transporting ethanol/bio-diesel within localized markets, expansion
of refining and blending facilities to handle ethanol/bio-diesel, and growth in
service stations equipped to handle ethanol/bio-diesel.
There is no assurance that the substantial investments required for these
infrastructure changes and expansions will be made or that they will be made on
a timely basis. Any delay or failure in making the changes to or expansion of
infrastructure could hurt the demand or prices for our products, impede our
delivery of products, impose additional costs on us or otherwise have a material
adverse effect on our results of operations or financial position. Our business
is dependent on the continuing availability of infrastructure and any
infrastructure disruptions could have a material adverse effect on our business.
33
ETHANOL CAN BE IMPORTED DUTY FREE FROM CERTAIN COUNTRIES INTO THE UNITED
STATES, WHICH MAY UNDERMINE THE ETHANOL INDUSTRY IN THE UNITED STATES.
Ethanol can be imported into the U.S. duty-free from some countries, which
may negatively affect the ethanol industry in the U.S. and our operations.
Imported ethanol is generally subject to a $0.54 per gallon tariff that was
designed to offset the $0.51 per gallon ethanol incentive available under the
federal excise tax incentive program for refineries that blend ethanol in their
fuel. A special exemption from the tariff exists for ethanol imported from 24
countries in Central America and the Caribbean, which is limited to a total of
7% of the previous year's U.S. production per year. Imports from the exempted
countries may increase as a result of new plants under development in such
countries and also due to increased domestic production. In addition, reductions
in the tariff currently applicable to ethanol imports from countries other than
those in Central America and the Caribbean that qualify for the exemption, or
increases in the percentage of ethanol that may be imported from Central America
and the Caribbean on a duty-free basis, may result in more ethanol from
countries having a lower cost of production than the United States being
imported into the U.S. An increase in such imported ethanol could adversely
affect the demand for domestically-produced ethanol and the price at which we
will be able to sell our ethanol.
COMPETITION FOR QUALIFIED PERSONNEL IN THE ETHANOL AND BIO-DIESEL
INDUSTRIES IS INTENSE AND MAY PREVENT US FROM HIRING AND RETAINING QUALIFIED
PERSONNEL TO OPERATE OUR PRODUCTION PLANTS.
Our success will depend in part on our ability to attract and retain
competent personnel. For each of our plants, we must hire qualified managers,
engineers, operators and other personnel, which can be challenging in the rural
communities in which our facilities will be located. Competition for both
managers and plant employees in the ethanol and bio-diesel industries is
intense, and we may be unable to attract and retain qualified personnel. If we
are unable to hire and retain productive and competent personnel, the
implementation of our business plan may be adversely affected, the amount of
ethanol/bio-diesel we produce may decrease and we may not be able to efficiently
operate our production plants and execute our business strategy.
CHANGES IN SPECIFICATION STANDARDS FOR BIO-DIESEL FUEL MAY INCREASE
PRODUCTION COSTS OR REQUIRE ADDITIONAL CAPITAL EXPENDITURES TO UPGRADE AND/OR
MODIFY OUR BIO-DIESEL FACILITY TO MEET THEM. SUCH UPGRADES AND/OR MODIFICATIONS
MAY ENTAIL DELAYS IN OR STOPPAGES OF PRODUCTION.
The American Society of Testing and Materials (ASTM) is the recognized
standard-setting body for fuels and additives in the United States. ASTM's
specification for pure bio-diesel (to be used in blends of up to 20% with diesel
fuel), ASTM D 6751, has been adopted by the Environmental Protection Agency, and
compliance is required in order for our bio-diesel to qualify as a legal motor
fuel for sale and distribution. ASTM has modified its D 6751 specification in
the past, and is expected to continue to modify the specification in the future
as the use of and experience with bio-diesel expands. There is no guarantee that
our future production facility will be able to produce compliant bio-diesel fuel
in the event of changes to the specification. We may need to invest significant
capital resources to upgrade or modify our future bio-diesel facility, which
might cause delays in or stoppages of production and the resultant loss of
revenues, or which might not be economically feasible at all. Any modifications
to the production facility or to the bio-diesel specifications may entail
increased production costs or reduced production capacity. These consequences
could result in a negative impact on our financial performance.
34
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
A. Land purchase options
The following table sets forth information concerning NexGen's land
purchase options as of March 31, 2008:
INTENDED TYPE OF SIZE OF LAND OPTION EXPIRATION
LOCATION OF LAND SITE FACILITY (ACRES) DATE PURCHASE PRICE
- --------------------- ------------------- ------------- ----------------------- ----------------------
Arkansas* Ethanol 407 July 9, 2008 $3,715,300
- --------------------- ------------------- ------------- ----------------------- ----------------------
Wisconsin** Ethanol 88 April 15, 2008 and $ 800,000
November 2008
- --------------------- ------------------- ------------- ----------------------- ----------------------
Iowa Bio-diesel 15 August 17, 2009 $ 337,500
- --------------------- ------------------- ------------- ----------------------- ----------------------
Ohio Ethanol 72 July 12, 2008 $1,440,000
- --------------------- ------------------- ------------- ----------------------- ----------------------
Indiana *** Ethanol 160 April 20, 2008 $4,000,000
- --------------------- ------------------- ------------- ----------------------- ----------------------
* NexGen has an option to purchase the land with a party that itself has an
option to purchase the land.
** Comprised of two options for two adjacent sites. The Company is negotiating
for the extension of the April 15, 2008 option.
*** The Company is negotiating for the extension of the option.
B. Principal offices
The Company's principal offices are in Wesley Chapel, Florida.
In 2007 the Company entered into a three-year lease for 1,250 square feet
of office space in Wesley Chapel, Florida. This lease terminates on January 31,
2010. The rent expense for the year 2007 was $32.
ITEM 3. LEGAL PROCEEDINGS - LITIGATION
As of the date of this Report, the Company was not a party to any material
pending or threatened legal proceedings.
35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting held on December 27, 2007, the Company's
shareholders voted to approve all of management's proposals as follows:
1. To elect 1 Class A and 2 Class C Directors:
NAME VOTES FOR VOTES AGAINST/WITHHELD
- ---- --------- ----------------------
Moshe Reuveni 1,403,489 22,390
Rolando Eisen 1,403,489 22,390
Luly Gurevitch 1,403,489 22,390
All of the abovementioned Directors resigned on December 31, 2007
concurrently with the closing of the NexGen Plan of arrangement.
2. To re-elect Prof. Varda Rotter as an external director:
VOTES FOR VOTES AGAINST/WITHHELD
--------- ----------------------
1,403,489 22,390
3. To appoint Kost, Forer, Gabbay & Kasierer as the Company's independent
public accountants:
VOTES FOR VOTES AGAINST/WITHHELD
--------- ----------------------
1,409,459 15,420
At the Company's extraordinary general meeting held on December 4, 2007,
the Company's shareholders voted to approve all of management's proposals as
follows:
1. Proposal to Approve the NexGen Plan of Arrangement:
VOTES FOR VOTES AGAINST/WITHHELD
--------- ----------------------
916,704 99,850
36
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED MATTERS
Our ordinary shares are quoted in the OTC Bulletin Board ("OTC-BB") under
the symbol "NXGNF" Prior to February 28, 2008, our ordinary shares were quoted
on the Nasdaq Capital Market under the symbol HCTL (through February 21, 2008)
and thereafter under the symbol NXGN. The following table sets forth the high
and low sales prices, of our common stock, as reported by NASDAQ and the OTC-BB,
for each quarter of 2006 and 2007.
2006 HIGH LOW
- ---- ---- ---
First Quarter 1.31 0.39
Second Quarter 1.06 0.51
Third Quarter 0.99 0.63
Fourth Quarter 4.30 0.85
2007 HIGH LOW
- ---- ---- ---
First Quarter 1.98 1.12
Second Quarter 2.03 0.92
Third Quarter 1.19 0.80
Fourth Quarter 1.15 0.80
As of March 2008, the number of shareholders of record was 72 and the
number of beneficial owners of its ordinary shares was approximately 900.
The Company has never paid a cash dividend on its ordinary shares. In the
foreseeable future, the Company intends to retain earnings for use in its
business, but does not rule out the possibility of paying cash dividends in the
appropriate circumstances. Future dividend policy will be determined by the
board of directors, and will depend upon the Company's earnings and financial
condition, capital requirements and other relevant factors, including the impact
of the distribution of dividends on the Company's tax liabilities. Declaration
of any final annual cash dividend requires shareholder approval, which may
reduce but not increase such dividend from the amount proposed by the board.
RECENT SALE OF UNREGISTERED SECURITIES
On January 9, 2008, the Company sold 150,000 ordinary shares for an
aggregate purchase price of $225,000 to an accredited investor in a private
placement transaction under Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial and operating
data as of the dates and for the periods indicated. The selected consolidated
balance sheet financial data as of December 31, 2007 and 2006 and the selected
consolidated income statement data and other financial data for the year ended
December 31, 2007 and for the period beginning August 10, 2006 (inception of
development stage) through December 31, 2006 and for the period beginning August
10, 2006 (inception of development stage) through December 31, 2007, have been
derived from our audited consolidated financial statements that are included in
Item 15 in this Form 10-K. Consolidated financial statements as of December 31,
2007 was audited by Kost, Forer, Gabbay and Kasierer and consolidated financial
statements as of December 31, 2006 were audited by Pender NewKirk & Company. You
should read the following table in conjunction with Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the accompanying notes. Among other
things, those financial statements include more detailed information regarding
the basis of presentation for the following consolidated financial data.
37
In accordance with that the Purchase Agreement, on December 31, 2007, the
Company completed the Plan pursuant to which the Company transferred
substantially all of its existing business and assets in the field of
biotechnology and medical devices to Gamida and acquired NexGen Bio's principal
assets in the field of ethanol and bio-diesel fuel production.
The Plan was treated as a reverse merger of the Company for financial
accounting purposes. Accordingly, the historical financial statements of the
Company before the Plan will be replaced with the historical financial
statements of NexGen Bio before the Plan in all future filings that the Company
makes with the SEC, including this Report.
AUGUST 10, 2006 AUGUST 10, 2006
YEAR ENDED (DATE OF INCEPTION) (DATE OF INCEPTION)
DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31,
STATEMENT OF OPERATION 2007 2006 2007
------------ ------------ ------------
(DOLLAR IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EXPENSES:
Legal and professional $ 300 $ 205 $ 505
Salaries expense 447 181 628
Travel expense 208 65 273
Loss on disposal of assets 129 - 129
Other expenses 482 38 520
------------ ------------ ------------
Net loss from operations 1,566 489 2,055
Interest expense 63 7 70
------------ ------------ ------------
Net loss $ 1,629 $ 496 $ 2,125
============ ============ ============
Basic and diluted loss per share 0.04 0.76 0.05
============ ============ ============
Weighted average number of shares used in
computing basic loss per share to Ordinary
shareholders 41,759,498 649,317 41,759,498
============ ============ ============
OTHER FINANCIAL DATA:
Working capital(deficit) (247) (325)
Net cash used in operating activities (845) (151) (996)
Net cash used in investing activities (351) (106) (457)
Net cash provided by financing activities 1,148 306 1,454
38
BALANCE SHEET DATA:
As of December 31
2007 2006
Dollars in thousands
--------------------
Total assets 574 202
Total equity (deficit) (76) (476)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
NexGen is a development stage company that is currently seeking to develop
and/or acquire ethanol and bio-diesel plants, and blending terminal facilities,
in the United States. Prior to the closing of the Purchase Agreement on December
31, 2007, the Company's business consisted of the development, manufacture and
marketing of clinical diagnostic test kits and the provision of services and
tools to diagnostic and biotech research professionals in laboratory and point
of care sites in Israel and worldwide.
