ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We
believe transparency and clarity are the primary goals of successful financial
reporting. We remain committed to increasing the transparency of our financial
reporting, providing our shareholders with informative financial disclosures
and
presenting an accurate view of our financial position and operating
results.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is designed to provide a reader of our financial statements with a
narrative from the perspective of our management on our financial condition,
results of operations, liquidity, and certain other factors that may affect
our
future results. Our MD&A is presented in the following
sections:
·
|
Business
Strategy, Core Philosophies, and Current
Operations
|
·
|
Going
Concern Statement
|
·
|
Critical
Accounting Policies and Estimates
|
·
|
Recent
Accounting Pronouncements
|
·
|
Liquidity
and Capital Resources
|
·
|
Off-Balance-Sheet
Arrangements
|
·
|
Qualitative
and Quantitative Disclosures About Market
Risk
|
The
following discussion and other sections of this Form 10-QSB contain
forward-looking statements that involve a number of risks and uncertainties.
These forward-looking statements are made pursuant to the “safe-harbor”
provisions of the Private Securities Litigation Reform Act of 1995 and are
made
based on management’s current expectations or beliefs, as well as assumptions
made by, and information currently available to, management. All statements
regarding future events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking statements.
In
many cases, you can identify forward-looking statements by terminology, such
as
“may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative
of such terms and other comparable terminology. These statements are only
predictions. Known and unknown risks, uncertainties and other factors could
cause our actual results to differ materially from those projected in the
forward-looking statements.
THE
INFORMATION CONTAINED IN THIS FORM 10-QSB IS NOT A COMPLETE DESCRIPTION OF
OUR
BUSINESS OR THE RISKS ASSOCIATED WITH AN INVESTMENT IN US. READERS ARE REFERRED
TO DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION,
WHICH IDENTIFY IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
OVERVIEW
As
of the
end of the quarter, September 30, 2007, Renewal Fuels, Inc. (“Renewal”) had two
wholly-owned subsidiaries - Renewal Biodiesel, Inc. (“Renewal Biodiesel”) and
Biodiesel Solutions, Inc. (“BSI”).
Renewal
Biodiesel was incorporated in the state of Delaware on March 9, 2007 and
acquired the business, fixed assets and inventory of the FuelMeister business
of
BSI, effective March 30, 2007. Renewal Biodiesel is engaged in the business
of
designing, developing, manufacturing and marketing personal biodiesel processing
equipment and accessories to convert used and fresh vegetable oil into
clean-burning biodiesel. Renewal Biodiesel’s products allow customers to make
biodiesel fuel, which is capable of powering all diesel fuel engines, for a
current cost of approximately 70 cents per gallon. Renewal Biodiesel has
developed a network of dealers in the United States for sale and distribution
of
its products. Renewal Biodiesel’s manufacturing facilities are currently located
in Sparks, Nevada.
BSI
is
developing and will manufacture a factory-built biodiesel processing plant
that
is designed to produce 350,000 gallons of biodiesel per year, appropriately
scaled for a variety of customers, including small communities, farms, farm
co-ops and trucking fleets. The design will provide a biodiesel production
system that is continuous, flexible, efficient, affordable, and fully-automated.
The automated control system will minimize labor costs and facilitates remote
diagnostics. BSI’s manufacturing facilities are currently located in Sparks,
Nevada, adjacent to the manufacturing facilities for Renewal
Biodiesel.
HISTORY
Reorganization
of Tech Laboratories, Inc. and Reverse Merger with Renewal Biodiesel,
Inc.
On
April
20, 2007, Tech Laboratories, Inc. entered into a Merger Agreement with Renewal
Biodiesel, a Delaware corporation formed in 2007 for the purposes of the asset
acquisition of the FuelMeister Business described below. Under the terms of
the
agreement, we acquired 100% of the common stock of Renewal Biodiesel in exchange
for the issuance by us of
343,610
shares of our series A convertible preferred stock, which was subsequently
converted into 22,907,323
common
shares. The officers and directors of Renewal Biodiesel assumed similar
positions with us. Although we were the legal acquirer, Renewal Biodiesel was
considered the accounting acquirer and as such the acquisition was accounted
for
as a reverse merger and recapitalization. As a result, the accompanying
consolidated financial statements represent the results of operations and cash
flows of the accounting acquirer (Renewal Biodiesel) from the date of its
inception on March 9, 2007. Immediately prior to the reorganization, we had
673,356 shares of common stock outstanding and net liabilities of $1,677,020,
consisting of the following, at fair value:
Net
liabilities assumed:
|
|
|
|
Accounts
payable
|
|
$
|
203,992
|
|
Long
term debt, including accrued interest
|
|
|
1,473,028
|
|
Net
liabilities assumed
|
|
$
|
1,677,020
|
|
The
net
liabilities assumed primarily represent debt obligations to YA Global
Investments, L.P. (“YA Global”) and were assumed in connection with the
provision of additional long-term debt financing provided by YA Global (see
Note
7 in our accompanying consolidated financial statements included in this
Report), which additional funding was provided simultaneously with the reverse
merger and recapitalization. Accordingly, the net liabilities assumed were
recorded as deferred financing costs incurred in connection with the additional
debt funding provided by YA Global and are being amortized by periodic charges
to income on a straight-line basis over the life of that debt funding. In
addition, the Company paid $180,000 in fees in connection with the additional
debt funding provided by YA Global.
Tech
Laboratories had no active business operations immediately prior to the merger.
Mr. John King, Chief Executive Officer and Mr. David Marks, Chairman were
officers and directors and were minority shareholders of Renewal Biodiesel.
Immediately
prior to the reorganization, Renewal Biodiesel issued an aggregate of 5,727,979
shares of its common stock to 23 accredited investors for an aggregate
consideration of $57,279. Under the terms of the agreement, we acquired 100%
of
the 5,727,979 shares of common stock of Renewal Biodiesel in exchange for the
issuance by us of 343,610 shares of series A preferred stock, which were
subsequently converted into 23,907,323 common shares (approximately 97% of
the
outstanding common shares immediately after the reorganization). The average
share price paid for the 5,727,979 shares of Renewal Biodiesel exchanged for
our
common shares was $0.01. Current officers, directors and principal stockholders
of ours, who beneficially own in the aggregate approximately 80% of our
outstanding common stock, owned the following aggregate shares of common stock
of Renewal Biodiesel:
Name
|
|
Common
Shares
Received
|
|
Renewal
Biodiesel Shares Owned
|
|
Average
Price Paid
|
|
|
|
|
|
|
|
|
|
Crivello
Group LLC (1)
|
|
|
666,666
|
|
|
166,700
|
|
$
|
0.01
|
|
Frank
P. Crivello SEP IRA (1)
|
|
|
13,333,333
|
|
|
3,334,000
|
|
$
|
0.01
|
|
John
King
|
|
|
2,300,000
|
|
|
575,115
|
|
$
|
0.01
|
|
David
Marks (2)
|
|
|
2,700,000
|
|
|
675,135
|
|
$
|
0.01
|
|
Other
investors as a group (17)
|
|
|
3,907,324
|
|
|
977,029
|
|
$
|
0.01
|
|
|
|
|
22,907,323
|
|
|
5,727,979
|
|
|
|
|
(1)
|
Mr.
Crivello is also the managing member of Crivello Group,
LLC.
|
(2)
|
Of
the shares attributed to Mr. Marks, 200,000 shares are registered
in the
name of the Irrevocable Children’s Trust of which Mr. Marks is a trustee
and 200,000 are registered in the name of Phoenix Investors, LLC
of which
Mr. Marks is Managing
Director.
|
Although
we were the legal acquirer, Renewal Biodiesel was considered the accounting
acquirer and as such the acquisition was accounted for as a reverse merger
and
recapitalization. The officers and directors of Renewal Biodiesel assumed
similar positions with us. As a result, the accompanying consolidated financial
statements represent the results of operations and cash flows of the accounting
acquirer (Renewal Biodiesel) from the date of its inception on March 9, 2007.
