SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
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x
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Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the fiscal year ended December 31, 200
7.
OR
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the transition period from
to
COMMISSION
FILE NUMBER 333-124060
STRATOS
RENEWABLES CORPORATION
(NAME
OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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Nevada
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20-1699126
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State
or other jurisdiction of incorporation or organization
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I.R.S.
Employer Identification Number
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9440
Santa Monica Blvd., Suite 401
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Beverly
Hills, California
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90210
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Address
of principal executive offices
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Zip
Code
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(310)
402-5901
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Issuer’s
telephone number
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Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
x
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.Yes
o
No
x
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
The
issuer generated no revenues for the fiscal year ended December 31,
2007.
The
aggregate market value of the voting common stock held by non-affiliates
of the
registrant as of April 15, 2008 was approximately $71,092,825 (computed
based on
the closing sale price of the common stock at $1.60 per share as of such
date).
Shares of common stock held by each officer and director and each person
owning
more than ten percent of the outstanding common stock have been excluded
in that
such persons may be deemed to be affiliates. This determination of the
affiliate
status is not necessarily a conclusive determination for other
purposes.
The
number of shares of common stock of the issuer outstanding as of April 15,
2008
was 59,972,936.
Transitional
Small Business Disclosure Format (Check One): Yes
o
No
x
TABLE
OF
CONTENTS
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Page
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PART I
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2
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Item
1.
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Description
of Business
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2
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Item
2.
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Description
of Property
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32
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Item
3.
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Legal
Proceedings
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32
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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32
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PART II
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33
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Item
5.
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Market
for Common Equity and Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
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33
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Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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36
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Item
7.
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Financial
Statements
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43
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Item
8.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosures
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43
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Item
8A(T).
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Controls
and Procedures
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43
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Item
8B.
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Other
Information
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45
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PART III
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45
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Item
9.
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Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
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45
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Item
10.
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Executive
Compensation
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50
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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52
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Item
12.
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Certain
Relationships and Related Transactions, and Director
Independence
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57
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Item
13.
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Exhibits
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58
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Item
14.
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Principal
Accountant Fees and Services
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59
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
INFORMATION
This
Annual Report on Form 10-KSB, the other reports, statements, and information
that we have previously filed or that we may subsequently file with the
Securities and Exchange Commission, or SEC, and public announcements that
we
have previously made or may subsequently make include, may include, incorporate
by reference or may incorporate by reference certain statements that may
be
deemed to be “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 and are intended to enjoy the benefits
of that act. Unless the context is otherwise, the forward-looking statements
included or incorporated by reference in this Form 10-KSB and those reports,
statements, information and announcements address activities, events or
developments that Stratos Renewables Corporation (together with its subsidiary,
Stratos del Peru S.A.C., hereinafter referred to as “we,” “us,” “our,” “our
Company” or “Stratos”) expects or anticipates, will or may occur in the future.
Any statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and
are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “will continue,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and
“outlook,” and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results
to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout
this document. All forward-looking statements concerning economic conditions,
rates of growth, rates of income or values as may be included in this document
are based on information available to us on the dates noted, and we assume
no
obligation to update any such forward-looking statements. It is important
to
note that our actual results may differ materially from those in such
forward-looking statements due to fluctuations in interest rates, inflation,
government regulations, economic conditions and competitive product and pricing
pressures in the geographic and business areas in which we conduct operations,
including our plans, objectives, expectations and intentions and other factors
discussed elsewhere in this Report.
The
risk
factors referred to in this Report could materially and adversely affect our
business, financial conditions and results of operations and cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by us, and you should not place undue reliance
on any such forward-looking statements. Any forward-looking statement speaks
only as of the date on which it is made and we do not undertake any obligation
to update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect
the
occurrence of unanticipated events. The risks and uncertainties described below
are not the only ones we face. New factors emerge from time to time, and it
is
not possible for us to predict which will arise. There may be additional risks
not presently known to us or that we currently believe are immaterial to our
business. In addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of factors, may
cause
actual results to differ materially from those contained in any forward-looking
statements.
If
any such risks occur, our business, operating results, liquidity and financial
condition could be materially affected in an adverse manner. Under such
circumstances, you may lose all or part of your investment.
The
industry and market data contained in this report are based either on our
management’s own estimates or, where indicated, independent industry
publications, reports by governmental agencies or market research firms or
other
published independent sources and, in each case, are believed by our management
to be reasonable estimates. However, industry and market data is subject to
change and cannot always be verified with complete certainty due to limits
on
the availability and reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties inherent in any
statistical survey of market shares. We have not independently verified market
and industry data from third-party sources. In addition, consumption patterns
and customer preferences can and do change. As a result, you should be aware
that market share, ranking and other similar data set forth herein, and
estimates and beliefs based on such data, may not be verifiable or
reliable.
PART
I
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Item
1.
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Description
of Business
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General
Stratos
Renewables Corporation, or Stratos, is a development stage company. Through
our
wholly - owned subsidiary stratos del Peru S.A.C., or stratos Peru, we intend
to
engage we in the production, processing and distribution of sugarcane
ethanol in Peru (as described in more detail below). Ethanol is a renewable
energy source that provides significant economic and environmental benefits
when
mixed with gasoline and used as motor fuel. It can be blended with gasoline
in
varying quantities up to pure ethanol. As of January 2008, ethanol is blended
into more than fifty percent (50%) of the gasoline sold in the U.S., typically
as a blend of ten percent (10%) ethanol and ninety percent (90%) gasoline,
as
reported by the Renewables Fuels Association in their Ethanol Industry Outlook
2008, or RFA 2008 Outlook. This blend, known as E10, is mandated in some
states
where auto emissions may reach harmful levels.
Corporate
History and Overview
We
were
incorporated in the State of Nevada on September 29, 2004 as New Design
Cabinets, Inc. or NDCI. Prior to the closing of the Share Exchange, as described
below, we were an operating public company, attempting to establish a base
of
operations in the custom cabinetry and furniture industry as a builder of
specialty, custom designed cabinets and wine racks. From inception to the
closing of the Share Exchange, we had limited operations and generated a
total
of
$61,900
in
revenues from the sale of wine rack “kits” and the oversight of various
construction activities.
On
November 14, 2007, pursuant to the Agreement Concerning the Exchange of
Securities or the Share Exchange Agreement, by and among NDCI, or Stratos
Peru, and the security holders of Stratos Peru, we acquired 999 or 99.9%
of the
issued and outstanding shares of common stock of Stratos Peru, and issued
45,000,000 shares of our common stock, par value $0.001, to the former common
stock holders of Stratos Peru. This acquisition is herein referred to as
the
“Share Exchange.”
To
date,
Stratos has had limited operations. Upon consummation of the Share Exchange,
we
commenced our business plan to develop ethanol and sugar products in Peru
through the cultivation, harvesting and processing of sugarcane in low cost
growing locations.
Stratos
Peru was incorporated in Lima, Peru, on February 27, 2007, under the name
Estratosfera del Peru S.A.C. or Estratosfera. On July 11, 2007, the shareholders
of Estratosfera changed the name of the company from Estratosfera del Peru
S.A.C. to Stratos del Peru S.A.C.
Effective
November 20, 2007, we amended our articles of incorporation to change our
name
to “Stratos Renewables Corporation.”
Closing
of Financings
Since
November 14, 2007, we have raised an aggregate of approximately $11.6 million
in
capital through various financings.
We
are
conducting a $10 million private placement, or the March 2008 Financing,
and
unless we receive the full $10 million earlier, we anticipate that we will
continue to offer our securities on the same terms and conditions until at
least
May 31, 2008. We have issued an aggregate of 2,267,782 shares of common
stock at a purchase price of $0.70 per share and warrants to purchase an
aggregate of 1,133,888 shares of common stock with an exercise price of $0.75
per share, pursuant to the March 2008 Financing.
In
connection with the closing of the Share Exchange, we completed private
placements of common stock, or the Private Placement, preferred stock, or
the
Series A Private Placement, and convertible promissory notes, or the Bridge
Financing, aggregating approximately $10 million. Pursuant to the Private
Placement, we issued an aggregate of 2,666,794 shares of common stock at
a
purchase price of $0.70 per share and warrants to purchase an aggregate of
1,333,396 shares of common stock with an exercise price of $0.75 per share.
Pursuant to the Series A Private Placement, we issued 7,142,857 shares of
Series
A preferred stock, at a purchase price of $0.70 per share and warrants to
purchase 1,785,714 shares of common stock at an exercise price of $0.75 per
share, to MA Green, LLC, a Delaware limited liability company, or MA Green.
Our
President and Chairman of the Board of Directors, Steven Magami, is the manager
of MA Green. We issued an aggregate of approximately $3.0 million in convertible
promissory notes and warrants to purchase an aggregate of 870,858 shares
of
common stock with an exercise price of $0.75 per share, pursuant to our Bridge
Financing.
Business
Plan
We
aim to
become the lowest cost and leading sugarcane ethanol producer in Peru. We
plan
to utilize low cost, locally grown sugarcane feedstock and service international
markets, particularly the U.S. market through tariff-free exports under the
newly signed Free Trade Agreement between the U.S. and Peru.
We
intend
to produce over 90% of the sugarcane we process. We will purchase the remaining
10% from local unaffiliated third party suppliers. We believe we can produce
at
least 145 tons of sugarcane per hectare per year, approximately twice the
average production per hectare in Brazil, the world’s largest sugarcane ethanol
producer. (One hectare is equivalent to approximately 2.47 acres.) According
to
the most current information available from the United Nations Food and
Agricultural Organization, or FAO, Brazil produced an average 74 tons of
sugarcane per hectare per year in 2006. Peru has unique climate and
environmental conditions which make it consistently ranked as one of the
world’s
highest yield sugarcane producers. In 2006, according to the FAO, Peru’s
sugarcane yields per hectare per year were the fifth highest in the world,
while
Brazil ranked 30
th
.
Further, we believe that Peru’s sugarcane producing potential is greatly
untapped. As a result, plantable land in Peru can be secured at a significantly
lower cost than in Brazil. We believe that our cost of securing land in Peru
will be roughly one-half the cost of similar agricultural property in Brazil.
By
combining high sugarcane yielding, coastal property with a low cost acquisition
of such land, we believe we can become one of the leading sugarcane ethanol
producers in the world.
Our
Strategy
We
believe that we have the resources to become one of the lowest cost
sugarcane ethanol producers in the world.
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Peru
has a comparative advantage in sugarcane production. According
to the FAO,
Peru’s average sugarcane yields per hectare per year were the fifth
highest in the world in 2006. Before
the
military
dictatorship that governed Peru in 1968-1980 nationalized the sugar
industry and turned it into cooperatives managed by its workers,
Peru’s
sugarcane yields were the world’s highest. In 1965, the FAO reports that
Peru yielded 155 tons of sugarcane per hectare per year. With the
use of
state-of-the-art technology and a world-class team of specialists,
we
anticipate being able to leverage Peru’s comparative advantage into a
competitive edge, reducing our cost of production
significantly.
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Peru’s
land prices are lower than in Brazil and are a fraction of land
prices in
developed countries producing fuel ethanol based on other
feedstocks.
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Transportation
costs will be low due to the coastal location of our proposed operations,
in addition to its proximity to the Pan-American
Highway.
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We
have
tariff free access to the U.S. market.
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·
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We
intend to take advantage of the recently signed Trade Promotion
Agreement
between the United States and Peru, or the Free Trade Agreement.
Pursuant
to the Free Trade Agreement, our fuel exports to the U.S., which
we expect
to be our main export market, will not be subject to the $0.54
per gallon
import tariff and 2.5% ad valorem tax imposed on Brazil fuel ethanol
exports to the U.S.
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We
will
utilize vertical integration and economies of scale, thereby lowering the
cost
of land.
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In
order to take advantage of economies of scale, and avoid the hold-up
problem, due to the nature of assets in the sugarcane ethanol cluster
(relationship-specific assets), we will be a vertically integrated
producer.
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We
intend to have a high volume of production (estimated to be 180
million
gallons of fuel ethanol per year) by 2014, hence benefiting from
economies
of scale.
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We
plan
to exploit our first mover advantage by securing land in Peru’s nascent fuel
ethanol industry, particularly land belonging to the extensive and under
utilized peasant communities along the northern coast.
Our
business plan consists of two phases. Phase I will primarily be focused on
establishing our initial ethanol production facilities and infrastructure.
Phase
II will primarily be focused on expanding our operations in strategic
locations.
Phase
I
Phase
I
of our business plan is comprised of six components:
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mill
and distillery acquisition, expansion and
modification;
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conducting
feasibility studies and generating a business plan for Phase
II.
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Mill
and distillery acquisition, expansion and modification
On
October 18, 2007, Stratos Peru entered into an asset purchase agreement with
Gabinete Tecnico de Cobranzas S.A.C., or Gabinete, pursuant to which it acquired
certain assets and rights relating to the Estrella del Norte sugar mill located
in the province of Chepen, Peru, or the Sugar Mill. Stratos Peru paid
approximately $4.5 million plus a value added ta
x
of 19%
to acquire the Sugar Mill. Of the purchase price, we held back $350,000,
or the Holdback, representing approximately 7.74% of the purchase price,
into an
escrow contingencies account with Banco Continental in Lima, Peru. The
Holdback is to protect us in the event Gabinete fails to fulfill certain
tax
obligations relating to the equipment for the years 2002 through 2007, the
equipment is lost or damaged while in transit from Gabinete, the equipment
is
not delivered to us, or certain representations made by Gabinete in the asset
purchase agreement are discovered to be false.
We
plan
to relocate the Sugar Mill and to acquire and install a distillery unit to
adjoin it for the production of ethanol. Additionally, we plan to upgrade the
Sugar Mill’s capacity to crush sugarcane from 500 tons of sugarcane per day to
1,100 tons of sugarcane per day. We estimate that we will need a total of
$9.6
million including the value added tax, in investment and working
capital to overhaul, expand and relocate the Sugar Mill, acquire the
distillery and conduct operations at the Sugar Mill and distillery through
the
first quarter of 2009.
We
entered into an agreement with a member of our advisory board, effective
December 4, 2007 to provide us with a plan for us to dismantle,
repair and overhaul the equipment from the Sugar Mill.
He
will
also provide us with engineering studies in order to determine the maximum
capacity of sugar cane processing of the Sugar Mill and to establish the
process
layout and technical specifications that will be required for new machinery
and
equipments.
In
addition, on February 27, 2008, we entered into an agreement with Panka
S.A.C. to provide us with a basic engineering plan and new layout of the
Sugar
Mill after the overhauling of the Sugar Mill is complete.
On
March
12, 2008, we entered into an agreement, the CWE Agreement, with CWE Engineering
& Supply S.A.C., or CWE. The CWE Agreement relates to the relocation
of the Sugar Mill to the Industrial Lot, as described below, that we have
obtained the rights to in the
Lambayeque
region
of
Peru. Under the terms of the CWE Agreement, we engaged CWE to clean, remove
and
disassemble equipment located at the Sugar Mill. We have agreed to
pay CWE a service fee of approximately $150,000, payable in installments.
In connection with the payment of the service fee, we executed two promissory
notes in favor of CWE, each in the amount of $8,330. The notes are
both due and payable on May 22, 2008. The CWE Agreement terminates on June
9, 2008. Also on March 12, 2008, we rerained a consultant to
provide
us with architectural services relating to the Sugar Mill, including the
technical specifications relating to the architecture of the Sugar Mill and
any
related property regulations.
In
March
2008 we began the dismantling of all of the equipment. As of March 29, 2008,
approximately 25% of the equipment has been dismantled. We anticipate that
the
dismantling will be complete by the end of May 2008.
After
modifying and expanding the Estrella del Norte facilities, we plan to use
approximately 40% of its capacity to produce raw sugar to be sold in the
local
wholesale markets, and 60% of its capacity to produce an estimated 4.8 million
gallons of ethanol a year.
Seedling
Production
The
second component of Phase I will be to establish a high quality seedling
production program to supply our planned intensive planting program scheduled
to
commence during Phase II of our business strategy. We intend to lease a plot
of
land in the Piura region, which we believe is an ideal location with respect
to
its climate and surrounding environment, to establish a sugarcane seedling
nursery.
In
furtherance of our seedling program, on February 6, 2008, Stratos Peru
entered into a services agreement with Biotecnologia del Peru S.A.C, or
Biotecnologia, to establish a pilot seedling laboratory. Biotecnologia is
to install a laboratory in Piura with appropriate equipment and experienced
personnel. Biotecnologia will study various breeds of genetic
material, and advise Stratos Peru which will be the most adequate to generate
elite sugar cane plantlets to be used in our future seedling nursery. The
pilot laboratory has already begun generating sugarcane plantlets.
Compost
Production
In
addition to establishing a seedling production program in Phase I, we also
intend to implement an organic fertilizer production program to support our
planned intensive planting program scheduled to commence during Phase II.
We
anticipate that our compost production program will begin in the second quarter
of 2008.
Land
Sourcing
The
fourth component of Phase I will be to acquire and secure options to acquire
the
use of land for sugarcane production from three potential sources: small
and
medium private land lots; peasant community land lots; and state owned land
lots. The most important factors in locating land suitable for sugarcane
production are water supply, soil composition, climate, distance from the
Sugar
Mill and access to roads and other services.
Consistent
with our view that access to land with adequate water is the main barrier
to
entry into Peru’s surging sugarcane ethanol industry, Stratos Peru has setup a
multidisciplinary and experienced land sourcing, land assessment and
hydrological studies’ team, comprised of 13 specialists. The land team is headed
by Guillermo Freund, former Chief Advisor to the Head of Peru’s National
Resources Institute, former Secretary General (3
rd
officer
in rank) and Chief Advisor at the Agriculture Ministry, where he was in
charge
of land acquisition, among other tasks. Dr. Freund team includes another
four
lawyers, four agronomists specialized in geographical information systems,
two
engineers specialized in soil and water sciences, in addition to two sustainable
rural development professionals. One of Peru’s leading land assessment firms, We
have also hired NeoAg Peru (a subsidiary of NeoAg Chile) to undergo soil
and
water studies. NeoAg has destined six executives to support our land sourcing
process.
Field
Installment
The
fifth
component, as part of our main objective to be the market leader in sustainably
low-cost ethanol production, will be to take advantage of our "Greenfield"
position to use only sophisticated crop management techniques to ensure maximum
yield with high sucrose and inverted sugar content. The Peruvian coast is
ideal
for these modern farming techniques, as water and nutrient content can be
managed due to the sandy soil and irrigation equipment to be installed. To
ensure the maximum benefit from the genetically cleaned sugar varieties that
we
intend to install on our comparatively low-cost land, significant investment
will go into channeling water to the sites from national irrigation projects
and
on field irrigation installation with back-up water supply, and land preparation
to ensure the longevity and productivity of the fields which including
grading, leveling, initial nutrient and organic material installation, and
field
layout. We estimate that the costs related to Field Installment for Phase
I may
be $1.5 million or higher.
Conducting
feasibility studies and generating a business plan for Phase
II
The
final
component of Phase I will initially involve hiring a consultant to conduct
a
feasibility study based on the information provided by our land sourcing
efforts. The study will focus on generating cost estimates and designs based
on
analyzing the climactic, water, soil, topography and irrigation characteristics
of the properties identified by our land sourcing team. Following the completion
of the feasibility study, we will create a comprehensive business plan for
Phase
II consisting of an overview of the industry, a market analysis, competitive
analysis, marketing plan, management plan and financial plan. We will also
perform a port feasibility study, which if successful, will optimize our
distribution of ethanol and reduce our operation costs for distribution to
world
markets.
Our
goal
is to have all of the components of Phase I completed by early 2009 so that
we
can begin executing Phase II.
Phase
II
Phase
II
of our
business plan will consist of our expansion in four strategic locations along
the northern Peruvian coast and the cultivation of our own sugarcane supplies
to
be used for production. In connection with
Phase
II
,
we
anticipate raising and investing funds up to an additional
$590
million approximately in order to plant sugarcane on 48,000 hectares of raw
land, and acquire and or build a total of four mills with attached ethanol
distilleries, with expandable capacities and distribution port infastructure.
By
the
fourth quarter of 2014,
it is
our goal to be able to process a total of 25,000 tons of sugarcane per day,
and
produce approximately 180 million gallons of anhydrous ethanol
annually.
We
expect
to initiate Phase II by the first quarter of 2009. The mills and distilleries
we
plan to establish in Phase II will be located in regions that we have selected
based on our extensive research of agro climatic conditions, hydrology, basic
services, logistic supplies and social environment. We plan to establish
the
four locations in two stages.
Stage
One - Olmos and Morrope
During
the first stage, which will begin in the second quarter of 2009, we plan
to
start exercising the lease contract which we believe we will have with the
Peasant Community of Olmos and Morrope for 24,000 hectares of land. We estimate
that the total cost for Stage One will be approximately $280 million, consisting
of $120 million in costs related to administration, field installation and
the
development of an infrastructure, and $160 million in costs related to the
construction of production facilities and distribution port.
Stage
Two - Chepen
During
the second stage, which will begin in the second quarter of 2011, we plan
to
plant the first 24,000 hectares of land around the Chepen valley, located
along
the northern Peruvian coast. We estimate that the total cost for this stage
will
be approximately $310 million, consisting of $120 million in costs related
to
administration, field installation, and the development of an infrastructure,
and $190 million in costs relating to the construction of production facilities
and distribution port.
Ethanol
Overview
Ethanol,
or ethyl alcohol, is a clear, colorless and flammable organic chemical compound
that can be used as a source of “clean” and renewable energy when blended with
gasoline. Ethanol causes gasoline to burn more thoroughly, thereby improving
combustion and reducing the amount of tailpipe carbon monoxide emissions.
The
amount of harmful exhaust emissions that are produced when gasoline is burned
is
inversely related to the amount of ethanol that is blended in the gasoline.
Thus, as the proportional content of ethanol in a gasoline blend is increased,
the relative amount of harmful exhaust emissions that is produced when the
gasoline is burned decreases.
Ethanol
blends can be used in almost all gasoline engines without costly modifications.
Ethanol is dispensed in service stations worldwide (5% content ethanol blends
in
the European Union, or EU, and 10% ethanol content blends in the United States)
with almost no reported incompatibility with vehicles that have unmodified
conventional engines.
The
use
of ethanol has been reported to have numerous significant long-term
environmental benefits, including the following:
|
|
·
|
ethanol
is a renewable fuel made from
plants;
|
|
|
·
|
ethanol
is not a fossil-fuel, and therefore, burning it does not increase
the
greenhouse effect;
|
|
|
·
|
ethanol
can be used to increase octane at low cost as an alternative to
harmful
fuel additives;
|
|
|
·
|
as
an octane enhancer, ethanol is reported to reduce emissions of
cancer-causing benzene and
butadiene;
|
|
|
·
|
ethanol
is biodegradable without harmful effects on the
environment;
|
|
|
·
|
ethanol’s
high oxygen content reduces carbon monoxide levels more than any
other
oxygenate, by up to 25-30%, according to the U.S. Environmental
Protection
Agency;
|
|
|
·
|
ethanol
is reported to reduce net carbon dioxide
emissions;
|
|
|
·
|
ethanol
blends are reported to reduce emissions of hydrocarbons, a large
contributor to the depletion of the ozone
layer;
|
|
|
·
|
high-level
ethanol blends are reported to reduce nitrogen oxide
emissions;
|
|
|
·
|
high-level
ethanol blends are reported to reduce emissions of volatile organic
compounds, or VOCs, a major sources of ground-level ozone formation;
and
|
|
|
·
|
sulphur
dioxide and particulate matter emissions decrease through the use
of
ethanol.
|
Ethanol
can be produced from a variety of raw materials, or feedstocks, and processes.
There are two general types of ethanol:
|
|
·
|
synthetic
ethanol, which is derived from crude oil or gas and coal;
and
|
|
|
·
|
bioethanol,
which is distilled from grains, molasses, fruit, cellulose, sugarcane
juice and from numerous other natural sources.
|
Regardless
of the production process, synthetic ethanol and bioethanol are chemically
identical.
Ethanol
as a gasoline additive
Oxygen
causes gasoline to burn more completely. Because ethanol contains 35% oxygen,
when added to gasoline, it serves as an oxygenate that improves fuel combustion
and reduces tailpipe emissions. Other fuel additives, such as MTBE (methyl
tertiary-butyl ether), are not as effective as ethanol. It requires
approximately twice the amount of the fuel additive MTBE (methyl tertiary-
butyl
ether) to obtain the same level of oxygenation in gasoline as ethanol. Thus,
gasoline blended with ethanol produces fewer emissions than gasoline blended
with MTBE. Additionally, since it was discovered that MTBE contributes to
groundwater contamination, MTBE has been phased out in 17 states in the United
States, thereby increasing the demand for alternative means of increasing
octane
levels. Blending high octane content ethanol with lower grade gasoline can
increase the overall octane rating of gasoline, allowing it to be sold as
a
higher octane premium blend.
