AE BIOFUELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
For the nine months ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,977,154
|
)
|
|
$
|
(8,772,678
|
)
|
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
|
|
|
|
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
245,776
|
|
|
|
605,909
|
|
|
Expired land options
|
|
|
-
|
|
|
|
40,000
|
|
|
Amortization and depreciation
|
|
|
569,337
|
|
|
|
529,263
|
|
|
Inventory provision
|
|
|
282,700
|
|
|
|
336,114
|
|
|
Amortization of debt discount
|
|
|
583,985
|
|
|
|
495,938
|
|
|
Impairment of long lived assets
|
|
|
-
|
|
|
|
2,086,350
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(78,777
|
)
|
|
|
326
|
|
|
Inventory
|
|
|
(916,303
|
)
|
|
|
(92,870
|
)
|
|
Prepaid expenses
|
|
|
964
|
|
|
|
88,698
|
|
|
Other current assets and other assets
|
|
|
26,039
|
|
|
|
664,666
|
|
|
Accounts payable
|
|
|
1,793,911
|
|
|
|
736,711
|
|
|
Accrued interest expense
|
|
|
1,658,442
|
|
|
|
1,027,095
|
|
|
Other liabilities
|
|
|
(206,362
|
)
|
|
|
324,254
|
|
|
Advances under lease agreement
|
|
|
500,000
|
|
|
|
-
|
|
|
Net cash used in operating activities
|
|
|
(1,517,442
|
)
|
|
|
(1,930,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment, net
|
|
|
(52,435
|
)
|
|
|
(78,978
|
)
|
|
Net cash used in investing activities
|
|
|
(52,435
|
)
|
|
|
(78,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under related party credit arrangements
|
|
|
2,612,000
|
|
|
|
1,485,500
|
|
|
Payments of borrowings under related party credit arrangements
|
|
|
(1,600,000
|
)
|
|
|
(169,630
|
)
|
|
Proceeds under working capital facility
|
|
|
3,189,946
|
|
|
|
2,255,536
|
|
|
Payments under working capital facility
|
|
|
(2,752,368
|
)
|
|
|
(1,845,439
|
)
|
|
Payments under debt facilities
|
|
|
-
|
|
|
|
3,449
|
|
|
Net cash provided by financing activities
|
|
|
1,449,578
|
|
|
|
1,729,416
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
110,073
|
|
|
|
9,512
|
|
|
Net cash increase (decrease) for period
|
|
|
(10,226
|
)
|
|
|
(270,274
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
52,178
|
|
|
|
377,905
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
41,952
|
|
|
$
|
107,631
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information, cash paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
37,723
|
|
|
$
|
281,480
|
|
|
Income taxes, net of refunds
|
|
|
3,200
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information, non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of registration rights liability through issuance of stock
|
|
|
-
|
|
|
$
|
1,807,748
|
|
|
Payment of interest through the issuance of stock
|
|
$
|
162,000
|
|
|
|
-
|
|
The accompanying notes are an integral part of the financial statements
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Activities and Summary of Significant Accounting Policies
Nature of Activities
. These consolidated financial statements include the accounts of AE Biofuels, Inc., a Nevada corporation, and its wholly owned subsidiaries: (i) American Ethanol, Inc., a Nevada corporation and its subsidiaries; Sutton Ethanol, LLC, a Nebraska limited liability company, Illinois Valley Ethanol, LLC, an Illinois limited liability company; Danville Ethanol, Inc., an Illinois corporation; AE Biofuels, Inc., a Delaware corporation and its subsidiary AE Renova, LLC, a Delaware limited liability company; (ii) Biofuels Marketing, a Delaware corporation; (iii) International Biodiesel, Inc., a Nevada corporation and its subsidiaries AE International Biofuels, Ltd., a British Virgin Islands company, AE DAABON, Ltd., a British Virgin Islands company, International Biofuels, Ltd, a Mauritius corporation and its subsidiary Universal Biofuels Private Ltd, an India company; (iv) AE Biofuels Americas, a Delaware corporation; (v) AE Biofuels Technologies, Inc., a Delaware corporation and its majority-owned subsidiary Energy Enzymes LLC, a Delaware limited liability company; (vi) AE Advanced Fuels, Inc., a Delaware corporation; and (vii) AE Advanced Fuels Keyes, Inc., a Delaware corporation (collectively, “AE Biofuels” or the “Company”).
We are an international biofuels company focused on the development, acquisition, construction and operation of next-generation fuel grade ethanol and biodiesel facilities, and the distribution, storage, and marketing of biofuels. We began selling fuel grade biodiesel from our production facility in Kakinada, India in November 2008. We operated a cellulosic ethanol commercial demonstration facility in Butte, Montana from August 2008 to June 2010, when our landlord sold the building and terminated our lease. In March 2010, we took possession, through project and lease agreements, of a 55 MGPY fuel grade ethanol facility in Keyes, California. We are currently retrofitting the Keyes ethanol facility, and plan to begin operating the plant in the first quarter of 2011.
Basis of Presentation and Consolidation
. The consolidated financial statements include the accounts of AE Biofuels, Inc. and its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated balance sheets as of September 30, 2010, the consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009, and the consolidated statements of cash flows for the three and nine months ended September 30, 2010 and 2009 are unaudited. The consolidated balance sheet as of December 31, 2009 was derived from the 2009 audited consolidated financial statements and notes thereto. The consolidated financial statements in this report should be read in conjunction with the 2009 audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.
See “Note 2. Ability to Continue as a Going Concern”.
The accompanying unaudited interim consolidated financial statements as of September 30, 2010 and 2009 and for the three and nine months ended September 30, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim consolidated financial statements for the three and nine months ended September 30, 2010 and 2009 have been prepared on the same basis as the audited consolidated statements as of December 31, 2009 and reflect all adjustments, consisting primarily of normal recurring adjustments, necessary for the fair presentation of its statement of financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.
Use of Estimates
. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant estimates, assumptions and judgments made by management include the determination of impairment of long-lived assets, the valuation of equity instruments such as options and warrants, the recognition and measurement of current taxes payable and deferred tax assets or liabilities, and the accrual for the payments under the Company’s registration rights agreement with certain of its shareholders and management’s judgment about contingent liabilities. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected. Refer to additional disclosures regarding the use of estimates below under the caption
Long-Lived Assets
.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications.
Certain prior period amounts were reclassified to conform to current period presentation. These reclassifications had no impact on previously reported net loss or accumulated deficit.
Revenue Recognition
. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed or determinable and collection is reasonably assured.
Cost of Goods Sold
. Cost of goods sold include those costs directly associated with the production of revenues, such as raw material purchases, factory overhead, and other direct production costs.
Research and Development.
Research and development costs are expensed as incurred, unless they have alternative future uses to the Company.
General and Administrative
. General and administrative expenses include those costs associated with the general operations of our business such as compensation, rent, consultants, and travel related to executive, legal and financial functions.
Cash and Cash Equivalents
. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances at various financial institutions domestically and abroad. Domestic accounts are insured by the FDIC. The Company’s accounts at these institutions may at times exceed federally insured limits. The Company has not experienced any losses in such accounts.
Accounts Receivable
. Accounts receivable consist of product sales made to large credit worthy customers.
Inventories
. Inventories are stated at the lower of cost, using the first-in and first-out (FIFO) method, or market.
Property, Plant and Equipment
. Property, plant and equipment are carried at cost less accumulated depreciation after assets are placed in service and are comprised primarily of land acquired for development of production facilities, and the biodiesel plant in India. The estimated useful life of this plant is 20 years. The estimated useful life for office equipment and computers is three years and the useful life of machinery and equipment is seven years. Depreciation is provided using the straight line method over the assets useful life.
Income Taxes.
We recognize income taxes in accordance with ASC 740, “Income Taxes”, using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of enacted tax law.
ASC 740 provides for recognition of deferred tax assets if the realization of such assets is more likely than not to occur. Otherwise, a valuation allowance is established for the deferred tax assets which may not be realized. As of December 31, 2009, the Company recorded a full valuation allowance against its net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance.
We are subject to income tax audits by the respective tax authorities in all of the jurisdictions in which we operate. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires us to make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long - Lived Assets.
We evaluate the recoverability of long-lived assets with finite lives in accordance with ASC Subtopic 360-10-35, “Property, Plant, and Equipment - Recognition”, which requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated undiscounted cash flows, the impairment loss would be measured as the difference between the carrying amount of the assets and its fair value based on the present value of estimated future cash flows.