The
fair
value of the common stock issued to the shareholders of Renewal Biodiesel was
estimated to be $0.2265 per share, based on the trading price of our common
stock immediately prior to the reorganization and reverse merger. The difference
between the fair value of the shares issued and the amount paid by the
shareholders of Renewal Biodiesel for their shares resulted in an immediate
expense of $5,131,231.
On
July
9, 2007, the Company, which was a New Jersey entity (“Tech Labs-NJ”), entered
into an Agreement and Plan of Merger with Tech Laboratories, Inc., a
Delaware entity (“Tech Labs - DE”) under which Tech Labs - NJ and Tech Labs - DE
were merged with and into the surviving corporation, Tech Labs - DE, whose
name
was subsequently changed on August 1, 2007 to Renewal Fuels, Inc. The
certificate of incorporation and bylaws of the surviving corporation became
the
certificate of incorporation and bylaws of the Company, and the directors and
officers in office of the surviving corporation became the directors and
officers of the Company.
On
July
10, 2007, the majority stockholders of the Company authorized a 1-for-15 reverse
stock split which was effective on August 1, 2007. As a result, the shares
of common stock of the Company (the "Old Shares") that were outstanding at
July
31, 2007 automatically converted into 23,805,126 shares of common stock
(the "New Shares"). All common share and per share amounts in our financial
statements have been retroactively restated to reflect this reverse stock split.
The New Shares issued pursuant to the reverse stock split are fully paid and
non-assessable. All New Shares have the same par value, voting rights and other
rights as the Old Shares. Stockholders of the Company do not have preemptive
rights to acquire additional shares of common stock which may be issued. Also
on
August 1, 2007, the Company changed its name from Tech Laboratories, Inc. to
Renewal Fuels, Inc. and the Company’s quotation symbol on the OTC Bulletin Board
was changed from TLBT to RNWF.
Acquisition
of Assets of FuelMeister Business
On
March
9, 2007, Crivello Group, LLC (“Crivello”) and its wholly-owned subsidiary,
Renewal Biodiesel, entered into an Asset Purchase Agreement with Biodiesel
Solutions, Inc. (“BSI”), which was effective March 30, 2007. Pursuant to the
Asset Purchase Agreement, BSI sold substantially all of the assets and property
of its FuelMeister operations (the “FuelMeister Business” , the “Predecessor” or
the “Predecessor Business”, an unrelated Company) to Renewal Biodiesel, in
exchange for an aggregate purchase price of $500,000, subject to adjustment.
Under the terms of the Agreement, the purchase price was subsequently adjusted
to $494,426 to reflect the inventory on hand at closing. Of the adjusted
purchase price, $100,000 was paid on execution of the Agreement as a down
payment, $100,000 was paid at closing, $50,000 was paid on April 11, 2007,
and
the balance of the purchase price was paid by delivery of a promissory note,
as
amended, in the amount of $244,426. The promissory note was subsequently paid
on
April 20, 2007. The $250,000 cash portion of the $494,426 purchase price of
the
assets was funded by loans received from Crivello of $200,000 and cash of
$57,279 received by Renewal Biodiesel from our founders for common stock. The
loans from Crivello, together with the promissory note for $244,426, were repaid
from the proceeds of loans from YA Global (see Note 7 in the accompanying
consolidated financial statements). The difference of $5,131,231 between the
fair value of the 22,907,323 common shares issued to our founders as a result
of
the reverse merger described above, determined based on the trading price of
$0.2265 per share immediately prior to the reorganization and reverse merger,
and the amount they paid for their shares of Renewal Biodiesel of $57,279 has
been recorded as stock-based transaction expense.
Renewal
Biodiesel also entered into a management services agreement with BSI, pursuant
to which BSI agreed to provide general management and administrative services
to
Renewal Biodiesel, as well as the use of its facilities. Renewal Biodiesel
reimbursed BSI for the direct cost of services and facilities, as provided.
The
agreement terminated 90 days after the FuelMeister acquisition or upon ten
days
notice by Renewal Biodiesel. As discussed in Note 1 to the financial statements,
we acquired BSI on July 2, 2007, which effectively resulted in termination
of
the agreement.
The
acquisition of the FuelMeister Business was accounted for by the purchase method
in accordance with Financial Accounting Standards Board Statement No. 141 ("FAS
141") and the results of its operations are included in these consolidated
financial statements from the date of acquisition. The aggregate purchase price
determined in accordance with FAS 141 was $494,426.
The
following is a summary of the net assets acquired at the date of acquisition,
at
fair value:
Net
assets acquired:
|
|
|
|
Inventory
|
|
$
|
34,426
|
|
Fixed
assets
|
|
|
9,145
|
|
Website
domain
|
|
|
50,150
|
|
Tradename
|
|
|
118,000
|
|
Customer
lists, engineering drawings and other intangibles
|
|
|
189,000
|
|
Goodwill
|
|
|
93,705
|
|
Net
assets acquired
|
|
$
|
494,426
|
|
Acquisition
of BSI
On
July
2, 2007, we entered into a merger agreement with BSI, as a result of which
we
acquired the remainder of BSI's business (i.e., other than the FuelMeister
Business acquired previously). BSI is engaged in the business of designing,
manufacturing and marketing processing equipment and accessories, including
personal biodiesel processors and “community scale” biodiesel processor systems,
which convert fresh and used vegetable oils into clean burning biodiesel fuel.
It complements and optimizes Renewal’s ability to design, develop, manufacture
and market both personal and community scale biodiesel processing equipment
and
accessories.
As
consideration for the acquisition of BSI, we issued an aggregate of 3,333,333
shares of common stock, 1,000,000 new Series B preferred shares of BSI,
initially convertible into 1,333,333 shares of our common stock, options to
purchase 94,600 shares of our common stock and $500,000 in cash.
The
BSI
Preferred Stock is immediately convertible at the option of the holders into
common stock of the Company at a conversion price equal to the greater of (i)
$0.75, or (ii) the average closing price of the common stock during the ten
trading days immediately preceding the conversion date. Prior to the acquisition
of BSI, the Company loaned $200,000 to BSI under an 8% 180 day secured
promissory note, due November 24, 2007. Upon the acquisition of BSI, the note
receivable was reclassified as a capital contribution to BSI.
Also
on
July 2, 2007, we entered into a Securities Purchase Agreement with YA Global
providing for the sale to YA Global of secured convertible debentures in the
aggregate principal amount of $2,700,000, of which $2,000,000 was advanced
immediately. The second installment of $700,000 will be funded within two
business days after the Company has unconditionally booked and received at
least
a 50% deposit for the sale of at least one
BiodieselMaster®
unit. We
also issued to YA Global five-year warrants to purchase 2,250,000 shares of
our
common stock at $0.90 per share. The Debentures bear interest at the prime
rate
plus 2.75% (but not less than 10%) and mature two years from the date of
issuance (the "Maturity Date"). The Company is not required to make any payments
until the Maturity Date. The holder of the Debentures may convert at any time
amounts outstanding into shares of Common Stock at a conversion price per share
equal to the lesser of (i) $0.05, or (ii) 80% of the lowest closing bid price
of
the Common Stock during the ten trading days immediately preceding the
conversion date.
