Item
2.01
|
Completion
of Acquisition or Disposition of
Assets
|
Closing
of the Share Exchange
On
November
14,
2007,
we closed the transactions contemplated by the Share Exchange Agreement and
issued 45,000,000 shares of our Common Stock to the former security holders
of
Stratos in exchange for 999, or 99.9%, of the issued and outstanding shares
of
common stock of Stratos. Upon closing of the Share Exchange, we had 55,000,000
shares of Common Stock issued and outstanding as a result of the issuance of
45,000,000 shares of Common Stock to the former security holders of Stratos.
The
Share Exchange is deemed to be a reverse acquisition for accounting purposes.
Stratos, the acquired entity, is regarded as the predecessor entity as of
November 14, 2007.
Effective
as of the closing of the Share Exchange, Kenneth P. Laurent, our former Chief
Executive Officer, President and sole director, and Todd Laurent, our former
Secretary and Treasurer, resigned from all of their positions with the Company
and the following persons were appointed as our officers and
directors:
Name
|
|
Position
|
Carlos
Antonio Salas
|
|
Chief
Executive Officer and Director
|
Luis
Humberto Goyzueta
|
|
President
and Director
|
Jorge
Eduardo Aza
|
|
Chief
Operating Officer
|
Julio
Cesar Alonso
|
|
Chief
Financial Officer and Treasurer
|
Gustavo
Goyzueta
|
|
Secretary
|
Steven
Magami
|
|
Chairman
of the Board
|
Luis
Francisco de las Casas
|
|
Director
|
Additional
information concerning our officers and directors is set forth
below.
Closing
of the Private Placement
Immediately
following the Share Exchange, we completed the Private Placement and issued
an
aggregate of 2,666,794 shares of Common Stock and warrants to purchase an
aggregate of 1,333,396 shares of Common Stock. The aggregate gross proceeds
raised by us in connection with the Private Placement was approximately $1.9
million. Each share of Common Stock was sold to investors at $0.70 per share.
The warrants expire five (5) years from the date of issuance and are exercisable
at $.75 per share, subject to adjustment in certain circumstances.
Closing
of the Series A Private Placement
Immediately
following the Share Exchange, we completed the Series A Private Placement and
issued to MA Green 7,142,857 shares of Series A Preferred Stock and warrants
to
purchase 1,785,714 shares of Common Stock. The gross proceeds raised by us
in
connection with the Series A Private Placement was $5.0 million. Each share
of
Series A Preferred Stock was sold at $0.70 per share. The warrants expire five
(5) years from the date of issuance and are exercisable at $.75 per share,
subject to adjustment in certain circumstances. Our Chairman of the Board of
Directors, Steven Magami, is the manager of MA Green.
Closing
of the Bridge Financing
Immediately
following the Share Exchange, we completed the Bridge Financing and issued
an
aggregate of approximately $3.0 million in convertible promissory notes and
warrants to purchase an aggregate of 870,858 shares of Common Stock. The
aggregate gross proceeds raised by us in connection with the Bridge Financing
was approximately $3.0 million. The warrants will expire three (3) years from
the date of issuance and are exercisable at $.75 per share, subject to
adjustment in certain circumstances.
Summary
of Closing of Financings
The
Share
Exchange, Private Placement, Series A Private Placement and the Bridge Financing
were conducted in reliance upon exemptions from the registration provisions
of
the Securities Act of 1933, as amended (the “Securities Act”), set forth in
Section 4(2), Regulation D and/or Regulation S of the Securities Act and the
rules and regulations promulgated thereunder.
Upon
completion of the Share Exchange and after giving effect to the Private
Placement, the Series A Private Placement and the Bridge Financing, the
ownership of NDCI was approximately as follows (excluding, (i) the shares of
Common Stock underlying the warrants issued to the investors in the Private
Placement, (ii) the shares of Common Stock underlying the warrant issued to
the
investor in the Series A Private Placement, (iii) the shares of Common Stock
underlying the outstanding convertible promissory notes issued to the bridge
note holders in connection with the Bridge Financing, and (iv) the shares of
Common Stock underlying the Bridge Warrants issued to the bridge note holders
in
connection with the Bridge Financing):
|
|
Percentage of
|
|
|
|
Ownership(1)
|
|
|
|
|
|
Old
NDCI Stockholders
|
|
|
15.4%
|
|
Former
Stratos Stockholders
|
|
|
69.4%
|
|
Private
Placement Investors
|
|
|
4.1%
|
|
Series
A Private Placement Investor
|
|
|
11.0%
|
|
(1)
Based
on 64,809,651 shares of capital stock issued and outstanding (assuming all
7,142,857 shares of Series A Preferred Stock are converted into Common Stock
on
a 1:1 basis).
The
Share
Exchange, Private Placement, Series A Private Placement and the Bridge Financing
are more fully described in Item 1.01 above, which disclosures are incorporated
herein by reference. A copy of the press release announcing the closing of
the
Share Exchange and completion of the Private Placement, Series A Private
Placement and the Bridge Financing is attached hereto as Exhibit
99.3.
BUSINESS
Corporate
History and Overview
Business
Prior to the Share Exchange
NDCI
was
incorporated in Nevada on September 9, 2005. Prior to the closing of the Share
Exchange, we were a
non-operating public shell that previously was attempting to establish a base
of
operations in the custom cabinetry and furniture industry as a builder of
specialty, custom designed cabinets and wine racks. From inception to the
closing of the Share Exchange, we had limited operations and generated a total
of $61,900 in revenues from the sale of wine rack “kits” and the oversight of
various construction activities.
Business
Subsequent to the Share Exchange
Stratos
is a Peruvian corporation that was incorporated on February 27, 2007. To date,
Stratos has had limited operations. Upon consummation of the Share Exchange,
we
commenced executing the business plan of Stratos, which involves the production,
processing and distribution of sugarcane ethanol in Peru. Ethanol is a renewable
energy source that provides significant economic and environmental benefits
when
mixed with gasoline and used as motor fuel.
Our
Business Plan Following the Share Exchange
Upon
consummation of the Share Exchange, we commenced our business plan to develop
ethanol and sugar products in Peru through the cultivation, harvesting and
processing of sugarcane in low cost growing locations.
Our
business plan consists of two phases. Phase I will primarily be focused on
establishing
our initial ethanol production facilities and infrastructure. Phase II will
primarily
be
focused on expanding our operations in strategic locations.
Phase
I
Phase
I
of our initial business plan is comprised of five components:
|
·
|
Mill
and distillery acquisition, expansion and
modification;
|
|
·
|
Conducting
feasibility studies and generating a business plan for Phase
II.
|
Mill
and distillery acquisition, expansion and modification
On
October 18, 2007, Stratos entered into an asset purchase agreement, pursuant
to
which Stratos acquired certain assets and rights relating to the Estrella del
Norte sugar mill located in the province of Chepen, Peru. Stratos paid a total
of approximately $4.5 million plus a value added tax of 19% to acquire the
mill.
The foregoing description does not purport to be a complete statement of the
parties’ rights and obligations under the asset purchase agreement. The
above description is qualified in its entirety by reference to the asset
purchase agreement and the amendment thereto and the escrow agreement entered
into in connection with the transaction, and the amendment thereto, copies
of
which can are included as Exhibits 10.1, 10.2, 10.3 and 10.4,
respectively, to this Current Report on Form 8-K and are incorporated
herein by reference.
We
plan
to relocate the mill and to acquire and install a distillery unit to adjoin
the
mill for the production of ethanol. Additionally, we plan to upgrade the mill’s
capacity to crush sugarcane from 500 tons of sugarcane a day to 700 tons of
sugarcane a day. We estimate that we will need a total of $3.5 million in
investment and working capital to expand the mill, acquire the distillery and
conduct operations at the mill and distillery through the fourth quarter of
2008.
After
modifying and expanding the Estrella del Norte facilities, we plan to use 50%
of
its capacity to produce raw sugar to be sold in the local wholesale markets,
and
50% of its capacity to produce an estimated 12.9 million liters of ethanol
a
year. We expect that approximately 22% of our total revenues generated by the
facilities will come from the sale of raw sugar and 82% of our revenues will
come from the sale of ethanol. In total, once the expansion and modification
of
the facilities is complete, we project that our annual expenses from operation
will be approximately $8.4 million and our annual revenues will be approximately
$11.2 million.
Seedling
production
The
second component of Phase I will be to establish a high quality seedling
production
program
to supply our planned intensive planting program scheduled to commence during
Phase
II of
our business strategy. We intend to lease a 500 hectare plot of land in the
Piura Region,
which
we
believe is an ideal location with respect to its climate and surrounding
environment, to
establish a sugarcane seedling nursery. We estimate that the total costs of
our
seedling production program will be approximately $7.0 million through the
fourth quarter of 2008.
Compost
Production
In
addition to establishing a seedling production program in Phase I, we also
intend to implement an organic fertilizer production program to support our
planned intensive planting program scheduled to commence during Phase II. We
anticipate that our compost production program will begin in the second quarter
of 2008.
We
estimate that the total costs of our compost production program will be
approximately $7.0 million through the fourth quarter of 2008.
Land
Sourcing
The
fourth component of Phase I will be to acquire and secure options to acquire
land for sugarcane production
from
three potential sources: small and medium private land lots; peasant community
land lots; and state owned land lots. The most important factors in locating
land suitable for sugarcane production are water supply, soil composition,
climate, distance from the mill and access to roads and other services. We
estimate that the total costs in connection with land sourcing will be
approximately $20.0 million.
Conducting
feasibility studies and generating a business plan for Phase
II
The
final
component of Phase I will initially involve hiring a consultant to conduct
a
feasibility study based on the information provided by our land sourcing
efforts. The study will focus on generating cost estimates and designs based
on
analyzing the climactic, water, soil, topography and irrigation characteristics
of the properties identified by our land sourcing team. Following the completion
of the feasibility study, we will create a comprehensive business plan for
Phase
II consisting of an overview of the industry, a market analysis, competitive
analysis, marketing plan, management plan and financial plan. We estimate that
the total costs in connection with conducting the feasibility study and
generating the business plan will be approximately $2.0 million.
Our
goal
is to have all of the components of Phase I completed by late 2008 so that
we
can begin executing Phase II by the end of 2008. We estimate that the total
cost
of Phase I will be approximately $50.0 million.
Phase
II
Phase
II
of our business plan will consist of our expansion in four strategic locations
along the northern Peruvian coast and the cultivation of our own sugarcane
supplies to be used for production. In connection with Phase II, we anticipate
raising and investing up to an additional $420.0 million in order to obtain
the
rights to an additional 49,000 hectares of land suitable for growing sugarcane,
and acquire and operate a total of four mills with attached ethanol
distilleries, with expandable capacities. By the end of 2014, it is our goal
to
able to process a total of 22,000 tons of sugarcane per day and produce
approximately 581 million liters of anhydrous ethanol annually.
We
expect
to initiate Phase II during the fourth quarter of 2008 and acquire the land
we
will use for production incrementally over a five year period. The mill and
distilleries we plan to establish in Phase II will be located in regions that
we
have selected based on extensive research of agroclimatic conditions, basic
services, logistic supplies and the social environment in the surrounding areas.
We plan to establish the four locations in two stages.
Stage
One – Chepen and Morrope
During
the first stage, we plan to acquire 6,000 hectares of land around the Chepen
Valley and 22,500 hectares of land in Morrope. We estimate that the total cost
for stage one will be approximately $230.0 million, consisting of $80.0 million
in costs related to field installation and the development of an infrastructure,
and $150.0 million in costs related to the construction of production
facilities. We plan to fund the costs of stage one from $55.0 million of equity
financing and $175.0 million of project debt financing.
Stage
Two – Casma and Chulucanas
During
stage two, which we expect will begin in 2009, we plan to acquire 6,500 hectares
of land in Casma and 14,000 hectares of land in Chulucanas. We estimate that
the
total cost for stage two will be approximately $190.0 million, consisting of
$60.0 million in costs related to field installation and the development of
an
infrastructure, and $130.0 million in costs related to the construction of
production facilities. We plan to fund the costs of stage two from $45.0 million
of cash generated from operations and $145.0 million of project debt
financing.
Ethanol
Overview
Ethanol,
or ethyl alcohol, is a clear, colorless and flammable organic chemical compound
that can be used as a source of “clean” and renewable energy when blended with
gasoline. Ethanol causes gasoline to burn more thoroughly, thereby improving
combustion and reducing the amount of tailpipe carbon monoxide emissions. The
amount of harmful exhaust emissions that are produced when gasoline is burned
is
inversely related to the amount of ethanol that is blended in the gasoline.
Thus, as the proportional content of ethanol in a gasoline blend is increased,
the relative amount of harmful exhaust emissions that is produced when the
gasoline is burned decreases.
Ethanol
blends can be used in almost all gasoline engines without costly modifications.
Ethanol is dispensed in service stations worldwide (5% content ethanol blends
in
the European Union (“EU”) and 10% ethanol content blends in the United States)
with almost no reported incompatibility with vehicles that have unmodified
conventional engines.
The
use
of ethanol has been reported to have numerous significant long-term
environmental benefits, including the following:
|
·
|
Ethanol
is a renewable fuel made from
plants;
|
|
·
|
Ethanol
is not a fossil-fuel, and therefore, burning it does not increase
the
greenhouse effect;
|
|
·
|
Ethanol
can be used to increase octane at low cost as an alternative to harmful
fuel additives;
|
|
·
|
As
an octane enhancer, ethanol is reported to reduce emissions of
cancer-causing benzene and
butadiene;
|
|
·
|
Ethanol
is biodegradable without harmful effects on the
environment;
|
|
·
|
Ethanol’s
high oxygen content reduces carbon monoxide levels more than any
other
oxygenate, by up to 25-30%, according to the U.S. Environmental Protection
Agency;
|
|
·
|
Ethanol
is reported to reduce net carbon dioxide
emissions;
|
|
·
|
Ethanol
blends are reported to reduce emissions of hydrocarbons, a large
contributor to the depletion of the ozone
layer;
|
|
·
|
High-level
ethanol blends are reported to reduce nitrogen oxide
emissions;
|
|
·
|
High-level
ethanol blends are reported to reduce emissions of volatile organic
compounds, or VOC’s, a major sources of ground-level ozone formation;
and
|
|
·
|
Sulphur
dioxide and particulate matter emissions decrease through the use
of
ethanol.
|
Ethanol
can be produced from a variety of raw materials, or feedstocks, and processes.
There are two general types of ethanol, synthetic ethanol, which is derived
from
crude oil or gas and coal, and bioethanol, which is distilled from grains,
molasses, fruit, cellulose, sugarcane juice and from numerous other natural
sources. Regardless of the production process, synthetic ethanol and bioethanol
are chemically identical.
