UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
quarterly period ended June 30, 2008
or
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
the
transition period from
______________ to
______________
Commission
File No.
000-50154
XETHANOL
CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
|
84-1169517
|
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
|
Identification
No.)
|
|
|
|
|
|
3348
Peachtree Road NE
Suite
250 Tower Place 200
Atlanta,
Georgia
|
|
30326
|
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(404)
814-2500
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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.
x
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
|
|
|
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
The
number of outstanding shares of the registrant’s common stock on August 11, 2008
was 28,609,103.
TABLE
OF CONTENTS
|
|
PAGE
|
|
|
|
|
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
|
3
|
|
|
|
|
PART
I – FINANCIAL INFORMATION
|
4
|
|
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
4
|
|
|
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
16
|
|
|
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
24
|
|
|
|
|
|
ITEM 4T.
|
CONTROLS
AND PROCEDURES
|
24
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
24
|
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
24
|
|
|
|
|
|
ITEM 1A.
|
RISK
FACTORS
|
26
|
|
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
26
|
|
|
|
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
26
|
|
|
|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
26
|
|
|
|
|
|
ITEM
5.
|
OTHER
INFORMATION
|
26
|
|
|
|
|
|
ITEM
6.
|
EXHIBITS
|
26
|
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
report contains “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of
1934. These statements relate to future economic performance, plans and
objectives of management for future operations and projections of revenues
and
other financial items that are based on the beliefs of our management, as well
as assumptions made by, and information currently available to, our management.
The
words
“may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,”
“intend,” “could,” “estimate,” “predict,” “potential,” “continue,” or the
negative of these terms or other similar expressions are intended to identify
forward-looking statements. We make forward-looking statements in the Notes
to
our unaudited consolidated financial statements included in this report and
in
Item 2 of this report. Some of the forward-looking statements relate to our
intent, belief or expectations regarding our strategies and plans, including
development of an alternative and renewable energy division and a demonstration
plant in Florida for converting citrus peel waste into ethanol, our investment
in and exclusive license with New Generation Biofuels Holdings, Inc., the
possible sale of properties, and the ways we may finance our future development
and investment activities. Other forward-looking statements relate to trends
affecting our financial condition and results of operations, our anticipated
capital needs and expenditures, and how we may address these needs.
These
statements involve risks, uncertainties and assumptions, including industry
and
economic conditions, competition and other factors discussed in this and our
other filings with the SEC. These forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, and actual results
may differ materially from those that are anticipated in the forward-looking
statements. See Item 1A, Risk Factors, in our Annual Report on Form 10-K for
the
year ended December 31, 2007 for a description of some of the important factors
that may affect actual outcomes.
For
these
forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The cautionary statements made in this report are intended to
be
applicable to all related forward-looking statements wherever they may appear
in
this report. You should not place undue reliance on the forward-looking
statements, which speak only as of the date of this report. All subsequent
written and oral forward-looking statements attributable to us or any person
acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
PART
I – Financial Information
Item
1.
Financial
Statements.
Xethanol
Corporation
Consolidated
Balance Sheets
(in
thousands, except share data)
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
8,806
|
|
$
|
12,322
|
|
|
Receivables
|
|
|
5
|
|
|
564
|
|
|
Inventories
|
|
|
154
|
|
|
294
|
|
|
Other
current assets
|
|
|
1,010
|
|
|
879
|
|
|
Total
current assets
|
|
|
9,975
|
|
|
14,059
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,084
|
|
|
4,316
|
|
|
Property
held for development
|
|
|
554
|
|
|
554
|
|
|
Property
previously held for development
|
|
|
5,416
|
|
|
5,416
|
|
|
Investment
in and advances to New Generation Biofuels Holdings, Inc.
|
|
|
201
|
|
|
647
|
|
|
Research
and license agreements, net of amortization of $545 and $409 in 2008
and
2007, respectively
|
|
|
486
|
|
|
623
|
|
|
Other
assets
|
|
|
1,153
|
|
|
403
|
|
|
TOTAL
ASSETS
|
|
$
|
21,869
|
|
$
|
26,018
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,401
|
|
$
|
3,221
|
|
|
Total
current liabilities
|
|
|
2,401
|
|
|
3,221
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
287
|
|
|
295
|
|
|
Minority
interest
|
|
|
116
|
|
|
116
|
|
|
Capitalized
lease obligation
|
|
|
10
|
|
|
14
|
|
|
Total
liabilities
|
|
|
2,814
|
|
|
3,646
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000,000 shares authorized; 0 shares issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized; 28,609,103
shares
issued and
outstanding
in 2008 and 2007, respectively
|
|
|
29
|
|
|
29
|
|
|
Additional
paid-in-capital
|
|
|
89,345
|
|
|
89,171
|
|
|
Accumulated
deficit
|
|
|
(70,319
|
)
|
|
(66,828
|
)
|
|
Total
stockholders' equity
|
|
|
19,055
|
|
|
22,372
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
21,869
|
|
$
|
26,018
|
|
See
Notes to Consolidated Financial Statements
Xethanol
Corporation
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except per share data)
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
688
|
|
$
|
3,265
|
|
$
|
3,700
|
|
$
|
5,687
|
|
|
Cost
of sales, including depreciation of $231 and $226 for six months
ended
June 30, 2008 and 2007 and $115 and $113 for three months ended June
30,
2008 and 2007
|
|
|
1,211
|
|
|
3,372
|
|
|
4,771
|
|
|
6,256
|
|
|
Gross
loss
|
|
|
(523
|
)
|
|
(107
|
)
|
|
(1,071
|
)
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,952
|
|
|
2,241
|
|
|
3,692
|
|
|
4,975
|
|
|
Equity
compensation
|
|
|
36
|
|
|
1,033
|
|
|
174
|
|
|
2,592
|
|
|
Depreciation
and amortization
|
|
|
18
|
|
|
18
|
|
|
37
|
|
|
35
|
|
|
Impairment
loss on property held for development
|
|
|
-
|
|
|
2,833
|
|
|
-
|
|
|
2,833
|
|
|
Research
and development
|
|
|
105
|
|
|
193
|
|
|
170
|
|
|
465
|
|
|
Total
operating expenses
|
|
|
2,111
|
|
|
6,318
|
|
|
4,073
|
|
|
10,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before other income (expense)
|
|
|
(2,634
|
)
|
|
(6,425
|
)
|
|
(5,144
|
)
|
|
(11,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
60
|
|
|
230
|
|
|
132
|
|
|
370
|
|
|
Interest
expense
|
|
|
(15
|
)
|
|
(15
|
)
|
|
(29
|
)
|
|
(29
|
)
|
|
Gain
on sale of grain inventory
|
|
|
141
|
|
|
-
|
|
|
141
|
|
|
-
|
|
|
Gain
on sale of stock in New Generation Biofuels Holdings, Inc.
|
|
|
1,067
|
|
|
-
|
|
|
1,824
|
|
|
-
|
|
|
Loss
on equity of New Generation Biofuels Holdings, Inc.
|
|
|
(137
|
)
|
|
(425
|
)
|
|
(417
|
)
|
|
(1,051
|
)
|
|
Other
income
|
|
|
-
|
|
|
3
|
|
|
2
|
|
|
4
|
|
|
Total
other income (expense)
|
|
|
1,116
|
|
|
(207
|
)
|
|
1,653
|
|
|
(706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,518
|
)
|
$
|
(6,632
|
)
|
$
|
(3,491
|
)
|
$
|
(12,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.23
|
)
|
$
|
(0.12
|
)
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
28,609,103
|
|
|
28,609,103
|
|
|
28,609,103
|
|
|
28,576,467
|
|
See
Notes to Consolidated Financial Statements
Xethanol
Corporation
Consolidated
Statement
of
Stockholders' Equity
(Unaudited)
(in
thousands)
|
|
|
Common
Stock
|
|
Additional
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-in-Capital
|
|
Deficit
|
|
Total
|
|
|
Balance
at December 31, 2007
|
|
|
28,609
|
|
$
|
29
|
|
$
|
89,171
|
|
$
|
(66,828
|
)
|
$
|
22,372
|
|
|
Options
granted under 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
Compensation Plan
|
|
|
-
|
|
|
-
|
|
|
174
|
|
|
-
|
|
|
174
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,491
|
)
|
|
(3,491
|
)
|
|
Balance
at June 30, 2008
|
|
|
28,609
|
|
$
|
29
|
|
$
|
89,345
|
|
$
|
(70,319
|
)
|
$
|
19,055
|
|
See
Notes to Consolidated Financial Statements
Xethanol
Corporation
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,491
|
)
|
$
|
(12,175
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
397
|
|
|
390
|
|
|
Issuance
of common stock, stock options and warrants for services
rendered
|
|
|
174
|
|
|
2,592
|
|
|
Gain
on sale of New Generation Biofuels Holdings, Inc.