The
aggregate purchase price for the BSI acquisition was determined based on the
fair value of the consideration issued, which consisted of common stock,
preferred shares of BSI convertible into our common stock, options to purchase
our common stock and cash, as follows:
3,333,333
shares of common stock
|
|
$
|
2,000,000
|
|
1,000,000
shares of preferred stock of BSI
|
|
|
800,000
|
|
96,400
common stock options
|
|
|
48,181
|
|
Note
receivable from BSI reclassified to contributed capital
|
|
|
200,000
|
|
Cash
paid, net of $77,986 cash acquired
|
|
|
422,014
|
|
Total
purchase price
|
|
$
|
3,470,195
|
|
The
purchase price was allocated to BSI’s net tangible and intangible assets based
on their estimated fair values as of the date of the completion of the
acquisition and based on a report by an independent, reputable appraiser in
accordance with the professional standards of the American Society of Appraisers
and the Institute of Business Appraisers. The amount allocated to purchased
“in
process research and development costs” was valued at fair value using a debt
free cash flow method. As required by current accounting literature, these
costs
are immediately expensed in the current period’s income statement. The
allocation of the total purchase price is summarized below:
|
|
Purchase
Price
|
|
Asset
Life
|
|
|
|
Allocation
|
|
In
Years
|
|
Working
capital, net and excluding cash acquired
|
|
$
|
(204,231
|
)
|
|
-
|
|
Fixed
assets
|
|
|
90,477
|
|
|
3
- 10
|
|
In
process research and development
|
|
|
3,140,000
|
|
|
-
|
|
Employee
contracts
|
|
|
114,000
|
|
|
2
|
|
Non-compete
agreements
|
|
|
100,000
|
|
|
1.5
|
|
Goodwill
|
|
|
229,979
|
|
|
Indefinite
|
|
Net
Assets Acquired
|
|
$
|
3,470,195
|
|
|
|
|
Purchase
Accounting For Acquisitions
The
results of operations of the 2007 Acquisitions are included in the Company's
results of operations beginning after their respective acquisition dates. The
following unaudited pro forma information combines the consolidated results
of
operations of the Company and the companies that it acquired as if the
acquisitions had occurred at the beginning of fiscal year 2006:
|
|
Three
Months
Ended
September, 30,
|
|
For
The Nine Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues
|
|
$
|
148,800
|
|
$
$
|
459,539
|
|
$
$
|
500,292
|
|
$
$
|
1,378,617
|
|
Loss
from Operations
|
|
$
|
(615,896
|
)
|
$
|
(178,488
|
)
|
$
|
(1,452,114
|
)
|
$
|
(8,794,637
|
)
|
Net
Loss
|
|
$
|
(1,216,899
|
)
|
$
|
(743,966
|
)
|
$
|
(3,389,752
|
)
|
$
|
(10,491,193
|
)
|
Per
Share - basic and fully diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.12
|
)
|
$
|
(0.07
|
)
|
$
|
(0.38
|
)
|
Weighted
average shares outstanding
|
|
|
27,488,705
|
|
|
27,488,705
|
|
|
27,488,705
|
|
|
27,488,705
|
|
The
unaudited pro forma information does not purport to be indicative of the results
that would actually have been achieved had the acquisitions occurred as of
the
date of the periods indicated.
Predecessor
Business
As
described above, under the terms of the Renewal Merger Agreement, we acquired
100% of the common stock of Renewal Biodiesel in exchange for the issuance
by us
of 22,907,323 common shares. Although we were the legal acquirer, Renewal
Biodiesel was considered to be the accounting acquirer and, as such, the
acquisition was accounted for as a reverse merger and recapitalization.
As
a
result, the accompanying unaudited consolidated financial statements represent
the results of operations and cash flows of the accounting acquirer and
Successor (Renewal Biodiesel) from the date of its inception on March 9, 2007
through September 30, 2007. The FuelMeister Business acquired by Renewal
Biodiesel constitutes our Predecessor business. The accompanying unaudited
consolidated financial statements, as of September 30, 2007 and for the period
March 9, 2007 (date of inception) through September 30, 2007, are those of
the
Successor. The statements of operations for the three months ended March 31,
2007 and for the three and nine months ended September 30, 2006, and the
statements of cash flows for the three months ended March 31, 2007 and for
the
nine months ended September 30, 2006 are those of our Predecessor, the
FuelMeister Business.
BUSINESS
STRATEGY, CORE PHILOSOPHIES, CURRENT OPERATIONS
Renewal
Fuels is dedicated to technologies that enable the production of high quality
fuels from a variety of non-food feedstock sources and waste streams. We believe
that developed and emerging technologies to produce fuels from waste will
provide an important alternative to feedstock sources which compete with uses
for food.
Renewal
Fuels’ business model includes strategic partnerships and acquisitions in the
expanding biofuels industry. Increasing political and social responsiveness,
combined with exciting developments in biofuel technology, has created an
unprecedented environment for organic growth as well as growth through
acquisitions. Our focused business model is designed to facilitate high profit
margins and security of feedstock pricing.
The
management of Renewal Fuels is establishing relationships with multiple biofuel
entities with projects, products, and technologies at various stages of
development, fitting the Company’s mission. The company is currently seeking
additional technologies and businesses to add to its portfolio, which currently
includes the businesses described below.
Renewal
manufactures and markets the FuelMeister® line of personal biodiesel processors
from its facility in Sparks, NV. The FuelMeister allows a user to make biodiesel
from waste vegetable oil, for personal use. The FuelMeister line of biodiesel
processors are produced from industrial-grade materials. In general, it takes
approximately 1/2 hour hands-on time per batch of biodiesel fuel production.
The
products offered are not do-it-yourself kits, but complete systems with all
key
components needed to make biodiesel ‘at home’ with ease and
confidence.
FuelMeister
biodiesel processors are supplied with a user safety kit, oil titration and
field test kit, high quality steel methanol pump, and easy prime oil draw tube.
Quick disconnect fittings allow for future expansion and more convenient
connection of tanks. If capacity needs change, additional modular tanks, lids,
and accessories can be added to the FuelMeister II platform. A customer can
start making biodiesel the same day the system arrives. All that is required
is
a barrel of used fryer oil (typically collected at no charge from local
restaurants), lye (at a typical cost of 20¢/gallon of biodiesel), a barrel of
racing methanol (at a typical cost of 50¢ /gallon of biodiesel), a barrel for
the finished biodiesel, AC power, and a water hose. Renewal’s products are
designed specifically to allow shipment by UPS in order to minimize customers’
freight expenses. This design was accomplished during an extensive upgrade
to
the product’s specifications in 2006. Any machines operating on diesel fuel,
including cars, trucks, generators, tractors, furnaces, etc. may be powered
with
the biodiesel produced with the FuelMeister II biodiesel production
system.
BSI,
which was acquired on July 2, 2007, manufactures a complementary product to
FuelMeister called BiodieselMaster®. This product is a factory-built biodiesel
processing plant that is appropriately scaled for a variety of customers,
including small communities, farms, farm co-ops and trucking fleets. The
BiodieselMaster® is a community-scale biodiesel processing unit that is designed
to produce 350,000 gallons of biodiesel per year. The design provides a
biodiesel production system that is continuous, flexible, efficient, affordable,
and fully-automated. The automated control system minimizes labor costs and
facilitates remote diagnostics.
RESULTS
OF OPERATIONS
Although
the revenue generating activities of the FuelMeister Business, the Predecessor
business, remained significantly intact after the acquisition, there have been
changes in our marketing strategy, administrative costs (including those
expenses related to public equity market participation) and financing
activities. As a result, we believe that the expenses of the Predecessor
business are not representative of our current business, financial condition
or
results of operations. Accordingly, where practicable we have included various
forward looking statements regarding the effects of our new operating structure.
