New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
Note
1
–
ORGANIZATION
AND PLAN OF OPERATION
New
Generation Biofuels Holdings, Inc. (the “Company”), formerly known as H2Diesel
Holdings, Inc., a Florida corporation, is a development stage company that
through its wholly owned subsidiary, New Generation Biofuels, Inc., formerly
known as H2Diesel Inc., a Delaware corporation, holds an exclusive license
for
North America, Central America and the Caribbean to commercialize proprietary
technology (the “Technology”) to manufacture alternative biofuels from vegetable
oils and animal fats that the Company intends to market as a new class of
renewable fuel for power generation, heavy equipment, marine use and as heating
fuel.
The
Company is in the development stage and has not generated any revenues. As
a
result, the Company has incurred a net loss of $19.1 million and negative
cash
flows from operating activities of $8.2 million since Inception. The Company
is
obligated to pay $6.0 million in additional payments under the Master License,
of which $1.0 million is due in March 2009. The Company has fully funded
its
operating budget for 2008 but intends to raise additional financing during
2008
to fund subsequent operating budgets and long term business objectives, if
such
financing is available on favorable terms. The Company’s continued existence is
dependent upon several factors, including obtaining additional debt or equity
financing, producing biofuel, developing a market for its biofuel, and achieving
certain levels of sales volume and profitability from the sale of its biofuel
and sublicenses of its technology. Management is investigating various sources
of debt or equity financing and is developing marketing and production plans
for
its products.
Note
2
-
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles
in the
United States and the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read
in
conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007. The interim financial statements are unaudited, but in
the
opinion of management, all adjustments, consisting only of normal recurring
accruals, considered necessary for a fair statement of the results of these
interim periods have been included. The results of the Company’s operations for
any interim period are not necessarily indicative of the operating results
that
may be expected for any other interim period or a full fiscal
year.
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. The Company’s most significant estimate is the value of its
exclusive license. Other significant estimates include the valuation of shares,
warrants or options issued for services and the estimated useful life of
the
exclusive license used to calculate amortization. The Company evaluates its
estimates on an ongoing basis. Actual results could differ significantly,
especially as to the estimated value of its exclusive license from those
estimates under different assumptions or conditions.
Loss
per Common Share
Loss
per
share (“EPS”) is computed based on the weighted average number of common shares
outstanding and excludes any potential dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
the
issuance of common stock, which would then share in the earnings of the Company.
The shares issuable upon the exercise of stock options and warrants are excluded
from the calculation of net loss per share as their effect would be
antidilutive. As of June 30, 2008 and 2007, there were 11,041,315 and 9,638,625,
respectively, shares of common stock equivalents including options (6,005,000
shares of common stock as of June 30, 2008 and 4,405,000 shares of common
stock
as of June 30, 2007), non employee options (1,591,000 shares of common stock
as
of June 30, 2008 and 1,531,000 shares of common stock as of June 30, 2007)
and
warrants (3,445,315 shares of common stock as of June 30, 2008 and 3,702,625
shares of common stock as of June 30, 2007) that could potentially dilute
EPS in
the future that were not included in the computation of EPS because to do
so
would have been antidilutive. As of June 30, 2008 and 2007 there were 29,900
and
42,550, respectively, shares of Series A Convertible Preferred Stock which
are
convertible into 747,500 and 1,063,750, respectively, shares of common stock
that were not included in the computation of EPS because to do so would have
been antidilutive as well. As of June 30, 2008 there were 79,405 shares of
Series B Convertible Preferred Stock which are convertible into 1,868,353
shares
of common stock that were not included in the computation of EPS because
to do
so would have been antidilutive as well.
Stock
Based Compensation
The
Company issues stock as compensation to employees and outside consultants
for
services provided to the Company. Employee share-based awards are accounted
for
in accordance with SFAS 123R, “Share-Based Payment”, which requires the Company
to measure the cost of employee services received based on the grant date
fair
value of the award and be recognized as an expense over the requisite service
period. The Company reports any tax benefits resulting from tax deductions
in
excess of share based compensation expense recognized as a source of financing
cash flows with an offsetting amount classified as a use of operating cash
flows. The Company accounts for non-employee share-based awards in accordance
with EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquisition, or in Conjunction with Selling, Goods or
Services” (“EITF 96-18”). Costs are measured at the estimated fair market value
of the consideration received or the estimated fair value of the equity
instrument issued, whichever is more reliably measurable. The value of equity
instruments issued for consideration other than employee services is determined
on the earliest of a performance commitment or completion of performance
by the
provider for goods or services as described in EITF 96-18.
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
Note
3
-
OPTIONS
In
October 2007, the Company’s board of directors approved an Omnibus Incentive
Plan (the "Incentive Plan") to attract, retain and motivate key employees,
to
provide an incentive for them to achieve long-range performance goals and
to
enable them to participate in the long-term growth of the Company. The Company’s
shareholders approved the Incentive Plan at their annual meeting in November
2007. Options granted under the Incentive Plan may include non-qualified
stock
options as well as incentive stock option intended to qualify under Section
422A
of the Internal Revenue Code. The aggregate number of shares of common stock
that are reserved for issuance under the Incentive Plan must not exceed 2.7
million shares. Each stock option agreement specifies when all or any
installment of the option becomes exercisable. Option awards are generally
granted with an exercise price equal to the market price of the Company’s common
stock on the grant dates; generally vest from 0 to 3 years of continuous
service
and have a 10 year contractual term.
Prior
to
November 2007, the Company issued stock options to employees based on employment
and other agreements and issued stock options to non-employees based on
contractual agreements.
Each
stock option agreement specifies when all or any installment of the option
becomes exercisable. Option awards are generally granted with an exercise
price
equal to the market price of the Company’s common stock on the grant date;
generally vest from 0 to 3 years of continuous service and have a 5 to 10
year contractual term.