With respect to our biodiesel facility in India, which comprises approximately 75% of the carrying value of total assets, we develop various assumptions to estimate the future cash flows that will be generated from this facility in order to test the recoverability of this asset. The determination of estimated future cash flows is highly uncertain in the current economic environment. Further, as our biodiesel facility in India has been in operation for about two years and to date has operated at less than 10% of its production capacity, we believe our assumptions regarding future cash flows and in turn the carrying value of its biodiesel facility represent a significant estimate in the preparation of our consolidated financial statements. Our revenues for the three and nine months ended September 30, 2010 were less than the same period of the previous year, due primarily to our inability to replicate in the current quarter a large international order which occurred during the three months ended September 30, 2009. Similarly, we incurred a gross loss for the three and nine months ended September 30, 2010 principally due to our high level of fixed costs relative to the plant productive capacity and the slower than expected adoption of biodiesel sales in India.
We are currently hampered by a disparity between the national biofuels tax policy in India and the State of Andhra Pradesh tax policy. Upon the adoption of the national law by the state, we anticipate the tax disparity will lessen the price of biodiesel relative to petroleum and allow for economic blending of biodiesel with petroleum based diesel. We are currently working with the national government to rationalize this tax structure, but cannot predict the timing or outcome of these governmental policy changes. We are also marketing our biodiesel product to industrial customers. We currently market our biodiesel product to three industrial customers and have hired a sales staff to promote this activity. While we cannot predict the success with which we will be able to penetrate this market, we believe that opportunities exist to grow our revenue base in the industrial market space. We have also prepared our forecast based on the current prices of fuel and feedstock commodities which currently are forecasted to provide gross production margins; however, our gross margins depend principally on the spread between feedstock and biodiesel prices and this spread has fluctuated significantly in recent months. We are also continuing to seek opportunities to raise additional funds for working capital purposes, which we believe will expand our opportunities to purchase, process and sell our product in a more economically competitive matter; however, there can be no assurances that we will be able to obtain additional financing at competitive terms.
We believe that the global market for biodiesel products is in its early stages and that we will ultimately be successful in executing on our business plan; however, we recognize that our ability to successfully execute on our business plan includes estimates and assumptions regarding the outcome of certain events that are included in our cash forecast (including those described above) which are not within the control of the Company. In light of our disappointing cash flows achieved to date through September 30, 2010, we have updated our internal cash forecast by extending the timeline for achieving an increase in plant utilization in light of the slower than expected adoption of biodiesel sales in India and recent operating results. The resulting updated cash forecast indicates that our undiscounted cash flows are expected to exceed the carrying value of our biodiesel plant in India. Based on sufficient cash flow from our updated forecast, we have concluded that no impairment charge is warranted at this time; however, if we are unable to successfully execute on our updated business plan, it is at least reasonably possible that changes to the assumptions regarding the estimated future cash flows expected to be generated from this facility will result in an impairment charge (write down) of the carrying value of the biodiesel facility and such impairment charge could be material to our financial statements.
Basic and Diluted Net Loss per Share.
Basic loss per share is computed by dividing loss attributable to common shareholders by the weighted average number of common shares outstanding for the period, net of shares subject to repurchase. Diluted loss per share reflects the dilution of common stock equivalents such as options, convertible preferred stock and warrants to the extent the impact is dilutive. Basic loss per share includes the vested portion of restricted stock grants. The unvested restricted stock grants are included only in the fully diluted net loss per share calculation. As we incurred net losses for the three months ended September30, 2010 and 2009, potentially dilutive securities have been excluded from the diluted net loss per share computations as their effect would be anti-dilutive.
The following table shows the weighted-average number of potentially dilutive shares excluded from the diluted net loss per share calculation for the three and nine months ended September 30, 2010, and 2009:
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
Series B preferred stock
|
|
|
3,264,067
|
|
|
|
3,340,979
|
|
|
|
3,208,703
|
|
|
|
3,330,725
|
|
|
Series B warrants
|
|
|
443,853
|
|
|
|
443,853
|
|
|
|
443,853
|
|
|
|
443,853
|
|
|
Common stock options and warrants
|
|
|
5,885,027
|
|
|
|
3,784,946
|
|
|
|
6,064,734
|
|
|
|
5,137,684
|
|
|
Unvested restricted stock
|
|
|
––
|
|
|
|
10,989
|
|
|
|
––
|
|
|
|
––
|
|
|
Total weighted average number of potentially dilutive shares excluded from the diluted net loss per share calculation
|
|
|
9,592,947
|
|
|
|
7,580,767
|
|
|
|
9,717,290
|
|
|
|
8,912,262
|
|
Comprehensive Income.
ASC 220, “Comprehensive Income”, requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources. Our other comprehensive income consists solely of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiaries. The investment in this subsidiary is considered indefinitely invested overseas, and as a result, deferred income taxes are not recorded related to the currency translation adjustments.
Foreign Currency Translation/Transactions.
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date; with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income. Income and expense accounts are translated at average exchange rates during the year. Gains and losses from foreign currency transactions are recorded in other income (loss), net. The functional currency is the local currency for all non-U.S. subsidiaries.
Fair Value of Financial Instruments.
Our financial instruments include cash and cash equivalents, mandatorily redeemable series B preferred stock, short and long-term debt and long term debt (related party). Cash and cash equivalents are carried at fair value as discussed in Note 17. The carrying value of our short-term debt approximates fair value due to the short-term maturity of this instrument, which absent an amendment to the existing loan agreement, matured in June 2010. Our secured term loan carrying value approximates fair value based upon the borrowing rates currently available to the Company for bank loans in India with similar terms and maturities. We are unable to estimate the fair value of the long term debt (related party) due to the lack of comparable available credit facilities.
Stock-Based Compensation Expense.
Effective January 1, 2006, we adopted the fair value recognition provisions of ASC 718, “Compensation – Stock Compensation”, requiring us to recognize expense related to the fair value of our stock-based compensation awards adjusted to reflect only those shares that are expected to vest. Our implementation of ASC Section 715-20-50, “Compensation – Retirement Benefits - Defined Benefit Plans - Disclosure”, used the modified-prospective-transition method.
We made the following estimates and assumptions in determining fair value of stock options as prescribed by ASC 718:
|
●
|
Valuation and amortization method
— We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
|
|
●
|
Expected Term
— Our expected term represents the weighted-average period that our stock-based awards are expected to be outstanding. We applied the “Simplified Method” as defined in the SEC’s Staff Accounting Bulletin No. 107 and 110.
|
|
●
|
Expected Volatility
— Our Company’s expected volatilities are based on the historical volatility of comparable public companies’ stock for a period consistent with our expected term.
|
|
●
|
Expected Dividend
— The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. We currently pay no dividends and do not expect to pay dividends in the foreseeable future.
|
|
●
|
Risk-Free Interest Rate
— We base the risk-free interest rate on the implied yield currently available on United States Treasury zero-coupon issues with an equivalent remaining term.
|
Commitments and Contingencies.
The Company records and/or discloses commitments and contingencies in accordance with ASC 450, “Contingencies”. ASC 450 applies to an existing condition, situation, or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. As of September 30, 2010, the Company is not aware of any material commitments or contingencies other than those disclosed in “Note 16. Contingent Liabilities.”
Recent Accounting Pronouncements
.
In August 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-22 (ASU 2010-22), “Accounting for Various Topics -- Technical Corrections to SEC Paragraphs - An announcement made by the staff of the U.S. Securities and Exchange Commission,” which amends various SEC paragraphs based on external comments received and the issuance of SAB 112, and amends or rescinds portions of certain SAB topics. We do not expect the provisions of ASU 2010-22 to have a material effect on the financial position, results of operations or cash flows of the Company.
In August 2010, the FASB issued ASU
2010-21, “Accounting for Technical Amendments to Various SEC Rules and Schedules: Amendments to SEC Paragraphs
”. The ASU reflects changes made by the SEC in Final Rulemaking
Release No. 33-9026
, which was issued in April 2009 and amended SEC requirements in Regulation S-X (
17 CFR 210.1-01
et seq.) and Regulation S-K (
17 CFR 229.10
et seq.) and made changes to financial reporting requirements in response to the FASB's issuance of
SFAS No. 141(R)
, “Business Combinations” (
ASC
805), and
SFAS No. 160 ,
“Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (
FASB ASC 810
). We do not expect the provisions of
ASU
2010-21 to have a material effect on the financial position, results of operations or cash flows of the Company.
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (ASC 820): Improving Disclosures about Fair Value Measurements,” which requires additional disclosures on transfers in and out of Level I and Level II and on activity for Level III fair value measurements. The new disclosures and clarifications on existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures on Level III activity, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We do not expect the adoption of ASU No. 2010-06 to have a material impact on our consolidated financial condition or results of operations.