Ethanol
as a gasoline
additive
Oxygen
causes gasoline to burn more completely. Ethanol, when added to gasoline, serves
as an oxygenate that improves fuel combustion and reduces tailpipe emissions.
Because ethanol contains 35% oxygen,
it
requires approximately twice the amount of the fuel additive MTBE (
methyl
tertiary-
butyl
ether) to achieve the
same
oxygenation as ethanol. Thus, gasoline blended with ethanol produces fewer
emissions than gasoline blended with MTBE. Additionally, since it was discovered
that MTBE contributes to groundwater contamination, MTBE has been phased out
in
17 states in the United States, thereby increasing the demand for alternative
means of increasing octane levels. Blending high octane content ethanol with
lower grade gasoline can increase the overall octane rating of gasoline,
allowing it to be sold as a higher octane premium blend.
Blending
ethanol with gasoline also increases the volume of available fuel and may help
to alleviate potential shortages of refined products. A new oil refinery has
not
been built in the United States in the past 30 years and with gasoline demand
forecasted to increase by 1.5% per annum from the current volume of
approximately 140 billion gallons per year, we believe that the United States
will become increasingly dependent on not only crude oil imports, but
also
on
imports of refined petroleum products (e.g., gasoline, to meet domestic
consumption
needs).
The use of ethanol may help to reduce the need to import both crude oil and
refined petroleum products.
The
Ethanol Market
Demand
World
consumption of fuel ethanol reached 41.9 billion liters in 2006.
Graph
1: Historical World Ethanol Consumption, 1998-2005
(Billion
liters)
By
2030,
the consumption of fuel ethanol is projected to reach 272 billion liters,
resulting in the displacement of 10% of the forecasted demand of gasoline
consumption (displacement of 191 billion liters as compared to an estimated
consumption of 1,924 billion liters).
Graph
2: Estimated Consumption of Fuel Ethanol, 2006-2030
The
interest in biofuels has increased primarily due to environmental, geo-political
and economic factors, including initiatives by countries to develop new markets
for agricultural products. The increase in demand for ethanol largely has been
driven by tax incentives and blending mandates, which are regulatory directives
requiring a minimum level of ethanol content in gasoline. Blending mandates
allow governments to bring biofuels into the market without providing subsidies
or tax credits for ethanol use.
Table
1: Regulatory Mandates will spur Ethanol Demand
Brazil
|
|
Gasoline
required to include 20-25% ethanol
|
Peru
|
|
Until
2010, up to 7.8% of gasoline must be ethanol
|
U.S.
|
|
Government
energy policies will create a market for approximately 7 billion
gallons
of renewable fuel by 2012
|
Canada
|
|
Until
2010, up to 7.5% of gasoline must be ethanol
|
EU
|
|
2%
of fuel must be renewable, increasing to 5.75% by 2010
|
China
|
|
Five
districts require the addition of 10% ethanol to
gasoline
|
Japan
|
|
Requires
gasoline to be 3% ethanol, increasing to 10% by
2010
|
Source:
Food and Agricultural Policy Research Institute, 2007.
In
2005
and 2006, several countries increased biofuel usage targets and mandates. By
the
end of 2006, biofuel blending mandates existed at the national level in ten
countries and at the regional and state level in four countries. Countries
with
mandates at the national level include Brazil, Peru, Colombia, Germany, France,
Malaysia, Philippines, Thailand, the United States (under the Federal Renewable
Fuel Standard) and the Dominican Republic. Countries with regional mandates
include India (nine states plus four federal territories), China (nine provinces
and certain cities), Canada (the provinces of Saskatchewan and Ontario) and
the
United States (Hawaii, Minnesota, Montana, Washington and
Wisconsin).
In
the
short to mid-term future, we believe that worldwide fuel ethanol consumption
will increase as a result of additional blending mandates prompted by the
rapidly growing fleet of flexible fuel vehicles, which are vehicles that can
efficiently use different sources of
fuel.
Projections of
fuel
ethanol use are summarized in Table 2 below (Table 2 includes two alternative
scenarios
for the
United States, based upon estimated targets of, respectively, 55.3 and 227
billion liters, by 2030).
Table
2: Targets/Estimates on Fuel Ethanol Consumption
Country/
Region
|
|
Value/when
|
|
Comment
|
U.S.
|
|
27
billion liters by 2012
|
|
Target
of 28.4 billion liters of biofuels defined by the Energy Policy
Act
|
|
|
55.3
billion liters by 2030
|
|
Estimated
by U.S. DOE (EIA, 2006)
|
|
|
227
billion liters by 2030
|
|
Possible
mandate by 2030
|
|
|
|
|
|
EU
|
|
2.5%
by 2010
|
|
Estimate
|
|
|
17.5%
by 2020
|
|
EU
target defined in January 2007
|
|
|
20.0%
by 2030
|
|
Estimate
|
|
|
|
|
|
Japan
|
|
10%
1
2015 onwards
|
|
Estimate
|
|
|
|
|
|
China
|
|
2.5
billion liters by 2010
|
|
Production
targets on fuel ethanol
|
|
|
12.6
billion liters by 2020
|
|
Production
targets on fuel ethanol
|
|
|
10%
1
by
2020
|
|
Target
defined by the Chinese government
|
|
|
|
|
|
Rest
of World
|
|
1%
2
by
2010, 10%
1
by
2020
|
|
Estimate
|
Source:
FO Licht
’
s,
World
Ethanol & Biofuels Report, 2006
1
10%
ethanol blending mandate
2
1%
ethanol blending mandate
Supply
In
2006,
world production of fuel ethanol reached 33 billion liters,
representing
approximately
70% of worlds total ethanol production. The United States is now the
world’s
largest
producer of fuel ethanol, surpassing Brazil, which historically has dominated
fuel ethanol production.
Graph
3: Historic Ethanol Production in Brazil, EU and the U.S.
(1975-2006)
Source:
F.O. Licht
’
s
World
Ethanol and Biofuels Report
The
primary feedstocks which are used for fuel ethanol production
vary
from country to country. Brazil produces fuel ethanol primarily from sugarcane,
the United States and China use corn as the primary feedstock, and in India,
ethanol is produced mainly from molasses (a co-product in the manufacturing
sugar industry).
Graph
4: Estimated Fuel Ethanol Production Capacity
(conventional
technologies)
Source:
F.O. Licht
’
s
World
Ethanol and Biofuels Report
World
net
trade in ethanol increased by 46.1% in 2006 over 2005, followed by a decline
in
2007 of 32.3%. As demand for ethanol increases in the future, world net trade
is
expected to increase 26.4% to reach nearly 1.3 billion gallons by 2016. However,
as there is a clear trend of countries becoming self sufficient in the ethanol
markets, world export
growth
rates are expected to decrease even though supply and demand growth rates
continue to increase
.
The
main
exporters of fuel ethanol in 2006 were Brazil (33.9%) and South
Africa
(10%).
Graph
5: Ethanol Main Exporters -2006
Source:
Food and Agriculture Policy Research Institute, 2007
The
main
importers in 2006 were the EU (39.2%) and the United States
(18.5%).
Graph
6: Ethanol Main Importers - 2006
Source:
Food and Agriculture Policy Research Institute, 2007.
Market
analysts forecast that world net imports will decrease by 2016 by approximately
52% as a result of production capacity growing more rapidly than
demand.
Ethanol
Prices
Typically,
ethanol is sold under six to twelve month contracts between ethanol producers
and petroleum companies.
Although
many of these contracts are fixed price, some of the contracts are pegged to
a
gasoline benchmark. To a lesser extent, ethanol is also sold on the spot market,
where prices fluctuate daily according to market conditions.
The
average world price for ethanol increased approximately 22.5% in 2006, to $1.80
per gallon. As the growth in ethanol production outpaces the growth in
consumption, the average price of ethanol is forecasted to begin a downward
trend to reach $1.35 per gallon by 2016. However, the accuracy of such forecasts
is questionable, considering the fact that although the average price of ethanol
was projected to be $1.50 per gallon throughout 2007, the average price in
2007
has remained as high as $1.80 per gallon.
Graph
7: Ethanol Historical Prices, 1984-2006
(US$
per
Gallon)
Source:
Food and Agriculture Policy Research Institute
While
ethanol prices stabilized in early 2006, the recent decline in ethanol prices
(United States average rack price was $2.32 per gallon on December 6, 2006,
42%
below the $3.98 peak on July 3, 2006, but 37% above the $1.69 price on October
3, 2006) has sparked concern in the industry of market overcapitalization in
infrastructure investments as new plant sites are being built nearby competitive
projects. Given that ethanol prices rebounded approximately 37% from October
to
December 2006, we do not believe that excess supply will cause ethanol prices
to
experience steep reductions. However, we expect that ethanol prices will
continue to be subjected to downward pressures going forward with the current
rate of capacity expansion.
Table
3: Ethanol Estimated Prices, 2007-2016
(US$
per
Gallon)
Year
|
|
World Ethanol Price
(Brazilian Anhydrous Price)
|
2007
|
|
1.50
|
2008
|
|
1.57
|
2009
|
|
1.55
|
2010
|
|
1.50
|
2011
|
|
1.47
|
2012
|
|
1.43
|
2013
|
|
1.40
|
2014
|
|
1.38
|
2015
|
|
1.36
|
2016
|
|
1.35
|
Source:
Food and Agriculture Policy Research Institute.
The
price
of ethanol is a function that is driven, in large part, by the price of
gasoline, plus or minus a premium reflecting ethanol’s own surplus or deficit to
required demand. The average ethanol premium to gasoline over the past five
years has been minimal (after adjusting for applicable tax credits in the United
States). We believe that the current premium for ethanol is a function of the
strong demand of ethanol, which will likely dissipate over the next twelve
to
eighteen months, and turn into a discount to gasoline during the capacity
expansion period in order to secure off-take of the product.
Over
the
past five years, the average United States ethanol premium to wholesale gasoline
averaged $0.43 per gallon. During this period, United States ethanol consumption
rose from 2.1 billion
gallons
a
year to 5.4 billion gallons a year, primarily due to the decreased use of MTBE
as an
additive
and also because of increasingly stringent environment requirements. As noted
in
Table 4 below, ethanol is expected to trade at an estimated $0.25 tax-adjusted
discount to gasoline beginning in 2008, reflecting the anticipated surplus
of
ethanol production over ethanol’s natural demand as a finishing
agent.
Table
4: Ethanol Rack Prices, 2005-2010
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Implied
wholesale gasoline $/gal
|
|
|
1.63
|
|
|
1.86
|
|
|
1.77
|
|
|
1.73
|
|
|
1.70
|
|
|
1.70
|
|
Blending
tax credit $/gal
|
|
|
0.51
|
|
|
0.51
|
|
|
0.51
|
|
|
0.51
|
|
|
0.51
|
|
|
0.51
|
|
Ethanol
premium/(discount) $/gal
|
|
|
(0.33
|
)
|
|
0.15
|
|
|
(0.09
|
)
|
|
(0.25
|
)
|
|
(0.22
|
)
|
|
(0.33
|
)
|
Rack
price of ethanol $/gal
|
|
|
1.80
|
|
|
2.52
|
|
|
2.20
|
|
|
1.98
|
|
|
1.99
|
|
|
1.88
|
|
Rack
price of ethanol $/litre
|
|
|
0.47
|
|
|
0.66
|
|
|
0.66
|
|
|
0.52
|
|
|
0.53
|
|
|
0.50
|
|
In
addition, there is a strong correlation between fossil oil, sugar and the
ethanol markets. The prices of oil, ethanol and sugar are characterized by
complex interactions, which can result in significant sugar price volatility.
Increases in oil prices contribute to make ethanol more competitive against
gasoline. If increases in oil prices are strong enough to drive ethanol
production up, then more sugarcane resources will be shifted away from sugar
production, which will become scarcer and more valuable.
The
Ethanol Industry
Bioethanol
is part of the
“
modem
biomass
”
based
sources of energy, which have a less severe impact on the environment than
conventional gasoline or other petroleum derived
additives.
Moreover, s
ugarcane
ethanol has been promoted as having an industrial positive net energy balance,
which means that the energy contained in a ton of sugarcane ethanol is greater
than the energy required to produce it.
There
are
a number of factors that determine the economic viability of ethanol production,
including
the
choice of raw material feedstock, land availability, socioeconomic frameworks,
consumer trends and new technology.
Feedstock
Feedstock
accounts for 70 to 80% of overall ethanol production
costs.
Feedstock costs are a function of land availability and field production costs,
crop
productivity, fermentable sugars/sucrose content (in case of sugar crops) and
industrial conversion ratios.
Currently,
approximately 61% of the world’s ethanol supply is being produced from sugar
crops, primarily from sugar beets, sugarcane and molasses, while the remainder
is produced from grains, primarily maize or corn. Although there are several
different metrics which can be used to analyze the choice of feedstock, we
believe that the lowest gross feedstock costs, per liter of fuel ethanol
produced, are currently achieved by sugarcane grown in the central and southern
regions of Brazil. Due to the geography, climate and other conditions in Peru,
we believe that Peru will be able to surpass the yields achieved in Brazil
at
lower gross
feedstock
costs.
Profitable
feedstock production is also dependent, in part, upon obtaining a reliable
permanent
source
of raw material. Most of the profitable sugar based ethanol businesses worldwide
are based on integrated plantation models that are able to provide feedstock
at
half the market price demanded from third party growers.
Graph
8: Ethanol Production Costs without Subsidies
Source:
O. Henniges and J. Zeddies, in F.O. Licht
’
s
World
Ethanol and Biofuels Report, Vol. 3, No. II
Land
availability
Land
is
the primary competitive factor in the sugarcane based ethanol business.
Agricultural feedstocks for the ethanol industry must compete for land with
crop
production for other purposes, such as for food and animal feed, and supplies
are likely to be limited. Furthermore, locations with climatic conditions that
are suitable to grow sugarcane are scarce.
Socioeconomic
frameworks
One
of
the key drivers of biofuel development throughout the world has been the
increase in rural economic development opportunities that biofuel production
facilitates.
Compared to other sources of energy, the production of ethanol is more
labor
intensive, thus, creating more jobs. It has been estimated that, in Brazil,
2,333 jobs are created for every one million tons of sugarcane harvested (which
produces 80 million liters of ethanol). Further, sugar based ethanol production
also provides an opportunity for countries that have existing sugar industries
to produce a higher value-added product, ethanol, rather than relying
exclusively on the volatile sugar commodity market.
Consumer
trends
The
International Energy Agency has estimated that recent policy initiatives, if
fully implemented, could result in biofuels (mainly ethanol) displacing up
to 5%
of the worldwide motor gasoline use by 2010. In OECD (Organization for Economic
Co-operation and Development) regions, most of this production would likely
be
from conventional ethanol produced from grain feedstocks, such as corn and
wheat. While ethanol produced from grain feedstocks can provide important
benefits, production costs using corn and wheat are generally high and
reductions in fossil energy use and CO2 emissions are modest. Ethanol production
in the southern hemisphere (Brazil and Peru) primarily utilizes sugar crops,
which are more efficient in reducing greenhouse gas emissions.