The
Company utilizes the Black-Scholes option valuation model to estimate the
fair
value of option and warrant grants on the date of grant. The following table
summarizes information about the stock options outstanding at June 30,
2008:
|
Weighted
Average Exercise Price
|
|
$
|
2.69
|
|
|
Expected
Life
|
|
|
5
years
|
|
|
Volatility
|
|
|
100.0
|
%
|
|
Dividend
Yield
|
|
|
0
|
%
|
|
Risk-free
interest rate
|
|
|
3.08
|
%
|
Employee
Options
A
summary
of the status of the Company’s options outstanding as of June 30, 2008 and the
changes during the year ending on that date is presented below:
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
5,605,000
|
|
$
|
2.63
|
|
|
8.54
|
|
|
|
|
|
Granted
|
|
|
400,000
|
|
$
|
3.50
|
|
|
9.54
|
|
|
|
|
|
Options
outstanding at June 30, 2008
|
|
|
6,005,000
|
|
$
|
2.69
|
|
|
8.37
|
|
|
|
|
|
Vested
and expected to vest - June 30, 2008
|
|
|
4,460,000
|
|
$
|
2.63
|
|
|
8.30
|
|
$
|
10,553,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at June 30, 2008
|
|
|
3,415,000
|
|
$
|
2.53
|
|
|
8.28
|
|
$
|
8,479,500
|
|
Options
outstanding at June 30, 2008 have an exercise price of $1.50 to $10.50 per
share. Options exercisable at June 30, 2008 do not include 1,545,000 performance
based options. For the six months ended June 30, 2008 and 2007, the Company
recorded a non-cash compensation charge of $1,193,411 and $996,163
respectively.
The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company’s closing stock price on June 30, 2008
and the exercise price, multiplied by the number of in-the-money options)
that
would have been received by the option holders had vested option holders
exercised their options on June 30, 2008. This amount changes based upon
changes
in the fair market value of the Company’s common stock. As of June 30, 2008,
$1,500,831 of the total unrecognized compensation costs related to stock
options
is expected to be recognized over a period of approximately two years and
six
months.
Non
Employee Options
The
Company has issued options in exchange for services rendered. The table below
summarizes stock option information with respect to all non employee stock
options as of June 30, 2008:
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
1,531,000
|
|
$
|
6.01
|
|
|
Granted
|
|
|
60,000
|
|
$
|
6.40
|
|
|
Options
outstanding at June 30, 2008
|
|
|
1,591,000
|
|
$
|
6.02
|
|
|
Options
exercisable at June 30, 2008
|
|
|
81,000
|
|
$
|
6.10
|
|
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
Non
employee options outstanding at June 30, 2008 have an exercise price of $6.00
to
$6.40 per share. Options exercisable at June 30, 2008 do not include 1,485,000
performance based options. For the six months ended June 30, 2008 and 2007,
the
Company recorded a non-cash compensation charge of $329,821 and $24,706
respectively. As of June 30, 2008, $96,357 of the total unrecognized
compensation costs related to non employee stock options is expected to be
recognized over a period of approximately six months.
Restricted
Stock Grants
In
May
2008, the Compensation Committee of the Company’s board of directors approved a
Management Equity Compensation Plan (the “Equity Compensation Plan”) to ensure
that equity remains a significant component of management compensation, to
align
employee and shareholder interests by providing opportunities for employees to
own the Company’s common stock and to motivate and retain key employees with
multi-year equity incentives. The Equity Compensation Plan generally
contemplates annual restricted stock grants under the Incentive Plan based
on
achieving certain performance targets and vesting annually over three years.
The
amount of each award is relative to an employee’s total compensation and based
on the individual’s ability to affect the Company’s results, with higher level
positions generally receiving grants equal to a greater percentage of their
compensation than lower level positions.
In
May
2008, the Company granted under the Equity Compensation Plan 31,989 restricted
shares to certain employees based on achieving certain 2007 performance targets.
The number of shares was calculated based on the dollar value of the award
divided by the closing price of the Company’s common stock on the American Stock
Exchange on the date the grant was approved by the Compensation Committee.
For
the period ended June 30, 2008, the Company recorded a non cash compensation
expense of $8,530. As of June 30, 2008, $196,199 of the total unrecognized
compensation costs related to restricted stock grants is expected to be
recognized over a period of approximately three years.
Note
4
–
LOSS
/
GAIN ON FAIR VALUE ADJUSTMENT
On
January 1, 2007, the Company implemented EITF 00-19-2, which requires a company
to recognize a liability for registration rights payments when they are probable
and the amount is reasonable estimable. As of December 31, 2006, the Company
had
not filed a “resale” registration statement for the October 2006 offering (the
“October 2006 Offering”). On January 1, 2007, the Company recorded a liability
for 6% of the shares issued in the October 2006 Offering. The Company recorded
a
$1,574,100 contingent liability based on the Company’s stock price at that date.
For the six months ended June 30, 2007, the Company recorded a gain on fair
value adjustment of $550,935 related to this liability as the Company’s stock
price declined during this period.
On
December 14, 2007, the Company determined that they would not be able to
file a
“resale” registration statement for the December 2007 offering (the “December
2007 Offering”) within 30 days. The Company anticipated that they would file by
April 30, 2008 and recorded a liability of $78,956 for 2% of the shares issued
in the December 2007 Offering. For the six months ended June 30, 2008, the
Company recorded a loss on fair value adjustment of $30,169 related to this
liability as the Company’s stock price declined during this
period.
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
The
Company filed the registration statement on May 30, 2008. Since the Company
filed its registration statement late and it has not been declared effective
by
the SEC within 180 days of the initial required filing date, for the six
months
ended June 30, 2008, the Company recorded an additional expense of $186,291
for
4% of the shares issued in the December 2007 Offering, up to the maximum
penalty
of 6% which is included in general and administrative expenses on the
consolidated statement of operations.
In
May
2008, the Company issued 35,486 shares of common stock representing penalty
shares of 4% of shares issued in the December 2007 Offering.
In
August 2008, the Company issued 17,743 shares of
common stock representing the balance of penalty shares of 2% of the shares
issued in the December 2007 Offering.