In accordance with that the Purchase Agreement, on December 31, 2007, the
Company completed the Plan pursuant to which the Company transferred
substantially all of its existing business and assets in the field of
biotechnology and medical devices to Gamida and acquired NexGen Bio's principal
assets in the field of ethanol and bio-diesel fuel production.
The Plan was treated as a reverse merger of the Company for financial
accounting purposes. Accordingly, the historical financial statements of the
Company before the Plan will be replaced with the historical financial
statements of NexGen Bio before the Plan in all future filings that the Company
makes with the SEC, including this Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements included in this Report 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. We
believe that the application of the following critical accounting policies
entails the most significant judgments and estimates used in the preparation of
our consolidated financial statements:
39
IMPAIRMENT OF LONG-LIVED ASSETS
Under Statement of Financial Accounting Standard No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," long-lived assets, such as
property and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset group to estimated undiscounted future cash flows
expected to be generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset group exceeds
the fair value of the asset group. During the year ended December 31, 2007 and
for the period beginning August 10, 2006 (inception of development stage)
through December 31, 2006, we have not recorded impairment charges for
long-lived assets.
GOING CONCERN PRESENTATION
The accompanying consolidated 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 this Report 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.
40
PLAN OF OPERATIONS
We intend to plan, develop, construct and/or acquire, own and operate
blending terminal facilities and ethanol and biodiesel plants.
We intend to build 10 million gallon storage and blending terminal in the
U.S.. We intend to blend 10% ethanol with gasoline and distribute E-10 as well
as blending 2% biodiesel with diesel and distribute B-2. This blending process
will create a total throughput of 500 million gallons blending and distribution
capacity per year, based on a weekly 10 million gallon turnover. The terminal
site is located in a strategic site with deep water access enabling the
transport of fuel on barges.
We intend to develop, construct and/or acquire ethanol and biodiesel plants
with aggregate capacity of up to 100 million gallons each. The ethanol plants
will be corn-based dry mill fuel-grade ethanol plants located in Arkansas,
Indiana, Ohio, Wisconsin and other states in the United States. The bio-diesel
plant will use palm and/or soybeans as well as animal fats.
We will not generate any revenues until we acquire an operating plant or,
complete construction of a blending terminal or, complete construction of one of
our plants. We anticipate that our losses will continue to increase until at
least one facility is operational. The construction period for an ethanol plant
is approximately 18 to 24 months. The construction period for a bio-diesel plant
is approximately 12 to 18 months. The construction period for building 10
million gallon storage and blending terminal is approximately 12 months. Our
intention is to start construction on the blending terminal first.
In order to be responsive to changing market conditions in the ethanol and
bio-diesel industries, we will also consider acquiring existing ethanol and
bio-diesel plants rather than constructing new plants, if we are able to make
such acquisitions at favorable enterprise valuations and have access to
reasonable financing terms. Acquired plants may be located in different states
and have different operating characteristics than the plants we propose to
construct. We have executed non binding letters of intent ("LOI's") to acquire
the majority interest in two separate ethanol production facilities, which
NexGen intends to acquire following receipt of phase-II financing.
We have limited financial resources and are entirely dependent on funds
that will be raised from third party financing sources for working capital
purposes and for the development of the blending terminal, the ethanol and
bio-diesel plants. Our goal is to raise $25 million and $63 million, utilizing
different financial instruments in order to fund the first two phases of our
business.
41
The following is the estimated breakdown of the sources and uses of such
financing:
PHASE I SOURCE OF FUNDS
Common Equity 40% $ 10,000,000
Long Term Debt 40% $ 10,000,000
Line of credit 20% $ 5,000,000
Total Source of Funds 100% $ 25,000,000
------------
USE OF FUNDS
Design, Construction & Startup
Plant Construction, Control System, etc. $ 12,500,000
Land & Site-Development Cost $ 5,000,000
STARTUP COSTS
Inventory $2,500,000
Working Capital $2,500,000
Pre-production period costs $ 250,000
Rolling Stock $ 500,000
Fire Protection/Water Supply $ 850,000
$ 6,600,000
ORGANIZATIONAL & FINANCING
Equity/ Debt Raising Costs $ 800,000
Organizational Costs $ 100,000
$ 900,000
Total Use of Funds $ 25,000,000
------------
Phase II SOURCE OF FUNDS
Common Equity $ 63,000,000
------------
USE OF FUNDS
Ethanol Plant acquisitions
Plant I $32,000,000
Plant II $20,000,000
Working Capital $ 6,000,000
Fees and other Costs $ 5,000,000
Total Use of Funds $ 63,000,000
------------
42
If we elect to commence operations by constructing new plants rather than
acquiring existing plants, our source and use of funds and timeline to bring the
plants to production will be different.
PLAN OF OPERATIONS UNTIL PLANT START-UP
Until the fourth quarter of 2008, or earlier if possible, we will be
actively involved in six principal tasks in connection with the first phase of
our development plans, if we elect to commence operations by constructing plants
rather than acquiring existing plants:
(1) Raising our equity and securing debt capital;
(2) Acquiring and preparing our plant and blending terminal sites;
(3) Completing construction agreements and securing necessary permits;
(4) Constructing our sites;
(5) Arranging and negotiating agreements for the purchase of corn, natural
gas and other needs and for marketing our ethanol and distillers grains; and
(6) Hiring and training management and operating employees.
Assuming that we successfully complete our financing objectives and obtain
adequate debt and equity financing, we believe that we will have sufficient cash
resources to cover all of our expenses associated with the construction and
commencement of operations of the plants, including site acquisition and
development, installation of road and rail access and utilities, application for
and receipt of permits, equipment acquisition and plant construction. We also
believe that we will have sufficient operating capital to cover our staff,
office, audit, legal, compliance, training and other start-up expenses during
this period.
We have contacted and have had limited discussions with prospective lenders
and investors, but have no agreement with any lender for the debt or investors
for the equity financing that we need.
If for any reason our options on one or more sites expire before we have
our equity and debt financing available to acquire such sites, we may find it
necessary to pay more than the option purchase price for such sites or to locate
alternative sites. There is no assurance that after full investigation we will
determine that any of our sites will be suitable for our plants or will be
acquired for those purposes. New sites could be identified by our site
acquisition team. Our Board of Directors reserves the right to change the
locations of the sites for our plants, in its sole discretion, for any reason.
We expect to continue the permitting process on our sites, and, if necessary
conduct investigations on other sites, including overall suitability for our
plants, environmental matters and road and rail access considerations.
43
CONSTRUCTION AGREEMENTS AND PERMITS
We expect to enter into an agreement with EPC contractors which will
provide for the construction of each of our plants. We anticipate that the
agreement will provide that the EPC contractors will prepare engineering
diagrams and drawings for our sites, plants, utilities and process systems,
assist us in obtaining permits for the construction of our plants, establish
final project specifications, contract documents and contract pricing and place
orders on our behalf for equipment, particularly equipment with lengthy order
lead times.
We anticipate that the EPC agreements will state the complete set of design
and construction services to be provided by our EPC contractors to construct our
blending terminal, ethanol and bio-diesel plants for us, state the allocated
costs of the work to be performed, state the manner in which increased costs due
to equipment and materials expense increases and change orders requested by us
would be allocated, state the responsibility for our EPC contractors and us to
acquire permits, provide a timetable for construction, and include warranties
and guarantees with respect to plant capacity and operation, payment terms and
similar matters.
After we identify our EPC contractors, we expect to work with the
contractors on the preliminary and final designs of the terminal/plants so
construction may be commenced as soon as possible following successful
completion of our equity and debt financings. Concurrently, we will seek
necessary construction permits, environmental permits and other contracts and
permits necessary for the construction of our sites.
Construction of our terminal and plants will include completion and
approval of the final design for the plant, final site preparation, installation
of underground piping, conduits and footings, structural framing, installation
of tanks, equipment and above-ground piping, enclosing structures, installation
of outside yard facilities, loading docks and related structures, and a variety
of other tasks. The construction phase will include testing of the plants
through certification by the construction engineers. Commencement of operations
will include training of plant operations personnel and incorporation of
operational testing, quality control and safety procedures.
With construction complete, we will move to the plant start-up phase, which
will involve complete start-up and testing of all equipment and facilities,
including any adjustments necessary. This process will take approximately two
months for each site. Assuming the availability of final operating permits, and
following a final capacity test run and certification by our construction
engineers, the blending terminal/plant will be turned over to us for the
commencement of commercial operations.
44
RESULTS OF OPERATIONS
AUGUST 10, 2006 AUGUST 10, 2006
YEAR ENDED (DATE OF INCEPTION)TO (DATE OF INCEPTION)TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2007 2006 2007
------- ------- -------
(DOLLAR IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------
EXPENSES:
Legal and professional $ 300 $ 205 $ 505
Salaries expense 447 181 628
Travel expense 208 65 273
Loss on disposal of assets 129 - 129
Other expenses 482 38 520
------- ------- -------
Net loss from operations 1,566 489 2,055
Interest expense 63 7 70
------- ------- -------
Net loss $ 1,629 $ 496 $ 2,125
======= ======= =======
Other financial data:
Net cash used in operating activities (845) (151) (996)
======= ======= =======
RESULTS OF OPERATIONS - 2007 COMPARED TO 2006 (IN THOUSANDS)
NexGen is a development stage company which has operational cost related to
our efforts to plan, develop, construct and/or acquire biofuels business. These
costs include Legal and professional costs, Salaries, Travel and other.
The Legal and professional cost amounted to $300 in 2007 compared to $205
for the period beginning August 10, 2006 (inception of development stage)
through December 31, 2006. Those costs related mainly to the land purchase
options and the Purchase Agreement.
The Salaries amounted to $447 in 2007 compared to $181 for the period
beginning August 10, 2006 (inception of development stage) through December 31,
2006.
The travel expenses amounted to $208 in 2007 compared to $65 for the period
beginning August 10, 2006 (inception of development stage) through December 31,
2006. Travel costs are for travel in the U.S. and out of the U.S. in connection
with the land purchase options, the Purchase Agreement and, our efforts to raise
funds.
Loss from expiration of purchase option amounted to $129 in 2007 and $0 for
the period beginning August 10, 2006 (inception of development stage) through
December 31, 2006. During 2007 the company expensed $54 for an Iowa land option,
instead, the company invested in land option in Arkansas. In addition, the
company expensed $75 which was paid in connection with construction costs in the
U.S.
45
Total loss from operation amounted to $1,566 in 2007 compared to $489 for
the period beginning August 10, 2006 (inception of development stage) through
December 31, 2006.
Net loss amounted to $1,629 in 2007 and $496 for the period beginning
August 10, 2006 (inception of development stage) through December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was a deficit of $247 at December 31, 2007
compared to a deficit of $325 at December 31, 2006. Historically, our cash needs
have been satisfied primarily through proceeds from private placements of 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.
Net cash used in operating activities amounted to $845 in 2007 compared to
$151 net cash used in operating activities for the period beginning August 10,
2006 (inception of development stage) through December 31, 2006.
Cash used in investing activities amounted to $ 351 in 2007 compared to
$106 in the period beginning August 10, 2006 (inception of development stage)
through December 31, 2006. Since date of inception of development stage and
until December 31, 2007, approximately $280 were invested in connection of the
reverse merger and $173 were invested in land purchase options.
Cash was provided from financing activities in the amount of $1,148 in 2007
compared to $306 the period beginning August 10, 2006 (inception of development
stage) through December 31, 2006 in 2006. Financing activities for both periods
represent net cash received from the Company's controlling shareholder for the
development of NexGen's business.
Subsequent to December 31, 2007, we raised approximately $225 through cash
generated by the sale of stock via a private offering. Additionally, we have an
unsecured line of credit available through a controlling shareholder for $500.
