UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
(Mark
One)
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED
JUNE
30, 2007
|
or
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For
the
transition period from _______________ to _______________
Commission
File Number:
000-30172
Renewal
Fuels, Inc.
(Exact
name of small business issuer as specified in its charter)
Delaware
|
22-1436279
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification
No.)
|
1818
North Farwell Avenue, Milwaukee, WI 53202
(Address
of principal executive offices)
(414)
283-2625
(Issuer’s
telephone number)
Tech
Laboratories, Inc.
(Former
name if changed from last report)
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
x
No
o
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
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 27,488,705 shares of common stock, $0.001
par
value per share, as of August 13, 2007.
Transitional
Small Business Disclosure Format (Check one): Yes
o
No
x
Explanatory
Notes
Renewal
Fuels, Inc. (hereinafter referred to as “us,” “we,” the “Company” or “Renewal”)
is filing this Amendment No. 1 on Form 10-QSB/A (the “First Amendment”) to its
Quarterly Report for the fiscal period ended June 30, 2007, which was filed
with
the Securities and Exchange Commission (“SEC”) on August 16, 2007 (the “Original
Report”) in response to certain comments raised by the staff of the
SEC. As more fully discussed in Note 13 to the
accompanying condensed consolidated financial statements, the purpose of this
Amendment is to restate our unaudited financial statements and notes included
in
Part I, Item 1
Financial Statements
and Part I, Item 2
Management’s
Discussion and Analysis
to address the following matters.
·
|
We
previously concluded that an important trademark acquired in a business
combination had an indefinite life. The accompanying financial statements
and notes have been revised to provide for an expected life for this
trademark of ten years. Amortization of this intangible asset is
reflected
in statements of operations.
|
·
|
We
previously recognized as an asset certain deferred financing costs
in
connection with our reverse merger with Tech Labs, Inc. Since principles
of accounting for reverse merger preclude the recognition of assets
other
than those of the accounting acquiree, we have revised our balance
sheet
to eliminate this asset.
|
·
|
We
have certain debt agreements and registration rights agreements that
are
in default. We have modified our disclosures to provide more information
about the nature of defaults, the remedies of the investors and our
conclusions related to the accounting consequences.
|
This
Amendment speaks only of the original filing date of the Original Report and,
except for those Items disclosed in this explanatory note, is unchanged from
the
Original Report. This First Amendment does not reflect events after the filing
of the Original Report or modify or update those disclosures affected by
subsequent events. Therefore, you should read this First Amendment
together with our other reports that update and supersede the information
contained in this First Amendment.
RENEWAL
FUELS, INC.
FORM
10-QSB/A
QUARTERLY
PERIOD ENDED JUNE 30, 2007
TABLE
OF CONTENTS
|
|
PART
1 FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet (Restated)
|
|
6
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations (Restated)
|
|
8
|
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity (Deficit) (Restated)
|
|
9
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Restated)
|
|
10
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
12
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
32
|
|
|
|
|
|
Item
3.
|
|
Controls
and Procedures
|
|
50
|
|
|
|
|
|
|
|
PART
II OTHER INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
|
52
|
|
|
|
|
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
52
|
|
|
|
|
|
Item
3.
|
|
Defaults
Upon Senior Securities
|
|
52
|
|
|
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
52
|
|
|
|
|
|
Item
5.
|
|
Other
Information
|
|
52
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
53
|
|
|
|
|
|
SIGNATURES
|
|
|
|
55
|
PART
1.
FINANCIAL INFORMATION
FORWARD-LOOKING
STATEMENTS
This
Form
10-QSB contains “forward-looking statements” relating to Renewal Fuels, Inc.
(formerly Tech Laboratories, Inc.) (referred to as the “Company” or “we”, “us”
or “our” in this Form 10-QSB), which represent the Company’s current
expectations or beliefs including, but not limited to, statements concerning
the
Company’s operations, performance, financial condition and growth. For this
purpose, any statements contained in this Form 10-QSB that are not statements
of
historical fact are forward-looking statements. Without limiting the generality
of the foregoing, words such as “may”, “anticipation”, “intend”, “could”,
“estimate”, or “continue” or the negative or other comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, such as credit losses,
dependence on management and key personnel, variability of quarterly results,
and the ability of the Company to continue its growth strategy and competition,
certain of which are beyond the Company’s control. Should one or more of these
risks or uncertainties materialize or should the underlying assumptions prove
incorrect, actual outcomes and results could differ materially from those
indicated in the forward-looking statements.
Any
forward-looking statement speaks only as of the date on which such statement
is
made, and the Company undertakes no 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. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of
each
such factor on the 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.
ITEM
1. FINANCIAL STATEMENTS
RENEWAL
FUELS, INC.
UNAUDITED
CONSOLIDATED BALANCE SHEET
AS
OF JUNE 30, 2007
(Restated)
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
|
$
|
116,030
|
|
Inventories
|
|
|
51,461
|
|
Prepaid
expenses and other current assets
|
|
|
24,578
|
|
Total
current assets
|
|
|
192,069
|
|
|
|
|
|
|
Property
and equipment - net
|
|
|
57,672
|
|
Note
receivable - Biodiesel Solutions
|
|
|
200,000
|
|
Financing
Fees, net of accumulated amortization of $17,507
|
|
|
162,493
|
|
Intangibles,
net of accumulated amortization of $14,117
|
|
|
292,883
|
|
Goodwill
|
|
|
93,705
|
|
|
|
|
|
|
Total
assets
|
|
$
|
998,822
|
|
(c
ontinued-)
RENEWAL
FUELS, INC.
UNAUDITED
CONSOLIDATED BALANCE SHEET
AS
OF JUNE 30, 2007
(Restated)
(-
continued)
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
|
$
|
199,409
|
|
Current
maturities of convertible debt
|
|
|
1,276,686
|
|
Customer
deposits
|
|
|
2,932
|
|
Total
current liabilities
|
|
|
1,479,027
|
|
|
|
|
|
|
Convertible
debt, less current maturities
|
|
|
764,169
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,243,196
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
(deficit):
|
|
|
|
|
Capital
stock:
|
|
|
|
|
Preferred
stock - par value of $.001; 20,000,000 shares authorized;
|
|
|
|
|
no
shares issued and outstanding
|
|
|
-
|
|
Common
stock - par value of $.001; 3,000,000,000 shares
authorized;
|
|
|
|
|
23,805,126
shares issued and outstanding
|
|
|
23,805
|
|
Additional
paid-in capital
|
|
|
4,733,359
|
|
Accumulated
deficit
|
|
|
(6,001,538
|
)
|
Total
stockholders’ equity
|
|
|
(1,244,374
|
)
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
998,822
|
|
See
accompanying notes to consolidated financial
statements.
|
|
|
|
|
RENEWAL
FUELS, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Successor
Business
|
|
Predecessor
Business
|
|
|
|
Three
Months Ended
June
30, 2007
Restated
|
|
March
9, 2007
(Date
of Inception)
to
June 30, 2007 Restated
|
|
Three
Months Ended
March
31, 2007
|
|
Three
Months Ended
June
30, 2006
|
|
Six
Months Ended
June
30, 2006
|
|
Sales
|
|
$
|
244,087
|
|
$
|
244,087
|
|
$
|
104,360
|
|
$
|
503,061
|
|
$
|
1,067,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
142,342
|
|
|
142,342
|
|
|
76,802
|
|
|
331,449
|
|
|
683,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
101,745
|
|
|
101,745
|
|
|
27,558
|
|
|
171,612
|
|
|
384,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation and benefits
|
|
|
32,696
|
|
|
34,272
|
|
|
52,320
|
|
|
69,430
|
|
|
125,544
|
|
Stock-based
transaction expense
|
|
|
5,131,231
|
|
|
5,131,231
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Occupancy
and equipment
|
|
|
8,257
|
|
|
8,257
|
|
|
18,666
|
|
|
23,900
|
|
|
69,930
|
|
Advertising
|
|
|
43,815
|
|
|
43,983
|
|
|
8,474
|
|
|
8,762
|
|
|
18,088
|
|
Professional
fees
|
|
|
317,898
|
|
|
349,741
|
|
|
8,474
|
|
|
2,949
|
|
|
12,029
|
|
Other
general and administrative
|
|
|
100,666
|
|
|
100,494
|
|
|
19,085
|
|
|
26,691
|
|
|
80,874
|
|
Total
operating expenses
|
|
|
5,634,563
|
|
|
5,667,979
|
|
|
107,019
|
|
|
131,732
|
|
|
306,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(5,532,818
|
)
|
|
(5,556,234
|
)
|
|
(79,461
|
)
|
|
39,880
|
|
|
77,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
755
|
|
|
755
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest
expense
|
|
|
(413,500
|
)
|
|
(415,427
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Financing
fees
|
|
|
(20,632
|
)
|
|
(20,632
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(5,966,195
|
)
|
$
|
(6,001,538
|
)
|
$
|
(79,461
|
)
|
$
|
39,880
|
|
$
|
77,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.25
|
)
|
$
|
(0.25
|
)
|
$
|
(.01
|
)
|
$
|
.01
|
|
$
|
.01
|
|
Diluted
|
|
$
|
(0.25
|
)
|
$
|
(0.25
|
)
|
$
|
(.01
|
)
|
$
|
.01
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,668,270
|
|
|
23,650,442
|
|
|
7,000,000
|
|
|
7,000,000
|
|
|
7,000,000
|
|
Diluted
|
|
|
23,668,270
|
|
|
23,650,442
|
|
|
7,000,000
|
|
|
7,000,000
|
|
|
7,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accomSee accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
RENEWAL
FUELS, INC.
UNAUDITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD
FROM INCEPTION (MARCH 9, 2007) TO JUNE 30, 2007
(Restated
)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
March 9, 2007 (Inception)
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock sold on March 9, 2007 to founders for cash
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
57,279
|
|
|
-
|
|
|
57,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption
of net liabilities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,677,020
|
)
|
|
-
|
|
|
(1,677,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
transaction expense related to common stock sold to
founders
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,131,231
|
|
|
-
|
|
|
5,131,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in exchange for net liabilities in a recapitalization
on
April 20, 2007
|
|
|
-
|
|
|
-
|
|
|
673,356
|
|
|
673
|
|
|
(673
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued in reverse merger
|
|
|
343,610
|
|
|
343
|
|
|
-
|
|
|
-
|
|
|
(343
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock on June 21, 2007
|
|
|
(343,610
|
)
|
|
(343
|
)
|
|
22,907,323
|
|
|
22,907
|
|
|
(22,564
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued on conversion of convertible debentures
|
|
|
-
|
|
|
-
|
|
|
224,447
|
|
|
225
|
|
|
82,675
|
|
|
-
|
|
|
82,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock warrants issued
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
238,932
|
|
|
-
|
|
|
238,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature of convertible debt instruments issued or
assumed
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
923,841
|
|
|
-
|
|
|
923,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,001,538
|
)
|
|
(6,001,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
June 30, 2007
|
|
|
-
|
|
$
|
-
|
|
|
23,805,126
|
|
$
|
23,805
|
|
$
|
4,553,359
|
|
$
|
(6,001,538
|
)
|
$
|
(1,244,374
|
)
|
See
accompanying notes to consolidated financial
statements.
RENEWAL
FUELS, INC.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Restated)
|
|
Successor
Business
|
|
Predecessor
Business
|
|
|
|
March
9, 2007
(Date
of Inception) to
June
30, 2007
(Restated)
|
|
Three
Months
Ended
March
31, 2007
|
|
Six
Months
Ended
June
30, 2006
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(6,001,538
|
)
|
$
|
(79,461
|
)
|
$
|
77,546
|
|
Adjustments
to reconcile net income (loss) to net cash
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
32,854
|
|
|
471
|
|
|
8,171
|
|
Amortization
of debt discounts
|
|
|
355,949
|
|
|
-
|
|
|
-
|
|
Stock-based
transaction expense
|
|
|
5,131,231
|
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities, net:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
-
|
|
|
11,198
|
|
Inventories
|
|
|
(17,035
|
)
|
|
26,151
|
|
|
87,525
|
|
Other
current assets
|
|
|
(24,577
|
)
|
|
11,915
|
|
|
(1,975
|
)
|
Accounts
payable and accrued expenses
|
|
|
(2,490
|
)
|
|
(5,857
|
)
|
|
(33,397
|
)
|
Accrued
interest
|
|
|
57,551
|
|
|
-
|
|
|
-
|
|
Customer
deposits
|
|
|
2,932
|
|
|
(12,224
|
)
|
|
12,793
|
|
Net
Cash Provided By (Used In) Operating Activities
|
|
|
(465,123
|
)
|
|
(59,005
|
)
|
|
161,861
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of FuelMeister assets
|
|
|
(494,426
|
)
|
|
-
|
|
|
-
|
|
Note
receivable - Biodiesel Solutions
|
|
|
(200,000
|
)
|
|
-
|
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(1,700
|
)
|
|
-
|
|
|
(759
|
)
|
Refund
of deposit
|
|
|
-
|
|
|
-
|
|
|
5,376
|
|
Net
Cash Provided By (Used In) Investing Activities
|
|
|
(696,126
|
)
|
|
-
|
|
|
4,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
57,279
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of warrants
|
|
|
238,932
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of long-term debt
|
|
|
1,161,068
|
|
|
-
|
|
|
-
|
|
Payment
of debt issuance costs
|
|
|
(180,000
|
)
|
|
-
|
|
|
-
|
|
Net
contributions (distributions) from (to) owner
|
|
|
-
|
|
|
31,953
|
|
|
(356,918
|
)
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
1,277,279
|
|
|
31,953
|
|
|
(356,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) In Cash
|
|
|
116,030
|
|
|
(27,052
|
)
|
|
(190,440
|
)
|
Cash
- Beginning of period
|
|
|
-
|
|
|
52,626
|
|
|
276,850
|
|
Cash
- End of period
|
|
$
|
116,030
|
|
$
|
25,574
|
|
$
|
86,410
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued-)
RENEWAL
FUELS, INC.
UNAUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
(-continued)
|
|
|
|
|
|
|
|
|
|
Successor
Business
|
|
Predecessor
Business
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure Of Cash Flow Information -
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,927
|
|
$
|
-
|
|
$
|
-
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures Of Non-Cash Investing And
Financing
Activities:
|
|
|
|
|
|
|
Net
liabilities assumed in a recapitalization
|
|
$
|
1,677,020
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
RENEWAL
FUELS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF AND FOR THE PERIODS ENDED JUNE 30, 2007 AND 2006
NOTE
1
NATURE
OF BUSINESS AND GOING CONCERN
Reorganization
of Tech Laboratories, Inc. and Reverse Merger with Renewal Biodiesel,
Inc.
On
April
20, 2007, Renewal Fuels, Inc., formerly Tech Laboratories, Inc. (the “Company”
or “we”, “us”, “our”), and its wholly-owned subsidiary, Renewal Fuels
Acquisitions, Inc. (“Renewal Acquisitions”), entered into a merger agreement
(the “Renewal Merger Agreement”) with Renewal Biodiesel, Inc. (formerly Renewal
Fuels, Inc.) (“Renewal Biodiesel”). Renewal Biodiesel was incorporated in the
state of Delaware on March 9, 2007 for the purpose of the acquisition of the
FuelMeister Business described below. Pursuant to the Renewal Merger Agreement,
Renewal Acquisitions was merged with and into Renewal Biodiesel. The former
shareholders of Renewal Biodiesel were issued an aggregate of 343,610 shares
of
the Company’s series A convertible preferred stock (the “Preferred Stock”),
which were immediately convertible at the option of the holders into an
aggregate of 268,588 shares of our common stock (4,028,827 shares prior to
the
1-for-15 reverse stock split described below). Following approval of the Renewal
Merger Agreement by our shareholders, the Preferred Stock became convertible
at
the option of the holders into an aggregate of 22,907,323 shares of our common
stock (343,610,000 shares prior to the reverse stock split). On June 21, 2007,
all of the holders converted their shares of Preferred Stock into 22,907,323
shares of the Company’s common stock.