Note
5
–
PREFERRED
STOCK
Series
A Preferred Stock
On
May 9,
2007, the Company completed the offering (the “Series A Private Placement”) of
27,950 shares of the Company’s newly issued Series A Cumulative Convertible
Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) at
price of $100.00 per share to “accredited investors” as defined under the
Securities Act of 1933, as amended (the “Securities Act”). The gross proceeds
were $2,795,000. Under the terms of the Series A Private Placement, each
investor had the option to purchase additional securities up to the amount
initially purchased on the same terms as those of the Series A Private Placement
(the “Subscriber Option”). On June 8, 2007, the Company sold an additional
14,600 shares of Series A Preferred Stock at price of $100.00 per share in
connection with exercises of the Subscriber Option. The gross proceeds were
$1,460,000.
At
any
time prior to the third anniversary of the initial date of issuance, any
holder
of Series A Preferred Stock may convert all or a portion of their shares
into
shares of the Company’s common stock calculated by multiplying the number of
shares to be converted by such shares’ “stated value” (
i.e
,
$100
per share plus the amount of all dividends accumulated thereon) and dividing
the
result by the “conversion price” then in effect. The initial
conversion price of each share of Series A Preferred Stock is $4.00, and
each
share of Series A Preferred Stock is initially convertible into 25 shares
of our
common stock. Upon the third anniversary of the date of issuance,
each share of Series A Preferred Stock shall automatically, and without any
action on the part of the holder, convert into that number of shares of our
common stock computed by dividing such share’s “stated value” by the “conversion
price” then in effect. The “conversion price” is subject to
adjustment upon the occurrence of certain events, including, among others,
a
stock split, reverse stock split, stock dividend or combination of our common
stock. The Series A Preferred Stock is not redeemable.
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
Each
share of Series A Preferred Stock will accrue cumulative dividends on a
quarterly basis at a rate of 8% per annum. All dividends will be paid in
shares
of common stock having a fair market value at the time of issuance equal
to the
amount of dividends to be paid, provided that to the extent the shares of
common
stock to be issued are not then registered under the registration rights
agreements with the Series A Preferred Stock investors, dividends shall cumulate
but shall remain unpaid until such time as the shares are registered and
issued. The Company may elect to pay any dividends in cash in lieu of
issuing shares of common stock. The Series A Preferred Stock shall
also participate on an as-converted basis with all dividends paid on the
shares
of common stock. For the six months ended June 30, 2008 the Company accrued
dividends for the Series A Preferred Stock of $161,236 which is included
in
accounts payable and accrued expenses.
Upon
any
liquidation of the Company, the holders of the Series A Preferred Stock will
be
entitled to be paid, prior to the common stock or any other securities that
by
their terms are junior to the Series A Preferred Stock, the original issue
price
of the Series A Preferred Stock plus all accrued and unpaid dividends. To
the
extent the proceeds of liquidation are insufficient to pay such amounts in
full,
the proceeds available will be allocated pro rata among the shares of Series
A
Preferred Stock.
As
of the
most recent balance sheet date, June 30, 2008, the liquidation value of the
Series A Preferred Stock was $3,361,511.
Each
investor in the Series A Private Placement also received a warrant exercisable
for a number of shares of common stock equal to 50% of the number of shares
of
common stock into which the Series A Preferred Stock purchased by such investor
is initially convertible. The initial exercise price of the warrants is $6.00
per share.
At
any
time following the first anniversary of the Closing Date and provided that
the
shares of Common Stock issuable upon exercise of the Warrants are not then
registered for resale pursuant to an effective registration statement under
the
Securities Act, the Warrants may also be exercised by means of a “cashless
exercise.” The warrants have a fair value of $2,610,882 based on the
Black-Scholes options pricing method.
Series
B Preferred Stock
On
March
31, 2008, the Company completed the offering (the “Series B Private Placement”)
of a total 43,986 shares of the Company’s newly issued Series B Convertible
Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”) at a
price of $100.00 per share to “accredited investors” under the Securities Act.
The gross proceeds from the issuance of 40,768 shares of Series B Preferred
Stock was $4,076,800. In addition, the Company issued 3,218 shares of Series
B
Preferred Stock as commission in connection with the Private
Placement.
On
May
13, 2008, the Company completed a second closing of the Series B Private
Placement”) of a total 35,419 shares of the Company’s Series B Preferred Stock.
The gross proceeds from the issuance of 35,123 shares of Series B Preferred
Stock was $3,512,300. In addition, the Company issued 296 shares of Series
B
Preferred Stock as commission in connection with the Private Placement. In
summary, in the offering that was closed on March 31, 2008 and May 13, 2008,
the
Company sold a total of 75,891 shares of Series B Preferred Stock and warrants
to purchase 446,413 shares of its common stock for total gross proceeds of
$7,589,100.
The
Series B Preferred Stock ranks junior to the Series A Preferred Stock and
senior
to the common stock with respect to the payment of dividends and amounts
payable
upon liquidation, dissolution or winding up of the Company. The Series B
Preferred Stock also is not redeemable.
At
any
time prior to the third anniversary of the date of issuance, any holder of
Series B Preferred Stock may convert all or a portion of their shares into
shares of the Company’s common stock calculated by dividing the sum of the
Stated Value and all accrued dividends not previously paid or added to the
Stated Value to the date of such conversion by the Series B Conversion Price
then in effect.
Upon
the
third anniversary of the initial issue date of the Series B Preferred Stock,
each share of Series B Preferred Stock will automatically convert into the
number of shares of common stock into which it is then convertible.
The
initial conversion price is $4.25 per share, subject to adjustment upon the
occurrence of certain major corporate events such as reorganizations and
stock
splits (the “Series B Conversion Price”).
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
Dividends
will be payable from the date of issuance at a rate of 8% per year when and
as
declared by the board of directors. To the extent that dividends are not
declared, or cannot be paid, there will be an increase in the Stated Value
of
the Series B Preferred Stock in the amount of 8% per year. In the event
dividends are declared by the Board and paid by the Company on the Common
Stock,
holders of Series B Preferred Stock will either share ratably in such dividends
based on the number of shares of common stock into which the Series B Preferred
Stock may be converted or (to the extent that dividends are not declared
or
cannot be paid), there will be a corresponding increase in the Stated Value.