The
discussion that follows of Results of Operations is in the following
sections:
·
|
Results
of operations for the three months ended September 30, 2007
(Successor);
|
·
|
Results
of operations for the period March 9, 2007 (date of inception) through
September 30, 2007
(Successor);
|
·
|
Results
of operations for the three months ended September 30, 2006
(Predecessor);
|
·
|
Results
of operations for the three months ended March 31, 2007
(Predecessor);
|
·
|
Results
of operations for the nine months ended September 30, 2006
(Predecessor);
|
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
The
information contained in this section is that of the Successor, Renewal Fuels,
Inc., for the three months ended September 30, 2007 (unaudited).
Net
Sales
|
|
$
|
148,800
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
109,048
|
|
|
73.3
|
%
|
Gross
Profit
|
|
|
39,752
|
|
|
26.7
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
243,101
|
|
|
163.4
|
%
|
Occupancy
and equipment
|
|
|
71,045
|
|
|
47.7
|
%
|
Advertising
|
|
|
96,187
|
|
|
64.6
|
%
|
Research
and development
|
|
|
3,140,000
|
|
|
2110.2
|
%
|
Professional
fees
|
|
|
80,150
|
|
|
53.9
|
%
|
Other
general and administrative expenses
|
|
|
217,665
|
|
|
146.3
|
%
|
Amortization
of intangible assets
|
|
|
52,807
|
|
|
35.5
|
%
|
Total
Operating Expenses
|
|
|
3,900,955
|
|
|
2621.6
|
%
|
Operating
Income (Loss)
|
|
|
(3,861,203
|
)
|
|
-2594.9
|
%
|
Interest
income
|
|
|
68
|
|
|
0.0
|
%
|
Deferred
financing fees
|
|
|
(266,076
|
)
|
|
-178.8
|
%
|
Interest
expense
|
|
|
(221,050
|
)
|
|
-148.6
|
%
|
Other
expenses
|
|
|
(23,326
|
)
|
|
-15.7
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Net
Income (Loss)
|
|
$
|
(4,371,587
|
)
|
|
-2937.9
|
%
|
Revenues
For
the
three months ended September 30, 2007, revenues were $148,800, a decrease when
compared with the Predecessor’s three months ended September 30, 2006, due to
management’s focus on the commercial BiodieselMaster® product and less on the
FuelMeister product.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended September 30, 2007 was $109,048 or 73.3% of
revenues for the quarter, resulting in a gross profit margin of $39,752 or
26.7%
for the three months ended September 30, 2007.
Employee
Compensation and Benefits
Employee
compensation and benefits were $243,101 or 163.4% of revenues for the three
months ended September 30, 2007,. These expenses have increased when compared
with the Predecessor’s three months ended September 30, 2006 due to increased
engineering and labor costs associated with the BiodieselMaster®
product.
Occupancy
and Equipment
Occupancy
and equipment expenses, consisting of rent, depreciation, amortization, and
other miscellaneous expenses, amounted to $71,045 or 47.7% of revenues for
the
three months ended September 30, 2007, an increase when compared with the
Predecessor’s three months ended September 30, 2006 due to facility expansion
for the BiodieselMaster ® product.
Advertising
Expenses
Advertising
expenses were $96,187, or 64.6% of revenues, for the three months ended
September 30, 2007 and increased when compared with the Predecessor’s three
months ended September 30, 2006 due to website costs and management’s re-launch
of the FuelMeister product.
Research
and Development Expenses
Research
and development expenses for the three months ended September 30, 2007 were
$3,140,000, representing in-process research and development costs incurred
in
the acquisition of BSI on July 2, 2007.
Professional
Fees
Professional
fees, consisting primarily of accounting, attorney and valuation fees, were
$80,150 or 53.9% of revenues for the three months ended September 30, 2007
and
increased compared with the Predecessor’s three months ended September 30, 2006
due to increased costs associated with SEC compliance and related matters.
General
and Administrative Expenses
General
and administrative expenses, consisting of administrative expenses, insurance
and other non-manufacturing related expenses, were $217,665 or 146.3% of revenue
for the three months ended September 30, 2007 and increased compared with the
Predecessor’s three months ended September 30, 2006 due to additional costs
associated with the BiodieselMaster® product.
Amortization
of Intangible Assets
Amortization
of intangible assets was $52,807 or 35.5% of revenue for the three months ended
September 30, 2007, primarily due to the amortization of assets acquired in
the
acquisition of BSI
Net
Financial (Income) Expense
Net
financial (income) expense, consisting primarily of interest expense of $221,050
and amortization of deferred financing fees of $266,076, amounted to a net
expense of $510,384 for the three months ended September 30, 2007, and increased
compared with the Predecessor’s three months ended September 30, 2006, due to
the amortization of deferred financing costs and debt discount associated with
our convertible debenture obligations.
Provision
for Income Taxes
During
the three months ended September 30, 2007, we experienced an operating loss
for
tax purposes. FuelMeister, our Predecessor, had historically experienced
operating losses, and as FuelMeister’s management were uncertain as to whether
FuelMeister would be able to utilize these tax losses before they expire, they
provided a reserve for the income tax benefits associated with FuelMeister’s net
future tax assets which primarily related to its cumulative net operating
losses. We have adopted the same policy to reserve such net tax assets until
such time as profitability is reasonably assured and it becomes more likely
than
not that we will be able to utilize such assets.
Net
Loss
As
a
result of the above, we reported a net loss of $4,371,587 for the three months
ended September 30, 2007.
RESULTS
OF OPERATIONS FOR THE PERIOD MARCH 9, 2007 (DATE OF INCEPTION) THROUGH SEPTEMBER
30, 2007
The
information contained in this section is that of the Successor, Renewal Fuels,
Inc., for the period March 9, 2007 (date of inception) through September 30,
2007 (unaudited).
Net
Sales
|
|
$
|
392,887
|
|
|
100.0
|
%
|
Cost
of Sales
|
|
|
251,390
|
|
|
64.0
|
%
|
Gross
Profit
|
|
|
141,497
|
|
|
36.0
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
277,373
|
|
|
70.6
|
%
|
Stock-based
transaction expense
|
|
|
5,131,231
|
|
|
1306.0
|
%
|
Occupancy
and equipment
|
|
|
79,302
|
|
|
20.2
|
%
|
Advertising
|
|
|
140,170
|
|
|
35.7
|
%
|
Research
and development
|
|
|
3,140,000
|
|
|
799.2
|
%
|
Professional
fees
|
|
|
429,891
|
|
|
109.4
|
%
|
Other
general and administrative expenses
|
|
|
315,209
|
|
|
80.2
|
%
|
Amortization
of intangible assets
|
|
|
52,807
|
|
|
13.4
|
%
|
Total
Operating Expenses
|
|
|
9,565,983
|
|
|
2434.8
|
%
|
Operating
Income (Loss)
|
|
|
(9,424,486
|
)
|
|
-2398.8
|
%
|
Interest
income
|
|
|
823
|
|
|
0.2
|
%
|
Deferred
financing fees
|
|
|
(447,325
|
)
|
|
-113.9
|
%
|
Interest
expense
|
|
|
(636,477
|
)
|
|
-162.0
|
%
|
Other
expenses
|
|
|
(23,326
|
)
|
|
-5.9
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Net
Income (Loss)
|
|
$
|
(10,530,791
|
)
|
|
-2680.4
|
%
|
Net
Sales
For
the
period from March 9, 2007 (inception) through September 30, 2007, net sales
were
$392,887 and decreased when compared with the Predecessor’s nine months ended
September 30, 2006 due to management’s focus on the commercial BiodieselMaster®
product and less on the FuelMeister product.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended September 30, 2007 was $251,390 or 64.0% of
revenues and decreased compared with the Predecessor’s nine months ended
September 30, 2006 due to management’s focus on the commercial BiodieselMaster®
product and less on the FuelMeister product. Gross profit margin was $141,497
or
36.0% for the period from March 9, 2007 (inception) through September 30, 2007.