On
July
9, 2007, the Company, which was a New Jersey entity (“Tech Labs-NJ”), entered
into an Agreement and Plan of Merger with Tech Laboratories, Inc., a
Delaware entity (“Tech Labs - DE”) under which Tech Labs - NJ and Tech Labs - DE
were merged with and into the surviving corporation, Tech Labs - DE, whose
name
was subsequently changed on August 1, 2007 to Renewal Fuels, Inc. The
certificate of incorporation and bylaws of the surviving corporation became
the
certificate of incorporation and bylaws of the Company, and the directors and
officers in office of the surviving corporation became the directors and
officers of the Company.
On
July
10, 2007, the majority stockholders of the Company authorized a 1-for-15 reverse
stock split pursuant to which, on August 1, 2007, the 357,076,887 shares
of common stock of the Company (the "Old Shares") that were outstanding at
June
30, 2007 automatically converted into 23,805,126 shares of common stock
(the "New Shares"). All common share and per share amounts in these financial
statements have been retroactively restated to reflect this reverse stock split.
The New Shares issued pursuant to the reverse stock split are fully paid and
non-assessable. All New Shares have the same par value, voting rights and other
rights as the Old Shares. Stockholders of the Company do not have preemptive
rights to acquire additional shares of common stock which may be issued. Also
on
August 1, 2007, the Company changed its name from Tech Laboratories, Inc. to
Renewal Fuels, Inc. and the Company’s quotation symbol on the OTC Bulletin Board
was changed from TLBT to RNWF.
Acquisition
of FuelMeister Business
Renewal
Biodiesel, Inc. (formerly Renewal Fuels, Inc.)(“Renewal Biodiesel”
as
described below, the “Predecessor”
)
all
tangible and intangible assets of the FuelMeister Business of Biodiesel
Solutions, Inc. (“BSI”), a Nevada corporation
and
unrelated and autonomous business entity
,
effective March 30, 2007. As a result, Renewal Biodiesel is engaged in the
business of designing, developing, manufacturing and marketing personal
biodiesel processing equipment and accessories to convert used and fresh
vegetable oil into clean-burning biodiesel. Renewal Biodiesel’s products allow
customers to make biodiesel fuel, which is capable of powering all diesel fuel
engines, for a current cost of approximately 70 cents per gallon. Renewal
Biodiesel has a network of dealers in the United States for sale and
distribution of its products. Renewal Biodiesel’s manufacturing facilities are
currently located in Sparks, Nevada.
At
the time of the FuelMeister acquisition, which was transacted before the reverse
merger discussed above, our current Chief Executive Officer (John King) and
one
of our directors (David Marks) served as officers, directors and minority
shareholders (individually and collectively) of Renewal Biodiesel. However,
they
had no affiliation with BSI. While influential, these relationships did not
give
rise to common control, which is defined as majority common ownership
levels.
Acquisition
of BSI
On
July
2, 2007, the Company and its wholly-owned subsidiary BSI Acquisitions, Inc.
(“BSI Acquisitions”) entered into a merger agreement (the “BSI Merger
Agreement”) with BSI (from whom Renewal Biodiesel had acquired the FuelMeister
Business). Pursuant to the BSI Merger Agreement, BSI Acquisitions was merged
with and into BSI and the Company thus acquired all of the remaining business
of
BSI, other than the FuelMeister Business which was previously acquired as a
result of the reverse merger with Renewal Biodiesel. The former shareholders
of
BSI were issued an aggregate of 3,266,667 shares of common stock of the Company
(49,000,000 shares prior to the 1-for-15 reverse stock split), 1,000,000 shares
of BSI series B convertible preferred stock (the “BSI Preferred Stock”) and
$500,000 in cash. The Company also issued an aggregate of 66,667 shares of
common stock of the Company (1,000,000 shares prior to the 1-for-15 reverse
stock split) and an aggregate of 133,333 options (2,000,000 prior to the reverse
stock split) to purchase shares of common stock of the Company to the
individuals, other than officers of BSI, employed by BSI. The BSI Preferred
Stock is immediately convertible at the option of the holders into common stock
of the Company at a conversion price per share equal to the greater of (i)
$0.75, or (ii) the average closing price of the common stock during the ten
trading days immediately preceding the conversion date. Prior to the acquisition
of BSI, the Company loaned $200,000 to BSI under an 8% 180 day secured
promissory note, due November 24, 2007. Upon the acquisition of BSI, the note
was forgiven and recorded as a capital contribution to BSI.
BSI
will
manufacture the BiodieselMaster®, a factory-built biodiesel processing plant
that is designed to produce 350,000 gallons of biodiesel per year and is
designed to be appropriately scaled for a variety of customers, including small
communities, farms, farm co-ops and trucking fleets. The design will provide
a
biodiesel production system that is continuous, flexible, efficient, affordable,
and fully-automated. The automated control system will minimize labor costs
and
facilitates remote diagnostics.
Predecessor
Business
As
described above, under the terms of the Renewal Merger Agreement, we acquired
100% of the common stock of Renewal Biodiesel in exchange for the issuance
by us
of 22,907,323 common shares. Although we were the legal acquirer, Renewal
Biodiesel was considered to be the accounting acquirer and, as such, the
acquisition was accounted for as a reverse merger and recapitalization.
As
a
result, the accompanying unaudited consolidated financial statements represent
the results of operations and cash flows of the accounting acquirer and
Successor (Renewal Biodiesel) from the date of its inception on March 9, 2007
through June 30, 2007. The FuelMeister Business acquired by Renewal Biodiesel
constitutes our Predecessor business. The accompanying unaudited consolidated
financial statements, as of June 30, 2007 and for the period March 9, 2007
(date
of inception) through, June 30, 2007, are those of the Successor. The statements
of operations and of cash flows for the three months ended March 31, 2007 and
for the three and six months ended June 30, 2006, are those of our Predecessor,
the FuelMeister Business.
Going
Concern
Our
financial statements are prepared using accounting principles generally accepted
in the United States of America applicable to a going concern, which contemplate
the realization of assets and the liquidation of liabilities in the normal
course of business. Since inception, we have incurred losses from operations.
Furthermore, we will require a significant amount of capital to proceed with
our
business plan. As such, our ability to continue as a going concern is contingent
upon us being able to secure an adequate amount of debt or equity capital to
enable us to meet our operating cash requirements and successfully implement
our
business plan. In addition, our ability to continue as a going concern must
be
considered in light of the challenges, expenses and complications frequently
encountered by entrance into new markets and the competitive environment in
which we operate.
Our
predecessor historically funded its cash requirements through operations and
contributions from the former owner. In connection with the acquisition of
the
FuelMeister Business and BSI, we obtained debt financing. We expect we will
need
to obtain additional funding through private or public equity and/or debt
financing to pay for the infrastructure needed to support our planned growth
but, as a public company, we believe we will have better access to additional
debt or equity capital.
There
can
be no assurance that our plans will materialize and/or that we will be
successful in raising required capital to grow our business and/or that any
such
capital will be available on terms acceptable to us. These factors, among
others, indicate that we may be unable to continue as a going concern for a
reasonable period of time. Our financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern.
NOTE
2
ACQUISITIONS
Reverse
Merger and Recapitalization
On
April
20, 2007, we entered into a Merger Agreement with Renewal Biodiesel, a Delaware
corporation formed in 2007 for the purposes of the asset acquisition described
below. Under the terms of the agreement, we acquired 100% of the common stock
of
Renewal Biodiesel in exchange for the issuance by us of
343,610
shares of our series A convertible preferred stock, which was subsequently
converted into 22,907,323
common
shares. The officers and directors of Renewal Biodiesel assumed similar
positions with us. Although we were the legal acquirer, Renewal Biodiesel was
considered the accounting acquirer and as such the acquisition was accounted
for
as a reverse merger and recapitalization. As a result, the accompanying
consolidated financial statements represent the results of operations and cash
flows of the accounting acquirer (Renewal Biodiesel) from the date of its
inception on March 9, 2007. Immediately prior to the reorganization, we had
673,356 shares of common stock outstanding (10,100,210 prior to the 1-for-15
reverse stock split) and net liabilities of $1,677,020, consisting of the
following, at fair value:
Net
liabilities assumed
:
|
|
|
|
Accounts
payable
|
|
$
|
203,992
|
|
Long
term debt, including accrued interest
|
|
|
1,473,028
|
|
Net
liabilities assumed
|
|
$
|
1,677,020
|
|
|
|
|
|
|
The
net liabilities assumed primarily represent debt obligations to YA Global
Investments, L.P. (f/k/a Cornell Capital Partners L.P) (herein “YA Global”) and
were assumed in connection with the provision of additional long-term debt
financing provided by YA Global (see Note 7), which additional funding was
provided simultaneously with the reverse merger and recapitalization. In
addition, the Company paid $180,000 in fees in connection with the additional
debt funding provided by YA Global.
Acquisition
of Assets of FuelMeister Business
On
March
9, 2007, Crivello Group, LLC (“Crivello”) and its wholly-owned subsidiary,
Renewal Biodiesel, entered into an Asset Purchase Agreement with Biodiesel
Solutions, Inc. (“BSI”), which was effective March 30, 2007. Pursuant to the
Asset Purchase Agreement, BSI sold substantially all of the assets and property
of its FuelMeister operations (the “FuelMeister Business” , the “Predecessor” or
the “Predecessor Business”, an unrelated Company) to Renewal Biodiesel, in
exchange for an aggregate purchase price of $500,000, subject to adjustment.
Under the terms of the Agreement, the purchase price was subsequently adjusted
to $494,426 to reflect the inventory on hand at closing. Of the adjusted
purchase price, $100,000 was paid on execution of the Agreement as a down
payment, $100,000 was paid at closing, $50,000 was paid on April 11, 2007,
and
the balance of the purchase price was paid by delivery of a promissory note,
as
amended, in the amount of $244,426. The promissory note was subsequently paid
on
April 20, 2007. The $250,000 cash portion of the $494,426 purchase price of
the
assets was funded by loans received from Crivello of $200,000 and cash of
$57,279 received by Renewal Biodiesel from our founders for common stock. The
loans from Crivello, together with the promissory note for $244,426, were repaid
from the proceeds of loans from Cornell (see Note 6). The difference of
$5,131,231 between the fair value of the 22,907,323 common shares issued to
our
founders as a result of the reverse merger described above, determined based
on
the trading price of $0.2265 per share immediately prior to the reorganization
and reverse merger, and the amount they paid for their shares of Renewal
Biodiesel of $57,279 has been recorded as stock-based transaction
expense.
Renewal
Biodiesel also entered into a management services agreement with BSI, pursuant
to which BSI agreed to provide general management and administrative services
to
Renewal Biodiesel, as well as the use of its facilities. Renewal Biodiesel
reimbursed BSI for the direct cost of services and facilities, as provided.
The
agreement terminated 90 days after the FuelMeister acquisition or upon ten
days
notice by Renewal Biodiesel. As discussed in Note 1, we acquired BSI on July
2,
2007, which effectively resulted in termination of the agreement.
The
acquisition of the FuelMeister Business was accounted for by the purchase method
in accordance with Financial Accounting Standards Board Statement No. 141 ("FAS
141") and the results of its operations are included in these consolidated
financial statements from the date of acquisition. The aggregate purchase price
determined in accordance with FAS 141 was $494,426.
The
following is a summary of the net assets acquired at the date of acquisition,
at
fair value:
Net
assets acquired:
|
|
|
|
Inventory
|
|
$
|
34,426
|
|
Fixed
assets
|
|
|
9,145
|
|
Website
domain
|
|
|
50,150
|
|
Tradename
|
|
|
118,000
|
|
Customer
lists, engineering drawings and other intangibles
|
|
|
189,000
|
|
Goodwill
|
|
|
93,705
|
|
Net
assets acquired
|
|
$
|
494,426
|
|
|
|
|
|
|
NOTE
3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information and the instructions to Form 10-QSB
and Rule 310 of Regulation SB of the Securities and Exchange Commission (the
"SEC"). Accordingly, these consolidated financial statements do not include
all
of the footnotes required by accounting principles generally accepted in the
United States of America. In management’s opinion, all adjustments (consisting
of normal and recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
June 30, 2007 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2007.
The
accompanying unaudited consolidated financial statements, as of June 30, 2007
and for the period March 9, 2007 (date of inception) through, June 30, 2007,
are
those of Renewal Fuels, Inc., the Successor. The statements of operations and
of
cash flows for the three months ended March 31, 2007 and for the three and
six
months ended June 30, 2006 are those of the FuelMeister Business, our
Predecessor.
Accounting
Policies
We
have
generally adopted the accounting policies of the Predecessor. Unless
specifically stated, the accounting policies described below are the accounting
policies of both the Successor and the Predecessor, which do not differ during
all periods presented.
Principles
of Consolidation
Successor
The
consolidated financial statements include the accounts of Renewal Fuels, Inc.
(“Renewal”) and its wholly owned subsidiary Renewal Biodiesel, Inc. (“Renewal
Biodiesel”), from March 9, 2007, the date that Renewal Biodiesel was
incorporated and, for Renewal, from April 20, 2007, the date of the reverse
merger between Renewal Biodiesel and Renewal. All inter-company accounts and
transactions have been eliminated in consolidation.
Predecessor
The
accompanying financial statements of the FuelMeister business (the “FuelMeister
Business” or the “Predecessor”, a carve-out business of Biodiesel Solutions,
Inc. and a predecessor business of Renewal Biodiesel, which carve-out business
was acquired by Renewal Biodiesel on March 30, 2007), are presented on a
carved-out basis as if it had been an independent reporting entity for the
periods presented. Certain
revenue
and expenses of Biodiesel have been allocated by management between the
FuelMeister Business and the operations retained by Biodiesel, based either
on
specific attribution of those revenues and expenses or, where necessary and
appropriate, based on management’s best estimate of an appropriate
allocation.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods
presented. Estimates that are critical to the accompanying financial statements
arise from our belief that we will secure an adequate amount of cash to continue
as a going concern, and that all long-lived assets and inventories are
recoverable. The markets for our products are characterized by intense
competition, rapid technological development, evolving standards and short
product life cycles, all of which could impact the future realization of our
assets. Estimates and assumptions are reviewed periodically and the effects
of
revisions are reflected in the period that they are determined to be necessary.
It is at least reasonably possible that our estimates could change in the near
term with respect to these matters.
Revenue
Recognition
Revenue
from equipment and parts and accessories sales are generally recognized at
the
date of shipment and revenue from services is recognized when the services
are
performed and all substantial contractual obligations have been satisfied.
Our
revenue recognition policy is consistent with the criteria set forth in SEC
Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements”
(“SAB 104”) for determining when revenue is realized or realizable and earned.
In accordance with the requirements of SAB 104, we recognize revenue when (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred; (3)
our
price to the buyer is fixed or determinable and (4) collectibility of the
receivables is reasonably assured.
Cash
and Cash Equivalents
We
consider all highly liquid instruments purchased with an original maturity
of
three months or less to be cash equivalents.
Inventories
Inventories
are stated at the lower of cost or market with cost determined using a first-in,
first-out basis. At June 30, 2007, inventories consisted of finished goods,
materials, and displays amounting to $12,187 and $37,741 and $1,533,
respectively.
Property
and Equipment
Property
and equipment are stated at cost. Major additions are capitalized, while minor
additions and maintenance and repairs, which do not extend the useful life
of an
asset, are expensed as incurred. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives of the respective
assets, which range from 3 to 7 years.
We
evaluate the carrying value of property and equipment when events and
circumstances warrant such a review. If the carrying values of the assets are
considered to be impaired, a loss is recognized based on the amount by which
the
carrying value exceeds the fair market value of the asset. We have not
experienced any impairment of our property and equipment.