2. Ability to Continue as a Going Concern
The accompanying financial statements have been prepared on the going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced losses and negative cash flow since inception and currently have a working capital deficit and total stockholders’ deficit. These factors raise substantial doubt about our ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on several factors, including the ability to raise a significant amount of capital for operating expenses, capital expenses, current liabilities and debt service.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have produced negative gross profit, have less than one month of operating cash, have incurred losses from inception through September 30, 2010 and have negative working capital (current assets less current liabilities) of $27,222,234. We have raised approximately $36.3 million to date through the sale of preferred stock and approximately $23.3 million, including accrued interest, through debt facilities. An additional $2 million of cash has been generated through the sale of its subsidiary, Wahoo Ethanol, LLC, with an additional $8 million through the dissolution of the Sutton Ethanol Joint Venture. We will have to raise significantly more capital and secure a significant amount of debt to complete our business plan and continue as a going concern. We have one biodiesel production facility in operation that began selling biodiesel to the domestic Indian market in November 2008. Cash flow from the biodiesel plant will likely be insufficient to allow for the completion of our business plan in fiscal 2010.
Management believes that it will be able to raise additional capital through equity offerings and debt financings and execute on our business plan to restart the Keyes facility. Should we not be able to raise enough capital, through financial instruments or generate adequate profits from operations, the Company may be forced to sell all or a portion of its existing biodiesel facility or other assets at a discount to market value and may incur additional impairment related to these assets to generate cash to continue our business plan or possibly discontinue operations. We have also arranged extended terms with our trade creditors. Our goal is to raise additional funds needed to construct and operate next generation ethanol and biodiesel facilities through stock offerings and debt financings. There can be no assurance that additional financing will be available to us at all, or on terms satisfactory to us. The accompanying financial statements do not include any adjustments to the classification or carrying values of our assets or liabilities that may result should we be unable to continue as a going concern.
3. Inventory
Inventory consists of the following:
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
Raw materials
|
|
$
|
619,003
|
|
|
$
|
389,442
|
|
|
Work-in-progress
|
|
|
578,223
|
|
|
|
77,123
|
|
|
Finished goods
|
|
|
63,508
|
|
|
|
126,896
|
|
|
Total inventory
|
|
$
|
1,260,734
|
|
|
$
|
593,461
|
|
For the three and nine months ended September 30, 2010, we expensed $47,771 and $285,098, respectively, in connection with the write-down of inventory to reflect market value below cost. For the three and nine months ended September 30, 2009, we expensed $101,549 and $335,722, respectively in connection with the write-down of inventory to reflect market value below cost.
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
September
30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
3,386,725
|
|
|
$
|
3,358,569
|
|
|
Buildings
|
|
|
12,196,355
|
|
|
|
11,828,545
|
|
|
Furniture and fixtures
|
|
|
135,227
|
|
|
|
126,718
|
|
|
Machinery and equipment
|
|
|
873,576
|
|
|
|
924,964
|
|
|
Construction in progress
|
|
|
3,334,565
|
|
|
|
3,155,001
|
|
|
Total gross property, plant & equipment
|
|
|
19,926,448
|
|
|
|
19,393,797
|
|
|
Less accumulated depreciation
|
|
|
(1,534,534
|
)
|
|
|
(945,922
|
)
|
|
Total net property, plant & equipment
|
|
$
|
18,391,914
|
|
|
$
|
18,447,875
|
|
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three and nine months ended September 30, 2010, we recorded $184,721 and $613,647 respectively, in depreciation expense. During the three and nine months ended September 30, 2009 we recorded $182,548 and $542,263 respectively, in depreciation expense. No interest was capitalized during the three months ended September30, 2010 or 2009.
Components of construction in progress include $3,046,971 related to our India biodiesel pretreatment and glycerin facility, and $287,594 related to the development of our Sutton property (held for future development of a next generation cellulosic ethanol facility). The estimated cost to complete construction of the pretreatment and glycerin facility is $1,000,000. Commitments for approximately $6,516 under construction contracts, purchase orders and other short term contracts were outstanding at September 30, 2010.
Our property, plant and equipment represent approximately 90% of the carrying value of total assets. Management is required to evaluate these long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
With respect to our biodiesel facility in India, which comprises approximately 75% of the carrying value of total assets, we develop various assumptions to estimate the future cash flows that will be generated from this facility in order to test the recoverability of this asset. The determination of estimated future cash flows is highly uncertain in the current economic environment. Further, as our biodiesel facility in India has been in operation for about two years and to date has operated at less than 10% of its production capacity, we believe our assumptions regarding future cash flows and in turn the carrying value of its biodiesel facility represent a significant estimate in the preparation of our consolidated financial statements. Our revenues for the three and nine months ended September 30, 2010 were less than the same period of the previous year, due primarily to our inability to replicate in the current quarter a large international order which occurred during the three months ended September 30, 2009. Similarly, we incurred a gross loss for the three and nine months ended September 30, 2010 principally due to our high level of fixed costs relative to the plant productive capacity and the slower than expected adoption of biodiesel sales in India.
We are currently hampered by a disparity between the national biofuels tax policy in India and the State of Andhra Pradesh tax policy. Upon the adoption of the national law by the state, we anticipate the tax disparity will lessen the price of biodiesel relative to petroleum and allow for economic blending of biodiesel with petroleum based diesel. We are currently working with the national government to rationalize this tax structure, but cannot predict the timing or outcome of these governmental policy changes. We are also marketing our biodiesel product to industrial customers. We currently market our biodiesel product to three industrial customers and have hired a sales staff to promote this activity. While we cannot predict the success with which we will be able to penetrate this market, we believe that opportunities exist to grow our revenue base in the industrial market space. We have also prepared our forecast based on the current prices of fuel and feedstock commodities which currently are forecasted to provide gross production margins; however, our gross margins depend principally on the spread between feedstock and biodiesel prices and this spread has fluctuated significantly in recent months. We are also continuing to seek opportunities to raise additional funds for working capital purposes, which we believe will expand our opportunities to purchase, process and sell our product in a more economically competitive matter; however, there can be no assurances that we will be able to obtain additional financing at competitive terms.
We believe that the global market for biodiesel products is in its early stages and that we will ultimately be successful in executing on our business plan; however, we recognize that our ability to successfully execute on our business plan includes estimates and assumptions regarding the outcome of certain events that are included in our cash forecast (including those described above) which are not within the control of the Company. In light of our disappointing cash flows achieved to date through September 30, 2010, we have updated our internal cash forecast by extending the timeline for achieving an increase in plant utilization in light of the slower than expected adoption of biodiesel sales in India and recent operating results. The resulting updated cash forecast indicates that our undiscounted cash flows are expected to exceed the carrying value of our biodiesel plant in India. Based on sufficient cash flow from our updated forecast, we have concluded that no impairment charge is warranted at this time; however, if we are unable to successfully execute on our updated business plan, it is at least reasonably possible that changes to the assumptions regarding the estimated future cash flows expected to be generated from this facility will result in an impairment charge (write down) of the carrying value of the biodiesel facility and such impairment charge could be material to our financial statements.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Other Current Assets, Other Assets and Other Current Liabilities
Other current assets and other assets consists of foreign input tax credits, restricted cash, payments for land options for possible future ethanol plants, supplier deposits and other prepayments.
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
Current
|
|
|
|
|
|
|
|
Short term deposits
|
|
$
|
79,342
|
|
|
$
|
56,221
|
|
|
Foreign input credits
|
|
|
256,281
|
|
|
|
256,124
|
|
|
Other
|
|
|
37,956
|
|
|
|
57,323
|
|
|
|
|
$
|
373,579
|
|
|
$
|
369,668
|
|
|
Long Term
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
––
|
|
|
$
|
10,744
|
|
|
Deposits
|
|
|
32,836
|
|
|
|
38,600
|
|
|
|
|
$
|
32,836
|
|
|
$
|
49,344
|
|
Foreign input and custom duty credits represent payment of tax to governmental agencies where the Company expects to receive reimbursement upon the filing of returns or the application of these funds to reduce the payment of future taxes.