We believe these funds will be sufficient to fund our current operations until
we obtain the third-party financing to fund the first phase of our business
plan. However, additional funding may not be available when required or it may
not be available on favorable terms. Without adequate funds, we may need to
significantly reduce or refocus our plan of operations or obtain funds through
arrangements that may require us to relinquish rights to certain or potential
markets, either of which could have a material adverse effect on our business,
financial condition and results of operations. Failure to secure additional
financing in a timely manner and on favorable terms when needed will have a
material adverse effect on the Company's ability to continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business.
As of December 31, 2007, the Company was not subject to any off balance
agreements, other then the office lease agreement disclosed under Item 2
"Description of Property".
46
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements", or SFAS 157, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements and, accordingly,
does not require any new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 for financial assets and
liabilities, as well as for any other assets and liabilities that are carried at
fair value on a recurring basis, and should be applied prospectively. The
adoption of the provisions of SFAS 157 related to financial assets and
liabilities and other assets and liabilities that are carried at fair value on a
recurring basis, is not anticipated to materially impact our consolidated
financial position and results of operations. Subsequently, the FASB provided
for a one-year deferral of the provisions of SFAS 157 for non-financial assets
and liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a non-recurring basis. We are currently
evaluating the impact of adopting the provisions of SFAS 157 for non-financial
assets and liabilities that are recognized or disclosed on a non-recurring
basis.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities", or SFAS 159. Under this Standard, we may elect to report financial
instruments and certain other items at fair value on a contract-by-contract
basis with changes in value reported in earnings. This election is irrevocable.
SFAS 159 provides an opportunity to mitigate volatility in reported earnings
that is caused by measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related hedging contracts
when the complex provisions of SFAS 133 hedge accounting are not met. SFAS 159
is effective for years beginning after November 15, 2007. We do not expect the
adoption of SFAS 159 will have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (Revised 2007)"Business Combinations", or SFAS 141R. SFAS 141R
will change the accounting for business combinations. Under SFAS 141R, an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS 141R will have an impact on accounting for future
business combinations once adopted and not on prior acquisitions.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements," referred to as SFAS 160. SFAS 160
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the non-controlling interest,
changes in a parent's ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the non-controlling owners. This standard is effective for fiscal
years beginning after December 15, 2008 and should be applied prospectively.
However, the presentation and disclosure requirements of the statement shall be
applied retrospectively for all periods presented. The adoption of the
provisions of SFAS 160 is not anticipated to materially impact our consolidated
financial position and results of operations.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2007, the Company was not exposed to interest rate risk
as it did not have any outstanding borrowings that were subject to fluctuating
interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The Company performed an evaluation of the effectiveness of its disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this Report. Based on the Company's evaluation, the Company's management,
including the chief executive officer and chief financial officer, has concluded
that the Company's disclosure controls and procedures as of the end of the
period covered by this Report were effective.
(b) Management's Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term in defined in Exchange
Act Rules l3a-15(f) under the Securities Exchange Act of 1934, as amended. Prior
to the closing of the Purchase Agreement on December 31, 2007, the Company's
business consisted of the development, manufacture and marketing of clinical
diagnostic test kits and the provision of services and tools to diagnostic and
biotech research professionals in laboratory and point of care sites in Israel
and worldwide. In accordance with the Purchase Agreement, on December 31, 2007,
the Company completed the Plan pursuant to which the Company transferred
substantially all of its existing business and assets in the field of
biotechnology and medical devices to Gamida and acquired NexGen Bio's principal
assets in the field of ethanol and bio-diesel fuel production. The Plan was
treated as a reverse merger of the Company for financial accounting purposes.
Accordingly, the historical financial statements of the Company before the Plan
will be replaced with the historical financial statements of NexGen Bio before
the Plan in all future filings that the Company makes with the SEC, including
this Report. In light of the disposition of substantially all of the Company's
operations, management did not conduct an evaluation of the effectiveness of our
internal control over financial reporting. As a result, our management was
unable to conclude that our internal control over financial reporting was
effective as of December 31, 2007.
48
(c) Change in Internal Control over Financial Reporting.
No change in our internal control over financial reporting occurred during
our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.
(d) Other.
The Company believes that a control system, no matter how well designed and
operated, can not provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been determined.
ITEM 9B. OTHER INFORMATION
Not applicable.
49
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
As of March 31, 2008, the executive officers and directors of the Company
are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
J. Ram Ajjarapu 39 Chief Executive Officer & Director
Eran Rotem 40 Chief Financial Officer
Bruce W. Wilkinson 69 Director
Roderick P.. Morrow 64 Director
Kenneth Hoyt 70 Director
Israel Amir 65 Director
Varda Rotter 60 Director
Elan Penn 56 Director
J. RAM AJJARAPU. has been a board member since the Closing Date and has
been Chief Executive Officer since January 9, 2008. Mr. Ajjarapu has been
President and Chief Executive Officer of NexGen Bio since August 2006. Prior to
joining NexGen Bio, Mr. Ajjarapu served as President and a director of American
Ethanol until he left the company in July 2006. In 2004, he co-founded Wahoo
Ethanol, LLC and Sutton Ethanol, LLC and served as Managing Member until both
were sold to American Ethanol in January 2006. While at Wahoo and Sutton, Mr.
Ajjarapu negotiated EPC (Engineering Procurement and Construction) agreements,
as well as procurement and off-take agreements. Mr. Ajjarapu was also
instrumental in obtaining Tax Increment Financing (TIF) of $10 million for each
company, as well as sales tax refunds and community grants. In 1995, he
co-founded and served as President and Director for 10-years of Global
Information Technology, Inc, an IT outsourcing and system design company. He
co-founded and also served as Managing Director for an Indian outsourcing
company from 1997 to 2004. He received a Bachelors degree in Electronics and
Communication Engineering from The Institute of Engineer (India) and a Masters
in Business Administration from University of South Florida.
ERAN ROTEM. Mr. Eran Rotem has served as the Company's Chief Financial
Officer since May 2002. Mr. Rotem served as a senior manager in Ernst & Young,
Certified Public Accountants, from 1995 until April, 2002. He is himself a CPA
and received his B.A. in Accounting and Finance form the Tel-Aviv College of
Management.
BRUCE W. WILKINSON ESQ. Mr. Wilkinson has been a director of the Company
since the Closing Date. Mr. Wilkinson has been Secretary of NexGen Bio since
August 2006. Mr. Wilkinson is a corporate lawyer and business consultant
providing corporate legal and business counsel to clients nationwide. Following
an initial career as in-house counsel, in 2002 he established, Intellysis Inc.,
a Tampa based outsourcing and consulting firm. As in-house counsel, he served as
Vice President and General Counsel of Stromberg Carlson, Vice President and
General Counsel of Thorn EMI (U.S.), and, at United Technologies, as corporate
counsel in several divisional capacities. His combined career as corporate
counsel and independent consultant/entrepreneur has blended skills in corporate
law, business and commercial transactions (including acquisitions) as well as
other matters affecting the management and operation of his business clients. He
holds a Bachelors degree from Williams College, a law degree from Cornell
University, and is a member of the California, Illinois and American Bar
Associations.
50
RODRICK P. MORROW. Mr. Morrow has served as a director of the Company since
the Closing Date. Mr. Morrow has 30 years of experience with retail and
distribution firms in senior management positions in marketing, finance,
information technology and human resources. He is currently the CFO and a
Director for Southern Imaging Group, Inc. Mr. Morrow was Vice President and CFO
for Pelican Companies, Inc., based in Conway, South Carolina. He served as Vice
President for Lowe's Companies with responsibilities in marketing, information
systems, human resources and administration. He has been a business consultant
in several industries, both domestic and international. Mr. Morrow holds a
Bachelors degree in Business Administration from the University of North
Carolina, Chapel Hill.
KENNETH HOYT. Mr. Hoyt has served as a director of the Company since the
Closing Date. Mr. Hoyt is a retired management consultant with a diverse
background of corporate and consulting experience in different industries in the
US and around the world. During a 20-year consulting career at Arthur D. Little,
Ascom AG and KSH International, Inc. Mr. Hoyt focused on serving the business
development, advanced technology and strategic investment needs of the
telecommunications equipment industry. As an electrical engineer and economist,
from 1960 to 1986, he held sales, marketing strategic planning and general
management positions in electrical equipment, computers, automotive parts and
telecommunications operating divisions at General Electric, Honeywell, ITT,
General Dynamics and Plessey PLC. Mr. Hoyt also has served on a variety of
non-profit boards and governmental agencies in transportation and land-use
planning in the Tampa, Florida region where he resides.
ISRAEL AMIR. Mr. Israel Amir has served as a director of the Company since
January 2000. Mr. Amir has also served as an external director of Dan Vehicle
and Transportation (D.R.T.) Ltd., an Israeli public company and as a member of
the boards of directors of several private Israeli companies (A.T. & T.
(Israel), TNS Teleseker Ltd., Israel Amir Consulting Ltd., SCT Stem Cell
Technologies Ltd. and Tele-Gal Ltd.). Mr. Amir has served since 1989 as an
independent economic consultant. He received his M.A. in Economics from the
Hebrew University in Jerusalem.
PROF. VARDA ROTTER has served as an External Director of the Company since
October 2001. Prof. Rotter received her B.Sc. and M.Sc. from Bar-Ilan University
in 1969 and 1971 respectively, and a Ph.D. in Cell Biology from the Weizmann
Institute of Science, Rehovot, in 1976. Following post-doctoral research at the
Center for Cancer Research of the Massachusetts Institute of Technology, she
joined the Weizmann Institute's Department of Cell Biology. She was appointed
Associate Professor in 1985 and Full Professor in 1992, and is now the incumbent
of the Norman and Helen Asher Professorial Chair in Cancer Research at the
Institute. Prof. Rotter is a genetic engineer, building biological bridges in
the submicroscopic world of cancer research, focusing on certain tumor
suppressor genes which may be used to obstruct the proliferation of cancer
cells.
DR. ELAN PENN has served as an External Director of the Company since
December 2003. Since 2002, he has owned and managed a private publisher (Penn
Publishing Ltd.). Prior to that Dr. Penn was V.P. Finance of A.1-Research &
Development of Artificial Intelligence Ltd. From 1998 to 2000 Dr. Penn was a
Director and the Chief Executive Officer of Sivan Computer Training Company Ltd
(traded on the TASE) and a Director and V.P. Finance of Mentortech Inc. (traded
on NASDAQ), both companies being part of the Formula Systems Ltd. group of
companies. From 1987 to 2000 Dr. Penn was V. P. Finance, Mashov Computers Ltd.
(traded on the TASE) and Magic Software Enterprises Ltd. (traded on NASDAQ),
both companies also being part of the Formula Systems Ltd. group. He has served
as a member of the Board of Directors of Mashov Computers Ltd. and Walla
Communications Ltd. (traded on the TASE), as well as of several international
subsidiaries of the Mashov Computers Ltd. group of companies. In 2005, he was
appointed as a director and audit committee member of Magic software Enterprises
Ltd and Telkor Power Supplies Ltd. Dr. Penn completed his PhD in Management
Science, Imperial College of Science & Technology, University of London and read
Economics at the Hebrew University of Jerusalem.
51
JIM MCALINDEN, Mr. McAlinden had been, since the Closing Date a director
and had been, since January 9, 2008 the president of the Company. Mr. McAlinden
held the positions of CFO and Chief Operating Officer of NexGen Bio since August
2006. Mr. McAlinden resigned from his position of Director and President for
personal reasons on February 21, 2008.
TERMS OF OFFICE
The Company's Articles of Association, as amended, provide for a board of
directors that consists of not less than two and no more than thirteen
Directors, including the external directors to be appointed and hold office in
accordance with the provisions of the Companies Law and any Regulations enacted
thereunder, as amended from time to time.