|
|
|
(1,824
|
)
|
|
-
|
|
|
Loss
on equity of New Generation Biofuels Holdings, Inc.
|
|
|
417
|
|
|
1,051
|
|
|
Impairment
loss on property held for development
|
|
|
-
|
|
|
2,833
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
559
|
|
|
65
|
|
|
Inventories
|
|
|
140
|
|
|
(7
|
)
|
|
Other
assets and liabilities
|
|
|
(130
|
)
|
|
(57
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
(820
|
)
|
|
314
|
|
|
Accounts
payable-related parties
|
|
|
-
|
|
|
(301
|
)
|
|
Net
cash used in operating activities
|
|
|
(4,578
|
)
|
|
(5,295
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(29
|
)
|
|
(1,023
|
)
|
|
Purchase
of property held for development
|
|
|
-
|
|
|
-
|
|
|
Investment
in Carbon Motors Corp.
|
|
|
(250
|
)
|
|
-
|
|
|
Investment
in note receivable Consus Ethanol, LLC
|
|
|
(500
|
)
|
|
-
|
|
|
Investment
in marketable securities
|
|
|
-
|
|
|
(38,100
|
)
|
|
Redemption
of marketable securities
|
|
|
-
|
|
|
21,800
|
|
|
Cash
received from sale of investment in New Generation Biofuels Holdings,
Inc.
|
|
|
1,853
|
|
|
-
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
1,074
|
|
|
(17,323
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Cash
received for common stock
|
|
|
-
|
|
|
223
|
|
|
Payment
of note payable
|
|
|
(8
|
)
|
|
(7
|
)
|
|
Payment
of capitalized lease obligation
|
|
|
(4
|
)
|
|
(4
|
)
|
|
Net
cash (used in) provided by financing activities
|
|
|
(12
|
)
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(3,516
|
)
|
|
(22,406
|
)
|
|
Cash
and cash equivalents - beginning of period
|
|
|
12,322
|
|
|
24,183
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
8,806
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
29
|
|
$
|
29
|
|
|
Income
taxes paid
|
|
|
29
|
|
|
92
|
|
See
Notes to Consolidated Financial Statements
Xethanol
Corporation
Notes
to Consolidated Financial Statements (Unaudited)
June
30, 2008
NOTE
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Xethanol
Corporation (the “Company”) is a renewable energy and clean technology company.
The Company’s businesses include: an alternative and renewable energy division
that is in the development stage; a plant in Blairstown, Iowa that until May
1,
2008 produced ethanol from corn; a demonstration plant in Florida for converting
citrus peel waste into ethanol that is in the development phase; bioseparation
and bio-fermentation technologies, along with strategic relationships with
government and university research labs to further develop and prove out these
technologies; and minority investments in other renewable energy or clean tech
businesses. The Company’s only source of revenue has been from its sales of
ethanol and related products at its Blairstown corn-based plant. As a result
of
the continued high prices for corn and natural gas, on May 1, 2008, the Company
temporarily ceased production of ethanol at the Blairstown plant to reduce
its
operating losses.
The
accompanying consolidated financial statements and related footnotes should
be
read in conjunction with the consolidated financial statements and related
footnotes contained in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007 filed with the U.S. Securities and Exchange Commission
(the “SEC”) on March 31, 2008.
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The
consolidated financial statements have been prepared in accordance with the
rules and regulations of the SEC related to interim statements. The financial
information contained herein is unaudited; however, in the opinion of
management, all adjustments necessary for a fair presentation of such financial
information have been included. All such adjustments are of a normal recurring
nature. The results of operations for the three and six months ended June 30,
2008 and 2007 are not necessarily indicative of the results expected for the
full year. The balance sheet presented as of December 31, 2007 is derived from
audited financial statements. Certain prior period research and development
amounts have been reclassified to conform to current period
presentation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Significant estimates include the valuation of shares issued
for services or in connection with acquisitions and the valuation of
investments, fixed assets and intangibles and their estimated useful lives.
The
Company evaluates its estimates on an ongoing basis. Actual results could differ
from those estimates under different assumptions or conditions.
Cash
and Cash Equivalents
The
Company’s cash and cash equivalents include cash on hand and on deposit,
including money market accounts and mutual funds that invest in highly liquid
debt instruments of the U.S. government and its agencies. All highly liquid
investments with stated maturities of three months or less from the date of
purchase are classified as cash equivalents.
Loss
per Common Share
Loss
per
share is computed based on weighted average number of common shares outstanding
and excludes any potential dilution. Diluted loss per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock, which would then share in the earnings of the Company.
The shares issuable on the exercise of stock options and warrants are excluded
from the calculation of net loss per share, as their effect would be
anti-dilutive.
During
the periods presented, the Company had securities outstanding that could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted loss per share, as their effect would have
been
anti-dilutive. The anti-dilutive securities are as follows (in
thousands):
|
|
|
Balance at June 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Employee
stock options
|
|
|
5,320
|
|
|
5,345
|
|
|
Series
A Warrants
|
|
|
2,124
|
|
|
2,124
|
|
|
Series
B Warrants
|
|
|
759
|
|
|
759
|
|
|
Other
Warrants
|
|
|
1,213
|
|
|
1,813
|
|
|
|
|
|
9,416
|
|
|
10,041
|
|
Recently
Issued Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair Value Measurements (“SFAS 157”), which clarifies that fair value is
the amount that would be exchanged to sell an asset or transfer a liability
in
an orderly transaction between market participants. Further, the standard
establishes a framework for measuring fair value in generally accepted
accounting principles and expands certain disclosures about fair value
investments. SFAS 157 became effective for financial assets and liabilities
on
January 1, 2008. This standard is not expected to materially affect how the
Company determines fair value during 2008, but it may result in certain
additional disclosures. The FASB has deferred the implementation of the
provisions of SFAS 157 relating to certain nonfinancial assets and liabilities
until January 1, 2009. The Company is evaluating whether this standard will
affect the Company’s determination of fair value in 2009.
In
December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability
to all transactions and other events in which one entity obtains control over
one or more other businesses. It broadens the fair value measurement and
recognition of assets acquired, liabilities assumed, and interests transferred
as a result of business combinations; and stipulates that acquisition related
costs be expensed rather than included as part of the basis of the acquisition.
SFAS 141R expands required disclosures to improve the ability to evaluate the
nature and financial effects of business combinations. SFAS 141R is effective
for all transactions entered into on or after January 1, 2009. The adoption
of
this standard on January 1, 2009 could materially impact the Company’s future
financial results to the extent that the Company makes significant acquisitions,
as related acquisition costs will be expensed as incurred, compared to the
Company’s current practice of capitalizing those costs and amortizing them over
the estimated useful life of the assets acquired.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 will require
noncontrolling interests (previously referred to as minority interests) to
be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. SFAS No. 160 is effective for periods beginning
on
or after December 15, 2008. The adoption of this statement will result in
minority interest currently classified in the “mezzanine” section of the balance
sheet to be reclassified as a component of stockholders’ equity, and minority
interest expense will no longer be recorded in the consolidated statement of
operations.
In
March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and
Hedging Activities (“SFAS No. 161”). The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, results of operations and cash flows.
SFAS No. 161 is effective for financial statements issued for fiscal years
and
interim periods beginning after November 15, 2008. The Company does not expect
this standard to have a material impact on its financial position, results
of
operations or cash flows.
In
May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in
the
preparation of financial statements that are presented in conformity with
generally accepted accounting principles (“GAAP”) in the United States. SFAS 162
will become effective sixty days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.” The
Company does not expect the adoption of SFAS 162 to have a material impact
on
its financial position, results of operations or cash flows.
NOTE
2. INVENTORIES
Raw
materials are carried at average cost. Work in process is based on the amount
of
average product costs currently in the production pipeline. Finished goods
are
carried at the lower of cost using the average cost method or market.