Other current liabilities consist of accrued:
|
|
|
September 30
, 2010
|
|
|
December 31, 2009
|
|
|
Vacation and wages
|
|
$
|
1,013,365
|
|
|
$
|
655,821
|
|
|
Duty and service tax
|
|
|
686,551
|
|
|
|
660,571
|
|
|
Termination fee
|
|
|
600,000
|
|
|
|
600,000
|
|
|
Legal fees
|
|
|
372,937
|
|
|
|
425,475
|
|
|
Repurchase obligations
|
|
|
345,957
|
|
|
|
265,581
|
|
|
Other
|
|
|
483,668
|
|
|
|
709,483
|
|
|
|
|
$
|
3,502,478
|
|
|
$
|
3,316,931
|
|
6. Debt
Debt consists of the following:
|
|
|
September
30
, 2010
|
|
|
December 31, 2009
|
|
|
Revolving line of credit (related party)
|
|
$
|
—
|
|
|
|
4,250,031
|
|
|
Total long term debt
|
|
|
—
|
|
|
|
4,250,031
|
|
|
Senior secured note, including accrued interest of $1,657,909 and $1,017,701 less deferred issuance costs of $0 and $583,985
|
|
|
7,327,909
|
|
|
|
6,083,716
|
|
|
Revolving line of credit (related party)
|
|
|
5,639,945
|
|
|
|
—
|
|
|
Unsecured working capital loan
|
|
|
790,028
|
|
|
|
326,234
|
|
|
Secured term loan
|
|
|
5,058,118
|
|
|
|
4,391,512
|
|
|
Total current debt
|
|
|
18,816,000
|
|
|
|
10,801,462
|
|
|
Total debt
|
|
$
|
18,816,000
|
|
|
$
|
15,051,493
|
|
Senior secured note
. On May 16, 2008, Third Eye Capital ABL Opportunities Fund (“Purchaser”) purchased a 10% senior secured note in the amount of $5 million along with 5 year warrants exercisable for 250,000 shares of common stock at an exercise price of $3.00 per share. The note is secured by first-lien deeds of trust on real property located in Nebraska and Illinois, by a first priority security interest in equipment located in Montana, and a guarantee of $1 million by McAfee Capital LLC (owned by Eric McAfee and his wife). Interest on the note accrues on the unpaid principal balance and is payable on the first business day of each quarter beginning on July 1, 2008. Prior to the note maturing on May 15, 2009, we entered into an amendment and limited waiver (the “Amendment”) with Third Eye Capital Corporation (“Agent”) on behalf of itself and the Purchaser dated March 31, 2009. The Amendment did not become effective as we were unable to meet the conditions of effectiveness set forth in the Amendment. Accordingly, the interest rate under this facility has been accrued at the default interest rate, which was 18%, during the period of default. We have no cross default provisions in this or any other debt agreement. As a result, our inability to execute the conditions of effectiveness of the effective Amendment did not have any adverse impact on our other debt obligations.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On December 10, 2009, we entered into an amendment to the note with Third Eye Capital Corporation extending the note maturity date until June 30, 2010 and waiving covenant defaults. The amended note bears interest at 10%. We evaluated the loan modification under ASC 470-50 and ASC 470-60 and determined that the amendment represented a non-troubled debt modification under ASC 470- 50, in which the original and new debt instrument are not substantially different, accordingly, fees between the debtor and creditor have been reflected as a reduction to the carrying value of the debt and will amortized ratably over the seven month term of the debt. Fees of $350,000 were incurred to extend the maturity and fees of $300,000 were incurred to waive the financial covenant defaults. At September 30, 2010 and December 31, 2009, we recorded deferred issuance costs of $0 and $583,985, respectively. The facility is currently in default due to the passage of the maturity repayment date. Accordingly, the interest rate under this facility has been accrued at the default interest rate, which was 18%, during the period of default. Subsequent to the balance sheet date, the Note and Warrant Purchase Agreement was amended. See “Note 18. Subsequent Events.”
Secured term loan
. On July 17, 2008, Universal Biofuels Private Limited (“UBPL”), a wholly-owned subsidiary, entered into a six year secured term loan with the State Bank of India in the amount of approximately $6 million. The term loan matures in March 2014 and is secured by UBPL’s assets, consisting of the biodiesel plant and land in Kakinada.
In July 2008 we drew approximately $4.6 million against the secured term loan. The loan principal amount is repayable in 20 quarterly installments of approximately $270,000, using exchange rates on December 31, 2009, with the first installment due in June 2009 and the last installment payment due in March 2014. The interest rate under this facility is subject to adjustment every two years, based on 0.25% above the Reserve Bank of India advance rate and is currently 12.00%.
The quarterly principal payment, beginning June 2009 and continuing through the balance sheet date, were not made and in the event of default of payment of any installment of principal payments, the term loan provides for liquidating damages at a rate of 2% per annum for the period of default.
On October 7, 2009, UBPL received a
demand notice from the State Bank of India. The notice informs UBPL that an event of default has occurred for failure to make an installment payment on the loan due in June, 2009 and demands repayment of the entire outstanding indebtedness of 19.60 crores (approximately $4 million) together with all accrued interest thereon and any applicable fees and expenses by October 10, 2009. As of September 30, 2010, UBPL was in default on thirteen months of interest, five principal repayments, asset coverage ratio and debt service coverage ratio. Additional provisions of default include the bank having the unqualified right to disclose or publish our company name and our directors names as defaulter in any medium or media. At the bank’s option, it may also demand payment of the balance of the loan since the principal payments are in default in September 2009. As a result we have classified the entire loan amount as current. We are currently in discussions with the bank with regards to an amendment to the Agreement of Loan for Overall Limit for the modification of terms.
Revolving line of credit – related party
. On August 17, 2009, International Biodiesel, Inc., a wholly owned subsidiary of AE Biofuels, Inc., entered into a Revolving Line of Credit Agreement with Mr. Cagan, (the “Lender”), for $5,000,000. The $5,000,000 Revolving Line of Credit is secured by accounts, investments, intellectual property, securities and other collateral of AE Biofuels, Inc. excluding the collateral securing our obligations under the Note and Warrant Purchase Agreement with Third Eye Capital Corporation and Third Eye Capital ABL Opportunities Fund and the collateral securing our obligations under the Secured Term Loan with the State Bank of India. The $5,000,000 Revolving Line of Credit bears interest at the rate of 10% per annum and matures on July 1, 2011, at which time the outstanding advances under the Revolving Line of Credit together with any accrued interest and other unpaid charges or fees will become due. Upon certain events, one of which is the default on certain other debt facilities, the Lender may declare a default upon 10 days prior written notice. Upon an event of default, the Lender may accelerate the outstanding indebtedness together with all accrued interest thereon and demand immediate repayment. We used the new Revolving Line of Credit Agreement to satisfy the outstanding balance under the unsecured revolving line of credit facility with a limit of $3,500,000 in August 2009. At September 30, 2010, a total of $5,639,945, including accrued interest, was outstanding under the $5,000,000 Revolving Line of Credit, dated August 17, 2009. The credit facility allows for the draw of principal in the amount of $5,000,000, of which $4,854,992 in principal draws were outstanding at September 30, 2010 and through the date of this report. All outstanding principal and accrued interest is due and payable on July 1, 2011.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating agreement
.
In November 2008, we entered into an operating agreement with Secunderabad Oils Limited (“Secunderabad”). Under this agreement Secunderabad agreed to provide us with working capital, on an as needed basis, to fund the purchase of feedstock and other raw materials for our Kakinada biodiesel facility. Working capital advances bear interest at the actual bank borrowing rate of Secunderabad, currently at 15%. During the three and nine months ended September 30, 2010, we settled on profit/(loss) with Secunderabad in the amount of approximately $2,425and $32,593, respectively, under the agreement and approximately $20,137 and $37,723, respectively, in interest for working capital funding. See "Note 11. Acquistions, Divestitures and Joint Ventures." During the three and nine months ended September 30, 2009 we paid Secunderabad approximately $112,260 and $192,394, respectively, under the agreement and approximately $52,793 and $60,237, respectively, in interest for working capital funding.
At September 30, 2010 and December 31, 2009 we had $790,028 and $326,234 outstanding under this agreement, respectively, and included as current short term borrowings on the balance sheet.
7. Operating Leases
We, through our subsidiaries, have non-cancelable operating leases for office space in Cupertino and Hyderabad, India. These leases expire at various dates through May 31, 2012. The Company records rent expense on a straight line basis.
Future minimum operating lease payments as of September 30, 2010, are:
|
|
|
Rental
Payments
|
|
|
2010
|
|
$
|
67,995
|
|
|
2011
|
|
|
275,119
|
|
|
2012
|
|
|
115,475
|
|
|
Total
|
|
$
|
458,589
|
|
For the three and nine months ended September 30, 2010 we paid rent under operating leases of $67,757 and $186,956, respectively and for the three and nine months ended September 30 2009, we paid $61,159 and $ 194,454, respectively.
In July, 2009, we entered into a sublease agreement with Solargen Energy, Inc. for approximately 3,000 square feet of leased space. For the three and nine months ended September 30, 2010, we invoiced, collected and offset as rent expense $21,418 and $64,254 under this agreement. The future minimum lease payments above exclude collections of rent under this sublease agreement. See “Note 14. Related Party Transactions.”