Blending
ethanol with gasoline also increases the volume of available fuel and may
help
to alleviate potential shortages of refined products. A new oil refinery
has not
been built in the United States in the past 30 years and with gasoline demand
forecasted to increase by 1.5% per annum from the current volume of
approximately 140 billion gallons per year, we believe that the United States
will become increasingly dependent on not only crude oil imports, but also
on
imports of refined petroleum products (e.g., gasoline, to meet domestic
consumption needs). The use of ethanol may help to reduce the need to import
both crude oil and refined petroleum products.
The
Ethanol Production Process
Technologically,
the process of producing ethanol from sugar is simpler than converting corn
into
ethanol. Converting corn into ethanol requires additional cooking and the
application of enzymes, whereas the conversion of sugar primarily requires
only
a yeast fermentation process and the removal of water. The energy requirement
for converting sugar into ethanol is about half that for corn.
The
sugarcane ethanol production process begins with cultivating and harvesting
sugarcane at a cane field. The cane is then processed at a sugar mill, where
the
cane stalks are shredded and crushed to extract the cane juice. The byproducts
of the juice extraction process are cane molasses and bagasse. Sugarcane
molasses is used in the production of alcohol beverages, fuel alcohol and
for
direct human consumption. Bagasse can be used to produce steam and generate
electricity within the plant. Excess electricity produced can be sold to
utility
grids.
After
sugarcane juice is extracted at the mill, it is then transformed into alcohol
at
a distillery through a fermentation process using yeasts as the catalyst.
The
fermentation process takes four to twelve hours and generates a significant
amount of CO2 and heat. Fermentation can be conducted in batch or continuously,
using open or closed fermentation tanks. Cooling is applied to maintain the
resulting fermented mixture. Much of the CO2 that is generated during the
fermentation process can be captured and converted into marketable products,
such as dry ice, liquid CO2 for soft drinks, fire-fighting foams, filtration
products and various industrial uses.
After
fermentation, the ethanol is distilled from other byproducts, resulting in
a
level of purity of approximately 95%. This mixture is often referred to as
“hydrous ethanol” because it contains 5% water. Hydrous ethanol can be
commercially used, but cannot be blended with gasoline. An additional reactant,
such as cyclohexane, is needed in order to dehydrate the ethanol, by forming
a
tertiary azeotropic mixture with water and alcohol. Anhydrous ethanol is
nearly
100% pure and can be blended with gasoline.
Sugarcane
is bulky and relatively expensive to transport and must be processed as soon
as
possible to minimize sucrose deterioration. In order to save costs, ethanol
is
often produced near a sugarcane field at a sugarcane mill with an adjoining
distillery plant.
The
Ethanol Market
Demand
World
consumption of fuel ethanol reached approximately 17 billion gallons in 2007,
as
presented at the F.O. Licht 4
th
Annual
Conference “Sugar and Ethanol Brazil.”
Graph
1: Historical World Ethanol Consumption, 1998-2005
(Billion
liters)
According
to the FO Licht’s 2006 World Ethanol & Biofuels Report referenced below, by
2030, the global consumption of fuel ethanol is projected to reach approximately
72 billion gallons, resulting in the displacement of 10% of the forecasted
demand of gasoline consumption.
Graph
2: Estimated Consumption of Fuel Ethanol, 2006-2030
The
interest in biofuels has increased primarily due to environmental, geo-political
and economic factors, including initiatives by countries to develop new markets
for agricultural products. The increase in demand for ethanol largely has
been
driven by tax incentives and blending mandates, which are regulatory directives
requiring a minimum level of ethanol content in gasoline. Blending mandates
allow governments to bring biofuels into the market without providing subsidies
or tax credits for ethanol use.
On
December 19, 2007, the United States expanded its Renewable Fuel Standard,
or
RFS, through the
Energy
Independence and Security Act
of
2007,
or EISA. This legislation mandates the use of 36 billion gallons of renewable
fuels per year by 2022. The following graphs depict the extent to which
legislation had to catch up with the unprecedented surge in fuel ethanol
consumption and production in the U.S.
Graph
3: U.S. Renewables Standards and Energy Act of 2007
Source:
F.O.
Licht 4
th
Annual
Conference “Sugar and Ethanol Brazil”
,
Dr.
Christoph Berg’s, Director, F.O. Licht, Germany, “World Ethanol 2008: Ethanol in
2008/09 - Light at the end of the tunnel?”
Graph
4: U.S. Renewables Standards and Energy Act of 2007
Source:
F.O. Licht 4
th
Annual
Conference “Sugar and Ethanol Brazil”, Dr. Christoph Berg’s, Director, F.O.
Licht, Germany, “World Ethanol 2008: Ethanol in 2008/09 - Light at the end of
the tunnel?”
In
the
last few years, several other countries increased biofuel usage targets and
mandates. Currently, biofuel blending mandates exist in at least fifteen
countries at the national or regional and state level. Countries with mandates
at the national level include Brazil, Colombia, Germany, France, Philippines,
Thailand, and the United States (under the federal RFS). Countries with regional
mandates include India (nine states plus four federal territories), China
(nine
provinces and certain cities), Canada (the provinces of Saskatchewan and
Ontario) and the United States (Hawaii, Iowa, Louisiana, Minnesota, Missouri,
Montana, and Washington). In Peru, all gasoline must contain 7.8% of fuel
ethanol starting on January 1, 2010. Petroperu, the state-owned oil company,
projects fuel ethanol demand of 22.6 million gallons per year in 2010 as
reported at the F.O. Licht 4
th
Annual
Conference, “Sugar and Ethanol Brazil.”
Table
1: Regulatory Mandates will Spur Ethanol Demand
|
Brazil
|
All
gasoline must contain between 20 and 25% anhydrous ethanol. Currently,
the
mandate is 23%.
|
|
Canada
|
By
2010, 5% of all motor vehicle fuel must be ethanol or
biodiesel.
|
|
France
|
Set
target rates for incorporation of biofuels into fossil fuels (by
energy
content). Calls for 5.75% in 2008, increasing to 10% in
2010.
|
|
Germany
|
Mandates
8% energy content in motor fuels by 2015, 3.6% coming from
ethanol.
|
|
Lithuania
|
Gasoline
must contain 7-15% Ethyl Tertiary-Butyl Ether, or ETBE. The ETBE
must be
47% ethanol.
|
|
Poland
|
Mandatory
“National Biofuel Goal Indicators” calling for biofuels to represent a set
percentage of total transportation fuel use. 2008’s standard is 3.45%, on
an energy content basis.
|
|
Argentina
|
Requires
the use of 5% ethanol blends by 2010.
|
|
Thailand
|
Gasoline
in Bangkok must be blended with 10% ethanol.
|
|
India
|
Requires
5% ethanol in all gasoline.
|
|
China
|
Five
Chinese provinces require 10% ethanol blends - Heilongjian, Jilin,
Liaoning, Anhui, and Henan.
|
|
The
Philippines
|
Requires
5% ethanol blends in gasoline beginning in 2008. The requirement
expands
to 10% in 2010.
|
|
Bolivia
|
Expanding
ethanol blends to 25% over the next five years. Current blend levels
are
at 10%.
|
|
Colombia
|
Requires
10% ethanol blends in cities with populations over
500,000.
|
|
Venezuela
|
Phasing
in 10% ethanol blending
requirement.
|
Source:
Ethanol Industry Outlook 2008, Renewable Fuels Association.
In
the
short to mid-term future, we believe that worldwide fuel ethanol consumption
will increase as a result of additional blending mandates prompted by the
rapidly growing fleet of flexible fuel vehicles, which are vehicles that
can
efficiently use different sources of fuel. Projections of fuel ethanol use
are
summarized in Table 2 below (Table 2 includes two alternative scenarios for
the
United States, based upon estimated targets of, respectively, 14.6 and 59.9
billion gallons, by 2030).
Table
2: Targets/Estimates on Fuel Ethanol Consumption
|
Country/
Region
|
|
Value/when
|
|
Comment
|
|
U.S.
|
|
36
billion gallons by 2022
|
|
ESIA
mandate
|
|
|
|
14.6
billion gallons by 2030
|
|
Estimated
by U.S. DOE (EIA, 2006)
|
|
|
|
59.9
billion gallons by 2030
|
|
Possible
mandate by 2030
|
|
|
|
|
|
|
|
EU
|
|
2.5%
by 2010
|
|
Estimate
|
|
|
|
17.5%
by 2020
|
|
EU
target defined in January 2007
|
|
|
|
20.0%
by 2030
|
|
Estimate
|
|
|
|
|
|
|
|
Japan
|
|
10%
1
2015 onwards
|
|
Estimate
|
|
|
|
|
|
|
|
China
|
|
0.66
billion gallons by 2010
|
|
Production
targets on fuel ethanol
|
|
|
|
3.3
billion gallons by 2020
|
|
Production
targets on fuel ethanol
|
|
|
|
10%
1
by
2020
|
|
Target
defined by the Chinese government
|
|
|
|
|
|
|
|
Rest
of World
|
|
1%
2
by
2010, 10%
1
by
2020
|
|
Estimate
|
Source:
FO Licht’s, World Ethanol & Biofuels Report, 2006
1
10%
ethanol blending mandate
2
1%
ethanol blending mandate
Supply
In
2007,
world production of fuel ethanol is estimated at nearly 13 billion gallons.
The
United States is now the world’s largest producer of fuel ethanol (6.5 billion
gallons in 2007), surpassing Brazil (5.0 billion gallons in 2007), which
historically has dominated fuel ethanol production, as reported by the
RFA 2008
Outlook.
Graph
5: Historic Ethanol Production in Brazil, EU and the U.S.
(1975-2006)
Source:
F.O. Licht
’
s
World
Ethanol and Biofuels Report
The
primary feedstocks which are used for fuel ethanol production vary from country
to country. According to a report entitled, The Emerging Biofuels Market:
Trade
and Development Implications from 2006, Brazil produces fuel ethanol primarily
from sugarcane, the United States and China use corn as the primary feedstock,
and India produces ethanol mainly from molasses (a co-product in the
manufacturing sugar industry).
Graph
6: Estimated Fuel Ethanol Production Capacity
(conventional
technologies)
Source:
F.O. Licht
’
s
World
Ethanol and Biofuels Report
According
to the Food and Agricultural Policy Research Institute’s reports on World
Biofuels from 2007 and 2008, world net trade in ethanol increased by 46.1%
in
2006 over 2005, followed by a decline in 2007 of 15.1%. As demand for ethanol
increases in the future, world net trade is expected to increase 10.4% in
2008,
and is projected to increase by 235% by 2017. However, as there is a clear
trend
of countries becoming self sufficient in the ethanol markets, world export
growth rates are expected to decrease even though supply and demand growth
rates
continue to increase.
The
main
exporters of fuel ethanol in 2006 were Brazil (33.9%) and South Africa
(10%).
Graph
7: Ethanol Main Exporters -2006
Source:
Food and Agriculture Policy Research Institute, 2007
The
main
importers in 2006 were the EU (39.2%) and the United States (18.5%). We plan
to
supply the U.S. market and we believe that the Free Trade Agreement between
Peru
and the U.S. gives us a significant competitive advantage over Brazilian
based
ethanol producers.
Graph
8: Ethanol Main Importers - 2006
Source:
Food and Agriculture Policy Research Institute, 2007.
Market
analysts forecast that world net imports will decrease by 2016 by approximately
52% as a result of production capacity growing more rapidly than
demand.
Ethanol
Prices
Typically,
ethanol is sold under six to twelve month contracts between ethanol producers
and petroleum companies. Although many of these contracts are fixed price,
some
of the contracts are pegged to a gasoline benchmark. To a lesser extent,
ethanol
is also sold on the spot market, where prices fluctuate daily according to
market conditions.
Ethanol
and unleaded gasoline’s retail prices in the U.S. increased steadily and were
highly correlated between 2002 and 2006.
Graph
9: Ethanol and Unleaded Gasoline Historical Retail Prices,
1997-2006
(US$
per Gallon)
Source:
Food and Agriculture Policy Research Institute database
The
futures market for ethanol seems to indicate a stabilization in ethanol
prices over the coming months.
Graph
10: Denatured Fuel Ethanol Futures Curve
__________________________
Source:
Chicago Board of Trade (CBOT)
According
to F.O. Licht, utilization rates, which declined steadily starting in 2004
due
to the capacity build-up, are projected to rise starting in 2008. In their
view,
while world ethanol production is estimated to continue rising in 2008, the
slower capacity build-out will rebalance the market and may push ethanol
prices
higher in 2009.
Graph
11: World’s Fuel Ethanol Production and Capacity Utilization Rates,
2000-2010
Source:
F.O. Licht, “World Ethanol 2008: Ethanol in 2008/09 - Light at the end of the
tunnel?”
The
Ethanol Industry
Bioethanol
is part of the
“
modern
biomass
based”
sources of energy, which have a less severe impact on the environment than
conventional gasoline or other petroleum derived additives. Moreover, sugarcane
ethanol has an industrial positive net energy balance, which means that the
energy contained in a ton of sugarcane ethanol is greater than the energy
required to produce it. There are a number of factors that determine the
economic viability of ethanol production, including the choice of raw material
feedstock, land availability, socioeconomic frameworks, consumer trends and
new
technology.
Feedstock
We
believe that our low cost feedstock business plan will give us a
significant competitive advantage. Feedstock accounts for 70 to 80% of overall
ethanol production costs. Feedstock costs are a function of land availability
and field production costs, crop productivity, fermentable sugars/sucrose
content (in case of sugar crops) and industrial conversion ratios.
Currently,
according to the SRI Consulting Ethanol Report from February 2008, approximately
70% of the world’s ethanol supply is being produced from sugar crops, primarily
from sugar beets, sugarcane and molasses, while the remainder is produced
from
grains, primarily maize or corn. Although there are several different metrics
which can be used to analyze the choice of feedstock, we believe that the
lowest
gross feedstock costs, per gallon of fuel ethanol produced, are currently
achieved by sugarcane grown in the central and southern regions of Brazil.
While
Peru does not yet have a developed ethanol industry due to the geography,
climate and other conditions in Peru, we believe that Peru will be able to
surpass the yields achieved in Brazil at lower gross feedstock
costs.
Profitable
feedstock production is also dependent, in part, upon obtaining a reliable
permanent source of raw material. Most of the profitable sugar based ethanol
businesses worldwide are based on integrated plantation models that are able
to
provide feedstock at less than the market price demanded from third
party growers.
Graph
12: Ethanol Production Costs without Subsidies
Source:
O. Henniges and J. Zeddies, in F.O. Licht
’
s
World
Ethanol and Biofuels Report, Vol. 3, No. II
Socioeconomic
frameworks
One
of
the key drivers of biofuel development throughout the world has been the
increase in rural economic development opportunities that biofuel production
facilitates. Compared to other sources of energy, the production of ethanol
is
more labor intensive, thus creating more jobs. It has been estimated that
in
Brazil 2,333 jobs are created for every one million tons of sugarcane harvested
(which produces approximately 21 million gallons of ethanol). Further, sugar
based ethanol production also provides an opportunity for countries that
have
existing sugar industries to produce a higher value-added product, ethanol,
rather than relying exclusively on the volatile sugar commodity
market.
Consumer
trends
The
International Energy Agency has estimated that recent policy initiatives,
if
fully implemented, could result in biofuels (mainly ethanol) displacing up
to 5%
of the worldwide motor gasoline use by 2010. In OECD (Organization for Economic
Co-operation and Development) regions, most of this production would likely
be
from conventional ethanol produced from grain feedstocks, such as corn and
wheat. While ethanol produced from grain feedstocks can provide important
benefits, production costs of using corn and wheat are generally high and
reductions in fossil energy use and CO2 emissions are modest. Ethanol production
in the southern hemisphere (Brazil and Peru) primarily utilizes sugar crops,
which are more efficient in reducing greenhouse gas emissions.
Graph
13: Biofuel Cost per Ton GHG Reduction
New
technologies
The
increasing use and demand for ethanol is also an incentive to promote advances
in biotechnology, particularly in the biomass-to-ethanol sector. New
technologies in sugarcane production, such as precision agriculture, energy
efficient irrigation systems, genetically modified seeds and integrated
harvesting and transport systems, could be adopted to lower sugarcane and
sugar
beet production costs. In addition, advanced processing technologies, such
as
increased use of industrial automation, new separation processes, higher
sucrose
recovery and higher fermentation productivity, could be adopted to lower
the
processing costs of converting sugarcane into ethanol.
Governmental
Regulation
Our
business is subject to extensive and frequently changing governmental laws
and
regulations. These laws may impact our existing and proposed business operations
by imposing:
|
|
·
|
restrictions
on our existing and proposed business operations and the need to
install
enhanced or additional controls;
|
|
|
·
|
the
need to obtain and comply with permits and
authorizations;
|
|
|
·
|
liability
for exceeding applicable permit limits or legal requirements;
and
|
|
|
·
|
specifications
for the ethanol we market and
produce.
|
Some
of
the governmental regulations that affect us are helpful to our ethanol
production business. The ethanol fuel industry is greatly dependent upon
tax
policies and environmental regulations that favor the use of ethanol in motor
fuel blends. At the end of 2007, fifteen countries had ethanol blending mandates
at the federal or regional level, requiring that gasoline contain a minimum
percentage of ethanol content. In the near future, blending mandates are
expected to be implemented by additional countries and increased by those
countries that currently impose blending mandates.
Environmental
Compliance
The
cost
of compliance with environmental and safety regulations in Peru is relatively
insignificant. We anticipate that our proposed facilities will not produce
any effluents or have any smoke stacks. With regards to safety, all equipment
must be fire proof and explosion proof. In addition, modern fire suppression
systems must be installed in order to be eligible for insurance and to protect
the safety of all employees.
Distribution
We
currently have no distribution arrangements in effect. We anticipate seeking
those as we get closer to the Sugar Mill going into production.
Customers
We
currently have no customers. Once we are in production, we anticipate that
our
major customers will be Herco Combustibles S.A., Ocean Marine S.A.C. and
PECSA
(Peruana De Combustibles S.A.).
Research
and Development
Our
research and development expenditures will be focused primarily on the efficient
production of sugarcane based fuel ethanol. During Phase I of our business
plan,
we expect to incur significant costs in implementing our seedling and compost
programs and identifying and analyzing land sources for sugarcane production.
Intellectual
Property
We
have
filed applications to register the trademarks “Stratos Renewables Corporation”
and “Stratos Renewables Corporation” and Design in the United States Trademark
Office and in the Peru Trademark Office. The applications are pending and
are in
good standing. Aside from these trademarks, we do not have any other patents,
trademarks, service marks, trade names, copyrights or other exclusive
intellectual property rights. We do not believe that any segment of our business
is dependent upon any single or group of intellectual property
rights.
Competition
We
face
substantial competition, particularly in U.S. ethanol market, which we expect
to
be our main market. Many of our competitors have longer operating histories
and
significantly more resources than we do.
Suppliers
During
Phase I, we will purchase 100% of the sugarcane to be used at the Sugar Mill
and
distillery from third party growers. During Phase II, we expect to grow and
cultivate 90% of the sugarcane needed for production.
Employees
As
of
March 29, 2008, we had a workforce of twenty-eight full time employees, of
which
four are executives. All of our employees are employed through Stratos Peru
except for Steven Magami. None of our employees are currently represented
by a
union or covered by a collective bargaining agreement. Management believes
its
employee relations are satisfactory.
Marketing
We
are
not currently engaged in marketing efforts at this time.
Risks
Relating to Our Business
RISK
FACTORS
In
addition to other information in this Current Report, the following risk
factors
should be carefully considered in evaluating our business because such factors
may have a significant impact on our business, operating results, liquidity
and
financial condition. As a result of the risk factors set forth below, actual
results could differ materially from those projected in any forward looking
statements. Additional risks and uncertainties not presently known to us,
or
that we currently consider to be immaterial, may also impact our business,
operating results, liquidity and financial condition. If any such risks occur,
our business, operating results, liquidity and financial condition could
be
materially affected in an adverse manner. Under such circumstances, you may
lose
all or part of your investment.
Risks
Related to our Business
Stratos
has no operating history on which to base an evaluation of its
business.
Stratos
is a recently incorporated development stage company with no operating results
to date. As Stratos has no operating history, it is difficult to evaluate
its
financial performance as of the date of this Current Report. Initially, we
anticipate that we will incur increased operating costs without realizing
any
revenues until the expansion and modification of the Sugar Mill, including
the
addition of a distillery unit, is complete. In addition, in the near future,
we
will start our seedling production program, compost production program and
land
sourcing program. We anticipate that a total of $33 million will be required
during Phase I, which is expected to be completed by the first quarter of
2009.
There can be no assurance that we will be able to complete the expansion
or
modification of the Sugar Mill or any of the programs of Phase I by the first
quarter of 2009, if ever. The failure to timely complete the components of
Phase
I would materially and adversely affect our ability to achieve any
revenues.
Additionally,
we will need up to an additional $590 million in order to complete Phase
II of
our operations, which is expected to begin in the first quarter of 2009 and
continue through 2014. There can be no assurance that we will be able to
raise
the additional funds we need to complete Phase II or that we will be able
to
begin any of the component programs of Phase II on a timely basis, if ever.
The
failure to raise these additional funds or to timely commence and complete
Phase
II would materially adversely affect our business, results of operations
and
financial condition.
The
fact that Stratos has not earned any revenues since the Share Exchange raises
substantial doubt about our ability to continue as a going
concern.
Stratos
generated nominal revenues in its prior iteration as New Design Cabinets,
Inc.
Since the Share Exchange, Stratos has generated no revenues, and we will
continue to incur operating expenses without generating revenues until the
expansion and modification of the Sugar Mill is completed. As a
result, we may need to obtain additional financing in order to develop and
continue operations. There can be no assurance that we will be able to obtain
the financing we require, or obtain such financing on terms that are
commercially viable for us. These circumstances raise substantial doubt about
our ability to continue as a going concern.
Additionally,
we may incur significant losses for the foreseeable future. We recognize
that if
we are unable to generate significant revenues from the Sugar Mill, we will
not
be able to earn profits or continue operations. As we are a development stage
company, we expect to face the risks, uncertainties, expenses and difficulties
frequently encountered by companies at the start up stage of their business
development. There is no assurance that we will be successful in addressing
these risks and uncertainties. Our failure to do so could have a materially
adverse effect on our financial condition. There is no history upon which
to
base any assumption as to the likelihood that we will prove successful and
we
can provide investors with no assurance that we will generate any operating
revenues or ever achieve profitable operations.
Our
business plan may not be realized.
Our
operations are subject to all of the risks inherent in the establishment
of a
new business enterprise, including inadequate working capital and a limited
operating history. The likelihood of our success must be considered in
light of the problems, expenses, complications and delays frequently encountered
in connection with the development of a new business. Unanticipated events
may occur that could affect the actual results achieved during forecast
periods. Consequently, the actual results of operations during the
forecast periods will vary from the forecasts and such variations may be
material. In addition, the degree of uncertainty increases with each
successive year presented. There can be no assurance that we will succeed
in the anticipated operation of our business plan. If our business plan
proves to be unsuccessful, our business may fail.
We
will require a significant amount of additional funding to execute our business
plan. Additional funding may not be
avai
l
able,
or if available, it may not be offered to us on agreeable
terms.
We
will
require a significant amount of additional capital in the future to sufficiently
fund our operations. We may not be able to obtain additional capital on terms
favorable to us or at all. We expect to increase our operating expenses over
the
coming years. We estimate that Phase I of our business plan, which is currently
in effect, will cost up to approximately $33.0
million.
Furthermore, we estimate that we will need up to an additional $590 million
to
fund our expansion during the course of Phase II of our operations, which
are
set to commence during the first quarter of 2009 and continue for five years
thereafter.
Financing
may not be available on terms acceptable to us or our investors, and may
be
available only on terms that would negatively affect the existing stockholders.
If adequate funds are not available, we likely will not be successful in
executing our business plan as anticipated and, as a result, we may be forced
to
cease operations and liquidate, in which case investors may not be able to
receive any return on their invested capital.