Intangible
Assets
Intangible
assets, consisting primarily of customer lists, engineering drawings and other
intangibles acquired as par t of the acquisition of the FuelMeister Business,
are amortized over their estimated useful lives, which range from 1 to 15
years.
Stock-Based
Compensation
In
accordance with Financial Accounting Standards No. 123 (“FAS 123 (Revised)”),
Share-Based
Payments
,
we
account for equity instruments issued to employees for services based on the
fair value of the equity instruments issued, and account for equity instruments
issued to those other than employees based on the fair value of the
consideration received, or the fair value of the equity instruments, whichever
is more readily measurable. We anticipate that the shares issued upon exercise
of any stock option would be obtained from our authorized and unissued
shares.
Derivative
Instruments and Beneficial Conversion Features
We
do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.
We
review
the terms of convertible debt and equity instruments we issue to determine
whether there are embedded derivative instruments, including the embedded
conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. When the ability to physical
or
net-share settle the conversion option is deemed to be not within the control
of
the company, the embedded conversion option may be required to be accounted
for
as a derivative financial instrument liability. In circumstances where the
convertible instrument contains more than one embedded derivative instrument,
including the conversion option, that is required to be bifurcated, the
bifurcated derivative instruments are accounted for as a single, compound
derivative instrument. In connection with the sale of convertible debt and
equity instruments, we may also issue freestanding options or warrants. We
may
also issue options or warrants to non-employees in connection with consulting
or
other services they provide. Depending on their terms, these options and
warrants may be accounted for as derivative instrument liabilities, rather
than
as equity.
Certain
instruments, including convertible debt and equity instruments and the
freestanding options and warrants issued in connection with those convertible
instruments, may be subject to registration rights agreements, which impose
penalties for failure to register the underlying common stock by a defined
date.
These potential cash penalties are accounted for in accordance with FAS No.
5,
Accounting
for Contingencies.
Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instruments are re-valued at each reporting date, with changes in the fair
value
reported as charges or credits to income. For option-based derivative financial
instruments, we use the Cox-Ross-Rubinstein binomial option pricing model to
value the derivative instruments. To the extent that the initial fair values
of
the freestanding and/or bifurcated derivative instrument liabilities exceed
the
total proceeds received, an immediate charge to income is recognized, in order
to initially record the derivative instrument liabilities at their fair value.
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed periodically,
including at the end of each reporting period. If re-classification is required,
the fair value of the derivative instrument, as of the determination date,
is
re-classified. Any previous charges or credits to income for changes in the
fair
value of the derivative instrument are not reversed.
When
the
embedded conversion option in a convertible debt instrument is not required
to
be bifurcated and accounted for separately as a derivative instrument, we review
the terms of the instrument to determine whether it is necessary to record
a
beneficial conversion feature, in accordance with EITF Issues 98-05 and 00-27.
When the effective conversion rate of the instrument at the time it is issued
is
less than the fair value of the common stock into which it is convertible,
we
recognize a beneficial conversion feature, which is credited to equity and
reduces the initial carrying value of the instrument.
When
convertible debt or equity instruments are initially recorded at less than
their
face value as a result of allocating some or all of the proceeds received to
derivative instrument liabilities or to a beneficial conversion feature, the
discount from the face amount, together with the stated interest on the
instrument, is amortized over the life of the instrument through periodic
charges to income, using the effective interest method.
Registration
Payment Arrangements
Certain
instruments, including convertible debt and equity instruments and the
freestanding options and warrants issued in connection with those convertible
instruments, are subject to registration rights agreements, which impose
penalties for our failure to register the underlying common stock by a defined
date. These potential cash penalties, which are referred to as registration
payment arrangements, are recorded when payments are both probable and
reasonably estimable, in accordance with FAS No. 5,
Accounting
for Contingencies.
As
of June 30, 2007 we are in default of certain registration rights agreements
and
the investors had certain rights to demand payments. However, the investors
have
not demanded payment, nor have they indicated that they will demand payment.
After consultation with investors and other actions we considered necessary,
we
have concluded that the probability of payment has not risen to a level that
would require an accrual. Further, on November 13, 2007, we obtained an
agreement with the investors wherein they explicitly waived their rights to
any
payments that they may otherwise be entitled to as of that date. Such rights
were not waived as to periods subsequent to November 13, 2007 and, accordingly,
we will continue to evaluate the need to accrue payments in future periods
until
all of our obligations under the registration rights agreements have been
fulfilled. (See Note 6-Long Term Debt for additional
information.)
Research
and Development Costs
Research
and development costs related to product development are expensed as incurred.
No such costs were incurred during the periods covered by these financial
statements.
Advertising
Costs
Advertising
costs are expensed as incurred. For the three months ended June 30, 2007 and
the
period from March 9, 2007 (date of inception) to June 30, 2007, advertising
costs were $43,815 and $43,983, respectively.
Shipping
and Handling Costs
Shipping
and handling costs are reported as a component of cost of sales.
Net
Income (Loss) Per Share
We
compute net income (loss) per share in accordance with FAS No. 128,
Earnings
per Share
(“FAS
128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions
of FAS 128 and SAB 98, basic net income (loss) per share is computed by dividing
the net income (loss) available to common stockholders for the period by the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share is computed by dividing the net loss for the period
by the number of common and common equivalent shares outstanding during the
period. Because of our net losses in 2007, none of these common stock equivalent
shares are dilutive; accordingly basic and diluted net loss per share are
identical for each of the periods in the accompanying statements of
operations.
Income
Taxes
Successor
We
account for income taxes under the liability method, in accordance with FAS
No.
109,
Accounting
for Income Taxes
.
Under
the liability method of FAS 109, deferred income taxes are recognized for the
tax consequences of temporary differences by applying enacted statutory rates
applicable to future years to differences between the tax bases of assets and
liabilities and their financial statement carrying amounts. Also, the effect
on
deferred taxes of a change in tax rates is recognized in income in the period
that included the enactment date.
Predecessor
Through
December 31, 2006, the Predecessor’s stockholder elected under the Internal
Revenue Code to be taxed as an S Corporation. In lieu of corporate income taxes,
the stockholders of S Corporations are taxed on their proportionate share of
a
company’s taxable income. Accordingly, no provision or liability for federal
income taxes has been included in the accompanying Predecessor financial
statements.
Effective
January 1, 2007, and in connection with the amendment and restatement of the
Predecessor’s articles of incorporation, the Predecessor became a C corporation
and therefore became subject to income taxes. From January 1, 2007, the
Predecessor accounted for income taxes under the liability method. The
Predecessor’s financial statements do not include a pro forma provision for
income taxes (as if it were a C corporation for the periods presented) in
accordance with FAS 109, because the overall provision (benefit) for all periods
presented would have been zero as (1) any current income taxes due would have
been reduced to zero through a deferred income tax benefit (as a result of
a
carry forward of prior year net operating losses and because (2) the net
deferred income tax assets arising from the remaining net operating loss
carryforwards and other temporary differences existing at March 31, 2007 would
have been fully reserved by a valuation allowance.
Impact
of Recently Issued Accounting Pronouncements
The
Financial Accounting Standards Board has recently issued several Financial
Accounting Standards, as summarized below. None of these statements have had,
or
are expected to have, a significant effect on our financial
statements.
Issued
|
|
Statement
|
|
|
|
February
2006
|
|
FAS
155 - “Accounting for Certain Hybrid Financial Instruments; an amendment
of Financial Accounting Standard Nos. 133 and 140"
|
|
|
|
March
2006
|
|
FAS
156 - “Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities”
|
|
|
|
June
2006
|
|
FAS
Interpretation 48 - "Accounting for Uncertainty in Income
Taxes"
|
|
|
|
September
2006
|
|
FAS
157 - “Fair Value Measurements”
|
|
|
|
September
2006
|
|
FAS
158 - “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)”
|
|
|
|
February
2007
|
|
FAS
159 - “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No.
115”
|
NOTE
4
FINANCIAL
INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
We
believe the book value of our cash, accounts payable and accrued expenses
approximates their fair values due to their short-term nature.
We
sell
products to value added distributors and other customers and generally require
payment in advance or at the time of sale. Periodically, we extend credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral. Our terms for our accounts receivable are generally net
30
days. As such, exposure to losses on receivables is principally dependent on
each customer's financial condition. We monitor our exposure to credit
losses and maintain allowances for any anticipated losses. At June 30,
2007, we did not have any accounts receivable. Our ability to collect
receivables arising in the future may be affected by economic
fluctuations.
We
maintain all of our cash in deposit accounts with one financial institution,
which deposit accounts at times may exceed federally insured limits. We
have not experienced any losses in such accounts.
NOTE
5 PROPERTY AND EQUIPMENT
At
June
30, 2007, property and equipment consists of the following:
Computer
equipment and software
|
|
$
|
50,792
|
|
Production
and shop equipment
|
|
|
7,051
|
|
Office
furniture and equipment
|
|
|
1,058
|
|
|
|
|
58,901
|
|
Less
accumulated depreciation and amortization
|
|
|
1,229
|
|
Property
and equipment - net
|
|
$
|
57,672
|
|
Depreciation
expense is included in other operating expenses in the accompanying statements
of operations.
NOTE
6
INTANGIBLE
ASSETS
The
following table summarizes amortized and unamortized intangible
assets:
|
|
As
of June 30, 2007
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
|
|
|
|
|
|
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
|
Customer
lists
|
|
$
|
70,000
|
|
$
|
1,167
|
|
$
|
68,833
|
|
Engineering
drawings
|
|
|
70,000
|
|
|
3,500
|
|
|
66,500
|
|
Non-compete
agreement
|
|
|
46,000
|
|
|
5,750
|
|
|
40,250
|
|
Tradename
|
|
|
118,000
|
|
|
2,950
|
|
|
115,050
|
|
Patent
application
|
|
|
3,000
|
|
|
750
|
|
|
2,250
|
|
|
|
$
|
307,000
|
|
$
|
14,117
|
|
$
|
292,883
|
|
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
93,705
|
|
|
|
|
|
|
|
|
|
$
|
93,705
|
|
|
|
|
|
|
|
Aggregate
Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended June 30, 2007
|
|
$
|
14,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
Year
ending December 31, 2007
|
|
|
|
|
|
|
|
$
|
28,234
|
|
Year
ending December 31, 2008
|
|
|
|
|
|
|
|
|
54,217
|
|
Year
ending December 31, 2009
|
|
|
|
|
|
|
|
|
36,217
|
|
Year
ending December 31, 2010
|
|
|
|
|
|
|
|
|
30,467
|
|
Year
ending December 31, 2011
|
|
|
|
|
|
|
|
|
30,467
|
|
Year
ending December 31, 2012
|
|
|
|
|
|
|
|
|
19,967
|
|
Thereafter
|
|
|
|
|
|
|
|
|
93,314
|
|
|
|
|
|
|
|
|
|
$
|
292,883
|
|
Amortized
intangible assets acquired during the period ended June 30, 2007 have a
weighted-average amortization period of
approximately
6
years.
NOTE
7 LONG-TERM DEBT
At
June
30, 2007, long-term debt consists of the following:
|
|
|
|
New
Obligations
|
|
|
|
Cornell
Capital Partners L.P., $1,000,000 convertible debenture, due April
20,
2009, interest at prime + 2.75% (11% at June 30, 2007)
|
|
$
|
1,000,000
|
|
Less
unamortized discount from warrants and beneficial conversion
feature
|
|
|
(385,427
|
)
|
|
|
|
614,573
|
|
|
|
|
|
|
Cornell
Capital Partners L.P., $400,000 convertible debenture, due May 31,
2009,
interest at prime + 2.75% (11% at June 30, 2007)
|
|
|
400,000
|
|
Less
unamortized discount from beneficial conversion feature
|
|
|
(396,504
|
)
|
|
|
|
3,496
|
|
Prior
Obligations (in default)
|
|
|
|
|
Montgomery
Equity Partners, Ltd., $300,000 15% convertible debenture, due on
demand,
including accrued interest of $67,685
|
|
|
367,685
|
|
|
|
|
|
|
Montgomery
Equity Partners, Ltd., $537,220 15% convertible debenture, due on
demand,
including accrued interest of $121,206
|
|
|
658,426
|
|
|
|
|
|
|
Cornell
Capital Partners L.P., $85,100 6.5% convertible promissory note,
due on
demand, including accrued interest of $61,000
|
|
|
146,100
|
|
|
|
|
|
|
LH
Financial, $156,080 18.0% convertible promissory note, due on demand,
including accrued interest of $94,495
|
|
|
250,575
|
|
|
|
|
|
|
|
|
|
2,040,855
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
1,276,686
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
764,169
|
|
On
April
20, 2007, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with Cornell Capital Partners L.P. ("Cornell") providing
for the sale by the Company to Cornell of its secured convertible debentures
in
the aggregate principal amount of $1,400,000 (the "New Debentures") of which
$1,000,000 was advanced immediately. The second instalment of $400,000 was
funded on May 31, 2007, following clearance by the Securities and Exchange
Commission (the “SEC”) of an information statement disclosing shareholder
approval of the issuance of the Preferred Stock to the former shareholders
of
Renewal Biodiesel.
The
New
Debentures bear interest at the prime rate plus 2.75% (but not less than 10%)
and mature on April 20, 2009 and May 31, 2009 (the "Maturity Dates"). The
Company is not required to make any payments until the Maturity Dates. The
holder of the New Debentures (the "Holder") may convert at any time principal
amounts outstanding under the New Debentures into shares of common stock of
the
Company at a conversion price per share equal to the lower of (a) $0.60 or
(b)
80% of the lowest closing bid price of the common stock during the ten trading
days immediately preceding the conversion date. The Company has the right to
redeem a portion or all amounts outstanding under the New Debentures prior
to
the Maturity Dates at a 15% redemption premium provided that (i) the closing
bid
price of the common stock is less than the fixed conversion price of the New
Debentures; (ii) the underlying shares are subject to an effective registration
statement; and (iii) no event of default has occurred and is continuing. The
New
Debentures contain standard anti-dilution adjustments for stock splits and
similar events. In the event that the Company sells or otherwise issues common
stock at a price below the current conversion price, the fixed conversion price
will be reduced to such lower price. If an Event of Default occurs, as defined
in the New Debentures, the holder may demand immediate repayment of all amounts
due under the New Debentures. In addition to non-payment of principal or
interest when due, defaults under other obligations and bankruptcy or similar
events, the Events of Default include a Change in Control of the Company, the
Company’s failure to file, achieve or maintain effectiveness of the required
registration statement (see below) if registration has been demanded by the
Holder of the New Debentures, and the failure to maintain the listing of the
Company’s common stock on a recognized exchange. Certain of these Events may
constitute derivative instruments. When the risks and rewards of such derivative
instruments are not clearly and closely related to the risks and rewards
associated with the New Debentures, the effect of these Events is considered
in
valuing any compound derivative instrument that may be bifurcated from the
New
Debentures.
The
obligations to Cornell, together with prior obligations to Cornell described
below, are secured by a security interest in the Company’s assets, including its
intellectual property. In addition, the Company pledged the shares of Renewal
Biodiesel to Cornell as additional security for the obligations to
Cornell.
Under
the
Purchase Agreement, the Company also issued to Cornell five-year warrants to
purchase 1,200,000 shares of common stock at an exercise price of $0.15 per
share.
In
connection with the Purchase Agreement, the Company also entered into a
registration rights agreement with Cornell (the "Registration Rights Agreement")
providing for the filing of a registration statement (the "Registration
Statement") with the SEC registering the common stock issuable upon conversion
of the New Debentures and exercise of the warrants. Upon written demand from
the
Holder, the Company is obligated to file a Registration Statement within 45
days
of such demand and to use its best efforts to cause the Registration Statement
to be declared effective no later than 150 days following receipt of such
demand. The Company is also required to ensure that the Registration Statement
remains in effect until all of the shares of common stock issuable upon
conversion of the New Debentures and exercise of the warrants have been sold
or
may be sold without volume restrictions pursuant to Rule 144(k) promulgated
by
the SEC. In the event of a default of its obligations under the Registration
Rights Agreement, including its agreement with respect to the filing and
effectiveness dates for the Registration Statement, the Company is required
to
pay to Cornell, as liquidated damages, for each thirty day period that the
Registration Statement has not been filed or declared effective, as the case
may
be, a cash amount equal to 2% of the face amount of the Debentures, not to
exceed 24%. As of August 13, 2007, no demand for registration has been received
by the Company.