On December 1, 2009, we entered into a project agreement and lease for a 55 million gallon nameplate ethanol facility located in Keyes, California with a lease term of 36 months at a monthly lease payment of $250,000 (an aggregate of $9,000,000 over the expected lease term). This lease is effective upon substantial completion of the retrofit and restart activities, which has yet to occur. Under the project agreement, we received a contribution of $500,000 towards certain costs of the project and are required to complete certain repair and retrofit activities prior to commencement of the lease. Subsequent to the balance sheet date, the lease agreement was amended and extended. See “Note 18. Subsequent Events.”
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Stockholders’ Deficit
Significant terms of the designated preferred stock are as follows:
Voting.
Holders of our Series B preferred stock are entitled to the number of votes equal to the number of shares of Common Stock into which the shares of Series B preferred stock held by such holder could be converted as of the record date. Cumulative voting with respect to the election of directors is not allowed. Currently each share of Series B preferred stock is entitled to one vote per share of Series B preferred stock. In addition, without obtaining the approval of the holders of a majority of the outstanding preferred stock, the Company cannot:
|
●
|
Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series B preferred stock;
|
|
●
|
Effect an exchange, reclassification, or cancellation of all or a part of the Series B preferred stock, including a reverse stock split, but excluding a stock split;
|
|
●
|
Effect an exchange, or create a right of exchange, of all or part of the shares of another class of shares into shares of Series B preferred stock; or
|
|
●
|
Alter or change the rights, preferences or privileges of the shares of Series B preferred stock so as to affect adversely the shares of such series.
|
Dividends
. Holders of all of our shares of Series B preferred stock are entitled to receive non-cumulative dividends payable in preference and before any declaration or payment of any dividend on common stock as may from time to time be declared by the board of directors out of funds legally available for that purpose at the rate of 5% of the original purchase price of such shares of preferred stock. No dividends may be made with respect to our common stock until all declared dividends on the preferred stock have been paid or set aside for payment to the preferred stock holders. To date, no dividends have been declared.
Liquidation Preference.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series B preferred stock are entitled to receive, prior and in preference to any payment to the holders of the common stock, $3.00 per share plus all declared but unpaid dividends (if any) on the Series B preferred stock. If the assets legally available for distribution to the holders of the Series B preferred stock are insufficient to permit the payment to such holders of their full liquidation preference, then our entire assets legally available for distribution are distributed to the holders of the Series B preferred stock in proportion to their liquidation preferences. After the payment to the holders of the Series B preferred stock of their liquidation preference, our remaining assets legally available for distribution are distributed to the holders of the common stock in proportion to the number of shares of common stock held by them. A liquidation, dissolution or winding up includes (a) the acquisition of the Company by another entity by means of any transaction or series of related transactions to which the Company is party (including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any sale of stock for capital raising purposes) that results in the voting securities of the Company outstanding immediately prior thereto failing to represent immediately after such transaction or series of transactions (either by remaining outstanding or by being converted into voting securities of the surviving entity or the entity that controls such surviving entity) a majority of the total voting power represented by the outstanding voting securities of the Company, such surviving entity or the entity that controls such surviving entity, or (b) a sale, lease or other conveyance of all or substantially all of the assets of the Company.
Conversion.
Holders of Series B preferred stock have the right, at their option at any time, to convert any shares into common stock. Each share of preferred stock will convert into one share of common stock, at the current conversion rate. The conversion ratio is subject to adjustment from time to time in the event of certain dilutive issuances and events, such as stock splits, stock dividends, stock combinations, reclassifications, exchanges and the like. In addition, at such time as the Registration Statement covering the resale of the shares of common stock is issuable, then all outstanding Series B preferred stock shall be automatically converted into common stock at the then effective conversion rate. For the year ended December 31, 2009, holders of 131,167 shares of Series B preferred stock elected to convert their shares of Series B preferred stock into 131,167 shares of common stock. During the nine months ended September 30, 2010, holders of 155,500 shares of Series B preferred stock elected to convert their shares of Series B preferred stock into 155,500 shares of common stock.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Registration Rights Agreement liquidated damages for certain common and Series B preferred stock holders.
Certain holders of shares of our common stock and holders of shares of our Series B preferred stock were entitled to have their shares of common stock (including common stock issuable upon conversion of Series B preferred stock) registered under the Securities Act within but no later than 30 days after the Reverse Merger Closing date, December 7, 2007, pursuant to the terms and subject to the conditions set forth in a Registration Rights Agreement entered into among the Company and such holders. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act.
We were required to make pro rata payments to each eligible stock investor as liquidated damages and not as a penalty, in the amount equal to 0.5% of the aggregate purchase price paid by such investor for the preferred stock for each thirty (30) day period or pro rata for any portion thereof following the date by which or on which such Registration Statement should have been filed or effective, as the case may be. Payments are in full compensation to the investors, and constitute the investor's exclusive remedy for such events. The amounts payable as liquidated damages were payable in cash or shares of common stock at the Company’s election. In lieu of registering the securities, the Company elected to issue shares of its common stock to eligible stockholders in full compensation to such stockholders. The liquidated damages ceased accruing in December 2008 when the shares became available for trading in compliance with Rule 144. We elected to pay these liquidated damages through the issuance of 406,656 shares of common stock to the holders of shares of our Series B preferred stock.
In February 2009, in full settlement of the $1,807,748 registration right liability, we issued a total of 406,656 shares of our common stock to eligible shareholders resulting in a reduction of the liability and a corresponding increase in additional paid in capital and common stock.
Mandatorily Redeemable Series B preferred stock.
In connection with the election of dissenters’ rights by the Cordillera Fund, L.P., at December 31, 2008 we reclassified 583,334 shares with an original purchase price of $1,750,002 out of shareholders’ equity to a liability called “mandatorily redeemable Series B preferred stock” and accordingly reduced stockholders equity by the same amount to reflect our estimated obligations with respect to this matter. See “Note 16. Contingent Liabilities.”
Common Stock
On October 6, 2008, the Company and TIC cancelled their Strategic Alliance Agreement and TIC agreed to return 4,000,000 shares of our common stock for a total payment of $500,000 of which $234,419 was paid to TIC upon the parties’ entry into the agreement and $265,581 was payable on or before December 30, 2008. Upon cancellation of the agreement, TIC returned 1,880,000 shares and will return the remaining 2,120,000 shares upon the receipt of the final payment. In the event the final payment is not received on or before December 30, 2009, interest shall begin to accrue at the annual rate of 18% until paid in full. At September 30, 2010, the Company had not made the payment required under the agreement.
9. Private Placement of Preferred Stock and Warrants
In connection with the sale of our Series A and B preferred stock, we issued to our placement agent warrants to purchase a number of shares of our Common Stock representing up to 8% of the shares of Series A and Series B preferred stock sold. The warrants are exercisable for a period of seven years from the date of issuance, have a net exercise provision and are transferable. The shares of our common stock issuable upon exercise of the warrants must be included in any Registration Statement filed by us with the Securities and Exchange Commission. Further, subject to certain conditions, we have indemnified the placement agents and affiliated broker-dealers against certain civil liabilities, including liabilities under the Securities Act.
A summary of warrant activity for placement warrants for the three months ended September 30, 2010 is as follows:
|
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Warrants
Exercisable
|
|
|
Remaining
Term
(years)
|
|
|
Outstanding, December 31, 2009
|
|
|
666,587
|
|
|
$
|
3.00
|
|
|
|
666,587
|
|
|
|
2.56
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Outstanding, September 30, 2010
|
|
|
666,587
|
|
|
|
3.00
|
|
|
|
666,587
|
|
|
|
2.06
|
|
The warrants are considered equity instruments. Since they were issued as a cost of the issuance of the Series A and B preferred stock, the fair value of these warrants has effectively been netted against the preferred stock sale proceeds.
Warrants
In May 2008, we issued 250,000 common stock warrants to Third Eye Capital in connection with our sale of a 10% senior secured note. These warrants are immediately exercisable at $0.12 per share.
In February 2007, we issued 5,000 warrants to a consultant as compensation for services rendered. These warrants are immediately exercisable at $3.00 per share.
10. Stock-Based Compensation
Common Stock Reserved for Issuance
AE Biofuels authorized the issuance of 4,000,000 shares under the 2007 Stock Plan for stock option awards, which includes both incentive and non-statutory stock options. These options generally expire five years from the date of grant and are exercisable at any time after the date of the grant, subject to vesting. Shares issued upon exercise before vesting are subject to a right of repurchase, which lapses according to the vesting schedule of the original option.