We
cannot
be certain that additional financing will not be needed beyond our current
and
projected needs or will be available when required and, if available, that
it
will be on terms satisfactory to us. Future financings may be dilutive to
existing stockholders. If we are unable to generate sufficient cash flow
and are
otherwise unable to obtain funds necessary to meet our funding requirements,
this would adversely affect our anticipated results of operations and financial
condition.
Our
future growth is dependent upon developing successful relationships with
existing sugarcane growers and establishing our own sugarcane supplies, which
requires us to obtain the use of significant amounts of land. If we are unable
to develop and maintain such relationships or develop our own supplies, our
future business prospects could be significantly
limited.
Our
future growth will be dependent initially on our ability to establish reliable
sources of sugarcane for the operation of the Sugar Mill, and going forward,
on
our ability to develop our own supplies of sugarcane, which requires us to
obtain the use of significant amounts of land. We must be successful in
establishing sugarcane supply relationships with local growers and there
is no
assurance that we will be able to enter into such relationships for sufficient
amounts of sugarcane. Additionally, we must be successful in establishing
seedling, compost and land sourcing programs in order to allow us to develop
a
consistent, reliable and cost-effective long-term supply of sugarcane. No
assurance can be given that we will be able to establish seedling our seedling,
compost and land sourcing programs, because we may not be able to obtain
the necessary amounts of land to be used for such programs. There is
significant competition for land that can be used for growing crops in
those areas of Peru that are proximately located to our
business. We can provide no assurances that we will be successful in
obtaining the required land necessary to fulfill our business
plan. If we are unsuccessful in our attempt to obtain the necessary
land for use in growing sugarcane and/or we fail to either
establish or develop supply relationships for sugarcane with local growers
or to
establish successful seedling, compost and land sourcing programs our business
could be materially and adversely affected.
Our
failure to accurately forecast market and customer demand for ethanol could
adversely affect our business and financial results.
The
ethanol industry faces difficulties in accurately forecasting market and
customer demand for its products. If our forecasts exceed actual market demand,
or if market demand decreases significantly from our forecasts, then we could
experience periods of product oversupply and price decreases, which could
impact
our financial performance. If our forecasts do not meet actual market demand,
of
if market demand increases significantly beyond our forecasts or beyond our
ability to add manufacturing capacity, then we may not be able to satisfy
customer product needs, which could result in a loss of market share if our
competitors are able to meet customer demands.
Significant
exchange rate variations between the Nuevo Sol and the U.S. dollar may adversely
affect our financial condition and results of
operations.
An
appreciation of the Nuevo Sol as compared to the U.S. dollar would result
in a
decrease in our operating margin, given that our revenues are denominated
in
U.S. dollars, and a portion of our cost of services rendered (the depreciation
of machinery) and administrative expenses are denominated in Nuevos
Soles.
Inflation
could adversely affect our financial condition and results of operations
and the
value of our securities.
Although
Peruvian inflation has moderated in recent years, Peru experienced high levels
of inflation in the past. Over the five-year period ended on December 31,
2006, the Peruvian economy experienced annual inflation averaging approximately
2.3% per year as measured by the Peruvian Consumer Price Index. This index
is
calculated by the Instituto Nacional de Estadística e Informática and measures
variations in prices of a selected group of goods and services typically
consumed by Peruvian families. Inflation for the six months ended June 30,
2007
was 2.25%. There can be no assurance, however, that inflation will remain
at
these levels.
If
Peru
experiences substantial inflation in the future, our costs may increase,
which
may adversely affect our ability to fulfill our obligations under the Notes.
Inflationary pressures may also curtail our ability to access foreign financial
markets and may lead to further government intervention in the economy,
including the introduction of government policies that may adversely affect
the
overall performance of the Peruvian economy. Our operating results and the
value
of our securities, including the Notes, may be adversely affected by higher
inflation.
Economic
and political developments in Peru could affect our business, financial
condition and results of operations.
All
of
our operations are conducted in Peru and are dependent upon the performance
of
the Peruvian economy. As a result, our business, financial position and results
of operations may be affected by the general conditions of the Peruvian economy,
price instability, inflation, interest rates, regulation, taxation, social
instability, political unrest and other developments in or affecting Peru,
over
which we have no control.
Our
financial condition and results of operations may also be affected by changes
in
Peru’s political climate to the extent that such changes affect the nation’s
economic policies, growth, stability or regulatory environment. On July 28,
2006, former president Alan García Pérez, leader of the American Popular
Revolutionary Alliance, took office for the second time. His previous term
in
office was from 1985 to 1990. In 1985, García had come to power in the middle of
a severe economic crisis, with the economy in recession and the public sector
staggering under a massive external debt burden. García responded with a failed
policy agenda that involved significant state intervention in the economy,
including an external debt moratorium and an attempt to nationalize the banking
system.
García
has now pledged to follow conservative economic policies and has indicated
a
desire to avoid the mistakes of his past government. Garcia named the
conservative banker Luis Carranza as minister of economy and finance. Carranza
held a senior position at Banco Bilbao Vizcaya Argentaria, or BBVA, in Spain
and
was a key adviser to Pedro Pablo Kuczynski, the prime minister (and former
finance minister) of former president Alejandro Toledo, who held office from
2001 to 2006. García has announced that, in general terms, his administration
would follow economic policies similar to those of the Toledo administration,
which included achieving sustained economic growth, increasing exports of
Peruvian goods, reducing unemployment, underemployment and poverty, reforming
the tax system, fostering private investment and increasing public investment
in
education, public health, and other social programs, while reducing overall
public spending.
It
is
uncertain whether the Peruvian government, including the administration of
President García, will continue to pursue business-friendly and open-market
economic policies or policies that stimulate economic growth and social
stability. Any changes in the Peruvian economy or the Peruvian government’s
economic policies may have a negative impact on our business, financial
condition and results of operations.
In
the past, Peru experienced significant levels of domestic terrorist activity.
It
is possible that a resurgence of terrorism in Peru may occur in the future,
which may have a material adverse effect on the Peruvian economy and,
ultimately, our business.
In
the
past, Peru experienced significant levels of terrorist activity that reached
its
peak in the late 1980s and early 1990s. Although local terrorist groups are
no
longer as powerful as they were during the 1980s and early 1990s, their members
still operate in remote mountainous and jungle areas in central and southern
Peru, where military patrols have decreased due to military spending cutbacks.
We cannot assure you that a resurgence of terrorism in Peru will not occur
or
that, if there is a resurgence, it will not have a material adverse impact
upon
the economy and prospects of Peru and, ultimately, our business.
We
are exposed to certain risks due to the international nature of our
operations.
We
are
exposed to risks associated with international operations. These include:
import and export licensing requirements, trade restrictions, changes in
tariff
rates, overlapping tax structures, transportation delays, currency
fluctuations, potentially adverse tax consequences, and compliance with a
variety of foreign laws and regulations. Any of the foregoing factors
could have a material adverse effect on our ability to expand our
international operations. Increased exposure to international markets
creates new areas with which we may not be familiar and could place us in
competition with new vendors. We cannot assure you that we will be
successful in our efforts to compete in these international markets.
We
currently have a competitive advantage due to the recently signed Free Trade
Agreement between the U.S. and Peru. Pursuant to the Free Trade Agreement,
our
fuel exports to the U.S., which we expect to be our main export market, will
not
be subject to the $0.54 per gallon import tariff and 2.5% ad valorem tax
imposed
on Brazil fuel ethanol exports to the U.S. There have been a number of proposals
by various lobbying groups to change the landscape and eliminate tariffs
on the
import of ethanol into the U.S. We can not provide any assurances that the
U.S.
will not eliminate such tariffs, thereby reducing our future competitive
advantage.
In
addition, certain foreign countries in which we plan to operate may not protect
intellectual property rights to the same extent as the laws of the U.S.
The failure to protect our proprietary information and any successful
intellectual property challenges or infringement proceedings against us could
have a material adverse affect on our business, financial condition or results
of operations.
We
depend on key service providers for assistance and expertise and any failure
or
loss of these relationships could delay our operations, increase our expenses
and hinder our success.
We
must
establish and maintain relationships with several key providers for contracting,
consulting and other services. Initially, we will need to secure contracts
for
labor and materials in relation to the expansion and modification of the
Estrella del Norte facilities. Upon completion of the expansion and modification
of the Estrella del Norte facilities, we will need to secure transportation
and
utility services, ensure that we are in environmental compliance, obtain
required permits, contract for sugarcane supplies and, eventually, market
our
bioethanol. If we should fail to maintain our relationship with any of these
key
providers, or if any of these providers should fail to perform, we would
be
forced to locate and retain alternative providers. As a consequence, due
to the
critical nature of these services, the commencement, and continuation, of
our
operations could be delayed, our start-up expenses could be significantly
increased and our business could be greatly harmed, even to the point of
failure
of our Company.
There
are several agreeme
n
ts
and relationships that remain to be negotiated, executed and implemented
which
will have a critical impact on our operations, expenses and
profitability.
There
are
several agreements, documents and relationships that remain to be negotiated,
executed and implemented before we can commence operations. In some cases,
the
parties with whom we would need to establish a relationship have yet to be
identified. Examples include agreements for equity financing, distribution
agreements and agreements with numerous consultants. Our expectations regarding
the likely terms of these agreements and relationships could vary greatly
from
the terms of any agreement or relationship that may eventually be executed
or
established. If we are unable to enter into these agreements or relationships
on
satisfactory terms, or if revisions or amendments to existing terms become
necessary, the consummation of the expansion and modification of the Estrella
del Norte facilities and the commencement of our operations could be delayed.
As
a result, our expenses could increase, our profitability could be adversely
affected and the value of your investment could decline.
The
cost of the expansion and modification of the Estrella del Norte facilities
could increase and, if an increase occurs, we may not have the resources
to
complete the expansion and modification of the
facilities.
Our
preliminary budget contemplates that the expansion and modification of the
Estrella del Norte facilities will cost approximately $9.6 million. Our
financial plan is based on this estimated cost, plus the cost of other site
improvements, capital expenditures, start-up and development costs and reserves
estimated to be approximately $23.6 million, resulting in total estimated
remaining capital requirements during Phase I of $33.2 million. If the cost
to
expand and modify the Estrella del Norte facilities or other costs increase
due
to economic factors, design modifications, construction delays or cost overruns,
the total cost of our project and the capital required could increase, perhaps
significantly. In such an event, our results of operations and ultimately
the
financial condition of our Company will be adversely affected.
Delays
due to weather, labor or material shortages, permitting or zoning delays,
or
opposition from local groups, may hinder our ability to timely commence
operations.
Our
construction timetable, which we believe to be reasonable, assumes the startup
of operations in the first quarter of 2009. Our schedule depends upon several
assumptions, many of which are beyond our control. We could incur delays
in the
acquisition and installation of the distillery unit due to permitting, adverse
weather conditions, labor or material shortages, defects in materials or
workmanship or other causes. In addition, the availability of financing,
changes
in interest rates or the credit environment or changes in political
administrations at the federal, provincial or municipal level that result
in
policy changes towards biofuel or our facilities could result in delays in
our
timetable for construction and commencement of operations. Any such delays
will
adversely affect our ability to commence operations and generate
revenue.
Unpredictable
natural and man-made catastrophic events could cause unanticipated losses
and
have a material adverse effect
on
the Peruvian economy and, ultimately, our business.
Catastrophes
can be caused by various events, including natural events such as floods,
earthquakes, hailstorms, severe winter weather and fires, and unnatural events
such as acts of war, terrorist attacks, explosions and riots. The incidence
and
severity of catastrophes are inherently unpredictable. The extent of losses
from
a catastrophe is a function of both the total amount of insured exposure
in the
area affected by the event and the severity of the event. Peru is a region
prone
to earthquakes and floods, both which may produce significant damage to our
infrastructure and operations. It is possible that a catastrophic event or
multiple catastrophic events could have a material adverse effect upon our
results of operations and financial condition.
Defects
in the construction or performance of our ethanol production facilities could
result in a reduction in our revenues and profitability and in the value
of your
investment in our Company.
We
anticipate that the distillery unit will come with warranties with respect
to
materials and workmanship and assurances that the facilities will operate
at
design capacity. However, defects in the construction or performance of the
facilities could occur and there is no assurance that we will be able to
correct
any problems that do in fact occur. If our facilities do not perform at or
above
design specifications, we may not be able compete in a competitive marketplace.
If defects delay the construction or hinder the operations of the facilities,
our operations, revenues, profitability and the value of your investment
in our
Company could be materially adversely affected. If defects require a lengthy
or
permanent discontinuance of production, your investment could be reduced
to very
little or no value.
Our
business is subject to comprehensive government regulation and any change
in
such regulation may have a material adverse effect on our
Company.
There
is
no assurance that the laws, regulations, policies or current administrative
practices of any government body, organization or regulatory agency in Peru
or
any other jurisdiction, will not be changed, applied or interpreted in a
manner
which will fundamentally alter the ability of our Company to carry on our
business. The actions, policies or regulations, or changes thereto, of any
government body or regulatory agency, or other special interest groups, may
have
a detrimental effect on our Company. Any or all of these situations may have
a
negative impact on our operations.
We
may be subject to governmental regulations or restrictions in connection
with
the construction and operation of our Sugar Mill in Peru, as well as on the
sale
of ethanol outside of Peru.
Our
proposed business is subject to regulation by governmental agencies in Peru,
where we intend to produce and initially sell ethanol. We cannot predict
in what
manner or to what extent or cost we will need to comply with such governmental
regulations, or to what extent such regulations will harm our business or
the
ethanol production and marketing industry in general.
We
intend
to sell ethanol into the worldwide market, including the United States. The
sale
of ethanol is subject to regulation by agencies of the United States federal
government, including, but not limited to, the Environmental Protection Agency
as well as other agencies in each jurisdiction in which ethanol is produced,
sold, stored or transported.
Environmental
laws and regulations that are expected to affect our planned operations are
extensive. Applicable laws and regulations are subject to change and there
is a
risk that such laws and regulations could be applied retroactively. Violations
of environmental laws and regulations or permit conditions can result in
substantial penalties, injunctive orders compelling installation of additional
controls, civil and criminal sanctions, permit revocations and/or facility
shutdowns. If significant unforeseen liabilities arise for corrective action
or
other compliance, our sales and profitability could be materially and adversely
affected.
It
is
also likely that operations at the Sugar Mill will be governed by other
government regulations. Compliance with regulations may be time-consuming
and
expensive and may delay or even prevent sales of ethanol in Peru or in other
jurisdictions.
Risks
Related to our Company
We
plan to grow very rapidly, which will place strains on our management team
and
other company resources.
We
plan
to grow and expand our operations at a rapid pace. This growth will place
a
significant strain on our management systems and resources. We will not be
able
to implement our business strategy in a rapidly evolving market without
effective planning and management processes. We have a short operating history
and have not implemented sophisticated managerial, operational and financial
systems and controls. We will be required to manage multiple relationships
with
various strategic partners, including suppliers, distributors, and other
third
parties. In order to manage the expected growth of our operations and personnel,
we will be required to significantly improve or replace existing managerial,
financial and operational systems, procedures and controls, and to expand,
train
and manage our growing employee base. We will be required to expand our finance,
administrative and operations staff. We may be unable to complete, in a timely
manner, the improvements to our systems, procedures and controls necessary
to
support our future operations, management may be unable to hire, train, retain,
motivate and manage required personnel and our management may be unable to
successfully identify, manage and exploit existing and potential market
opportunities. As a result, our business and financial condition may be
adversely affected.
Our
ability to hire and retain key personnel will be an important factor in the
success of our business and a failure to hire and retain key personnel may
result in our inability to manage and implement our business
plan.
We
are
highly dependent upon our management personnel because of their experience
in
the alternative energy industry and specifically with bioethanol and related
products. The loss of the services of one or more of these individuals may
impair management’s ability to operate our Company. We do not anticipate
purchasing key man insurance for any of our management or employees, which
insurance would provide us with insurance proceeds in the event of their
death.
Without key man insurance, we may not have the financial resources to develop
or
maintain our business until we could replace the individual or to replace
any
business lost by the death of that person. The competition for qualified
personnel in the markets in which we operate is intense. In addition, in
order
to manage growth effectively, we must implement management systems and recruit
and train new employees. We may not be able to attract and retain the necessary
qualified personnel. If we are unable to retain or to hire qualified personnel
as required, we may not be able to adequately manage and implement our
business.
The
past activities of NDCI prior to the Share Exchange, may lead to future
liability for the combined companies.
Prior
to
the Share Exchange, we were engaged in businesses and were managed by parties
unrelated to that of our current operations. Any liabilities relating to
such
prior business, including any liabilities arising out of our limited residential
construction operations, may have a material adverse effect on us.
Most
of our assets, directors and officers are located outside the United States,
with the result being that it may be difficult for investors to enforce within
the United States any judgments obtained against us or any of our directors
or
officers.
Although
we are organized under the laws of the State of Nevada, our principal business
is located in Peru. Outside the United States, it may be difficult for investors
to enforce judgments against us that are obtained in the United States in
any
action, including actions predicated upon civil liability provisions of federal
securities laws. In addition, all of our directors and officers, except for
Steven Magami and Valerie Broadbent, reside outside the United States, and
nearly all of the assets of these persons and our assets are located outside
of
the United States. As a result, it may not be possible for investors to effect
service of process within the United States upon such persons or to enforce
against us or such persons judgments predicated upon the liability provisions
of
United States securities laws. There is substantial doubt as to the
enforceability against us or any of our directors and officers located outside
the United States in original actions or in actions of enforcement of judgments
of United States courts or liabilities predicated on the civil liability
provisions of United States federal securities laws. In addition, as the
majority of our assets are located outside of the United States, it may be
difficult to enforce United States bankruptcy proceedings against us. Under
bankruptcy laws in the United States, courts typically have jurisdiction
over a
debtor’s property, wherever it is located, including property situated in other
countries. Courts outside of the United States may not recognize the United
States bankruptcy court’s jurisdiction. Accordingly, you may have trouble
administering a United States bankruptcy case involving a Nevada company
as
debtor with most of its property located outside the United States. Any orders
or judgments of a bankruptcy court obtained by you in the United States may
not
be enforceable.
If
we suffer a loss to our facilities that is not adequately insured, our
operations could be seriously harmed.
Our
facilities are subject to catastrophic loss due to fire, flood, terrorism
or
other natural or man-made disasters. In particular, our facilities could
be
subject to a catastrophic loss caused by earthquake due to their location
in
Peru, which has recently experienced high levels of seismic activity. Although
we carry insurance for property damage and business interruption, it may
not be
adequate to cover potential catastrophic losses. If any of our facilities
were
to experience a catastrophic loss that is not adequately insured, it could
disrupt our operations, delay production, result in large expenses to repair
or
replace the facility or cause us to discontinue operations
indefinitely.
If
we fail to maintain an effective system of our internal controls, we may
not be
able to accurately report our financial results or prevent
fraud.
We
are
subject to reporting obligations under the U.S. securities laws. The SEC,
as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report of such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of the company’s internal controls
over financial reporting. This requirement applies to us beginning with our
annual report on Form 10-KSB for the year ended December 31, 2007. In addition,
in the future, an independent registered public accounting firm will be required
to attest to and report on management’s assessment of the effectiveness of the
company’s internal controls over financial reporting. Our management may
conclude that our internal controls over our financial reporting are not
effective. Moreover, even if our management concludes that our internal controls
over financial reporting are effective, our independent registered public
accounting firm may still decline to attest to our management’s assessment or
may issue a report that is qualified if it is not satisfied with our controls
or
the level at which our controls are documented, designed, operated, or reviewed,
or if it interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational, and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and
are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result
in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price
of
our stock. Furthermore, we anticipate that we will incur considerable costs
and
use significant management time and other resources in an effort to comply
with
Section 404 and other requirements of the Sarbanes-Oxley Act.
Risks
Related to the Biofuel Industry
Our
business could be significantly and adversely impacted by changes in government
regulations over energy policy.
Our
operations and properties may become subject to a wide variety of federal,
provincial and municipal laws and regulations, including those governing
the
use, storage, handling, generation, treatment, emission release, discharge
and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees.
As
such, the nature of our operations may expose us to the risk of claims with
respect to such matters and there can be no assurance that material costs
or
liabilities will not be incurred in connection with such claims. Environmental
legislation may also provide for standards, restrictions and prohibitions
on the
handling of certain types of waste and for releases, spills, emissions into
the
environment of substances that are being handled by our Company. Any breach
by
us of such legislation may result in the suspension or revocation of necessary
licenses, permits or authorizations, civil liability and the imposition of
fines
and penalties which would adversely affect our financial condition.
Our
business is not diversified because we are primarily dependent upon one product.
As a consequence, we may not be able to adapt to changing market conditions or
endure any decline in the biofuel industry.
Our
business consists primarily of bioethanol and sugar production and sales.
We do
not have any other lines of business or other sources of revenue to rely
upon if
we are unable to produce and sell bioethanol and sugar, or if the market
for
such products declines. Although our Sugar Mill will have the ability to
process
sugar cane, the distillery unit will not have the ability to produce any
other
products. Our lack of diversification means that we may not be able to adapt
to
changing market conditions or to withstand any significant decline in the
bioethanol industry.
An
increase in the price for sugarcane supplies and/or a decrease in market
prices
for biofuel could result in a significant reduction in our revenues and
profitability.
Our
financial results will greatly depend on prices for our sugarcane supplies
and
market prices for the bioethanol that we produce.
Sugarcane supplies, which will comprise a major portion of our operating
expenses, do not have a direct price relationship to the price of bioethanol
in
the marketplace. For an operating bioethanol plant, falling bioethanol prices,
coupled with a rise in sugarcane prices, can result in significant reductions
in
cash flow and reduced profitability. These prices will change based on available
supplies, the supply and market prices for alternative products and other
market
factors. For instance, increased supplies of bioethanol or alternative fuels
may
lead to lower prices for bioethanol, regardless of the price of sugarcane.
In
addition, increased production of bioethanol could result in increased demand
for sugarcane, resulting in higher operating costs and lower profitability.
There can be no assurance as to the price of these commodities in the future,
and any increase in sugarcane prices or decrease in the price of bioethanol
would adversely affect our financial condition.
Our
projected operating costs could be significantly higher than we expect due
to
the nature of our industry and our limited operating history, resulting in
a
reduction of our income and any distributions we may
make.
In
addition to general economic conditions, market fluctuations and commodity
prices, significant increases in operating costs could adversely affect us
due
to numerous factors, many of which are beyond our control. These increases
could
arise for several reasons, such as:
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higher
prices for sugarcane;
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increased
costs for natural gas, electricity, water and other
utilities;
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higher
transportation costs for sugarcane supplies and for our bioethanol
products due to rising fuel costs and greater demands on truck
and rail
transportation services; and
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rising
labor costs, particularly if any labor shortage should
occur.
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Our
operations also subject us to ongoing compliance with applicable governmental
regulations, such as those governing pollution control, occupational safety
and
other matters. We may have difficulty complying with these regulations and
our
compliance costs could increase significantly. Increases in operating costs
would have a negative impact on our operating income, and could result in
substantially decreased earnings or a loss from our operations, adversely
affecting our financial condition.
The
market price of bioethanol has followed the price of petroleum and decreases
in
the price of petroleum-based fuels would very likely decrease the price of
bioethanol, resulting in reductions in our revenues.
Historically,
bioethanol prices have generally paralleled movements in petroleum prices.
Petroleum prices in the international market have been difficult to forecast
due
to the impact of wars and other political factors, economic uncertainties,
exchange rates and natural disasters. Just as a small reduction in the real
or
anticipated supply of crude oil can have a significant upward impact on the
price of petroleum-based fuels, a perceived reduction of such threats can
result
in a significant reduction in petroleum fuel prices. A reduction in
petroleum-based fuel prices could have a significantly adverse effect on
our
revenues and profits.
The
bioethanol and biofuel industry is becoming more competitive and as a result,
we
may not be able to achieve profitability.
Competition
in the bioethanol and biofuel industry is growing more intense as more
production facilities are built and the industry expands. Our business will
face
competitive challenges from larger facilities that can produce a wider range
and
larger quantity of products than we can, and from other plants similar to
our
proposed bioethanol production facilities. Many of these bioethanol and other
biofuel producers will compete with us for sugarcane and/or customers in
our
regional market. We expect that additional bioethanol and other biofuel
producers will enter the market if the regulatory environment remains favorable
and the demand for bioethanol and other biofuels continues to
increase.
As
more bioethanol and other biofuel facilities are built, bioethanol and other
biofuel production will increase and, if demand does not sufficiently increase,
this could result in lower prices for bioethanol and other biofuels, which
will
decrease the amount of revenue we generate.