Employee
Compensation and Benefits
Employee
compensation and benefits were $277,373 or 70.6% of revenues for the period
from
March 9, 2007 (inception) through September 30, 2007 and increased compared
with
the Predecessor’s nine months ended September 30, 2006 due to increased
engineering and labor costs associated with the BiodieselMaster®
product.
Stock
Based Transaction Expense
Stock
based transaction expense related to the reverse merger and recapitalization
was
$5,131,231 for the period from March 9, 2007 (inception) through September
30,
2007.
Occupancy
and Equipment
Occupancy
and equipment expenses, consisting of rent, depreciation, amortization, and
other miscellaneous expenses, amounted to $79,302 or 20.2% of revenues for
the
period from March 9, 2007 (inception) through September 30, 2007 and increased
compared with the Predecessor’s nine months ended September 30, 2006 due to
facility expansion for the BiodieselMaster ® product.
Advertising
Expenses
Advertising
expenses were $140,170, or 35.7% of revenues, for the period from March 9,
2007
(inception) through September 30, 2007 and increased compared with the
Predecessor’s nine months ended September 30, 2006 due to website costs and
management’s re-launch of the FuelMeister product.
Research
and Development Expenses
Research
and development expenses for the period from March 9, 2007 (inception) through
September 30, 2007were $3,140,000 representing in-process research and
development costs incurred in the acquisition of BSI on July 2, 2007..
Professional
Fees
Professional
fees, consisting primarily of accounting, attorney and valuation fees, were
$429,891 or 109.4% of revenues for the period from March 9, 2007 (inception)
through September 30, 2007 and increased compared with the Predecessor’s nine
months ended September 30, 2006 due to increased costs associated with SEC
compliance and related matters.
General
and Administrative Expenses
General
and administrative expenses, consisting of administrative expenses, insurance
and other non-manufacturing related expenses, were $315,208 or 80.2% of revenue
for the period from March 9, 2007 (inception) through September 30, 2007 and
increased compared with the Predecessor’s three months ended September 30, 2006
due to additional costs associated with the BiodieselMaster® product.
Amortization
of Intangible Assets Expense
Amortization
of intangible assets was $52,807 or 13.4% of revenue for the period from March
9, 2007 (inception) through September 30, 2007, primarily related to the
amortization of assets related to the acquisition of BSI on July 2, 2007.
Net
Financial (Income) Expense
Net
financial (income) expense, consisting primarily of interest expense of $636,477
and amortization of deferred financing fees of $477,325, amounted to a net
expense of $1,106,305 for the period from March 9, 2007 (inception) through
September 30, 2007.
Provision
for Income Taxes
During
the period from March 9, 2007 (inception) through September 30, 2007, we
experienced an operating loss for tax purposes. FuelMeister, our Predecessor,
had historically experienced operating losses, and as FuelMeister’s management
were uncertain as to whether FuelMeister would be able to utilize these tax
losses before they expire, they provided a reserve for the income tax benefits
associated with FuelMeister’s net future tax assets which primarily related to
its cumulative net operating losses. We have adopted the same policy to reserve
such net tax assets until such time as profitability is reasonably assured
and
it becomes more likely than not that we will be able to utilize such
assets.
Net
Loss
As
a
result of the above, we reported a net loss of $10,530,791 for the period from
March 9, 2007 (inception) through September 30, 2007.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
(PREDECESSOR)
The
information contained in this section is that of our Predecessor, the
FuelMeister Business, for the three months ended September 30, 2006
(unaudited).
Net
Sales
|
|
$
|
571,386
|
|
|
100
|
%
|
Cost
of sales
|
|
|
350,804
|
|
|
61.4
|
%
|
Gross
Profit
|
|
|
220,582
|
|
|
38.6
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
65,405
|
|
|
11.4
|
%
|
Occupancy
and equipment
|
|
|
24,705
|
|
|
4.3
|
%
|
Advertising
|
|
|
37,452
|
|
|
6.6
|
%
|
Professional
fees
|
|
|
6,588
|
|
|
1.2
|
%
|
Other
general and administrative expenses
|
|
|
34,918
|
|
|
6.1
|
%
|
Total
Operating Expenses
|
|
|
169,069
|
|
|
29.6
|
%
|
Operating
Income (Loss)
|
|
|
51,513
|
|
|
9.0
|
%
|
Net
Income (Loss)
|
|
$
|
51,513
|
|
|
9.0
|
%
|
Revenues
For
the
three months ended September 30, 2006, FuelMeister’s revenue was $571,386.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended September 30, 2007 was $350,804 or 61.4% of
revenues for the quarter. As a result, gross profit margin was $220,581 or
38.6%.
Employee
Compensation and Benefits
Employee
compensation and benefits were $65,405 or 11.4% of revenues for the three months
ended September 30, 2006.
Occupancy
and Equipment
Occupancy
and equipment expenses, consisting of rent, depreciation, amortization, and
other miscellaneous expenses, amounted to $24,705 or 4.3% of revenues for the
three months ended September 30, 2006.
Professional
Fees
Professional
fees, consisting primarily of accounting and attorney fees of $6,588 were 1.2%
of revenues for the three months ended September 30, 2006.
General
and Administrative Expenses
General
and administrative expenses, consisting of administrative expenses, insurance
and other non-manufacturing related expenses, were $34,918, or 6.1% of revenue
for the three months ended September 30, 2006.
Provision
for Income Taxes
During
the three months ended September 30, 2006, FuelMeister experienced an operating
loss for tax purposes. FuelMeister had historically experienced operating
losses, and as FuelMeister’s management were uncertain as to whether FuelMeister
would be able to utilize these tax losses before they expire, they provided
a
reserve for the income tax benefits associated with FuelMeister’s net future tax
assets which primarily related to its cumulative net operating losses.
Net
Income
As
a
result of the above, FuelMeister reported net income of $51,513 or 9.1% of
revenues for the three months ended September 30, 2006.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007
(PREDECESSOR)
The
information contained in this section is that of our Predecessor, the
FuelMeister Business, for the three months ended March 31, 2007
(unaudited).
Net
Sales
|
|
$
|
104,360
|
|
|
100.0
|
%
|
Cost
of Sales
|
|
|
76,802
|
|
|
73.6
|
%
|
Gross
Profit
|
|
|
27,558
|
|
|
26.4
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Occupancy
and equipment
|
|
|
18,666
|
|
|
17.9
|
%
|
Advertising
|
|
|
8,474
|
|
|
8.1
|
%
|
Other
general and administrative expenses
|
|
|
79,879
|
|
|
76.5
|
%
|
Total
Operating Expenses
|
|
|
107,019
|
|
|
102.5
|
%
|
Operating
Income (Loss)
|
|
|
(79,461
|
)
|
|
(76.1
|
%)
|
Net
Income (Loss)
|
|
$
|
(79,461
|
)
|
|
(76.1
|
%)
|
Revenues
For
the
three months ended March 31, 2007, FuelMeister’s revenue was $104,360.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended March 31, 2007 was $76,802, or 73.6% of
revenues, resulting in a gross profit margin of $27,558 or 26.4%.
Advertising
Expenses
Advertising
expenses were $8,474, or 8.1% of revenues, for the three months ended March
31,
2007.
General
and Administrative Expenses
General
and administrative expenses, consisting of payroll, administrative expenses,
insurance, legal and other non-manufacturing related expenses were $79,879
for
the three months ended March 31, 2007. Payroll accounted for most of the expense
with $52,320 for the three months ended March 31, 2007.
Occupancy
and Equipment
Occupancy
and equipment expense, consisting of rent, depreciation, amortization, and
other
miscellaneous expenses, amounted to $18,666 for the three months ended March
31,
2007.