Inventories
consisted of the following (in thousands):
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Raw
materials
|
|
$
|
120
|
|
$
|
85
|
|
|
Work
in process
|
|
|
-
|
|
|
109
|
|
|
Finished
goods
|
|
|
34
|
|
|
100
|
|
|
|
|
$
|
154
|
|
$
|
294
|
|
NOTE
3. PROPERTY AND EQUIPMENT, PROPERTY HELD FOR DEVELOPMENT AND PROPERTY PREVIOUSLY
HELD FOR DEVELOPMENT
Property
and equipment at the Company’s plant in Blairstown, Iowa, consists of the
following (in thousands):
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Land
|
|
$
|
28
|
|
$
|
28
|
|
|
Buildings
|
|
|
732
|
|
|
732
|
|
|
Machinery
and equipment
|
|
|
3,912
|
|
|
3,906
|
|
|
Land
improvements
|
|
|
569
|
|
|
569
|
|
|
|
|
|
5,241
|
|
|
5,235
|
|
|
Less
accumulated depreciation and amortization
|
|
|
1,356
|
|
|
1,125
|
|
|
|
|
$
|
3,885
|
|
$
|
4,110
|
|
Property
and equipment at the Company’s Atlanta, Georgia and New York, New York corporate
offices consists of the following (in thousands):
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Furniture
and fixtures
|
|
$
|
283
|
|
$
|
259
|
|
|
Less
accumulated depreciation and amortization
|
|
|
84
|
|
|
53
|
|
|
|
|
$
|
199
|
|
$
|
206
|
|
Property
held for development consists of the following fixed assets (in
thousands):
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
Machinery
and equipment
|
|
$
|
554
|
|
$
|
554
|
|
Property
held for development consists of machinery and equipment purchased in connection
with the proposed demonstration plant in Bartow, Florida. Depreciation will
not
be recorded on these assets until they are placed into service or research
and
development activities begin.
Property
previously held for development consists of the following fixed assets (in
thousands):
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
|
Land
|
|
$
|
1,709
|
|
$
|
1,709
|
|
|
Buildings
|
|
|
1,817
|
|
|
1,817
|
|
|
Machinery
and equipment
|
|
|
1,890
|
|
|
1,890
|
|
|
|
|
$
|
5,416
|
|
$
|
5,416
|
|
The
Company has reevaluated its facility in Augusta, Georgia and has decided that
the facility does not fit within its long-term corporate strategy. The Company’s
board of directors has decided to seek a buyer for the facility. The Company
expects to use a real estate brokerage firm to assist in marketing the property
for sale, but the Company has not retained such a firm as of June 30, 2008.
The
Company can offer no assurances regarding how long it would take to sell the
facility or the price the Company might receive. The carrying value of this
property at June 30, 2008 and at December 31, 2007, after an impairment charge
of $2.1 million in 2007, is $3.5 million.
The
Company has reevaluated its facility in Spring Hope, North Carolina and has
determined that the facility does not fit within its long-term corporate
strategy. The Company’s board of directors has decided to seek a buyer for the
facility. Before the Company sells the property (or as a term of its sale),
the
Company expects that it will have to resolve certain liens on the property
filed
by companies that performed, or have claimed to have performed, environmental
remediation and demolition work on the property. The Company has accrued
$500,000 to settle claims and $450,000
for
environmental clean-up at June 30, 2008 and December 31, 2007. The Company
has
not completed an environmental study or remediation. These estimates may require
adjustment. The Company can offer no assurances regarding how long it would
take
to sell the facility or the price the Company might receive. The carrying value
of this property at June 30, 2008 and December 31, 2007, after an impairment
charge of $7.0 million in 2007, is $856,000.
The
Company has determined to defer indefinitely its expansion project at its second
ethanol site at Blairstown and is currently evaluating several alternatives
in
which to dispose of or use the property. The carrying value of this property
at
June 30, 2008 and December 31, 2007, after an impairment charge of $2.6 million
in 2007, is $1,060,000.
NOTE
4. OTHER INVESTMENTS
In
January 2008, the Company invested $250,000 in Carbon Motors Corporation, a
development stage American automaker developing a specially-built law
enforcement vehicle featuring a clean diesel engine that can run on biodiesel
fuel. For its investment, the Company received a warrant that is initially
exercisable for 30,000 shares of Series B Preferred Stock at a price of $1.05
per share with a term of five years. This amount is included in other assets
in
the consolidated balance sheet at June 30, 2008.
In
January 2008, the Company made a $500,000 investment in Consus Ethanol, LLC
of
Pittsburgh, Pennsylvania, a development stage company, pursuant to a convertible
promissory note. Consus Ethanol has a permitted site in western Pennsylvania,
where it plans to build the first of several ethanol plants. Its business model
calls for a cogeneration plant using waste coal to power the companion ethanol
plant. The note bears interest at the rate of 10% per annum and has an initial
term of six months.
Before
the maturity date, either Xethanol or Consus can extend the note for an
additional six months, subject to acceptance of the request for extension by
the
other party. During July 2008, Xethanol and Consus agreed to extend the note
an
additional six months through December 31, 2008. Xethanol may also convert
the
outstanding principal and accrued interest to shares of common stock by
providing 30 days written notice to Consus before the maturity date or in the
event Consus proposes to enter into certain transactions.
The
Company recorded interest income of $23,000 on the note for the three and six
months ended June 30, 2008. Northeast Securities is a financial advisor to
Consus Ethanol; the vice chairman of Northeast Securities is the chairman of
the
Company’s board of directors. This amount is included in other assets in the
consolidated balance sheet at June 30, 2008.
NOTE
5. INCENTIVE COMPENSATION PLAN
The
Xethanol Corporation 2005 Incentive Compensation Plan (the “Plan”) provides for
grants of stock options, stock appreciation rights or SARs, restricted or
deferred stock, other stock-related awards and performance awards that may
be
settled in cash, stock or other property. On February 12, 2008, at the
conclusion of the Company’s annual meeting, the Company’s stockholders approved
an amendment to the Plan to increase the number of shares of common stock
available for issuance under the plan from 4,000,000 to 6,500,000, which covered
all of the options previously granted subject to stockholder approval. Persons
eligible to receive awards under the Plan are the officers, directors, employees
and consultants to the Company and its subsidiaries. As of June 30, 2008,
317,070 shares of common stock and stock options to purchase 5,320,000 shares
of
common stock were outstanding under the Plan, and a total of 862,930 shares
were
available for future awards under the Plan.
No
options were granted during the three months ended June 30, 2008. Options to
purchase 150,000 shares of common stock expired during the three and six months
ended June 30, 2008. During the six months ended June 30, 2008, options to
purchase 275,000 shares of common stock were granted to directors. An option
to
purchase 50,000 shares of common stock were forfeited during the six months
ended June 30, 2008. The Company recorded net compensation expense for
outstanding stock options of $36,000 and $174,000 for the three and six months
ended June 30, 2008, respectively.
The
weighted average fair value of stock options is estimated at the grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
Exercise
price
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
-
|
|
|
5.00
|
%
|
|
2.36
|
%
|
|
4.84
|
%
|
|
Expected
life of options
|
|
|
-
|
|
|
5.00
|
|
|
10.00
|
|
|
9.73
|
|
|
Expected
dividend yield
|
|
|
-
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected
volatility
|
|
|
-
|
|
|
55.0
|
%
|
|
55.0
|
%
|
|
55.0
|
%
|
NOTE
6. WARRANTS
The
Company issued no warrants during the three and six months ended June 30, 2008.
The Company recorded no compensation expense for outstanding warrants for the
three and six months ended June 30, 2008. Warrants to purchase 35,312 shares
of
common stock expired during the three and six months ended June 30, 2008. At
June 30, 2008, warrants to purchase 4,095,834 shares of common stock with a
weighted average exercise price of $5.80 were outstanding.
NOTE
7. INVESTMENT IN NEW GENERATION BIOFUELS HOLDINGS, INC. (FORMERLY H2DIESEL
HOLDINGS, INC.)
The
Company considers its investment in New Generation Biofuels Holdings, Inc.
(“New
Generation Biofuels”), formerly named H2Diesel Holdings, Inc., as a variable
interest in a Variable Interest Entity (“VIE”). New Generation Biofuels is the
licensee of a proprietary vegetable oil-based diesel biofuel to be used as
a
substitute for conventional petroleum diesel and biodiesel, heating and other
fuels, under an exclusive license agreement with the inventor of the biofuel.