A
significant number of bioethanol and other biofuel plants are currently being
planned and built in Peru and around the world. As a consequence, bioethanol
and
other biofuel production is expected to increase rapidly in the next two
to
three years. The demand for bioethanol and other biofuels is dependent upon
numerous factors such as governmental regulations and incentives and the
development of other technologies or products that may compete with bioethanol.
If the demand for bioethanol and other biofuels does not sufficiently increase,
then increased bioethanol and other biofuels production may lead to lower
bioethanol prices. Decreases in the market price of bioethanol will result
in
lower revenues, decreased profitability, and adversely affect our financial
condition.
Technological
advances and changes in production methods in the bioethanol and biofuel
industry could render our production facilities obsolete and adversely affect
our ability to compete and the value of your
investment.
Technological
advances could significantly decrease the cost of producing bioethanol and
other
biofuels. If we are unable to adopt or incorporate technological advances
into
our operations, our proposed production facilities could become uncompetitive
or
obsolete. We expect that technological advances in bioethanol and biofuel
production methods will continue to occur. If improved technologies become
available to our competitors, they may be able to produce bioethanol at a
lower
cost than us. In such an event, we may be required to acquire new technology
and
retrofit our production facilities so that we remain competitive. There is
no
assurance that third-party licenses for any new technologies would be available
on commercially reasonable terms or that any new technologies could be
incorporated into our proposed production facilities. The costs of upgrading
our
technology and production facilities could be substantial. If we are unable
to
obtain, implement or finance new technologies, our production facilities
could
be uncompetitive and our operating income would be reduced.
The
development of alternative fuels and energy sources may reduce the demand
for
bioethanol, resulting in a reduction in our
profitability.
Alternative
fuels are continually under development. Petroleum based fuels, other biofuels
and other energy sources that can compete with bioethanol in the marketplace
are
already in use and more acceptable alternatives may be developed in the future,
which may decrease the demand for bioethanol or the type of bioethanol that
we
expect to produce. Technological advances in engine and exhaust system design
and performance could also reduce the use of biofuels, which would reduce
the
demand for bioethanol. Further advances in power generation technologies,
based
on cleaner hydrocarbon based fuels, fuel cells and hydrogen are actively
being
researched and developed. If these technological advances and alternatives
prove
to be economically feasible, environmentally superior and accepted in the
marketplace, the market for bioethanol could be significantly diminished
or
replaced, which would adversely affect our financial condition.
Competition
for qualified personnel in the bioethanol industry is intense and we may
not be
able to hire and retain qualified managers, engineers and operators to operate
our plant efficiently.
When
the
expansion and modification of the Estrella del Norte facilities nears
completion, we will need a significant number of employees to operate the
facilities. Our success depends in part on our ability to attract and retain
competent personnel. We must hire or otherwise engage qualified managers,
engineers and accounting, human resources, operations and other personnel.
Competition for employees in the bioethanol industry is intense. If we are
unable to hire, train and retain qualified and productive personnel, we may
not
be able to operate the plant efficiently and the amount of bioethanol we
produce
and market may decrease.
Compliance
with new and existing environmental laws and regulations could significantly
increase our construction and start-up costs, and force us to delay or halt
construction or operation.
To
expand, modify and operate the Estrella del Norte facilities, we may need
to
obtain and comply with a number of permitting requirements. We may have
difficulties obtaining the permits we need. As a condition of granting necessary
permits, regulators could make additional demands that increase our costs
of
construction and operations, in which case we could be forced to obtain
additional capital. We cannot assure you that we will be able to obtain and
comply with all necessary permits to construct and operate our proposed
production facilities as planned.
Risks
Related to our Capital Stock
There
has been a limited public trading market for our securities, and the market
for
our securities may continue to be limited and be sporadic and highly
volatile.
There
is
currently a limited public market for our common stock. Our common stock
has
only been listed for trading on the National Association of Securities Dealers,
Inc. Over-the-Counter Bulletin Board, or the OTCBB, since December 8, 2005,
and
is now listed under the symbol “SRNW.” We cannot assure you that an active
market for our shares will be established or maintained in the future. The
OTCBB
is not a national securities exchange, and many companies have experienced
limited liquidity when traded through this quotation system. Holders of our
common stock may, therefore, have difficulty selling their shares, should
they
decide to do so. In addition, there can be no assurances that such markets
will
continue or that any shares, which may be purchased, may be sold without
incurring a loss. The market price of our shares, from time to time, may
not
necessarily bear any relationship to our book value, assets, past operating
results, financial condition or any other established criteria of value,
and may
not be indicative of the market price for the shares in the future.
In
addition, the market price of our common stock may be volatile, which could
cause the value of our common stock to decline. Securities markets experience
significant price and volume fluctuations. This market volatility, as well
as
general economic conditions, could cause the market price of our common stock
to
fluctuate substantially. Many factors that are beyond our control may
significantly affect the market price of our shares. These factors
include:
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·
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price
and volume fluctuations in the stock
markets,
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|
·
|
changes
in our earnings or variations in operating
results,
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|
·
|
any
shortfall in revenue or increase in losses from levels expected
by
securities analysts,
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·
|
changes
in regulatory policies or law,
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·
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operating
performance of companies comparable to us,
and
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·
|
general
economic trends and other external
factors.
|
Even
if
an active market for our common stock is established, stockholders may have
to
sell their shares at prices substantially lower than the price they paid
for the
shares or might otherwise receive than if an active public market
existed.
If
we issue additional shares in the future, it will result in dilution to our
existing stockholders.
Our
Board
of Directors may choose to issue additional shares of our capital stock in
the
future to acquire one or more businesses or to provide additional financing.
In
addition, the holders of our convertible promissory notes, Series A preferred
stock and warrants have the right to convert their securities into shares
of our
common stock. The issuance of additional securities will result in a reduction
of the book value and market price of the outstanding shares of our common
stock. If we issue any such additional shares, such issuance will cause a
reduction in the proportionate ownership and voting power of all current
stockholders. Further, such issuance may result in a change of control of
our
corporation.
Our
Series A Preferred contains rights, preferences and privileges that are senior
to our common stock, which could negatively impact our common
stockholders.
We
have
an aggregate of 7,142,857 shares of Series A preferred stock issued and
outstanding and may issue additional shares of Series A preferred stock in
the
future. Our Series A preferred stock contains certain rights that are senior
to
the rights of our common stock, including, but not limited to, liquidation,
anti-dilution, conversion, voting and registration rights. Furthermore, the
holders of our Series A preferred stock could delay, defer or prevent us
from
effecting a change in control in the future, which in turn, could have a
depressive effect on the prevailing market price of our common stock.
Our
common stock is subject to “penny stock” regulations that may affect the
liquidity of our common stock.
Our
common stock is subject to the rules adopted by the SEC that regulate
broker-dealer practices in connection with transactions in “penny stocks.” Penny
stocks are generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted
on
the NASDAQ Stock Market, for which current price and volume information with
respect to transactions in such securities is provided by the exchange or
system).
The
penny
stock rules require that a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the SEC, which contains the following:
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·
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a
description of the nature and level of risk in the market for penny
stocks
in both public offerings and secondary
trading,
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·
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a
description of the broker’s or dealer’s duties to the customer and of the
rights and remedies available to the customer with respect to violation
of
such duties or other requirements of securities
laws,
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·
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a
brief, clear, narrative description of a dealer market, including
“bid”
and “ask” prices for penny stocks and significance of the spread between
the “bid” and “ask” price,
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·
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a
toll-free telephone number for inquiries on disciplinary actions,
definitions of significant terms in the disclosure document or
in the
conduct of trading in penny stocks,
and
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·
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such
other information and in such form (including language, type, size
and
format), as the SEC shall require by rule or
regulation.
|
Prior
to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer the following:
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·
|
the
bid and offer quotations for the penny
stock,
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·
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the
compensation of the broker-dealer and its salesperson in the
transaction,
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·
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the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market
for such stock,
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·
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the
liquidity of the market for such stock,
and
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·
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monthly
account statements showing the market value of each penny stock
held in
the customer’s account.
|
In
addition, the penny stock rules require that prior to a transaction in a
penny
stock not otherwise exempt from those rules, the broker-dealer must make
a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock such as our common stock if
it is
subject to the penny stock rules.
Additional
Information
We
are a
public company and file annual, quarterly and special reports and other
information with the SEC. We are not required to, and do not intend to, deliver
an annual report to security holders. You may read and copy any document
we file
at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C.
20549. You can request copies of these documents by writing to the SEC and
paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330
for
more information about the operation of the public reference room. Our filings
are also available, at no charge, to the public at
http://www.sec.gov
.
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Item
2.
|
Description
of Property
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Our
principal executive offices are located at 9440 Santa Monica Blvd., Suite
401,
Beverly Hills, California 90210.
ARC
Investment Partners, an affiliate of Steven Magami, our President, currently
provides this space to us free of charge. This space may not be available
to us
free of charge in the future. We also lease offices in Lima, Peru for
approximately $296,000 per year. The lease is a four year lease, which commenced
in January 2008.
On
December 28, 2007, we engaged an unaffiliated third party, on an exclusive
basis, to assist us in locating and acquiring land in the Tumbes, Piura,
Lambayeque, La Libertad and Arequipa regions of Peru for the operation of
the
Sugar Mill. Our engagement with them terminates on December 28,
2009. We agreed to compensate this unaffiliated third party for such
services at a fixed amount per hectare of land obtained on our behalf.
Since the date of the agreement, they have obtained control over 40 hectares
of
land from various owners or possessors in the Lambayeque region and have
agreed
to transfer control over the land, or Industrial Lot, to us as soon as the
lot
has been consolidated. We are still in the process of locating additional
land
in Peru.
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Item
3.
|
Legal
Proceedings
|
We
are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead any third party to initiate material
legal
proceedings against us.
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Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
During
the fourth quarter of the year ended December 31, 2007 there were two written
consents entered into by the security holders of our Company.
On
November 14, 2007 the majority shareholder of NDCI entered into a written
consent authorizing and approving: (1) the cancellation of 89,900,000
shares of the Company's common stock by Kenneth Laurent; (2) the Agreement
Concerning the Exchange of Securities By and Among NDCI,
Stratos Peru and the security holders of Stratos del Peru S.A.C.(or
the Exchange Agreement); (3) the Amended and Restated Articles of
Incorporation of NDCI; (4) the Amended and Restated Bylaws of NDCI; (5) setting
the number of directors to be five; (6) the appointment of the following
directors effective as of the date of the closing of the Exchange
Agreement: Luis Francisco de las Casas, Steven Magami (Chairman), Gustavo
Goyzueta, Carlos Antonio Salas, and Luis Goyzueta; and (7) the appointment
of
the following officers effective as of the date of the closing of the Exchange
Agreement: Carlos Antonio Salas (Chief Executive Officer), Luis Goyzueta
(President), Jorge Eduardo Aza (Chief Operating Officer), Julio Cesar Alonso
(Chief Financial Officer and Treasurer) and Gustavo Goyzueta
(Secretary).
On
November 15, 2007 the common and Series A preferred shareholders of NDCI
entered
into a written consent to amend the Amended and Restated Articles of
Incorporation to change our name from New Design Cabinets, Inc. to Stratos
Renewables Corporation.
PART
II
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Item
5.
|
Market
for Common Equity and Related Stockholder Matters and Small Business
Issuer Purchases of Equity
Securities
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading
History
Our
common stock is quoted on the
Over-The-Counter
Bulletin Board under the symbol “
SRNW
.”
Trading
in our common stock has not been extensive and such trades cannot be
characterized as constituting an active trading market. The following is
a
summary of the high and low closing prices of our common stock on the OTC
Bulletin Board during the periods presented, as reported on the website of
the
NASDAQ Stock Market. Such prices represent inter-dealer prices, without retail
mark-up, mark down or commissions, and may not necessarily represent actual
transactions:
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Closing
Sale Price
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High
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Low
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Year
Ending
December
31, 2008
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First
Quarter
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$
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1.90
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$
|
1.50
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Year
Ended
December
31, 2007
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First
Quarter
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$
|
0.0033
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$
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0.0033
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Second
Quarter
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0.0033
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0.0033
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Third
Quarter
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0.0033
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0.0033
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Fourth
Quarter
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1.75
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0.0033
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Year
Ended
December
31, 200
6
|
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First
Quarter
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$
|
0.0033
|
|
$
|
0.0033
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|
Second
Quarter
|
|
|
0.0033
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|
0.0033
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|
Third
Quarter
|
|
|
0.0033
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0.0033
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Fourth
Quarter
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0.0033
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0.0033
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On
April
7, 2008, the closing sales price for our common stock was $1.60, as reported
on
the website of the OTCBB. As of April 7, 2008, there were approximately 90
stockholders of record of the common stock (not including the number of persons
or entities holding stock in nominee or street name through various brokerage
firms) and 59,972,936 outstanding shares of common stock.
Dividends
We
have
never declared or paid any cash dividends on our common stock. For the
foreseeable future, we intend to retain any earnings to finance the development
and expansion of our business, and we do not anticipate paying any cash
dividends on our common stock. Any future determination to pay dividends
will be
at the discretion of the Board of Directors and will be dependent upon then
existing conditions, including our financial condition and results of
operations, capital requirements, contractual restrictions, business prospects
and other factors that the Board of Directors considers relevant. Each holder
of
our Series A preferred stock is entitled to a 10% per annum cumulative
dividend.
There
are
no restrictions in our articles of incorporation or bylaws that prevent us
from
declaring dividends. The Nevada Revised Statutes, however, prohibit us from
declaring dividends where, after giving effect to the distribution of the
dividend:
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·
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we
would not be able to pay our debts as they become due in the usual
course
of business; or
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·
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our
total assets would be less than the sum of our total liabilities
plus the
amount that would be needed to satisfy the rights of stockholders
who have
preferential rights superior to those receiving the distribution,
unless
otherwise permitted under our articles of
incorporation.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
Neither
NDCI nor Stratos had any equity compensation plans in place as of
December 31, 2007.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is
Holladay
Stock
Transfer
,
2939 N.
67th Place, Suite C, Scottsdale, Arizona 85251. The phone number of the transfer
agent is (480) 481-3940.
RECENT
SALES OF UNREGISTERED SECURITIES
The
following represents our sales of unregistered securities in the last three
years:
2008
On
March
7, 2008 we closed on $1,587,447 of our $10 million March 2008 Financing,
and
unless we receive the full $10 million earlier, we anticipate that we will
continue to offer our securities on the same terms and conditions until at
least
May 31, 2008. Pursuant to the March 2008 Financing, we issued an aggregate
of
2,267,782 shares of common stock at a purchase price of $0.70 per share and
warrants to purchase an aggregate of 1,133,888 shares of common stock with
an
exercise price of $0.75 per share. The warrants have a “cashless” exercise
provision, expire five years from the date of issuance, and are exercisable
at
$0.75 per share, subject to adjustment under certain circumstances. The common
stock and warrants issued in connection with the March 2008 Financing were
not
registered under the Securities Act and were issued in reliance upon exemptions
set forth in Section 4(2), Regulation D and/or Regulation S of the Securities
Act. Our determination with regard to the applicable exemptions from
registration was based on the representations of the investors, which included,
in pertinent part, that such investors were either: (a) “accredited investors”
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act, or (b) not a “U.S. person” as such term is defined in Rule 902(k) of
Regulation S under the Securities Act, and that the investors understood
that
the securities may not be sold or otherwise disposed of without registration
under the Securities Act or an applicable exemption therefrom.
2007
On
November 14, 2007, pursuant to the acquisition of Stratos Peru, we issued
45,000,000 shares of our common stock to the security holders of Stratos
Peru in
exchange for 999, or 99.9%, of the issued and outstanding shares of Stratos
Peru. Such securities were not registered under the Securities Act and were
issued in reliance upon exemptions set forth in Section 4(2), Regulation
D
and/or Regulation S of the Securities Act. Our determination with regard
to the
applicable exemptions from registration was based on the representations
of the
security holders, which included, in pertinent part, that such security holders
were either: (a) “accredited investors” within the meaning of Rule 501 of
Regulation D promulgated under the Securities Act, or (b) not a “U.S. person” as
such term is defined in Rule 902(k) of Regulation S under the Securities
Act,
and that the security holders understood that the securities may not be sold
or
otherwise disposed of without registration under the Securities Act or an
applicable exemption therefrom.
On
November 14, 2007, pursuant to the Private Placement, we issued an aggregate
of
2,666,794 shares of common stock and warrants to purchase an aggregate of
1,333,396 shares of common stock. Each share of common stock was sold to
investors at $0.70 per share, for an aggregate of gross proceeds of
approximately $1.9 million. The warrants expire five years from the date
of
issuance and are exercisable at $0.75 per share, subject to adjustment in
certain circumstances. The common stock and warrants issued under connection
with the Private Placement were not registered under the Securities Act in
reliance upon exemptions set forth in Section 4(2), Regulation D and/or
Regulation S of the Securities Act. Our determination with regard to the
applicable exemptions from registration was based on the representations
of the
investors, which included, in pertinent part, that such investors were either:
(a) “accredited investors” within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act, or (b) not a “U.S. person” as that term is
defined in Rule 902(k) of Regulation S under the Securities Act, and that
the
investors understood that the securities may not be sold or otherwise disposed
of without registration under the Securities Act or an applicable exemption
therefrom.
On
November 14, 2007, we entered into a Series A preferred stock and warrant
Purchase Agreement with MA Green, to sell an aggregate of 7,142,857 shares
of
Series A preferred stock, $0.001 par value and a warrant to purchase an
aggregate of 1,785,714 shares of common stock, or the Series A Private
Placement. Each share of Series A preferred stock was sold at $0.70 per share
for an aggregate of approximately $5 million in gross proceeds. The warrant
expires five years from the date of issuance and is exercisable at $0.75
per
share, subject to adjustment under certain circumstances. Our Chairman of
the
Board of Directors, Steven Magami, is the manager of MA Green.
The
Series A preferred stock and warrants issued in connection with the Series
A
Private Placement were not registered under the Securities Act and were issued
in reliance upon the exemption set forth in Section 4(2) and Regulation D
of the
Securities Act. We made this determination based on the representations of
the
investor, which included, in pertinent part, that such investor was an
“accredited investor” within the meaning of Rule 501 of Regulation D promulgated
under the Securities Act, and that the investor understood that the securities
may not be sold or otherwise disposed of without registration under the
Securities Act or an applicable exemption therefrom.
On
November 14, 2007, we entered into Note and Warrant Purchase Agreements with
investors to issue an aggregate of approximately $3 million in convertible
promissory notes, or the Notes, and warrants to purchase an aggregate of
870,858
shares of common stock to investors, or the Bridge Financing. The Notes issued
in connection with the Bridge Financing bear interest at 10% per annum. The
Note
holders received one warrant to purchase one share of common stock, at an
exercise price of $0.75 per share, subject to adjustment under certain
circumstances for every $3.50 invested in the Company in connection with
the
Bridge Financing, or the Bridge Warrants. The Bridge Warrants are exercisable
for three years from the closing date of the Bridge Financing.
Upon
the
earlier to occur of: (i) April 30, 2008, the Maturity Date of the Notes,
(ii)
the consummation of a private investment in public equity financing, or PIPE,
with institutional investors for at least $25 million, net of offering expenses,
or (iii) when, upon the occurrence of an event of default as described in
the
Notes, such amounts are declared due and payable, the Note holders are entitled
to repayment equal to 30% in excess of the principal and accrued interest
then
due and outstanding under the terms of the Notes, or the Repayment Amount.
Upon
the earlier to occur of the Maturity Date or the consummation of the PIPE,
the
Note holders will have the right to convert (in whole or in part) 110% of
the
Repayment Amount into shares of common stock of the Company at the fair market
value of each share of common stock, or at the price per share of common
stock
sold to investors in the PIPE, as the case may be.
The
Notes
issued in connection with the Bridge Financing were not registered under
the
Securities Act and were issued in reliance upon exemptions set forth in Section
4(2), Regulation D and/or Regulation S of the Securities Act. We made this
determination based on the representations of the investors, which included,
in
pertinent part, that such investors were either (a) “accredited investors”
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act, or (b) not a “U.S. person” as that term is defined in Rule 902(k) of
Regulation S under the Securities Act, and that the investors understood
that
the securities may not be sold or otherwise disposed of without registration
under the Securities Act or an applicable exemption therefrom.
2005
In
January 2005, we completed an offering of our common stock to a group of
private
investors. We issued 260,000 shares of common stock at $0.10 per share to
23 stockholders for an aggregate offering price of $26,000. This transaction
(a)
involved no general solicitation, (b) involved less than thirty-five
non-accredited purchasers, and (c) relied on a detailed disclosure document
to
communicate to the investors all material facts about NDCI, including an
audited
balance sheet and reviewed statements of income, changes in stockholders’ equity
and cash flows. Thus, we believe that the offering was exempt from
registration under Regulation D, Rule 505 of the Securities Act.
|
Item
6.
|
Management’s
Discussion and Analysis or Plan of
Operation
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Overview
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this annual
report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. The
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including but
not
limited to the risks discussed in this report.
We
are
engaged in the business of producing, processing and distributing sugarcane
ethanol in Peru. Ethanol is a renewable energy source that provides significant
economic and environmental benefits when mixed with gasoline and used as
motor
fuel.
On
November 14, 2007, we completed a share exchange agreement with Stratos.
As a
result of the Share Exchange, we abandoned our previous cabinetry and furniture
business and commenced the business of producing, processing and distributing
sugarcane ethanol. Because we are the successor business to Stratos and because
the operations and assets of Stratos represents our entire business and
operations from the closing date of the Share Exchange, our management's
discussion and analysis and plan of operations are based on Stratos’ intended
operations.
Neither
Stratos nor Stratos Peru has
generated
any revenue since the commencement of our operations on February 27,
2007.
Critical
Accounting Policies and Estimates
Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States
of America. The preparation of the financial statements requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including those related
to
revenue recognition, recoverability of intangible assets, and contingencies
and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates
as to
the appropriate carrying value of certain assets and liabilities which are
not
readily apparent from other sources, primarily the valuation of our fixed
assets
and the recoverability of our VAT receivable. The methods, estimates and
judgments we use in applying these most critical accounting policies have
a
significant impact on the results we report in our financial
statements.
Impairment
of long-lived assets
We
follow
the guidance of Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, which
addresses financial accounting and reporting for the impairment or disposal
of
long-lived assets. We periodically evaluate the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 requires
impairment losses to be recorded on long-lived assets used in operations
when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on our
review, we believe that, as of December 31, 2007 there were no significant
impairments of long-lived assets.
Plan
of Operations
Overview
This
current report contains forward-looking statements that involve significant
risks and uncertainties. The following discussion, which focuses on our plan
of
operation through the commencement of operations of our plant, consists almost
entirely of forward-looking information and statements. Actual events or
results
may differ materially from those indicated or anticipated, as discussed in
the
section entitled “Forward Looking Statements.” This may occur as a result of
many factors, including those set forth in the section entitled “Risk
Factors.”
Upon
consummation of the Share Exchange, we commenced our business plan to develop
ethanol and sugar products through the cultivation, harvesting and processing
of
sugarcane in low cost growing locations. From a strategic value perspective,
our
management believes a geographic focus in Peru will be a key component in
achieving our goals.
Our
business plan consists of two phases. Phase I will primarily be focused on
establishing our initial ethanol production facilities and infrastructure.
Phase
II will primarily be focused on expanding our operations in strategic
locations.
Phase
I
Phase
I
of our business plan is comprised of six components:
|
|
·
|
mill
and distillery acquisition, expansion and
modification;
|
|
|
·
|
conducting
feasibility studies and generating a business plan for Phase
II.
|
Mill
and distillery acquisition, expansion and modification
On
October 18, 2007, Stratos Peru entered into an asset purchase agreement with
Gabinete Tecnico de Cobranzas S.A.C., or Gabinete, pursuant to which it acquired
certain assets and rights relating to the Estrella del Norte sugar mill located
in the province of Chepen, Peru, or the Sugar Mill. Stratos Peru paid
approximately $4.5 million plus a value added tax of 19% to acquire the Sugar
Mill. Of the purchase price, we held back $350,000, or the Holdback,
representing approximately 7.74% of the purchase price, into an escrow
contingencies account with Banco Continental in Lima, Peru. The Holdback
is to protect us in the event Gabinete fails to fulfill certain tax obligations
relating to the equipment for the years 2002 through 2007, the equipment
is lost
or damaged while in transit from Gabinete, the equipment is not delivered
to us,
or certain representations made by Gabinete in the asset purchase agreement
are
discovered to be false.