Provision
for Income Taxes
During
the three months ended March 31, 2007, FuelMeister experienced operating and
tax
losses. FuelMeister had historically experienced operating losses, and as
FuelMeister’s management were uncertain as to whether FuelMeister would be able
to utilize these tax losses before they expire, they provided a reserve for
the
income tax benefits associated with FuelMeister’s net future tax assets which
primarily relate to its cumulative net operating losses.
Net
Loss
As
a
result of the above, FuelMeister reported a net loss of $79,461 for the three
months ended March 31, 2007.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(PREDECESSOR)
The
information contained in this section is that of our Predecessor, FuelMeister,
for the nine months ended September 30, 2006 (unaudited).
Net
Sales
|
|
$
|
1,638,813
|
|
|
100
|
%
|
Cost
of Sales
|
|
|
1,034,220
|
|
|
63.1
|
%
|
Gross
Profit
|
|
|
604,593
|
|
|
36.9
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
197,103
|
|
|
12.0
|
%
|
Occupancy
and equipment
|
|
|
98,481
|
|
|
6.0
|
%
|
Advertising
|
|
|
55,542
|
|
|
3.4
|
%
|
Professional
fees
|
|
|
18,617
|
|
|
1.1
|
%
|
Other
general and administrative expenses
|
|
|
119,299
|
|
|
7.3
|
%
|
Total
Operating Expenses
|
|
|
489,042
|
|
|
29.8
|
%
|
Operating
Income (Loss)
|
|
|
115,551
|
|
|
7.1
|
%
|
Net
Income (Loss)
|
|
$
|
115,551
|
|
|
7.1
|
%
|
Revenues
For
the
nine months ended September 30, 2006, FuelMeister’s revenue was $1,638,813.
Cost
of Sales and Gross Profit
Cost
of
sales for the nine months ended September 30, 2006 was $1,034,220 or 63.1%
of
revenues for the quarter. As a result, gross profit margin was $604,593 or
36.9%.
Employee
Compensation and Benefits
Employee
compensation and benefits were $197,103 or 12.0% of revenues for the nine months
ended September 30, 2006.
Occupancy
and Equipment
Occupancy
and equipment expenses, consisting of rent, depreciation, amortization, and
other miscellaneous expenses, amounted to $98,481 or 6.0% of revenues for the
nine months ended September 30, 2006.
Professional
Fees
Professional
fees, consisting primarily of accounting and attorney fees of $18,617 were
1.1%
of revenues for the nine months ended September 30, 2006.
General
and Administrative Expenses
General
and administrative expenses, consisting of administrative expenses, insurance
and other non-manufacturing related expenses, were $119,299 or 7.3% of revenue
for the nine months ended September 30, 2006.
Provision
for Income Taxes
During
the nine months ended September 30, 2006, we experienced an operating loss
for
tax purposes. FuelMeister, our Predecessor, had historically experienced
operating losses, and as FuelMeister’s management were uncertain as to whether
FuelMeister would be able to utilize these tax losses before they expire, they
provided a reserve for the income tax benefits associated with FuelMeister’s net
future tax assets which primarily related to its cumulative net operating
losses. We have adopted the same policy to reserve such net tax assets until
such time profitability is reasonably assured and it becomes more likely than
not that we will be able to utilize such assets.
Net
Income
As
a
result of the above, we reported net income of $115,552 for the nine months
ended September 30, 2006.
GOING
CONCERN
Our
financial statements are prepared using accounting principles generally accepted
in the United States of America applicable to a going concern, which contemplate
the realization of assets and the liquidation of liabilities in the normal
course of business. Since inception, we have incurred losses from operations.
Furthermore, we will require a significant amount of capital to proceed with
our
business plan. As such, our ability to continue as a going concern is contingent
upon us being able to secure an adequate amount of debt or equity capital to
enable us to meet our operating cash requirements and successfully implement
our
business plan. In addition, our ability to continue as a going concern must
be
considered in light of the challenges, expenses and complications frequently
encountered by entrance into new markets and the competitive environment in
which we operate.
Our
Predecessor historically funded its cash requirements through operations and
contributions from the former owner. In connection with the acquisition of
the
FuelMeister Business and BSI, we obtained debt financing. We expect we will
need
to obtain additional funding through private or public equity and/or debt
financing to pay for the infrastructure needed to support our planned growth
but, as a public company, we believe we will have better access to additional
debt or equity capital.
There
can
be no assurance that our plans will materialize and/or that we will be
successful in raising required capital to grow our business and/or that any
such
capital will be available on terms acceptable to us. These factors, among
others, indicate that we may be unable to continue as a going concern for a
reasonable period of time. Our financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain.
Our
critical accounting policies are those where we have made the most difficult,
subjective or complex judgments in making estimates, and/or where these
estimates can significantly impact our financial results under different
assumptions and conditions. Our critical accounting policies are:
|
|
Allowance
for Doubtful Accounts
|
|
|
Derivative
Financial Instruments
|
Revenue
Recognition
In
accordance with Staff Accounting Bulletin 104 - Revenue Recognition in Financial
Statements (“SAB 104”), revenue is generally recognized and earned when all of
the following criteria are satisfied a) persuasive evidence of sales
arrangements exist; b) delivery has occurred; c) the sales price is fixed or
determinable, and d) collectibility is reasonably assured. It is the fourth
criterion that requires us to make significant estimates. In those cases where
all four criteria are not met, we defer recognition of revenue until the period
these criteria are satisfied. In some cases where collectibility is an issue,
we
defer revenue recognition until the cash is actually received.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is evaluated on a regular basis and adjusted
based upon management's best estimate of probable losses inherent in
receivables, based on historical experience, including the historical loss
experience of the Predecessor. Receivables are determined to be past due if
they
have not been paid by the payment due dates. Debts are written off against
the
allowance when deemed to be uncollectible. Subsequent recoveries, if any, are
credited to the allowance when received.
Derivative
Financial Instruments
In
connection with the sale of debt or equity instruments, we may sell options
or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as conversion options, which in certain circumstances may
be
required to be bifurcated from the associated host instrument and accounted
for
separately as a derivative instrument liability.
The
identification of, and accounting for, derivative instruments is complex. Any
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded
as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated conversion options that are accounted for
as
derivative instrument liabilities, we determine the fair value of these
instruments using the Cox-Ross-Rubinstein binomial option pricing model. That
model requires assumptions related to the remaining term of the instruments
and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life
of
the instruments. Because of the limited trading history for our common stock,
we
have estimated the future volatility of our common stock price based on not
only
the history of our stock price but also the experience of other entities
considered comparable to us. The identification of, and accounting for,
derivative instruments and the assumptions used to value them can significantly
affect our financial statements.
Product
Warranties
At
the
time a sale is recognized, the company records the estimated future warranty
costs. These costs are estimated based on historical warranty claims. For the
current period we used the historical warranty experience of the Predecessor
company. Warranty provisions are included as a component of cost of
sales.
Inventory
Obsolescence
We
evaluate our inventory for excess and obsolescence on a quarterly basis. In
preparing our evaluation, we look at the expected demand for our products for
the next six to twelve months in order to determine whether or not such raw
materials, WIP and finished goods require a change in the inventory reserve
in
order to record the inventory at net realizable value. After discussions with
the senior management team, a reserve is established so that inventory is
appropriately stated at the lower of cost or net realizable value.
RECENT
ACCOUNTING PRONOUNCEMENTS
Impact
of Recently Issued Accounting Pronouncements
-
The
Financial Accounting Standards Board has recently issued several Financial
Accounting Standards, as summarized below. None of these statements have had,
or
are expected to have, a significant effect on our financial statements or those
of our Predecessor.