With the exception of the election of external directors which shall be
governed in accordance with the provisions of the Companies Law, directors shall
be elected at the Annual General Meeting by an ordinary majority .The directors
so elected shall hold office until the next Annual General Meeting unless
determined otherwise at a subsequent General Meeting. Notwithstanding the
aforesaid, if no directors are appointed at the Annual General Meeting, the
directors appointed at the previous Annual General Meeting shall continue to
hold office. With the exception of the removal of external directors which shall
be governed in accordance with the provisions of the Companies Law, at a General
Meeting by an Ordinary Majority, the shareholders shall be entitled to remove
any director(s) from office, to elect directors in place of the director(s) so
removed or to fill any vacancy, however created, including a vacancy resulting
from an enlargement of the Board of Directors by resolution of the Board of
Directors, on the Board of Directors.
The Board of Directors may, from time to time, appoint an additional
director or additional directors to the Company, in order to fill the office of
a director which has been vacated or for any reason or as an additional director
or additional directors, provided that the overall number of directors does not
exceed the maximum number specified above. A director appointed as aforesaid
shall cease to hold office at the end of the Annual Meeting following his
appointment.
The Companies Law requires the board of directors of a public company to
determine the number of directors who shall possess accounting and financial
expertise On March 29, 2006 the board of directors determined the minimum number
to be two directors. The Company may be deemed to be a "controlled company"
under the applicable Nasdaq regulations because MAC, the Company's principal
stockholder owns approximately 84% of the Company's issued and outstanding
shares. As such, the Company is exempt from the requirements of Nasdaq Rule
4350(c) with respect to the nomination of directors.
52
ALTERNATE DIRECTORS
The Articles of Association of the Company provide that any director may,
by written notice to the Company, appoint another person to serve as an
alternate director, subject to the approval of the directors, and may cancel
such appointment. According to the Companies Law, the following persons may not
be appointed nor serve as an alternate director: (i) a person not qualified to
be appointed as a director, (ii) an actual director, or (iii) another alternate
director. Appointment of an alternate director for a member of a committee of
the board of directors is only permitted if the alternate director is a member
of the board of directors and does not regularly serve as a member of such
committee. If the committee member being substituted is an external director,
such alternate director may only be another outside director possessing the same
expertise as the external director being substituted and may not be a regular
member of such committee. There are currently no alternate directors.
EXTERNAL DIRECTORS
Pursuant to Israeli law, the Company is required to appoint two external
directors. These directors must be unaffiliated with the Company and its
principals. A person shall be qualified to serve as an external director only if
he or she possesses accounting and financial expertise or professional
qualifications. At least one external director must posses accounting and
financial expertise and the other external directors are to possess professional
qualifications, as promulgated by regulations to the Companies Law. These
regulations provide that financial and accounting expertise require such
external director to possess a high level of understanding in business matters,
such that he or she can read and understand financial statements in depth and be
able to raise issues with respect to the manner in which the financial data is
presented therein. The company's board of directors is to determine such
candidate's qualifications based on his or her education, experience and skills
regarding financial and control matters in companies of similar size and in a
similar industry and knowledge of preparation and approval of financial
statements under the Companies Law and Israeli securities laws These
requirements do not apply to external directors appointed before the recent
amendment to the Companies Law but will apply to their re-appointment for an
additional term.
External directors are to be elected by a majority vote at a shareholders'
meeting, provided that such majority includes at least one-third of the shares
held by non-controlling shareholders voted at the meeting or that the total
number of shares held by non-controlling shareholders voted against the election
of the director does not exceed one percent of the aggregate voting rights in
the Company.
The initial term of an external director is three years and may be extended
for. additional periods of up to three years each, pursuant to a recent
amendment to the Companies Law, provided that the audit committee and the board
of directors confirm that, in light of the outside director's expertise and
special contribution to the work of the board of directors and its committees,
the reelection for such additional period(s) is beneficial to the company
External directors may be removed only by the same percentage of shareholders as
is required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the Company. Under the Companies Law, any
committee of the Board of Directors must include at least one external director,
and the Audit Committee must include all if the external Directors.
The Companies Law details certain standards for the independence of
external directors. These directors must be unaffiliated with the company on
whose board they serve and such company's principals. They are entitled to
obtain all information relating to such company's management and assets and to
receive assistance, in special cases, from outside experts at the expense of the
company. The Companies Law imposes an obligation on these directors to convene a
meeting of a company's board of directors upon becoming aware of matters that
suggest infringements of law, neglect of good business practice or improper
conduct.
53
An external director is entitled to compensation, as provided for in
regulations adopted under the Companies Law, but is prohibited from receiving
any other compensation, directly or indirectly, in connection with service
provided as an external director.
In October 2001, the Company's shareholders appointed Prof. Varda Rotter as
an External Director, and on December 20, 2004 and there after on December 27,
2007, the shareholders re-appointed her in the same capacity. In December 2003,
the Company's shareholders appointed Mr. Elan Penn as an External Director and
on December 20, 2006 the shareholders re-appointed him in the same capacity.
Both Prof. Rotter and Mr. Penn have been serving as external directors from the
date of their respective appointments to date.
DIRECTORS' COMPENSATION
The Company's executive directors (i.e. directors who receive remuneration
from the Company either as employees or consultants) are not entitled to receive
any separate compensation in consideration for their services as directors of
the Company. The Company's non-executive directors receive annual fees which
amounted to $8,000 per person for 2007 on account of all services as directors,
including participation in board and audit committee proceedings. The members of
the board do not receive any additional remuneration upon termination of their
services as directors.
AUDIT COMMITTEE
The Companies Law requires that certain transactions, actions and
arrangements be approved in certain cases, by the audit committee of the
company's board of directors, whose members meet certain criteria of
independence as defined in the Companies Law and by the board of directors
itself and in certain circumstances, shareholder approval is also required. The
vote required by the audit committee and the board of directors for approval of
such matters, in each case, is a majority of the disinterested directors
participating in a duly convened meeting. The Company's audit committee is
comprised of Professors Varda Rotter, Mr. Rodrick P. Morrow and Dr. Elan Penn.
The Company has determined that the members of the audit committee meet the
applicable NASDAQ and SEC independence standards. In addition, the Company has
determined that Dr. Elan Penn is a financial expert as defined by the SEC.
INTERNAL AUDITOR
Under the Companies Law, Israeli companies whose securities are publicly
traded are also required to appoint an Internal Auditor in accordance with the
proposal of the audit committee. The role of the Internal Auditor is to examine,
inter alia, whether the Company's actions comply with the law, integrity and
orderly business procedure. In November 2000, Mr. Yossi Ginosar was appointed as
the Company's Internal Auditor. In March 2007, Mr. Yossi Ginosar was
re-appointed as such.
54
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange act requires the Company's officers,
directors and persons who beneficially own more than 10% of the Company's common
stock to file reports of ownership and changes in ownership with the SEC. These
reporting persons also are required to furnish the Company with copies of all
Section 16(a) forms they file. To the Company's knowledge, no officers,
directors and persons who beneficially own more than 10% of the Company's
ordinary shares have failed to file the reports required pursuant to Section
16(a).
CODE OF ETHICS
The Board of Directors has adopted a Code of Ethics that applies to all of
our officers, directors and employees. The Code sets forth fundamental
principles of integrity and business ethics and is intended to ensure ethical
decision making in the conduct of professional responsibilities. The full text
of the Code is filed as an exhibit to the Report.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual salary, bonuses and all other
compensation awards and pay outs on account of NexGen Bio's Chief Executive
Officer for services rendered to it during the fiscal years ended December 31,
2007 and December 31, 2006. No executive officer received more than US$100,000
per annum during this period.
SUMMARY COMPENSATION TABLE
Change in
Pension Value
Non-Equity and
Incentive Nonqualified
Stock Option Plan Deferred
Name and Principal Salary Bonus Awards Awards Compensation Compensation All Other Total
Position Year (US$) (US$) (US$) US$) (US$) Earnings (US$) Compensation (US$)
- ----------------------- -------- ----------- -------- ---------- ---------- ------------- ----------------- --------------- -----------
J. Ram Ajjarapu, 2007 150,000(1) - - - - - 150,000
Chairman and CEO 2006 76,344(1) - - - - - - 76,344
- ----------------------- -------- ----------- -------- ---------- ---------- ------------- ----------------- --------------- -----------
Jim McAlinden (2) 2007 46,875 - - - - - - 46,875
Chief Financial Officer 2006 25,347 - - - - - - 25,347
- ----------------------- -------- ----------- -------- ---------- ---------- ------------- ----------------- --------------- -----------
(1) The salaries for the year ended December 31, 2007 and for the period
beginning August 10, 2006 (inception of development stage) through December
31, 2006 were accrued and have not been paid. According to Purchase
Agreement, none of the accrued liabilities of NexGen Biofuels Inc survived
the completion of the Plan.
(2) Mr. Jim McAlinden was the Chief Financial Officer of NexGen Biofuels Inc
until December 31, 2007.
55
COMPENSATION AGREEMENTS
Our executive compensation is divided into the following components:
BASE SALARY
Base salaries for our executive officers are established based on the scope
of their roles, responsibilities, experience levels and performance, taking into
account competitive market compensation paid by comparable companies for similar
positions. Base salaries are reviewed approximately annually, and may be
adjusted from time to time to realign salaries with market levels after taking
into account individual performance and experience.
Base salaries for the named executive officers can be found in the Summary
Compensation Table described above. For 2008, our Chief Executive Officer salary
will be established by our Audit committee and Board of directors during the
second quarter of 2008.
Mr. Eran Rotem, The Company's Chief Financial Officer before the completion
of the Plan, is the Company's Chief Financial Officer. Mr. Rotem's base salary
is $180,000 per year.
According to a new employment agreement that was signed with Mr. Rotem in
2008, the Company granted the Mr. Rotem 650,000 options to purchase Ordinary
shares of the Company under the ISO Plan (defined below). The Options have the
following terms, among others: (i) a term of 5 years, subject to earlier
expiration ; (ii) an exercise price of $1.50 per share, and (iii) vesting and
exercise rights in five equal installments of 130,000 shares each, on the first
through fourth anniversary dates of Mr. Rotem's employment. In addition, Mr.
Rotem received 400,000 Ordinary Shares of the Company. These 400,000 shares are
subject to other restrictions.
In connection with the Company's request that Mr. Rotem relocate from
Israel to Tampa, Florida, the Company agreed to pay Mr. Rotem $10,000 in order
to compensate him for moving costs, such as temporary housing and storage, air
fares, shipment cost, etc.
OTHER COMPENSATION
In addition to the compensation components described, we intend to continue
to maintain modest executive benefits and perquisites for officers, including
our named executive officers; provided, however, that the Audit Committee may
revise, amend, or add to the officers' executive benefits and perquisites if it
deems advisable in order to remain competitive with comparable companies and/or
to retain individuals who are critical to the company.
EMPLOYEE SHARE OPTION PLANS
In July 2000, the shareholders of the Company approved the Company's 2000
Incentive Share Option Plan (the "ISO PLAN") adopted by the Company's board of
directors in February 2000, pursuant to which share options in the Company may
be granted to employees, directors and consultants of the Company or any
subsidiary. An aggregate of 500,000 Ordinary Shares of the Company were reserved
for issuance under the ISO Plan, subject to certain adjustment. The ISO Plan was
administered by the board of directors either directly or upon the
recommendation of the Share Option Committee. The Company's board of directors
appointed the members of the Company's audit committee to also serve as the
Company's Share Option Committee.