We
plan
to relocate the Sugar Mill and to acquire and install a distillery unit to
adjoin it for the production of ethanol. Additionally, we plan to upgrade
the
Sugar Mill’s capacity to crush sugarcane from 500 tons of including the value
added tax sugarcane per day to 1,100 tons of sugarcane per day. We estimate
that
we will need a total of $9.6 million in investment and working capital to
overhaul, expand and relocate the Sugar Mill, acquire the distillery and
conduct
operations at the mill and distillery through the first quarter of 2009.
On
December 4, 2007 we entered into an agreement with Mr. Luis Rivas, a member
of
our advisory board, for his services in providing us with a plan for us
to hire
a contractor to dismantle, repair and overhaul the equipment from the Sugar
Mill. He will also provide us with engineering studies in order to determine
the
maximum capacity of sugar cane processing of the Sugar Mill and to establish
the
process layout and technical specifications that will be required for new
machinery and equipments.
On
February 27, 2008, Stratos Peru entered into an agreement with Panka S.A.C.
to
provide us with a basic engineering plan and new layout of the Sugar Mill
after
the overhauling of the Sugar Mill.
On
March
12, 2008, Stratos Peru entered into an agreement, the CWE Agreement, with
CWE. The CWE Agreement relates to the relocation of the Sugar Mill to the
Industrial Lot, that we have obtained the rights to in the Lambayeque
region. Under the terms of the CWE Agreement, we engaged CWE to clean, remove
and disassemble equipment located at the Sugar Mill. We have agreed
to pay CWE a service fee of approximately $150,000, payable in
installments. In connection with the payment of the service fee, we
executed two promissory notes in favor of CWE, each in the amount of
$8,330. The Notes are both due and payable on May 22, 2008. The CWE
Agreement terminates on June 9, 2008.
In
March
2008 we began the dismantling of all of the equipment. As of March 29, 2008,
approximately 25% of the equipment has been dismantled. We anticipate that
the
dismantling will be complete by the end of May 2008.
After
modifying and expanding the Estrella del Norte facilities, we plan to use
approximately 40% of its capacity to produce raw sugar to be sold in the
local
wholesale markets, and 60% of its capacity to produce an estimated 4.9 million
gallons of ethanol a year.
Seedling
Production
The
second component of Phase I will be to establish a high quality seedling
production program to supply our planned intensive planting program scheduled
to
commence during Phase II of our business strategy. We intend to lease a plot
of
land in the Piura region, which we believe is an ideal location with respect
to
its climate and surrounding environment, to establish a sugarcane seedling
nursery.
On
February 6, 2008, Stratos Peru entered into a services agreement with
Biotecnologia Del Peru S.A.C, or Biotecnologia, to establish a pilot seedling
laboratory, or Pilot Laboratory. Biotecnologia is to install a laboratory
in Piura with appropriate equipment and experienced personnel. They will
study various breeds of genetic material, and advise Stratos Peru which
will be
the most adequate to generate elite sugar cane plantlets to be used in
our
future seedling nursery. The Pilot Laboratory has already begun generating
sugarcane plantlets, and we anticipate that we will receive a report on
their
advancements by the end of the April 2008.
Compost
Production
In
addition to establishing a seedling production program in Phase I, we also
intend to implement an organic fertilizer production program to support our
planned intensive planting program scheduled to commence during Phase II.
We
anticipate that our compost production program will begin in the second quarter
of 2008.
Land
Sourcing
The
fourth component of Phase I will be to acquire and secure options to acquire
land for sugarcane production from three potential sources: small and medium
private land lots; peasant community land lots; and state owned land lots.
The
most important factors in locating land suitable for sugarcane production
are
water supply, soil composition, climate, distance from the Sugar Mill and
access
to roads and other services.
Field
Installment
The
fifth
component, as part of our main objective to be the market leader in sustainable
low-cost ethanol production, will be to take advantage of our "greenfield"
position to use only sophisticated crop management techniques to ensure maximum
yield with high sucrose and inverted sugar content. The Peruvian coast is
ideal
for these modern farming techniques, as water and nutrient content can be
managed due to the sandy soil and irrigation equipment to be installed. To
ensure the maximum benefit from the genetically cleaned sugar varieties that
we
intend to install on our comparatively low-cost land, significant investment
will go into channeling water to the sites from national irrigation projects
and
on field irrigation installation with back-up water supply, and land preparation
to ensure the longevity and productivity of the fields which includes
grading, leveling, initial nutrient and organic material installation, and
field
layout.
Conducting
feasibility studies and generating a business plan for Phase
II
The
final
component of Phase I will initially involve hiring a consultant to conduct
a
feasibility study based on the information provided by our land sourcing
efforts. The study will focus on generating cost estimates and designs based
on
analyzing the climactic, water, soil, topography and irrigation characteristics
of the properties identified by our land sourcing team. Following the completion
of the feasibility study, we will create a comprehensive business plan for
Phase
II consisting of an overview of the industry, a market analysis, competitive
analysis, marketing plan, management plan and financial plan. We will also
perform a port feasibility study, which if successful, will optimize our
distribution of ethanol and reduce our operation costs for distribution to
world
markets.
Our
goal
is to have all of the components of Phase I completed by early 2009 so that
we
can begin executing Phase II.
Phase
II
Phase
II
of our business plan will consist of our expansion in four strategic locations
along the northern Peruvian coast and the cultivation of our own sugarcane
supplies to be used for production. In connection with Phase II, we anticipate
raising and investing funds up to an additional $590 million in order to
plant
sugarcane on 48,000 hectares of raw land, and acquire and operate a total
of
four mills with attached ethanol distilleries, with expandable capacities
and
distribution port infrastructure. By the fourth quarter of 2014, it is our
goal
to be able to process a total of 25,000 tons of sugarcane per day, and produce
approximately 180 million gallons of anhydrous ethanol annually.
We
expect
to initiate Phase II by the first quarter of 2009. The mill and distillers
we
plan to establish in Phase II will be located in regions that we have selected
based on our extensive research of agro climatic conditions, hydrology, basic
services, logistic supplies and social environment. We plan to establish
the
four locations in two stages.
Stage
One - Olmos and Morrope
During
the first stage, which will begin in the second quarter of 2009, we plan
to
start exercising the lease contract which we believe we will have with the
Peasant Community of Olmos and Morrope for 24,000 hectares of land. We estimate
that the total cost for Stage One will be approximately $280 million, consisting
of $120 million in costs related to administration, field installation and
the
development of an infrastructure, and $160 million in costs related to the
construction of production facilities and distribution port.
Stage
Two - Chepen
During
the second stage, which will begin in the second quarter of 2011, we plan
to
plant the first 24,000 hectares of land around the Chepen valley, located
along
the northern Peruvian coast. We estimate that the total cost for this stage
will
be approximately $310 million, consisting of $120 million in costs related
to
administration, field installation, and the development of an infrastructure,
and $190 million in costs relating to the construction of production facilities
and distribution port.
Trends
and Uncertainties
Our
future growth will be dependent initially on our ability to establish reliable
sources of sugarcane for the operation of the Sugar Mill, and going forward,
on
our ability to develop our own supplies of sugarcane. We must be successful
in
establishing sugarcane supply relationships with local growers and there
is no
assurance that we will be able to enter into such relationships for sufficient
amounts of sugarcane. Additionally, we must be successful in establishing
seedling, compost and land sourcing programs in order to allow us to develop
a
consistent, reliable and cost-effective long-term supply of sugarcane.
We
will
require a significant amount of additional capital in the future to sufficiently
fund our operations. We may not be able to obtain additional capital on terms
favorable to us or at all. We expect to increase our operating expenses over
the
coming years. We estimate that Phase I of our business plan, which is currently
in effect, will cost a total of approximately $33 million. Furthermore, we
estimate that will need up to an additional $590 million to fund our expansion
during the course of Phase II of our operations, which is set to commence
during
the first quarter of 2009 and continue for five years thereafter.
Most
of
our operations, including the Sugar Mill, along with the land we have acquired
and propose to acquire on which to grow our sugarcane supplies, are located
in
Peru. Although we believe that conducting operations in Peru will provide
us
with significant competitive advantages, we will also be subject to risks
not
typically associated with ownership of United States companies.
Financing
To
date,
we have had negative cash flows from operations and we have been dependent
on
sales of our equity securities and debt financing to meet our cash requirements.
We expect this situation to continue for the foreseeable future. We anticipate
that we will have negative cash flows from operations during our fiscal year
ended December 31, 2008.
Given
that we are a development stage company and have not generated any revenues
to
date, our cash flow projections are subject to numerous contingencies and
risk
factors beyond our control, including our ability to manage our expected
growth,
complete construction of our proposed plant and commence operations. We can
offer no assurance that our company will generate cash flow sufficient to
meet
our cash flow projections or that our expenses will not exceed our projections.
If our expenses exceed estimates, we will require additional monies during
the
next twelve months to execute our business plan.
There
are
no assurances that we will be able to obtain funds required for our continued
operation. There can be no assurance that additional financing will be available
to us when needed or, if available, that it can be obtained on commercially
reasonable terms. If we are not able to obtain additional financing on a
timely
basis, we will not be able to meet our other obligations as they become due
and
we will be forced to scale down or perhaps even cease the operation of our
business.
There
is
substantial doubt about our ability to continue as a going concern as the
continuation of our business is dependent upon obtaining further long-term
financing, completion of our proposed plant and successful and sufficient
market
acceptance of our products once developed and, finally, achieving a profitable
level of operations. The issuance of additional equity securities by us could
result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash
commitments.
Liquidity
and Capital Resources
Cash
Flows from Financing Activities
There
are
no assurances that we will be able to obtain further funds required for our
continued operations. We intend to pursue various financing alternatives
to meet
our immediate and long-term financial requirements. There can be no assurance
that additional financing will be available to us when needed or, if available,
that it can be obtained on commercially reasonable terms. If we are not able
to
obtain additional financing on a timely basis, we will be unable to conduct
our
operations as planned, and we will not be able to meet our other obligations
as
they become due. In such event, we will be forced to scale down or perhaps
even
cease our operations.
Private
Placement
We completed a
private placement for our securities on November 14, 2007, or Private
Placement, pursuant to which we issued an aggregate of 2,666,794 shares of
common stock and warrants to purchase an aggregate of 1,333,396 shares of
common
stock. We raised $1,867,090 aggregate gross proceeds in connection with the
Private Placement. We sold to investors each share of common stock at $0.70
per
share. The fair value of the warrants amounted to $352,268. We computed the
fair
value using the Black-Scholes model under the following assumptions: (1)
expected life of 1 year; (2) volatility of 100%; and (3) risk free interest
of
5.0%. The warrants expire after five (5) years from the date of issuance
and are
exercisable at $0.75 per share, subject to adjustment in certain circumstances.
Series
A Preferred Stock Private Placement
We
completed a Series A private placement on November 14, 2007, or Series A
Private
Placement, pursuant to which we issued to MA Green 7,142,857 shares of Series
A
Preferred Stock and warrants to purchase 1,785,714 shares of common stock.
We
raised $5,000,000 gross in connection with the Series A Private Placement.
We
sold each share of Series A Preferred Stock at $0.70 per share. The warrants
expire five (5) years from the date of issuance and are exercisable at $0.75
per
share, subject to adjustment in certain circumstances. Our Chairman of the
Board
of Directors, Steven Magami, is the manager of MA Green.
The
fair
value of the 1,785,714 warrants issued with the Series A Private Placement
was
$471,765. The fair value was computed using the Black-Scholes model under
the
following assumptions: (1) expected life of 1 year; (2) volatility of 100%,
(3)
risk free interest of 5.0% and (4) dividend rate of 10%. In addition, since
this
convertible preferred stock is convertible into shares of common stock at
a
one-to-one ratio (unless the conversion occurs upon the consummation of a
financing or financings in an aggregate amount of $25 million), an embedded
beneficial conversion feature was recorded as a discount to additional paid
in
capital in accordance with Emerging Issues Task Force No. 00-27, "Application
of
Issue No. 98-5 to Certain Convertible Instruments." The intrinsic value of
the
beneficial conversion feature has been recorded as a preferred stock dividend
at
the date of issuance. The Company recognized $471,765 of preferred dividends
related to the beneficial conversion feature.
Bridge
Financing
We
entered into a Note and Warrant Purchase Agreement on November 14, 2007,
or
Bridge Financing, with investors and issued an aggregate of $3,048,000 in
convertible promissory notes and warrants to purchase an aggregate of 870,858
shares of common stock. The convertible promissory notes issued in connection
with the Bridge Financing bear interest at 10% per annum. The bridge note
holders received one (1) warrant to purchase one (1) share of common stock,
at
an exercise price of $0.75 per share, for every $3.50 invested in the Company
in
connection with the Bridge Financing. We raised $3.0 million aggregate gross
proceeds in connection with the Bridge Financing. The warrants will expire
three
(3) years from the closing date of Bridge Financing. Total interest expense
at
December 31, 2007 amounted to $56,125.
The
following table summarizes the above transactions
|
Description
|
|
Gross
Proceeds
|
|
|
Private
Placement - Common Stock
|
|
$
|
1,867,090
|
|
|
Private
Placement - Preferred Stock
|
|
|
5,000,000
|
|
|
Bridge
Financing
|
|
|
3,048,000
|
|
|
|
|
$
|
9,915,090
|
|
Recent
Sale of Common Stock
On
March
7, 2008 we closed on $1,587,447 of our $10 million private placement. We
anticipate that we will continue to offer our securities on the same terms
and
conditions until at least may 31, 2008. Pursuant to the March 2008
Financing, we issued an aggregate of 2,267,782 shares of Common Stock at
a
purchase price of $0.70 per share and warrants to purchase an aggregate of
1,133,888 shares of Common Stock with an exercise price of $0.75 per share.
Cash
Used for Investing Activities
On
October 18, 2007, we signed a purchase-sale contract with Gabinete Técnico de
Cobranza S.A.C., and have acquired certain assets that are part of the
Sugar Mill. This purchase price was $5,382,328:
|
|
·
|
$5,032,328
by bank draft issued to the order of Gabinete Técnico de Cobranza
S.A.C.;
|
|
|
·
|
$350,000
to be deposited in a bank account in order to guarantee payment
of any
contingency that may arise from this
transaction.
|
We
acquired certain assets from
Gabinete
Técnico de Cobranza S.A.C. as part of its overall business strategy to purchase,
sale, produce, distribute, market, transport, warehouse, export and import
of
all kinds of products derives from hydrocarbons and bio-fuels.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition: The fair values are
determined based on an appraisal:
|
|
|
|
|
|
Plant
and equipment
|
|
$
|
4,522,965
|
|
|
VAT
receivable
|
|
|
859,363
|
|
|
Purchase
price
|
|
$
|
5,382,328
|
|
We
have determined that the discounted cash flows generated by the
exploitation of the Sugar Mill will suffice to cover the carrying value of
the
assets acquired in this acquisition.
The
Sugar
Mill did not have any operations for the past several years.
Off-Balance
Sheet Arrangements
Our
company has no outstanding off-balance sheet guarantees, interest rate swap
transactions or foreign currency contracts. Neither our company nor our
operating subsidiary engages in trading activities involving non-exchange
traded
contracts.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or
events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to
be
reported at amounts that include the amounts attributable to both parent
and the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, we do not expect the
adoption of SFAS 160 to have a significant impact on our results of operations
or financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair
value.
Unrealized gains and losses on items for which the fair value option has
been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. We are currently assessing the impact
of SFAS
No. 159 on our financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R).” This statement requires employers to recognize the
overfunded or underfunded status of a defined benefit postretirement plan
(other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the
year in
which the changes occur through comprehensive income of a business entity
or
changes in unrestricted net assets of a not-for-profit organization. This
statement also requires an employer to measure the funded status of a plan
as of
the date of its year-end statement of financial position, with limited
exceptions. The provisions of SFAS No. 158 are effective for employers with
publicly traded equity securities as of the end of the fiscal year ending
after
December 15, 2006. The adoption of this statement had no effect on our reported
financial position or results of operations.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The
objective of SFAS No. 157 is to increase consistency and comparability in
fair
value measurements and to expand disclosures about fair value measurements.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new
fair
value measurements. The provisions of SFAS No. 157 are effective for fair
value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on our
future reported financial position or results of operations.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in
Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
We are currently evaluating the effect of this pronouncement on financial
statements.
|
Item
7.
|
Financial
Statements
|
See
Index
to Consolidated Financial Statements on Page F-1.
|
Item
8.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosures
|
As
of
December 4, 2007, Stratos replaced Bagell, Josephs, Levine & Company,
L.L.C., or BJLC as its independent registered public accounting firm, and
engaged Moore Stephens Wurth Frazer and Torbet, LLP, or MSWFT as its new
independent registered public accounting firm.
The
reports of BJLC on the Company’s financial statements for the fiscal years ended
December 31, 2006 and 2005 did not contain an adverse opinion or disclaimer
of
opinion, except that the reports stated that they were prepared assuming
that
the Company will continue as a going concern, as to which the Company’s
recurring operating losses raised substantial doubt. During the Company’s fiscal
years ended December 31, 2006 and 2005 and the subsequent interim period
preceding the termination, there were no disagreements with BJLC on any
matter
of accounting principles or practices, financial statement disclosure,
or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of BJLC, would have caused BJLC to make reference to the subject
matter of the disagreements in connection with its report on the financial
statements for such years or subsequent interim periods.
The
Company’s Board of Directors was advised by BJLC that during their performance
of audit procedures for the Company’s fiscal years ended December 31, 2006 and
2005, BJLC identified a material weakness as defined in Public Company
Accounting Oversight Board Standard No. 2 in the Company’s internal control over
financial reporting. This deficiency consisted primarily of inadequate
staffing
and supervision that could lead to the untimely identification and resolution
of
accounting and disclosure matters and failure to perform timely and effective
reviews.
During
the two most recent fiscal years and the interim period preceding the engagement
of MSWFT, the Company has not consulted with MSWFT regarding either: (i)
the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on
the Company’s financial statements; or (ii) any matter that was either the
subject of a disagreement or event identified in paragraph (a)(1)(iv) of
Item
304 of Regulation S-B.
|
Item
8A(T).
|
Controls
and Procedures
|
Controls
and Procedures
As
of
December 31, 2007, we carried out an evaluation, under the supervision and
with
the participation of our management, including our chief executive officer
and
chief financial officer, of the effectiveness of the design and operation
of our
“disclosure controls and procedures,” as such term is defined under Exchange Act
Rules 13a-15(e) and 15d-15(e).
Based
on
this evaluation, our chief executive officer and chief financial officer
concluded that, as of December 31, 2007, such disclosure controls and procedures
were effective to ensure that information required to be disclosed by us
in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms
of the Securities and Exchange Commission, and accumulated and communicated
to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed
and
operated, can provide only reasonable assurance of achieving the desired
control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining an adequate system
of
internal control over financial reporting. Our system of internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States of America.
Our
internal control over financial reporting includes those policies and procedures
that:
|
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect our transactions and dispositions of our
assets;
|
|
|
·
|
provide
reasonable assurance that our transactions are recorded as necessary
to
permit preparation of our financial statements in accordance with
accounting principles generally accepted in the United States of
America,
and that our receipts and expenditures are being made only in accordance
with authorizations of our management and our directors;
and
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that
could
have a material effect on the financial
statements.
|
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Due
to
our current size and our being in the development or start-up stage we are
still
in the process of retaining personnel qualified in applying U.S. generally
accepted accounting principles or US GAAP and U.S. standards of financial
reporting. We are in the process of preparing to be in compliance with the
internal control requirements under Section 404 of the Sarbanes Oxley Act,
for
our fiscal year ending December 31, 2008, and only recently became aware
of the
need to comply with such rules for our fiscal year ended December 31,
3007. During most of 2007 our internal accounting staff was primarily
engaged in ensuring compliance with Peruvian accounting and reporting
requirements for our operating subsidiaries and was not required to meet
or
apply US GAAP requirements. Our current accounting department
responsible for financial reporting of the Company on a consolidated basis
is
relatively new to U.S. GAAP and the related internal control procedures
required of U.S. public companies. As a result, we have engaged an
outside U.S. CPA firm to help us prepare our US GAAP financial statements.
We
are also in the process of forming our internal audit function to help monitor
our control procedures. We intend to put an Audit Committee of the Board
of Directors in place which will also contribute to the oversight of our
accounting and audit functions.
Our
management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
From this evaluation, our management concluded that our system of internal
control over financial reporting was effective as of December 31,
2007.
This
annual report does not include an attestation report of our registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC
to
provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting during
the
quarter ended December 31, 2007 that materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Item
8B(T).
Other
Information
Not
applicable.
PART
III
|
Item
9.
|
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange
Act
|
MANAGEMENT
Directors
and Officers
Our
directors are elected annually and serve until the next annual meeting of
the
stockholders or until their successors are elected and qualify, subject to
their
prior death, resignation or removal. Officers serve at the discretion of
our
Board of Directors. There are no family relationships among any of our directors
and executive officers. Our board members are encouraged to attend meetings
of
the Board of Directors and the annual meeting of stockholders. The Board
of
Directors held no meetings and adopted ten unanimous written consents in
lieu of
meetings in 2007.
The
following table sets forth certain biographical information with respect
to our
directors and executive officers:
|
Name
|
|
Age
|
|
Position
|
|
Carlos
Antonio Salas
|
|
40
|
|
Chief
Executive Officer and Director
|
|
Steven
Magami
|
|
31
|
|
President
and Chairman of the Board of Directors
|
|
Jorge
Eduardo Aza
|
|
3
4
|
|
Chief
Operating Officer
|
|
Julio
Cesar Alonso
|
|
28
|
|
Chief
Financial Officer and Treasurer
|
|
Luis
Francisco de las Casas
|
|
4
6
|
|
Director
|
|
Valerie
Broadbent
|
|
69
|
|
Secretary
|
Carlos
Antonio Salas,
Chief
Executive Officer and Director,
has
served as a senior executive in the fields of agribusiness and agricultural
development, and is the former Director General of the National Institute
for
Agricultural Research (equivalent to the United States’ Undersecretary of
Agriculture), appointed by the President of Peru and the Ministry of
Agriculture. Mr. Salas has been instrumental in directing technical, commercial,
and financial evaluations of more than 100 medium and large size companies
in
the food and agribusiness sector worldwide. Mr. Salas has served on more
than
ten national and international committees and boards related to agricultural
research and development. He has gathered expertise in fifteen countries,
throughout the Americas, Africa and the EU. In the last two years, Mr. Salas
has
led mining and agriculture and reengineering processes in the Peruvian
agribusiness sector. Mr. Salas holds an MSC and a PhD in Crop Science from
North
Carolina State University and a joint MBA in Food and Agribusiness Management
from the Krannet School at Purdue University and Wageningen Universiteit
in the
Netherlands.
Steven
S. Magami, President and Chairman of the Board of Directors,
has led
a career as a private equity investor, investment banker and C-level executive,
with a focus on the clean energy sector for several years. Mr. Magami is a
partner of ARC Investment Partners, a private equity firm focused on renewable
energy. Mr. Magami has extensive experience in the biofuels industries
were he
has financed and built companies from business plans through the evolution
of
their business strategy and concluding institutional equity financing.
He has
served as President and a Director of Pure Biofuels Corporation, a leading
Latin American biodiesel producer, since 2007. Previously, Mr. Magami was
a
principal investor with Lovell Minnick Partners managing and investing
capital for institutions including Goldman Sachs and GE. Mr. Magami was
instrumental in building a successful portfolio of companies through LBOs,
growth capital and venture investments. Mr. Magami started his career as
an
investment banker advising large buyout firms on industry roll-up strategies.
He
has served on the boards of numerous public and private companies guiding
business strategy, leading corporate development initiatives and driving
acquisition strategies.
Luis
de las Casas, Director,
was
formerly Peru’s Vice-Minister of Construction and has broad experience in public
policy, strategic expansion projects and territorial planning. He has been
involved in several land acquisition and expansion programs and has actively
designed, directed, and managed social and rural development projects related
to
peasant communities and farmer coops. He participates currently in
multidisciplinary Consultative Boards and is the President of FINCA, the
Foundation for the Innovation and Competitiveness of Agriculture. He has
an MS
in regional and rural planning.
Jorge
Eduardo Aza, Chief Operating Officer
,
has
over a decade of experience in the supply chain management industry. Mr.