New Generation Biofuels has in turn sublicensed this technology to the Company.
Because the Company is not the primary beneficiary of the VIE, the Company
has
accounted for its investment in New Generation Biofuels utilizing the equity
method of accounting pursuant to
APB
Opinion No. 18
,
The
Equity Method of Accounting for Investments in Common Stock
.
At June
30, 2008, the Company owned 5,490,000 shares of New Generation Biofuels common
stock, which represented 29.1% of the outstanding common stock of New Generation
Biofuels. New Generation Biofuels is currently a development stage company
that
has not yet generated any revenues. In February 2008, the Company sold 180,000
shares of New Generation Biofuels common stock for net proceeds of approximately
$777,000. In June 2008, the Company sold 180,000 shares of New Generation
Biofuels common stock for net proceeds of approximately $1.1 million. The
Company has recorded gains on the sales of New Generation Biofuels’ common stock
for the three and six months ended June 30, 2008 of $1.1 million and $1.8
million, respectively. The Company is evaluating whether or not to pursue the
manufacture and sale of a diesel biofuel under its exclusive license with New
Generation Biofuels.
New
Generation Biofuels is a development stage company with no revenues. According
to its quarterly report on Form 10-Q for the quarter ended March 31, 2008 filed
with the SEC, New Generation Biofuels has incurred a net loss of $16.3 million
and negative cash flows from operating activities of $6.5 million since its
inception. New Generation Biofuels is obligated to make periodic payments to
the
inventor of the biofuel. After paying $850,000 to the inventor in April 2008,
New Generation Biofuels is obligated to pay an additional $1.0 million annually
for the next six years beginning in March 2009. New Generation Biofuels’ annual
report on Form 10-K for the year ended December 31, 2007 and its quarterly
report on Form 10-Q for the quarter ended March 31, 2008 also note that New
Generation Biofuels’ continued existence beyond 2008 is dependent upon several
factors, including obtaining additional debt or equity financing, production
of
its products, developing a market for its products, and achieving certain levels
of sales volume and profitability from the sale of its products and sublicenses
of its technology. If New Generation Biofuels fails to make the license payments
to the inventor as required, the Company could lose its entire investment in
New
Generation Biofuels as well as its sublicense of the technology.
The
net
loss and investment in
New
Generation Biofuels
presented in the Company’s financial statements have been estimated and were
provided to the Company by New Generation Biofuels. The Company has not
independently verified the accuracy of the foregoing financial data of New
Generation Biofuels.
NOTE
8. LEGAL PROCEEDINGS
The
Company is a party to the lawsuits described below. An adverse result in these
lawsuits could have a material adverse effect on the Company’s business, results
of operations and financial condition. In connection with the class action
lawsuit described below (and a derivative action that has been dismissed),
the
Company accrued $200,000 at December 31, 2006 to cover the deductible amount
it
is required to pay under its director and officer insurance policy for those
claims. Since the inception of the class action, the Company has paid $200,000
in legal fees. At June 30, 2008, the Company had an accrued liability for
approximately $517,000 in additional legal fees of which fees of $11,000 and
$152,000 were expensed during the three and six months ended June 30, 2008,
respectively. At June 30, 2008, the Company had a $300,000 receivable from
its
insurance carriers, which is the amount of legal fees the insurance carriers
have agreed to pay under the tentative settlement described
below.
Class
Action Lawsuit
.
In
October 2006, a shareholder class action complaint was filed in the United
States District Court for the Southern District of New York, purportedly brought
on behalf of all purchasers of Xethanol common stock during the period January
31, 2006 through August 8, 2006. The complaint alleges, among other things,
that
the Company and some of its former officers and directors made materially false
and misleading statements regarding the Company’s operations, management and
internal controls in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5. The individual defendants are Lawrence
S.
Bellone, a former director, Executive Vice President, Corporate Development,
principal accounting officer and Chief Financial Officer; Christopher
d’Arnaud-Taylor, a former director, Chairman, President and Chief Executive
Officer; and Jeffrey S. Langberg, a former director. The plaintiffs seek, among
other things, unspecified compensatory damages and reasonable costs and
expenses, including counsel fees and expert fees. Six nearly identical class
action complaints were thereafter filed in the same court, all of which have
been consolidated into one action, In re Xethanol Corporation Securities
Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.) (the “Class Action”). The plaintiffs
filed their amended consolidated complaint on March 23, 2007. On November 28,
2007, the defendants, including the Company, reached an agreement in principle
with plaintiffs’ lead counsel to settle the Class Action. The tentative
settlement agreement, which was reached during a mediation overseen by a retired
United States District Court Judge, calls for the payment of $2.8 million to
the
plaintiffs, of which the Company will pay $400,000 and the Company’s insurance
carriers will pay $2.4 million. In addition, the Company’s insurance carriers
will pay $300,000 in legal costs. The settlement remains subject to District
Court approval. The settlement fairness hearing is scheduled for September
15,
2008. Although the Company expects the District Court to approve the settlement
agreement, the Company can give no assurance that the District Court will
approve the settlement agreement as finalized by the parties or at all.
Global
Energy and Management, LLC Lawsuit
.
In December 2007, Global Energy and Management, LLC (“Global Energy”) filed an
action in the federal court for the Southern District of New York against the
Company and nine current or former officers, directors and employees, entitled
Global Energy and Management v. Xethanol Corporation, et al., 07 Civ. 11049
(NRB) (S.D.N.Y.). The lawsuit alleges fraud by the defendants in connection
with
Global Energy’s alleged investment of $250,000 in NewEnglandXethanol, LLC, a
joint venture of the Company and Global Energy. On March 19, 2008, Global Energy
served the Company with its second amended complaint. In that complaint, based
on an alleged investment of $250,000, Global Energy sought more than $10,000,000
in damages plus pre-judgment interest and costs. After the Company asked the
District Court in May 2008 for leave to move to dismiss the complaint, Global
Energy served the Company with its third amended complaint, seeking damages
of
only $250,000. The Company moved to dismiss that complaint in June 2008,
and Global Energy has opposed that motion. On July 31, 2008, the Company filed
its reply papers in further support of the motion to dismiss the complaint,
together with a motion for sanctions against Global Energy and its counsel
for
filing a complaint without valid legal or factual basis. The Company’s
management has instructed counsel to vigorously represent and defend its
interests in this litigation. Given the substantial reduction in damages that
Global Energy is now seeking, the Company’s management believes that this
lawsuit is no longer material to the Company.
NOTE
9. SUBSEQUENT EVENT
Jacoby
Energy Development, Inc. Lawsuit
.
On July 28, 2008, Jacoby Energy Development, Inc. (“JEDI”), Geoplasma, LLC and
Georecover-Live Oak, LLC filed an action in the Superior Court of Fulton County
of the State of Georgia (File No. 2008CV154224) against the Company, its
subsidiary Global Energy Systems, Inc. (“GES”), and six current officers and
employees. The six individual defendants are Romilos Papadopoulos, the
Company’s Chief Operating Offer, Chief Financial Officer, Executive Vice
President and Secretary; Michael Ellis, President of GES; and four other
employees of GES. The complaint alleges, among other things, that the
Company breached a mutual nondisclosure agreement related to previous
negotiations for a possible merger between the Company and JEDI and its
affiliates.
The
plaintiffs allege that the Company breached the
agreement by soliciting and hiring the six individual defendants, who were
previously employed by the plaintiffs, and by using the plaintiffs’ confidential
and proprietary information for its own business purposes. The plaintiffs
also allege that the Company tortuously interfered with the plaintiffs’ business
and misappropriated the plaintiffs’ trade secrets. The plaintiffs seek,
among other things, a permanent injunction, unspecified compensatory damages
plus costs and expenses incurred in connection with the litigation, including
attorneys’ fees, and general and punitive damages in an amount not less than $10
million. Management has instructed counsel to defend the lawsuit
vigorously.
Item
2.
Management
Discussion and Analysis of Financial Condition and Results of
Operations.
Safe
Harbor Statement under the Private Securities Litigation Reform Act of
1995
.