Dividends will be paid semiannually, at the Company’s election, in cash, in
shares of Series B Preferred Stock (valued at Stated Value) or in common
stock
valued at the market price, on September 30 and March 31 of each year beginning
on September 30, 2008 to holders of record on the 15
th
day of
the preceding month. If there is an increase in Stated Value because dividends
were not or could not be paid, that increase will occur semiannually on the
dates that dividends would have been paid. For the six months ended June
30,
2008, the Company accrued dividends on the Series B Preferred Stock of $124,994.
The
Series B Preferred Stock is convertible into 1,868,367 shares of common stock,
at the election of the holders, at an initial conversion price of $4.25 per
share. The fair market value of this beneficial conversion was calculated
based
on the difference between the share price of the common stock, at the time
of
issuance, and the initial conversion price. This resulted in a Series B
Preferred Stock dividend in the amount of $2,963,995 recorded during the
six
months ended June 30, 2008.
Upon
any
Liquidation of the Company, after the Company has made the required
distributions to the holders of Series A Preferred Stock (and any other
preferred stock then outstanding, if any, ranking in liquidation senior to
the
Series B Preferred Stock), and before any distribution is made to the holders
of
Common Stock (and any other stock ranking in liquidation junior to the Series
B
Preferred Stock), the holders of Series B Preferred Stock will be entitled
to be
paid an amount in cash equal to the aggregate liquidation value of Series
B
Preferred Stock, which equals the Stated Value plus all accrued dividends
not
previously paid or added to Stated Value. As of the most recent balance sheet
date, June 30, 2008, the liquidation value of the Series B Preferred Stock
was
$8,065,494.
Each
investor in the Series B Private Placement also received a warrant exercisable
for a number of shares of Common Stock equal to 25% of the number of shares
of
Common Stock into which the Series B Preferred Stock purchased by such investor
is initially convertible. The initial exercise price of the warrants is $6.25
per share. Both the Series B Preferred Stock and the warrants include
antidilution provisions that, if triggered, could result in a reduction of
the
conversion price of the Series B Preferred Stock or the exercise price of
the
warrants, but not below $3.00 per share. The warrants have a fair value of
$2,032,739 based on the Black-Scholes option pricing method.
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
In
connection with the Series B Private Placement, the Company agreed to register
the resale of the shares of common stock issuable (i) upon conversion of
the
Series B Preferred Stock, (ii) as dividends on the Series B Preferred Stock,
and
(iii) upon exercise of warrants, all in accordance with registration rights
agreements among the Company and each of the investors. Under the registration
rights agreement, the Company is required to file a “resale” registration
statement with the SEC covering such shares on or before the 30th day following
the closing of the Series B Private Placement. The Company filed the
registration statement on May 30, 2008, within the required time period.
As of
August 14, 2008, the registration statement was not yet effective.
If
at any
time prior to the first to occur of (i) the first anniversary of the
registration of the common stock underlying the Series B Preferred Stock
or (ii)
18 months after the closing , the Company issues any additional shares of
common
stock with a purchase price less than the Conversion Price of the Series
B
Preferred Stock, or additional convertible securities with a conversion price
less than the Conversion Price of the Series B Preferred Stock, the Conversion
Price of the Series B Preferred Stock will be reduced to the purchase price
at
which such common stock has been issued or the conversion price of such
additional convertible securities, but not below a Conversion Price of $3.00
per
share. The antidilution adjustments in the Series B Preferred Stock and warrants
will not apply to certain issuances of equity securities or warrants, including
those not issued in capital-raising transactions (such as to customers,
suppliers, joint venture partners or in connection with acquisitions of
property) or in connection with equity award or options granted by the Company
to employees, consultants and directors under employee benefit plans approved by
the Board of Directors under which options generally are granted with exercise
prices at least equal to the Company’s stock price on the grant
dates.
In
connection with the Series B Private Placement, the Company paid a commission
of
$249,288, issued 3,514 shares of Series B Preferred Stock and warrants
exercisable for 197,437 shares of common stock as consideration for investors
introduced to the company. The warrants have a fair value of $770,858 based
on
the Black-Scholes option pricing model. The warrants are considered a cost
directly associated with the issuance of stock.
Note
6
–
AGREEMENTS
On
March
14, 2008, the Company entered into a lease agreement for office space in
Lake
Mary, Florida in connection with the relocation of its corporate headquarters
to
Florida. The lease commitment is for approximately 6,000 square feet of office
space commencing in July 2008 for a period of sixty six months. The total
rental
commitment, for the entire rental period, is approximately $952,000.
New
Generation Biofuels Holdings, Inc.
(A
Development Stage Enterprise)
Notes
to
Consolidated Financial Statements
On
March
20, 2008, the Company paid $150,000 of the $1,000,000 payment due on March
20,
2008 under the Exclusive License Agreement. On March 23, 2008, the Exclusive
License Agreement, as amended, was further amended to extend the due date
of the
remaining $850,000 that was due on March 20, 2008 to the closing of the
Company’s next financing, with net proceeds that exceed $850,000. On April 3,
2008, the Company paid the $850,000 that was due under the Exclusive License
Agreement.
On
March
21, 2008, the Company entered into a test burn agreement with FirstEnergy
Corporation to evaluate the Company’s proprietary biofuel technology in power
generation applications. The Agreement requires the Company to supply its
biofuel for a test program to be performed at FirstEnergy’s Edgewater Power
Plant combustion turbine facility in Lorain, Ohio. The test program includes
the
evaluation of both technical and environmental performance characteristics
of
its biofuel. The agreement also required the Company to pay 50% of all costs
of
environmental emissions testing conducted in connection with the test program,
provided that its aggregate obligation with respect to such expenses shall
not
exceed $15,000. FirstEnergy is entitled to all revenue arising from sales
of
electricity generated during the testing. The parties have agreed to negotiate
a
mutually agreeable biofuel purchase agreement in the event the tests are
deemed
successful.
On
June
2, 2008, the Company entered into a biofuel sales agreement with Dynegy Oakland
LLC, a subsidiary of Dynegy, Inc. The agreement provides for Dynegy to purchase
up to 1.7 million gallons of biofuel per year for use at Dynegy’s power plant in
Oakland, California, based on Dynegy’s forecasts of a portion of the historical
fuel consumption at their facility. There is no minimum purchase requirement.