Graph
9: Biofuel Cost per Ton GHG Reduction
New
technologies
The
increasing use and demand for ethanol is also an incentive to promote advances
in biotechnology, particularly in the biomass-to-ethanol sector. New
technologies in sugarcane production, such as precision agriculture, energy
efficient irrigation systems, genetically modified seeds and integrated
harvesting
and transport systems, could be adopted to lower sugarcane and sugar beet
production
costs.
In addition, advanced processing technologies, such as increased use of
industrial automation, new separation processes, higher sucrose recovery and
higher fermentation productivity, could be adopted to lower the processing
costs
of converting sugarcane into ethanol.
The
Ethanol Production Process
Technologically,
the process of producing ethanol from sugar is simpler than converting corn
into
ethanol. Converting corn into ethanol requires additional cooking and the
application of enzymes, whereas the conversion of sugar primarily requires
only
a yeast fermentation process and the removal of water. The energy requirement
for converting sugar into ethanol is about half that for corn.
The
sugarcane ethanol production process begins with cultivating and harvesting
sugarcane at a cane field. The cane is then processed at a sugar mill, where
the
cane stalks are
shredded
and crushed to extract the cane juice. The byproducts of the juice extraction
process are
cane
molasses and bagasse. Sugarcane molasses is used in the production of alcohol
beverages, fuel alcohol and for direct human consumption. Bagasse can be used
to
produce steam and generate electricity within the plant. Excess electricity
produced can be sold to utility grids.
After
sugarcane juice is extracted at the mill, it is then transformed into alcohol
at
a distillery through a fermentation
process
using yeasts as the catalyst. The fermentation process takes four to twelve
hours and generates a significant amount of CO2 and heat. Fermentation can
be
conducted in batch or continuously, using open or closed fermentation tanks.
Cooling is applied to maintain the resulting fermented wine mixture. Much of
the
CO2 that is generated during the fermentation process can be captured and
converted into marketable products, such as dry ice, liquid CO2 for soft drinks,
fire-fighting foams, filtration products and various industrial
uses.
After
fermentation, the ethanol is distilled from other byproducts, resulting in
a
level of
purity
of
approximately 95%. This mixture is often referred to as “hydrous ethanol”
because it contains 5%
water.
Hydrous ethanol can be commercially used, but cannot be blended with gasoline.
An additional reactant, such as cyclohexane, is needed in order to dehydrate
the
ethanol, by forming a tertiary azeotropic mixture with water and alcohol.
Anhydrous ethanol is nearly 100% pure and can be blended with
gasoline.
Sugarcane
is bulky and relatively expensive to transport and must be processed as soon
as
possible
to minimize sucrose deterioration. In order to save costs, ethanol is often
produced near a sugarcane field at a sugarcane mill with an adjoining distillery
plant.
Governmental
Regulation
Our
business is subject to extensive and frequently
changing
governmental
laws
and
regulations
.
These
laws may impact our
existing
and
proposed
business
operations
by
imposing
:
|
·
|
Restrictions
on our existing and proposed business operations and the need
to
install enhanced or additional
controls;
|
|
·
|
The
need to obtain and comply with permits and
authorizations;
|
|
·
|
Liability
for exceeding applicable permit limits or legal requirements;
and
|
|
·
|
Specifications
for the ethanol we market and
produce.
|
Some
of
the governmental regulations that affect us are helpful to our
ethanol
production business. The ethanol fuel industry is greatly dependent upon tax
policies and environmental regulations that favor the use of ethanol in motor
fuel blends. At the end of 2006, thirteen countries had ethanol blending
mandates at the federal or regional level, requiring that gasoline contain
a
minimum percentage of ethanol content. In the near future, blending mandates
are
expected to be implemented by additional countries and increased by those
countries that currently impose blending mandates.
Environmental
Compliance
The
cost
of compliance with environmental and safety regulations in Peru is relatively
insignificant. Our proposed facilities will not produce any effluents or have
any smoke stacks. With regards to safety, all equipment must be fire proof
and
explosion proof. In addition, modern fire suppression systems must be installed
in order to be eligible for insurance and to protect the safety of all
employees.
Distribution
On
September 19, 2007, Stratos entered into a five year agreement with Petrox
S.A.C., a Peruvian fuel distributor, to
sell
10,000 gallons of ethanol per day at a fixed price of $2.00 per gallon.
Customers
We
anticipate that our major customers will be HERCO, PECSA and Ocean
Marine.
Research
and Development
Our
research and development expenditures will be focused primarily on the efficient
production of
sugarcane
based fuel ethanol. During Phase I of our business plan, we expect to incur
significant costs in
implementing
our seedling and compost programs and identifying and analyzing land sources
for
sugarcane
production. We anticipate incurring approximately $34.0 million in connection
with these
activities through the fourth quarter of 2008.
Intellectual
Property
We
do not
have any patents, trademarks, service marks, trade names, copyrights or other
intellectual property rights, other than name reservations reserving the name
“Stratos Renewables Corporation” in the States of Delaware and Nevada and common
law trademark rights to such corporate name. In the near future, we anticipate
making certain trademark filings in the United States and in Peru. W
e
do
not
believe that any segment
of our
business are dependent upon any single or group of intellectual
properties.
Competition
We
face
significant competition in the motor fuel and ethanol industries.
Competition in these markets is based principally on price, quality, government
regulations and consumer trends. Many of our competitors have longer operating
histories and significantly more resources than we do.
Suppliers
During
Phase I, we will purchase 100% of the sugarcane to be used at the Estrella
del
Norte mill and distillery from third party growers. During Phase II, we expect
to grow and cultivate 90% of the sugarcane needed for production..
Employees
As
of
November 14, 2007, we have a workforce of approximately ten employees,
consisting of eight full-time and two part-time employees.
Additional
Information
We
are a
public company and file annual, quarterly and special reports and other
information with the SEC. We are not required to, and do not intend to, deliver
an annual report to security holders. You may read and copy any document we
file
at the SEC’s public reference room at 100 F Street, N.E.,
Washington,
D.C. 20549. You can request copies of these documents by writing to the
SEC
and
paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for
more information about the operation of the public reference room. Our filings
are also available, at no charge, to the public at
http://www.sec.gov
.
RISK
FACTORS
In
addition to other information in this Current Report, the following risk factors
should be carefully considered in evaluating our business because such factors
may have a significant impact on our business, operating results, liquidity
and
financial condition. As a result of the risk factors set forth below, actual
results could differ materially from those projected in any forward looking
statements. Additional risks and uncertainties not presently known to us, or
that we currently consider to be immaterial, may also impact our business,
operating results, liquidity and financial condition. If any such risks occur,
our business, operating results, liquidity and financial condition could be
materially affected in an adverse manner. Under such circumstances, you may
lose
all or part of your investment.
Risks
Related to our Business
Stratos
has no operating history on which to base an evaluation of its
business.
Stratos
is a recently incorporated development stage company with no operating results
to date. As Stratos has no operating history, it is difficult to evaluate its
financial performance as of the date of this Current Report. Initially, we
anticipate that we will incur increased operating costs without realizing any
revenues until the expansion and modification of the Estrella del Norte sugar
mill, including the addition of a distillery unit, is complete. In addition,
in
the near future, we will start our seedling production program, compost
production program and land sourcing program. We anticipate that a total of
$50.0 million will be required during Phase I, which is expected to be completed
by the fourth quarter of 2008. There can be no assurance that we will be able
to
complete the expansion or modification of the mill or any of the programs of
Phase I by the fourth quarter of 2008, if ever. The failure to timely complete
the components of Phase I would materially and adversely affect our ability
to
achieve any revenues.
Additionally,
we will need up to an additional $420.0 million in order to complete Phase
II of
our operations, which is expected to begin in the fourth quarter of 2008 and
continue through 2014. There can be no assurance that we will be able to raise
the additional funds we need to complete Phase II or that we will be able to
begin any of the component programs of Phase II on a timely basis, if ever.
The
failure to raise these additional funds or to timely commence and complete
Phase
II would materially adversely affect our business, results of operations and
financial condition.
The
fact that Stratos has not earned any revenues since inception raises substantial
doubt about our ability to continue as a going
concern.
Stratos
has not generated any revenues since its inception and we will continue to
incur
operating expenses without generating revenues until the expansion and
modification of the Estrella del Norte facilities is completed. As a result,
we
may need to obtain additional financing in order to develop and continue
operations. There can be no assurance that we will be able to obtain the
financing we require, or obtain such financing on terms that are commercially
viable for us. These circumstances raise substantial doubt about our ability
to
continue as a going concern.
Additionally,
we may incur significant losses for the foreseeable future. We recognize that
if
we are unable to generate significant revenues from the Estrella del Norte
facilities, we will not be able to earn profits or continue operations. Upon
consummation of the Share Exchange, we also expect to face the risks,
uncertainties, expenses and difficulties frequently encountered by companies
at
the start up stage of their business development. There is no assurance that
we
will be successful in addressing these risks and uncertainties. Our failure
to
do so could have a materially adverse effect on our financial condition. There
is no history upon which to base any assumption as to the likelihood that we
will prove successful and we can provide investors with no assurance that we
will generate any operating revenues or ever achieve profitable
operations.
We
will require a significant amount of additional funding to execute our business
plan. Additional funding may not be available, or if available, it may not
be
offered to us on agreeable terms.
We
will
require a significant amount of additional capital in the future to sufficiently
fund our operations. We may not be able to obtain additional capital on terms
favorable to us or at all. We expect to increase our operating expenses over
the
coming years. We estimate that Phase I of our business plan, which is currently
in effect, will cost a total of approximately $50.0 million. Furthermore, we
estimate that will need up to an additional $420.0 million to fund our expansion
during the course of Phase II of our operations, which is set to commence during
the fourth quarter of 2008 and continue for five years thereafter.
Financing
may not be available on terms acceptable to us or our investors, and may be
available only on terms that would negatively affect the existing stockholders.
If adequate funds are not available, we likely will not be successful in
executing our business plan as anticipated and, as a result, we may be forced
to
cease operations and liquidate, in which case investors may not be able to
receive any return of their invested capital.
We
cannot
be certain that additional financing will not be needed beyond our current
and
projected needs or will be available when required and, if available, that
it
will be on terms satisfactory to us. Future financings may be dilutive to
existing stockholders. If we are unable to generate sufficient cash flow and
are
otherwise unable to obtain funds necessary to meet our funding requirements,
this would adversely affect our anticipated results of operations and financial
condition
Our
future growth is dependent upon developing successful relationships with
existing sugarcane growers and establishing our own sugarcane supplies. If
we
are unable to develop and maintain such relationships or develop our own
supplies, our future business prospects could be significantly
limited.
Our
future growth will be dependent initially on our ability to establish reliable
sources of sugarcane for the operation of the Estrella del Norte sugar mill,
and
going forward, on our ability to develop our own supplies of sugarcane. We
must
be successful in establishing sugarcane supply relationships with local growers
and there is no assurance that we will be able to enter into such relationships
for sufficient amounts of sugarcane. Additionally, we must be successful in
establishing seedling, compost and land sourcing programs in order to allow
us
to develop a consistent, reliable and cost-effective long-term supply of
sugarcane. The failure to either establish or develop supply relationships
for
sugarcane with local growers or to establish successful seedling, compost and
land sourcing programs may materially adversely affect our business, results
of
operations and financial condition.
There
are risks associated with conducting our business operations in Peru, including
political and social unrest.
Most
of
our operations, including the Estrella del Norte facilities, along with the
land
we propose to acquire on which to grow our sugarcane supplies, are located
in
Peru. Although we believe that conducting operations in Peru will provide us
with significant competitive advantages, we will also be subject to risks not
typically associated with ownership of United States companies, and therefore,
should be considered more speculative than investments in the United States.
Peru is a developing country that has experienced political, social and economic
difficulties over the last several years. Our operations could be affected
in
varying degrees by political instability, social unrest and changes in
government regulation relating to foreign investment and the biofuel industry.
Operations may also be affected in varying degrees by possible terrorism,
military conflict, crime, fluctuations in currency rates and high inflation.
In
addition, Peru has, from time to time in the past, nationalized private
businesses. There can be no assurance that the Peruvian government will not
nationalize our business and our assets in the future. Our operations could
be
adversely affected by continued political, social and economic unrest in
Peru.
We
depend on key service providers for assistance and expertise and any failure
or
loss of these relationships could delay our operations, increase our expenses
and hinder our success.
We
must
establish and maintain relationships with several key providers for contracting,
consulting and other services. Initially, we will need to secure contracts
for
labor and materials in relation to the expansion and modification of the
Estrella del Norte facilities. Upon completion of the expansion and modification
of the Estrella del Norte facilities, we will need to secure transportation
and
utility services, ensure that we are in environmental compliance, obtain
required permits, contract for sugarcane supplies and, eventually, market our
bioethanol. If we should fail to maintain our relationship with any of these
key
providers, or if any of these providers should fail to perform, we would be
forced to locate and retain alternative providers. As a consequence, due to
the
critical nature of these services, the commencement, and continuation, of our
operations could be very seriously delayed, our start-up expenses could be
significantly increased and our business could be greatly harmed, even to the
point of failure of our Company.
There
are several agreements and relationships that remain to be negotiated, executed
and implemented which will have a critical impact on our operations, expenses
and profitability.
There
are
several agreements, documents and relationships that remain to be negotiated,
executed and implemented before we can commence operations. In some cases,
the
parties with whom we would need to establish a relationship have yet to be
identified. Examples include agreements for equity financing, an executed
contract to acquire and install the distillery unit and agreements with numerous
consultants. Our expectations regarding the likely terms of these agreements
and
relationships could vary greatly from the terms of any agreement or relationship
that may eventually be executed or established. If we are unable to enter into
these agreements or relationships on satisfactory terms, or if revisions or
amendments to existing terms become necessary, the consummation of the expansion
and modification of the Estrella del Norte facilities and the commencement
of
our operations could be delayed. As a result, our expenses could increase,
our
profitability could be adversely affected and the value of your investment
could
decline.
The
cost of the expansion and modification of the Estrella del Norte facilities
could increase and, if an increase occurs, we may not have the resources to
complete the expansion and modification of the facilities.