Aza has
developed logistic projects in the mining industry, has experience in freight
forwarding operations, and has held financial positions with different global
logistics companies such as Eagle Global Logistic and UTI Worldwide Inc.
Mr. Aza
holds a BSc degree in Business Administration and Finance from UPC, a member
of
Laureate Universities in Peru.
Julio
Cesar Alonso, Chief Financial Officer and Treasurer,
previously served as a senior financial auditor of PricewaterhouseCoopers,
leading teams for planning and execution of financial audits for local companies
such as Nextel del Perú, Grupo Backus, Grupo Graña y Montero, Grupo Quimica
Suiza, IBM del Peru, Kraft Foods del Perú, Eckerd Peru and Talma Menzies, and
international companies such as Rentokil US Pest Control and Teleflex Corp.
Mr.
Alonso has participated as a team member of the Transaction Services Group
in
charge of all due diligence projects for PricewaterhouseCoopers. He also
has
experience working for cargo transportation and integrated logistics companies.
Mr. Alsonso holds a BSc in Business Administration and Finance from the UPC,
a
member of Laureate Universities in Peru.
Valerie
Broadbent, Secretary,
is
the
managing member of Berkeley Consulting Group, LLC and Chief Administrative
Officer of MBA Holdings, LLC, which consults and advises companies on
organization, corporate administration, business strategies, restructuring,
overseeing capital formation and mergers and acquisitions. Ms. Broadbent
has
more than 30 years of experience working in corporate administration for
both
public companies and in the private sector. She has served as Corporate
Secretary for three public companies and numerous private companies.
To
the
best of our knowledge, none of our directors, executive officers, promoters
or
control persons, or any nominated directors, has been involved in any of
the
following events during the past five years:
|
|
·
|
any
bankruptcy petition filed by or against any business of which such
person
was a general partner or executive officer either at the time of
the
bankruptcy or within two years prior to that
time;
|
|
|
·
|
any
conviction in a criminal proceeding or being subject to a pending
criminal
proceeding, excluding traffic violations and other minor
offences;
|
|
|
·
|
being
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting
his
involvement in any type of business, securities or banking activities;
or
|
|
|
·
|
being
found by a court of competent jurisdiction in a civil action, the
SEC or
the Commodity Futures Trading Commission to have violated a federal
or
state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
|
Board
of Directors
Our
Board
of Directors is currently composed of three members, Carlos Antonio Salas,
Steven Magami, and Luis de las Casas. Steven Magami is our Chairman of the
Board
of Directors. In this capacity, he is responsible for presiding at meetings
of
the Board of Directors and exercising and performing such other powers and
duties as may be from time to time assigned by the Board of Directors or
prescribed by our Amended and Restated Bylaws.
None
of
our directors are deemed independent. All the members of our Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committees
are
required to be independent pursuant to their charters. We are in the process
of
recruiting independent directors, and as soon as we have retained them, we
will
appoint members to these board committees.
Director
Qualifications
We
believe that our directors should have the highest professional and personal
ethics and values, consistent with our longstanding values and standards.
They
should have broad experience at the policy-making level in business or banking.
They should be committed to enhancing stockholder value and should have
sufficient time to carry out their duties and to provide insight and practical
wisdom based on experience. Their service on other boards of public companies
should be limited to a number that permits them, given their individual
circumstances, to perform responsibly all director duties for us. Each director
must represent the interests of all stockholders. When considering potential
director candidates, the Board of Directors also considers the candidate’s
character, judgment, diversity, age and skills, including financial literacy
and
experience in the context of our needs and the needs of the Board of
Directors.
Board
Committees
Audit
Committee.
We
have
adopted an Audit Committee Charter, although at this time, we do not yet
have a
separately designated standing audit committee. Pursuant to Section 3(a)(58)(B)
of the Exchange Act, the entire Board of Directors acts as an audit committee
for the purpose of overseeing the accounting and financial reporting processes,
and audits of our financial statements. The SEC recently adopted new regulations
relating to audit committee composition and functions, including disclosure
requirements relating to the presence of an “audit committee financial expert”
serving on its audit committee. We have only recently begun increasing our
operations, and we are now seeking to acquire an independent director who
qualifies as an “audit committee financial expert” as soon as reasonably
practicable. Our current directors, by virtue of their education and past
employment experience, have considerable knowledge of financial statements,
finance, and accounting, and have significant employment experience involving
financial oversight responsibilities. Accordingly, we believe that our current
directors capably fulfill the duties and responsibilities of an audit committee
in the absence of such a designated expert at this time.
Our
Audit
Committee will oversee our accounting and financial reporting processes,
internal systems of accounting and financial controls, relationships with
independent auditors and audits of financial statements. Specific
responsibilities include the following:
|
|
·
|
selecting,
hiring and terminating our independent
auditors;
|
|
|
·
|
evaluating
the qualifications, independence and performance of our independent
auditors;
|
|
|
·
|
approving
the audit and non-audit services to be performed by our independent
auditors;
|
|
|
·
|
reviewing
the design, implementation, adequacy and effectiveness of our internal
controls and critical accounting
policies;
|
|
|
·
|
overseeing
and monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to
financial statements or accounting
matters;
|
|
|
·
|
reviewing
with management and our independent auditors any earnings announcements
and other public announcements regarding our results of operations;
and
|
|
|
·
|
preparing
the audit committee report that the Commission requires in our
annual
proxy statement.
|
Compensation
Committee and Nominating and Corporate Governance Committee.
We
have
adopted a Compensation Committee charter and a Nominating and Governance
Committee charter, although we have not yet designated a Compensation Committee
or a Nominating committee, due to our lack of independent directors. We intend
to retain independent directors to serve on these committees, as soon as
reasonably practicable.
Our
Compensation Committee will assist our Board of Directors in determining
the
development plans and compensation of our executive officers and employees.
Specific responsibilities include the following:
|
|
·
|
approving
the compensation and benefits of our executive
officers;
|
|
|
·
|
reviewing
the performance objectives and actual performance of our executive
officers; and
|
|
|
·
|
administering
our stock option and other equity compensation
plans.
|
Our
Nominating and Governance Committee will assist the Board of Directors by
identifying and recommending individuals qualified to become members of our
Board of Directors, reviewing correspondence from our stockholders,
establishing, evaluating and overseeing our corporate governance guidelines,
and
recommending compensation plans for our directors. Specific responsibilities
include the following:
|
|
·
|
evaluating
the composition, size and governance of our Board of Directors
and its
committees and making recommendations regarding future planning
and the
appointment of directors to our
committees;
|
|
|
·
|
establishing
a policy for considering stockholder nominees for election to our
Board of
Directors;
|
|
|
·
|
evaluating
and recommending candidates for election to our Board of Directors;
and
|
|
|
·
|
recommending
and determining the compensation of our
directors.
|
Board
Meetings
The
Board
of Directors of our Company held no meetings of directors and took ten actions
by written consent during the fiscal year ended December 31, 2007. Other
than
that paid to Steven Magami, no compensation has been paid to the directors
for
the year ended December 31, 2007.
Code
of Ethics
Our
Chief
Executive Officer and all senior financial officers, including the Chief
Financial Officer, are bound by a Code of Ethics that complies with Item
406 of
Regulation S-B of the Exchange Act.
A
Code of
Ethics relates to written standards that are reasonably designed to deter
wrongdoing and to promote:
|
|
·
|
honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships;
|
|
|
·
|
full,
fair, accurate, timely and understandable disclosure in reports
and
documents that are filed with, or submitted to, the SEC and in
other
public communications made by an
issuer;
|
|
|
·
|
compliance
with applicable governmental laws, rules and
regulations;
|
|
|
·
|
the
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the code;
and
|
|
|
·
|
accountability
for adherence to the code.
|
Insider
Trading Policy
In
order
to take an active role in the prevention of insider trading violations by
our
officers, directors, employees and other related individuals, we have
adopted an Insider Trading Policy and Whistleblower Policy and
Procedures.
Foreign
Corrupt Practices Act
We
have
adopted policies and procedures relating to the U.S. Foreign Corrupt
Practices Act, or the FCPA. The FCPA makes it illegal to give or
offer to give money or anything of value to a foreign official, a foreign
political party, a party official or a candidate for political office in
order
to influence official acts or decisions of that person or entity, to obtain
or
retain business, or to secure any improper advantage. It is our policy
that Stratos, our directors, officers, employees and agents strictly comply
with
the FCPA in the U.S. and in every jurisdiction in which we operate.
Stockholder
Relations
We
do not
have any restrictions on stockholder nominations under our Amended and Restated
Articles of Incorporation or Amended and Restated Bylaws. The only restrictions
are those applicable generally under Nevada law. Currently, the entire Board
of
Directors decides on nominees, on the recommendation of one or more members
of
the Board of Directors. The Board of Directors will consider suggestions
from
individual stockholders, subject to evaluation of the person’s merits.
Stockholders may communicate nominee suggestions directly to any of the board
members, accompanied by biographical details and a statement of support for
the
nominees. The suggested nominee should also provide a statement of consent
to
being considered for nomination. Although there are no formal criteria for
nominees, our Board of Directors believes that persons should be actively
engaged in business endeavors, have a financial background, and be familiar
with
acquisition strategies and money management.
The
Board
of Directors has not adopted a formal methodology for communications from
stockholders but plans to adopt one as soon as reasonably
practicable.
We
do not
have a policy regarding the attendance of board members at the annual meeting
of
stockholders.
|
Item
10.
|
Executive
Compensation
|
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth all compensation received during the two years
ended
December 31, 2007 by our current President and each of the other most highly
compensated executive officers. None of our officers received total compensation
which exceeded $100,000 during either of the two fiscal years ended December
31,
2006 or December 31, 2007.
|
Name
and
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
|
|
Option
|
|
Non-Equity
|
|
Non-
|
|
All
Other
|
|
Total
|
|
|
Principal
|
|
|
|
($)
|
|
($)
|
|
Awards
|
|
Awards
|
|
Incentive
|
|
qualified
|
|
Compensation
|
|
($)
|
|
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Deferred
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luis
Goyzueta,
President
(1)
|
|
|
2007
|
|
$
|
33,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlos
Antonio
Salas,
Chief
Executive
Officer,
Director
and
General
Manager
(2)
|
|
|
2007
|
|
$
|
27,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
P.
Laurent,
President
and
Chief
Executive
Officer
(3)
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julio
Cesar
Alonso,
Chief
Financial
Officer
and
Treasurer
(4)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd
Laurent,
Secretary
and
Treasurer
(5)
|
|
|
2007
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________________________________
|
(1)
|
Luis
Goyzueta served as President and a Director of Stratos from November
14,
2007 until March 10, 2008, when he resigned from both positions.
Mr.
Goyzueta did not receive any compensation for his services rendered
to
Stratos. Mr. Goyzueta also served as a manager of Stratos Peru
since
November 5, 2007, pursuant to an employment agreement with Stratos
Peru.
As a manager of Stratus Peru, Mr. Goyzueta received a salary of
$12,700
per month. Mr. Goyzueta resigned from his position as a manager
of Stratos
Peru on March 10, 2008.
|
|
(2)
|
Carlos
Antonio Salas has served as Chief Executive Officer and a Director
of
Stratos Peru since November 5, 2007, and as Chief Executive Officer
and
Director of Stratos since November 14, 2007. Beginning on November
5,
2007, Mr. Salas received salary of $13,800 per month pursuant to
his
employment agreement with Stratos Peru.
Mr. Salas is not compensated in either of his executive roles with
Stratos.
|
|
|
|
|
(3)
|
Kenneth
Laurent served as the President and Chief Executive Officer of
NDCI Mr.
Laurent did not receive any direct cash or non-cash compensation
during
the fiscal years ended December 31, 2006 or December 31, 2007.
Mr. Laurent
resigned from both positions on November 14, 2007.
|
|
|
|
|
(4)
|
Julio
Cesar Alonso served as the Chief Financial Officer for Stratos
Peru since
November 5, 2007 and as Chief Financial Officer effective November
14,
2007. Beginning on November 5, 2007 Mr. Alonso received salary
of $5,700
per month pursuant to his employment agreement with Stratos
Peru.
|
|
|
|
|
(5)
|
Todd
Laurent served as the Secretary and Treasurer of NDCI Mr. Laurent
did not
receive any direct cash or non-cash compensation during the fiscal
years
ended December 31, 2006 or December 31, 2007. Mr. Laurent resigned
on
November 14, 2007.
|
Outstanding
Equity Awards At Fiscal Year-End
No
option
awards, unexercised options, unvested stock awards or equity incentive plan
awards were granted to our named executive officers during fiscal year ended
at
December 31, 2007.
Director
Compensation
The
following table summarizes the compensation paid to Stratos’ directors for the
fiscal year ended December 31, 2007:
|
Name
|
|
Fees
|
|
Stock
|
|
Option
|
|
Non-Equity
|
|
All
Other
|
|
Total
|
|
|
|
|
Earned
or
|
|
Awards
|
|
Awards
|
|
Incentive
Plan
|
|
Compensation
|
|
($)
|
|
|
|
|
Paid
in
|
|
($)
|
|
($)
|
|
Compensation
|
|
($)
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
P. Laurent
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Magami
(2)
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,000
|
|
|
Carlos
Antonio Salas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luis
Humberto
Goyzueta
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Luis
Francisco de las Casas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
(1)
|
Kenneth
P. Laurent did not receive any direct cash or non-cash compensation
during
the fiscal years ended December 31, 2006 or December 31, 2007.
Mr. Laurent
resigned on November 14, 2007.
|
|
|
|
|
(2)
|
Steven
Magami has served as our Chairman of the Board of Directors since
November
14, 2007, pursuant to which he received $10,000 per month in
compensation.
|
|
|
|
|
(3)
|
Luis
Humberto
Goyzueta
resigned as a Director of Stratos on March 10,
2008.
|
Compensation
Arrangements
Prior
to
November 14, 2007, we had only one director, Kenneth P. Laurent.
Mr. Laurent did not receive any direct compensation for his services. In
connection with the acquisition of Stratos Peru, Kenneth P. Laurent resigned
from his position as our sole director. Concurrent therewith, we appointed
four new directors to our Board of Directors: Carlos Antonio Salas, Luis
Humberto Goyzueta, Steven Magami and Luis Francisco de las Casas. Mr. Goyzueta
resigned as a director on March 10, 2008. Steven Magami received $10,000
per
month in his capacity as Chairman of the Board of Directors. None of the
other
directors have received any direct compensation for their services.
Employment
Agreements
Other
than as described below, we are not party to any employment contracts with
our
officers and directors.
Steven
Magami.
Steven
Magami has served as our Chairman of the Board of Directors since November
14,
2007. He continued to serve solely as our Chairman of the Board through March
14, 2008, when he was also appointed President of Stratos. Mr. Magami receives
$10,000 per month for his services as Chairman of the Board and as President
of
Stratos. He currently does not have an employment agreement with the
Company.
Carlos
Antonio Salas.
Our
wholly owned subsidiary, Stratos Peru, entered into an employment agreement
with
Mr. Salas for his services as Chief Executive Officer effective November
5,
2007. The term of the agreement is for one year, ending on November 4, 2008.
Pursuant to the terms of the agreement, we have agreed to pay Mr. Salas an
annual salary of $165,600 per year. In addition to his annual salary, Mr.
Salas
will be granted one additional month of salary in July and again in December
under Peruvian Labor laws.
Eduardo
Aza.
Our
wholly owned subsidiary, Stratos Peru, entered into an employment agreement
with
Mr. Aza for his services as Chief Operating Officer effective November 22,
2007.
The term of the agreement is for one year, ending on November 4, 2008. Pursuant
to the terms of the agreement, we have agreed to pay Mr. Aza an annual salary
of
$96,000 per year. In addition to his annual salary, Mr. Aza will be granted
one
additional month of salary in July and again in December under Peruvian Labor
laws.
Julio
Cesar Alonso.
Our
wholly owned subsidiary, Stratos Peru, entered into an employment agreement
with
Mr. Alonso for his services as Chief Financial Officer effective November
5,
2007. The term of the agreement is for one year, ending on November 4, 2008.
Pursuant to the terms of the agreement, we have agreed to pay Mr. Alonso
an
annual salary of $68,400 per year. In addition to his annual salary, Mr.
Alonso
will be granted one additional month of salary in July and again in December
under Peruvian Labor laws.
Consulting
and Advisory Agreements
As
of
April 7, 2008 we have entered into four agreements with unaffiliated third
party
consultants for the purpose of providing us with advisory services in connection
with our business, strategy, operations and financings. Pursuant to these
agreements, we have issued an aggregate of 1,250,000 warrants, all of which
will
have vested by March 7, 2009, and are exercisable at a weighted average price
of
$0.72 per share. One of these agreements expired on February 15, 2008, but
the
remaining agreements have a one year term. All the warrants have a five year
term. The consultants also receive stipends ranging between $5,000 and $10,000
per month.
Stock
Option Plans
None.
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The
following table sets forth certain information concerning the number of shares
of our common stock owned beneficially as of April 15, 2008 by: (i) each
person
(including any group) known to use to own more than 5% of any class of our
voting securities, (ii) each of our directors and each of our named executive
officers, and (iii) officers and directors as a group. Unless otherwise
indicated, the stockholders listed possess sole voting and investment power
with
respect to the shares shown and the officers, directors and stockholders
can be
reached at our principal offices at 9440 Santa Monica Boulevard, Suite 401,
Beverly Hills, California 90210.
As
of
April 7, 2008, we had 59,972,936 shares of common stock and 7,142,857 shares
of
Series A preferred stock issued and outstanding.
|
Name
of Beneficial Owner and
|
|
Shares
of common stock
Beneficially
Owned
|
|
Shares of Series A preferred
stock
Beneficially
Owned
|
|
|
Address
(1)
|
|
Number
(2)
|
|
Percentage
(2)
|
|
Number
(2)
|
|
Percentage
(2)
|
|
|
Carlos
Antonio Salas
|
|
|
5,000,000
|
|
|
8.
3
|
|
|
-
|
|
|
-
|
|
|
Luis
Humberto Goyzueta
(3)
|
|
|
17,287,327
|
|
|
2
8.6
|
|
|
-
|
|
|
-
|
|
|
Jorge
Eduardo Aza
|
|
|
3,018,018
|
|
|
5
.0
|
|
|
-
|
|
|
-
|
|
|
Julio
Cesar Alonso
|
|
|
540,541
|
|
|
*
|
|
|
-
|
|
|
-
|
|
|
Gustavo
Goyzueta
(4)
|
|
|
3,018,018
|
|
|
5.
0
|
|
|
-
|
|
|
-
|
|
|
Steven
Magami
(5)
|
|
|
11,946,589
|
|
|
17.
3
|
|
|
7,142,857
|
|
|
100
|
|
|
Luis
Francisco de las Casas
|
|
|
540,541
|
|
|
*
|
|
|
-
|
|
|
-
|
|
|
MA
Green, LLC
(6)
|
|
|
8,928,571
|
|
|
1
2.9
|
|
|
7,142,857
|
|
|
100
|
|
|
SGM
Capital, LLC
(7)
|
|
|
3,018,018
|
|
|
5.
0
|
|
|
-
|
|
|
-
|
|
|
Kenneth
P. Laurent
(8)
|
|
|
6,100,000
|
|
|
10.
2
|
|
|
-
|
|
|
-
|
|
|
All
Executive Officers and Directors as a Group (5 persons)
(9)
|
|
|
21,045,689
|
|
|
30.5
|
|
|
7,142,857
|
|
|
100
|
|
|
*
|
Less
than 1%
|
|
|
|
|
(1)
|
Unless
otherwise indicated, the address of the beneficial owner is 9440
Santa
Monica Blvd., Suite 401, Beverly Hills, CA 90210.
|
|
|
|
|
(2)
|
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of the date of this Annual Report, are
deemed
outstanding for computing the percentage ownership of the stockholder
holding the options or warrants, but are not deemed outstanding
for
computing the percentage ownership fo any other stockholder. Unless
otherwise indicated in the footnotes to this table, we believe
stockholders named in the table have sole voting and sole investment
power
with respect to the shares set forth opposite such stockholder’s name.
Percentage of ownership is based on 59,972,936 shares of common
stock
outstanding as of April 15, 2008.
|
|
|
|
|
(3)
|
Luis
Humberto Goyzueta’s address is Av. La Merced 810, Surco, Lima, Peru. Mr.
Luis Humberto Goyzueta’s holdings consist of 16,930,290 shares of common
stock and warrants to purchase 357,037 shares of common
stock.
|
|
|
|
|
(4)
|
Gustavo
Goyzueta’s address is Calle La Coruna 149, La Estancia, La Molina, Lima,
Peru.
|
|
|
|
|
(5)
|
Steven
Magami’s holdings consist of 3,018,018 shares of common stock, 7,142,857
shares of Series A preferred stock and a warrant to purchase 1,785,714
shares of common stock. 3,018,018 shares of common stock are held
by SGM
Capital, LLC. Mr. Magami is the manager of SGM Capital, LLC and
exercises
voting and investment control over the shares. 7,142,857 shares
of Series
A preferred stock and warrants to purchase 1,785,714 shares of common
stock are held by MA Green, LLC. Mr. Magami is the manager of MA
Green,
LLC and exercises voting and investment control over the
shares.
|
|
(9)
|
MA
Greene, LLC’s holdings consist of 7,142,857 shares of Series A preferred
stock and a warrant to purchase 1,785,714 shares of common stock.
Steven
Magami is the manager of MA Green, LLC and exercises voting and
investment
control over the shares.
|
|
|
|
|
(10)
|
SGM
Capital, LLC’s holdings consist of 3,018,018 shares of common stock.
Steven Magami is the manager of SGM Capital, LLC and exercises
voting and
investment control over the shares.
|
|
|
|
|
(11)
|
Kenneth
Laurent’s address is 3313 N. 83rd Place, Scottsdale, AZ
85251.
|
|
|
|
|
(12)
|
Consists
of 21,045,689 shares of common stock, 7,142,857 shares of Series
A
preferred stock and warrants to purchase 1,785,714 shares of common
stock.
|
DESCRIPTION
OF SECURITIES
We
are presently authorized under our Amended and Restated Articles of
Incorporation to issue 300,000,000 shares of capital stock, consisting of
250,000,000 shares of common stock and 50,000,000 shares of preferred stock,
$.001 par value. As of April 15, 2008, we had 59,972,936 shares of common
stock,
7,142,857 shares of Series A preferred stock and warrants to purchase an
aggregate of 6,373,856 shares of common stock issued and
outstanding.
The
following descriptions of our capital stock are only summaries and do not
purport to be complete and are subject to and qualified by our Amended and
Restated Articles of Incorporation, our Amended and Restated Bylaws, by the
Amended and Restated Certificate of Designation of our Series A preferred
stock
and by the provisions of applicable corporate laws of the State of Nevada.
Common
Stock
As
of
April 7, 2008, we had 59,972,936 shares of common stock issued and outstanding.
Each share of common stock issued and outstanding entitles the holder thereof
to
one vote on all matters submitted to the vote of the stockholders. Our common
stock may be issued for such consideration and for such corporate purposes
as
the Board of Directors may from time to time determine. Fully paid shares
of
common stock are not liable to any further call or assessment. Dividends
may be
declared and paid on our common stock only out of legally available funds.
Upon
the sale of substantially all of the stock or assets of the Company or
dissolution, liquidation, or winding up of the Company, whether voluntary
or
involuntary, after all liquidation preferences payable to any series of
preferred stock have been satisfied, the remaining net assets of the Company
will be distributed to the holders of common stock and preferred stock in
proportion to the number of shares of common stock then held by them and
the
number of shares of common Stock which the holders of preferred stock have
the
right to acquire upon conversion of the preferred stock held by them. To
the
extent that additional shares of common stock may be issued in the future,
the
relative interests of the then existing stockholders may be
diluted.
Series
A Preferred Stock
As
of
April 7, 2008 we have an aggregate of 7,142,857 issued and outstanding shares
of
Series A preferred stock. Upon the purchase of their Series A preferred stock,
the holders of the Series A preferred stock received a funding fee equal
to 2%
of the purchase price paid. The holders of our Series A preferred stock are
entitled to the following rights, preferences and privileges:
Optional
Conversion
The
holders of our Series A preferred stock have the right to convert the Series
A
preferred stock at any time into shares of our common stock. The initial
conversion ratio is 1:1 and is subject to anti-dilution adjustment as described
below. In addition, the holder has the right to convert one and a half times
the
total number of shares of Series A Preferred held by the holder into shares
of
our common stock, upon the closing of a financing (whether debt or equity)
or
multiple financings led by one or more institutional investors whereby an
aggregate amount of $25.0 million, net of offering expenses, is received
by the
Company. Accumulated dividends, if any, are payable on conversion.