56
On August 28, 2003 the Company amended the ISO Plan, as detailed below, pursuant
to amendments to the Israel Income Tax Ordinance regarding options that had come
into effect. Under the amended plan, a total of 377,500 ordinary shares of the
Company are reserved and authorized for the purpose of the option plan, subject
to certain adjustments. The plan is administered by the Board of Directors,
(either directly or upon the recommendation of the Share Option Committee),
which has broad discretion, subject to certain limitations, to determine the
persons entitled to receive options, the terms and conditions on which options
are granted and the number of shares subject to each grant. Options under the
plan are issued to Israeli employees, directors, office holders, consultants,
advisers and service providers of the Company and its subsidiaries.
On August 27, 2007 the Company amended the ISO Plan to include the ability to
grant ordinary shares and share units of the Company, in addition to options to
purchase shares of the Company; and increase the number of the ordinary shares
of the Company available for issuance to 2,000,000 (two million) ordinary
shares.
As of December 31, 2007 options to purchase 1,613,334 ordinary shares remained
available for issuance under the plan and, there were options outstanding to
purchase 341,500 ordinary shares. All the outstanding options were exercised to
shares during the first quarter of 2008.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth, as of December 31, 2007, information
regarding options under our ISO Plan our only active plans . The ISO Plan has
been approved by our shareholders. Outstanding options under the ISO Plan that
are forfeited or cancelled will be available for future grants. All of the
options are for the purchase of our ordinary shares.
NUMBER OF
SECURITIES TO BE WEIGHTED AVERAGE NUMBER OF SECURITIES
ISSUED UPON EXERCISE PRICE REMAINING AVAILABLE FOR
EXERCISE OF OF OUTSTANDING FUTURE ISSUANCES UNDER
OUTSTANDING OPTIONS, EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS (A) RIGHTS (B) REFLECTED IN COLUMN (A)(C)
- --------------------------------------------------------- --------------------- ------------------ ---------------------------
Equity compensation plans approved by security holders 341,500 $ 0.68 1,613,334
Equity compensation plans not approved by security
holders 0 $ 0 0
======= =========
57
DIRECTOR COMPENSATION
The following table sets forth information concerning the compensation paid
to the non-employee directors of NexGen Bio during fiscal 2007:
- --------------------------------------------------------------------------------------------------------
Change in
Pension Value
Fees Non-Equity and
Earned Incentive Nonqualified
or Paid Option Plan Deferred All Other
in Cash Stock Awards Compensation Compensation Compensation
Name (US$) Awards ($) ($) ($) Earnings ($) Total (US$)
- ---------- --------- ----------- --------- ------------ ---------------- ------------ -----------------
Aruna
Ajjarapu 0 - - - - - 0
- --------------------------------------------------------------------------------------------------------
Dipak
Sinha 0 - - - - - 0
- --------------------------------------------------------------------------------------------------------
Jan
Ohvrall 0 - - - - - 0
- --------------------------------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets out, to the best of our knowledge, the numbers of
shares in the Company beneficially owned as at December 31, 2007 by:
(i) each of our present Executive Officers and Directors,
(ii) each person (including any "group" as that term is defined in Section
13(d)(3) of the Securities Exchange Act) who beneficially owns more
than 5% of our Common Stock, and
58
(iii) all of our present Directors and officers as a group.
PERCENTAGE OF
ORDINARY
NUMBER OF ORDINARY SHARES OWNED
NAME SHARES(1) OUTSTANDING(1) ADDRESS
- ---- --------- -------------- -------
J. Ram Ajjarapu 35,187,542 (2) 84% 2533 Windguard Circle, Suite 102, Wesley Chapel, Florida 33544
Jim McAlinden 899,199 2% 2533 Windguard Circle, Suite 102, Wesley Chapel, Florida 33544
Eran Rotem 137,000 (3) 32 Hshaham St. Petach Tikva, Israel, 49170
Bruce W. Wilkinson 64,229 2533 Windguard Circle, Suite 102, Wesley Chapel, Florida 33544
Roderick P.. Morrow 42,820 11223 Bloomington Dr., Tampa 33635
Kenneth Hoyt 42,820 4610 Westford Circle, Tampa, 33618
Israel Amir 386,666 0.9% 32 Hshaham St. Petach Tikva, Israel, 49170
Varda Rotter - 32 Hshaham St. Petach Tikva, Israel, 49170
Elan Penn - 32 Hshaham St. Petach Tikva, Israel, 49170
Officers and Directors as a
Group (9 persons) 36,760,276 (3) 88%
MAC Bioventures, Inc 35,151,842 84% B-93 Indian Airlines Colony, Begumpt, Hyderabad AP 500016
(1) Based upon 41,759,498 ordinary shares outstanding as of December 31, 2007.
(2) Including 35,151,842 shares owned by MAC, as to which Mr. Ajjarapu may be
deemed to share beneficial ownership.
(3) Includes 117,000 shares issuable upon exercise of options.
59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with the Purchase Agreement, on December 31, 2007, the
Company completed the Plan pursuant to which Healthcare transferred
substantially all of its existing business and assets in the field of
biotechnology and medical devices to Gamida and acquired NexGen Bio's principal
assets in the field of ethanol and bio-diesel fuel production.
At the Closing, the following transactions, which together comprise the
Plan, occurred:
o NexGen Bio transferred its principal assets (the "NexGen Assets") in
the ethanol and bio-diesel fuel industry consisting of options to
purchase five Greenfield sites in the United States and permitting for
100 million gallons of annual ethanol or bio-diesel production per
site to NexGen 2007, Inc. ("Newco"), a wholly-owned subsidiary of the
Company;
o The Company issued to MAC and MAC's designees an aggregate of
38,280,000 ordinary shares, representing the $58 million appraised
value of the NexGen Assets divided by $1.50 (the agreed upon value of
the Company shares less 1%);
o The Company issued to Israel Amir an aggregate of 386,666 ordinary
shares; and
o The Company transferred substantially all of its existing assets to
Gamida, in consideration for 4,700,000 shares of the Company held by
Gamida.
The Company and NexGen Bio agreed that it is in the best interests of the
parties to this Agreement that one existing director of the Purchaser, Israel
Amir, commit to serve as a director of the Company for a period of no less than
two years after the Closing. As such, and in consideration for Mr. Amir's
willingness to provide services and advice to the Company, the Company issued to
Mr. Amir at Closing, an amount of the Company's Ordinary Shares (or options
exercisable into ordinary Shares) in an amount equal to 1% of NexGen Assets
Valuation divided by $1.50.
Pursuant to the Purchase Agreement, NexGen Bio may, subject to the
Company's written consent, until 180 days following the Closing, transfer to
NewCo an existing functional ethanol or bio-diesel plant or all of the shares
held by NexGen Bio of an entity which directly owns such a plant ("Option
Assets"), in consideration for such number of our ordinary shares equal to the
value of the Option Assets (based on a written valuation prepared by a
recognized independent firm acceptable to the Company) divided by $1.50 less 1 %
("Option Shares").
The aggregate number of Option Shares issuable by the Company, if any,
shall not exceed 80,000,000 Ordinary Shares.
60
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company's principal accountants for the years 2006 and 2007 were Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global. NexGen's Bio
principle accountants for the year 2006 were Pender NewKirk & Company, CPAs.
The table below summarizes the audit and other fees paid (in thousands of
USD) the Company and its consolidated subsidiaries to Kost Forer Gabbay &
Kasierer and to Pender NewKirk & Company, CPAs, during each of 2007 and 2006:
Year Ended December 31, 2007 Year Ended December 31, 2006
---------------------- -----------------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Audit Fees (1) $ 40 100% $114 92%
Audit-Related Fees (2) $ 0 0% $ 0 0%
Tax Fees (3) $ 0 0% $ 10 8%
Total $ 40 100% $124 100%
(1) "Audit fees" includes annual audit fees for NexGen and its
subsidiaries.
(2) "Audit-related fees" are fees related to assurance and associated
services that traditionally are performed by the independent auditor, including
consultation concerning reporting standards.
(3) for services rendered to the company during and/or pertaining to the
year 2006 in connection with the following: tax related work, consulting
services as to government grants, review of the financial statements,
consultation as to various transaction and the like.
The Audit Committee pre-approves on an annual basis the audit and certain
non-audit services provided to the Company by its auditors. Such annual
pre-approval is given with respect to particular services and sets forth a
specific budget for such services. Additional services not covered by the annual
pre-approval may be approved by the Audit Committee on a case-by-case basis as
the need for such services arises.
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" set forth on page F-1.
2. Financial Statement Schedule.
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" set forth on page F-1.
3. Exhibits.
See "Index to Exhibits" set forth on the following page.
INDEX TO EXHIBITS
(D) EXHIBITS
EXHIBIT NO. INCORP. BY REFERENCE DESCRIPTION
- ----------- -------------------- -----------
3.1 1.1(1) Memorandum of Association of the Registrant, as amended
3.2 1.2(2) Articles of Association, restated to include all amendments
in effect as of December 31, 2006
3.3 1.3(3) Amendment to Articles of Association
10.1 4.34(2) Purchase Agreement between Healthcare Technologies Ltd.,
Gamida For Life B.V., MAC Bioventures Inc. and NexGen
Biofuels Inc.
10.2 4.35(3) Amendment No. 1 to Purchase Agreement.
14 11(2) Code of Ethics
21 (4) List of Subsidiaries
23.1 * Consent of Independent Public Accountant (Kost Forer Gabbay & Kasierer)
23.2 * Consent of Independent Public Accountant (Pender Newkirk & Company LLP)
31.1 * Certification of Chief Executive Officer required by Rule
13a-14(a) under the Exchange Act
31.2 * Certification of Chief Executive Officer required by Rule
13a-14(a) under the Exchange Act
32.1 * Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
62
32.2 * Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
99.1 4.33(5) Audit Committee Charter
99.2 4.36(6) AAA Valuation dated May 4, 2007 and letter dated July 13,
2007.
99.3 4.37(6) Valuation from David Boas Business Consultant Ltd., dated
January 20, 2007.
- ----------
*Filed herewith.
(1) Incorporated by reference to the Registrant's Annual
Report on Form 20-F for the Fiscal year ended December
31, 1997.
(2) Incorporated by reference to the Registrant's Annual
Report on Form 20-F for the Fiscal year ended December
31, 2006.
(3) Incorporated by reference to the Registrant's Current
Report on Form 8-K dated December 31, 2007.
(4) Incorporated by reference to the Consolidated Financial
Statements that are filed as a part of this Form 10-K.
(5) Incorporated by reference to the Registrant's Annual
Report on Form 20-F for the Fiscal year ended December
31, 2004.
(6) Incorporated by reference to the Registrant's Proxy
Statement filed as an exhibit to the Registrant's Form
6-K dated August 2007, filed on August 16, 2007.
63
NEXGEN BIOFUELS LTD. AND SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
IN U.S. DOLLARS
INDEX
PAGE
----------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-4
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-21
APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS F-22
F - 1
 | n | Kost Forer Gabbay & Kasierer | n | Phone: 972-3-5680333 |
| | 3 Aminadav St.
Tel-Aviv 67067, Israel | | Fax:Â Â Â Â 972-3-5633407 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
NEXGEN BIOFUELS LTD. AND SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
We have audited the accompanying consolidated balance sheets of NexGen
Biofuels Ltd. (formerly: Healthcare Technologies Ltd.) and its subsidiaries (the
"Company") as of December 31, 2007 and the related consolidated statements of
operations, changes in shareholders' deficiency and cash flows for the year
ended December 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements of NexGen Biofuels Inc. as of December 31, 2006 and for the
period August 10, 2006 (date of inception) through December 31, 2006, were
audited by other auditors, whose report dated May 8, 2007, except for statement
of changes in shareholders' deficiency for the period August 10, 2006 (date of
inception) through December 31, 2006, for which the date is April 15, 2008,
expressed an unqualified opinion on those statements, which included an
explanatory paragraph on circumstances which raise substantial doubts on Nexgen
Bio's ability to continue as a going concern. Our opinion on the statements of
operations, shareholders' deficiency, and cash flows for the period August 10,
2006 (date of inception) through December 31, 2007, insofar as it relates to
amounts for prior periods through December 31, 2006, is based solely on the
report of other auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits and the report of the other auditors provide a reasonable basis for
our opinion.