Our
preliminary budget contemplates that the expansion and modification of the
Estrella del Norte facilities will cost approximately $9.0 million. Our
financial plan is based on this estimated cost, plus the cost of other site
improvements, capital expenditures, start-up and development costs and reserves
estimated to be approximately $41.0 million, resulting in total estimated
remaining capital requirements during Phase I of $50.0 million. If the cost
to
expand and modify the Estrella del Norte facilities or other costs increase
due
to economic factors, design modifications, construction delays or cost overruns,
the total cost of our project and the capital required could increase, perhaps
significantly. In such an event, our profitability and ultimately the financial
condition of our Company will be adversely affected.
Delays
due to weather, labor or material shortages, permitting or zoning delays, or
opposition from local groups, may hinder our ability to timely commence
operations.
Our
construction timetable, which we believe to be reasonable, assumes the
commencement of the expansion and modification of the Estrella del Norte
facilities in November 2007 and startup of operations in the fourth quarter
of
2008. Our schedule depends upon several assumptions, many of which, are beyond
our control. We could incur delays in the acquisition and installation of the
distillery unit due to permitting, adverse weather conditions, labor or material
shortages, defects in materials or workmanship or other causes. In addition,
the
availability of financing, changes in interest rates or the credit environment
or changes in political administrations at the federal, provincial or municipal
level that result in policy changes towards biofuel or our facilities could
result in delays in our timetable for construction and commencement of
operations. Any such delays will adversely affect our ability to commence
operations and generate revenue.
Defects
in the construction or performance of our ethanol production facilities could
result in a reduction in our revenues and profitability and in the value of
your
investment in our Company.
We
anticipate that the distillery unit will come with warranties with respect
to
materials and workmanship and assurances that the facilities will operate at
design capacity. However, defects in the construction or performance of the
facilities could occur and there is no assurance that we will be able to correct
any problems that do in fact occur. If our facilities do not perform at or
above
design specifications, we may not be able compete in a competitive marketplace.
If defects delay the construction or hinder the operations of the facilities,
our operations, revenues, profitability and the value of your investment in
our
Company could be materially adversely affected. If defects require a lengthy
or
permanent discontinuance of production, your investment could be reduced to
very
little or no value.
Our
business is subject to comprehensive government regulation and any change in
such regulation may have a material adverse effect on our
Company.
There
is
no assurance that the laws, regulations, policies or current administrative
practices of any government body, organization or regulatory agency in Peru
or
any other jurisdiction, will not be changed, applied or interpreted in a manner
which will fundamentally alter the ability of our Company to carry on our
business. The actions, policies or regulations, or changes thereto, of any
government body or regulatory agency, or other special interest groups, may
have
a detrimental effect on our Company. Any or all of these situations may have
a
negative impact on our operations.
Risks
Related to our Company
We
plan to grow very rapidly, which will place strains on our management team
and
other company resources.
We
plan
to grow and expand our operations at a rapid pace. This growth will place a
significant strain on our management systems and resources. We will not be
able
to implement our business strategy in a rapidly evolving market without
effective planning and management processes. We have a short operating history
and have not implemented sophisticated managerial, operational and financial
systems and controls. We will be required to manage multiple relationships
with
various strategic partners, including suppliers, distributors, and other third
parties. In order to manage the expected growth of our operations and personnel,
we will be required to significantly improve or replace existing managerial,
financial and operational systems, procedures and controls, and to expand,
train
and manage our growing employee base. We will be required to expand our finance,
administrative and operations staff. We may be unable to complete, in a timely
manner, the improvements to our systems, procedures and controls necessary
to
support our future operations, management may be unable to hire, train, retain,
motivate and manage required personnel and our management may be unable to
successfully identify, manage and exploit existing and potential market
opportunities. As a result, our business and financial condition may be
adversely affected.
Our
ability to hire and retain key personnel will be an important factor in the
success of our business and a failure to hire and retain key personnel may
result in our inability to manage and implement our business plan.
We
are
highly dependent upon our management personnel such as Carlos Antonio Salas
and
Luis Humberto Goyzueta because of their experience in the alternative energy
industry and specifically with bioethanol and related products. The loss of
the
services of one or more of these individuals may impair management's ability
to
operate our Company. We do not anticipate purchasing key man insurance for
any
of our management or employees, which insurance would provide us with insurance
proceeds in the event of their death. Without key man insurance, we may not
have
the financial resources to develop or maintain our business until we could
replace the individual or to replace any business lost by the death of that
person. The competition for qualified personnel in the markets in which we
operate is intense. In addition, in order to manage growth effectively, we
must
implement management systems and recruit and train new employees. We may not
be
able to attract and retain the necessary qualified personnel. If we are unable
to retain or to hire qualified personnel as required, we may not be able to
adequately manage and implement our business.
The
past activities of NDCI prior to the Share Exchange, may lead to future
liability for the combined companies.
Prior
to
the Share Exchange, we were engaged in businesses and were managed by parties
unrelated to that of our current operations. Any liabilities relating to such
prior business, including any liabilities arising out of our limited residential
construction operations, may have a material adverse effect on us.
If
our internal control over financial reporting and disclosure controls and
procedures are not effective, we cannot provide reliable financial
information.
Prior
to
the Share Exchange, Stratos, as a private company, had not been required to
maintain disclosure controls and procedures or internal control over financial
reporting, which is required for public companies by the United States
securities laws. Further, although NDCI, as a public company, has been subject
to such securities laws, our disclosure controls and procedures have been deemed
to be ineffective and a material weakness was identified with respect to our
internal control over financial reporting. These deficiencies consisted
primarily of inadequate staffing and supervision that could lead to the untimely
identification and resolution of accounting and disclosure matters and failure
to perform
timely
and effective reviews. Going forward, we expect to fully comply with the
requirements to maintain effective disclosure controls and procedures and
internal control over financial reporting. However, c
ompliance
with these obligations requires significant time and resources from our
management and our finance and accounting staff and will significantly increase
our legal, insurance and financial compliance costs. As a result of the
increased costs associated with being a public company, our operating income
as
a percentage of revenue is likely to be lower. If we discover additional
deficiencies in the future, we will make efforts to remediate these
deficiencies, however, there can be no assurance that we will be successful
either in identifying deficiencies or in their remediation. Any failure to
maintain effective controls or procedures in the future could adversely affect
our business or cause us to fail to meet our reporting obligations. Such
noncompliance could also result in an adverse reaction in the financial
marketplace due to a loss of investor confidence in the reliability of our
financial statements. In addition, perceptions of our business among customers,
suppliers, rating agencies, lenders, investors, securities analysts and others
could be adversely affected. If we fail to maintain effective internal control
over financial reporting and disclosure controls and procedures in the future,
we may not be able to accurately report our financial results, which could
have
an adverse effect on our business.
Most
of our assets, directors and officers are located outside the United States,
with the result being that it may be difficult for investors to enforce within
the United States any judgments obtained against us or any of our directors
or
officers.
Although
we are organized under the laws of the State of Nevada, our principal business
is located in Peru. Outside the United States, it may be difficult for investors
to enforce judgments against us that are obtained in the United States in any
action, including actions predicated upon civil liability provisions of federal
securities laws. In addition, all of our directors and officers, except for
Steven Magami, reside outside the United States, and nearly all of the assets
of
these persons and our assets are located outside of the United States. As a
result, it may not be possible for investors to effect service of process within
the United States upon such persons or to enforce against us or such persons
judgments predicated upon the liability provisions of United States securities
laws. There is substantial doubt as to the enforceability against us or any
of
our directors and officers located outside the United States in original actions
or in actions of enforcement of judgments of United States courts or liabilities
predicated on the civil liability provisions of United States federal securities
laws. In addition, as the majority of our assets are located outside of the
United States, it may be difficult to enforce United States bankruptcy
proceedings against us. Under bankruptcy laws in the United States, courts
typically have jurisdiction over a debtor's property, wherever it is located,
including property situated in other countries. Courts outside of the United
States may not recognize the United States bankruptcy court's jurisdiction.
Accordingly, you may have trouble administering a United States bankruptcy
case
involving a Nevada company as debtor with most of its property located outside
the United States. Any orders or judgments of a bankruptcy court obtained by
you
in the United States may not be enforceable.
If
we are unable to protect our proprietary rights or if we become subject to
claims of infringement relating to the proprietary rights of others, we may
not
be able to compete effectively.
Our
success is dependent in part on obtaining, maintaining and enforcing our
proprietary rights and our ability to avoid claims of infringement relating
to
the proprietary rights of others. While we anticipate taking precautionary
steps
to protect our
intellectual
property
,
we may
not be successful in completely protecting such rights. In addition, certain
of
our intellectual properties may not be qualified for protection under United
States or other laws and others may independently develop substantially
equivalent information and techniques or otherwise gain access to or disclose
our intellectual properties. If we are unable to protect our proprietary rights,
we may lose our competitive advantage. Additionally, if a third party asserts
that our products, processes, trademarks or other intellectual properties have
infringed upon their intellectual property, we could incur substantial
litigation costs defending against such claims, be required to pay royalties,
license fees or other damages or be barred from using the products, processes,
trademarks or intellectual property at issue, any of which could have a material
adverse effect on our business, operating results and financial
condition.
If
we suffer a loss to our facilities that is not adequately insured, our
operations could be seriously harmed.
Our
facilities are subject to catastrophic loss due to fire, flood, terrorism or
other natural or man-made disasters. In particular, our facilities could be
subject to a catastrophic loss caused by earthquake due to their location in
Peru, which has recently experienced high levels of seismic activity. Although
we intend to carry insurance for property damage and business interruption,
our
facilities and our business is not insured at this point in time. Furthermore,
if we obtain insurance in the future, it may not be adequate to cover potential
catastrophic losses. If any of our facilities were to experience a catastrophic
loss that is not adequately insured, it could disrupt our operations, delay
production, result in large expenses to repair or replace the facility or cause
us to discontinue operations indefinitely.
Risks
Related to the Biofuel Industry
Our
business could be significantly and adversely impacted by changes in government
regulations over energy policy.
Our
operations and properties may become subject to a wide variety of federal,
provincial and municipal laws and regulations, including those governing the
use, storage, handling, generation, treatment, emission release, discharge
and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees.
As
such, the nature of our operations may expose us to the risk of claims with
respect to such matters and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Environmental
legislation may also provide for standards, restrictions and prohibitions on
the
handling of certain types of waste and for releases, spills, emissions into
the
environment of substances that are being handled by our Company. Any breach
by
us of such legislation may result in the suspension or revocation of necessary
licenses, permits or authorizations, civil liability and the imposition of
fines
and penalties which would adversely affect our financial condition.
Our
business is not diversified because we are primarily dependent upon one product.
As a consequence, we may not be able to adapt to changing market conditions
or
endure any decline in the biofuel industry.
Our
business consists primarily of bioethanol and sugar production and sales. We
do
not have any other lines of business or other sources of revenue to rely upon
if
we are unable to produce and sell bioethanol and sugar, or if the market for
such products declines. Although the Estrella del Norte sugar mill will have
the
ability to process sugar cane, the distillery unit will not have the ability
to
produce any other products. Our lack of diversification means that we may not
be
able to adapt to changing market conditions or to withstand any significant
decline in the bioethanol industry.
An
increase in the price for sugarcane supplies and/or a decrease in market prices
for biofuel could result in a significant reduction in our revenues and
profitability.
Our
financial results will greatly depend on prices for our sugarcane supplies
and
market prices for the bioethanol that we produce.
Sugarcane
supplies, which will comprise a major portion of our operating expenses, do
not
have a direct price relationship to the price of bioethanol in the marketplace.
For an operating bioethanol plant, falling bioethanol prices, coupled with
a
rise in sugarcane prices, can result in significant reductions in cash flow
and
reduced profitability. These prices will change based on available supplies,
the
supply and market prices for alternative products and other market factors.
For
instance, increased supplies of bioethanol or alternative fuels may lead to
lower prices for bioethanol, regardless of the price of sugarcane. In addition,
increased production of bioethanol could result in increased demand for
sugarcane, resulting in higher operating costs and lower profitability. There
can be no assurance as to the price of these commodities in the future, and
any
increase in sugarcane prices or decrease in the price of bioethanol would
adversely affect our financial condition.
Our
projected operating costs could be significantly higher than we expect due
to
the nature of our industry and our limited operating history, resulting in
a
reduction of our income and any distributions we may make.
In
addition to general economic conditions, market fluctuations and commodity
prices, significant increases in operating costs could adversely affect us
due
to numerous factors, many of which are beyond our control. These increases
could
arise for several reasons, such as:
|
·
|
Higher
prices for sugarcane;
|
|
·
|
Increased
costs for natural gas, electricity, water and other
utilities;
|
|
·
|
Higher
transportation costs for sugarcane supplies and for our bioethanol
products due to
rising
fuel costs and greater demands on truck and rail transportation services;
and
|
|
·
|
Rising
labor costs, particularly if any labor shortage should
occur.
|
Our
operations also subject us to ongoing compliance with applicable governmental
regulations, such as those governing pollution control, occupational safety
and
other matters. We may have difficulty complying with these regulations and
our
compliance costs could increase significantly. Increases in operating costs
would have a negative impact on our operating income, and could result in
substantially decreased earnings or a loss from our operations, adversely
affecting our financial condition.
The
market price of bioethanol has followed the price of petroleum and decreases
in
the price of petroleum-based fuels would very likely decrease the price of
bioethanol, resulting in reductions in our revenues.
Historically,
bioethanol prices have generally paralleled movements in petroleum prices.
Petroleum prices in the international market have been difficult to forecast
due
to the impact of wars and other political factors, economic uncertainties,
exchange rates and natural disasters. Just as a small reduction in the real
or
anticipated supply of crude oil can have a significant upward impact on the
price of petroleum-based fuels, a perceived reduction of such threats can result
in a significant reduction in petroleum fuel prices. A reduction in
petroleum-based fuel prices could have a significantly adverse effect on our
revenues and profits.
The
bioethanol and biofuel industry is becoming more competitive and as a result,
we
may not be able to achieve profitability.
Competition
in the bioethanol and biofuel industry is growing more intense as more
production facilities are built and the industry expands. Our business will
face
competitive challenges from larger facilities that can produce a wider range
and
larger quantity of products than we can, and from other plants similar to our
proposed bioethanol production facilities. Many of these bioethanol and other
biofuel producers will compete with us for sugarcane and/or customers in our
regional market. We expect that additional bioethanol and other biofuel
producers will enter the market if the regulatory environment remains favorable
and the demand for bioethanol and other biofuels continues to increase.
As
more bioethanol and other biofuel facilities are built, bioethanol and other
biofuel production will increase and, if demand does not sufficiently increase,
this could result in lower prices for bioethanol and other biofuels, which
will
decrease the amount of revenue we generate.