The
statements in this report that are not historical facts are forward-looking
statements that involve a number of known and unknown risks, uncertainties
and
other factors, all of which are difficult or impossible to predict and many
of
which are beyond our control that may cause our actual results, performance
or
achievements to be materially different from any future results, performance
or
achievements expressed or implied by those forward-looking statements. These
risks are detailed in our Annual Report on Form 10-K for the year ended December
31, 2007 and our other SEC filings. See the cautionary statements included
in
the Note Regarding Forward-Looking Statements at the beginning of this
report.
Overview
Our
only
source of revenue has been from our sales of ethanol and related products at
our
corn-based Xethanol BioFuels plant in Blairstown, Iowa. As a result of the
continued high prices for corn and natural gas, on May 1, 2008 we temporarily
ceased production of ethanol at our Blairstown plant to reduce our operating
losses. We had cash and cash equivalents of approximately $8.8 million as of
June 30, 2008 and $8.0 million as of August 1, 2008.
For
the
six months ended June 30, 2008, net cash of $1.1 million was provided in
connection with investing activities. During the first six months of 2008,
we
made a $500,000 convertible loan to Consus Ethanol, LLC, invested $250,000
in
Carbon Motors Corporation and purchased property and equipment for $29,000.
Also
during the first six months of 2008, we sold 360,000 shares of the common stock
of New Generation Biofuels Holdings, Inc. (formerly named H2Diesel Holdings,
Inc.) for $1.9 million. We currently hold 5,490,000 shares of common stock
in
New Generation Biofuels, which represents approximately 29.1% of its outstanding
common stock, at June 30, 2008.
During
June 2008, we formed a new operating division, Global Energy Systems, Inc.
(GES), which is focusing on utility energy service contracts, landfill gas
to
energy projects, biomass to energy and waste to energy projects. We plan to
use
a portion of our current cash to provide working capital for GES while we
analyze options to finance projects that GES initiates. We will also use cash
on
hand to fund corporate overhead as well as research and development. GES
generated no revenues during the six months ended June 30, 2008. We will need
substantial additional capital to pursue our plans, and we can give no assurance
that we will be able to raise the additional capital we need on commercially
acceptable terms, or at all.
We
are
continuing to evaluate an opportunity to build a demonstration plant for
converting citrus peel waste into ethanol. The estimated cost for the two-year
build-out of the demonstration plant is approximately $6 million. On January
22,
2008, the
Florida
Department of Agriculture and Consumer Services
approved
a $500,000 grant for this purpose. We are reviewing various sources of funding
including government grants.
We
anticipate significant capital expenditures and investments over the next 12
months and longer related to our business as described above. We have
reevaluated our Augusta, Georgia and Spring Hope, North Carolina facilities
and
have decided that they do not fit within our long-term corporate strategy.
On
March 20, 2008, our board authorized management to pursue the sale of each
facility.
The
Company can offer no assurances regarding how long it will take to sell the
facilities or the price the Company might receive. We are also evaluating
whether or not to pursue the manufacture and sale of a diesel biofuel under
our
exclusive license with New Generation Biofuels.
We
currently plan to sell some of our New Generation Biofuels stock from time
to
time to raise capital.
Results
of Operations
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
Net
Loss.
We
incurred a net loss of $1.5 million, or $.05 per share, for the three months
ended June 30, 2008 versus a net loss of $6.6 million, or $.23 per share, for
the prior year quarter. Included in the net loss for the three months ended
June
30, 2008 were non-cash charges totaling $372,000 or 25% of our net loss for
the
quarter. Non-cash charges included:
|
|
·
|
$199,000
in depreciation and amortization
expenses;
|
|
|
·
|
$137,000
in loss on equity of New Generation Biofuels;
and
|
|
|
·
|
a
$36,000 charge related to stock options for services
rendered.
|
The
decrease in net loss of $5.1 million for the three months ended June 30, 2008
as
compared to the prior year quarter resulted primarily from:
|
|
·
|
a
$2.8 decrease in impairment losses;
|
|
|
·
|
a
$1.1 million increase in gain on sales of
investments;
|
|
|
·
|
a
$1.0 million decrease in equity compensation
expenses;
|
|
|
·
|
a
$289,000 decrease in general and administrative expenses;
and
|
|
|
·
|
a
$288,000 decrease in loss on equity of New Generation Biofuels;
|
partially
offset by a $416,000 increase in gross loss from our Blairstown
plant.
Net
Sales.
Net
sales for the three months ended June 30, 2008 decreased to $688,000 from $3.3
million for the three months ended June 30, 2007. This decrease was due to
the
cessation of ethanol production at our Blairstown facility, effective May 1,
2008. During the three months ended June 30, 2008,
our
Blairstown facility
sold
280,000 gallons of ethanol at an average price of $2.15 per gallon and generated
revenue of $87,000 from the sales of by-products. Total average revenue per
gallon including by-products was $2.46. During the three months ended June
30,
2007, our Blairstown plant sold 1.4 million gallons of ethanol at monthly prices
ranging between $2.01 and $2.09 per gallon, with an average price of $2.06
per
gallon. We generated revenue of $293,000 from the sales of by-products for
the
three months ended June 30, 2007.
Cost
of Sales.
Cost of
sales is comprised of direct materials, direct labor and factory overhead.
Included in factory overhead are energy costs, depreciation, and repairs and
maintenance. Cost of sales for the three months ended June 30, 2008 was $1.2
million compared to $3.4 for the three months ended June 30, 2007. The decrease
in cost of sales was due to the cessation of ethanol production at our
Blairstown, Iowa facility, effective May 1, 2008. The average monthly cost
of
sales during the three months ended June 30, 2008 was $4.33 per gallon compared
to $2.82 for the prior year quarter. The Blairstown facility is a refurbished
plant and, as a result, lacks the energy efficiencies of newer plants.
Additionally, because the plant is a smaller production facility, it cannot
benefit from economies of scale available to larger plants, leading to per
gallon expenses higher than those of larger plants.
Gross
Loss.
Gross
loss for the three months ended June 30, 2008 was $523,000, or 76% of net sales
versus a gross loss of $107,000, or 3% of net sales for the three months ended
June 30, 2007. The increase in gross loss is principally due to the higher
average cost per gallon for the three months ended June 30, 2008 compared to
that of the prior year.
General
and Administrative Expenses.
General
and administrative expenses (“G&A”) were $1,952,000 for the three months
ended June 30, 2008, compared to $2,241,000 for the three months ended June
30,
2007, reflecting a decrease of $289,000, or 13%. Included in G&A for the
three months ended June 30, 2008 was corporate overhead of $1.7 million,
compared to corporate overhead of $1.8 million in 2007, a decrease of $141,000,
or 8% compared to 2007 corporate overhead.
The
primary components of 2008 corporate overhead expense were:
|
|
·
|
$725,000
for legal and accounting services;
|
|
|
·
|
$311,000
for payroll expenses;
|
|
|
·
|
$200,000
for consulting services; and
|
|
|
·
|
$116,000
for travel and entertainment
expenses.
|
The
decrease in corporate overhead in 2008 as compared to 2007 was primarily
attributable to:
|
|
·
|
a
$178,000 decrease in travel and entertainment expenses, which for
2007
included travel costs for new executive management assessments of
our
facilities; and
|
|
|
·
|
a
$42,000 reduction in payroll costs.
|
Included
in G&A are our costs for our CoastalXethanol operations, as well as costs
for our Spring Hope property. The net decrease in G&A in 2008 was due in
significant part to an $84,000 decrease in costs related to our CoastalXethanol
operations, which resulted from the termination in September 2007 of our joint
venture with Coastal Energy Development, Inc. and cost saving procedures
instituted by management.
Equity
Compensation.
Equity
compensation for the three months ended June 30, 2008 was $36,000 compared
to
$1.0 million for the three months ended June 30, 2007. The overall decrease
in
equity compensation reflects:
|
|
·
|
$19,000
in compensation expense for the three months ended June 30, 2008
related
to stock options granted to outside directors under the 2005 Incentive
Compensation Plan, which represents a decrease of $162,000 from $181,000
in the prior year quarter;
|
|
|
·
|
$17,000
in compensation expense for the three months ended June 30, 2008
related
to stock options granted to employees and consultants under the 2005
Incentive Compensation Plan, which represents a decrease of $667,000
from
$684,000 in the prior year quarter;
and
|
|
|
·
|
no
compensation expense related to warrants issued for the three months
ended
June 30, 2008, a decrease of $168,000 from the prior year
quarter.
|
Depreciation
and Amortization.