Automatic
Conversion
Each
share of Series A preferred stock will automatically convert into shares
of our
common stock, at the then applicable conversion rate, if the common stock
has
been trading above $2.00 per share for a period of 120 consecutive days.
In no
event shall the Series A preferred stock automatically convert into shares
of
common stock until nine months from November 14, 2007. Accumulated dividends,
if
any, are payable on conversion
.
Anti-dilution
The
conversion rate of the Series A preferred stock is subject to adjustment,
on a
full ratchet basis, to prevent dilution in the event that we issue additional
shares at a purchase price per share less than the conversion price. There
will
be no adjustment to the conversion rate of the Series A preferred stock for
issuances of (i) shares of common stock issued upon conversion of the Series
A
preferred stock, (ii) shares issued to employees, consultants or directors
in
accordance with plans approved by the Board of Directors, (iii) shares issued
upon exercise of warrants existing on November 14, 2007, (iv) shares of common
stock issued as a dividend or distribution on the Series A preferred stock,
(v)
shares issued or issuable pursuant to equipment lease and bank financing
arrangements, (vi) shares of common stock issued or issuable pursuant to
an
acquisition of another company by us, or (vii) shares of common stock that
are
otherwise excluded by vote or written consent of the holder of the Series
A
preferred stock.
Dividend
The
holders of Series A preferred stock are entitled to a 10% per annum cumulative
dividend.
Liquidation
In
the
event of the liquidation, dissolution or winding up of our operation, the
rights
of the holders of Series A preferred stock are senior to the rights of the
holders of common stock. Each share of Series A preferred stock entitles
the
holder to a liquidation amount of $1.05, subject to adjustment in certain
circumstances. After payment of the liquidation amount to the holders of
Series
A preferred stock, the holders of common stock and Series A preferred stock
are
entitled to receive our remaining assets in proportion to the number of
shares of common stock then held by them, with the shares of Series A preferred
stock treated for this purpose as if they had been converted into shares
of
common stock at the then applicable conversion rate. A sale of all or
substantially all of our assets or our merger or consolidation or into
any other company is treated as a liquidation, dissolution or winding up
of
us.
Voting
Rights
The
holders of Series A preferred stock are entitled to a number of votes equal
to
the number of shares of common stock issuable upon conversion of the holder’s
Series A preferred stock. The holders of Series A preferred stock shall vote
with holders of common stock on all matters except as otherwise required
by
law.
Further,
so long as there is a minimum of 1,000,000 shares of Series A preferred stock
issued and outstanding, the holders of Series A preferred stock will have
the
exclusive right to elect one director to the Board of
Directors.
So
long
as any of the Series A preferred stock shall be issued and outstanding, we
shall not, without first obtaining the approval of the holders of more than
50%
of the outstanding shares of the Series A preferred stock: (1) amend, alter
or
repeal any provision of the Amended and Restated Articles of Incorporation
or
the Amended and Restated Bylaws of the Company, if such action would adversely
alter the rights, preferences, privileges or powers of, or restrictions provided
for the benefit of the Series A preferred stock; (2) increase or decrease
the
authorized number of shares of Series A preferred stock; (3) authorize or
create
any new class or series of shares having rights, preferences or privileges
with
respect to dividends or payments upon liquidation senior to or on a parity
with
Series A preferred stock or having voting rights other than those granted
to the
Series A preferred stock generally; (4) enter into any transaction or series
of
related transactions deemed to be a liquidation, dissolution or winding up
our
Company; (5) authorize a merger, acquisition or sale of substantially all
of our assets or any of the assets of our subsidiaries; (6)
voluntarily liquidate or dissolve; or (7) except in the ordinary course of
business, borrow any money, or otherwise incur any indebtedness, other than
pursuant to the Bridge Financing.
Protective
Provisions
So
long
as any of the Series A preferred stock shall be issued and outstanding, we
shall not, without first obtaining the approval of the holders of more than
50%
of the outstanding shares of the Series A preferred stock: (1) amend, alter
or
repeal any provision of our Amended and Restated Articles of Incorporation
or the Amended and Restated Bylaws, if such action would adversely alter
the
rights, preferences, privileges or powers of, or restrictions provided for
the
benefit of the Series A preferred stock; (2) increase or decrease the authorized
number of shares of Series A preferred stock; (3) authorize or create any
new
class or series of shares having rights, preferences or privileges with respect
to dividends or payments upon liquidation senior to or on a parity with Series
A
preferred stock or having voting rights other than those granted to the Series
A
preferred stock generally; (4) enter into any transaction or series of related
transactions deemed to be a liquidation, dissolution or winding up of the
Company; (5) authorize a merger, acquisition or sale of substantially all
of the
assets of the Company or any of its subsidiaries; (6) voluntarily liquidate
or
dissolve; or (7) except in the ordinary course of business, borrow any money,
or
otherwise incur any indebtedness, other than pursuant to the Bridge
Financing.
Convertible
Promissory Notes
The
convertible promissory notes issued in connection with the Bridge Financing,
or
the Notes, bear interest at 10% per annum. Upon the earlier to occur of:
(i)
April 30, 2008, the Maturity Date of the Notes, (ii) the consummation of
a
private investment in public equity financing, or PIPE, with institutional
investors for at least $25 million, net of offering expenses, or (iii) when,
upon the occurrence of an event of default as described in the Notes, such
amounts are declared due and payable, the Note holders are entitled to repayment
equal to 30% in excess of the principal and accrued interest then due and
outstanding under the terms of the Notes, or the Repayment Amount. Upon the
earlier to occur of the Maturity Date or the consummation of the PIPE, the
Note
holders will have the right to convert (in whole or in part) 110% of the
Repayment Amount into our shares of common stock of the Company at the fair
market value of each share of common stock, or at the price per share of
common
stock sold to investors in the PIPE, as the case may be.
Warrants
As
of
April 15, 2008, we had warrants to purchase 6,373,856 shares of common stock
outstanding. 3,119,110 of these warrants were issued in connection with the
Private Placement and Series A Private Placement, have a five year term and
are
exercisable at $0.75 per share. 870,858 of the warrants were issued in
connection with the Bridge Financing, have a three year term and are also
exercisable at $0.75 per share. 1,133,888 warrants were issued in connection
with the March 2008 Financing, have a five year term and are exercisable
at
$0.75 per share. The remaining 1,250,000 warrants were issued pursuant various
consulting and advisory agreements, have a five year term, and are exercisable
at a weighted average price of approximately $0.72 per share.
Registration
Rights
We
have
granted certain registration rights in connection with the Private Placement,
Series A Private Placement and Bridge Financing. We are obligated to file
with
the SEC within 30 days after we close the PIPE, a registration statement
covering the resale of:
|
|
·
|
100%
of the common stock and common stock underlying the warrants issued
in
connection with the Private
Placement;
|
|
|
·
|
100%
of the common stock underlying the Series A preferred stock and
common
stock underlying the warrant issued in connection with the Series
A
Private Placement; and
|
|
|
·
|
100%
of the common stock underlying the promissory notes and common
stock
underlying the warrants issued in connection with the Bridge
Financing.
|
If
the
SEC limits the number of securities that may be registered on the registration
statement, such number of securities will be cutback (in the following order)
to
comply with any such limitation imposed by the SEC: (i) shares of common
stock
underlying any and all warrants to be registered, (ii) common stock and (iii)
shares of common stock underlying the Series A preferred stock. Any required
cutbacks will be applied to investors pro-rata in accordance with the number
of
securities sought to be included in such registration statement. We are required
to use best efforts to have the registration statement declared effective
by the
SEC within 150 days after the filing date.
If
the
registration statement is not filed within 30 days after we close the PIPE,
or
is not declared effective by the SEC within 150 days after we close the PIPE,
we
will be required to pay to each investor an amount equal to 1.5% of the purchase
price paid by such investor for its securities, for each 30 day period until
the
registration statement is filed or declared effective. The maximum amount
we
will be obligated to pay for the failure to file the registration statement
or
cause the registration statement to be declared effective is 10% of the purchase
price of the securities paid by each investor. Similar payments will be required
to be made by us to the investors if effectiveness of the registration statement
is suspended for more than 30 consecutive days. In no event will we be liable
for liquidated damages as to any shares of common stock, any shares of common
stock underlying warrants, any shares of common stock underlying Series A
preferred stock or any shares of common stock underlying convertible promissory
notes which are not permitted by the SEC to be included in the registration
statement solely due to comments received by us from the SEC.
In
addition, at any time after November 14, 2008, the holders of Series A preferred
stock shall have the right to require that we file a registration statement
with the SEC covering the shares of common stock underlying the Shares A
preferred stock and the common stock underlying the warrants issued to the
investor in the Series A Private Placement. We shall file the registration
statement no later than thirty days after the Company’s receipt of the request.
If in the good faith judgment of the Board of Directors of the Company, the
filing of the registration statement would be materially detrimental to the
Company, then the Company shall have the one time right to defer such filing
for
a period of not more than one hundred eighty days after receipt of the request.
The registration statement filed pursuant to the request of the holder of
Series
A preferred stock may include other securities of the Company and may include
securities of the Company being sold for the account of the Company. The
penalty
provisions set forth above are also applicable to the demand registration
statement. These registration rights are also applicable to all holders of
Series A preferred stock, whether purchased pursuant to the Series A Private
Placement or at a later date.
|
Item
12.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Other
than as set forth in this Report, Stratos has not entered into any material
transactions with any director, executive officer, and nominee for director,
beneficial owner of five percent or more of its common stock, or family members
of such persons.
Kenneth
P. Laurent, our former Chief Executive Officer, President and sole director
was
considered our promoter within the meaning of the federal securities laws,
for
serving as the incorporator of NDCI on September 21, 2004. Mr. Laurent purchased
10,000,000 shares of our common stock for $10,000 on October 13, 2004. The
purchase price for the shares was arbitrarily set by Mr. Laurent. Other than
as
set forth in this Current Report, Mr. Laurent did not receive anything of
value
from us for his services as our promoter.
On
January 7, 2008, Stratos Peru entered into a Services Agreement with
Agribusiness Consulting & Management Peru SAC, or ACM, pursuant to which ACM
agreed to provide consulting services to Stratos Peru for 45 days, including
updating the use of funds for Phase I and structuring a financial model for
the
simulation of various scenarios regarding Stratos’ ethanol production. Pursuant
to the agreement, ACM is to receive compensation in the amount of approximately
$99,000 for the services provided. Antonio Salas, the Chief Executive Officer
of
our Company and of Stratos Peru owns 95% of ACM, and the Chief Executive
Officer
of ACM is Gissela Camminati, who is the wife of Mr. Salas. Mr. Salas was
also a
former member of the Board of Directors of ACM.
On
March
10, 2008, Stratos Peru entered into a services agreement with Iberocons S.A.
or
Iberocons, pursuant to which Iberocons has agreed to conduct a feasibility
analysis of using desalinated sea water as part of the irrigation process
for
our greenfields. The agreement terminates on April 29, 2008. The consideration
for services rendered will be $33,000. Iberocons owns 5% of ACM, and Mr.
Salas
is a 10% owner of Iberocons.
Anti-Takeover
Provisions
Our
Amended and Restated Articles of Incorporation and Amended and Restated Bylaws
contain provisions that may make it more difficult for a third party to acquire
or may discourage acquisition bids for the Company. Our Board of Directors
is
authorized, without the action of our stockholders, to issue authorized but
unissued common stock and preferred stock. The existence of undesignated
preferred stock and authorized but unissued common stock enables us to
discourage or to make it more difficult to obtain control of us by means
of a
merger, tender offer, proxy contest or otherwise.
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
2.1
|
|
Agreement
Concerning the Exchange of Securities*
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation*
|
|
3.2
|
|
Amended
and Restated Bylaws*
|
|
3.3.
|
|
Certificate
of Designation*
|
|
4.1
|
|
Specimen
Stock Certificate for Shares of common stock*
|
|
4.2
|
|
Specimen
Stock Certificate for Shares of Series A preferred
stock*
|
|
4.3
|
|
Form
of warrant*
|
|
4.4
|
|
Form
of Promissory Note*
|
|
4.5
|
|
Form
of Promissory Note*
|
|
4.6
|
|
Form
of Bridge warrant*
|
|
4.7
|
|
Form
of warrant*
|
|
10.1
|
|
Equipment
Purchase Agreement by and between Stratos del Peru S.A.C. and Gabinete
Tecnico De Cobranzas S.A.C.*
|
|
10.2
|
|
Amendment
to the Equipment Purchase Agreement by and between Stratos del
Peru S.A.C.
and Gabinete Tecnico De Cobranzas S.A.C.*
|
|
10.3
|
|
Escrow
Agreement by and between Stratos del Peru S.A.C. and Blanca Fernandez
Pasapera*
|
|
10.4
|
|
Amendment
to the Escrow Agreement by and between Stratos del Peru S.A.C.
and Blanca
Fernandez Pasapera*
|
|
10.5
|
|
Form
of Subscription Agreement*
|
|
10.6
|
|
Series
A Stock and warrant Purchase Agreement*
|
|
10.7
|
|
Note
and warrant Purchase Agreement*
|
|
10.8
|
|
Note
and warrant Purchase Agreement*
|
|
10.9
|
|
Memorandum
of Understanding by and between Stratos del Peru S.A.C. and Petrox
S.A.C.*
|
|
10.10
|
|
Promissory
Note*
|
|
10.11
|
|
Work
Agreement by and between Stratos del Peru S.A.C. and CWE Engineering
&
Supply S.A.C.**
|
|
10.12
|
|
Services
Agreement by and between Stratos del Peru S.A.C. and Agribusiness
Consulting & Management Peru S.A.C. **
|
|
10.13
|
|
Services
Agreement by and between Stratos del Peru S.A.C. and Iberocons
S.A.**
|
|
10.14
|
|
Reserved
|
|
10.15
|
|
|
|
10.16
|
|
|
|
10.17
|
|
Services
Agreement by and between Stratos del Peru S.A.C. and Biotecnologia
del
Peru S.A.C. dated February 6, 2008**
|
|
10.18
|
|
Services
Agreement by and between Stratos del Peru S.A.C. and Panka S.A.C.
dated
February 27, 2008**
|
|
14.1
|
|
Code
of Ethics**
|
|
21.1
|
|
List
of Subsidiaries*
|
|
99.1
|
|
Audit
Committee Charter**
|
|
99.2
|
|
Compensation
Committee Charter**
|
|
99.3
|
|
Nominations
Committee Charter**
|
|
99.4
|
|
Foreign
Corrupt Practices Act Policies and
Procedures**
|
*
Filed
in the 8K dated November 20, 2007.
**
Filed
herewith.
__________________________________
|
Item
14.
|
Principal
Accountant Fees and
Services
|
On
December 4, 2007 we appointed Moore Stephens Wurth Frazer and Torbet, LLP
as our
independent auditors for the fiscal year ended December 31, 2007.
The
following table shows the fees paid or accrued by us for the audit and other
services provided by Bagell, Josephs, Levine & Company LLC and Moore
Stephens Wurth Frazer and Torbet, LLP for fiscal 2007 and 2006.
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
85,000
|
|
$
|
7,500
|
|
|
Audit-Related
Fees
|
|
|
-
|
|
|
304
|
|
|
Tax
Fees
|
|
|
-
|
|
|
275
|
|
|
All
Other Fees
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
85,000
|
|
$
|
8,079
|
|
|
|
|
|
|
|
|
|
|
As
defined by the SEC, (i) “audit fees” are fees for professional services rendered
by our principal accountant for the audit of our annual financial statements
and
review of financial statements included in our Form 10-Q, or for services
that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years; (ii) “audit-related
fees” are fees for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of
our
financial statements and are not reported under “audit fees;” (iii) “tax fees”
are fees for professional services rendered by our principal accountant for
tax
compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for
products and services provided by our principal accountant, other than the
services reported under “audit fees,” “audit-related fees,” and “tax
fees.”
Under
applicable SEC rules, the Audit Committee is required to pre-approve the
audit
and non-audit services performed by the independent auditors in order to
ensure
that they do not impair the auditors’ independence. The SEC’s rules specify the
types of non-audit services that an independent auditor may not provide to
its
audit client and establish the Audit Committee’s responsibility for
administration of the engagement of the independent auditors. Until such
time as
we have an Audit Committee in place, the Board of Directors will pre-approve
the
audit and non-audit services performed by the independent auditors.
Consistent
with the SEC’s rules, the Audit Committee Charter requires that the Audit
Committee review and pre-approve all audit services and permitted non-audit
services provided by the independent auditors to us or any of our subsidiaries.
The Audit Committee may delegate pre-approval authority to a member of the
Audit
Committee and if it does, the decisions of that member must be presented
to the
full Audit Committee at its next scheduled meeting.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
Date:
April
15, 2008
|
STRATOS
RENEWABLES CORPORATION,
|
|
|
a
Nevada corporation
|
|
|
|
|
|
By:
|
/s/
STEVEN MAGAMI
|
|
|
|
Steven
Magami, President
|
|
|
|
(Principal
Executive Officer)
|
In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the
dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
STEVEN MAGAMI
|
|
President
and Chairman of the Board of Directors
|
|
April
15, 2008
|
|
Steven
Magami
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
CARLOS ANTONIO SALAS
|
|
Chief
Executive Officer and Director
|
|
April
15, 2008
|
|
Carlos
Antonio Salas
|
|
|
|
|
|
|
|
|
|
|
|
/s/
JULIO CESAR ALONSO
|
|
Chief
Financial Officer and Treasurer
|
|
April
15, 2008
|
|
Julio
Cesar Alonso
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
LUIS FRANCISCO DE LAS CASAS
|
|
Director
|
|
April
15, 2008
|
|
Luis
Francisco de las Casas
|
|
|
|
|
STRATOS
RENEWABLES CORPORATION
(A
Development Stage Company)
Consolidated
Financial Statements
For
the Period from Inception (February 27, 2007) to December 31,
2007
Contents
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of December 31, 2007
|
F-2
|
|
|
|
|
|
|
Consolidated
Statement of Operations for the period from inception
|
|
|
|
(February
27, 2007) to December 31, 2007
|
F-3
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders’ Deficit for the period from inception
|
|
|
|
(February
27, 2007) to December 31, 2007
|
F-4
|
|
|
|
|
|
|
Consolidated
Statement of Cash Flows for the period from inception
|
|
|
|
(February
27, 2007) to December 31, 2007
|
F-5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements for the period from inception
|
|
|
|
(February
27, 2007) to December 31, 2007
|
F-6
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
Stratos
Renewables Corporation
We
have
audited the accompanying consolidated balance sheet of Stratos Renewables
Corporation (a development stage company) as of December 31, 2007, and the
related consolidated statements of operations, stockholders’ deficit and cash
flows for the period from inception (February 27, 2007) to December 31, 2007.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Stratos Renewables
Corporation as of December 31, 2007, and the results of its operations and
cash
flows for the period from inception (February 27, 2007) to December 31, 2007,
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company’s working capital deficit raises
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut,
California
March
28,
2008
Stratos
Renewables Corporation
(A
Development Stage Company)
Consoldiated
Balance Sheet
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,357,417
|
|
|
Debt
issue costs, net
|
|
|
56,948
|
|
|
Prepaid
Consulting
|
|
|
155,020
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
3,569,385
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
4,600,923
|
|
|
VAT
RECEIVABLE
|
|
|
899,567
|
|
|
OTHER
ASSETS
|
|
|
21,711
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
9,091,586
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
payable
|
|
$
|
173,032
|
|
|
Accrued
interest
|
|
|
39,248
|
|
|
Other
payables
|
|
|
84,648
|
|
|
Accrued
interest and redemption premium
|
|
|
670,150
|
|
|
Convertible
promissory notes, net of debt discount of $552,369
|
|
|
2,495,631
|
|
|
Accrued
beneficial converstion liability
|
|
|
250,938
|
|
|
Accrued
warrant liablity
|
|
|
1,164,501
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,878,148
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
Preferred
stock; $0.001 par value; 50,000,000 shares authorized; 7,142,857
shares issued and outstanding
|
|
|
7,143
|
|
|
Common
stock; $0.001 par value; 250,000,000 shares authorized; 57,666,794
shares issued and outstanding
|
|
|
57,667
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
6,193,629
|
|
|
Other
comprehensive income
|
|
|
14,021
|
|
|
Deficit
accumulated during the development stage
|
|
|
(2,059,022
|
)
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
4,213,438
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
9,091,586
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these financial
statements.
Stratos
Renewables Corporation
(A
Development Stage Company)
Statement
of Operations and Other Comprehensive Loss
|
|
|
For the period
|
|
|
|
|
from inception
|
|
|
|
|
(February 27, 2007)
|
|
|
|
|
to December 31, 2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
-
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
-
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
-
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
Consulting
fees
|
|
|
144,784
|
|
|
General
and administrative
|
|
|
520,779
|
|
|
Professional
fees
|
|
|
100,611
|
|
|
Wages
|
|
|
210,928
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
977,102
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
Amortization
of debt discounts and debt issuance costs
|
|
|
(609,317
|
)
|
|
Interest
and financing costs
|
|
|
(721,462
|
)
|
|
Change
in value of beneficial conversion feature
|
|
|
624,052
|
|
|
Change
in value of warrant liability
|
|
|
95,972
|
|
|
Other
|
|
|
600
|
|
|
TOTAL
OTHER EXPENSES, net
|
|
|
(610,155
|
)
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,587,257
|
)
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT
|
|
|
-
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,587,257
|
)
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDEND
|
|
|
471,765
|
|
|
|
|
|
|
|
|
NET
LOSS ATTIRUBTED TO COMMON STOCKHOLDERS
|
|
$
|
(2,059,022
|
)
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
14,021
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
(2,045,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE - BASIC AND DILUTED
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON EQUIVALENT
SHARES
OUTSTANDING - BASIC AND DILUTED
|
|
|
46,930,529
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these financial
statements.
Stratos
Renewables Corporation
(A
Development Stage Company)
Statement
of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additonal
|
|
Other
|
|
During the
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Development
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Gain (loss)
|
|
Stage
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
February 27, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of shares for cash
|
|
|
|
|
|
|
|
|
45,000,000
|
|
|
45,000
|
|
|
(44,666
|
)
|
|
|
|
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with reverse merger transaction
|
|
|
|
|
|
|
|
|
10,000,000
|
|
|
10,000
|
|
|
(9,789
|
)
|
|
|
|
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash
|
|
|
|
|
|
|
|
|
2,666,794
|
|
|
2,667
|
|
|
1,442,065
|
|
|
|
|
|
|
|
|
1,444,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued for cash
|
|
|
7,142,857
|
|
|
7,143
|
|
|
|
|
|
|
|
|
4,334,254
|
|
|
|
|
|
|
|
|
4,341,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend on preferred shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471,765
|
|
|
|
|
|
(471,765
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,021
|
|
|
|
|
|
14,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,587,257
|
)
|
|
(1,587,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
7,142,857
|
|
$
|
7,143
|
|
|
57,666,794
|
|
$
|
57,667
|
|
$
|
6,193,629
|
|
$
|
14,021
|
|
$
|
(2,059,022
|
)
|
$
|
4,213,438
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these financial
statements.