The product price is based on a variable pricing formula. The contract is
for a
term until March 31, 2010 and month to month thereafter unless terminated
by
either party at any time with at least sixty day written notice.
In
August
2007, the Company entered into an equipment rental agreement with the equipment
manufacturer for a nominal fee for equipment used in the production process
at
the Twin Rivers plant facility.
Note
7
–
LEGAL
PROCEEDINGS
In
August
2008, the Company settled a lawsuit with a former consultant involving claims
for breach of contract and specific performance in order to avoid uncertainties
and potential litigation expenses. Pursuant to the settlement, the Company
modified the exercise price of the common stock warrants originally
issued to the former consultant. Accordingly, for the six months ended June
30,
2008, the Company recorded a non-cash legal settlement expense of
$359,595.
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We
are a
development stage renewable fuels provider that holds an exclusive license
for
North America, Central America and the Caribbean to commercialize proprietary
technology to manufacture alternative biofuels from vegetable oils and animal
fats that we intend to market as a new class of renewable fuel for power
generation, heavy equipment, marine use and as heating fuel.
Our
business commenced in February 2006. Our activities since inception have
included acquiring our exclusive license, conducting research and development
to
improve our product, conducting test burns at power generation facilities,
entering into an agreement with our strategic partner Twin Rivers to construct
a
pilot production facility, entering into a biofuel sales agreement, and raising
equity capital. We have incurred annual operating losses since inception
and
expect to incur substantial operating losses in the future in connection
with
the development of our core products. As of June 30, 2008, we had an
accumulated deficit of $25.0 million.
The
operation and development of our business will require substantial additional
capital to fund our operations, payments due under the exclusive license,
the
acquisition or development of manufacturing plants, research and development,
and other initiatives, including potentially the financing of future
acquisitions.
Our
long-term business strategy consists of developing two revenue streams: (1)
direct sales from manufacturing plants that we may purchase or build (either
directly or through joint ventures) in order to process, market and sell
our
chemical additive and/or biofuel using our proprietary technology and (2)
the
collection of royalties through sublicensing our proprietary technology.
Our
near-term business strategy is focusing on direct sales of our biofuel produced
at manufacturing plants that we may purchase or build, either directly or
through joint ventures. To execute this strategy, we are pursuing an active
test
burn program where we are working with a number of energy producers to validate
our biofuel. We have completed a number of test burns and are scheduled to
conduct more in the near future. In addition, we are working to improve our
ability to produce our biofuel and are continuing negotiations to lease or
construct production facilities. We are engaged in a highly competitive business
where we compete with petroleum-based fuels and other alternative fuels,
but, we
believe we have a competitive advantage because we have the flexibility to
utilize multiple raw materials in the production of our biofuel without
significant impact on the performance of our product. We are actively pursuing
our eligibility and qualification for tax credits and other government
incentives. To date, we have entered into one biofuel sales agreement but
have
not recognized any revenue or any costs of revenue. Our costs have consisted
mainly of research and development relating to our product and general and
administrative costs.
Financial
Operations Overview
Research
and Development Costs
We
have
established a research and development group, headed by our Chief Technology
Officer, Andrea Festuccia, which is based in Rome, Italy and in Milford,
Connecticut. We have conducted additional development of the product, as
well as
testing in laboratory conditions of the performance of biofuel made with
our
technology. From inception through June 30, 2008, we have incurred aggregate
research and development costs of approximately $1.2 million.
Our
research and development costs consist of expenses incurred in identifying,
developing and testing our product. These expenses consist primarily of salaries
and related expenses for personnel, fees paid to professional service providers,
costs of consultants and the costs of manufacturing batches of our biofuel
for
use in conducting test burns.
General
and Administrative Expenses
General
and administrative expenses consist primarily of the costs associated with
our
general management, including salaries, benefits and professional fees such
as
legal and accounting expenses. Continued increases will also likely result
from
the additional hiring of operational, financial, accounting, marketing and
information systems personnel. We have eight employees, all of whom are full
time executives.
Interest
and Other Income (Expense), Net
Interest
income consists of interest earned on our cash and short-term investments.
Interest expense consists of interest incurred related to the license agreement
payable.
Income
Taxes
We
have
not recognized any deferred tax assets or liabilities in our financial
statements since we cannot assure their future realization. Because realization
of deferred tax assets is dependent upon future earnings, a full valuation
allowance has been recorded on the net deferred tax assets, which relate
primarily to net operating loss carry-forwards.
Comparison
of the three months ended June 30, 2008 and the three months ended June 30,
2007
Research
and Development Expenses
Research
and development expenses were approximately $146,000 for the three months
ended
June 30, 2008 compared to approximately $99,000 for the three months ended
June 30, 2007. The increase in research and development expenses in 2008
reflects primarily the cost of conducting test burns and costs from conducting
tests to evaluate additional customized fuel formulations using our proprietary
blending technology.
General
and Administrative Expenses
General
and administrative expenses were $2.1 million for the three months ended
June 30, 2008 compared to $1.0 million for the three months ended
June 30, 2007. The increase of $1.1 million in 2008 over the prior period
was primarily attributable to increased expense associated with stock options
and warrants and an increase in personnel and related costs to support
the
company’s growth.
Interest
Expense
Interest
expense was approximately $0.1 million for the three months ended June 30,
2008 compared to approximately $0.2 million for the three months ended
June 30, 2007. The decrease is due to a reduction in the License Agreement
payable balance. Interest expense consists of interest incurred related
to the
License Agreement payable.
Gain/Loss
on fair value adjustment
Loss
on
fair value adjustment was approximately $10,000 for the three months ended
June 30, 2008 compared to a gain of approximately $105,000 for the three
months ended June 30, 2007.
Comparison
of the six months ended June 30, 2008 and the six months ended June 30,
200
7
Research
and Development Expenses
Research
and development expenses were approximately $0.3 million for the six months
ended June 30, 2008 compared to $0.2 million for the six months ended
June 30, 2007. The increase in research and development expenses in 2008
reflects primarily the cost of conducting test burns and costs from conducting
tests to evaluate additional customized fuel formulations using our proprietary
blending technology.