Depreciation and amortization expense for the three months ended June 30, 2008
was $18,000 compared to $18,000 for the prior year quarter, representing no
change.
Impairment
Loss – Property Held for Development.
At June
30, 2007, we recorded a $2.8 million impairment loss on property held for
development.
Research
and Development.
There
was $105,000 in research and development expenses for the three months ended
June 30, 2008, representing a decrease of $88,000 from the prior year’s quarter.
Currently, our research and development expense relates to the amortization
of
our research agreements and payments under consulting arrangements. We have
fully satisfied all financial obligations due to National Renewable Energy
Laboratory, the USDA Forest Products Laboratory, Virginia Tech and the Energy
& Environmental Research Center under existing research agreements.
Currently, we are continuing our relationships with some of these institutions
based extensions of the agreements obtained at no additional cost. We are
continuing to evaluate other agreements that are scheduled to expire during
the
second six months of 2008.
Interest
Income.
Interest
income for the three months ended June 30, 2008 was $60,000, representing a
decrease of $170,000 from $230,000 for the three months ended June 30, 2007.
This decrease is primarily due to the decrease in our average cash and cash
equivalents balances compared to the prior year quarter.
Interest
Expense.
Interest
expense was $15,000 for the three months ended June 30, 2008, unchanged from
$15,000 for the three months ended June 30, 2007.
Gain
on Sale of Grain Inventory.
We
recorded a gain of $141,000 on the sale of grain inventory during the three
months ended June 30, 2008. We had no sales of grain inventory in the prior
year
quarter.
Gain
on Sale of Investment in New Generation Biofuels.
We
recorded a gain of $1.1 million on the sale of 180,000 shares of the common
stock of New Generation Biofuels during the three months ended June 30, 2008.
We
had no sales of marketable securities or investments in the prior year
quarter.
Loss
on Equity of New Generation Biofuels.
We
recorded a loss on equity of New Generation Biofuels of $137,000 for the three
months ended June 30, 2008, compared to a loss on equity of New Generation
Biofuels of $425,000 for the three months ended June 30, 2007. This loss
represents our portion of New Generation Biofuels’ net losses, based on the
equity method of accounting for the three month periods ended June 30, 2008
and
June 30, 2007, respectively.
Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
Net
Loss.
We
incurred a net loss of $3.5 million for the six months ended June 30, 2008
versus a net loss of $12.2 million for the prior year. Included in the net
loss
for the six months ended June 30, 2008 were non-cash charges totaling $774,000
or 22% of our net loss for the six months. Non-cash charges
included:
|
|
·
|
a
$417,000 loss on equity of New Generation Biofuels;
|
|
|
·
|
$397,000
in depreciation and amortization expenses;
and
|
|
|
·
|
a
$174,000 charge related to stock options and warrants for services
rendered.
|
The
decrease in net loss of $8.7 million for the six months ended June 30, 2008
as
compared to the prior year six months resulted primarily from:
|
|
·
|
a
$2.8 million decrease in impairment
losses;
|
|
|
·
|
a
$2.4 million decrease in equity compensation
expenses;
|
|
|
·
|
a
$1.8 million increase in gain on sales of
investments;
|
|
|
·
|
a
$1.3 million decrease in general and administrative
expenses;
|
|
|
·
|
a
$634,000 decrease in loss on equity of New Generation Biofuels;
and
|
|
|
·
|
a
$295,000 decrease in research and development
expenses;
|
partially
offset by a $502,000 increase in gross loss from our Blairstown
plant.
Net
Sales.
Net
sales for the six months ended June 30, 2008 decreased to $3.7 million from
$5.7
million for the six months ended June 30, 2007. This decrease was due to the
May
1, 2008 cessation of ethanol production at our Blairstown facility. During
the
six months ended June 30, 2008, our Blairstown facility sold 1.7 million gallons
of ethanol at monthly prices ranging between $1.89 and $2.15 per gallon at
an
average price of $1.98 per gallon and generated revenue of $404,000 from the
sales of by-products. Total average revenue per gallon including by-products
was
$2.22. During the six months ended June 30, 2007, the Blairstown plant sold
2.6
million gallons of ethanol at monthly prices ranging between $1.84 and $2.09
per
gallon with an average price of $1.99 per gallon and generated revenue of
$503,000 from the sales of by-products.
Cost
of Sales.
Cost of
sales is comprised of direct materials, direct labor and factory overhead.
Included in factory overhead are energy costs, depreciation, and repairs and
maintenance. Cost of sales for the six months ended June 30, 2008 was $4.8
million compared to $6.3 for the six months ended June 30, 2007. The decrease
in
cost of sales was due to the May 1, 2008 cessation of ethanol production at
our
Blairstown facility. The average monthly cost of sales during the six months
ended June 30, 2008 was $2.86 per gallon compared to $2.40 for the prior year
six months.
Gross
Loss.
Gross
loss for the six months ended June 30, 2008 was $1.1 million, or 29% of net
sales, versus a gross loss of $569,000, or 10% of net sales, for the six months
ended June 30, 2007. The increase in gross loss is principally due to the higher
average cost per gallon for the six months ended June 30, 2008 compared to
that
of the prior year.
General
and Administrative Expenses.
General
and administrative expenses (“G&A”) were $3.7 million for the six months
ended June 30, 2008, compared to $5.0 million for the six months ended June
30,
2007, reflecting a decrease of $1.3 million, or 26%. Included in G&A for the
six months ended June 30, 2008 was corporate overhead of $3.2 million, compared
to corporate overhead of $3.8 million in 2007, a decrease of $663,000, or 17%
compared to 2007 corporate overhead.
The
primary components of 2008 corporate overhead expense were:
|
|
·
|
$1.2
million for legal and accounting
services;
|
|
|
·
|
$609,000
for payroll expenses;
|
|
|
·
|
$442,000
for consulting services; and
|
|
|
·
|
$236,000
for travel and entertainment
expenses.
|
The
decrease in corporate overhead in 2008 as compared to 2007 was primarily
attributable to:
|
|
·
|
a
$454,000 decrease in travel and entertainment expenses, which for
2007
included travel costs for new executive management assessments of
our
facilities;
|
|
|
·
|
a
$131,000 decrease in accounting, legal and professional fees, due
primarily to the higher costs incurred in 2007 related to our Form
SB-2
registration statement; and
|
|
|
·
|
a
$87,000 reduction in payroll costs due to a reduction in the number
of
employees instituted by management.
|
Included
in G&A are our costs for our CoastalXethanol operations, as well as costs
for our Spring Hope property. The net decrease in G&A in 2008 was due in
significant part to a $485,000 decrease in costs related to our CoastalXethanol
operations, which resulted from the termination in September 2007 of our joint
venture with Coastal Energy Development, Inc. and cost saving procedures
instituted by management.
Equity
Compensation.
Equity
compensation for the six months ended June 30, 2008 was $174,000 compared to
$2.6 million for the six months ended June 30, 2007. The overall decrease in
equity compensation reflects:
|
|
·
|
$105,000
in compensation expense for the six months ended June 30, 2008 related
to
stock options granted to employees and consultants under the 2005
Incentive Compensation Plan, which represents a decrease of $1.5
million
from $1.6 million in the prior year six
months;
|
|
|
·
|
$69,000
in compensation expense for the six months ended June 30, 2008 related
to
stock options granted to outside directors under the 2005 Incentive
Compensation Plan, which represents a decrease of $539,000 from $608,000
in the prior year six months; and
|
|
|
·
|
no
compensation expense related to warrants issued for the six months
ended
June 30, 2008, a decrease of $421,000 from the prior year six
months.
|
Depreciation
and Amortization.
Depreciation and amortization expense for the six months ended June 30, 2008
was
$37,000 compared to $35,000 for the prior year six months, representing a slight
increase of $2,000.
Impairment
Loss – Property Held for Development.
At June
30, 2007, we recorded a $2.8 million impairment loss on property held for
development.
Research
and Development.
We
incurred $170,000 in research and development expenses for the six months ended
June 30, 2008, representing a decrease of $295,000 from the prior year’s six
months. Our research and development expense relates to the amortization of
our
research agreements and payments under consulting arrangements. We have fully
satisfied all financial obligations due to National Renewable Energy Laboratory,
the USDA Forest Products Laboratory, Virginia Tech and the Energy &
Environmental Research Center under existing research agreements. Currently,
we
are continuing our relationships with some of these institutions based
extensions of the agreements obtained at no additional cost. We are continuing
to evaluate other agreements that are scheduled to expire during the second
six
months of 2008.