Prior
Obligations
(in
default)
On
April
20, 2007, as part of the net liabilities assumed on the reverse merger, the
Company assumed certain existing obligations to Cornell and other entities.
These obligations included two existing 15% convertible debenture obligations
dated December 27, 2005 due to Montgomery Equity Partners, Ltd, an affiliate
of
Cornell (the “Old Debentures”), in the face amounts of $537,220 and $300,000,
together with accrued interest at April 20, 2007 of $105,310 and $58,808,
respectively. The Old Debentures were due on December 27, 2006
and,
accordingly, are in default for non-payment of principal and
interest
.
In
connection with one of these Old Debentures, the Company previously issued
warrants to purchase 6,666 shares of common stock at an exercise price of $0.015
per share. As amended on May 31, 2007, the Old Debentures
are
convertible into shares of common stock at a conversion price per share equal
to
the lesser of (a) $0.60 or (b) 80% of the lowest closing bid price of the common
stock during the ten trading days immediately preceding the conversion
date
.
In
connection with these Old Debentures, the Company
was
obligated to file a Registration Statement with the SEC, registering the shares
issuable on conversion of the Old Debentures and the Old Warrants. The Company
did
not
filed the required registration statement (which was required to be filed by
March 27, 2006 and effective by May 26, 2006).
As
a result,
under
the terms of the Old Debentures, the Company
was
required
to pay to Cornell, as liquidated damages, for each thirty day period that the
Registration Statement has not been filed or declared effective, as the case
may
be, a cash amount equal to 2% of the face amount of the Old Debentures.
However,
recognition of damages is subject to consideration of both the probability
of
incurring damages and whether amounts are estimable. Based upon direct dialog,
and as further discussed in the next paragraph, the Company did not record
damages in any of the periods presented.
On
November 13, 2007, the Company confirmed its conclusions related to
non-recognition of liquidated damages that could arise from registration rights
afforded investors of the Prior Obligations, in default, described in Note
7,
and obtained a formal waiver of any amounts due under those arrangements through
the date of the waiver. The waiver does not extend to periods beyond the
effective date and, accordingly, those investors may acquire rights to
liquidated damages in future periods. As provided in the Company’s policies for
accounting for registration payment arrangements, continuous evaluation of
the
probability of incurring damages is required and will be performed
periodically.
The
Company also assumed the remaining portions of a convertible promissory note
that was originally issued in 2000. A portion of the note is held by Cornell
and
a portion is held by entities associated with LH Financial. The notes are
convertible into shares of common stock at a conversion price per share equal
to
85% of the average of the five lowest closing bid prices of the common stock
during the 22 trading days immediately preceding the conversion date. During
the
period April 21, 2007 to June 30, 2007, Cornell converted an aggregate principal
amount of $82,900 of the promissory note held by it into 224,447 common shares.
Subsequent to June 30, 2007, Cornell converted the remaining principal amount
of
the note held by it of $85,100, together with all accrued interest, aggregating
$61,000, into 350,359 shares of common stock.
The
remaining Prior Obligations as of June 30, 2007 are in default for non-payment
of principal and interest when such amounts became due. The investors rights
under these circumstances provide for acceleration (or post-maturity date,
demand payment) in cash at the face value plus accrued interest or shares,
based
upon the contractual conversion option embedded in the arrangements. On November
13, 2007, the Company received a waiver of default remedies under the remaining
Prior Obligations that was effective for periods through that date. The waiver
does not extend to periods subsequent to November 13, 2007. While the investors
have not indicated their intention to call the Prior Obligations, they have
the
right to do so and, accordingly, the Company is required to carry these
obligations as current liabilities until receipt of a waiver that is effective
for a period beyond a year or the settlement of the arrangement through payment
or conversion.
Subsequent
Event - Additional Financing
On
July
2, 2007, the Company entered into an additional Securities Purchase Agreement
(the "Additional Purchase Agreement") with Cornell providing for the sale by
the
Company to Cornell of its secured convertible debentures in the aggregate
principal amount of $2,700,000 (the "Additional Debentures") of which $2,000,000
was advanced immediately. The second installment of $700,000 will be funded
within two business days after the Company has unconditionally booked and
received at least a 50% deposit for the sale of at least one BiodieselMaster
Unit.
The
interest rate, repayment terms, conversion rights, conversion price,
anti-dilution provisions, redemption provisions, events of default and
registration requirements of the Additional Debentures are identical to those
of
the New Debentures described above, except that the fixed element of the
conversion price is $0.75, not $0.60.
The
obligations to Cornell, together with prior obligations to Cornell, are secured
by a security interest in the Company’s assets and the assets of its
subsidiaries, including their intellectual property. In addition, the Company
pledged the shares of BSI to Cornell as additional security for the obligations
to Cornell.
Under
the
Additional Purchase Agreement, the Company also issued to Cornell five-year
warrants to purchase 2,250,000 shares of common stock at an exercise price
of
$0.90 per share.
Derivative
Instrument Liabilities and Beneficial Conversion Feature
In
accounting for the Convertible Debentures and the associated Warrants, the
Company has considered the requirements of
EITF
Issue 00-19, "Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled In, a Company's Own Common Stock".
Because
the number of shares that may be required to be issued on conversion of the
Convertible Debentures is dependent on the price of the Company’s common stock,
the number of shares ultimately required is indeterminate. However, full
conversion of the outstanding Convertible Debentures and exercise of outstanding
Warrants (including those Debentures and Warrants issued subsequent to June
30,
2007), together with currently outstanding common stock and all other currently
existing requirements to issue common stock, require the Company to have
approximately 45 million common shares authorized. The Company is authorized
to
issue 3 billion common shares. As a result, management of the Company believes
it will have sufficient authorized shares available to physically settle all
contracts that currently require delivery of common shares. Furthermore,
management of the Company, together with investors associated with management,
control a majority of the outstanding common shares of the Company. Accordingly,
management of the Company believes it is in a position to secure shareholder
approval of an increase in the authorized number of shares, should such an
increase be required in the future. As a result of management’s conclusion that
it will have sufficient authorized shares available to settle all outstanding
contracts requiring delivery of common shares, the conversion option embedded
in
the Convertible Debentures has not been bifurcated and the Warrants issued
in
connection with the Convertible Debentures have been accounted for as equity
instruments.
The
Company has also reviewed the terms of the Convertible Debentures to determine
whether there are embedded derivative instruments, other than the conversion
option, that may be required to be bifurcated and accounted for separately
as
derivative instrument liabilities. Certain events of default associated with
the
Convertible Debentures, including failure to effect or maintain registration
when required, the failure to maintain the listing of the Company’s common stock
on a recognized exchange and similar events, have risks and rewards that are
not
clearly and closely associated with the risks and rewards of the debt
instruments in which they are embedded. However, events of default serve only
to
permit the holder to demand repayment and do not require the Company to pay
any
premium on default. Accordingly, these embedded derivative instruments are
considered to have minimal, if any, value.
If
the
effective conversion price for a Convertible Debenture is less than the market
value of the underlying shares at the time the debenture is issued, the Company
recognizes a beneficial conversion feature in accordance with EITF Issues 98-05
and 00-27. The value of the beneficial conversion feature, which is credited
to
additional paid-in capital, reduces the initial carrying amount of the
debenture. During the period ended June 30, 2007, the Company recorded
beneficial conversion features aggregating $923,841.
The
discount from the face amount of the Convertible Debentures represented by
the
value initially assigned to any associated Warrants and to any beneficial
conversion feature is amortized over the period to the due date of each
Convertible Debenture, using the effective interest method. Included in the
beneficial conversion feature of $923,841 recorded during the period ended
June
30, 2007 is $333,574 related to debentures assumed by the Company on the reverse
merger described in Note 2. Because those debentures are past due, the discount
from the face amount of the debentures was immediately expensed and is included
in interest expense for the period.
For
warrants and option-based derivative instruments, the Company estimates fair
value using the Cox-Ross-Rubinstein binomial valuation model, based on the
market price of the common stock on the valuation date, an expected dividend
yield of 0%, a risk-free interest rate based on
constant
maturity rates published by the U.S. Federal Reserve applicable to the remaining
term of the instruments
,
and an
expected life equal to the remaining term of the instruments.
Because
of the limited historical trading period of our common stock, the expected
volatility of our common stock over the remaining life of the conversion options
and Warrants has been estimated at 123%, based on a review of the volatility
of
entities considered by management as most comparable to our
business.
NOTE
8 LEASE COMMITMENTS
Operating
Lease
Prior
to
the acquisition of BSI on July 2, 2007, the Company leased operating space
and
other services from BSI under a 90 day agreement, which expired on June 30,
2007.
BSI’s
operating facility is leased under an operating lease agreement. The lease
term
is from November 1, 2004 through October 31, 2007. Payments required under
this
lease range from approximately $4,300 to $4,500 per month, plus a share of
the
operating costs, estimated to be $900 per month. Beginning in January 2006,
Biodiesel entered into an additional operating lease for additional facilities.
The lease term is from January 1, 2006 to October 31, 2008. Payments required
under this lease approximate $11,000 per month, plus a share of operating costs,
estimated to be $3,000 per month.
NOTE
9 CAPITAL STOCK
The
authorized capital stock of the Company is 3,020,000,000 shares, consisting
of
3,000,000,000 shares of Common Stock, par value $0.001 per shares and 20,000,000
shares of Preferred Stock, par value $0.001 per share.
The
Board
of Directors is authorized to divide the 20,000,000 shares of Preferred Stock
into one or more series, and to determine for each such series its designation,
the number of shares of such series, the powers, preferences and rights and
the
qualifications, limitations or restrictions for the shares of such series.
The
Board of Directors has designated 343,610 shares as Series A Convertible
Preferred Stock. These shares were issued in exchange for the acquisition of
Renewal Biodiesel, as described in Notes 1 and 2. On June 21, 2007 all of the
holders converted their shares of Series A Convertible Preferred Stock into
22,907,323 shares of the Company’s common stock. At June 30, 2007, no shares of
Preferred Stock were outstanding.
Common
Stock
Holders
of the Company’s common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of the Company’s common stock representing a majority of the
voting power of the Company’s capital stock issued, outstanding and entitled to
vote, represented in person or by proxy, are necessary to constitute a quorum
at
any meeting of stockholders. A vote by the holders of a majority of the
Company’s outstanding shares is required to effectuate certain fundamental
corporate changes such as liquidation, merger or an amendment to the Company’s
articles of incorporation.
Holders
of the Company’s common stock are entitled to share in all dividends that the
Board of Directors, in its discretion, declares from legally available funds.
In
the event of liquidation, dissolution or winding up, each outstanding share
entitles its holder to participate pro rata in all assets that remain after
payment of liabilities and after providing for each class of stock, if any,
having preference over the common stock. The Company’s common stock has no
pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to the Company’s common stock.
Preferred
Stock
Holders
of the Company’s Preferred Stock are entitled to one vote for each share on all
matters submitted to a preferred stockholder vote. Holders do not have a right
to vote with the common stockholders. Holders of Preferred Stock do not have
cumulative voting rights. Holders of the Company’s Preferred Stock representing
a majority of the voting power of the Company’s Preferred Stock issued,
outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of Preferred stockholders.
Holders of the Company’s Preferred Stock are entitled to share in all dividends
that the Board of Directors, in its discretion, declares from legally available
funds.
NOTE
10 STOCK OPTION PLANS
On
July
10, 2007, the majority stockholders approved the 2007 Stock Incentive Stock
Plan
(the "2007 Incentive Plan") and authorized 1,000,000 shares of common stock
for
issuance of stock awards and stock options thereunder. As of August 13, 2007,
no
stock awards or stock options have been issued under the 2007 Incentive
Plan.
Under
the
2007 Incentive Plan, options may be granted which are intended to qualify as
Incentive Stock Options ("ISOs") under Section 422 of the Internal Revenue
Code
of 1986 (the "Code") or which are not ("Non-ISOs") intended to qualify as
Incentive Stock Options thereunder. The primary purpose of the 2007 Incentive
Plan is to attract and retain the best available personnel for the Company
by
granting stock awards and stock options in order to promote the success of
the
Company's business and to facilitate the ownership of the Company's stock by
employees. The 2007 Incentive Plan will be administered by the Company's Board
of Directors, as the Board of Directors may be composed from time to time.
Under
the
2007 Incentive Plan, stock awards and options may be granted to key employees,
officers, directors or consultants of the Company. The purchase price of the
common shares subject to each ISO shall not be less than the fair market value
(as set forth in the 2007 Incentive Plan), or in the case of the grant of an
ISO
to a Principal Stockholder, not less that 110% of fair market value of such
common shares at the time such Option is granted. The purchase price of the
common shares subject to each Non-ISO shall be determined at the time such
Option is granted, but in no case less than 85% of the fair market value of
such
common shares at the time such Option is granted.
NOTE
11 OTHER COMMITMENTS AND CONTINGENCIES
As
described in Note 6, the Company entered into a Registration Rights Agreement
with Cornell providing for the filing of a registration statement with the
SEC
registering the common stock issuable upon conversion of the debentures and
exercise of the warrants sold to Cornell. Upon written demand from Cornell,
the
Company is obligated to file a Registration Statement within 45 days and to
use
its best efforts to cause the Registration Statement to be declared effective
no
later than 150 days following receipt of such demand. The Company is also
required to ensure that the Registration Statement remains in effect until
all
of the shares of common stock issuable upon conversion of the debentures and
exercise of the warrants have been sold or may be sold without volume
restrictions pursuant to Rule 144(k). In the event of a default of its
obligations under the Registration Rights Agreement, the Company is required
to
pay to Cornell, for each thirty day period that the Registration Statement
has
not been filed or declared effective, a cash amount equal to 2% of the face
amount of the Debentures, not to exceed 24%. As of August 13, 2007, no demand
for registration has been received by the Company.
See
Note 12, below, for related events.
As
described below in Note 11, on July 10, 2007 the Company executed a letter
of
intent to acquire North Shore Energy Technologies ("North Shore"), a sustainable
energy company planning to build a bio-refinery capable of economically
converting wood waste into highly-versatile methanol.
NOTE
12 SUBSEQUENT EVENTS
Acquisition
of BSI
On
July
2, 2007, the Company and its wholly-owned subsidiary BSI Acquisitions, Inc.
(“BSI Acquisitions”) entered into a merger agreement (the “BSI Merger
Agreement”) with Biodiesel Solutions, Inc. (“BSI”), from whom Renewal Biodiesel
had acquired the FuelMeister Business. Pursuant to the BSI Merger Agreement,
BSI
Acquisitions was merged with and into BSI and the Company thus acquired all
of
the remaining business of BSI, other than the FuelMeister Business which was
previously acquired as a result of the reverse merger with Renewal Biodiesel.
The former shareholders of BSI were issued an aggregate of 3,266,667 shares
of
common stock of the Company (49,000,000 shares prior to the 1-for-15 reverse
stock split), 1,000,000 shares of BSI series B convertible preferred stock
(the
“BSI Preferred Stock”) and $500,000 in cash. The Company also issued an
aggregate of 66,667 shares of common stock of the Company (1,000,000 shares
prior to the 1-for-15 reverse stock split) and an aggregate of 133,333 options
(2,000,000 prior to the reverse stock split) to purchase shares of common stock
of the Company to the individuals, other than officers of BSI, employed by
BSI.