A
significant number of bioethanol and other biofuel
plants
are currently being planned and built in Peru and around the world. As a
consequence, bioethanol and other biofuel
production
is expected to increase rapidly in the next two to three years. The demand
for
bioethanol and other biofuels
is
dependent upon numerous factors such as governmental regulations and incentives
and the development of other technologies or products that may compete with
bioethanol. If the demand for bioethanol and other biofuels
does
not
sufficiently increase, then increased bioethanol and other biofuels production
may lead to lower bioethanol prices. Decreases in the market price of bioethanol
will result in lower revenues, decreased profitability, and adversely affect
our
financial condition.
Technological
advances and changes in production methods in the bioethanol and biofuel
industry could render our production facilities obsolete and adversely affect
our ability to compete and the value of your investment.
Technological
advances could significantly decrease the cost of producing bioethanol and
other
biofuels. If we are unable to adopt or incorporate technological advances into
our operations, our proposed production facilities could become uncompetitive
or
obsolete. We expect that technological advances in bioethanol and biofuel
production methods will continue to occur. If improved technologies become
available to our competitors, they may be able to produce bioethanol at a lower
cost than us. In such an event, we may be required to acquire new technology
and
retrofit our production facilities so that we remain competitive. There is
no
assurance that third-party licenses for any new technologies would be available
on commercially reasonable terms or that any new technologies could be
incorporated into our proposed production facilities. The costs of upgrading
our
technology and production facilities could be substantial. If we are unable
to
obtain, implement or finance new technologies, our production facilities could
be uncompetitive and our operating income would be reduced.
The
development of alternative fuels and energy sources may reduce the demand for
bioethanol, resulting in a reduction in our profitability.
Alternative
fuels are continually under development. Petroleum based fuels, other biofuels
and other energy sources that can compete with bioethanol in the marketplace
are
already in use and more acceptable alternatives may be developed in the future,
which may decrease the demand for bioethanol or the type of bioethanol that
we
expect to produce. Technological advances in engine and exhaust system design
and performance could also reduce the use of biofuels, which would reduce the
demand for bioethanol. Further advances in power generation technologies, based
on cleaner hydrocarbon based fuels, fuel cells and hydrogen are actively being
researched and developed. If these technological advances and alternatives
prove
to be economically feasible, environmentally superior and accepted in the
marketplace, the market for bioethanol could be significantly diminished or
replaced, which would adversely affect our financial condition.
Competition
for qualified personnel in the bioethanol industry is intense and we may not
be
able to hire and retain qualified managers, engineers and operators to operate
our plant efficiently.
When
the
expansion and modification of the Estrella del Norte facilities nears
completion, we will need a significant number of employees to operate the
facilities. Our success depends in part on our ability to attract and retain
competent personnel. We must hire or otherwise engage qualified managers,
engineers and accounting, human resources, operations and other personnel.
Competition for employees in the bioethanol industry is intense. If we are
unable to hire, train and retain qualified and productive personnel, we may
not
be able to operate the plant efficiently and the amount of bioethanol we produce
and market may decrease.
Compliance
with new and existing environmental laws and regulations could significantly
increase our construction and start-up costs, and force us to delay or halt
construction or operation.
To
expand, modify and operate the Estrella del Norte facilities, we may need to
obtain and comply with a number of permitting requirements. We may have
difficulties obtaining the permits we need. As a condition of granting necessary
permits, regulators could make additional demands that increase our costs of
construction and operations, in which case we could be forced to obtain
additional capital. We cannot assure you that we will be able to obtain and
comply with all necessary permits to construct and operate our proposed
production facilities as planned.
Risks
Related to our Capital Stock
Our
Common Stock is illiquid and the value of our Common Stock may be negatively
impacted by factors which are unrelated to our
operations
.
Although
our Common Stock has been approved for quoting
on
the
Over The Counter Bulletin Board under the symbol “NDSG,” no public market for
our Common Stock has been established yet.
There
is
no assurance that a sufficient market will develop in our Common Stock, in
which
case it could be difficult or impossible for stockholders to sell their stock.
In addition, even if a public market does develop for our Common Stock, the
market price of our Common Stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of our competitors, trading volume in our
Common Stock, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. The stock market
in general is also subject to extreme price and volume fluctuations. This
volatility has had a significant effect on the market price of securities issued
by many companies for reasons unrelated to their operating performance and
could
have the same effect on our Common Stock.
If
we issue additional shares in the future, it will result in dilution to our
existing stockholders.
Our
Board
of Directors may choose to issue additional shares of our capital stock in
the
future to acquire one or more businesses or to provide additional financing.
In
addition, the holders of our convertible promissory notes, Series A Preferred
Stock and warrants have the right to convert their securities into shares of
our
Common Stock. The issuance of additional securities will result in a reduction
of the book value and market price of the outstanding shares of our Common
Stock. If we issue any such additional shares, such issuance will cause a
reduction in the proportionate ownership and voting power of all current
stockholders. Further, such issuance may result in a change of control of our
corporation.
Our
Series A Preferred contains rights, preferences and privileges that are senior
to our Common Stock, which could negatively impact our common
stockholders.
We
have
an aggregate of 7,142852 shares of Series A Preferred Stock issued and
outstanding and may issue additional shares of Series A Preferred Stock in
the
future. Our Series A Preferred Stock contains certain rights that are senior
to
the rights of our Common Stock, including, but not limited to, liquidation,
anti-dilution, conversion, voting and registration rights. Furthermore, the
holders of our Series A Preferred Stock
could
delay, defer or prevent us from effecting a change in control in the future,
which in turn, could have a depressive effect on the prevailing market price
of
our Common Stock.
SELECTED
CONSOLIDATED FINANCIAL DATA
You
should read the summary consolidated financial data set forth below in
conjunction with the section entitled “Management’s Discussion and Analysis of
Financial Condition or Plan of Operations” and our predecessor’s financial
statements and the related notes included elsewhere in this Current Report.
We
derived the financial data for the period from February 27, 2007 (inception)
to
October 18, 2007 and as of October 18, 2007 from the predecessor’s financial
statements included in this Current Report. The historical results are not
necessarily indicative of the results to be expected for any future
period.
|
|
From February
27, 2007
(inception) to
October 18,
2007
|
|
Revenue
|
|
|
-
|
|
Cost
of Revenue
|
|
|
-
|
|
Total
Operating Expenses
|
|
$
|
2,003
|
|
Net
Loss
|
|
$
|
(2,003
|
)
|
Loss
Per Share - Basic and Diluted
|
|
$
|
(2.00
|
)
|
Weighted
Average Shares Outstanding
|
|
|
1,000
|
|
|
|
As of October 18,
2007
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
Total
Current Assets
|
|
$
|
331
|
|
VAT
Receivable
|
|
$
|
859,363
|
|
Machinery
and Equipment, net
|
|
$
|
4,522,965
|
|
Total
Assets
|
|
$
|
5,382,659
|
|
Total
Current Liabilities
|
|
$
|
5,384,404
|
|
Total
Shareholders’ Deficit
|
|
$
|
(1,745
|
)
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Overview
You
should read the following discussion of our financial condition and results
of
operations together with the audited financial statements and the notes to
the
audited financial statements included in this current report on Form 8-K. This
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results may differ materially from those anticipated
in
these forward-looking statements.
We
are
engaged in the business of producing, processing and distributing sugarcane
ethanol in Peru. Ethanol is a renewable energy source that provides significant
economic and environmental benefits when mixed with gasoline and used as motor
fuel.
On
November 14, 2007, we completed a share exchange agreement with Stratos. As
a
result of the Share Exchange, we abandoned our previous cabinetry and furniture
business and commenced the business of producing, processing and distributing
sugarcane ethanol. Because we are the successor business to Stratos and because
the operations and assets of Stratos represents our entire business and
operations from the closing date of the Share Exchange, our management's
discussion and analysis and plan of operations are based on Stratos’ intended
operations.
We
have
not generated any revenue since the commencement of our operations on February
27, 2007.
Critical
Accounting Policies and Estimates
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of the financial statements 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, including those related to
revenue recognition, recoverability of intangible assets, and contingencies
and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as
to
the appropriate carrying value of certain assets and liabilities which are
not
readily apparent from other sources, primarily the valuation of our fixed assets
and the recoverability of our VAT receivable. The methods, estimates and
judgments we use in applying these most critical accounting policies have a
significant impact on the results we report in our financial
statements.
Impairment
of long-lived assets
We
follow
the guidance of Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which
addresses financial accounting and reporting for the impairment or disposal
of
long-lived assets. We periodically evaluate the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded 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. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on our
review, we believe that, as of October 18, 2007 there were no significant
impairments of long-lived assets.
Plan
of Operations
Overview
This
current report contains forward-looking statements that involve significant
risks and uncertainties. The following discussion, which focuses on our plan
of
operation through the commencement of operations of our plant, consists almost
entirely of forward-looking information and statements. Actual events or results
may differ materially from those indicated or anticipated, as discussed in
the
section entitled “Forward Looking Statements.” This may occur as a result of
many factors, including those set forth in the section entitled “Risk
Factors.”
Upon
consummation of the Share Exchange, we commenced our business plan to develop
ethanol and sugar products through the cultivation, harvesting and processing
of
sugarcane in low cost growing locations. From a strategic value perspective,
our
management believes a geographic focus in Peru will be a key component in
achieving our goals.
Our
business plan consists of two phases. Phase I will primarily be focused on
establishing
our initial ethanol production facilities and infrastructure for future
expansion. Phase II will primarily
be
focused on expansion activities in strategic locations.
Phase
I
Phase
I
of our initial business plan is comprised of five components:
|
·
|
Mill
and distillery acquisition, expansion and
modification;
|
|
·
|
Conducting
feasibility studies and generating a business plan for Phase
II.
|
We
anticipate that a total of $50.0 million will be required during Phase I, which
is expected to be completed by the fourth quarter of 2008. The break down is
as
follows:
Description
|
|
Amount
|
|
Estrella
del Norte sugar mill acquisition
|
|
$
|
5,500,000
|
|
Mill
and distillery expansion and modification
|
|
|
3,500,000
|
|
Seedling
production
|
|
|
7,000,000
|
|
Compost
production
|
|
|
7,000,000
|
|
Land
sourcing
|
|
|
20,000,000
|
|
Conducting
feasibility studies and develop plan for Phase II
|
|
|
2,000,000
|
|
Operations
|
|
|
5,000,000
|
|
Total
|
|
$
|
50,000,000
|
|
Phase
II
Phase
II
of our business plan will consist of our expansion in four strategic locations
along the northern Peruvian coast and the cultivation of our own sugarcane
supplies to be used for production. In connection with Phase II, we anticipate
raising and investing up to an additional $420.0 million in order to obtain
the
rights to an additional 49,000 hectares of land suitable for growing sugarcane,
and acquire and operate a total of four mills with attached ethanol
distilleries, with expandable capacities. By the end of 2014, it is our goal
to
able to process a total of 22,000 tons of sugarcane per day and produce
approximately 581 million liters of anhydrous ethanol annually.
We
expect
to initiate Phase II during the fourth quarter of 2008 and acquire the land
we
will use for production incrementally over a five year period. The mill and
distilleries we plan to establish in Phase II will be located in regions we
have
selected based on our extensive research of agroclimatic conditions, basic
services, logistic supplies and social environment. We plan to establish the
four locations in two stages.
Stage
One – Chepen and Morrope
During
the first stage, which will begin in the fourth quarter of 2008, we plan to
acquire 6,000 hectares of land around Chepen valley and 22,500 hectares of
land
in Morrope. We estimate that the total cost for stage one will be approximately
$230.0 million, consisting of $80.0 million in costs related to field
installation and the development of an infrastructure, and $150.0 million in
costs related to the construction of production facilities. We plan to fund
the
costs of stage one from $55.0 million of equity financing and $175.0 million
of
project debt financing.
Stage
Two – Casma and Chulucanas
During
stage two, which will begin in 2009, we plan to acquire 6,500 hectares of land
in Casma and 14,000 hectares of land in Chulucanas. We estimate that the total
cost for stage two will be approximately $190.0 million, consisting of $60.0
million in costs related to field installation and the development of an
infrastructure, and $130.0 million in costs related to the construction of
production facilities. We plan to fund the costs of stage two from $45.0 million
of cash flow generated from operations and $145.0 million of project debt
financing.
We
will
incur increased operating costs without realizing any revenues until the
expansion and modification of the Estrella del Norte sugar mill (including
the
addition of a distillery unit) is complete. We anticipate that the expansion
and
modification of the mill to be completed by the fourth quarter of 2008. Along
with the expansion and modification of the Estrella del Norte sugar mill, we
anticipate beginning a seedling production program, a compost production
program, a land sourcing program and conducting feasibility studies. These
programs, along with the expansion and modification of the Estrella del Norte
sugar mill, constitute Phase I of our business plan.
Trends
and Uncertainties
Our
ability to generate revenues in the future is dependent on whether we
successfully complete the expansion and modification of the Estrella del Norte
sugar mill. We cannot predict whether or when this may happen and this causes
uncertainty with respect to the continuation and growth of our company and
our
ability to generate revenues. We will also need approximately $420.0 million
for
Phase II, which is expected to begin in the fourth quarter of 2008 and continue
though 2014. There can be no assurance that we will be able to raise the
additional funds needed to complete Phase II or that we will be able to begin
any of the component programs of Phase II on a timely basis, if ever.
Financing
To
date,
we have had negative cash flows from operations and we have been dependent
on
sales of our equity securities and debt financing to meet our cash requirements.
We expect this situation to continue for the foreseeable future. We anticipate
that we will have negative cash flows during our fiscal year ended December
31,
2008.
Given
that we are a development stage company and have not generated any revenues
to
date, our cash flow projections are subject to numerous contingencies and risk
factors beyond our control, including our ability to manage our expected growth,
complete construction of our proposed plant and commence operations. We can
offer no assurance that our company will generate cash flow sufficient to meet
our cash flow projections or that our expenses will not exceed our projections.
If our expenses exceed estimates, we will require additional monies during
the
next twelve months to execute our business plan.
There
are
no assurances that we will be able to obtain funds required for our continued
operation. There can be no assurance that additional financing will be available
to us when needed or, if available, that it can be obtained on commercially
reasonable terms. If we are not able to obtain additional financing on a timely
basis, we will not be able to meet our other obligations as they become due
and
we will be forced to scale down or perhaps even cease the operation of our
business.
There
is
substantial doubt about our ability to continue as a going concern as the
continuation of our business is dependent upon obtaining further long-term
financing, completion of our proposed plant and successful and sufficient market
acceptance of our products once developed and, finally, achieving a profitable
level of operations. The issuance of additional equity securities by us could
result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash
commitments.
Liquidity
and Capital Resources
There
are
no assurances that we will be able to obtain further funds required for our
continued operations. We intend to pursue various financing alternatives to
meet
our immediate and long-term financial requirements. There can be no assurance
that additional financing will be available to us when needed or, if available,
that it can be obtained on commercially reasonable terms. If we are not able
to
obtain additional financing on a timely basis, we will be unable to conduct
our
operations as planned, and we will not be able to meet our other obligations
as
they become due. In such event, we will be forced to scale down or perhaps
even
cease our operations.