General
and Administrative Expenses
General
and administrative expenses were $4.0 million for the six months ended
June 30, 2008 compared to $2.1 million for the six months ended
June 30, 2007. The increase of $1.9 million in 2008 over the prior period
was primarily attributable to increased expense associated with stock options
and warrants and an increase in personnel and related costs to support
the
company’s growth.
Interest
Expense
Interest
expense was approximately $0.3 million for the six months ended June 30,
2008 compared to approximately $0.4 million for the six months ended
June 30, 2007. The decrease is due to a reduction in the License Agreement
payable balance. Interest expense consists of interest incurred related to
the
License Agreement payable.
Gain/Loss
on fair value adjustment
Loss
on
fair value adjustment was $30,169 for the six months ended June 30, 2008
compared to a gain of approximately $551,000 for the six months ended
June 30, 2007.
Liquidity
and Capital Resources
Liquidity
At
June
30, 2008, we had $5.5 million in cash.
Several
existing commitments that require significant expenditures may continue to
impact our liquidity. Under the license agreement with the inventor of our
proprietary technology, we paid $1,000,000 in 2008 and are required to pay
an
additional $6.0 million over the next six years, with the next $1.0 million
payment due in March 2009. We have to pay various costs under our arrangements
with Twin Rivers and will need to fund costs associated with the manufacture
of
biofuel at our pilot and any future production facilities. We also will continue
incurring costs to test our technology, enhance research and development,
pay
our employees and sustain operations. We have fully funded our operating
budget
for 2008 and expect our available cash as of June 30, 2008 to be sufficient
to
fund our estimated $4 million cash requirements for the next 12 months. However,
we intend to raise additional financing during 2008 to fund subsequent operating
budgets and long term business growth objectives if such financing is available
on favorable terms. We would likely seek such funding through public or private
financings or some combination of them.
Cash
Flows
Net
cash
used in operating activities was approximately $2.8 million for the six
months ended June 30, 2008 primarily reflecting our net loss of
$5.0 million, partially offset by $1.7 million in non-cash stock-based
compensation expense, approximately $0.2 million in non-cash penalty share
expense and $0.3 million in non-cash amortization expense associated with
our
license agreement payable.
Net
cash
used in investing activities was zero for the six months ended June 30,
2008.
Net
cash
provided by financing activities was $6.6 million for the six months ended
June 30, 2008, and consisted principally of $7.2 million in net
proceeds from the issuance of preferred stock, $0.5 in proceeds from the
exercise of warrants and partially offset by $1.0 million in payments for
our
License Agreement.
Capital
Requirements and Resources
Our
future capital requirements will depend on many factors, including:
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the
level of cash flows from product
sales;
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conducting
additional testing with utilities, independent power producers
or others,
including product application testing, to gain market acceptance
of our
biofuel among customers and equipment
manufacturers;
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continuing
operations at our pilot biofuel production facility and constructing
another facility under our arrangements with Twin Rivers or with
others to
supply our product initially for testing and eventually for the
broader
biofuel market;
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the
scope and results of our research and development
efforts;
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developing
a marketing plan for the heating fuel and marine markets and a
technology
plan that complements the marketing
plan;
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entering
into feedstock supply and transportation logistics agreements to
supply
our production facilities;
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developing
additional strategic relationships to attract potential customers
and
sublicensees and to obtain the capital commitments necessary to
engineer,
construct and operate biofuel plants in our exclusive
territory;
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continuing
to pursue favorable tax incentives for our biofuel, particularly
efforts
to include our biofuel in the $1 per gallon credit afforded biodiesel
and
to have the benefit of such a change extend beyond the current
expiration
date of December 31, 2008;
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recruiting
additional key employees to expand the capabilities of our existing
management team; and
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the
costs of maintaining, expanding and protecting our intellectual
property
portfolio, including litigation costs and
liabilities.
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Although
we expect our cash on hand at June 30, 2008 to be sufficient to fund operations
for the next twelve months, we will need additional financing to fund future
operations and capital expenditures and to cover our net losses. We
would likely seek such funding through public or private financings or some
combination of them. Additional funding may not be available to us on acceptable
terms, or at all. Given our need for capital, we may raise money on an
opportunistic basis when the market makes it attractive to do so.
We
have financed our operations to date primarily
through the sale of our common and preferred stock and warrants in privately
negotiated transactions with accredited investors. In
2008, we
have raised $7,589,100 in gross proceeds from the sale of Series B Convertible
Preferred Stock with a conversion price of $4.25 per share and warrants to
purchase common stock with an initial exercise price of $6.25 per
share.
If
we
raise capital through the sale of equity securities, or securities convertible
into equity, dilution to our then existing shareholders would result. If
we
raise additional capital through debt, we would likely become subject to
covenants restricting our business activities, and holders of
debt instruments would have rights and privileges senior to those of our
equity investors. In addition, servicing the interest and repayment obligations
under these borrowings would divert funds that would otherwise be available
to
support research and development or commercialization activities.
If
we are
unable to obtain adequate financing on a timely basis, we may be required
to
delay, reduce the scope of or eliminate one or more of our programs, any
of
which could have a material adverse effect on our business, financial condition
and results of operations.
We
expect
that our available cash and interest income will be sufficient to finance
currently planned activities through June 2009. These estimates are based
on
certain assumptions, which could be negatively impacted by the matters discussed
under “Risk Factors.” Future capital requirements could vary significantly and
will depend on certain factors, many of which are not within our control.
These
factors include, among others, the extent of development and testing of the
technology needed before commercial operation, the nature and timing of
licensing and sublicensing activities, costs of plant construction, costs
of raw
material feed stocks, sales expenses, hiring qualified management and employees,
responding to competitive pressures and complying with regulatory requirements.
If we are successful, the expansion of our business will require us to commit
capital that substantially exceeds our current financial resources. Any needed
financing may not be available on favorable terms, if at all.