The BSI Preferred Stock is immediately convertible at the option of the holders
into common stock of the Company at a conversion price per share equal to the
greater of (i) $0.75, or (ii) the average closing price of the common stock
during the ten trading days immediately preceding the conversion date. Prior
to
the acquisition of BSI, the Company loaned $200,000 to BSI under an 8%, 180
day
secured promissory note, due November 24, 2007. Upon the acquisition of BSI,
the
note was forgiven and recorded as a capital contribution to BSI.
BSI
manufactures the BiodieselMaster®, a factory-built biodiesel processing plant
that is designed to produce 350,000 gallons of biodiesel per year and which
is
appropriately scaled for a variety of customers, including small communities,
farms, farm co-ops and trucking fleets. The design provides a biodiesel
production system that is continuous, flexible, efficient, affordable, and
fully-automated. The automated control system minimizes labor costs and
facilitates remote diagnostics.
Additional
Financing
On
July
2, 2007, as described in Note 6, the Company entered into a Securities Purchase
Agreement (the "Additional Purchase Agreement") with Cornell providing for
the
sale by the Company to Cornell of its secured convertible debentures in the
aggregate principal amount of $2,700,000 (the "Additional Debentures") of which
$2,000,000 was advanced immediately. The second installment of $700,000 will
be
funded within two business days after the Company has unconditionally booked
and
received at least a 50% deposit for the sale of at least one BiodieselMaster
Unit. Under the Additional Purchase Agreement, the Company also issued to
Cornell five-year warrants to purchase 2,250,000 shares of common stock at
an
exercise price of $0.90 per share.
Change
of Domicile
On
July
9, 2007, the Company, which was a New Jersey entity (“Tech Labs-NJ”), entered
into an Agreement and Plan of Merger with Tech Laboratories, Inc., a
Delaware entity (“Tech Labs - DE”) under which Tech Labs - NJ and Tech Labs - DE
were merged with and into the surviving corporation, Tech Labs - DE, whose
name
was subsequently changed on August 1, 2007 to Renewal Fuels, Inc. The
certificate of incorporation and bylaws of the surviving corporation became
the
certificate of incorporation and bylaws of the Company, and the directors and
officers in office of the surviving corporation became the directors and
officers of the Company.
Reverse
Stock Split
On
July
10, 2007, the majority stockholders of the Company authorized a 1-for-15 reverse
stock split pursuant to which, on August 1, 2007, the 357,076,887 shares
of Common Stock of the Company (the "Old Shares") that were outstanding at
June
30, 2007 automatically converted into 23,805,126 shares of common stock
(the "New Shares"). All common share and per share amounts in these financial
statements have been retroactively restated to reflect this reverse stock split.
The New Shares issued pursuant to the reverse stock split are fully paid and
non-assessable. All New Shares have the same par value, voting rights and other
rights as Old Shares. Stockholders of the Company do not have preemptive rights
to acquire additional shares of common stock which may be issued. Also on August
1, 2007, the Company changed its name from Tech Laboratories, Inc. to Renewal
Fuels, Inc. and the Company’s quotation symbol on the OTC Bulletin Board was
changed from TLBT to RNWF.
Proposed
Acquisition
On
July
10, 2007, the Company announced that it has signed a letter of intent to acquire
North Shore Energy Technologies ("North Shore"), a sustainable energy company
planning to build a bio-refinery capable of economically converting wood waste
into highly-versatile methanol.
North
Shore has completed initial planning for a facility which is designed to produce
approximately 43 million gallons per year of bio-Methanol from wood waste,
to be
supplied by one of the largest timber operators in the U.S. The wood waste
feedstock has been committed from timbering operations in the local market,
with
more than adequate supply for the North Shore facility. The facility will be
located on the site of existing forestry operations of the feedstock supply
partner. The facility is projected to be fully operational in 2009, subject
to
receipt of adequate funding, as well as completion of customary engineering,
permitting and other requirements.
As
described in Note 7, on October 5, 2007, 1,343,750 of the Company’s common
shares were issued by the transfer agent upon completion of a request received
on September 21, 2007 to convert $215,000 of the Company’s convertible
debentures.
As
further discussed in Note 7, on November 13, 2007, the Company received a
written waiver affirming that any damages, payments or penalties associated
with
default notes and related arrangements, including registration rights agreements
were waived through November 13, 2007. However, no demand for any amounts had
been made by the investors. The Company can not give any assurances that the
investors will not demand registration related payments or payment of principal
and interest on debentures following the effective date of the
waiver.
NOTE
13 RESTATEMENTS
The
accompanying unaudited consolidated financial statements have been restated
for
the matters discussed below. All associated footnote disclosures have been
revised for the matters giving rise to the financial statement restatements.
In
addition, certain of our footnotes have been augmented to provide expanded
information about certain transactions and accounting therefore.
Intangible
assets and related amortization expense:
As
discussed in Note 2 Acquisitions, on March 9, 2007 we acquired the net assets
of
Fuelmiester and accounted for the acquisition as a business combination under
FASB 141. As part of this transaction, we recorded the fair value assigned
to
the Trade Name acquired and concluded that the Trade Name had an indefinite
life
and accordingly recorded no amortization related to this intangible. We have
subsequently determined that the an estimated life of 10 years is more
reasonable and, accordingly the unaudited financial statements and notes to
the
financial statements included in Part 1, Item 1
Financial
Statements
of the
Original Report are hereby restated to reflect a life of 10 years and to record
the related amortization expense of the Trade Name.
Deferred
finance costs, related amortization and paid-in capital:
As
discussed in Note 2
Acquisitions
,
on
April 20, 2007, we entered into a Merger Agreement in 2007. Under the terms
of
the agreement, we acquired 100% of the common stock of Renewal Biodiesel in
exchange for the issuance by us of
343,610
shares of our series A convertible preferred stock, which was subsequently
converted into 22,907,323
common
shares. The net liabilities assumed primarily represented debt obligations
and
were assumed in connection with the provision of additional long-term debt
financing provided by Cornell, which additional funding was provided
simultaneously with the reverse merger and recapitalization. In our original
filing, the net liabilities assumed were recorded as deferred financing costs
incurred in connection with the additional debt funding rather than paid-in
capital (arising from the reverse merger reorganization) and were then amortized
by periodic charges to income on a straight-line basis over the life of that
debt funding. We have subsequently determined that the acquired debt should
have
been recorded as a reduction to stockholders equity and, accordingly
t
he
unaudited financial statements and notes have been restated to reclassify the
acquired debt as a reduction to stockholders equity and to reverse the
amortization charges taken against income.
Reconciliation
of accounts as previously reported and as restated:
The
following table illustrates the effects on the account classifications resulting
from the above restatements:
|
|
As
Reported
|
|
Restatement
Adjustments
|
|
|
|
As
Restated
|
|
Balance
Sheet as of June 30, 2007
|
|
|
|
|
|
|
|
|
|
Finance
fees net
|
|
$
|
1,678,896
|
|
$
|
(1,516,403
|
)
|
|
(A
|
)
|
$
|
162,493
|
|
Intangible
assets, net
|
|
|
177,833
|
|
|
115,050
|
|
|
(B
|
)
|
|
292,883
|
|
Paid-in
capital
|
|
|
6,410,378
|
|
|
(1,677,020
|
)
|
|
(A
|
)
|
|
4,733,359
|
|
Accumulated
Deficit
|
|
|
(6,159,204
|
)
|
|
157,666
|
|
|
(C
|
)
|
|
(6,001,538
|
)
|
Statement
of Operations, Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
general and administrative
|
|
|
97,716
|
|
|
2,950
|
|
|
(B
|
)
|
|
100,666
|
|
Deferred
Financing fees
|
|
|
181,249
|
|
|
(160,617
|
)
|
|
(A
|
)
|
|
20,632
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.26
|
)
|
|
0.01
|
|
|
(C
|
)
|
|
(0.25
|
)
|
Diluted
|
|
|
(0.26
|
)
|
|
0.01
|
|
|
(C
|
)
|
|
(0.25
|
)
|
Statement
of Operations, March 9, 2007 (Date of Inception) to June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
general & administrative
|
|
|
97,544
|
|
|
2,950
|
|
|
(B
|
)
|
|
100,494
|
|
Deferred
Financing fees
|
|
|
181,249
|
|
|
(160,617
|
)
|
|
(A
|
)
|
|
20,632
|
|
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.26
|
)
|
|
0.01
|
|
|
(C
|
)
|
|
(0.25
|
)
|
Diluted
|
|
|
(0.26
|
)
|
|
0.01
|
|
|
(C
|
)
|
|
(0.25
|
)
|
Notes
to
adjustments:
(A)
Net
liabilities assumed in the acquisition of FuelMeister were originally recorded
as deferred financing fees and were amortized over the life of the financing
arrangement obtained for the purpose of funding the acquisition. We have
reclassified these net liabilities and reduced stockholders equity with a charge
to additional paid in capital. We have reversed the amortization charges taken
against income.
(B)
Trade
name acquired in the acquisition of FuelMeister was originally assigned an
indefinite life. We have now assigned a life of 10 years to the intangible
asset
and we are amortizing this asset on a straight line basis over 10
years.
(C)
Net
income and Retained Earnings has been adjusted to reflect the impact of the
reversal of financing fees and charge for amortization expense.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and other sections of this Form 10-QSB contain
forward-looking statements that involve a number of risks and uncertainties.
These forward-looking statements are made pursuant to the “safe-harbor”
provisions of the Private Securities Litigation Reform Act of 1995 and are
made
based on management’s current expectations or beliefs, as well as assumptions
made by, and information currently available to, management. All statements
regarding future events, our future financial performance and operating results,
our business strategy and our financing plans are forward-looking statements.
In
many cases, you can identify forward-looking statements by terminology, such
as
“may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative
of such terms and other comparable terminology. These statements are only
predictions. Known and unknown risks, uncertainties and other factors could
cause our actual results to differ materially from those projected in the
forward-looking statements.
THE
INFORMATION CONTAINED IN THIS FORM 10-QSB IS NOT A COMPLETE DESCRIPTION OF
OUR
BUSINESS OR THE RISKS ASSOCIATED WITH AN INVESTMENT IN US. READERS ARE REFERRED
TO DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION,
WHICH IDENTIFY IMPORTANT RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
Overview
As
of the
end of the quarter, June 30, 2007, Renewal Fuels, Inc. (“Renewal”) had one
business segment, Renewal Biodiesel.
Renewal
Biodiesel was incorporated in the state of Delaware on March 9, 2007 and
acquired the business, fixed assets and inventory of FuelMeister from Biodiesel
Solutions, Inc. (“BSI”) effective March 30, 2007. Renewal Biodiesel is engaged
in the business of designing, developing, manufacturing and marketing personal
biodiesel processing equipment and accessories to convert used and fresh
vegetable oil into clean-burning biodiesel. Renewal Biodiesel’s products allow
customers to make biodiesel fuel, which is capable of powering all diesel fuel
engines, for a current cost of approximately 70 cents per gallon. Renewal
Biodiesel has developed a network of dealers in the United States for sale
and
distribution of its products. Renewal Biodiesel’s manufacturing facilities are
currently located in Sparks, Nevada.
HISTORY
Reorganization
of Tech Laboratories, Inc. to Renewal Fuels, Inc.
On
April
20, 2007, Renewal Fuels, Inc., formerly Tech Laboratories, Inc., and its
wholly-owned subsidiary Renewal Fuels Acquisitions, Inc. (“Renewal
Acquisitions”), entered into a merger agreement (the “Renewal Merger Agreement”)
with Renewal Biodiesel, Inc. (formerly Renewal Fuels, Inc.) (“Renewal
Biodiesel”). Pursuant to the Renewal Merger Agreement, Renewal Acquisitions was
merged with and into Renewal Biodiesel. The former shareholders of Renewal
Biodiesel were issued an aggregate of 343,610 shares of the Company’s series A
convertible preferred stock (the “Preferred Stock”), which were immediately
convertible at the option of the holders into an aggregate of 268,588 shares
of
our common stock (4,028,827 shares prior to the 1-for-15 reverse stock split
described below). Following approval of the Renewal Merger Agreement by our
shareholders, the Preferred Stock became convertible at the option of the
holders into an aggregate of 22,907,323 shares of our common stock (343,610.000
shares prior to the reverse stock split). On June 21, 2007, all of the holders
converted their shares of Preferred Stock into 22,907,323 shares of the
Company’s common stock.
On
July
9, 2007, the Company, which was a New Jersey entity (“Tech Labs-NJ”), entered
into an Agreement and Plan of Merger with Tech Laboratories, Inc., a
Delaware entity (“Tech Labs - DE”) under which Tech Labs - NJ and Tech Labs - DE
were merged with and into the surviving corporation, Tech Labs - DE, whose
name
was subsequently changed on August 1, 2007 to Renewal Fuels, Inc. The
certificate of incorporation and bylaws of the surviving corporation became
the
certificate of incorporation and bylaws of the Company, and the directors and
officers in office of the surviving corporation became the directors and
officers of the Company.
On
July
10, 2007, the majority stockholders of the Company authorized a 1-for-15 reverse
stock split pursuant to which, on August 1, 2007, the 357,076,887 shares
of Common Stock of the Company (the "Old Shares") that were outstanding as
of
June 30, 2007 automatically converted into 23,805,126 shares of common
stock (the "New Shares"). All common share and per share amounts in these
financial statements have been retroactively restated to reflect this reverse
stock split. The reason for the reverse stock split is to increase the per
share
stock price. The Company believes that if it is successful in maintaining a
higher stock price, the stock will generate greater interest among professional
investors and institutions. If the Company is successful in generating interest
among such entities, it is anticipated that the shares of its common stock
would
have greater liquidity and a stronger investor base. No assurance can be given,
however, that the market price of the New Shares will rise in proportion to
the
reduction in the number of outstanding shares resulting from the reverse stock
split. The New Shares issued pursuant to the reverse stock split are fully
paid
and non-assessable. All New Shares have the same par value, voting rights and
other rights as Old Shares. Stockholders of the Company do not have preemptive
rights to acquire additional shares of common stock which may be issued. Also
on
August 1, 2007, the Company changed its name from Tech Laboratories, Inc. to
Renewal Fuels, Inc. and the Company’s quotation symbol on the OTC Bulletin Board
was changed from TLBT to RNWF.
Tech
Laboratories, Inc. had no active business operations immediately prior to the
merger. John King, our Chief Executive Officer and a principal stockholder,
and
David Marks, our Chairman and a principal stockholder, were the officers and
directors of Renewal Biodiesel.
Immediately
prior to the reorganization, Renewal Biodiesel issued an aggregate of 5,727,979
shares of its common stock to 23 accredited investors for an aggregate
consideration of $57,279. Under the terms of the agreement, we acquired 100%
of
the 5,727,979 shares of common stock of Renewal Biodiesel in exchange for the
issuance by us of 343,610 shares of series A preferred stock, which were
subsequently converted into 23,907,323 common shares (approximately 97% of
the
outstanding common shares immediately after the reorganization). The average
share price paid for the 5,727,979 shares of Renewal Biodiesel exchanged for
our
common shares was $0.01. Current officers, directors and principal stockholders
of ours, who beneficially own in the aggregate approximately 80% of our
outstanding common stock, owned the following aggregate shares of common stock
of Renewal Biodiesel:
Name
|
|
Common
Shares
Received
|
|
Renewal
Biodiesel Shares Owned
|
|
Average
Price Paid
|
|
|
|
|
|
|
|
|
|
Crivello
Group LLC (1)
|
|
|
666,666
|
|
|
166,700
|
|
$
|
0.01
|
|
Frank
P. Crivello SEP IRA (1)
|
|
|
13,333,333
|
|
|
3,334,000
|
|
$
|
0.01
|
|
John
King
|
|
|
2,300,000
|
|
|
575,115
|
|
$
|
0.01
|
|
David
Marks (2)
|
|
|
2,700,000
|
|
|
675,135
|
|
$
|
0.01
|
|
Other
investors as a group (17)
|
|
|
3,907,324
|
|
|
977,029
|
|
$
|
0.01
|
|
|
|
|
22,907,323
|
|
|
5,727,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Mr.