In our opinion, based on our audit and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2007 and the consolidated results of their
operations and their cash flows for the year ended December 31, 2007, in
conformity with accounting principles generally accepted in the U.S.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred significant
recurring losses. The realization of a major portion of its assets is dependent
upon its ability to meet its future financing needs and the success of its
future operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Tel-Aviv, Israel /s/ KOST FORER GABBAY & KASIERER
April 15, 2008 A Member of Ernst & Young Global
F - 2
 |
================================================================================
Report of Independent Registered Public Accounting Firm
Board of Directors
Nexgen Biofuels, Inc. and Subsidiaries
(A Development Stage Company and Majority Owned Subsidiary
of Mac Bioventures, Inc.)
Wesley Chapel, Florida
We have audited the accompanying consolidated balance sheet of Nexgen Biofuels,
Inc. and Subsidiaries (the "Company") (a development stage company and majority
owned subsidiary of Mac Bioventures, Inc.) as of December 31, 2006 and the
related consolidated statements of operations, changes in stockholders' deficit,
and cash flows for the period August 10, 2006 (date of inception) through
December 31, 2006. These consolidated financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required at this time, to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2006 and the results of its operations and cash flows for the
period August 10, 2006 (date of inception) through December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company incurred a net loss of $496,372
for the period August 10, 2006 (date of inception) through December 31, 2006. As
of December 31, 2006, the Company had $324,310 of negative working capital and
$49,350 of cash with which to satisfy any future cash requirements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
- --------------------------------
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
May 8, 2007
Except for the statement of changes in shareholders' deficiency for the period
August 10, 2006 (date of inception) through December 31, 2006, for which the
date is April 15, 2008.
PENDER NEWKIRK & COMPANY LLP o CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
100 South Ashley Drive o Suite 1650 o Tampa, Florida 33602 o (813) 229-2321 o
Fax: (813) 229-2359
================================================================================
PCAOB REGISTERED
MEMBER OF AGN INTERNATIONAL, LTD. - A WORLDWIDE
ASSOCIATION OF SEPARATE AND INDEPENDENT ACCOUNTING AND CONSULTING FIRMS
MEMBER OF PRIVATE COMPANIES PRACTICE SECTION AND CENTER FOR AUDIT QUALITY OF
THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
F - 2A
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
-------------
2007 2006
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 49
Gamida For Life B.V. (Note 3) 397 -
Other accounts receivable and prepaid expenses 5 -
---- ----
TOTAL current assets 403 49
---- ----
LONG-TERM INVESTMENTS:
Investments in land purchase options (Note 4) 166 150
---- ----
PROPERTY AND EQUIPMENT, NET 5 3
---- ----
TOTAL assets $574 $202
==== ====
The accompanying notes are an integral part of the consolidated financial
statements.
F - 3
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
DECEMBER 31,
--------------------
2007 2006
------- -------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term bank credit (Note 5) $ 39 $ -
Loan from Gamidor Diagnostics (Note 6) 230 -
Trade payables 319 216
Employees and payroll accruals 62 158
------- -------
TOTAL current liabilities 650 374
------- -------
LONG-TERM LIABILITIES:
Line of Credit from related parties - 304
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
SHAREHOLDERS' DEFICIENCY (Note 8):
Share capital -
Ordinary shares of NIS 0.04 par value - Authorized: 190,000,000 and 40,000,000
shares as of December 31, 2007 and 2006; Issued and Outstanding: 41,759,498 and
649,317 shares as of December 31,
2007 and 2006, respectively 434 33
Additional paid-in capital 1,615 (313)
Ordinary shares payable - 300
Deficit accumulated during the development stage (2,125) (496)
------- -------
TOTAL shareholders' deficiency (76) (476)
------- -------
TOTAL liabilities and shareholders' deficiency $ 574 $ 202
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F - 4
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
AUGUST 10, 2006 AUGUST 10, 2006
(DATE OF INCEPTION) (DATE OF INCEPTION)
YEAR ENDED TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2007 2006 2007
----------- ----------- -----------
EXPENSES:
Legal and professional $ 300 $ 205 $ 505
Salaries expense 447 181 628
Travel expense 208 65 273
Loss from expiration of land purchase option 129 - 129
Other expenses 482 38 520
----------- ----------- -----------
Net loss from operations 1,566 489 2,055
Interest expense 63 7 70
----------- ----------- -----------
Net loss $ 1,629 $ 496 $ 2,125
=========== =========== ===========
Basic and diluted loss per share 0.04 0.76 0.05
=========== =========== ===========
Weighted average number of shares used in
computing basic loss per share attributed to
Ordinary shareholders 41,759,498 649,317 41,759,498
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F - 5
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DEFICIT
ACCUMULATED
ORDINARY SHARES **) ADDITIONAL ORDINARY DURING THE
--------------------------- PAID-IN SHARES DEVELOPMENT
SHARES AMOUNT CAPITAL PAYABLE STAGE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Balance as of August 10, 2006 (date of inception) 649,317 $ 33 $ (33) $ - $ - $ -
Ordinary Shares payable, founders - - (59) 63 - 4
Ordinary Shares payable for services - - (222) 237 - 15
Capital contributions since August 10, 2006 - - 1 - - 1
Net loss for period - - - - (496) (496)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2006 649,317 33 (313) 300 (496) (476)
Shares issued in January 2007, $0.0001/share-founders shares 6,737,643 63 - (63) - -
Common Stock Payable-founders - - - *) - -
Shares issued in January 2007, $0.0001/share-founders shares 101,468 1 (1) - - -
Shares issued in February 2007, $0.0001/share-founders shares 7,990 *) - - - -
Shares issued in May 2007, $0.0001/share-founders shares related to
January 2007 stock commitment 79,896 1 (1) *) - -
Shares issued in May 2007, $0.45/share-employee/consulting services 10,387 *) 29 - - 29
Shares issued in May 2007, $0.45/share-consulting services 159,792 2 - - - -
Shares issued in May 2007, $0.45/share-consulting services 17,577 *) 50 - - 50
Shares issued in August 2007, $0.91/share-director services 27,964 *) - - - -
Shares issued in August 2007, $1.02/share-consulting services 798 *) 5 - - 5
Amortization of prepaid stock services - - 10 - - 10
Purchase of treasury shares (4,700,000) (68) - - - (68)
Issuance of common stock in connection with the merger,
net of acquisition cost of $280 38,666,666 402 1,836 (237) - 2,001
Net loss - - - - (1,629) (1,629)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2007 41,759,498 $ 434 $ 1,615 $ - $ (2,125) $ (76)
=========== =========== =========== =========== =========== ===========
*) Represent amount less then one thousand dollar.
**) All share information included in this report has been retroactively
adjusted to reflect the reverse merger.
The accompanying notes are an integral part of the consolidated financial
statements.
F - 6
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
AUGUST 10, 2006 AUGUST 10, 2006
(DATE OF (DATE OF
YEAR ENDED INCEPTION) TO INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2007 2006 2007
------- ------- -------
OPERATING ACTIVITIES
Net loss $(1,629) $ (496) $(2,125)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation expense 1 - 1
Compensation related to stock issuance (63) 19 (44)
Expiration of land purchase option 54 - 54
Issuance of shares 187 - 187
Increase in trade payable 255 168 423
Increase in Employees and payroll accruals 350 158 508
------- ------- -------
Net cash used in operating activities (845) (151) (996)
------- ------- -------
INVESTING ACTIVITIES
Purchase of computer equipment (1) (3) (4)
Cash used in connection with acquisition (280) - (280)
Investments in land purchase options (70) (103) (173)
------- ------- -------
Net cash used in investing activities (351) (106) (457)
------- ------- -------
FINANCING ACTIVITIES
Net proceeds from line of credit, related party 1,216 305 1,521
Purchase of treasury shares (68) - (68)
Proceeds from issuance of shares - 1 1
------- ------- -------
Net cash provided by financing activities 1,148 306 1,454
------- ------- -------
NET INCREASE (DECREASE) IN CASH (48) 49 1
CASH AT BEGINNING OF PERIOD 49 - -
------- ------- -------
CASH AT END OF PERIOD $ 1 $ 49 $ 1
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F - 7
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1:- GENERAL
a. About the Company
NexGen Biofuels Ltd. (formally: Healthcare Technologies Ltd.) and its
subsidiaries (the "Company" or "NexGen"), is a development stage company
that is currently seeking to develop and/or acquire ethanol and bio-diesel
plants in the United States. NexGen Biofuels Ltd. was established as an
Israeli corporation. Prior to the closing of the Purchase Agreement
(defined below) on December 31, 2007, the Company's business consisted of
the development, manufacture and marketing of clinical diagnostic test kits
and the provision of services and tools to diagnostic and biotech research
professionals in laboratory and point of care sites in Israel and
worldwide.
In accordance with the Purchase Agreement, dated as of January 16, 2007, as
amended (the "Purchase Agreement"), and consummated on December 31, 2007,
by and among, the Company, NexGen Biofuels, Inc., ("NexGen Bio"), MAC
Bioventures Inc., ("MAC"), the parent company of NexGen Bio, and Gamida for
Life B.V., ("Gamida"), the parent company of NexGen (formally: Healthcare
Technologies Ltd.), the Company completed a Plan of Arrangement (the
"Plan") as following:
1. The Company transferred substantially all of its existing assets and
liabilities to Gamida, in consideration for 4,700,000 shares of the
Company held by Gamida.
2. NexGen Bio transferred its principal assets (the "NexGen Assets") in
the ethanol and biodiesel fuel industry consisting of options to
purchase five Greenfield sites in the United States and permitting for
100 million gallons of annual ethanol or bio-diesel production per
site to NexGen 2007, Inc ("NewCo"), a wholly-owned subsidiary of the
Company;
The Company issued to MAC and MAC's designees an aggregate of
38,280,000 ordinary shares, representing the $58 million appraised
value of the NexGen Assets divided by $1.50 (the agreed upon value of
NexGen share) less 1%;
In addition, the Company issued 386,666 ordinary shares to one of its
directors.
The Plan subject to shareholders approval which was granted on December 4,
2007.
NexGen Bio may, subject to the Company's written consent, until 180 days
following the Closing, transfer to NewCo an existing functional ethanol or
bio-diesel plant or all of the shares held by the NexGen Bio of an entity
which directly owns such a plant ("Option Assets"), in consideration for
such number of NexGen ordinary shares equal to the value of the Option
Assets (based on a written valuation prepared by a recognized independent
firm acceptable to the Company) divided by $1.50 less 1 % ("Option
Shares"). The aggregate number of Option Shares issuable by NexGen, if any,
shall not exceed 80,000,000 ordinary Shares.
Prior to the Plan, the Company had no substantial operations as it
transferred all of its existing assets to Gamida. Therefore, the financial
statements and accompanying notes represent the historical results of
NexGen Bio, unless otherwise stated.
F - 8
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 1:- GENERAL (CONT.)
In accordance with EITF 98-3, since NexGen is a development stage company
and has not commenced planned principal operations, it is presumed not to
be a business and the transaction constitutes an asset acquisition.
However, since MAC continues to control the assets before and after the
Plan, the Plan was accounted for according to its substance, a reverse
merger effected through the acquisition of assets.
Acquisition cost was deducted form the additional paid in capital to the
extent of receivables transferred to Gamida in connection with the Plan.
On January 28, 2008, the Company changed its name from Healthcare
Technologies Ltd. to NexGen Biofuels Ltd.
The Company's shares are quoted via the Over The Counter Bulletin Board
(OTCBB) in the United States.