Critical
Accounting Policies
Our
consolidated financial statements and accompanying notes have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires we make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expense. Management evaluates the accounting policies
and estimates it uses to prepare the financial statements. We base our
estimates on assumptions believed to be reasonable under current facts and
circumstances. The Company’s most significant estimates are the value of its
exclusive, perpetual life, Master License Agreement and its useful life.
The
Company recorded its Master License Agreement at cost in accordance with
SFAS
142 “Goodwill and Other Intangible Assets.” The value of the Master License
Agreement is tested for impairment in accordance with SFAS 144 “Accounting for
the Impairment or Disposal of Long-Lived Assets,” which requires a review of the
value of long-lived assets on a periodic basis for impairment whenever
events or
changes in circumstances indicate that the carrying amount of the assets
may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash
flows
expected to be generated by the asset. If such assets are considered impaired,
the impairment to be recognized is measured by the amount by which the
carrying
amount of the asset exceeds the fair value of the assets.
The
Company prepared a SFAS 144 analysis of the Master License Agreement by
utilizing a relief of royalty valuation method. The premise behind this method
is that a buyer would be willing to pay a royalty for the right to use
a
developed technology in order to gain market share, as opposed to developing
a
new competitive technology. Accordingly, this method measures the cash
flows of
the technology via the relief from the royalty on the technology that a
willing
buyer would typically pay. The key variables used in the relief-from-royalty
method include the projected royalty base (i.e. product revenue or volume),
a
royalty rate and the effect of taxes.
Based
on
a review of the Company’s sublicensing agreement with Xethanol and other
third-party licensing agreements for various alternative fuel technologies,
the
revenue base selected was projected gallons of biofuel production. Because
of
the uncertainty associated with the Company’s future production, we considered
three scenarios for a sensitivity analysis. Scenarios 1 and 2 assume the
Company’s production will equal 1% and 2%, respectively, of total projected U.S.
biodiesel production
in
each
of the projected periods.. Scenario 3 is based on the Company’s then current
estimate of its anticipated production. We applied equal probability to
each of
the three scenarios.
In
determining a royalty rate for the Technology, we examined the royalty
rates for
alternative energy related technologies, including biofuels, as well as
the
Company’s sublicense with Xethanol. Based on this information, we applied a
$0.10 per gallon royalty. Taxes were estimated based upon a combined effective
total state and federal tax rate of 40%.
Based
upon our analysis the probability weighted sum of the undiscounted cash
flows
attributable to the Master License Agreement is greater than its carrying
value.
Therefore, the value of the licensed bio-fuel technology is recoverable
in
accordance with SFAS 144.
The
useful life of the Master License Agreement was assumed to be thirteen
years
based on management’s assessment of the projected duration of economically
competitive new product life in the alternative-energy
industry.
Other
significant estimates include the valuation of shares, stock options and
warrants issued. Actual amounts and results could differ from these estimates
made by management.
Off−Balance
Sheet Arrangements
We
do not
have any off−balance sheet arrangement or commitment that will have a current
effect on our financial condition, lead to changes in our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources that is material to investors.
ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable to “smaller reporting companies” under Item 305(e) of Regulation
S-K.
ITEM
4T. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act, is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
As
required by Rule 13a-15 under the Exchange Act, we are required to evaluate
the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. This evaluation
was carried out under the supervision of our Chief Executive Officer and
Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer
and
Chief Financial Officer concluded that our disclosure controls and procedures
were
not
effective due to the material weaknesses discussed in Item 9A of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, including
the
detailed discussion of these control deficiencies under
Management’s
Report on Internal Control over Financial Reporting
.
A
material weakness is a deficiency, or a combination of deficiencies, in
disclosure controls or internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or detected
on a
timely basis. During 2008, we implemented the steps outlined in our
2007
Form
10-K that we believe will eliminate these material weaknesses and improve
the
effectiveness of our internal controls over financial
reporting.
(b)
Changes in Internal Control over Financial Reporting
During
the quarter ended March 31, 2008, the Company implemented certain steps to
improve the effectiveness of our internal control over financial reporting,
including the following:
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In
December 2007, we hired a Chief Financial Officer. His responsibilities
specifically include developing and implementing appropriate disclosure
controls and procedures and internal controls over financial
reporting.
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In
January 2008, we appointed our Chief Financial Officer as the Corporate
Secretary of our Board of Directors to improve the communication
flow
between the Board and our accounting
personnel.
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In
March 2008, we established a Disclosure Committee consisting of
the senior
management team to properly ensure that we are complying with disclosure
requirements by addressing disclosure issues that may arise from
time to
time.
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We
also engaged outside resources to supplement our finance and accounting
departments to support the preparation of financial statements
and reports
that are to be filed with the SEC.
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During
the quarter ended June 30, 2008, there were no significant changes in our
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1A. Risk Factors
An
investment in our common stock involves a high degree of risk. You
should carefully consider the following updated risks and those incorporated
by
reference herein from our Annual Report on Form 10-K for the year ended December
31, 2007, together with the other information contained in our SEC filings,
before you decide to invest in our common stock. If any of these
risks actually occur, our business, results of operations and financial
condition would likely suffer. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of
your
investment.
Risks
Related to Our Business
We
may never fully realize the value of our technology license agreement,
which
presently is our principal asset.
We
may
not be successful in realizing the expected benefits from our master license
agreement, which represented over 80% of our total assets as of December
31,
2007. We have not yet generated any revenues or cash flows from our biofuel
and
do not expect to begin to amortize the license agreement until we recognize
revenues from the technology at the end of 2008 at the earliest. Further,
we
initially intended to use the licensed technology to generate our expected
revenues without any significant modification, but we have conducted significant
additional research and development to modify the basic fuel technology
to meet
market demands for particular fuel attributes. To date, we have incurred
approximately $1,206,222 in research and development separate from our
license
payments, and we are continuing to incur additional research and development
costs to optimize our fuels to test different feedstocks and to tailor
the fuel
energy output, emissions and other specifications to the specific needs
of
potential customers.
Risks
Related to Our Common Stock
Our
Series B Preferred Stock and warrants issued in our March and May 2008 private
placement include antidilution provisions that, if triggered, could dilute
the
ownership interests of our existing common
stockholders.