The following is a summary of options granted under the 2007 Stock Plan:
|
|
|
Shares
Available For
Grant
|
|
|
Number of
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Balance as of December 31, 2008
|
|
|
1,490,500
|
|
|
|
2,509,500
|
|
|
$
|
3.24
|
|
|
Authorized
|
|
|
882,410
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(2,884,000
|
)
|
|
|
2,884,000
|
|
|
|
0.16
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
696,500
|
|
|
|
(696,500
|
)
|
|
|
3.14
|
|
|
Balance as of December 31, 2009
|
|
|
185,410
|
|
|
|
4,697,000
|
|
|
|
1.37
|
|
|
Authorized
|
|
|
908,734
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,490,000
|
)
|
|
|
1,490,000
|
|
|
|
0.21
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
600,000
|
|
|
|
(600,000
|
)
|
|
|
1.43
|
|
|
Balance as of September 30, 2010
|
|
|
204,144
|
|
|
|
5,587,000
|
|
|
|
1.05
|
|
The weighted average remaining contractual term at September 30, 2010 was 3.79 years. The aggregate intrinsic value of the shares outstanding at September 30, 2010 is $0. The aggregate intrinsic value represents the total pretax intrinsic value, based on the excess of the Company’s closing stock price at September 30, 2010 of $0.05, over the options holders’ strike price, which would have been received by the option holders had all option holders exercised their options as of that date. The weighted average grant date fair value of these awards issued during the nine months ended September 30, 2010 is $0.07.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Included in the table above are 857,000 options issued to consultants in November 2007,June 2008, May 2009, August 2009 and March 2010. These options had an exercise price of $3.00, $3.70, $0.16, $0.15, and $0.21, respectively, and generally vest over 3 years. At December 31, 2009 the weighted average remaining contractual term was 2.90 years. We recorded an expense for the three and nine months ended September 30, 2010 in the amount of $6,574 and $26,029, respectively, and for the three and nine months ended September 30, 2009 in the amount of $16,004 and $19,274 respectively, which reflects periodic fair value remeasurement of outstanding consultant options under ASC 505-50-30, “Equity-Based Payment for Non-Employees Initial Measurement”, (formerly Emerging Issues Task Force, or EITF, No. 96-18, “Accounting for Equity Instruments that are issued to Other Employees for Acquiring, or in Conjunction with Selling, Goods or Services,”). The valuation using the Black-Scholes-Merton model is based upon the current market value of our common stock and other current assumptions, including the expected term (contractual term for consultant options). We record the expense related to consultant options using the accelerated expense pattern prescribed in ASC 505-50-30. Options outstanding that have vested or are unvested of September 30, 2010 are as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Term
(In Years)
|
|
|
Aggregate
Intrinsic
Value
1
|
|
|
Vested
|
|
|
3,706,708
|
|
|
$
|
1.35
|
|
|
|
1.64
|
|
|
$
|
—
|
|
|
Unvested
|
|
|
1,880,292
|
|
|
$
|
0.35
|
|
|
|
1.96
|
|
|
|
—
|
|
|
Total
|
|
|
5,587,000
|
|
|
$
|
1.70
|
|
|
|
1.80
|
|
|
$
|
—
|
|
———————
(1) Based on the $0.05 closing price of AE Biofuels stock on September 30, 2010, as reported on the Over-the-Counter Markets, options had no aggregate intrinsic value.
Valuation and Expense Information
We incurred non-cash stock compensation expense of $67,089 and $245,776 during the three and nine months ended September 30, 2010 respectively, for options granted to our general and administrative employees and consultants. We incurred non-cash stock compensation expense of $153,635 and $605,909 for the three and nine months ended September 30, 2009, respectively, for options granted to our general and administrative employees and consultants. All stock option expense was classified as general and administrative expense.
As of September 30, 2010 and 2009, we held $198,730 and $591,219, respectively, of total unrecognized compensation expenses under ASC Section 715-20-50, “Compensation – Retirement Benefits Defined Benefit Plan-General Disclosure” net of estimated forfeitures, related to stock options that we will amortize over the next four fiscal years.
11. Acquisitions, Divestitures and Joint Ventures
Marketing Company Acquisition.
On September 1, 2007, we acquired Biofuels Marketing, Inc., a Nevada corporation, in exchange for 200,000 shares of common stock valued at $3.00 per share. Of the shares issued, 50% were contingent upon the continued employment of the President of Biofuels Marketing through August 31, 2009, and are accounted for as compensation expense as earned. Of the purchase price, $300,000 was assigned to the primary asset acquired, which was a customer list, which was amortized over 18 months.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Technology Company Formation.
On February 28, 2007, we acquired a 51% interest in Energy Enzymes, Inc. We have the right to acquire the remaining 49% for 1,000,000 shares of our common stock upon the fulfillment of certain performance milestones or at our option to waive certain performance milestones. The performance milestones had not been met as of September 30, 2010. In accordance with ASC Section 810-10-65, “Transition and Open Effective Date Information”, we attributed net loss to Energy Enzymes, Inc. beginning at the date of adoption of ASC Section 810-10-65 in our consolidated statement of operations and recorded the minority interest to non-controlling interest in the stockholders equity section of our balance sheet. The equity attributable to the Company and to the non-controlling interest in Energy Enzymes, Inc. for the nine months ended September 30, 2010 and 2009 are as follows:
|
|
For the nine months ended September 30, 2010
|
|
For the nine months ended September, 2009
|
|
|
|
Parent
|
|
Noncontrolling Interest
|
|
Consolidated
|
|
Parent
|
|
|
Noncontrolling
Interest
|
|
|
Consolidated
|
|
|
December 31,
Accumulated deficit
|
|
$
|
(1,803,799
|
)
|
|
$
|
(362,375
|
)
|
|
$
|
(2,166,174
|
)
|
|
$
|
(1,426,633
|
)
|
|
$
|
––
|
|
|
$
|
(1,426,633
|
)
|
|
Attributable net loss
|
|
|
(144,628
|
)
|
|
|
(138,956
|
)
|
|
|
(283,584
|
)
|
|
|
(305,905
|
)
|
|
|
(293,891
|
)
|
|
|
(599,776
|
)
|
|
September 30,
Accumulated
deficit
|
|
$
|
(1,948,427
|
)
|
|
$
|
(501,331
|
)
|
|
$
|
(2,449,758
|
)
|
|
$
|
(1,732,538
|
)
|
|
$
|
(293,891
|
)
|
|
$
|
(2,026,409
|
)
|
Operating Agreement.
In November 2008, we entered into an operating agreement with Secunderabad Oils Limited (“Secunderabad”). Under this agreement Secunderabad agreed to provide us with plant operational expertise on an as-needed basis and working capital, on an as needed basis, to fund the purchase of feedstock and other raw materials for our Kakinada biodiesel facility. Working capital advances bear interest at the actual bank borrowing rate of Secunderabad. In return, we agreed to pay Secunderabad an amount equal to 30% of the plant’s monthly net operating profit. In the event that our biodiesel facility operates at a loss, Secunderabad owes us 30% of the losses. The agreement can be terminated by either party at any time without penalty.
During the three and nine months ended September 30, 2010, we settled on profit/(loss) with Secunderabad in the amount of approximately $2,425and $32,593, respectively, under the agreement and approximately $20,137 and $37,723, respectively, in interest for working capital funding. During the three and nine months ended September 30, 2009 we paid Secunderabad approximately $112,260 and $192,394, respectively, under the agreement and approximately $52,793 and $60,237, respectively, in interest for working capital funding.
At September 30, 2010 and December 31, 2009 we had $790,028 and $326,234 outstanding under this agreement, respectively, and included as current short term borrowings on the balance sheet.
On January 23, 2008, International Biofuels, Ltd. agreed to end the joint venture with Acalmar Oils and Fats, Ltd. including termination of Acalmar’s right to own or receive any ownership interest in the joint venture. The total cancellation price payable by International Biofuels was $900,000 and is classified in our Statement of Operations as a shareholder agreement cancellation payment. For the year ended December 31, 2008, $300,000 was paid to Acalmar by the Company, reducing the remaining balance due to Acalmar to $600,000 at December 31, 2008. The balance remained at $600,000 as of September 30, 2009.
12. Commitments
Construction Contracts
We contracted with Desmet Ballestra India Pvt. Ltd. to build a glycerin refinery and pre-treatment plant at our existing biodiesel plant in Kakinada. At September 30, 2010 and December 31, 2009, commitments under construction contracts were outstanding for approximately $62,898 and $60,654, respectively. Commitments under purchase orders and other short term construction contracts were $6,516 at September 30, 2010.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivative Instruments
ASC 815 (SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”), establishes accounting and reporting standards for derivative instruments as either assets or liabilities in the statement of financial position based on their fair values. Changes in the fair values are required to be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings.