Crivello is also the managing member of Crivello Group,
LLC.
|
|
(2)
Of
the shares attributed to Mr. Marks, 200,000 shares are registered
in the
name of the Irrevocable Children’s Trust of which Mr. Marks is a trustee
and 200,000 are registered in the name of Phoenix Investors, LLC
of which
Mr. Marks is Managing Director
.
|
Although
we were the legal acquirer, Renewal Biodiesel was considered the accounting
acquirer and as such the acquisition was accounted for as a reverse merger
and
recapitalization. The officers and directors of Renewal Biodiesel assumed
similar positions with us. As a result, the accompanying consolidated financial
statements represent the results of operations and cash flows of the accounting
acquirer (Renewal Biodiesel) from the date of its inception on March 9, 2007.
The
fair
value of the common stock issued to the shareholders of Renewal Biodiesel was
estimated to be $0.2265 per share, based on the trading price of our common
stock immediately prior to the reorganization and reverse merger. The difference
between the fair value of the shares issued and the amount paid by the
shareholders of Renewal Biodiesel for their shares resulted in an immediate
expense of $5,131,231.
Acquisition
of Operating Assets from Predecessor Business -
FuelMeister
On
April
20, 2007, Renewal Fuels, Inc., formerly Tech Laboratories, Inc. (the “Company”
or “we”, “us”, “our”), and its wholly-owned subsidiary Renewal Fuels
Acquisitions, Inc. (“Renewal Acquisitions”), entered into a merger agreement
(the “Renewal Merger Agreement”) with Renewal Biodiesel, Inc. (formerly Renewal
Fuels, Inc.) (“Renewal Biodiesel”). Renewal Biodiesel was incorporated in the
state of Delaware on March 9, 2007 for the purpose of the acquisition of the
FuelMeister Business described below. Pursuant to the Renewal Merger Agreement,
Renewal Acquisitions was merged with and into Renewal Biodiesel. The former
shareholders of Renewal Biodiesel were issued an aggregate of 343,610 shares
of
the Company’s series A convertible preferred stock (the “Preferred Stock”),
which were immediately convertible at the option of the holders into an
aggregate of 268,588 shares of our common stock (4,028,827 shares prior to
the
1-for-15 reverse stock split described below). Following approval of the Renewal
Merger Agreement by our shareholders, the Preferred Stock became convertible
at
the option of the holders into an aggregate of 22,907,323 shares of our common
stock (343,610,000 shares prior to the reverse stock split). On June 21, 2007,
all of the holders converted their shares of Preferred Stock into 22,907,323
shares of the Company’s common stock.
On
March
9, 2007, Crivello Group, LLC (“Crivello”) and its wholly-owned subsidiary,
Renewal
Biodiesel, entered into an Asset Purchase Agreement with Biodiesel Solutions,
Inc. (“BSI”), which closed on March 30, 2007. Pursuant to the Asset Purchase
Agreement, BSI sold substantially all of the assets and property of its
FuelMeister operations (the “FuelMeister Business”, the “Predecessor” or the
“Predecessor Business”, an unrelated Company) to Renewal Biodiesel, in exchange
for an aggregate purchase price of $500,000, subject to adjustment. Under the
terms of the Agreement, the purchase price was subsequently adjusted to $494,426
to reflect the inventory on hand at closing. Of the adjusted purchase price,
$100,000 was paid on execution of the Agreement as a down payment, $100,000
was
paid at closing, $50,000 was paid on April 11, 2007, and the balance of the
purchase price was paid by delivery of a promissory note, as amended, in the
amount of $244,426. The promissory note was subsequently paid on April 20,
2007.
The $494,426 purchase price of the assets was funded with loans received from
Cornell Capital Partners L.P. and cash received from our founders for common
stock.
Financing
With Cornell Capital Partners, L.P.
On
April
20, 2007, the Company entered into a Securities Purchase Agreement (the
"Purchase Agreement") with Cornell Capital Partners L.P. ("Cornell") providing
for the sale by the Company to Cornell of its secured convertible debentures
in
the aggregate principal amount of $1,400,000 (the "New Debentures") of which
$1,000,000 was advanced immediately. The second instalment of $400,000 was
funded on May 31, 2007, following clearance by the Securities and Exchange
Commission (the “SEC”) of an information statement disclosing shareholder
approval of the issuance of the Preferred Stock to the former shareholders
of
Renewal Biodiesel.
The
New
Debentures bear interest at the prime rate plus 2.75% (but not less than 10%)
and mature on April 20, 2009 and May 31, 2009 (the "Maturity Dates"). The
Company is not required to make any payments until the Maturity Dates. The
holder of the New Debentures (the "Holder") may convert at any time principal
amounts outstanding under the New Debentures into shares of common stock of
the
Company at a conversion price per share equal to the lower of (a) $0.60 or
(b)
80% of the lowest closing bid price of the common stock during the ten trading
days immediately preceding the conversion date. The Company has the right to
redeem a portion or all amounts outstanding under the New Debentures prior
to
the Maturity Dates at a 15% redemption premium provided that (i) the closing
bid
price of the common stock is less than the fixed conversion price of the New
Debentures; (ii) the underlying shares are subject to an effective registration
statement; and (iii) no event of default has occurred and is continuing. The
New
Debentures contain standard anti-dilution adjustments for stock splits and
similar events. In the event that the Company sells or otherwise issues common
stock at a price below the current conversion price, the fixed conversion price
will be reduced to such lower price. If an Event of Default occurs, as defined
in the New Debentures, the holder may demand immediate repayment of all amounts
due under the New Debentures. In addition to non-payment of principal or
interest when due, defaults under other obligations and bankruptcy or similar
events, the Events of Default include a Change in Control of the Company, the
Company’s failure to file, achieve or maintain effectiveness of the required
registration statement (see below) if registration has been demanded by the
Holder of the New Debentures, and the failure to maintain the listing of the
Company’s common stock on a recognized exchange.
The
obligations to Cornell, together with prior obligations to Cornell described
below, are secured by a security interest in the Company’s assets, including its
intellectual property. In addition, the Company pledged the shares of Renewal
Biodiesel to Cornell as additional security for the obligations to
Cornell.
Under
the
Purchase Agreement, the Company also issued to Cornell five-year warrants to
purchase 1,200,000 shares of common stock at an exercise price of $0.15 per
share.
In
connection with the Purchase Agreement, the Company also entered into a
registration rights agreement with Cornell (the "Registration Rights Agreement")
providing for the filing of a registration statement (the "Registration
Statement") with the SEC registering the common stock issuable upon conversion
of the New Debentures and exercise of the warrants. Upon written demand from
the
Holder, the Company is obligated to file a Registration Statement within 45
days
of such demand and to use its best efforts to cause the Registration Statement
to be declared effective no later than 150 days following receipt of such
demand. The Company is also required to ensure that the Registration Statement
remains in effect until all of the shares of common stock issuable upon
conversion of the New Debentures and exercise of the warrants have been sold
or
may be sold without volume restrictions pursuant to Rule 144(k) promulgated
by
the SEC. In the event of a default of its obligations under the Registration
Rights Agreement, including its agreement with respect to the filing and
effectiveness dates for the Registration Statement, the Company is required
to
pay to Cornell, as liquidated damages, for each thirty day period that the
Registration Statement has not been filed or declared effective, as the case
may
be, a cash amount equal to 2% of the face amount of the Debentures, not to
exceed 24%. As of August 13, 2007, no demand for registration has been received
by the Company.
Settlement
with Stursberg & Veith
On
June
30, 2005, the law firm of Stursberg & Veith (“S&V”), former counsel to
the Company, filed a lawsuit claiming that they were owed $161,179 plus
interest, costs, and disbursements. On December 5, 2005, a judgment was rendered
by the court to make payment of $204,834, including interest. In order to settle
this matter without further expense or delay, on April 25, 2007, the Company
and
S&V entered into a settlement agreement pursuant to which the Company agreed
to pay S&V the sum of $100,000 on or before April 30, 2007. Upon such
payment, under the terms of the agreement, each party released the other from
any liabilities or claims.
Acquisition
of BSI
On
July
2, 2007, the Company and its wholly-owned subsidiary BSI Acquisitions, Inc.
(“BSI Acquisitions”) entered into a merger agreement (the “BSI Merger
Agreement”) with Biodiesel Solutions, Inc. (“BSI”), from whom Renewal Biodiesel
had acquired the FuelMeister Business. Pursuant to the BSI Merger Agreement,
BSI
Acquisitions was merged with and into BSI and the Company thus acquired all
of
the remaining business of BSI, other than the FuelMeister Business which was
previously acquired as a result of the reverse merger with Renewal Biodiesel.
The former shareholders of BSI were issued an aggregate of 3,266,667 shares
of
common stock of the Company (49,000,000 shares prior to the 1-for-15 reverse
stock split), 1,000,000 shares of BSI series B convertible preferred stock
(the
“BSI Preferred Stock”) and $500,000 in cash. The Company also issued an
aggregate of 66,667 shares of common stock of the Company (1,000,000 shares
prior to the 1-for-15 reverse stock split) and an aggregate of 133,333 options
(2,000,000 prior to the reverse stock split) to purchase shares of common stock
of the Company to the individuals, other than officers of BSI, employed by
BSI.
The BSI Preferred Stock is immediately convertible at the option of the holders
into common stock of the Company at a conversion price per share equal to the
greater of (i) $0.75, or (ii) the average closing price of the common stock
during the ten trading days immediately preceding the conversion date. Prior
to
the acquisition of BSI, the Company loaned $200,000 to BSI under an 8%, 180
day
secured promissory note, due November 24, 2007. Upon the acquisition of BSI,
the
note was forgiven and recorded as a capital contribution to BSI.
BSI
will
manufacture the BiodieselMaster®, a factory-built biodiesel processing plant
that is designed to produce 350,000 gallons of biodiesel per year and which
is
designed to be appropriately scaled for a variety of customers, including small
communities, farms, farm co-ops and trucking fleets. The design will provide
a
biodiesel production system that is continuous, flexible, efficient, affordable,
and fully-automated. The automated control system will minimize labor costs
and
facilitates remote diagnostics.
Additional
Financing With Cornell Capital Partners, L.P.
On
July
2, 2007, the Company entered into an additional Securities Purchase Agreement
(the "Additional Purchase Agreement") with Cornell providing for the sale by
the
Company to Cornell of its secured convertible debentures in the aggregate
principal amount of $2,700,000 (the "Additional Debentures") of which $2,000,000
was advanced immediately. The second installment of $700,000 will be funded
within two business days after the Company has unconditionally booked and
received at least a 50% deposit for the sale of at least one BiodieselMaster
Unit.
The
interest rate, repayment terms, conversion rights, conversion price,
anti-dilution provisions, redemption provisions, events of default and
registration requirements of the Additional Debentures are identical to those
of
the New Debentures described above, except that the fixed element of the
conversion price is $0.75, not $0.60.
The
obligations to Cornell, together with prior obligations to Cornell, are secured
by a security interest in the Company’s assets and the assets of its
subsidiaries, including their intellectual property. In addition, the Company
pledged the shares of BSI to Cornell as additional security for the obligations
to Cornell.
Under
the
Additional Purchase Agreement, the Company also issued to Cornell five-year
warrants to purchase 2,250,000 shares of common stock at an exercise price
of
$0.90 per share.
RESULTS
OF OPERATIONS
Although
the revenue generating activities of FuelMeister, the predecessor business,
remained significantly intact after the acquisition, there have been changes
in
our marketing strategy, administrative costs (including those expenses related
to public equity market participation) and financing activities. As a result,
we
believe that the expenses of the predecessor business are not representative
of
our current business, financial condition or results of operations. Accordingly,
where practicable we have included various forward looking statements regarding
effects of our new operating structure.
The
discussion that follows of Results of Operations is in the following
sections:
·
|
Results
of operations for the three months ended June 30, 2007
(successor);
|
·
|
Results
of operations for the period March 9, 2007 (date of inception) through
June 30, 2007 (successor);
|
·
|
Results
of operations for the three months ended June 30, 2006
(predecessor);
|
·
|
Results
of operations for the three months ended March 31, 2007
(predecessor);
|
·
|
Results
of operations for the six months ended June 30, 2006
(predecessor);
|
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007
The
information contained in this section is that of the successor, Renewal Fuels,
Inc., for the three months ended June 30, 2007 (unaudited).
Net
Sales
|
|
$
|
244,087
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
142,342
|
|
|
58.3
|
%
|
Gross
Profit
|
|
|
101,745
|
|
|
41.7
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Stock-based
transaction expense
|
|
|
5,131,231
|
|
|
2102.2
|
%
|
General
and administrative expenses
|
|
|
451,260
|
|
|
184.9
|
%
|
Advertising
expenses
|
|
|
43,815
|
|
|
18.0
|
%
|
Occupancy
and equipment
|
|
|
8,257
|
|
|
3.4
|
%
|
Total
Operating Expenses
|
|
|
5,634,563
|
|
|
2308.5
|
%
|
Operating
Income (Loss)
|
|
|
(5,532,818
|
)
|
|
(
2266.7
|
)%
|
Net
financial expense
|
|
|
(433,377
|
)
|
|
(177.6
|
)%
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(5,966,195
|
)
|
|
(
2444.0
|
)%
|
Revenues
For
the
three months ended June 30, 2007, revenues were $244,087.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended June 30, 2007 was $142,342 or 58.3% of revenues
for the quarter. As a result, gross profit margin was $101,745 or 41.7% for
the
three months ended June 30, 2007.
Advertising
Expenses
Advertising
expenses were $43,815, or 18% of revenues, for the three months ended June
30,
2007.
General
and Administrative Expenses
General
and administrative expenses for the three months ended June 30, 2007 were
$
451,260
,
consisting of professional fees of $317,898, together with administrative
expenses, insurance, and other non-manufacturing related expenses.
Stock
Based Transaction Expense
Stock
based transaction expense for the period was $5,131,231, representing the
difference between the fair value of our common shares issued to the
shareholders of Renewal Biodiesel in the reverse merger and reorganization
and
the amount they paid for their shares of Renewal Biodiesel.
Occupancy
and Equipment
Occupancy
and equipment expense, consisting of rent, depreciation, amortization, and
other
miscellaneous expenses, amounted to $8,257 for the three months ended June
30,
2007.
Net
Financial (Income) Expense
Net
financial (income) expense of $
433,377
consisted
primarily of interest expense of $413,500 for the three months ended June 30,
2007.
Provision
for Income Taxes
During
the three months ended June 30, 2007, we experienced an operating loss for
tax
purposes. FuelMeister, our Predecessor, had historically experienced operating
losses, and as FuelMeister’s management were uncertain as to whether FuelMeister
would be able to utilize these tax losses before they expire, they provided
a
reserve for the income tax benefits associated with FuelMeister’s net future tax
assets which primarily related to its cumulative net operating losses. We have
adopted the same policy to reserve such net tax assets until such time
profitability is reasonably assured and it becomes more likely than not that
we
will be able to utilize such assets.
Net
Loss
As
a
result of the above, we reported a net loss of
$
5,966,195
for the three months ended June 30, 2007.
RESULTS
OF OPERATIONS FOR THE PERIOD MARCH 9, 2007 (DATE OF INCEPTION) THROUGH JUNE
30,
2007
The
information contained in this section is that of the successor, Renewal Fuels,
Inc., for the period March 9, 2007 (date of inception) through June 30, 2007
(unaudited).