As for the Company's list of subsidiaries, affiliates and other companies
refer to Appendix I.
b. Development Stage Enterprise
The Company has been in the development stage since its formation on August
10, 2006. It has primarily been engaged in the development of ethanol
plants while raising capital to carry out its business plan. The Company
expects to continue to incur significant operating losses and to generate
negative cash flow from operating activities while it develops its customer
base and establishes itself in the marketplace. The Company's ability to
eliminate operating losses and to generate positive cash flow from
operations in the future will depend upon a variety of factors, many of
which the Company may be unable to control. If the Company is unable to
implement its business plan successfully, it may not be able to eliminate
operating losses, generate positive cash flow, or achieve or sustain
profitability, which would materially adversely affect its business,
operations, and financial results, as well as its ability to make payments
on its debt obligations.
c. Going Concern
The Company incurred a net loss of $2,125 for the period August 10, 2006
(date of inception) through December 31, 2007. As of December 31, 2007 the
company had $247 of negative working capital, $76 shareholders deficiency
and $1 of cash. The Company depends upon capital to be derived from future
financial activities, such as subsequent offerings of its Ordinary Shares,
or debt financing in order to operate and grow the business. There can be
no assurance that the Company will be successful in raising such capital.
The key factors that are not within the Company's control and that have the
direct bearing on operating results include, but are not limited to,
acceptance of the Company's business plan, the ability to raise capital in
the future, the ability to expand its customer base, and the ability to
hire key employees to grow the business. There may be other risks and
circumstances that management may be unable to predict. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include
any adjustments relating to recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
F - 9
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared according to
United States generally accepted accounting principles ("U.S. GAAP"),
applied on a consistent basis, as follows:
A. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS:
The functional currency of the Company and its subsidiaries is the
U.S. dollar ("dollar"), as the dollar is the currency of the primary
economic environment in which the Company has operated and expects to
continue to operate in the foreseeable future. Part of the Company's
operations is currently conducted in Israel and most of its expenses
are currently paid in dollars. Financing and investing activities and
equity transactions are effected in dollars.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into dollars in accordance with Statement of
Financial Accounting Standard No. 52, "Foreign Currency Translations".
All transaction gains and losses of the remeasurement of monetary
balance sheet items are reflected in the statements of operations as
financial income or expenses, as appropriate.
C. BASIS OF PRESENTATION:
The Plan was treated as a reverse merger of the Company for financial
accounting purposes. Accordingly, the historical financial statements
of the Company before the Plan have been replaced with the historical
financial statements of NexGen Bio before the Plan.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany transactions
and balances have been eliminated upon consolidation. See Appendix A
for a list of subsidiaries as of December 31, 2007 and 2006.
D. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include short-term, highly liquid
investments that are readily convertible to cash with original
maturities of three months or less at acquisition.
E. INVESTMENTS IN LAND PURCHASE OPTIONS:
Investment in land purchase options are agreements between the Company
and property owners to acquire parcels of land for the purpose of
constructing biofuel plants. The land purchase options are treated as
non-current assets as the Company's intention is to exercise
the options and develop the biofuel plants. The Company capitalizes
the payments to obtain the option to acquire the parcels of land.
Additionally, all costs directly identified with the respective land
parcels are capitalized. At the time it becomes probable that the
property will not be acquired, all capitalized costs associated with
the land parcel are charged to operations.
F - 10
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. PROPERTY AND EQUIPMENT, NET:
Property and equipment consist of computer equipment that is stated at
cost, net of accumulated depreciation. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
assets, generally three years.
Depreciation expenses for 2007 and for the period August 10, 2006
(date of inception) through December 31, 2006 amounted to $1 and $0,
respectively.
G. INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). This Statement prescribes the use of the liability
method whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable
value if it is more likely-than-not that some portion or all of the
deferred taxes will not be realized.
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes-An interpretation of FASB Statement No. 109.
The Interpretation clarifies the accounting for uncertainties in
income taxes recognized in an enterprise's financial statements and
prescribes a recognition threshold and measurement attributes of
income tax positions taken or expected to be taken on a tax return.
Under FIN 48, the impact of an uncertain tax position taken or
expected to be taken on an income tax return must be recognized in the
financial statements at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized in
the financial statements unless it is more likely than not of being
sustained. The Company adopted the provisions of FIN 48 as of January
1, 2007. The impact of adopting FIN 48 was insignificant to the
Company's consolidated financial statements.
Interest associated with uncertain income tax positions and penalties
are classified as income tax expenses. The Company has not recorded
any material interest or penalties during any of the years presented.
F - 11
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
H. BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE:
Basic net earnings (loss) per share are computed based on the weighted
average number of Ordinary shares outstanding during each year.
Diluted net earnings (loss) per share are computed based on the
weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential of Ordinary shares considered
outstanding during the year, in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128").
I. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and receivables.
As of December 31, 2007, the Company was not exposed to interest rate
risk as it did not have any outstanding borrowings that were subject
to fluctuating interest rates.
The Company has no off-balance-sheet concentration of credit risk such
as foreign exchange contracts, option contracts or other foreign
hedging arrangements.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, other accounts
receivable, short-term bank credit, trade payables and other accounts
payable approximate their fair value due to the short-term maturity of
such instruments.
K. SEVERANCE PAY:
The Company's liability for severance pay is calculated pursuant to
Israel's Severance Pay Law based on the most recent salary of the
employees, multiplied by the number of years of employment as of the
balance sheet date. Employees are entitled to one month's salary for
each year of employment, or a portion thereof. The Company's liability
for all of its employees is fully provided by monthly deposits with
severance pay funds, insurance policies and by an accrual. The value
of these policies is recorded as an asset in the Company's
consolidated balance sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israel's Severance Pay Law
or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial
profits.
F - 12
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
L. IMPAIRMENT OF LONG LIVED ASSETS
During the year 2007, and the period August 10, 2006 (date of
inception) through December 31, 2006, no severance expenses were
recorded.
The Company accounts for long-lived asset impairments under SFAS No.
144, "Accounting for the Impairment or disposal of Long-Lived Assets."
SFAS No. 144 requires a three step approach for recognizing and
measuring the impairment of the assets to be held and used.
The Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amounts. The impairment loss is measured
by comparing the fair value of the assets to their carrying amount.
Fair value is estimated on based on undiscounted future cash flows.
Assets held for sale are classified as discontinued operations, stated
at the lower of the assets' carrying amounts or fair value less cost
to sell, and are no longer depreciated. During the year 2007, and the
period August 10, 2006 (date of inception) through December 31, 2006,
no impairment charges were recorded.
M. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" (SFAS 157) which defines
fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157 applies to
other accounting pronouncements that require or permit fair value
measurements and, accordingly, does not require any new fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 for financial assets and liabilities, as well as for
any other assets and liabilities that are carried at fair value on a
recurring basis, and should be applied prospectively. The adoption of
the provisions of SFAS 157 related to financial assets and liabilities
and other assets and liabilities that are carried at fair value on a
recurring basis is not anticipated to materially impact the Company's
consolidated financial position and results of operations.
Subsequently, the FASB provided for a one-year deferral of the
provisions of SFAS 157 for non-financial assets and liabilities that
are recognized or disclosed at fair value in the consolidated
financial statements on a non-recurring basis. The Company is
currently evaluating the impact of adopting the provisions of SFAS 157
for non-financial assets and liabilities that are recognized or
disclosed on a non-recurring basis.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities" (SFAS 159). Under this Standard, the Company
may elect to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value
reported in earnings. This election is irrevocable. SFAS 159 provides
an opportunity to mitigate volatility in reported earnings that is
caused by measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related hedging
contracts when the complex provisions of SFAS 133 hedge accounting are
not met. SFAS 159 is effective for years beginning after November 15,
2007. The Company does not expect the adoption of SFAS 159 will have a
material impact on its consolidated financial statements.
F - 13
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (Revised 2007) (SFAS 141R), Business Combinations.
SFAS 141R will change the accounting for business combinations. Under
SFAS 141R, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment and disclosure for certain specific
items in a business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS 141R will have an impact on accounting
for future business combinations once adopted and not on prior
acquisitions.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160
establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and
the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This standard is effective for fiscal
years beginning after December 15, 2008 and should be applied
prospectively. However, the presentation and disclosure requirements
of the statement shall be applied retrospectively for all periods
presented. The adoption of the provisions of Statement No. 160 is not
anticipated to materially impact the Company's consolidated financial
position and results of operations.
NOTE 3:- GAMIDA FOR LIFE B.V.
According to the Purchase Agreement, Gamida is obligated to repay the
Company for all of NexGen Biofuels Ltd. liabilities regarding the period
ended December 31, 2007.
Gamida has repaid the above liabilities in full, until March 31, 2008.
F - 14
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 4:- INVESTEMENTS IN LAND PURCHASE OPTIONS
Investments in land purchase options at December 31, 2007 consist of the
following:
DESCRIPTION DATE OF DATE OF PRICE PER OPTIONS OTHER
OF PROPERTY SUBSIDIARY OPTION EXPIRATION ACRE COST COSTS TOTAL
- -------------------- -------------- ----------- ----------- ------ ------ ------ ------
15 Acres Council Bluffs
Mills County, IA Biofuels, Inc. 8/01/06 8/17/09 $ 22 $ 7.5 $ 13.4 $ 20.9
2 Properties
Township of
Reedsburg Reedsburg 10/30/06 02/01/08(3) $ 2.5 20 19.2 39.2
Sauk County, WI Biofuels, Inc 10/17/06 11/01/08(1)
160 Acres Indiana
Shelby County, IN Biofuels, Inc 4/20/07 4/20/08 $ 25 40 22.9 62.9
407 Acres Arkansas
Jefferson County, AR Biofuels, LLC 10/09/07 07/09/08 $ 9.1 20 - 20
72 Acres
Township of Erie Port Clinton
Ottawa County, OH Biofuels, Inc 1/12/07 1/12/08(2) 1 22 23
------ ------ ------ ------
$ 88.5 $ 77.5 $ 166
------ ------ ------
(1) The aggregate purchase price of one property is $500; the other
property has a purchase price of $2.5 per acre.
(2) Price per acre ranges from $10 to $20. The purchase price for a
separate sewer and water system will be approximately $300 and
$500, respectively. On January 7, 2008 the Company paid $ 7.5 to
extend this option to July 12, 2008.
(3) In January 2008, the Company extended this option to April 15,
2008.
F - 15
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 4:- INVESTEMENTS IN LAND PURCHASE OPTIONS (CONT.)
Investments in land purchase options at December 31, 2006 consist of the
following:
PURCHASE
DESCRIPTION DATE OF DATE OF PRICE PER OPTIONS OTHER
OF PROPERTY SUBSIDIARY OPTION EXPIRATION ACRE COST COSTS TOTAL
- ----------------- -------------- ----------- ----------- -------------- -------- ----------- -----------
62 Acres Council Bluffs
Mills County, IA Biofuels, Inc. 8/01/06 8/17/09(5) $ 22 $ 7.5 $ 13.4 $ 20.9
2 Properties
Montgomery Red Oak 07/14/06 4/30/07(4) $ 10 to $12 29 25.4 54.4
County, IA Ethanol, Inc
2 Properties
Township of
Reedsburg Reedsburg 10/30/06 2/01/08(6) $ 2.5 10 19.2 29.2
Sauk County, WI Biofuels, Inc 11/14/06 02/01/08(1)
160 Acres Indiana
Shelby County, IN Biofuels, Inc 4/20/07 4/20/08 $ 25(2) 22.9 22.9
72 Acres
Township of Erie Port Clinton
Ottawa County, OH Biofuels, Inc 1/12/07 1/12/08 (3) $ 1 22 23
-------- ----------- -----------
$ 47.5 $ 102.9 $ 150.4
-------- ----------- -----------
(1) The aggregate purchase price of one property in $500; the other
property has a purchase price of $2.5 per acre. In October 2007,
the Company paid $10 to extend these options through November
2008.