Interest
Income.
Interest
income for the six months ended June 30, 2008 was $132,000, representing a
decrease of $238,000 from $370,000 for the six months ended June 30, 2007.
This
decrease is primarily due to the decrease in our average cash and cash
equivalents balances compared to the prior year six months.
Interest
Expense.
Interest
expense was $29,000 for the six months ended June 30, 2008, unchanged from
$29,000 for the six months ended June 30, 2007.
Gain
on Sale of Grain Inventory.
We
recorded a gain of $141,000 on the sale of grain inventory during the six months
ended June 30, 2008. We had no sales of grain inventory in the prior year
period.
Gain
on Sale of Investment in New Generation Biofuels.
We
recorded a gain of $1.8 million on the sale of 360,000 shares of the common
stock of New Generation Biofuels during the six months ended June 30, 2008.
We
had no sales of marketable securities or investments in the prior year six
months.
Loss
on Equity of New Generation Biofuels.
We
recorded a loss on equity of New Generation Biofuels of $417,000 for the six
months ended June 30, 2008, compared to a loss on equity of New Generation
Biofuels of $1.1 million for the six months ended June 30, 2007. This loss
represents our portion of New Generation Biofuels’ net losses, based on the
equity method of accounting for the six month periods ended June 30, 2008 and
June 30, 2007, respectively.
Liquidity
and Capital Resources
As
of
June 30, 2008, we had cash and cash equivalents of $8.8 million. Our working
capital as of June 30, 2008 was $7.6 million, representing a decrease in working
capital of $3.2 million compared to working capital of $10.8 million at December
31, 2007. As of June 30, 2008, we had outstanding debt instruments totaling
$297,000.
During
the six months ended June 30, 2008, we used net cash of $4.6 million for
operating activities. Net cash provided by investing activities was $1.1
million, consisting of $1.9 million provided by the sale of our 360,000 of
our
shares of common stock in New Generation Biofuels, offset by $750,000 used
for
investments and $29,000 for property and equipment. During the six months ended
June 30, 2008, we made $8,000 in payments under a note payable and $4,000 in
capitalized lease payments.
In
December 2006, we formed a joint venture to invest in a research project to
produce ethanol from citrus waste. We agreed to pay $600,000 to our joint
venture partner over the next ten years. We are continuing to evaluate an
opportunity to build a demonstration plant for converting citrus peel waste
into
ethanol. The estimated cost for the two-year build-out of the demonstration
plant is approximately $6 million. On January 22, 2008, the Florida Department
of Agriculture and Consumer Services approved a $500,000 grant for this purpose.
We are reviewing various sources of funding including government grants.
In
addition, we are evaluating whether or not to pursue the manufacture and sale
of
a diesel biofuel under our exclusive license with New Generation Biofuels.
We
will
need substantial additional capital to fund the business of GES, build the
demonstration plant and fund any other growth opportunities we pursue. Our
primary sources of capital are as follows:
|
|
·
|
We
have cash and cash equivalents of $8.0 million on hand as of August
1,
2008.
|
|
|
·
|
We
hold 5,490,000 shares of N
ew
Generation Biofuels common stock. New Generation Biofuels common
stock has
recently traded at over $4.00 per share on the American Stock Exchange.
Given that we own more than 29% of the outstanding shares of New
Generation Biofuels, we have relied on SEC Rule 144 in selling 360,000
shares of New Generation Biofuels common stock in 2008. Under that
rule,
the volume of our sales of shares of New Generation Biofuels common
stock
is limited to 1% of the outstanding common shares of New Generation
Biofuels every 90 days. We expect to continue to sell shares of New
Generation Biofuels common stock under Rule 144 in the future, and
we may
seek to sell a larger block of our New Generation Biofuels shares
in some
other manner at a substantial discount to the market price. We can
offer
no assurances that we will be able to continue to sell shares of
New
Generation Biofuels common stock under Rule 144 or
otherwise.
|
|
|
·
|
We
have reevaluated our Augusta and Spring Hope facilities and have
decided
that they do not fit within our long-term corporate strategy. On
March 20,
2008, our board authorized management to purs
ue the sale of each
facility. We can offer no assurances regarding the proceeds of the
sale of
one or both of those properties or the timing of any such sale or
sales.
|
We
may
also seek to raise capital through additional equity offerings, debt financing,
bond financing or a combination of these methods.
To
conserve our cash and cash equivalents, we have taken or expect to take several
actions:
|
|
·
|
We
have downsized our operations by terminating personnel and electing
not to
renew certain consulting agreements. We estimate that these measures
will
save us approximately $220,000 annually.
|
|
|
·
|
If
we are successful in selling our Augusta facility, we estimate that
we
would reduce our annual overhead by approximately $600,000.
|
|
|
·
|
If
we are successful in selling our Spring Hope facility, we estimate
that we
would reduce our annual overhead by approximately $250,000.
|
|
|
·
|
We
have indefinitely deferred construction of a new Blairstown ethanol
plant
as a result of the changing ethanol market, continued high prices
for corn
and our inability to arrange debt or equity financing for the
project.
|
|
|
·
|
We
expect to vacate our New York office effective August 31, 2008, which
will
save us approximately $250,000 annually.
|
|
|
·
|
As
a result of the continued high prices for corn and natural gas, on
May 1,
2008 we temporarily ceased production of ethanol at our Blairstown
plant.
|
As
noted
above, we can offer no assurances regarding the proceeds of the sale of one
or
both of our Augusta and Spring Hope properties or the timing of any such sale
or
sales. Further, before we can sell the Spring Hope property, we will have to
resolve certain liens on the property filed by companies that performed, or
have
claimed to perform, environmental remediation and demolition work on the
property.
We
currently have no commitments for any additional financing, and we can give
no
assurance that we will be able to raise the additional capital we need on
commercially acceptable terms or at all. Our failure to raise capital as needed
would significantly restrict our growth and hinder our ability to compete.
We
will need to curtail expenses further, reduce planned investments in technology
and research and development and forgo business opportunities. Additional equity
financings are likely to be dilutive to holders of our common stock, and debt
financing, if available, may involve significant payment obligations and
covenants that restrict how we operate our business.
Off-Balance
Sheet Arrangements
We
have
not entered into any transactions with unconsolidated entities in which we
have
financial guarantees, subordinated retained interests, derivative instruments
or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in
an
unconsolidated entity that provides us with financing, liquidity, market risk
or
credit risk support.
Critical
Accounting Policies
The
preparation of our unaudited consolidated financial statements requires us
to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an ongoing basis, including those
related to valuation of intangible assets, investments, property and equipment;
contingencies and litigation; and the valuation of shares issued for services
or
in connection with acquisitions. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values 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 accounting policies that we follow are described
in Note 2 our audited consolidated financial statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2007.
With
regard to our policies surrounding the valuation of shares issued for services
or in connection with acquisitions, we rely on the fair value of the shares
at
the time they were issued. After considering various trading aspects of our
stock, including volatility, trading volume and public float, we believe that
the price of our stock as reported on the American Stock Exchange is the most
reliable indicator of fair value. The fair value of options and warrants issued
for services is determined at the grant date using a Black-Scholes option
pricing model and is expensed over the respective vesting periods. A
modification of the terms or conditions of an equity award is treated as an
exchange of the original award for a new award in accordance with Statement
of
Financial Accounting Standards (“SFAS”) No. 123R.
We
evaluate impairment of long-lived assets in accordance with SFAS No. 144,
“
Accounting
for the Impairment or Disposal of Long-Lived Assets.”
We
assess the impairment of long-lived assets, including property and equipment
and
purchased intangibles subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The asset impairment review assesses the fair value of the assets
based on the future cash flows the assets are expected to generate. We recognize
an impairment loss when estimated undiscounted future cash flows expected to
result from the use of the asset plus net proceeds expected from the disposition
of the asset (if any) are less than the related asset’s carrying amount.
Impairment losses are measured as the amount by which the carrying amounts
of
the assets exceed their fair values. Estimates of future cash flows are
judgments based on management’s experience and knowledge of our operations and
the industries in which we operate. These estimates can be significantly
affected by future changes in market conditions, the economic environment,
capital spending decisions of our customers and inflation.