Net
Sales
|
|
$
|
244,087
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
142,342
|
|
|
58.3
|
%
|
Gross
Profit
|
|
|
101,745
|
|
|
41.7
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
Stock-based
transaction expense
|
|
|
5,131,231
|
|
|
2102.2
|
%
|
General
and administrative expenses
|
|
|
484,508
|
|
|
198.5
|
%
|
Advertising
expenses
|
|
|
43,983
|
|
|
18.0
|
%
|
Occupancy
and equipment
|
|
|
8,257
|
|
|
3.4
|
%
|
Total
Operating Expenses
|
|
|
5,667,979
|
|
|
2322.1
|
%
|
Operating
Income (Loss)
|
|
|
(5,566,234
|
)
|
|
(
2266.7
|
)%
|
Net
financial expense
|
|
|
(435,304
|
)
|
|
(178.3
|
)%
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(6,001,538
|
)
|
|
(
2458.8
|
)%
|
Revenues
For
the
period March 9, 2007 (date of inception) through June 30, 2007, revenues were
$244,087.
Cost
of Sales and Gross Profit
Cost
of
sales for the period March 9, 2007 (date of inception) through June 30, 2007
was
$142,342, or 58.3% of revenues for the period. As a result, gross profit margin
for the period was $101,745 or 41.7%.
Advertising
Expenses
Advertising
expenses were $43,983, or 18% of revenues for the period March 9, 2007(date
of
inception) through June 30, 2007.
General
and Administrative Expenses
General
and administrative expenses for the period were
$484,508
,
consisting of administrative expenses, insurance, legal and other
non-manufacturing related expenses. Of these expenses, professional fees,
including legal, consulting, and accounting fees, were $349,741.
Stock
Based Transaction Expense
Stock
based transaction expense for the period was $5,131,231, representing the
difference between the fair value of our common shares issued to the
shareholders of Renewal Biodiesel in the reverse merger and reorganization
and
the amount they paid for their shares of Renewal Biodiesel.
Occupancy
and Equipment
Occupancy
and equipment expense, consisting of rent, depreciation, amortization, and
other
miscellaneous expenses, amounted to $8,257 for the period March 9, 2007 (date
of
inception) through June 30, 2007.
Net
Financial (Income) Expense
Net
financial (income) expense of 435,304 consisted primarily of interest expense
of
$415,427 for the period March 9, 2007 (date of inception) through June 30,
2007.
Provision
for Income Taxes
During
the period March 9, 2007 (date of inception) through June 30, 2007, we
experienced an operating loss for tax purposes. FuelMeister, our Predecessor,
had historically experienced operating losses, and as FuelMeister’s management
were uncertain as to whether FuelMeister would be able to utilize these tax
losses before they expire, they provided a reserve for the income tax benefits
associated with FuelMeister’s net future tax assets which primarily related to
its cumulative net operating losses. We have adopted the same policy to reserve
such net tax assets until such time profitability is reasonably assured and
it
becomes more likely than not that we will be able to utilize such
assets.
Net
Loss
As
a
result of the above, we reported a net loss of
$
6,001,538
for the period March 9, 2007 (date of inception) through June 30, 2007.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006
(PREDECESSOR)
The
information contained in this section is that of our predecessor, the
FuelMeister Business, for the three months ended June 30, 2006
(unaudited).
Net
Sales
|
|
$
|
503,061
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
331,449
|
|
|
65.9
|
%
|
Gross
Profit
|
|
|
171,612
|
|
|
34.1
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
99,070
|
|
|
19.7
|
%
|
Advertising
expenses
|
|
|
8,762
|
|
|
1.7
|
%
|
Occupancy
and equipment
|
|
|
23,900
|
|
|
4.8
|
%
|
Total
Operating Expenses
|
|
|
131,732
|
|
|
26.2
|
%
|
Operating
Income (Loss)
|
|
|
39,880
|
|
|
7.9
|
%
|
Net
financial expense
|
|
|
-
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
39,880
|
|
|
7.9
|
%
|
Revenues
For
the
three months ended June 30, 2006, revenues were $503,061.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended June 30, 2006 was $331,449, or 65.9% of
revenues, resulting in a gross profit margin of $171,612 or 34.1%.
Advertising
Expenses
Advertising
expenses were $8,762, or 1.7% of revenues, for the three months ended June
30,
2006.
General
and Administrative Expenses
General
and administrative expenses, consisting of payroll, administrative expenses,
insurance, legal and other non-manufacturing related expenses, were $99,070
for
the three months ended June 30, 2006. Payroll accounted for most of the expense
with $69,430 for the three months ended June 30, 2006.
Occupancy
and Equipment
Occupancy
and equipment expense, consisting of rent, depreciation, amortization, and
other
miscellaneous expenses, amounted to $23,900 for the three months ended June
30,
2006.
Provision
for Income Taxes
During
the three months ended June 30, 2006, FuelMeister experienced an operating
loss
for tax purposes. FuelMeister had historically experienced operating losses,
and
as FuelMeister’s management were uncertain as to whether FuelMeister would be
able to utilize these tax losses before they expire, they provided a reserve
for
the income tax benefits associated with FuelMeister’s net future tax assets
which primarily related to its cumulative net operating losses.
Net
Income
As
a
result of the above, FuelMeister reported net income of $39,880 for the three
months ended June 30, 2006.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007
(PREDECESSOR)
The
information contained in this section is that of our predecessor, the
FuelMeister Business, for the three months ended March 31, 2007
(unaudited).
Net
Sales
|
|
$
|
104,360
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
76,802
|
|
|
73.6
|
%
|
Gross
Profit
|
|
|
27,558
|
|
|
26.4
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
79,879
|
|
|
76.5
|
%
|
Advertising
expenses
|
|
|
8,479
|
|
|
8.1
|
%
|
Occupancy
and equipment
|
|
|
18,666
|
|
|
17.9
|
%
|
Total
Operating Expenses
|
|
|
107,042
|
|
|
102.6
|
%
|
Operating
Income (Loss)
|
|
|
(79,461
|
)
|
|
(76.1)
|
%
|
Net
financial expense
|
|
|
-
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(79,461
|
)
|
|
(76.1)
|
%
|
Revenues
For
the
three months ended March 31, 2007, FuelMeister’s revenue was $104,360.
Cost
of Sales and Gross Profit
Cost
of
sales for the three months ended March 31, 2007 was $76,802, or 73.6% of
revenues resulting in a gross profit margin of $27,558 or 26.4%.
Advertising
Expenses
Advertising
expenses were $8,474, or 8.1% of revenues, for the three months ended March
31,
2007.
General
and Administrative Expenses
General
and administrative expenses, consisting of payroll, administrative expenses,
insurance, legal and other non-manufacturing related expenses were $79,879
for
the three months ended March 31, 2007. Payroll accounted for most of the expense
with $52,320 for the three months ended March 31, 2007.
Occupancy
and Equipment
Occupancy
and equipment expense, consisting of rent, depreciation, amortization, and
other
miscellaneous expenses, amounted to $18,666 for the three months ended March
31,
2007.
Provision
for Income Taxes
During
the three months ended March 31, 2007, FuelMeister experienced operating and
tax
losses. FuelMeister had historically experienced operating losses, and as
FuelMeister’s management were uncertain as to whether FuelMeister would be able
to utilize these tax losses before they expire, they provided a reserve for
the
income tax benefits associated with FuelMeister’s net future tax assets which
primarily relate to its cumulative net operating losses.
Net
Loss
As
a
result of the above, FuelMeister reported a net loss of $79,461 for the three
months ended March 31, 2007.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE
30, 2006 (PREDECESSOR)
The
information contained in this section is that of our predecessor, FuelMeister,
for the six months ended June 30, 2006 (unaudited).
Net
Sales
|
|
$
|
1,067,427
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
683,416
|
|
|
64.0
|
%
|
Gross
Profit
|
|
|
384,011
|
|
|
36.0
|
%
|
Operating
Expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
218,447
|
|
|
20.5
|
%
|
Advertising
expenses
|
|
|
18,088
|
|
|
1.7
|
%
|
Occupancy
and equipment
|
|
|
69,930
|
|
|
6.6
|
%
|
Total
Operating Expenses
|
|
|
306,465
|
|
|
28.7
|
%
|
Operating
Income (Loss)
|
|
|
77,546
|
|
|
7.2
|
%
|
Net
financial expense
|
|
|
-
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
77,546
|
|
|
7.2
|
%
|
Revenues
For
the
six months ended June 30, 2006, FuelMeister’s revenue was $1,067,427.
Cost
of Sales and Gross Profit
Cost
of
sales was $683,416 for the six months ended June 30, 2006 or 64.0% of revenues,
resulting in a gross profit margin of $384,011 or 36.0%.
Advertising
Expenses
Advertising
expenses were $18,088, or 1.7% of revenues, for the six months ended June 30,
2006.
General
and Administrative Expenses
General
and administrative expenses, consisting of payroll, administrative expenses,
insurance, legal and other non-manufacturing related expenses, were $218,447
for
the six months ended June 30, 2006. Payroll accounted for most of the expense
with $125,544 for the six months ended June 30, 2006.
Occupancy
and Equipment
Occupancy
and equipment expense, consisting of rent, depreciation, amortization, and
other
miscellaneous expenses, amounted to $69,930 for the six months ended June 30,
2006.
Provision
for Income Taxes
During
the six months ended June 30, 2006, FuelMeister experienced operating and tax
losses. FuelMeister had historically experienced operating losses, and as
FuelMeister’s management were uncertain as to whether FuelMeister would be able
to utilize these tax losses before they expire, they provided a reserve for
the
income tax benefits associated with FuelMeister’s net future tax assets which
primarily relate to its cumulative net operating losses.
Net
Income
As
a
result of the above, FuelMeister reported net income of $77,546 for the six
months ended June 30, 2006.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain.
Our
critical accounting policies are those where we have made the most difficult,
subjective or complex judgments in making estimates, and/or where these
estimates can significantly impact our financial results under different
assumptions and conditions. Our critical accounting policies are:
|
·
|
Allowance
for Doubtful Accounts
|
|
·
|
Derivative
Financial Instruments
|
|
|
|
|
·
|
Warranty
Obligations
|
|
|
|
|
·
|
Inventory
Obsolescence
|
Revenue
recognition
In
accordance with Staff Accounting Bulletin 104 - Revenue Recognition in Financial
Statements (“SAB 104”), revenue is generally recognized and earned when all of
the following criteria are satisfied a) persuasive evidence of sales
arrangements exist; b) delivery has occurred; c) the sales price is fixed or
determinable, and d) collectibility is reasonably assured. It is the fourth
criterion that requires us to make significant estimates. In those cases where
all four criteria are not met, we defer recognition of revenue until the period
these criteria are satisfied. In some cases where collectibility is an issue,
we
defer revenue recognition until the cash is actually received.
Allowance
for doubtful accounts
The
allowance for doubtful accounts is evaluated on a regular basis and adjusted
based upon management's best estimate of probable losses inherent in
receivables, based on historical experience, including the historical loss
experience of the Predecessor. Receivables are determined to be past due if
they
have not been paid by the payment due dates. Debts are written off against
the
allowance when deemed to be uncollectible. Subsequent recoveries, if any, are
credited to the allowance when received.
Derivative
financial instruments
In
connection with the sale of debt or equity instruments, we may sell options
or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as conversion options, which in certain circumstances may
be
required to be bifurcated from the associated host instrument and accounted
for
separately as a derivative instrument liability.
The
identification of, and accounting for, derivative instruments is complex. Any
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded
as
charges or credits to income, in the period in which the changes occur. For
options, warrants and bifurcated conversion options that are accounted for
as
derivative instrument liabilities, we determine the fair value of these
instruments using the Cox-Ross-Rubinstein binomial option pricing model. That
model requires assumptions related to the remaining term of the instruments
and
risk-free rates of return, our current common stock price and expected dividend
yield, and the expected volatility of our common stock price over the life
of
the instruments. Because of the limited trading history for our common stock,
we
have estimated the future volatility of our common stock price based on not
only
the history of our stock price but also the experience of other entities
considered comparable to us. The identification of, and accounting for,
derivative instruments and the assumptions used to value them can significantly
affect our financial statements.
Product
warranties
At
the
time a sale is recognized, the company records the estimated future warranty
costs. These costs are estimated based on historical warranty claims. For the
current period we used the historical warranty experience of the predecessor
company. Warranty provisions are included as a component of cost of
sales.
Inventory
obsolescence
We
evaluate our inventory for excess and obsolescence on a quarterly basis. In
preparing our evaluation, we look at the expected demand for our products for
the next six to twelve months in order to determine whether or not such raw
materials, WIP and finished goods require a change in the inventory reserve
in
order to record the inventory at net realizable value. After discussions with
the senior management team, a reserve is established so that inventory is
appropriately stated at the lower of cost or net realizable value.
Recent
Accounting Pronouncements
Impact
of Recently Issued Accounting Pronouncements
-
The
Financial Accounting Standards Board has recently issued several Financial
Accounting Standards, as summarized below. None of these statements have had,
or
are expected to have, a significant effect on our financial statements or those
of our Predecessor.
Issued
|
|
Statement
|
|
|
|
February
2006
|
|
FAS
155 - “Accounting for Certain Hybrid Financial Instruments; an amendment
of Financial Accounting Standard Nos. 133 and 140" (“FAS
155”)
|
|
|
|
March
2006
|
|
FAS
156 - “Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities”
|
|
|
|
June
2006
|
|
FAS
Interpretation 48 - "Accounting for Uncertainty in Income
Taxes"
|
|
|
|
September
2006
|
|
FAS
157 - “Fair Value Measurements”
|
|
|
|
September
2006
|
|
FAS
158 - “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” - an amendment of FASB Statements No. 87, 88, 106,
and 132(R)”
|
|
|
|
February
2007
|
|
FAS
159 - “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No.
115”
|
|
|
|
Liquidity
and Capital Resources
QUARTER
ENDED JUNE 30, 2007 FOR RENEWAL FUELS, INC.
In
connection with our founding and the acquisition of FuelMeister’s business and
certain of its assets, we received $57,279 in proceeds from the sale of our
common stock and secured $1,400,000 in convertible debt financing during the
three months ended June 30, 2007. At June 30, 2007, we had cash on hand of
$116,030.
During
the period from inception on March 9, 2007 through June 30, 2007, we had a
net
loss of $6,001,538 which included non-cash items totaling $5,520,033 consisting
primarily of stock-based transaction expense and amortization of debt discount
and financing fees.
Substantially
all of our debt has variable interest rates and, accordingly, a change in
interest rates will affect our results of operations. However, interest is
generally payable on maturity, rather than currently, and thus our cash flows
from operations would not be immediately impacted in the short-term by an
adverse change in interest rates. As described below, on July 2, 2007, we
obtained additional convertible debt financing from Cornell, which was used
to
fund the acquisition of BSI, also described below, and for working capital
.
Net
cash
used in investing activities was $696,126, of which $494,426 was used in the
acquisition of assets from FuelMeister, our Predecessor, and $200,000 was
provided as a loan to BSI, which we acquired on July 2, 2007, as described
below.
Net
cash
provided by financing activities was $1,277,279 consisting of $1,400,000 of
proceeds from the sale of convertible debt and warrants to Cornell, less
$180,000 of fees incurred and $57,279 in proceeds from the sale of our common
stock to our founders. At June 30, 2007, our primary debt has terms of
approximately 21 months with interest rates ranging from 11% to 15%. All of
our
debt is convertible by the holder into shares of our common stock.
Subsequent
Acquisition and Financing Activities
Acquisition
of BSI
On
July
2, 2007, the Company and its wholly-owned subsidiary BSI Acquisitions, Inc.
(“BSI Acquisitions”) entered into a merger agreement (the “BSI Merger
Agreement”) with Biodiesel Solutions, Inc. (“BSI”), from whom Renewal Biodiesel
had acquired the FuelMeister Business. Pursuant to the BSI Merger Agreement,
BSI
Acquisitions was merged with and into BSI and the Company thus acquired all
of
the remaining business of BSI, other than the FuelMeister Business which was
previously acquired as a result of the reverse merger with Renewal Biodiesel.