(2) Cost of this option is $40 and subsequently paid on May 3, 2007
in accordance with terms of the option agreement.
(3) Price per acre ranges from $10 to $20. The purchase price for a
separate sewer and water system will be approximately $300 and
$500, respectively.
(4) As the option expired unexercised on September 2007, the Company
expensed the cost of it during the year 2007. The amount of $54.4
was included in the statement of operations as loss on disposal
of land purchase option.
(5) The option expired on August 1, 2007. The Company relinquished
the rights to 47 acres of land related to this option, and in
return, the option was extended to August 17, 2009 for no
additional consideration.
(6) In January 2008, The Company extended this option until April 15,
2008
If at the expiration date of the above options, the options are not
extended or exercised, the total amounts invested in the options will be
expensed in accordance with generally accepted accounting principles.
The carrying amount of all land purchase options are evaluated periodically
to determine if adjustment to their balance is warranted.
F - 16
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 4:- INVESTEMENTS IN LAND PURCHASE OPTIONS (CONT.)
Other cost is comprised of legal fees and commissions.
In 2007, NexGen Bio deposited an amount of $75 for building construction on
one of the lands, the amount was expensed later on the year.
NOTE 5:- SHORT-TERM BANK CREDIT
INTEREST RATE DECEMBER 31,
------------ LINKAGE ----------------
2007 2006 TERMS 2007 2006
--- --- --- --- -------
Short-term bank loans 7% - NIS $39 $ -
=== =======
The short term credit was repaid to the bank as of the end of March 2008.
Under the terms of the Purchase Agreement, Gamida repaid the Company the
full amount.
NOTE 6:- LOAN FROM GAMIDOR DIAGNOSTICS LTD
As part of the Purchase Agreement, the Company continues to carry an
existing loan from Gamidor Diagnostics Ltd, amounting to $230. The loan
shall only be repayable in proceeds received by the Company from the
December 31, 2007 Plan, (the "Closing Date") in connection with the
exercise of options to purchase ordinary shares of the Company, outstanding
as of the Closing Date. In the event the loan will not be fully repaid on
or before 180 days following the Closing Date, then such loan shall be
forgiven and cancelled and the Company shall not be obligated to make any
further payment in connection with the loan.
As of March 31 2008, all the options were exercised and the loan was repaid
in full.
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
In 2007 the Company entered into a three-year lease for 1,250 square
feet of office space in Wesley Chapel, Florida. This lease expired on
January 31, 2010.
At December 31, 2006, the Company entered into a lease agreement for
office space in New York, New York. The lease expired on June 30,
2007.
Rent expense for the year ended December 31, 2007 and the period
August 10, 2006 (date of inception) through December 31, 2006, was $32
and $4, respectively.
F - 17
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
The following is a schedule by year of future minimum rental payments
required under the aforementioned leases as of December 31, 2007:
2008 $ 31
2009 32
2010 3
-----------
$ 66
===========
NOTE 8:- SHAREHOLDERS' DEFICIENCY
a. Ordinary shares confer upon their holders voting rights and the right
to receive dividends, if declared.
b. On December 31, 2007, all of NexGen Bio's outstanding shares were
replaced with a total of 38,280,000 Ordinary Shares of the Company, in
accordance with the Assets Purchase Agreement. In addition, according
to the Assets Purchase Agreement, the Company repurchased 4,700,000 of
its Ordinary Shares from Gamida, the Company's former controlling
shareholder. Such repurchases of Ordinary shares are accounted for as
Treasury shares, and result in a reduction of shareholders' equity.
All share information included in this report has been retroactively
adjusted to reflect the reverse merger.
According to the Assets Purchase Agreement, the Company granted to
Israel Amir 386,666 Ordinary Shares for his willingness to commit to
serve as a director of the Company for a period of no less than two
years after the Closing. The Company has accounted for this award in
accordance with FAS123(R). The total grant date fair value was $ 352,
reflecting the quoted market price of the Company's Ordinary shares as
of the date of grant over the purchase price of $ 0 as compensation
expense, ratably over the release period of the Restricted Shares.
c. Before December 31, 2007 NexGen Bio had 400,000,000 shares of common
stock authorized with a par value of $0.0001.
During 2007, NexGen Bio issued a total of 7,143,515 shares to its
founders, employees, directors and consultants.
NexGen Bio had no common shares issued or outstanding as of December
31, 2006. At the date of inception and through December 31, 2006, the
NexGen Bio Board of Directors authorized and committed to issue
6,641,767 shares to Mac and 95,875 and 23,969 shares to two executives
of NexGen Bio, respectively, pursuant to their employment agreements.
Those shares were issued in January 2007 and vested at the commitment
date. NexGen Bio recorded in 2006 the 6,641,767 and 95,875 shares at
par value, and recorded a stock payable of $4 (included as a component
of equity) and a corresponding entry for the same amount to
compensation expense. These stock commitments were recorded at par
value as the Board of Directors determined that NexGen Bio had minimal
value at the respective commitment dates, which approximated the date
of inception. In connection with the 23,969 share commitment, NexGen
Bio recorded a stock payable of $15 and a corresponding entry to
compensation expense.
F - 18
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 8:- SHAREHOLDERS' DEFICIENCY (CONT.)
From January and until December 2007, NexGen Bio issued an additional
381,904 shares of common stock to employees and consultants.
NexGen Bio had 25,000,000 shares of preferred stock authorized with a
par value of $0.0001. There were no preferred shares issued or
outstanding for all periods.
d. In July 2000, the shareholders of the Company approved the Company's
2000 Incentive Share Option Plan (the "ISO Plan") adopted by the
Company's board of directors in February 2000, pursuant to which share
options in the Company may be granted to employees, directors and
consultants of the Company or any subsidiary. An aggregate of 500,000
Ordinary Shares of the Company were reserved for issuance under the
ISO Plan, subject to certain adjustment. The ISO Plan was administered
by the board of directors either directly or upon the recommendation
of the Share Option Committee. The Company's board of directors
appointed the members of the Company's audit committee to also serve
as the Company's Share Option Committee.
On August 28, 2003 the Company amended the ISO Plan, as detailed
below, pursuant to amendments to the Israel Income Tax Ordinance
regarding options that had come into effect. Under the amended plan, a
total of 377,500 ordinary shares of the Company are reserved and
authorized for the purpose of the option plan, subject to certain
adjustments. The plan is administered by the Board of Directors,
(either directly or upon the recommendation of the Share Option
Committee), which has broad discretion, subject to certain
limitations, to determine the persons entitled to receive options, the
terms and conditions on which options are granted and the number of
shares subject to each grant. Options under the plan are issued to
Israeli employees, directors, office holders, consultants, advisers
and service providers of the Company and its subsidiaries.
On August 27, 2007 the Company amended the ISO Plan to include the
ability to grant ordinary shares and share units of the Company, in
addition to options to purchase shares of the Company; and increase
the number of the ordinary shares of the Company available for
issuance to 2,000,000 (two million) ordinary shares.
As of December 31, 2007 options to purchase 1,613,334 ordinary shares
remained available for issuance under the plan.
F - 19
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 9:- TAXES ON INCOME
a. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985:
Results for tax purposes are measured in terms of earnings in NIS
after certain adjustments for increases in Israel's Consumer Price
Index ("CPI"). As explained in Note 2b, the financial statements are
measured in U.S. dollars. The difference between the annual change in
the CPI and in the NIS/dollar exchange rate causes a difference
between taxable income and the income before taxes shown in the
financial statements. In accordance with paragraph 9(f) of SFAS No.
109, the Company has not provided deferred income taxes in respect of
the difference between the reporting currency and the tax bases of
assets and liabilities.
b. Tax rates applicable:
Taxable income of Israeli companies is subject to tax at the rate of
29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.
c. Carryforward tax losses:
As of December 31, 2007, the Company's losses for Israeli tax purposes
totaled approximately $ 10,000. The U.S. subsidiaries had immaterial
U.S. Federal and State net operating loss carryforward.
Under Israeli law, these losses may be carried forward and offset
against taxable income in the future for an indefinite period. Under
the inflationary adjustments law, carryforward tax losses and
deductions for inflation are linked to the CPI.
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
are as follows:
DECEMBER 31,
------------------
2007 2006
------- -------
Net deferred tax asset and liabilities are comprised of the
following:
Accrued salary and interest expense $ - $ 55
Capitalized start-up and acquisition costs 177 130
Carryforward losses 2,900 -
Valuation allowance (3,077) (185)
------- -------
- -
------- -------
Net deferred tax assets $ - $ -
======= =======
F - 20
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 9:- TAXES ON INCOME (CONT.)
The Company provided valuation allowances in respect of deferred tax
assets resulting from losses carryforward and other temporary
differences, since it has a history of losses and thus, management
currently believes that it is more likely than not that the deferred
taxes will not be realized in the foreseeable future.
e. The main reconciling items between the statutory tax rate of the
Company and the effective tax rate are the non-recognition of tax
benefits from accumulated net operating losses carryforward among the
subsidiaries due to the uncertainty of the realization of such tax
benefits.
f. The Company adopted the provisions of FIN 48 as of January 1, 2007.
The impact of adopting FIN 48 was insignificant on the Company's
consolidated financial statements.
NOTE 10:- RELATED PARTIES
The Purchase Agreement provides that in the event, following the
Closing, the Company is obligated to pay an amount on account of
liabilities created following the Closing, MAC shall provide the
Company with sufficient funds, either directly or pursuant to a
service agreement to be entered into, to ensure that the Company will
be able to pay such liabilities when due.
NOTE 11:- SUBSEQUENT EVENTS
On January 9, 2008, the Company sold 150,000 ordinary shares for an
aggregate purchase price of $225,000 to an accredited investor in a
private placement transaction.
F - 21
NEXGEN BIOFUELS LTD. AND ITS SUBSIDIARIES
(FORMERLY: HEALTHCARE TECHNOLOGIES LTD.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
APPENDIX I
The following is a list of NexGen Biofuels Ltd's subsidiaries
affiliates and other companies:
PERCENTAGE OF HOLDING
AND OWNERSHIP
-------------
DECEMBER 31,
-------------
COMPANY 2007 2006
--- ---
NexGen 2007, Inc 100% -
Council Bluffs Biofuels, Inc (1) 100% 100%
Reedsburg Biofuels, Inc (1) 100% 100%
Indiana Biofuels, Inc (1) 100% 100%
Arkansas Biofuels, Inc (1) 100% 100%
Port Clinton Biofuels, Inc (1) 100% 100%
(1) Wholly-owned subsidiaries of NexGen 2007, Inc.
F - 22
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized:
NEXGEN BIOFUELS LTD.
By: /s/ J. Ram Ajjarapu
-----------------------
J. Ram Ajjarapu
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ J. Ram Ajjarapu Chief Executive Officer and Director April 15, 2008
- ----------------------- (Principal Executive Officer)
J. Ram Ajjarapu
/s/ Eran Rotem Chief Financial Officer April 15, 2008
- ----------------------- (Principal Financial and Accounting Officer)
Eran Rotem
/s/ Bruce Wilkinson Director April 15, 2008
- -----------------------
Bruce Wilkinson
/s/ Roderick P.. Morrow Director April 15, 2008
- -----------------------
Roderick P.. Morrow
/s/ Kenneth Hoyt Director April 15, 2008
- -----------------------
Kenneth Hoyt
/s/ Israel Amir Director April 15, 2008
- -----------------------
Israel Amir
/s/ Varda Rotter Director April 15, 2008
- -----------------------
Varda Rotter
/s/ Elan Penn Director April 15, 2008
- -----------------------
Elan Penn
64