Issued
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Statement
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February
2006
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FAS
155 - “Accounting for Certain Hybrid Financial Instruments; an amendment
of Financial Accounting Standard Nos. 133 and 140" (“FAS
155”)
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March
2006
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FAS
156 - “Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities”
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June
2006
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FAS
Interpretation 48 - "Accounting for Uncertainty in Income
Taxes"
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September
2006
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FAS
157 - “Fair Value Measurements”
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September
2006
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FAS
158 - “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)”
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February
2007
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FAS
159 - “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No.
115”
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LIQUIDITY
AND CAPITAL RESOURCES
Cash
and Cash Flows From Operations:
The
accompanying condensed consolidated financial statements have been prepared
assuming we will continue as a going concern. During the period from inception
on March 9, 2007 through September 30, 2007, we had a net loss of $10,530,791
which included non-cash items totaling $8,771,000, consisting primarily of
stock-based transaction expense, acquired in process R&D, and amortization
of deferred financing fees and intangible assets. Our existence is dependent
on
management’s ability to develop profitable operations and successful integration
of our acquired businesses.
Net
cash
used in investing activities was $962,521, of which $494,426 was used in the
acquisition of the assets of the FuelMeister Business, our Predecessor, $46,081
was used for fixed asset acquisitions, and $422,014 was used in the acquisition
of BSI.
Net
cash
provided by financing activities was $3,007,211 consisting of $1,118,109 of
proceeds from the sale of convertible debt, beneficial conversion
feature, and warrants to YA Global, less $450,000 of fees incurred,
issuance of warrants for $343,337, issuance if beneficial conversion
feature for $938,554, and $57,279 in proceeds from the sale of our common stock
to our founders. At September 30, 2007, our primary debt has terms of
approximately 21 months with interest rates ranging from 11% to 15%. All of
our
debt is convertible by the holder into shares of our common stock. Substantially
all of our debt has variable interest rates and, accordingly, a change in
interest rates will affect our results of operations. However, interest is
generally payable on maturity, rather than currently, and thus our cash flows
from operations would not be immediately impacted in the short-term by an
adverse change in interest rates.
Financing
Through Equity
On
March
09, 2007, founders stock and stock based transaction expenses were incurred
in
the amount of $57,279 and $5,131,231, respectively, as a result of the reverse
merger.
Financing
Through Convertible Debentures
New
Obligations
On
April
20, 2007, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with
YA
Global
providing for the sale by the Company to
YA
Global
of its
secured convertible debentures in the aggregate principal amount of $1,400,000
(the "New Debentures") of which $1,000,000 was advanced immediately. The second
instalment of $400,000 was funded on May 31, 2007, following clearance by the
Securities and Exchange Commission (the “SEC”) of an information statement
disclosing shareholder approval of the issuance of the Preferred Stock to the
former shareholders of Renewal Biodiesel.
The
New
Debentures bear interest at the prime rate plus 2.75% (but not less than 10%)
and mature on April 20, 2009 and May 31, 2009 (the "Maturity Dates"). The
Company is not required to make any payments until the Maturity Dates. The
holder of the New Debentures (the "Holder") may convert at any time principal
amounts outstanding under the New Debentures into shares of common stock of
the
Company at a conversion price per share equal to the lower of (a) $0.60 or
(b)
80% of the lowest closing bid price of the common stock during the ten trading
days immediately preceding the conversion date. The Company has the right to
redeem a portion or all amounts outstanding under the New Debentures prior
to
the Maturity Dates at a 15% redemption premium provided that (i) the closing
bid
price of the common stock is less than the fixed conversion price of the New
Debentures; (ii) the underlying shares are subject to an effective registration
statement; and (iii) no event of default has occurred and is continuing. The
New
Debentures contain standard anti-dilution adjustments for stock splits and
similar events. In the event that the Company sells or otherwise issues common
stock at a price below the current conversion price, the fixed conversion price
will be reduced to such lower price. If an Event of Default occurs, as defined
in the New Debentures, the holder may demand immediate repayment of all amounts
due under the New Debentures. In addition to non-payment of principal or
interest when due, defaults under other obligations and bankruptcy or similar
events, the Events of Default include a Change in Control of the Company, the
Company’s failure to file, achieve or maintain effectiveness of the required
registration statement (see below) if registration has been demanded by the
Holder of the New Debentures, and the failure to maintain the listing of the
Company’s common stock on a recognized exchange. Certain of these Events may
constitute derivative instruments. When the risks and rewards of such derivative
instruments are not clearly and closely related to the risks and rewards
associated with the New Debentures, the effect of these Events is considered
in
valuing any compound derivative instrument that may be bifurcated from the
New
Debentures.
The
obligations to YA Global, together with prior obligations to
YA
Global
described below, are secured by a security interest in the Company’s assets,
including its intellectual property. In addition, the Company pledged the shares
of Renewal Biodiesel to
YA
Global
as
additional security for the obligations to
YA
Global
.
Under
the
Purchase Agreement, the Company also issued to
YA
Global
five-year warrants to purchase 1,200,000 shares of common stock at an exercise
price of $0.15 per share. The warrants were valued at $238,932 using the
Cox-Ross-Rubenstein binomial model, based on the market price at the time they
were issued of $0.2265, estimated volatility of 123%, a risk free rate of 4.75%
and the five year life of the warrants.
In
connection with the Purchase Agreement, the Company also entered into a
registration rights agreement with
YA
Global
(the
"Registration Rights Agreement") providing for the filing of a registration
statement (the "Registration Statement") with the SEC registering the common
stock issuable upon conversion of the New Debentures and exercise of the
warrants. Upon written demand from the Holder, the Company is obligated to
file
a Registration Statement within 45 days of such demand and to use its best
efforts to cause the Registration Statement to be declared effective no later
than 150 days following receipt of such demand. The Company is also required
to
ensure that the Registration Statement remains in effect until all of the shares
of common stock issuable upon conversion of the New Debentures and exercise
of
the warrants have been sold or may be sold without volume restrictions pursuant
to Rule 144(k) promulgated by the SEC. In the event of a default of its
obligations under the Registration Rights Agreement, including its agreement
with respect to the filing and effectiveness dates for the Registration
Statement, the Company is required to pay to YA Global, as liquidated damages,
for each thirty day period that the Registration Statement has not been filed
or
declared effective, as the case may be, a cash amount equal to 2% of the face
amount of the Debentures, not to exceed 24%. As of November 14, 2007, no demand
for registration has been received by the Company.
On
July
2, 2007, the Company entered into an additional Securities Purchase Agreement
(the "Additional Purchase Agreement") with
YA
Global
providing for the sale by the Company to
YA
Global
of its
secured convertible debentures in the aggregate principal amount of $2,700,000
(the "Additional Debentures") of which $2,000,000 was advanced immediately.
The
second installment of $700,000 will be funded within two business days after
the
Company has unconditionally booked and received at least a 50% deposit for
the
sale of at least one BiodieselMaster® unit.
The
interest rate, repayment terms, conversion rights, conversion price,
anti-dilution provisions, redemption provisions, events of default and
registration requirements of the Additional Debentures are identical to those
of
the New Debentures described above, except that the fixed element of the
conversion price is $0.75, not $0.60.
The
obligations to YA Global, together with prior obligations to YA Global, are
secured by a security interest in the Company’s assets and the assets of its
subsidiaries, including their intellectual property. In addition, the Company
pledged the shares of BSI to
YA
Global
as
additional security for the obligations to
YA
Global
.
Under
the
Additional Purchase Agreement, the Company also issued to
YA
Global
five-year warrants to purchase 2,250,000 shares of common stock at an exercise
price of $0.90 per share. The warrants were valued at $1,104,405 using the
Cox-Ross-Rubenstein binomial model, based on the market price at the time they
were issued of $0.60, estimated volatility of 123%, a risk free rate of 4.90%
and the five year life of the warrants.