As
of
June 30, 2008, our carrying value of our investment in New Generation Biofuels
was $201,000 in accordance with APB No. 18. During the first six months of
2008,
we sold 360,000 shares of New Generation Biofuels’ common stock under SEC Rule
144 for a net aggregate sales price of $1.9 million. As of June 30, 2008, we
own
5,490,000 shares of New Generation Biofuels common stock, which represented
approximately 29.1% of the common stock then outstanding.
Our
remaining $486,000 of intangible assets at June 30, 2008 consisted of research
and license agreements relating to our 2006 acquisition of Advanced Biomass
Gasification Technologies, Inc. (“ABGT”). The research agreement ($260,000, net
of amortization) is currently being amortized over its three-year term. The
license agreement ($226,000, net of amortization) is currently being amortized
over its 20-year life.
After
an
assessment of the current state of the relevant business plan surrounding the
development of ABGT gasification technology, including discussions with
scientists, review of milestones and on site visits to demonstration facilities,
we do not believe there are any impairments. We will review the useful life
of
our license agreement at least annually, and we will determine its
recoverability in accordance with SFAS No. 144. Future impairments may occur
if
our remaining technology is not viable.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk.
Not
required for smaller reporting companies.
Item
4T.
Controls
and Procedures.
Based
on
our management’s evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, as of June 30, 2008, the end of the period
covered by this report, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”)) were effective to ensure that information required to be disclosed by us
in reports that 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 SEC and is accumulated and communicated to our management, including
our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There
was
no change in our internal control over financial reporting that occurred during
the quarter ended June 30, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
The
design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events. There can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
PART
II - OTHER INFORMATION
Item
1.
Legal
Proceedings.
We
are a
party to the lawsuits described below. An adverse result in these lawsuits
could
have a material adverse effect on our business, results of operations and
financial condition. In connection with the class action lawsuit described
below
(and a derivative action that has been dismissed), we accrued $200,000 at
December 31, 2006 to cover the deductible amount we are required to pay under
our director and officer liability insurance policy for those claims. Through
June 30, 2008, we have paid $200,000 in legal fees, have accrued a liability
for
the approximately $517,000 in additional legal fees and have recorded a $300,000
receivable from our insurance carriers, which is the amount of legal fees the
insurance carriers have agreed to pay under the tentative settlement described
below. Legal fees of $11,000 and $152,000 were expensed during the three and
six
months ended June 30, 2008, respectively.
Class
Action Lawsuit
.
In
October 2006, a shareholder class action complaint was filed in the United
States District Court for the Southern District of New York, purportedly brought
on behalf of all purchasers of Xethanol common stock during the period January
31, 2006 through August 8, 2006. The complaint alleges, among other things,
that
Xethanol and some of its former officers and directors made materially false
and
misleading statements regarding the Xethanol’s operations, management and
internal controls in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5. The individual defendants are Lawrence
S.
Bellone, a former director, Executive Vice President, Corporate Development,
principal accounting officer and Chief Financial Officer; Christopher
d’Arnaud-Taylor, a former director, Chairman, President and Chief Executive
Officer; and Jeffrey S. Langberg, a former director. The plaintiffs seek, among
other things, unspecified compensatory damages and reasonable costs and
expenses, including counsel fees and expert fees. Six nearly identical class
action complaints were thereafter filed in the same court, all of which have
been consolidated into one action, In re Xethanol Corporation Securities
Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.) (the “Class Action”). The plaintiffs
filed their amended consolidated complaint on March 23, 2007. On November 28,
2007, the defendants, including Xethanol Corporation, reached an agreement
in
principle with plaintiffs’ lead counsel to settle the Class Action. The
tentative settlement agreement, which was reached during a mediation overseen
by
a retired United States District Court Judge, calls for the payment of $2.8
million to the plaintiffs, of which we paid $400,000 and our insurance carriers
will pay $2.4 million. In addition, our insurance carriers will pay $300,000
in
legal costs. The settlement remains subject to District Court approval. The
settlement fairness hearing is scheduled for September 15, 2008. Although we
expect the District Court to approve the settlement agreement, we can give
no
assurance that the District Court will approve the settlement agreement as
finalized by the parties or at all.
Global
Energy and Management, LLC Lawsuit
.
In December 2007, Global Energy and Management, LLC (“Global Energy”) filed an
action in the federal court for the Southern District of New York against
Xethanol and nine current or former officers, directors and employees, entitled
Global Energy and Management v. Xethanol Corporation, et al., 07 Civ. 11049
(NRB) (S.D.N.Y.). The lawsuit alleges fraud by the defendants in connection
with
Global Energy’s alleged investment of $250,000 in NewEnglandXethanol, LLC, a
joint venture of Xethanol and Global Energy. On March 19, 2008, Global Energy
served Xethanol with its second amended complaint. In that complaint, based
on
an alleged investment of $250,000, Global Energy sought more than $10,000,000
in
damages plus pre-judgment interest and costs. After Xethanol asked the District
Court in May 2008 for leave to move to dismiss the complaint, Global Energy
served Xethanol with its third amended complaint, seeking damages of only
$250,000. Xethanol moved to dismiss that complaint in June 2008, and
Global Energy has opposed that motion. On July 31, 2008, Xethanol filed its
reply papers in further support of the motion to dismiss the complaint, together
with a motion for sanctions against Global Energy and its counsel for filing
a
complaint without valid legal or factual basis. Xethanol’s management has
instructed counsel to vigorously represent and defend Xethanol’s interests in
this litigation. Given the substantial reduction in damages that Global Energy
is now seeking, Xethanol’s management believes that this lawsuit is no longer
material to Xethanol.
Jacoby
Energy Development, Inc. Lawsuit
.
On July 28, 2008, Jacoby Energy Development, Inc. (“JEDI”), Geoplasma, LLC and
Georecover-Live Oak, LLC filed an action in the Superior Court of Fulton County
of the State of Georgia (File No. 2008CV154224) against Xethanol, our subsidiary
Global Energy Systems, Inc. (“GES”), and six current officers and
employees. The six individual defendants are Romilos Papadopoulos, our
Chief Operating Offer, Chief Financial Officer, Executive Vice President and
Secretary; Michael Ellis, President of GES; and four other employees. The
complaint alleges, among other things, that we breached a mutual nondisclosure
agreement related to previous negotiations for a possible merger between
Xethanol and JEDI and its affiliates. The plaintiffs allege that we
breached the agreement by soliciting and hiring the six individual defendants,
who were previously employed by the plaintiffs, and by using the plaintiffs’
confidential and proprietary information for our own business purposes.
The complaint also alleges that we tortuously interfered with the plaintiffs’
business and misappropriated the plaintiffs’ trade secrets. The plaintiffs seek,
among other things, a permanent injunction, unspecified compensatory damages
plus costs and expenses incurred in connection with the litigation, including
attorneys’ fees, and general and punitive damages in an amount not less than $10
million. Management has instructed counsel to defend the lawsuit
vigorously.
Litigation
is subject to inherent uncertainties, and an adverse result in this or other
matters that may arise from time to time could have a material adverse effect
on
our business, results of operations and financial condition. We may incur
material legal and other expenses, and our management may be
distracted.
Item
1A.
Risk
Factors.
In
addition to the other information set forth in this quarterly report, you
should
carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in
our Annual Report on Form 10-K for the year ended December 31, 2007. These
risk
factors could materially affect our business, financial condition or future
results. Additional risks and uncertainties not currently known to us or
that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item
3.
Default
Upon Senior Securities.
None.
Item
4.
Submission
of Matters to a Vote of Security Holders.
None.
Item
5.
Other
Information.
None.
Item
6.
Exhibits.
|
Exhibit
No.
|
|
Description
of Exhibit
|
|
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32
|
|
Joint
Certifications of Principal Executive Officer and Principal Financial
Officer Pursuant to 10 U.S.C. Section 1350, Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
|
XETHANOL
CORPORATION
|
|
|
|
|
|
Date:
August 13, 2008
|
By:
|
/s/
David Ames
|
|
|
|
David
Ames
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
August 13, 2008
|
By:
|
/s/
Romilos Papadopoulos
|
|
|
Romilos
Papadopoulos
Chief
Financial Officer
(Principal
Financial Officer)
|
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