The Company does not use derivative instruments for speculative or trading purposes. Beginning in the quarter ended June 30, 2010, the Company first entered into certain derivative instruments in order to manage exposures related to commodity price fluctuations associated with the Company’s purchase of crude palm oil at its Indian subsidiary. The Company currently uses commodity forward contracts (“forwards”), which minimize commodity price risks from changes in crude palm oil prices. These derivatives have no hedging designation; accordingly, the derivatives are marked-to-market at each balance sheet date and any gain or loss is recognized in other income/expense in the statement of operations. The amount of derivative fair values in the balance sheet is included in other current assets and/or other current liabilities, respectively. As of September 30, 2010, we did not hold any forward contracts.
The forward contracts have maturities of less than one year (and generally have maturities of up to 90 days) and require the Company to exchange commodities at specified dates and rates. The Company considers the credit risk related to the forward contracts to be low because such instruments are entered into with financial institutions having high credit ratings and are generally settled on a net basis.
Firm Price Purchase Commitments
As of September 30, 2010, the Company had $1,300,000 (which approximates fair value at September 30, 2010) of firm price purchase commitments for 1,650 metric ton of feedstock at our India plant.
13. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. Currently, the CODM is the Chief Financial Officer. In the prior year the Company considered itself to operate within a single operating segment. The commencement of operations in India as well as the opening of the demonstration facility in Butte, MT resulted in the Company’s reevaluation of its management structure and reporting around business segments
AE Biofuels recognized three reportable geographic segments: “India”, “North America” and “Other.”
The “India” operating segment encompasses the Company’s 50 MGY nameplate capacity biodiesel manufacturing plant in Kakinada, the administrative offices in Hyderabad, India, and the holding companies in Nevada and Mauritius. The Company’s biodiesel is marketed and sold primarily to customers in India through brokers and by the Company directly. For the third quarter ended September 30, 2010, revenues from our Indian operations were 100% of total net revenues. Indian revenues consist of sales of biodiesel produced by our plant in Kakinada to customers in India. The majority of the Company’s assets as of September 30, 2010 were attributable to its Indian operations.
The “North America” operating segment includes our leased plant in Keyes, CA, our cellulosic ethanol commercial demonstration facility, and our land held for future ethanol plant development in Sutton, NE and in Danville, IL. The Company is utilizing the Montana demonstration facility to commercialize its proprietary enzymatic and cellulosic technology. As our technology gains market acceptance, this business segment will include our domestic commercial application of the cellulosic technology, our plant construction projects and any acquisitions of ethanol or ethanol related technology facilities in North America.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The “Other” segment encompasses the Company’s costs associated with new market development, company-wide fund raising, formation, executive compensation and other corporate expenses.
Summarized financial information by reportable segment for the three and nine months ended September 30, 2010, based on the internal management system, is as follows:
|
Statement of Operations Data
|
|
For the Nine months ended September 2010
|
|
|
For the Three months ended September 2010
|
|
|
Revenues
|
|
|
|
|
|
|
|
India
|
|
$
|
5,635,480
|
|
|
$
|
1,592,932
|
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
Total revenues
|
|
$
|
5,635,480
|
|
|
$
|
1,592,932
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
India
|
|
$
|
5,823,256
|
|
|
|
1,671,989
|
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
Total cost of goods sold
|
|
$
|
5,823,256
|
|
|
$
|
1,671,989
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
|
|
|
|
|
|
|
India
|
|
$
|
(187,776)
|
|
|
$
|
(79,057)
|
|
|
North America
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
Total gross profit (loss)
|
|
$
|
(187,776)
|
|
|
$
|
(79,057)
|
|
For the nine months ended September 30, 2010 all of our revenues were from sales to external customers in our India segment. During the three months ended September 30, 2010, no single customers accounted for more than 10% of our consolidated revenue. During the nine months ended September 30, 2010, no single customer accounted for more than 10% of our consolidated revenues. All sales during the three months nine months ended September 30, 2010 were made into the domestic India market.
|
Balance Sheet Data
|
|
|
|
|
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
|
Total Assets
|
|
|
|
|
|
|
|
India
|
|
$
|
17,030,784
|
|
|
$
|
16,224,300
|
|
|
North America (United States)
|
|
|
3,144,135
|
|
|
|
3,250,827
|
|
|
Other
|
|
|
60,501
|
|
|
|
91,091
|
|
|
Total Assets
|
|
$
|
20,235,420
|
|
|
$
|
19,566,218
|
|
14. Related Party Transactions
Description of Agreements with Related Parties
Laird Cagan, a former member of the Company’s board of directors and a significant stockholder, provides us with a $5,000,000 secured revolving line of credit. The secured revolver line of credit was entered into on August 17, 2009 and the initial draw was made to pay off the previous unsecured revolving line of credit. At September 30,2010, a total of $4,854,992, plus accrued interest of $784,953 was outstanding under these credit facilities which accrues interest at 10% interest per annum. All outstanding principal and accrued interest under the secured revolving line of credit is due and payable on July 1, 2011.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 30, 2010, AE Advanced Fuels Keyes, Inc., a wholly owned subsidiary of AE Biofuels, Inc., entered into an Unsecured Promissory Note with Mr. Cagan for $1,600,000 as bridge financing for the repair and retrofit activities at the Keyes plant. The note bears no interest. In partial consideration for this loan, we agreed to issue 600,000 shares of common stock to Mr. Cagan. At our option, this note is payable in whole or part at any time.
During the three months ended March 31, 2010, we borrowed and repaid $1,600,000 under this credit facility.
We pay Eric A. McAfee, the Company’s Chief Executive Officer and Chairman of the board of directors, a salary of $10,000 per month for services rendered as our President and CEO. For each of the three and nine months ended September 30, 2010 and 2009, we paid or accrued Mr. McAfee $30,000 and $ 90,000 respectively, pursuant to this agreement. As of September 30, 2010, the Company owed Mr. McAfee $250,000 under the terms of this agreement.
We are billed by McAfee Capital for certain expense reimbursements, principally in connection with services provided by Eric A. McAfee and his administrative personnel. For the three and nine months ended September 30, 2010, we paid McAfee Capital $285,588 and $313,547, respectively and for the three and nine months ended September 30, 2009, we paid McAfee Capital $ 12,536 and 20,443 respectively. Eric A. McAfee, an officer and member of our board of directors, owns 100% of McAfee Capital. The Company owes McAfee Capital $338,452 under the terms of this agreement.
In July, 2009, we entered into a sublease agreement with Solargen Energy, Inc. for approximately 3,000 square feet of leased space. Eric McAfee is also a member of the Board of Directors and a significant shareholder of Solargen, Energy, Inc. Michael Peterson, a member of our Board of Directors is also the Chief Executive Officer of Solargen, Energy, Inc. For the nine months ended September 30, 2010, we invoiced, collected and offset as rent expense $105,532 under this agreement in addition to a prepayment of $11,876 we received for April rent. The future minimum lease payments above exclude collections of rents under this sublease agreement. See Note 7 Operating Leases.
15. Income Tax
We file a consolidated federal income tax return. This return includes all corporate subsidiaries 80% or more owned by the Company as well as the Company’s pro-rata share of taxable income from pass-through entities in which Company holds an ownership interest. The Company owns 51% of Energy Enzymes, Inc., which files a separate federal income tax return and is 100% consolidated for financial reporting. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its subsidiaries.
Based on our evaluation of current and anticipated future taxable income, we believe it is more likely than not that insufficient taxable income will be generated to realize the net deferred tax assets, and accordingly, a valuation allowance has been set against these net deferred tax assets.
We do not provide for U.S. income taxes for any undistributed earnings of our foreign subsidiaries, as we consider these to be permanently reinvested in the operations of such subsidiaries and have a cumulative foreign loss. At September 30, 2010, these undistributed earnings (losses) totaled approximately $6,085,006. Some countries in which our subsidiaries are located may impose withholding taxes on distributed earnings. However, due to our overall deficit in foreign cumulative earnings and our U.S. loss position, we do not believe a material net unrecognized U.S. deferred tax liability exists.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We recognize the tax benefits from uncertain tax positions in our financial statements only if the position is more-likely-than-not of being sustained on audit, based on the technical merits of the position. Tax positions that meet the recognition threshold are reported at the largest amount that is more-likely-than-not to be realized. This determination requires a high degree of judgment and estimation. We periodically analyze and adjust amounts recorded for our uncertain tax positions, as events occur to warrant adjustment, such as when the statutory period for assessing tax on a given tax return or period expires or if tax authorities provide administrative guidance or a decision is rendered in the courts. We do not reasonably expect the total amount of uncertain tax positions to significantly increase or decrease within the next 12 months. As of September 30, 2010, our uncertain tax positions were not significant.