Prior
Obligations
On
April
20, 2007, as part of the net liabilities assumed on the reverse merger, the
Company assumed certain existing obligations to
YA
Global
and
other entities. These obligations included two existing 15% convertible
debenture obligations dated December 27, 2005 due to Montgomery Equity Partners,
Ltd, an affiliate of
YA
Global
(the
“Old Debentures”), in the face amounts of $537,220 and $300,000, together with
accrued interest at April 20, 2007 of $105,310 and $58,808, respectively. The
Old Debentures were due on December 27, 2006. In connection with one of these
Old Debentures, the Company previously issued warrants to purchase 6,666 shares
of common stock at an exercise price of $0.015 per share. As amended on May
31,
2007, the Old Debentures are convertible into shares of common stock at a
conversion price per share equal to the lesser of (a) $0.60 or (b) 80% of the
lowest closing bid price of the common stock during the ten trading days
immediately preceding the conversion date.
In
connection with these Old Debentures, the Company is obligated to file a
Registration Statement with the SEC, registering the shares issuable on
conversion of the Old Debentures and the Old Warrants. The Company has not
filed
the required registration statement (which was required to be filed by March
27,
2006 and effective by May 26, 2006). Under the terms of the Old Debentures,
the
Company is required to pay to YA Global, as liquidated damages, for each thirty
day period that the Registration Statement has not been filed or declared
effective, as the case may be, a cash amount equal to 2% of the face amount
of
the Old Debentures. The Company has received a letter from
YA
Global
waiving
all rights to collect any and all liquidated damages, whether in shares of
stock
or cash, arising from any default under any of the convertible debenture
agreements.
The
Company also assumed the remaining portions of a convertible promissory note
that was originally issued in 2000. A portion of the note is held by
YA
Global
and a
portion is held by entities associated with LH Financial. The notes are
convertible into shares of common stock at a conversion price per share equal
to
85% of the average of the five lowest closing bid prices of the common stock
during the 22 trading days immediately preceding the conversion date. During
the
period April 21, 2007 to September 30, 2007,
YA
Global
converted their entire principal amount of $168,000 plus all accrued interest
thereon of $61,000 into 574,807 common shares.
On
September 21, 2007,
YA
Global
converted $215,000 of the $537,220 principal amount of the Old Debentures held
by it into 1,343,750 shares of common stock at $0.16 per share (the lesser
of
$0.60 or 80% of the lowest closing bid price of the common stock during the
ten
trading days immediately preceding the conversion date, which was $0.20). These
shares were issued by the transfer agent on October 5, 2007. As of November
14,
2007 there have been no conversions of convertible debentures subsequent to
September 30, 2007.
Derivative
Instrument Liabilities and Beneficial Conversion Feature
In
accounting for the Convertible Debentures and the associated Warrants, the
Company has considered the requirements of
EITF
Issue 00-19, "Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled In, a Company's Own Common Stock".
Because
the number of shares that may be required to be issued on conversion of the
Convertible Debentures is dependent on the price of the Company’s common stock,
the number of shares ultimately required is indeterminate. However, full
conversion of the outstanding Convertible Debentures and exercise of outstanding
Warrants, together with currently outstanding common stock and all other
currently existing requirements to issue common stock, require the Company
to
have approximately 52 million common shares authorized. The Company is
authorized to issue 3 billion common shares. As a result, management of the
Company believes it will have sufficient authorized shares available to
physically settle all contracts that currently require delivery of common
shares. Furthermore, management of the Company, together with investors
associated with management, control a majority of the outstanding common shares
of the Company. Accordingly, management of the Company believes it is in a
position to secure shareholder approval of an increase in the authorized number
of shares, should such an increase be required in the future. As a result of
management’s conclusion that it will have sufficient authorized shares available
to settle all outstanding contracts requiring delivery of common shares, the
conversion option embedded in the Convertible Debentures has not been bifurcated
and the Warrants issued in connection with the Convertible Debentures have
been
accounted for as equity instruments.
The
Company has also reviewed the terms of the Convertible Debentures to determine
whether there are embedded derivative instruments, other than the conversion
option, that may be required to be bifurcated and accounted for separately
as
derivative instrument liabilities. Certain events of default associated with
the
Convertible Debentures, including failure to effect or maintain registration
when required, the failure to maintain the listing of the Company’s common stock
on a recognized exchange and similar events, have risks and rewards that are
not
clearly and closely associated with the risks and rewards of the debt
instruments in which they are embedded. However, events of default serve only
to
permit the holder to demand repayment and do not require the Company to pay
any
premium on default. Accordingly, these embedded derivative instruments are
considered to have minimal, if any, value.
If
the
conversion option embedded in the Convertible Debentures has not been
bifurcated, then the effective conversion price for a Convertible Debenture
is
less than the market value of the underlying shares at the time the debenture
is
issued (usually as a result of the allocation of part of the proceeds received
to common stock warrants or other instruments), the Company recognizes a
beneficial conversion feature in accordance with EITF Issues 98-05 and 00-27.
The value of the beneficial conversion feature, which is credited to additional
paid-in capital, reduces the initial carrying amount of the debenture. During
the period ended June 30, 2007 and the three months September 30, 2007, the
Company recorded beneficial conversion features aggregating $923,841 and
$348,287, respectively.
The
discount from the face amount of the Convertible Debentures represented by
the
value initially assigned to any associated Warrants and to any beneficial
conversion feature is amortized over the period to the due date of each
Convertible Debenture, using the effective interest method. Included in the
beneficial conversion feature of $923,841 recorded during the period ended
June
30, 2007 was $333,574 related to debentures assumed by the Company on the
reverse merger described above. Because those debentures are past due, the
discount from the face amount of the debentures was immediately expensed and
is
included in interest expense for the period.
For
warrants and option-based derivative instruments, the Company estimates fair
value using the Cox-Ross-Rubinstein binomial valuation model, based on the
market price of the common stock on the valuation date, an expected dividend
yield of 0%, a risk-free interest rate based on
constant
maturity rates published by the U.S. Federal Reserve applicable to the remaining
term of the instruments, (which rates ranged from 4.57% to 4.90%)
,
and an
expected life equal to the remaining term of the instruments.
Because
of the limited historical trading period of our common stock, the expected
volatility of our common stock over the remaining life of the conversion options
and Warrants was estimated at 123%, based on a review of the volatility of
entities considered by management as most comparable to our
business.
Investing
Acquisition
of Assets of FuelMeister Business
As
noted
above, on March 9, 2007, Crivello Group, LLC (“Crivello”) and its wholly-owned
subsidiary, Renewal Biodiesel, entered into an Asset Purchase Agreement with
Biodiesel Solutions, Inc. (“BSI”), which was effective March 30, 2007. Pursuant
to the Asset Purchase Agreement, BSI sold substantially all of the assets and
property of its FuelMeister operations (the “FuelMeister Business”, the
“Predecessor” or the “Predecessor Business”, an unrelated Company) to Renewal
Biodiesel, in exchange for an aggregate purchase price of $500,000, subject
to
adjustment. Under the terms of the Agreement, the purchase price was
subsequently adjusted to $494,426 to reflect the inventory on hand at
closing.
Acquisition
of BSI
As
noted
above, on July 2, 2007, we entered into a merger agreement with BSI, as a result
of which we acquired the remainder of BSI's business (i.e., other than the
FuelMeister Business acquired previously). BSI is engaged in the business of
designing, manufacturing and marketing processing equipment and accessories,
including personal biodiesel processors and “community scale” biodiesel
processor systems, which convert fresh and used vegetable oils into clean
burning biodiesel fuel. It complements and optimizes Renewal’s ability to
design, develop, manufacture and market both personal and community scale
biodiesel processing equipment and accessories.
OFF-BALANCE
SHEET ARRANGEMENTS
We
currently have no off balance sheet arrangements, other than the property leases
described in the footnotes to the financial statements.