Stratos
Renewables Corporation
(A
Development Stage Company)
Statement
of Cash Flows
|
|
|
For the period
|
|
|
|
|
from inception
|
|
|
|
|
(February 27, 2007)
|
|
|
|
|
to December 31, 2007
|
|
|
|
|
|
|
|
CASH
FLOW FROM OPERATING ACTIVITIES:
|
|
|
|
|
Net
loss
|
|
$
|
(1,587,257
|
)
|
|
Adjustments
to net income for non-cash activities:
|
|
|
|
|
|
Amortization
of debt discounts and debt issuance costs
|
|
|
609,317
|
|
|
Depreciation
and amortization
|
|
|
2,094
|
|
|
Change
in value of beneficial conversion feature
|
|
|
(624,052
|
)
|
|
Change
in value of warrant liability
|
|
|
(95,972
|
)
|
|
Amortization
of prepaid consulting
|
|
|
51,672
|
|
|
Adjustment
to reconcile net loss to net cash
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
Other
assets
|
|
|
(20,868
|
)
|
|
Accrued
interest and redemption premium
|
|
|
670,150
|
|
|
Accounts
payable
|
|
|
170,619
|
|
|
Interest
payable
|
|
|
39,248
|
|
|
Other
payables
|
|
|
81,362
|
|
|
Net
cash used in operating activities
|
|
|
(703,687
|
)
|
|
|
|
|
|
|
|
CASH
FLOW FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Purchases
of plant and equipment
|
|
|
(4,604,638
|
)
|
|
VAT
receivable
|
|
|
(864,657
|
)
|
|
Cash
acquired with acquisition
|
|
|
211
|
|
|
Net
cash used in investing activities
|
|
|
(5,469,084
|
)
|
|
|
|
|
|
|
|
CASH
FLOW FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
1,867,090
|
|
|
Proceeds
from sale of preferred stock
|
|
|
5,000,000
|
|
|
Payment
of offerings costs associated with common and preferred
stock
|
|
|
(256,593
|
)
|
|
Proceeds
from issuance of convertible debenture
|
|
|
3,048,000
|
|
|
Payment
of offerings costs associated with convertible debenture
|
|
|
(113,897
|
)
|
|
Net
cash provided by financing activities
|
|
|
9,544,600
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(14,412
|
)
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
3,357,417
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, Beginning of period
|
|
|
-
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, End of period
|
|
$
|
3,357,417
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Costs
associated with acqisition:
|
|
|
|
|
|
Beneficial
conversion feature associated with convertible debenture
|
|
$
|
874,990
|
|
|
Issuance
of warrants in acquisition
|
|
$
|
229,748
|
|
|
Acquisition
of shell company
|
|
$
|
211
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these financial
statements.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Note
1 - Organization and Significant Accounting Policies
Organization
and line of business
Stratos
Renewables Corporation, formerly New Design Cabinet, Inc., (the “Company”) was
incorporated in the State of Nevada on September 29, 2004. Stratos del Peru
S.A.C was incorporated in Lima, Peru, on February 27, 2007 with the name of
Estratosfera del Perú S.A.C. On July 11, 2007, the general meeting of
shareholders agreed to change the Company’s name to its current one, Stratos del
Peru S.A.C (“Stratos del Peru”), which was officially registered with the Tax
Administration on October 11, 2007.
On
November 14, 2007, Stratos del Peru entered into a share exchange agreement
(“Share Exchange”) with the Company. Pursuant to the agreement, the Company
issued 45,000,000 shares of its common stock to the former security holders
of
Stratos del Peru in exchange for 999, or 99.9%, of the issued and outstanding
shares of common stock of Stratos del Peru. Upon closing the Share Exchange,
the
Company had 55,000,000 shares of common stock issued and outstanding as a result
of the issuance of 45,000,000 shares of common stock to the former security
holders of Stratos del Peru. Effective November 20, 2007, the Company amended
its articles of incorporation to change the name of the corporation from “New
Design Cabinets, Inc.” to “Stratos Renewables Corporation.”
The
Share
Exchange is deemed to be a reverse acquisition under the purchase method of
accounting. As the acquired entity, Stratos del Peru is regarded as the
predecessor entity as of November 14, 2007. Accordingly, the merger of the
Company and Stratos del Peru was recorded as a recapitalization of the Stratos
del Peru, with Stratos del Peru being treated as the continuing entity and
the
management and board of directors of Stratos del Peru were appointed as officers
and directors of the Company. The accompanying consolidated statement of
operations presents the amounts as if the acquisition occurred on February
27,
2007 (date of inception for Stratos del Peru). A consolidated statement of
operations for the year ended December 31, 2006 is not presented as Stratos
del
Peru did not commence operations until February 27, 2007.
Additionally,
in connection with the reverse merger transaction, the Company conducted a
private placement of common stock, preferred stock and convertible promissory
notes totaling approximately $10 million.
The
Company’s business objectives are the purchase, sale, production, distribution,
marketing, transport, warehousing, mixture, exports and imports of all kinds
of
products derived from hydrocarbons and bio-fuels, being solids, liquids or
gases
.
The
Company is currently a development stage company under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 7 as it has not
commenced operations. The Company’s offices and administrative headquarters are
located in Lima, Peru.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Basis
of presentation
The
accompanying consolidated financial statements are presented in US dollars
and
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The accompanying consolidated financial
statements include the accounts of Stratos Renewables Corporation and its
99.99%
owned subsidiary, Stratos del Peru. All intercompany accounts and transactions
have been eliminated within the consolidation.
Minority
interest
Minority
interest has not been presented on the consolidated balance sheet due to
accumulated losses which exceed the minority stockholders equity. In accordance
with
Accounting
Principles Board Opinion
No. 18,
the minority interest has been written down to zero on the accompanying balance
sheet.
Foreign
currency translation
The
reporting currency of the Company is the US dollar. The Company uses its local
currency, Peruvian Nuevos Soles (PEN) as its functional currency. Such financial
statements were translated into U.S. Dollars (USD) in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency
Translation,” with the PEN as the functional currency. Assets and liabilities
are translated using the exchange rates prevailing at the balance sheet date.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of stockholders’
equity. Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency
are
included in the results of operations as incurred.
Translation
adjustment was $14,021 at December 31, 2007. Asset and liability amounts at
December 31, 2007 were translated at 2.997 PEN to $1.00 USD. Equity accounts
were stated at their historical rate. The average translation rates applied
to
the statement of operations for the period from inception (February 27, 2007)
to
December 31, 2007 was 3.118. Cash flows are also translated at average
translation rates for the period; therefore, amounts reported on the statement
of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet.
Use
of
estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosures of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from these
estimates.
See
report of independent registered public accounting
firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Fair
value of financial instruments
For
certain of the Company's financial instruments, including cash and cash
equivalents, other receivables, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
Cash
and cash equivalents
For
purposes of the statements of cash flows, the Company defines cash equivalents
as all highly liquid debt instruments purchased with a maturity of three months
or less.
Concentration
of credit risk
Cash
includes cash on hand and demand deposits in accounts maintained within Peru
and
the United States. Certain f
inancial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions which, from
time to time, may exceed Federal Deposit Insurance Corporation insured limits
for the banks located in the Unites States. Balances at financial institutions
within Peru are not covered by insurance. As of December 31, 2007, the Company
had deposits in excess of federally insured limits totaling $3,403,946. The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any significant risks on its cash in bank accounts.
The
Company will extend credit based on an evaluation of the customer's financial
condition, generally without collateral. Exposure to losses on receivables
is
principally dependent on each customer's financial condition. The Company will
monitor its exposure for credit losses and will maintain allowances for
anticipated losses, as required.
VAT
receivable
At
December 31, 2007, the Company recognized a VAT (value added tax) receivable
of
$899,567 in Peru. VAT is charged at a standard rate of 19% and the Company
obtains income tax credits for VAT paid in connection with the purchase of
capital equipment and other goods and services employed in its operations.
The
Company is entitled to use the credits against its Peruvian income tax liability
or to receive a refund credit against VAT payable or sales. As the Company
does
not anticipate incurring either a Peruvian tax or a VAT liability during the
next fiscal year, the receivable was classified as a long-term
asset.
Plant
and equipment
Plant
and
equipment are stated at historical cost and are depreciated using the
straight-line method over their estimated useful lives ranging from 4 to 10
years. The useful life and depreciation method are reviewed periodically to
ensure that the depreciation method and period are consistent with the
anticipated pattern of future economic benefits. Expenditures for maintenance
and repairs are charged to operations as incurred while renewals and betterments
are capitalized. Gains and losses on disposals are included in the results
of
operations.
See
report of independent registered public accounting
firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Impairment
of long-lived assets
The
Company follows the guidance of Statement of Financial Accounting Standards
No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The Company periodically evaluates the carrying
value of long-lived assets to be held and used in accordance with SFAS 144.
SFAS
144 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets’
carrying amounts. In that event, a loss is recognized based on the amount by
which the carrying amount exceeds the fair market value of the long-lived
assets. Loss on long-lived assets to be disposed of is determined in a similar
manner, except that fair market values are reduced for the cost of disposal.
Based on its review, the Company believes that, as of December 31, 2007 there
were no significant impairments of its long-lived assets.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of
changes in tax laws and rates on the date of enactment. The income tax rate
applicable to Peruvian companies is 30%. If the Company distributes its earnings
fully or partially, it shall apply an additional rate of 4.1% on the distributed
amount, which will be borne by the shareholders, as long as they are individuals
or companies non-domiciled in Peru
.
The
4.1%
rate tax will be borne by the Company and will apply on any amount or payment
in
kind subject to income tax that may represent an indirect disposition not
subject to subsequent tax control, including amounts debited to expenses and
undeclared revenues
.
As
from
January 1, 2007 the tax payer must liquidate and pay the 4.1% tax directly
together with its monthly obligations without the requirement of a previous
tax
audit by the Tax Administration.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes”, during 2007. A tax position is recognized as a benefit only if it is
“more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The adoption had no affect on the
Company’s financial statements.
Basic
and Diluted Losses per share
The
Company reports earnings per share in accordance with SFAS No. 128, "Earnings
per Share." Basic earnings per share is computed by dividing the net income
by
the weighted average number of common shares available. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common shares
that
would have been outstanding if the potential common shares had been issued
and
if the additional common shares were dilutive. All preferred shares, warrants,
and options were excluded from the diluted loss per share due to the
anti-dilutes effect.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Accrued
warrant liability and accrued beneficial conversion feature
Pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and
Potentially Settled in, a Company's Own Stock", the Company has recorded the
fair value of all outstanding warrants as an accrued warrant liability since
the
Company’s convertible promissory notes is convertible into an undetermined
number of shares of common stock. As a result, the Company may not have enough
authorized shares to satisfy the exercise of its outstanding warrants. In
addition, the fair value of the beneficial conversion feature associated with
the convertible promissory notes is recorded as an accrued beneficial conversion
liability
Recently
issued accounting pronouncements
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and
the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results
of
operations or financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities“. This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of SFAS No. 159 on its financial position and results of
operations.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”. This statement requires employers to
recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income
of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The provisions of SFAS No. 158 are effective for
employers with publicly traded equity securities as of the end of the fiscal
year ending after December 15, 2006. The adoption of this statement had no
effect on the Company‘s reported financial position or results of
operations.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements“. The
objective of SFAS No. 157 is to increase consistency and comparability in fair
value measurements and to expand disclosures about fair value measurements.
SFAS
No. 157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new
fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company‘s future reported financial position or results of
operations.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.
Note
2 – Development Stage Company and Going Concern
The
Company is a new development stage company and is subject to risks and
uncertainties that include: new product development, actions of competitors,
reliance on the knowledge and skills of its employees to be able to service
customers, and availability of sufficient capital and a limited operating
history. Accordingly, the Company presents its consolidated financial statements
in accordance with the accounting principles generally accepted in the United
States of America that apply in establishing new operating enterprises. As
a
development stage enterprise, the Company discloses the deficit accumulated
during the development stage and the consolidated accumulated statement of
operations and cash flows from inception of the development stage to the date
on
the current balance sheet. Contingencies exist with respect to this matter,
the
ultimate resolution of which cannot presently be determined.
The
accompanying consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America,
which contemplates continuation of the Company as a going concern. However,
the
Company has not generated any operating revenue and has working capital
deficits, which raises substantial doubt about its ability to continue as a
going concern.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
In
view
of these matters, realization of certain of the assets in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in
turn is dependent upon the Company's ability to meet its financial requirements,
raise additional capital, and the success of its future operations.
Management
recently raised approximately $10 million in debt and equity capital and is
attempting to raise additional debt and equity capital. Management believes
that
this plan provides an opportunity for the Company to continue as a going
concern.
Note
3 - Plant and Equipment
Plant
and
equipment at consisted of the following at December 31 2007:
|
Description
|
|
Amount
|
|
|
Sugar
plant
|
|
|
|
|
|
Vehicles
|
|
|
2,416
|
|
|
Computer
equipment
|
|
|
48,439
|
|
|
|
|
|
4,603,102
|
|
|
Accumulated
depreciation
|
|
|
(2,179
|
)
|
|
Plant
and equipment, net
|
|
|
|
|
Depreciation
expense amounted to $2,094 for the period ended December 31, 2007.
Note
4 – Private Placement of Equity and Debt Securities
Common
stock Private Placement
Immediately
following the above mentioned Share Exchange under Note 1, the Company entered
into a private placement (“Private Placement”) and issued an aggregate of
2,666,794 shares of common stock and warrants to purchase an aggregate of
1,333,396 shares of common stock. The issuance of 2,666,794 shares of common
stock has been included as a component in the accompanying consolidated
Statement of Stockholders’ Equity. The aggregate gross proceeds raised by the
Company in connection with the Private Placement were $1,867,090. Each share
of
common stock was sold to investors at $0.70 per share. The fair value of the
warrants amounted to $352,268. The fair value was computed using the
Black-Scholes model under the following assumptions: (1) expected life of 1
year; (2) volatility of 100%; and (3) risk free interest of 5.0%. The warrants
expire after five (5) years from the date of issuance and are exercisable at
$0.75 per share, subject to adjustment in certain circumstances.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Series
A Preferred Stock Private Placement
Immediately
following the above mentioned Share Exchange, the Company completed a Series
A
Private Placement (“Series A Private Placement”) and issued to MA Green
7,142,857 shares of Series A Preferred Stock and warrants to purchase 1,785,714
shares of common stock. The issuance of 7,142,857 shares of Preferred Stock
has
been included as a component in the accompanying Statement of Stockholders’
Equity. The gross proceeds raised by the Company in connection with the Series
A
Private Placement were $5,000,000. Each share of Series A Preferred Stock was
sold at $0.70 per share. The warrants expire five (5) years from the date of
issuance and are exercisable at $0.75 per share, subject to adjustment in
certain circumstances. The Company’s Chairman of the Board of Directors, Steven
Magami, is the manager of MA Green.
The
fair
value of the 1,785,714 warrants issued with the Series A Private Placement
was
$471,765. The fair value was computed using the Black-Scholes model under the
following assumptions: (1) expected life of 1 year; (2) volatility of 100%,
(3)
risk free interest of 5.0% and (4) dividend rate of $0%. In addition, since
this
convertible preferred stock is convertible into shares of common stock at a
one
to one ratio an embedded beneficial conversion feature was recorded as a
discount to additional paid in capital in accordance with Emerging Issues Task
Force No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments." The intrinsic value of the beneficial conversion feature has
been
recorded as a preferred stock dividend at the date of issuance. The Company
recognized $471,765 of preferred dividends related to the beneficial conversion
feature.
Bridge
Financing
Immediately
following the above mentioned Share Exchange, the Company entered into a Note
and Warrant Purchase Agreement (“Bridge Financing”) with investors and issued an
aggregate of $3,048,000 in convertible promissory notes and warrants to purchase
an aggregate of 870,858 shares of common stock. The convertible promissory
notes
issued in connection with the Bridge Financing bear interest at 10% per annum.
The bridge note holders received one (1) warrant to purchase one (1) share
of
common stock, at an exercise price of $0.75 per share, for every $3.50 invested
in the Company in connection with the Bridge Financing. The aggregate gross
proceeds raised by the Company in connection with the Bridge Financing were
approximately $3.0 million. The warrants will expire three (3) years from the
closing date of Bridge Financing. Total interest expense at December 31, 2007
amounted to $56,125.
Further,
upon the earlier to occur of (i) three (3) months from the closing date of
the
Bridge Financing (the “Maturity Date”), and (ii) the consummation a PIPE
financing with institutional investors for at least $25 million, net of offering
expenses (the “PIPE”), the bridge note holders are entitled to repayment (in
cash or in Common Stock) equal to 25% to 30% in excess of the principal and
accrued interest then due and outstanding under the terms of the notes (the
“Repayment Amount”). The bridge note holders entitled to a Repayment Amount of
25% in excess of the principal and accrued interest due under the terms of
the
notes will receive a 5% origination fee as consideration for making loans to
the
Company. The bridge note holders entitled to a Repayment Amount of 30% in excess
of the principal and accrued interest due under the terms of the notes will
not
be entitled to an origination fee. Upon the earlier to occur of the Maturity
Date or the consummation of the PIPE, the bridge note holders will have the
right to convert (in whole or in part) 110% of the Repayment Amount into shares
of Common Stock of the Company at the fair market value of each share of Common
Stock, or at the price per share of Common Stock sold to investors in the PIPE,
as the case may be.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Per
EITF
00-19, paragraph 4, these convertible promissory notes do not meet the
definition of a “conventional convertible debt instrument” since the debt is not
convertible into a fixed number of shares. The debt can be converted into
common stock at a conversions price that is a percentage of the market price;
therefore the number of shares that could be required to be delivered upon
“net-share settlement” is essentially indeterminate. Therefore, the
convertible promissory notes are considered “non-conventional,” which means that
the detachable warrants and the conversion feature must be bifurcated from
the
debt and shown as a separate derivative liability.
The
$3,048,000 proceeds from the convertible promissory notes were
allocated
to the detachable warrants.
The fair
value of the 870,858 warrants issued in connection with this transaction was
$229,748. The fair value was determined
using
the Black-Scholes option pricing model and the following
assumptions: term of 1 year, a risk free interest rate
of 5.0%, a dividend yield of 0% and volatility of 100%.
In
addition the fair value of the beneficial conversion feature associated with
the
convertible promissory notes was $874,990. Both the value assigned to the
warrants ($229,748) and the beneficial conversion feature ($874,990) is recorded
as debt discounts and will be amortized over the terms of the convertible
promissory notes.
For
the
period ended December 31, 2007, the Company amortized $552,369 of the aforesaid
debt discounts as other expense in the accompanying consolidated statements
of
operations.
A
summary
of the convertible promissory notes and related discounts is
below:
|
|
|
Total
|
|
|
Gross
convertible promissory notes
|
|
$
|
3,048,000
|
|
|
Debt
discounts
|
|
|
(552,369
|
)
|
|
Convertible
promissory notes, net
|
|
$
|
2,495,631
|
|
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Warrants
The
following is a summary of the warrant activity:
|
Outstanding
at inception (February 27, 2007)
|
|
-
|
|
|
Granted
|
|
|
4,739,968
|
|
|
Forfeited
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
Outstanding
as of December 31, 2007
|
|
|
4,739,968
|
|
Following
is a summary of the status of warrants outstanding at December 31,
2007:
|
Outstanding Warrants
|
|
Exercisable Warrants
|
|
|
Exercise
Price
|
|
Number
|
|
Average
Remaining
Contractual
Life
|
|
Average
Exercise
Price
|
|
Number
|
|
Average
Remaining
Contractual Life
|
|
|
$
|
0.75
|
|
|
3,989,968
|
|
|
4.875
|
|
$
|
0.75
|
|
|
3,989,968
|
|
|
4.875
|
|
|
$
|
0.70
|
|
|
750,000
|
|
|
4.89
|
|
$
|
0.70
|
|
|
166,667
|
|
|
4.89
|
|
|
Total
|
|
|
4,739,968
|
|
|
|
|
|
|
|
|
4,156,635
|
|
|
|
|
Note
5 – Intercompany Promissory Note
In
connection with the Share Exchange, the Company agreed to lend Stratos del
Peru
$5.5 million pursuant to the terms of a Promissory Note, dated as of November
14, 2007 (the “Promissory Note”). The Promissory Note is unsecured, bears
interest at a rate of 4.39% compounded annually and must be repaid in full
on or
before November 14, 2014. As of December 31, 2007 there is $30,181 of accrued
interest. These amounts have been eliminated in consolidation in the December
31, 2007 financial statements.
Note
6 – Acquisition of assets
On
October 18, 2007, the Company signed a purchase-sale contract with Gabinete
Técnico de Cobranza S.A.C., and have subsequently acquired certain assets that
are part of a sugar mill. This purchase price was $5,382,328:
|
|
·
|
$5,032,328
by bank draft issued to the order of Gabinete Técnico de Cobranza
S.A.C.;
|
|
|
·
|
$350,000
to be deposited in a bank account in order to guarantee payment of
any
contingency that may arise from this
transaction.
|
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
The
Company acquired certain assets from
Gabinete
Técnico de Cobranza S.A.C. as part of its overall business strategy to purchase,
sale, produce, distribute, market, transport, warehouse, export and import
of
all kinds of products derives from hydrocarbons and bio-fuels.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition: The fair values are
determined based on an appraisal:
|
Plant
and equipment
|
|
$
|
4,522,965
|
|
|
VAT
receivable
|
|
|
859,363
|
|
|
Purchase
price
|
|
$
|
5,382,328
|
|
The
Company has determined that the discounted cash flows generated by the
exploitation of the sugar mill will suffice to cover the carrying value of
the
assets acquired in this acquisition.
The
sugar
mill did not have any operations for the past several years.
Note
7 - Income taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes
and
the amounts used for income tax purposes. The Company has incurred net operating
losses in Peru and the United States for income tax purposes for the year ended
December 31, 2007. The net operating loss carry forwards amounted to $490,009
and $537,805 for Peru and the United States, respectively which may be available
to reduce future years’ taxable income. These carry forwards will expire, if not
utilized through 2011 and 2027 for Peru and the United States, respectively.
Management believes that the realization of the benefits from these losses
appears uncertain due to the Company’s limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. The net change in the valuation allowance for the year ended
December 31, 2007 was an increase of $377,399. Management will review this
valuation allowance periodically and make adjustments as warranted.
Significant
components of the Company's deferred tax assets and liabilities at December
31,
2007 are as follows:
|
|
|
Peru
|
|
U.S.
|
|
Total
|
|
|
Deferred
tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
147,003
|
|
$
|
230,396
|
|
$
|
377,399
|
|
|
Deferred
tax assets, net
|
|
|
147,003
|
|
|
230,396
|
|
|
377,399
|
|
|
Valuation
allowance
|
|
|
(147,003
|
)
|
|
(230,396
|
)
|
|
(377,399
|
)
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
A
reconciliation of the statutory income tax rate and the effective income tax
rate for the period from inception (February 27, 2007) to December 31, 2007
is
as follows:
|
|
|
Peru
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Statutory
income tax rate
|
|
|
30
|
%
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(30
|
)%
|
|
(43
|
)%
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
0
|
%
|
|
0
|
%
|
Note
8 – Commitments and contingencies
On
September 19, 2007, the Company entered into a five year agreement with Petrox
S.A.C., a Peruvian fuel distributor, to
sell
10,000 gallons of ethanol per day at a fixed price of $2.00 per
gallon.
The
Company entered into a four year lease agreement for office space in Lima,
Peru
for monthly payments of $6,179. The lease begins in January, 2008.
The
aggregate minimum annual lease commitments for the operating leases extending
beyond one year are as follows:
|
Year Ending December 31,
|
|
Amount
|
|
|
2008
|
|
$
|
74,148
|
|
|
2009
|
|
|
74,148
|
|
|
2010
|
|
|
74,148
|
|
|
2011
|
|
|
74,148
|
|
|
|
|
$
|
296,592
|
|
Note
9 – Related party transactions
The
Company was charged fund raising fees by a member of the board of directors
that
amounted to $84,970. These fees have been recorded as an asset under debt
issuance costs.
The
Company also received consulting services from a member of its board of
directors. Total consulting fees amounted to $17,750.
As
discussed in Note 4, the Company completed a Series A Private Placement (“Series
A Private Placement”) and issued to MA Green 7,142,857 shares of Series A
Preferred Stock and warrants to purchase 1,785,714 shares of common stock.
The
gross proceeds raised by the Company in connection with the Series A Private
Placement were $5,000,000. The Company’s Chairman of the Board of Directors,
Steven Magami, is the manager of MA Green.
See
report of independent registered public accounting firm.
Stratos
Renewables Corporation
(A
Development Stage Company)
Notes
to Consolidated Financial Statements
For
the Period From Inception (February 27, 2007) to December 31,
2007
Note
10 – Subsequent events
On
March
7, 2008 the Company closed on $1,587,447 of its $10 million private placement
(the “March 2008 Financing”), and the Company anticipates that it will continue
to offer its securities on the same terms and conditions until at least July
1,
2008. Pursuant to the March 2008 Financing, the Company issued an aggregate
of
2,267,782 shares of Common Stock at a purchase price of $0.70 per share and
warrants to purchase an aggregate of 1,133,891 shares of Common Stock with
an
exercise price of $0.75 per share.
On
March
26, 2008, the Company entered into an Amendment to Convertible Promissory
Note
(“Amendment”) with investors related to the $3,048,000 Convertible Promissory
Notes as described in Note 4. Pursuant to the Amendment, the maturity dates
of
the Convertible Promissory Notes have been extended from February 14, 2008
to
April 30, 2008.
See
report of independent registered public accounting firm.
Stratos Renewables (PK) (USOTC:SRNW)
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