Going
Concern
Due
to
the uncertainty of our ability to meet our current operating and capital
expenses, there is substantial doubt regarding our ability to continue as a
going concern.
Off-Balance
Sheet Arrangements
Our
company has no outstanding derivative financial instruments, off-balance sheet
guarantees, interest rate swap transactions or foreign currency contracts.
Neither our company nor our operating subsidiary engages in trading activities
involving non-exchange traded contracts.
Related
Party Transactions
For
a
description of our related party transactions, see the section of this Current
Report on Form 8-K entitled “Certain Relationships and Related
Transactions.”
DESCRIPTION
OF PROPERTY
Our
principal executive offices are located 9440 Santa Monica Blvd., Suite 401,
Beverly Hills, CA 90210. We are in the process of locating land in Peru which
will be used for the operation of
the
mill
and the distillery unit for the production of ethanol.
MANAGEMENT
Appointment
of New Directors and Officers
In
connection with the Share Exchange, we appointed four new directors to our
Board
of Directors. Furthermore, concurrent with the closing of the Share Exchange,
Kenneth P. Laurent, our former Chief Executive Officer, President and sole
director, and Todd Laurent, our former Secretary and Treasurer, resigned from
all of their positions with the Company. Simultaneously with the resignation
of
Kenneth Laurent and Todd Laurent, Carlos Antonio Salas was appointed as our
Chief Executive Officer, Luis Humberto Goyzueta was appointed as our President,
Jorge Eduardo Aza was appointed as our Chief Operating Officer, Julio Cesar
Alonso was appointed as our Chief Financial Officer and Treasurer and Gustavo
Goyzueta was appointed as our Secretary.
The
following table sets forth the names and ages of our directors and executive
officers, as of the date of this Current Report:
Name
|
|
Age
|
|
Position
|
Carlos
Antonio Salas
|
|
40
|
|
Chief
Executive Officer and Director
|
Luis
Humberto Goyzueta
|
|
32
|
|
President
and Director
|
Jorge
Eduardo Aza
|
|
33
|
|
Chief
Operating Officer
|
Julio
Cesar Alonso
|
|
28
|
|
Chief
Financial Officer and Treasurer
|
Gustavo
Goyzueta
|
|
28
|
|
Secretary
|
Steven
Magami
|
|
31
|
|
Chairman
of the Board
|
Luis
Francisco de las Casas
|
|
47
|
|
Director
|
Current
Management
Carlos
Antonio Salas
,
Chief
Executive Officer and Director, has served as a senior executive in the fields
of agribusiness and agricultural development, and is the former Director
General
of the National Institute for Agricultural Research (equivalent to the country’s
Undersecretary of Agriculture), appointed by the President of Peru and the
Ministry of Agriculture. Mr. Salas has been instrumental in directing technical,
commercial, and financial evaluations of more than 100 medium and large size
companies in the food and agribusiness sector worldwide. Mr. Salas has served
on
more than ten national and international committees and boards related to
agricultural research and development. He has gathered expertise in fifteen
countries, throughout the Americas, Africa and the EU. In the last two years,
Mr. Salas led mining and agriculture and reengineering processes in the Peruvian
agribusiness sector. Mr. Salas holds an MSC and a PhD in Crop Science from
North
Carolina State University and a joint MBA in Food and Agribusiness Management
from the Krannet School at Purdue University and Wageningen Universiteit
in the
Netherlands.
Luis
Humberto Goyzueta
,
President and Director, has served as a senior executive with natural resource
companies in Peru for numerous years. He is General Manager and serves on
the
Board of Directors of Inter Pacific Oil, a Peruvian biodiesel company. He
also
serves on the Board of Directors of a Peruvian oil marketing company, Oiltec
S.A.C., which is the former partner of Gulf Oil International in Peru.
Furthermore, he serves as President of two Peruvian mining companies, Compañía
Minera Moria and Minera Inka Sol. In addition to his Peruvian natural resource
expertise, Mr. Goyzueta serves as Chief Executive Officer and Director of
Pure
Biofuels Corporation, a leading Latin American biodiesel producer.
Jorge
Eduardo Aza
,
Chief
Operating Officer, has over a decade of experience in the supply chain
management industry. Mr. Aza has developed logistic projects in the mining
industry, has experience in freight forwarding operations, and has held
financial positions with different global logistics companies such as Eagle
Global Logistic ($2.5 billion Co.) and UTI Worldwide Inc.($2.8 billion Co.).
Mr.
Aza holds a Degree in Business Administration and Finance.
Julio
Cesar Alonso
,
Chief
Financial Officer and Treasurer, previously served as a senior financial auditor
of PricewaterhouseCoopers, leading teams for planning and execution of financial
audit for local companies such as Nextel del Perú, Grupo Backus, Grupo Graña y
Montero, Grupo Quimica Suiza, IBM del Peru, Kraft Foods del Perú, Eckerd Peru
and Talma Menzies, and international companies such as Rentokil US Pest Control
and Teleflex Corp. Mr. Alonso has participated as a team member of the
Transaction Services Group in charge of all due diligence projects for
PricewaterhouseCoopers. He also has experience working for cargo transportation
and integrated logistics companies.
Gustavo
Goyzueta
,
Secretary, previously held manager positions with Oiltech S.A.C. and Software
S.A., where he conducted investment analysis, negotiated contract terms and
coordinated treasury functions and capital budgeting. Mr. Goyzueta serves as
Chief Financial Officer of Pure Biofuels Corporation, a leading Latin American
biodiesel producer.
Steven
S. Magami
,
Chairman of the Board of Directors, has led a career as a private equity
investor, investment banker and C-level executive, and has focused exclusively
on the clean energy sector for several years. Mr. Magami is President and a
Director of Pure Biofuels Corporation, a leading Latin American biodiesel
producer, and a Partner of ARC Investment Partners, a private equity firm with
a
focus on clean energy. Mr. Magami formerly served as Chief Strategy Officer
of a
leading U.S. biodiesel producer. Previously, Mr. Magami was a Principal with
Lovell Minnick Partners (LMP), a private equity firm managing funds for
institutions including Goldman Sachs, GE, and CalPERS. At LMP, he was
instrumental in raising and investing the firm's funds as well as sourcing
and
building a successful portfolio of companies through LBOs, growth capital and
venture investments. Mr. Magami started his career as an investment banker
advising large buyout firms on industry roll-up strategies. He has served on
the
boards of numerous public and private companies guiding business strategy,
leading corporate development initiatives and driving acquisition
strategies.
Luis
de las Casas
,
Director, is an architect with an MS in regional and rural planning. Mr. De
La
Casas was formerly Peru’s Vice-Minister of Construction and has broad experience
in public policies, strategic expansion projects and territorial planning.
He
has been involved in several land acquisition and expansion programs and has
actively designed, directed, and managed social and rural development projects
related to peasant communities and farmer coops. He participates currently
in
multidisciplinary Consultative Boards and is the President of FINCA, the
Foundation for the Innovation and Competitiveness of Agriculture.
To
the
best of our knowledge, no family relationships exist among our directors or
executive officers or persons nominated or chosen by us to become directors
or
executive officers, except for the relationship between Luis Humberto Goyzueta
and Gustavo Goyzueta, who are brothers. To the best of our knowledge, none
of
our directors, executive officers, promoters or control persons appointed
following the closing of the Share Exchange, or any nominated directors, has
been involved in any of the following events during the past five
years:
|
·
|
any
bankruptcy petition filed by or against any business of which such
person
was a general partner or executive officer either at the time of
the
bankruptcy or within two years prior to that
time;
|
|
·
|
any
conviction in a criminal proceeding or being subject to a pending
criminal
proceeding, excluding traffic violations and other minor
offences;
|
|
·
|
being
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting
his
involvement in any type of business, securities or banking activities;
or
|
|
·
|
being
found by a court of competent jurisdiction in a civil action, the
SEC or
the Commodity Futures Trading Commission to have violated a federal
or
state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
|
Board
of Directors
Our
Board
of Directors is currently composed of four members. Steven Magami has been
appointed as the Chairman of the Board of Directors. In this capacity, he is
responsible for
presiding
at meetings of the Board of Directors and exercising and performing such other
powers and duties as may be from time to time assigned by the Board of Directors
or prescribed by our Amended and Restated Bylaws.
Board
Committees
As
of
this date, our Board of Directors has not appointed an audit committee,
compensation committee or nominating committee, however, we are not currently
required to have such committees. Accordingly, we do not have an “audit
committee financial expert” as such term is defined in the rules promulgated
under the Securities Act and the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). The functions ordinarily handled by these committees are
currently handled by our entire Board of Directors. Our Board of Directors
intends, however, to review our governance structure and institute board
committees as necessary and advisable in the future, to facilitate the
management of our business.
Board
Meetings
The
Board
of Directors of NDCI held no special meetings of directors and took one action
by written consent during the fiscal year ended December 31, 2006. Directors
may
be paid their expenses, if any, of attendance at such meeting of the Board
of
Directors, and may be paid a fixed sum for attendance at each meeting of
the
Board of Directors or a stated salary as a director. No such payment shall
preclude any director from serving us in any other capacity and receiving
compensation therefore except as otherwise provided under applicable law.
Except
as set forth below, no compensation has been paid to the directors.
No
Code of Ethics
A
code of
ethics relates to written standards that are reasonably designed to deter
wrongdoing and to promote:
|
·
|
honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships;
|
|
·
|
full,
fair, accurate, timely and understandable disclosure in reports and
documents that are filed with, or submitted to, the SEC and in other
public communications made by an
issuer;
|
|
·
|
compliance
with applicable governmental laws, rules and
regulations;
|
|
·
|
the
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the code;
and
|
|
·
|
accountability
for adherence to the code.
|
We
have
not adopted a code of ethics because, to date, we have had no meaningful
operations. However, we plan to adopt a code of ethics in the
future.
We
do not
have any restrictions on stockholder nominations under our Amended and Restated
Articles of Incorporation or Amended and Restated Bylaws. The only restrictions
are those applicable generally under Nevada law. Currently, the entire Board
of
Directors decides on nominees, on the recommendation of one or more members
of
the Board of Directors. The Board of Directors will consider suggestions from
individual stockholders, subject to evaluation of the person’s merits.
Stockholders may communicate nominee suggestions directly to any of the board
members, accompanied by biographical details and a statement of support for
the
nominees. The suggested nominee should also provide a statement of consent
to
being considered for nomination. Although there are no formal criteria for
nominees, our Board of Directors believes that persons should be actively
engaged in business endeavors, have a financial background, and be familiar
with
acquisition strategies and money management.
The
Board
of Directors has not adopted a formal methodology for communications from
stockholders but plans to adopt a formal methodology after the closing of the
Share Exchange.
We
do not
have a policy regarding the attendance of board members at the annual meeting
of
stockholders.
EXECUTIVE
COMPENSATION
For
purposes of the discussion contained in this section entitled “Executive
Compensation,” the relevant information is presented in each instance first with
respect to NDCI and then with respect to Stratos prior to the closing of the
Share Exchange.
Summary
Compensation
NDCI
Prior
to
the closing of the Share Exchange, Kenneth P. Laurent served as our Chief
Executive Officer, President and sole director and Todd Laurent served as our
Secretary and Treasurer. Kenneth Laurent and Todd Laurent did not receive any
direct cash or non-cash compensation during the fiscal year ended
December 31, 2006. No other executive officers received salary and
bonus in excess of $100,000 for the last fiscal year ended December 31,
2006.
Stratos
Carlos
Antonio Salas, the General Manager of Stratos, and the Chief Executive Officer
of NDCI following the Share Exchange (the “Named Executive Officer”) did not
receive any direct cash or non-cash compensation from the date of inception
of
Stratos, February 27, 2007, through the closing of the Share Exchange. No other
executive officer received any compensation for the period beginning on the
date
of inception of Stratos and ending on November 14, 2007.
Outstanding
Equity Awards
NDCI
Kenneth
P. Laurent and Todd Laurent did not have any option awards, unexercised options,
unvested stock awards or equity incentive plan awards at December 31,
2006.
Stratos
Carlos
Antonio Salas did not have any option awards, unexercised options, unvested
stock awards or equity incentive plan awards at November 14, 2007.
Director
Compensation
NDCI
Prior
to
the Share Exchange, we had only one director, Kenneth P. Laurent.
Mr. Laurent did not receive any direct compensation for his services.
Stratos
In
connection with the Share Exchange, Kenneth P. Laurent resigned from his
position as our sole director. Concurrent therewith, we appointed four new
directors to our Board of Directors: Carlos Antonio Salas, Luis Humberto
Goyzueta, Steven Magami and Luis Francisco de las Casas. None of the directors
have received any direct compensation for their services.
Employment
Agreements
We
have
not entered into employment agreements with any of our officers, directors
or
employees.
SECURITY
OWNERSHIP PRIOR TO CHANGE OF CONTROL
The
following table sets forth certain information regarding our Common Stock
beneficially owned immediately prior to the Share Exchange on November 14,
2007,
for (i) each stockholder we know to be the beneficial owner of 5% or more of
our
outstanding Common Stock, (ii) each of our executive officers and directors,
and
(iii) all executive officers and directors as a group. In general, a person
is
deemed to be a “beneficial owner” of a security if that person has or shares the
power to vote or direct the voting of such security, or the power to dispose
or
to direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which the person has the right to acquire
beneficial ownership within 60 days. To the best of our knowledge, all persons
named have sole voting and investment power with respect to such shares, except
as otherwise noted. Prior to the Share Exchange, at November 14, 2007,
10,000,000 shares of our Common Stock were outstanding.
Name
of Beneficial Owner and Address
|
|
Amount
and Nature of Beneficial Ownership
|
|
Percent
of Class
|
|
Kenneth
P. Laurent
3313
N. 83rd Place
Scottsdale,
AZ 85251
|
|
|
6,100,000
|
|
|
61.0
|
%
|
Todd
Laurent
3313
N. 83rd Place
Scottsdale,
AZ 85251
|
|
|
0
|
|
|
-
|
|
All
Executive Officers and Directors as a group (2 persons)
|
|
|
6,100,000
|
|
|
61.0
|
%
|
SECURITY
OWNERSHIP AFTER CHANGE OF CONTROL
The
following table sets forth certain information regarding our Common Stock and
Series A Preferred Stock beneficially owned on November 14, 2007, for (i) each
stockholder known to be the beneficial owner of 5% or more of that class of
our
capital stock, (ii) each executive officer and director, and (iii) all executive
officers and directors as a group, taking into account the closing of the Share
Exchange, and the issuance of securities under our Private Placement, Series
A
Private Placement and Bridge Financing.