Both
the
Series B Preferred Stock and the warrants issued in our March and May 2008
private placement include antidilution provisions that, if triggered, would
result in the issuance of additional shares that would dilute the interests
of existing common stockholders. These antidilution provisions will apply
if we issue equity in certain capital-raising transactions for a price
below the $4.25 conversion price of the Series B Preferred Stock or the $6.25
exercise price of the warrants within the first to occur of one year
from the date of registration of the underlying common stock from the private
placement or 18 months from the respective closing dates, March 31,
2008 or May 13, 2008. If these provisions are triggered, the conversion price
of
the Series B Preferred Stock or the exercise price of the warrants would be
adjusted downward, but not below a floor of $3.00 per share. Any sales of
additional equity that trigger these antidilution provisions could be
disproportionately dilutive and adversely affect the prevailing market prices
of
our common stock. The existence of conversion features also may result in
short selling of our common stock that may further depress the
market price.
If
we do not meet the American Stock Exchange (AMEX) requirements for continued
listing, our common stock may be delisted which could negatively impact our
stock’s liquidity.
Under
AMEX listing rules, our common stock could be delisted from AMEX if we do
not
meet certain standards regarding our financial condition and operating results
(including, among other factors, maintaining adequate stockholders’ equity and
market capitalization and minimizing losses from continuing operations over
multiple years), the distribution of our publicly held securities and compliance
with AMEX listing agreements and SEC rules and regulations. If our securities
are delisted from AMEX, they likely will be quoted again for trading on the
OTC
Bulletin Board which may depress demand for our shares and limit market
liquidity due to the reluctance or inability of certain investors to buy
stocks
on the OTC Bulletin Board. Consequently, an investor may find it more difficult
to trade our securities, which may adversely affect the ability to resell
securities purchased from the selling stockholders.
A
significant number of our shares are
eligible for sale, and their sale could depress the market price of our common
stock.
Sales
of
a significant number of shares of our common stock in the public market could
depress the market price of our common stock. In 2007, we registered on
currently effective registration statements a total of 11,173,050 shares
of our
common stock held by non-affiliate selling stockholders that are now eligible
for trading in the public market, including shares issuable upon conversion
or
exercise of rights to purchase that are not currently outstanding. In 2008,
we
are seeking to register on pending registration statements an additional
4,809,438 shares of our common stock held by non-affiliate selling stockholders
in connection with private placements of our common stock and warrants
in December 2007 and our Series B convertible preferred stock and
warrants in March and May 2008. Many of the shares sold to selling
stockholders listed in these registration statements were offered by the
Company
at prices less than the recent market price of the Company’s common stock, which
closed on AMEX on August 12, 2008 at $4.65 per share. In addition, we may
be
obligated to register shares held by Xethanol to facilitate the spinoff to
Xethanol’s stockholders of the shares of our common stock issued to Xethanol in
the reverse merger. Such registration would make 5,490,000 additional shares
of
our common stock eligible for trading in the public market. Some or all of
these
shares of common stock may be offered from time to time in the open market
pursuant to a registration statement or Rule 144, and these sales may depress
the market price for shares of our common stock.
Our
common stock is thinly traded and subject to
volatility.
Although
our common stock is traded on AMEX, it has traded in relatively small volumes.
During the second quarter of 2008, an average of only about 50,000 shares
traded
each day. If our common stock continues to be thinly traded, it may enhance
volatility in the share price and make it difficult for investors to buy
or sell
shares in the public market without materially affecting the quoted share
price.
Further, investors seeking to buy or sell a certain quantity of our shares
in
the public market may be unable to do so within one or more trading days.
If
limited trading in our stock continues, it may be difficult for holders to
sell
their shares in the public market at any given time at prevailing prices,
which
may limit the liquidity of our common stock.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
On
May
13, 2008, we completed a second closing of our private placement of Series
B
Convertible Preferred Stock and warrants to purchase common stock to investors
who qualify as “accredited investors” under the Securities Act. In this second
closing, we sold 35,123 shares of our Series B Preferred Stock at a price
of $100.00 per share and five-year warrants to purchase 208,345 shares of
our common stock at an exercise price of $6.25 per share (the “May Offering”).
The gross proceeds from the May Offering were $3,512,300 excluding shares
and
warrants issued as commissions. In summary, in the offering that we closed
on
March 31, 2008 and May 13, 2008, we sold a total of 75,891 shares of our
Series B Convertible Preferred Stock and warrants to purchase
446,413 shares of our common stock for total gross proceeds of $7,589,100.
This offering was exempt from registration under the Securities Act in
accordance with Section 4(2) under the Securities Act and Rule 506 promulgated
thereunder. The sales were made pursuant to subscription agreements between
the
Company and each investor. We previously disclosed information on this offering
in our Current Report on Form 8-K, filed May 14, 2008.
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
The
following exhibits, which are furnished with this Quarterly Report or
incorporated herein by reference, are filed as part of this Quarterly Report.
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Exhibit Number
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Exhibit
Description
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3.1
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Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 to the Current Report on Form 8-K, filed March 31,
2008).
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3.2
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Articles
of Amendment to the Articles of Incorporation relating to our
Series B
Cumulative Convertible Preferred Stock (incorporated by reference
to
Exhibit 3.2 to the Current Report on Form 8-K, filed March 31,
2008).
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3.3
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Amended
and Restated Bylaws, dated March 5, 2008 (incorporated by reference
to
Exhibit 3.3 to the Annual Report on Form 10-K for the year ended
December
31, 2007, filed March 31, 2008)
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31.1
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Certification
of the Chief Executive Officer, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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31.2
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Certification
of the Principal Financial and Accounting Officer, as adopted
pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification
of the Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification
of the Principal Financial and Accounting Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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Date:
August 14, 2008
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By:
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/s/
David A. Gillespie
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David
A. Gillespie
President
and Chief Executive Officer
(Principal
Executive Officer)
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Date:
August 14, 2008
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By:
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/s/
Cary
J. Claiborne
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Cary
J. Claiborne
Chief
Financial Officer
(Principal
Financial and Accounting
Officer)
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