We conduct business globally and, as a result, one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as India, Mauritius, and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2006.
16. Contingent Liabilities
On March 28, 2008, the Cordillera Fund, L.P. filed a complaint in the Clark County District Court of the State of Nevada against American Ethanol, Inc. and the Company. The complaint sought a judicial declaration that Cordillera has a right to payment from the Company for its American Ethanol shares at fair market value pursuant to Nevada’s Dissenters’ Rights Statute, a judicial declaration that Cordillera is not a holder of Series B preferred stock in the Company under the provisions of the statute; and a permanent injunction compelling the Company to apply the Dissenters’ Rights Statute to Cordillera’s shares and reimburse Cordillera for attorneys fees and costs.
On September 2, 2008 the case was transferred to the Second Judicial Court of the State of Nevada, located in Washoe County, Nevada. On or about October 7, 2009, the Court entered a judgment awarding damages in the amount of $1,750,002 plus accrued interest to Cordillera. On October 19, 2009, the Company filed a Notice of Appeal of the judgment. This appeal is still pending. The amount of the judgment was accrued at December 31, 2009. See “Note 8. Stockholder’s Equity.”
On May 1, 2009 our transfer agent, Corporate Stock Transfer, Inc., filed a Complaint for Interpleader in the United States District Court for the District of Colorado. The interpleader action was based on the Company’s and CST’s refusal to remove the restrictive legend from a certificate representing 5,600,000 shares of the Company's restricted common stock held by Surendra Ajjarapu and sought judicial determination as to whether the legend could lawfully be removed from the Certificate. On July 1, 2009 Ajjarapu answered the Complaint and cross-claimed against the Company and CST for breach of fiduciary duty, conversion, violation of Section 10(b) of the Exchange Act and Rule 10b-5 and injunctive relief. The Ajjarapus also counter-claimed against CST for declaratory judgment. The interpleader action was rendered moot when the legends were lifted from the Ajjarapu’s certificates and the Ajjarapus’ filed an Amended Complaint reciting the same claims set forth in their original Cross-Complaint against the Company and CST. Company does not believe it has any liability for the matters described in this litigation and intends to defend itself vigorously. However, there can be no assurance regarding the outcome of the litigation. An estimate of possible loss, if any, or the range of loss cannot be made and therefore we have not accrued a loss contingency related to these actions.
17. Fair Value of Financial Instruments and Related Measurement
Fair value, as defined in ASC Topic 820-10, “Fair Value Measurements and Disclosures”, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, whether using an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques requires significant judgment and are primarily dependent upon the characteristics of the asset or liability, the principal (or most advantageous) market in which participants would transact for the asset or liability and the quality and availability of inputs. Inputs to valuation techniques are classified as either observable or unobservable within the following hierarchy:
Level 1 Inputs
These inputs come from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs
These inputs are other than quoted prices that are observable, for an asset or liability. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs
These are unobservable inputs for the asset or liability which require the Company’s own assumptions.
As required by ASC Topic 820-10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Our Level 1 financial assets reflect the fair value of cash held in commercial bank accounts with short term maturities. We consider the statement we receive from the bank as a quoted price for cash and measure the fair value of these assets using the bank statement.
The carrying amounts and fair values of the Company’s financial instruments at September 30, 2010, are as follows:
Fair Value Measurement - Recurring Basis
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
Amount
at September 30, 2010
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and time deposits
|
|
$
|
41,952
|
|
|
$
|
41,952
|
|
|
$
|
––
|
|
|
$
|
––
|
|
|
Total
|
|
$
|
41,952
|
|
|
$
|
41,952
|
|
|
|
|
|
|
$
|
––
|
|
Fair Value Measurement - Nonrecurring Basis
The Company performs impairment tests under the guidance of ASC 360-10, “Property, Plant, and Equipment”, whenever there are indicators of impairment. The Company would recognize an impairment loss only if the carrying value of a long-lived asset or group of assets is not recoverable from undiscounted cash flows, and would measure an impairment loss as the difference between the carrying value and fair value of the assets based on discounted cash flows projections. As of and for the nine month period ended September 30, 2010 and 2009, the Company made no fair value measurements on a non recurring basis with respect to its asset and liabilities. The Company estimated the fair value of its idle land holdings in Illinois and Nebraska by using available market prices based on recent market appraisals (level 2 inputs).
AE BIOFUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
18. Subsequent Events.
Energy Enzymes Merger:
On October 14, 2010, the noncontrolling interest in Energy Enzymes was merged with and into AE Biofuels Technologies, Inc. in exchange for 1,000,000 shares of stock in AE Biofuels, Inc. We do not expect the effect of this merger to have a material effect on the financial position, results of operations or cash flows of the Company.
AE Advanced Fuels Keyes, Inc.Project Financing:
On October 29, 2010, Third Eye Capital Corporation, as agent, (“Purchaser”) entered into a Note Purchase Agreement for the purchase of $4,500,000 of 12% Senior Secured Term Notes dated October 18, 2010 (the “Term Note”) of AE Advanced Fuels Keyes, Inc., a subsidiary of AE Biofuels, Inc. The Term Note is secured by first-lien deeds of trust on all real and personal property, an assignment of proceeds of all government grants, and guarantee of AE Biofuels, Inc., and a guarantee from McAfee Capital enforceable on 200,000 shares of Evolution Petroleum stock. Laird Cagan is a director and co-founder of Evolution Petroleum. See "Note 14. Related Party Transactions." Interest on the Term Note accrues on the unpaid principal balance and is payable monthly in arrears. Payment of principal begins upon substantial completion and commencement of the lease of the Cilion Plant on a monthly basis equal to the greater of $200,000, $0.05 per gallon produced from the Cilion plant, or 50% of free cash flow. Prepayment of all or any portion of the outstanding principal amount of the Term Note may occur upon 60 days written notice. Upon substantial completion and commencement of the lease of the Cilion plant, the Purchaser will receive 2% of total sales until repayment of the Term Note, after which the Purchaser will receive 1% of total sales for a period of the lesser of five (5) years or the term of the lease. The Purchaser receives a placement fee of three (3) percent of the the Note and a commitment fee of three (3) percent of the Note plus the payment of expenses relating to the establishment and operation of the Note. The Purchaser also receives one share of stock in AE Biofuels, Inc. for every $2 of Term Note purchased. The Term Note matures twelve (12) months from closing, and at that time the outstanding principal amount of the Term Note together with all accrued and unpaid interest thereon will become due. From the proceeds, AE Biofuels receives $1,000,000 for repayment of loans with with Third Eye Capital, as agent, and operating funds. The remaining proceeds are used to pay for the retrofit and restart of the Keyes plant.
Senior Secured Note Amendment:
Concurrently with the Term Note, we entered into an Amendment No. 5 and Limited Waiver (the “Amendment”) to the Note and Warrant Purchase Agreement dated as of May 16, 2008 (the “Note”) with Third Eye Capital Corporation (“Agent”). The Note had an original principal amount of $5,000,000 and originally was due and payable on May 15, 2009. On December 19, 2009, the maturity date of the Note was extended to June 30, 2010. The Amendment waives any defaults and extends the maturity date of the Note to June 30, 2011. The Note may be extended at our option thereafter on a monthly basis upon payment of a monthly extension fee of $75,000 per month.
We agreed to pay extension and amendment fees to the Agent of $500,000 in consideration for waivers of covenants and extension of the maturity date. Payment may be made in our stock shares at 90% of the closing price of the stock for an aggregate issuance not to exceed 15% of the total issued and outstanding stock. The waiver and extension fee will be added to the outstanding principal amount on the Note.
The Purchaser also receives first lien deeds of trust on all real and personal property, subordination and postponement of all related-party and third party loans, as well as cross-collateralization and cross-default to any financing transaction among and between AE Biofuels, Inc.; AE Advanced Fuels Keyes, Inc.; and the Purchaser.
Cilion Lease and Project Agreement Extension:
On October 29, 2010, Cilion agreed to extend the lease commencement date and project agreement until January 31, 2011 and waive any defaults under the agreements in exchange for a progress payment made prior to the commencement of the lease in the amount of $500,000 by AE Advanced Fuels Keyes upon closing of the Note Purchase Agreement with Third Eye Capital Corporation, as agent.
Subordination Agreement with Laird Cagan
: In conjunction with the Subordination Agreement with Laird Cagan dated October 29, 2010, we agreed to an extension fee representing 5% of the outstanding balance for the current and subsequent years where the notes are outstanding in the amount of approximately $250,000 to be paid in stock at the rate conversion of $0.05 per share or in cash.
Stock Issuances:
On November 4, 2010, we issued 50,000 shares of common stock in connection with financial advisory services.