Upon
completion of the Share Exchange, Private Placement, Series A Private Placement
and Bridge Financing we had 57,666,794 shares of Common Stock and 7,142,857
shares of Series A Preferred Stock issued and outstanding as of November 14,
2007.
Name
of Beneficial Owner and
|
|
Shares
of Common Stock
Beneficially
Owned
|
|
Shares of Series A Preferred Stock
Beneficially
Owned
|
|
Address(1)
|
|
Number(2)
|
|
Percentage (2)
|
|
Number
(2)
|
|
Percentage
(2)
|
|
Carlos
Antonio Salas(3)
|
|
|
5,000,000
|
|
|
8.7
|
%
|
|
-
|
|
|
-
|
|
Luis
Humberto Goyzueta(4)
|
|
|
17,287,327
|
|
|
29.8
|
%
|
|
-
|
|
|
-
|
|
Jorge
Eduardo Aza(5)
|
|
|
3,018,018
|
|
|
5.2
|
%
|
|
-
|
|
|
-
|
|
Julio
Cesar Alonso(6)
|
|
|
540,541
|
|
|
*
|
|
|
-
|
|
|
-
|
|
Gustavo
Goyzueta(7)
|
|
|
3,018,018
|
|
|
5.2
|
%
|
|
-
|
|
|
-
|
|
Steven
Magami(8)
|
|
|
11,946,589
|
|
|
17.9
|
%
|
|
7,142,857
|
|
|
100
|
%
|
Luis
Francisco de las Casas(9)
|
|
|
540,541
|
|
|
*
|
|
|
-
|
|
|
-
|
|
MA
Green, LLC(10)
|
|
|
8,928,571
|
|
|
13.4
|
%
|
|
7,142,857
|
|
|
100
|
%
|
SGM
Capital, LLC(11)
|
|
|
3,018,018
|
|
|
5.2
|
%
|
|
-
|
|
|
-
|
|
Kenneth
P. Laurent(12)
|
|
|
6,100,000
|
|
|
10.6
|
%
|
|
-
|
|
|
-
|
|
All
Executive Officers and Directors as a Group (7 persons)
(13)
|
|
|
41,351,034
|
|
|
61.8
|
%
|
|
7,142,857
|
|
|
100
|
%
|
*
|
Less
than 1%
|
(1)
|
Unless
otherwise indicated, the address of the beneficial owner is 9440
Santa
Monica Blvd., Suite 401, Beverly Hills, CA 90210.
|
(2)
|
The
amounts of beneficial ownership reflects the completion of the Share
Exchange, Private Placement, Series A Private Placement and Bridge
Financing. Percentage of Common Stock beneficially owned is based on
a total of 57,666,794 shares of Common Stock issued and outstanding
as of
November 14, 2007. Percentage of Series A Preferred
Stock beneficially owned is based on a total of 7,142,857 shares of
Series A Preferred Stock issued and outstanding as of November 14,
2007.
|
(3)
|
The
address of the beneficial owner is Av. La Encalada 569, of. 202,
Surco,
Lima, Peru.
|
(4)
|
The
address of the beneficial owner is Av. La Merced 810, Surco, Lima,
Peru.
The beneficial owner’s holdings consist of 16,930,290 shares of Common
Stock and warrants to purchase 357,037 shares of Common Stock.
|
(5)
|
The
address of the beneficial owner is Calle Clemente X No 187, Dpto.
302,
Monterrico, Surco, Lima, Peru.
|
(6)
|
The
address of the beneficial owner is Av. Leon Barandiaran 963, La Planicie,
La Molina, Lima, Peru.
|
(7)
|
The
address of the beneficial owner is Calle La Coruna 149, La Estancia,
La
Molina, Lima, Peru.
|
(8)
|
The
beneficial owner’s holdings consist of 3,018,018 shares of Common Stock,
7,142,857 shares of Series A Preferred Stock and a warrant to purchase
1,785,714 shares of Common Stock. 3,018,018 shares of Common Stock
are
held by SGM Capital, LLC. Steven Magami is the manager of SGM Capital,
LLC
and exercises voting and investment control over the shares. 7,142,857
shares of Series A Preferred Stock and a warrant to purchase 1,785,714
shares of Common Stock are held by MA Green, LLC. Steven Magami is
the
manager of MA Green, LLC and exercises voting and investment control
over
the shares.
|
(9)
|
The
address of the beneficial owner is Av. La Encalada 569, of. 202,
Surco,
Lima, Peru.
|
(10)
|
The
beneficial owner’s holdings consist of 7,142,857 shares of Series A
Preferred Stock and a warrant to purchase 1,785,714 shares of Common
Stock. Steven Magami is the manager of MA Green, LLC and exercises
voting
and investment control over the shares.
|
(11)
|
The
beneficial owner’s holdings consist of 3,018,018 shares of Common Stock.
Steven Magami is the manager of SGM Capital, LLC and exercises voting
and
investment control over the shares.
|
(12)
|
The
address of the beneficial owner is 3313 N. 83rd Place, Scottsdale,
AZ
85251.
|
(13)
|
Consists
of 32,065,426 shares of Common Stock, 7,142,857 shares of Series
A
Preferred Stock and warrants to purchase 2,142,751 shares of Common
Stock.
|
Changes
in Control
We
are
unaware of any arrangement which may at a subsequent date result in a change
of
control of our Company.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
NDCI
Other
than as set forth in this Current Report, NDCI has not entered into any material
transactions with any director, executive officer, and nominee for director,
beneficial owner of five percent or more of its Common Stock, or family members
of such persons.
Kenneth
P. Laurent, our former Chief Executive Officer, President and sole director
was
considered our promoter within the meaning of the federal securities laws,
for
serving as the incorporator of NDCI on September 21, 2004. Mr. Laurent purchased
10,000,000 shares of our Common Stock for $10,000 on October 13, 2004. The
purchase price for the shares was arbitrarily set by Mr. Laurent. Other than
as
set forth in this Current Report, Mr. Laurent did not receive anything of value
from us for his services as our promoter.
Stratos
Other
than as set forth in this Current Report, Stratos has not entered into any
material transactions with any director, executive officer, and nominee for
director, beneficial owner of five percent or more of its common stock, or
family members of such persons.
DESCRIPTION
OF SECURITIES
We
are
presently authorized under our Amended and Restated Articles of Incorporation
to
issue 300,000,000 shares of capital stock, consisting or 250,000,000 shares
of
Common Stock and 50,000,000 shares of preferred stock, $.001 par value
(“Preferred Stock”). As of the closing of the Share Exchange, Private Placement,
Series A Private Placement and Bridge Financing, we had 57,666,794 shares of
Common Stock, 7,142,857 shares of Series A Preferred Stock and warrants to
purchase an aggregate of 3,989,968 shares of Common Stock issued and
outstanding.
The
following descriptions of our capital stock are only summaries and do not
purport to be complete and are subject to and qualified by our Amended and
Restated Articles of Incorporation, our Amended and Restated Bylaws, by the
Certificate of Designation of our Series A Preferred Stock and by the provisions
of applicable corporate laws of the State of Nevada. The descriptions of our
Common Stock, Preferred Stock, convertible promissory notes and warrants to
purchase shares of our Common Stock, reflect changes to our capital structure
that occurred immediately prior to, concurrently with or immediately after
the
closing of the Share Exchange.
Common
Stock
As
of
November 14, 2007, we had 57,666,794 shares of Common Stock issued and
outstanding. Each share of Common Stock issued and outstanding entitles the
holder thereof to one (1) vote on all matters submitted to the vote of the
stockholders. Our Common Stock may be issued for such consideration and for
such
corporate purposes as the Board of Directors may from time to time determine.
Fully paid shares of Common Stock are not liable to any further call or
assessment. Dividends may be declared and paid on our Common Stock only out
of
legally available funds. Upon the sale of substantially all of the stock or
assets of the Company or dissolution, liquidation, or winding up of the Company,
whether voluntary or involuntary, after all liquidation preferences payable
to
any series of Preferred Stock have been satisfied, the remaining net assets
of
the Company will be distributed to the holders of Common Stock and Preferred
Stock in proportion to the number of shares of Common Stock then held by them
and the number of shares of common Stock which the holders of Preferred Stock
have the right to acquire upon conversion of the Preferred Stock held by them.
To the extent that additional shares of Common Stock may be issued in the
future, the relative interests of the then existing stockholders may be
diluted.
Series
A Preferred Stock
On
November 14, 2007, we issued an aggregate of 7,142,857 shares of Series A
Preferred Stock in connection with our Series A Private Placement. The holder
of
our Series A Preferred Stock is entitled to the following rights, preferences
and privileges:
Conversion
Optional
Conversion
The
holder of our Series A Preferred Stock has the right to convert the Series
A
Preferred Stock at any time into shares of our Common Stock. The initial
conversion ratio is 1:1 and is subject to anti-dilution adjustment as described
below. In addition, the holder has the right to convert one and a half times
the
total number of shares of Series A Preferred held by the holder into shares
of
our Common Stock, upon the closing of a financing (whether debt or equity)
or
multiple financings led by one or more institutional investors whereby an
aggregate amount of $25.0 million, net of offering expenses, is received by
the
Company. Accumulated dividends, if any, are payable on conversion.
Automatic
Conversion
Each
share of Series A Preferred Stock will automatically convert into shares of
our
Common Stock, at the then applicable conversion rate, if the Common Stock has
been trading above $2.00 per share for a period of 120 consecutive days. In
no
event shall the Series A Preferred Stock automatically convert into shares
of
Common Stock until nine months from closing date of the Share Exchange.
Accumulated dividends, if any, are payable on conversion.
Anti-dilution
The
conversion rate of the Series A Preferred Stock is subject to adjustment, on
a
full ratchet basis, to prevent dilution in the event that we issue additional
shares at a purchase price per share less than the conversion price. There
will
be no adjustment to the conversion rate of the Series A Preferred Stock for
issuances of (i) shares of Common Stock issued upon conversion of the Series
A
Preferred Stock, (ii) shares issued to employees, consultants or directors
in
accordance with plans approved by the Board of Directors, (iii) shares issued
upon exercise of warrants existing on the closing date of the Share Exchange,
(iv) shares of Common Stock issued as a dividend or distribution on the Series
A
Preferred Stock, (v) shares issued or issuable pursuant to equipment lease
and
bank financing arrangements, (vi) shares of Common Stock issued or issuable
pursuant to an acquisition of another company by the Company, or (vii) shares
of
Common Stock that are otherwise excluded by vote or written consent of the
holder of the Series A Preferred Stock.
Dividend
The
holder of Series A Preferred Stock is entitled to a 10% per annum cumulative
dividend.
Liquidation
In
the
event of the liquidation, dissolution or winding up of the Company, the rights
of the holder of Series A Preferred Stock are senior to the rights of the
holders of Common Stock.
Each
share of Series A Preferred Stock entitles the holder to a liquidation amount
of
$1.05, subject to adjustment in certain circumstances.
After
payment of the liquidation amount to the holder of Series A Preferred Stock,
the
holders of Common Stock and Series A Preferred Stock are entitled to receive
the
remaining assets of the Company in proportion to the number of shares of Common
Stock then held by them, with the shares of Series A Preferred Stock treated
for
this purpose as if they had been converted into shares of Common Stock at the
then applicable conversion rate.
A
sale of
all or substantially all of our assets or a merger or consolidation of our
Company with or into any other company is treated as a liquidation, dissolution
or winding up of the Company.
Voting
Rights
The
holder of Series A Preferred Stock is entitled to a number of votes equal to
the
number of shares of Common Stock issuable upon conversion of the holder’s Series
A Preferred Stock. The holder of Series A Preferred Stock shall vote with
holders of Common Stock on all matters except as otherwise required by
law.
Protective
Provisions
So
long
as any of the Series A Preferred Stock shall be issued and outstanding, the
Company shall not, without first obtaining the approval of the holders of more
than 50% of the outstanding shares of the Series A Preferred Stock: (1) amend,
alter or repeal any provision of the Amended and Restated Articles of
Incorporation or the Amended and Restated Bylaws of the Company, if such action
would adversely alter the rights, preferences, privileges or powers of, or
restrictions provided for the benefit of the Series A Preferred Stock; (2)
increase or decrease the authorized number of shares of Series A Preferred
Stock; (3) authorize or create any new class or series of shares having rights,
preferences or privileges with respect to dividends or payments upon liquidation
senior to or on a parity with Series A Preferred Stock or having voting rights
other than those granted to the Series A Preferred Stock generally; (4) enter
into any transaction or series of related transactions deemed to be a
liquidation, dissolution or winding up of the Company; (5) authorize a merger,
acquisition or sale of substantially all of the assets of the Company or any
of
its subsidiaries; (6) voluntarily liquidate or dissolve; or (7) except in the
ordinary course of business, borrow any money, or otherwise incur any
indebtedness, other than pursuant to the Bridge Financing.
Convertible
Promissory Notes
The
convertible promissory notes issued in connection with the Bridge Financing
bear
interest at 10% per annum. Upon the earlier to occur of (i) the Maturity Date
and (ii) the consummation the PIPE, the bridge note holders are entitled to
a
Repayment Amount (in cash or in Common Stock) equal to 25% to 30% in excess
of
the principal and accrued interest then due and outstanding under the terms
of
the notes. The bridge note holders entitled to a Repayment Amount of 25% in
excess of the principal and accrued interest due under the terms of the notes
will receive a 5% origination fee as consideration for making loans to the
Company. The bridge note holders entitled to a Repayment Amount of 30% in excess
of the principal and accrued interest due under the terms of the notes will
not
be entitled to an origination fee. Upon the earlier to occur of the Maturity
Date or the consummation of the PIPE, the bridge note holders will have the
right to convert (in whole or in part) 110% of the Repayment Amount into shares
of Common Stock of the Company at the fair market value of each share of Common
Stock, or at the price per share of Common Stock sold to investors in the PIPE,
as the case may be.
Warrants
On
November 14, 2007, we issued the following securities:
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Warrants
to purchase 1,333,396 shares of Common Stock issued in connection
with the
Private Placement;
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A
warrant to purchase 1,785,714 shares of Common Stock issued in connection
with the Series A Private Placement;
and
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Warrants
to purchase 870,858 shares of Common Stock issued in connection with
the
Bridge Financing.
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The
warrants are immediately exercisable at an exercise price of $.75 per share,
subject to adjustment. The warrants issued in connection with the Private
Placement and Series A Private Placement have a five (5) year term. The warrants
issued in connection with the Bridge Financing have a three (3) year
term.