The former shareholders of BSI were issued an aggregate of 3,266,667 shares
of
common stock of the Company (49,000,000 shares prior to the 1-for-15 reverse
stock split), 1,000,000 shares of BSI series B convertible preferred stock
(the
“BSI Preferred Stock”) and $500,000 in cash. . The Company also issued an
aggregate of 66,667 shares of common stock of the Company (1,000,000 shares
prior to the 1-for-15 reverse stock split) and an aggregate of 133,333 options
(2,000,000 prior to the reverse stock split) to purchase shares of common stock
of the Company to the individuals, other than officers of BSI, employed by
BSI.
The BSI Preferred Stock is immediately convertible at the option of the holders
into common stock of the Company at a conversion price per share equal to the
greater of (i) $0.75, or (ii) the average closing price of the common stock
during the ten trading days immediately preceding the conversion date. Prior
to
the acquisition of BSI, the Company loaned $200,000 to BSI under an 8% 180
day
secured promissory note, due November 24, 2007. Upon the acquisition of BSI,
the
note was forgiven and recorded as a capital contribution to BSI.
BSI
will
manufacture the BiodieselMaster®, a factory-built biodiesel processing plant
that is designed to produce 350,000 gallons of biodiesel per year and which
is
designed to be appropriately scaled for a variety of customers, including small
communities, farms, farm co-ops and trucking fleets. The design will provide
a
biodiesel production system that is continuous, flexible, efficient, affordable,
and fully-automated. The automated control system will minimize labor costs
and
facilitates remote diagnostics.
Additional
Financing With Cornell Capital Partners, L.P.
On
July
2, 2007, the Company entered into a Securities Purchase Agreement (the
"Additional Purchase Agreement") with Cornell providing for the sale by the
Company to Cornell of its secured convertible debentures in the aggregate
principal amount of $2,700,000 (the "Additional Debentures") of which $2,000,000
was advanced immediately. The second installment of $700,000 will be funded
within two business days after the Company has unconditionally booked and
received at least a 50% deposit for the sale of at least one BiodieselMaster
Unit.
The
Additional Debentures bear interest at the prime rate plus 2.75% (but not less
than 10%) and mature two years from the date of issuance (the "Maturity Date").
The Company is not required to make any payments until the Maturity Date. The
holder of the Additional Debentures may convert at any time amounts outstanding
into shares of common stock at a conversion price per share equal to the lesser
of (i) $0.75, or (ii) 80% of the lowest closing bid price of the common stock
during the ten trading days immediately preceding the conversion date.
The
Company has the right to redeem a portion or all amounts outstanding under
the
Additional Debentures prior to the Maturity Date at a 15% redemption premium
provided that (i) the average volume weighted average price of the Company’s
common stock is less than the conversion price of the Additional Debentures;
(ii) the underlying shares are subject to an effective registration statement;
and (iii) no event of default has occurred and is continuing.
The
obligations to Cornell, together with prior obligations to Cornell, are secured
by a security interest in the Company’s assets and the assets of its
subsidiaries, including their intellectual property. In addition, the Company
pledged the shares of BSI to Cornell as additional security for the obligations
to Cornell.
Under
the
Additional Purchase Agreement, the Company also issued to Cornell five-year
warrants to purchase 2,250,000 shares of common stock at an exercise price
of
$0.90 per share.
In
connection with the Additional Purchase Agreement, the Company also amended
its
registration rights agreement with Cornell (the "Registration Rights Agreement")
providing for the filing of a registration statement (the "Registration
Statement") with the SEC registering the common stock issuable upon conversion
of the Additional Debentures and exercise of the warrants. Upon written demand
from the Holder, the Company is obligated to file a Registration Statement
within 45 days of such demand. The Company is obligated to use its best efforts
to cause the Registration Statement to be declared effective no later than
150
days following receipt of a written demand for the filing of a Registration
Statement and to ensure that the Registration Statement remains in effect until
all of the shares of common stock issuable upon conversion of the New Debentures
and Additional Debentures and exercise of the warrants have been sold or may
be
sold without volume restrictions pursuant to Rule 144(k) promulgated by the
SEC.
In the event of a default of its obligations under the Registration Rights
Agreement, including its agreement with respect to the filing and effectiveness
dates for the Registration Statement, the Company is required to pay to Cornell,
as liquidated damages, for each thirty day period that the registration
statement has not been filed or declared effective, as the case may be, a cash
amount equal to 2% of the face amount of the New Debentures and Additional
Debentures, not to exceed 24%.
Off-Balance
Sheet Arrangements
We
currently have no off balance sheet arrangements.
Qualitative
and Quantitative Disclosures about Market Risk
We
are
exposed to certain market risks which exist as part of our ongoing business
operations. We currently do not engage in derivative and hedging transactions
to
mitigate the affects of the risks below. Because the operating structure of
our
business is different from that of our predecessor, FuelMeister, we have
described only those risks as they apply to our current operating environment.
Interest
Rates
Changes
in U.S. interest rates would affect the interest paid on our borrowings and/or
earned on our cash and cash equivalents. Based on our overall interest rate
exposure at June 30, 2007, a near-term change in interest rates, based on
historical small movements, would not materially affect our operations or the
fair value of interest rate sensitive instruments. Our debt instruments have
variable interest rates and terms and, therefore, a significant change in
interest rates could have a material adverse effect on our financial position
or
results of operations if we are unable to change the prices we charge to
customers for our products.
We
considered the historical volatility of short term interest rates and determined
that it was reasonably possible that an adverse change of 100 basis points
could
be experienced in the near term. Based on our borrowings at June 30, 2007,
a
hypothetical 1.00% (100 basis-points) increase in interest rates would result
in
additional expenses of approximately $6,000 for the quarter or an annual
increase in expenses of approximately $24,000.
Foreign
Currency Fluctuations
Currently
we do not have significant transactions transacted in currencies other than
the
U.S. dollar.
We
currently do not engage in hedging. However, we may do so in the future.
ITEM
3. Controls And Procedures.
Disclosure
Controls and Procedures
We
carried out an evaluation of the effectiveness of the design and operation
of
our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934 (the “Exchange Act”) under the supervision and with the
participation of our chief executive officer, chief financial officer and other
members of our management team.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.
Accordingly,
our
disclosure controls and procedures are designed to provide reasonable assurance
of achieving their objectives.
However,
any
system of controls can provide only reasonable, and not absolute, assurance
that
the objectives of the control system are met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood
of
future events.
Based
upon the initial evaluation of the effectiveness of the design and operation
of
our disclosure controls and procedures as relating to our Quarterly Report
on
Form 10-QSB for the Quarterly Period ended June 30, 2007, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures were effective in timely alerting them to material information
required to be included in our Exchange Act filings. Notwithstanding the
aforementioned process, certain errors subsequently came to our attention that,
ultimately, required the filing of restated quarterly financial statements
for
this period and augmentation of certain disclosures, each of which is more
fully
described in the accompanying financial statements. As a result, we have
reconsidered our process for evaluation and our conclusions.
We
continue to believe that our disclosure controls and procedures are reasonably
effective to achieve the objectives set forth in the first paragraph above.
Our
basis for this conclusion is largely based on the fact that those matters giving
rise to the restatements were, in fact, included in our overall review and
evaluation. However, the outcome of the original accounting for these matters
and transactions followed interpretations of accounting guidance that ultimately
was incorrect. We intend to further evaluate our disclosure controls and
procedures process in order to develop measures that will afford a higher level
of assurance in meeting the objective of this process. However, those measures
have not yet been identified or implemented at this time.
Management’s
Report on Internal Control Over Financial Reporting
We
will
be required by the Sarbanes-Oxley Act to include an assessment of our internal
control over financial reporting firm in our Annual Report on Form 10-KSB
beginning with our filing for our fiscal year ending December 31, 2007 and
attestation from an independent registered public accounting firm in our Annual
Report on Form 10-KSB beginning with our filing for our fiscal year ending
December 31, 2008.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
the quarter ended June 30, 2007, which have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1.
Legal
Proceedings
.
On
June
30, 2004, the law firm of Stursberg & Veith (“S&V”), former counsel to
the Company, filed a lawsuit claiming that they were owed $161,179 plus
interest, costs, and disbursements. On December 5, 2005, a judgment was rendered
by the court to make payment of $204,834, including interest. In order to settle
this matter without further expense or delay, on April 25, 2007, the Company
and
S&V entered into a settlement agreement pursuant to which the Company agreed
to pay S&V the sum of $100,000 on or before April 30, 2007. Upon payment,
under the terms of the agreement, each party released the other from any
liabilities or claims.
ITEM
2.
Unregistered
Sales Of Equity Securities And Use Of Proceeds
.
None.
ITEM
3.
Defaults
Upon Senior Securities
.
None.
ITEM
4.
Submission
Of Matters To A Vote Of Security Holders
.
In
connection with the merger of Renewal Fuels Acquisitions, Inc., (a wholly-owned
subsidiary of the Company), with and into Renewal Fuels, Inc. the former
shareholders of Renewal Fuels, Inc. were issued an aggregate of 343,610 shares
of Series A Convertible Preferred Stock of the Company on April 20, 2007. The
shares of Series A Convertible Preferred Stock were immediately convertible
at
the option of the holders into an aggregate of 268,588 shares of the Company’s
common stock; however, after obtaining shareholder approval, the Series A
Convertible Preferred Stock became convertible into an aggregate of 22,907,323
shares of the Company’s common stock.
On
April
12, 2007, shareholders representing 51.66% of the Company’s outstanding common
stock approved the full conversion of the Series A Convertible Preferred Stock,
and on June 21, 2007 all of the holders of the Series A Convertible Preferred
Stock converted their shares of preferred stock and were issued 22,907,323
shares of the Company’s common stock.
On
April
12, 2007, shareholders representing 51.66% of the Company’s outstanding common
stock also approved the merger of the Company with and into Tech Laboratories,
Inc., a newly formed Delaware corporation, to result in a change of the
Company’s domicile from New Jersey to Delaware, and on July 9, 2007 the Company
entered into an Agreement and Plan of Merger and merged with and into Tech
Laboratories, Inc., a Delaware corporation.
ITEM
5.
Other
Information
.
None.
ITEM
6.
Exhibits
.
Exhibit
Number
|
|
Description
|
|
|
|
3.1
|
|
Amendment
to Certificate of Incorporation of Tech Laboratories, Inc.
(1)
|
|
|
|
3.2
|
|
Amended
and Restated By-laws of Tech Laboratories, Inc. (1)
|
|
|
|
10.1
|
|
Agreement
and Plan of Merger, dated April 20, 2007, among Tech Laboratories,
Inc.,
Renewal Fuels Acquisitions, Inc. and Renewal Fuels, Inc.
(1)
|
|
|
|
10.2
|
|
Asset
Purchase Agreement, dated March 30, 2007, among Crivello Group, LLC,
Renewal Fuels, Inc. and Biodiesel Solutions, Inc. (1)
|
|
|
|
10.3
|
|
Securities
Purchase Agreement, dated April 20, 2007, by and between Tech
Laboratories, Inc. and Cornell Capital Partners L.P.
(1)
|
|
|
|
10.4
|
|
$1,000,000
principal amount Secured Convertible Debenture, dated April 20, 2007,
by
and between Tech Laboratories, Inc. and Cornell Capital Partners
L.P.
(1)
|
|
|
|
10.5
|
|
Warrant
to purchase 18,000,000 shares of Common Stock of Tech Laboratories,
Inc.
dated April 20, 2007 (1)
|
|
|
|
10.6
|
|
Registration
Rights Agreement, dated April 20, 2007, by and between Tech Laboratories,
Inc. and Cornell Capital Partners L.P. (1)
|
|
|
|
10.7
|
|
Pledge
and Escrow Agreement, dated April 20, 2007, by and between Tech
Laboratories, Inc., David Gonzalez and Cornell Capital Partners L.P.
(1)
|
|
|
|
10.8
|
|
Restated
Security Agreement, dated April 20, 2007, by and between Tech
Laboratories, Inc. and Cornell Capital Partners L.P.
(1)
|
|
|
|
10.9
|
|
Services
Agreement between Renewal Fuels, Inc. and Biodiesel Solutions, Inc.,
dated
as of March 30, 2007 (1)
|
|
|
|
10.10
|
|
Settlement
Agreement between Tech Laboratories, Inc. and Stursburg & Veith, dated
as of April 25, 2007 (1)
|
|
|
|
10.11
|
|
Amendment
No. 1 to Secured Convertible Debenture No. TCHL-1-1, dated May 31,
2007,
by and between Tech Laboratories, Inc. and Cornell Capital Partners
L.P.
(2)
|
|
|
|
10.12
|
|
Amended
and Restated $1,000,000 principal amount Secured Convertible Debenture,
dated May 31, 2007, by and between Tech Laboratories, Inc. and Cornell
Capital Partners L.P. (2)
|
|
|
|
10.13
|
|
Amendment
No. 1 to Secured Convertible Debenture No. TCHL-1-2, dated May 31,
2007,
by and between Tech Laboratories, Inc. and Cornell Capital Partners
L.P.
(2)
|
|
|
|
10.14
|
|
$400,000
principal amount Secured Convertible Debenture, dated May 31, 2007,
by and
between Tech Laboratories, Inc. and Cornell Capital Partners L.P.
(2)
|
|
|
|
10.15
|
|
$300,000
principal amount Secured Convertible Debenture, dated December 27,
2005,
by and between Tech Laboratories, Inc. and Montgomery Equity Partners,
Ltd. (incorporated by reference to the exhibits to Registrant’s Form 8-K
filed on January 10, 2006).
|
|
|
|
10.16
|
|
Amendment
No. 1 to Secured Convertible Debenture No. MEP-2, dated May 31, 2007,
by
and between Tech Laboratories, Inc. and Montgomery Equity Partners,
Ltd.
(2)
|
|
|
|
10.17
|
|
Amended
and Restated $537,220 principal amount Secured Convertible Debenture,
dated December 27, 2005, by and between Tech Laboratories, Inc. and
Montgomery Equity Partners, Ltd. (incorporated by reference to the
exhibits to Registrant’s Form 8-K filed on January 10,
2006).
|
|
|
|
10.18
|
|
Amendment
No. 1 to Secured Convertible Debenture No. MEP-3, dated May 31, 2007,
by
and between Tech Laboratories, Inc. and Montgomery Equity Partners,
Ltd.
(2)
|
|
|
|
10.19
|
|
Agreement
and Plan of Merger, dated July 2, 2007, among Tech Laboratories,
Inc., BSI
Acquisitions, Inc. and Biodiesel Solutions, Inc. (3)
|
|
|
|
10.20
|
|
Securities
Purchase Agreement, dated July 2, 2007, by and between Tech Laboratories,
Inc. and Cornell Capital Partners L.P. (3)
|
|
|
|
10.21
|
|
$2,000,000
principal amount Secured Convertible Debenture, dated July 2, 2007,
by and
between Tech Laboratories, Inc. and Cornell Capital Partners L.P.
(3)
|
|
|
|
10.22
|
|
Warrant
to purchase 33,750,000 shares of Common Stock of Tech Laboratories,
Inc.
dated July 2, 2007 (3)
|
|
|
|
10.23
|
|
Amendment
No. 1 to Registration Rights Agreement, dated July 2, 2007, by and
between
Tech Laboratories, Inc. and Cornell Capital Partners L.P.
(3)
|
|
|
|
10.24
|
|
Security
Agreement, dated July 2, 2007, by and between Biodeisel Solutions,
Inc.,
Renewal Fuels, Inc. and Cornell Capital Partners L.P.
(3)
|
|
|
|
31.1
|
|
Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.1
|
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2
|
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
(1)
Incorporated
by reference to Form 8-K filed on April 26, 2007
(2)
Incorporated
by reference to Form 8-K filed on June 8, 2007
(3)
Incorporated
by reference to Form 8-K filed on July 6,
2007
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
TECH
LABORATORIES, INC.
|
|
|
|
Dated:
April
8, 2008
|
By:
|
/s/ John
King
|
|
John
King,
|
|
Chief Executive Officer and Chief Financial
Office
(Principal Financial and Accounting Officer)
|
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