Registration
Rights
We
have
granted certain registration rights in connection with the Private Placement,
Series A Private Placement and Bridge Financing. We are obligated to file with
the SEC within 30 days after we close the PIPE, a registration statement
covering the resale of:
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100%
of the Common Stock and Common Stock underlying the warrants issued
in
connection with the Private
Placement;
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100%
of the Common Stock underlying the Series A Preferred Stock and Common
Stock underlying the warrant issued in connection with the Series
A
Private Placement; and
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100%
of the Common Stock underlying the promissory notes and Common Stock
underlying the warrants issued in connection with the Bridge
Financing.
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If
the
SEC limits the number of securities that may be registered on the registration
statement, such number of securities will be cutback (in the following order)
to
comply with any such limitation imposed by the SEC: (i) shares of Common Stock
underlying any and all warrants to be registered, (ii) Common Stock and (iii)
shares of Common Stock underlying the Series A Preferred Stock. Any required
cutbacks will be applied to investors pro-rata in accordance with the number
of
securities sought to be included in such registration statement. We are required
to use best efforts to have the registration statement declared effective by
the
SEC within 150 days after the filing date.
If
the
registration statement is not filed within 30 days after we close the PIPE,
or
is not declared effective by the SEC within 150 days after we close the PIPE,
we
will be required to pay to each investor an amount equal to 1.5% of the purchase
price paid by such investor for its securities, for each 30 day period until
the
registration statement is filed or declared effective. The maximum amount we
will be obligated to pay for the failure to file the registration statement
or
cause the registration statement to be declared effective is 10% of the purchase
price of the securities paid by each investor. Similar payments will be required
to be made by us to the investors if effectiveness of the registration statement
is suspended for more than 30 consecutive days.
In
no
event will we be liable for liquidated damages as to any shares of Common Stock,
any shares of Common Stock underlying warrants, any shares of Common Stock
underlying Series A Preferred Stock or any shares of Common Stock underlying
convertible promissory notes which are not permitted by the SEC to be included
in the registration statement solely due to comments received by us from the
SEC.
In
addition, at any time after one year following the Share Exchange, the holder
of
Series A Preferred Stock shall have the right to require that the Company file
a
registration statement with the SEC covering, the shares of Common Stock
underlying the Shares A Preferred Stock and the Common Stock underlying the
warrant issued to the investor in the Series A Private Placement. The Company
shall file the registration statement no later than thirty days after the
Company’s receipt of the request. If in the good faith judgment of the Board of
Directors of the Company, the filing of the registration statement would be
materially detrimental to the Company, then the Company shall have the one
time
right to defer such filing for a period of not more than one hundred eighty
days
after receipt of the request. The registration statement filed pursuant to
the
request of the holder of Series A Preferred Stock may include other securities
of the Company and may include securities of the Company being sold for the
account of the Company. The penalty provisions set forth above are also
applicable to the demand registration statement.
Anti-Takeover
Provisions
Our
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws
contain provisions that may make it more difficult for a third party to acquire
or may discourage acquisition bids for the Company. Our Board of Directors
is
authorized, without the action of our stockholders, to issue authorized but
unissued Common Stock and Preferred Stock. The existence of undesignated
Preferred Stock and authorized but unissued Common Stock enables us to
discourage or to make it more difficult to obtain control of us by means of
a
merger, tender offer, proxy contest or otherwise.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Effective
December 8, 2005, our Common Stock was approved for quotation on the Over The
Counter Bulletin Board under the symbol "NDCB.OB". As of November 14, 2007,
no
public market for our Common Stock has yet developed and there can be no
assurance that a meaningful trading market will subsequently develop.
As
of
November 14, 2007:
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We
had outstanding 57,666,794 shares of Common Stock, warrants to purchase
3,989,968 shares of Common Stock, 7,142,857 shares of Series A Preferred
Stock convertible into
shares
of Common Stock
and
an aggregate of approximately $3.0 million in convertible promissory
notes
issued and outstanding;
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6,100,000
shares of Common Stock can be sold pursuant to Rule 144 under the
Securities Act;
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We
have agreed to register 1,333,396 shares of Common Stock, 3,989,968
shares
of Common Stock underlying warrants,
7,142,857
shares
of Common Stock underlying Series A Preferred Stock and that number
of
shares of Common Stock underlying convertible promissory notes that
may be
issued our note holders at maturity of the notes for sale by our
security
holders; and
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We
are not publicly offering and have not proposed to publicly offer
any
Common Stock. In the future, we may adopt a stock option plan and
register
on a Form S-8 the shares of Common Stock underlying options issuable
pursuant to such plan.
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Holders
As
of
November 14, 2007, there were approximately 66 holders of record our Common
Stock.
Dividends
We
have
never declared or paid any cash dividends on our Common Stock. For the
foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our Common Stock. Any
future determination to pay dividends will be at
the discretion of the Board of Directors and will be dependent upon
then existing conditions, including our financial condition and results of
operations, capital requirements, contractual restrictions, business
prospects and other factors that the Board of Directors
considers relevant. Each holder of our Series A Preferred Stock
is
entitled to a 10% per annum cumulative dividend.
Securities
Authorized for Issuance Under Equity Compensation Plans
Transfer
Agent and Registrar
The
transfer agent and registrar for our Common Stock is
Holladay
Stock Transfer, 2939 N. 67th Place, Suite C, Scottsdale, Arizona 85251. The
phone number of the transfer agent is (480) 481-3940.
LEGAL
PROCEEDINGS
We
are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate material legal
proceedings against us.
RECENT
SALES OF UNREGISTERED SECURITIES
The
following represents our sales of unregistered securities in the last three
years:
2007
(First, Second Quarters and Third Quarters)
On
November 14, 2007, pursuant to the Share Exchange Agreement, we issued
45,000,000 shares of our Common Stock to the security holders of Stratos in
exchange for 999, or 99.9%, of the issued and outstanding shares of Stratos.
Such securities were not registered under the Securities Act in reliance upon
exemptions set forth in Section 4(2), Regulation D and/or Regulation S of the
Securities Act. We made this determination based on the representations of
the
security holders, which included, in pertinent part, that such security holders
were either (a) “accredited investors” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, or (b) not a “U.S. person” as
that term is defined in Rule 902(k) of Regulation S under the Securities Act,
and that the security holders understood that the securities may not be sold
or
otherwise disposed of without registration under the Securities Act or an
applicable exemption therefrom.
On
November 14, 2007, pursuant to the Private Placement, we issued an aggregate
of
2,666,794 shares of Common Stock and warrants to purchase an aggregate of
1,333,396 shares of Common Stock to investors in exchange for gross proceeds
of
approximately $1.9 million. The warrants expire five (5) years from the date
of
issuance are exercisable at $.75 per share, subject to adjustment in certain
circumstances. The Common Stock and warrants issued in connection with the
Private Placement were not registered under the Securities Act in reliance
upon
exemptions set forth in Section 4(2), Regulation D and/or Regulation S of the
Securities Act. We made this determination based on the representations of
the
investors, which included, in pertinent part, that such investors were either
(a) “accredited investors” within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act, or (b) not a “U.S. person” as that term is
defined in Rule 902(k) of Regulation S under the Securities Act, and that the
investors understood that the securities may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
On
November 14, 2007, pursuant to the Series A Private Placement, we issued
7,142,857 shares of Series A Preferred Stock and warrants to purchase 1,785,714
shares of Common Stock to an investor in exchange for gross proceeds of $5.0
million. The warrants expire five (5) years from the date of issuance and are
exercisable at $.75 per share, subject to adjustment in certain circumstances.
The Series A Preferred Stock and warrants issued in connection with the Series
A
Private Placement were not registered under the Securities Act in reliance
upon
the exemption set forth in Section 4(2) and Regulation D of the Securities
Act.
We made this determination based on the representations of the investor, which
included, in pertinent part, that such investor was an “accredited investor”
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act, and that the investor understood that the securities may not be sold or
otherwise disposed of without registration under the Securities Act or an
applicable exemption therefrom.
On
November 14, 2007, pursuant to the Bridge Financing, we issued an aggregate
of
approximately $3.0 million in convertible promissory notes and warrants to
purchase an aggregate of 870,858 shares of Common Stock to investors. The
warrants expire three (3) years from the date of issue and may be exercised
at
$.75 per share, subject to adjustment in certain circumstances. The convertible
promissory notes and warrants issued in connection with the Bridge Financing
were not registered under the Securities Act in reliance upon exemptions set
forth in Section 4(2), Regulation D and/or Regulation S of the Securities Act.
We made this determination based on the representations of the investors, which
included, in pertinent part, that such investors were either (a) “accredited
investors” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act, or (b) not a “U.S. person” as that term is defined in Rule
902(k) of Regulation S under the Securities Act, and that the investors
understood that the securities may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption
therefrom.
2005
In
January 2005, we completed an offering of our Common Stock to a group of private
investors. We issued 260,000 shares of Common Stock at $0.10 per share for
an aggregate offering price of $26,000 to 23 stockholders. This transaction
(a)
involved no general solicitation, (b) involved less than thirty-five
non-accredited purchasers, and (c) relied on a detailed disclosure document
to
communicate to the investors all material facts about NDCI, including an audited
balance sheet and reviewed statements of income, changes in stockholders' equity
and cash flows. Thus, we believe that the offering was exempt from
registration under Regulation D, Rule 505 of the Securities Act.
2004
In
October 2004, we issued 10,000,000 shares of our Common Stock to Kenneth P.
Laurent, our founding stockholder and former Chief Executive Officer, President
and sole director, in exchange for cash in the amount of $10,000. This
sale of stock did not involve any public offering, general advertising or
solicitation. At the time of the issuance, Mr. Laurent had fair access to
and was in possession of all available material information about our Company,
as he was formerly the sole officer and director of NDCI. The shares
issued to Mr. Laurent bear a restrictive transfer legend in accordance with
Rule
144 under the Securities Act. On the basis of these facts, we believe that
the issuance of stock to our founding stockholder qualifies for the exemption
from registration contained in Section 4(2) of the Securities Act.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Nevada
Revised Statutes (“NRS”) 78.7502(1) provides that a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit
or
proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in
good
faith and in a manner which he reasonably believed to be in or not opposed
to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person is liable pursuant to NRS 78.138
or
did not act in good faith and in a manner which he reasonably believed to be
in
or not opposed to the best interests of the corporation, or that, with respect
to any criminal action or proceeding, he had reasonable cause to believe that
his conduct was unlawful.
NRS
78.7502(2) provides that a corporation may indemnify any person who was or
is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and
reasonably incurred by him in connection with the defense or settlement of
the
action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted
in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom,
to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action
or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court
deems
proper.
NRS
78.7502(3) provides that to the extent that a director, officer, employee or
agent of a corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in NRS 78.7502(1) or 78.7502(2),
or in defense of any claim, issue or matter therein, the corporation shall
indemnify him against expenses, including attorneys’ fees, actually and
reasonably incurred by him in connection with the defense.
NRS
78.751(1) provides that any discretionary indemnification pursuant to NRS
78.7502, unless ordered by a court or advanced pursuant to subsection 2, may
be
made by the corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances. The determination must be made: (a) by the
stockholders; (b) by the board of directors by majority vote of a quorum
consisting of directors who were not parties to the action, suit or proceeding;
(c) if a majority vote of a quorum consisting of directors who were not parties
to the action, suit or proceeding so orders, by independent legal counsel in
a
written opinion; or (d) if a quorum consisting of directors who were not parties
to the action, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
NRS
78.751(2) provides that the articles of incorporation, the bylaws or an
agreement made by the corporation may provide that the expenses of officers
and
directors incurred in defending a civil or criminal action, suit or proceeding
must be paid by the corporation as they are incurred and in advance of the
final
disposition of the action, suit or proceeding, upon receipt of an undertaking
by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to
be
indemnified by the corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate personnel other than
directors or officers may be entitled under any contract or otherwise by
law.
NRS
78.751(3) provides that the indemnification pursuant to NRS 78.7502 and
advancement of expenses authorized in or ordered by a court pursuant to NRS
78.751 (a) does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the articles
of
incorporation or any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, for either an action in his official capacity or an
action in another capacity while holding his office, except that
indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the
advancement of expenses made pursuant to NRS 78.751(2), may not be made to
or on
behalf of any director or officer if a final adjudication establishes that
his
acts or omissions involved intentional misconduct, fraud or a knowing violation
of the law and was material to the cause of action; and (b) continues for a
person who has ceased to be a director, officer, employee or agent and inures
to
the benefit of the heirs, executors and administrators of such a
person.
NRS
78.752 provides that a corporation may purchase and maintain insurance or make
other financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against him and liability and expenses incurred by him in
his
capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the corporation has the authority to indemnify him
against such liability and expenses. No financial arrangement made
pursuant to NRS 78.752 may provide protection for a person adjudged by a court
of competent jurisdiction, after exhaustion of all appeals therefrom, to be
liable for intentional misconduct, fraud or a knowing violation of law, except
with respect to the advancement of expenses or indemnification ordered by a
court.
Our
Amended and Restated Articles of Incorporation provide that
our
officers and directors shall not be personally liable to the Company or its
stockholders for monetary damages for conduct as an officer or director, except
for liability of the officer or director (i) for acts or omissions that involve
intentional misconduct by the officer or director or a knowing violation of
law
by the officer or director, (ii) for conduct violating the Nevada Revised
Statutes, or (iii) for any transaction from which the officer or director will
personally receive a benefit in money, property or services to which the officer
or director is not legally entitled. Our Amended and Restated Articles of
Incorporation further provide that if the Nevada Revised Statutes are amended
in
the future to authorize corporate action further eliminating or limiting the
personal liability of officers or directors, then the liability of our officers
or directors shall be eliminated or limited to the full extent permitted by
the
Nevada Revised Statutes, as so amended, without any requirement of further
action by the stockholders.
Our
Amended and Restated Articles of Incorporation require us to indemnify any
individual made a party to a proceeding because that individual is or was an
officer or director of the Company and to advance or reimburse the reasonable
expenses incurred by the individual in advance of final disposition of the
proceeding, without regard to the limitations in Nevada Revised Statute 78.7502,
or any other limitation which may thereafter be enacted, to the extent such
limitation may be disregarded if authorized by the Amended and Restated Articles
of Incorporation, to the full extent and under all circumstances permitted
by
applicable law.
Our
Amended and Restated Bylaws require us to indemnify our
officers
and directors to the fullest extent permitted by the laws of Nevada.
Further,
our Amended and Restated Bylaws permit us to purchase and maintain insurance
on
behalf of any person who is or was our director or officer against liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person’s status as our officer or director, whether or
not we would have the power to indemnify such person against such liability.
The
indemnification provisions described above provide coverage for claims arising
under the Securities Act and the Exchange Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons of pursuant to the our Amended and Restated
Articles of Incorporation, Amended and Restated Bylaws, the Nevada Revised
Statutes, or otherwise, we have been advised that in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities
Act
and is, therefore, unenforceable.