ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE RESULTS OF OUR OPERATIONS AND FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
This section of the report includes a number of forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: "believe," "expect," "estimate," "anticipate," "intend," "project" and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this annual report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.
The following discussion provides an analysis of the results of our operations, an overview of our liquidity and capital resources and other items related to our business. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited financial statements and notes included in our Annual Report on Form 10-K as of and for the year ended December 31, 2016.
Overview
Company references herein are referring to consolidated information pertaining to Incoming, Inc., the registrant.
The following discussion is an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance and should be read in conjunction with the financial statements included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward looking statements as a result of any number of factors, including those set forth in this Quarterly Report and elsewhere in the Company’s Annual Report on Form 10-K and other public filings.
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All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Company Overview
NABE is a refiner and producer of commercial-grade biodiesel as specified by the American Society of Testing and Materials (ASTM D6751). Our refining and production facility is located in Lenoir, North Carolina with a nameplate annual capacity of five million gallons. Our facility produces biodiesel from virgin, agri-based feedstock using commercial specifications. The biodiesel we produce is sold throughout North Carolina, South Carolina and Virginia directly or through wholesale distributors. Currently, we are engaged in producing biodiesel and strategically purchasing biodiesel from other producers to meet commercial requirements. We also purify and sell glycerin, which is created as a byproduct of the biodiesel production process. Once the facility has accumulated sufficient glycerin to make full loads, it is typically sold to the market.
Our production process starts with purchasing the most cost effective and suitable agri-based feedstock (e.g., soy, canola, sunflower, cotton seed and chicken/pork fat). A sample of every feedstock is tested by our in-house laboratory in order to develop the proper recipe of catalysts for the transesterification process. The glycerin byproduct is then separated from the biodiesel and any excess methanol is recovered. Recovered methanol is either sold or reused in the production process. Glycerin is sold on the open market as either a crude product or as a further-processed tech grade product. While biodiesel is our main product, glycerin is a popular chemical used in pharmaceutical and hygiene applications and serves as an additional source of revenue.
Our facility is capable of producing biodiesel from a wide range of agri-based feedstocks: soy, canola, sunflower, cotton seed and chicken/pork fat. Biodiesel production costs are highly dependent on the cost of feedstock, and we believe the ability to utilize a variety of feedstocks efficiently and interchangeably is imperative to gaining a competitive advantage in the biodiesel production market.
Results of Operations
The following is a discussion and analysis of our results of operations for the three-month period ended March 31, 2017, and the factors that could affect our future financial condition. This discussion and analysis should be read in conjunction with our financial statements and the notes thereto included elsewhere in this report. Our financial statements are prepared in accordance with United States generally accepted accounting principles. All references to dollar amounts in this section are in United States dollars unless expressly stated otherwise.
Revenue and Revenue From Related Parties
The Company generated revenues of $68,131 during the period January 1, 2017 through March 31, 2017. Revenue generated during the period was due to sales of biodiesel, kerosene, de-methylated glycerin, and recovered methanol. Third-party transactions during the first quarter of 2017 included biodiesel sales totaling $43, de-methylated glycerin sales of $2,775, and recovered methanol sales of $658. Related party kerosene sales totaled $64,655 during the period under consideration.
The Company generated revenues of $624 during the period January 1, 2016 through March 31, 2016. Revenue generated during the period was due to sales of biodiesel and recovered methanol. Third-party biodiesel sales totaled $38 while recovered methanol sales of $586 during the first quarter of 2016.
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Comparing the Company’s activity for the period January 1, 2017 through March 31, 2017 to the activity for the period January 1, 2016 through March 31, 2016, there was an increase in revenue of $67,507 from $624 to $68,131. The period-over-period increase was primarily due to sale of kerosene to a related party during the quarter. NABE started leveraging its existing operating licenses to sell kerosene during the last quarter of 2016. Kerosene sales totaled $64,655 during the first quarter of 2017, but there were no kerosene sales during the same period in 2016. Biodiesel sales totaled $43 in the first quarter of 2017 but were $38 during the same period in 2016. De-methylated glycerin sales totaled $2,775 during the first quarter of 2017 compared with no sales of the recovered product during the first three months of 2016. Recovered methanol sales were $658 in the first quarter of 2017 while they totaled $568 in the same period for 2016.
Cost of Revenue
Cost of revenue totaled $99,265 during the period January 1, 2017 through March 31, 2017. For the same period, cost of revenue consisted of costs associated with raw materials, labor, overhead, and utilities.
Cost of revenue totaled $10,836 during the period January 1, 2016 through March 31, 2016. For the same period, cost of revenue consisted of costs associated with labor, overhead, and utilities.
Comparing the Company’s activity for the period January 1, 2017 through March 31, 2017 to the activity for the period January 1, 2016 through March 31, 2016, there was an increase in cost of revenues of $88,429 as the cost of revenues increased from $10,836 to $99,265. The period-over-period increase was in line with the newly implemented strategy for selling kerosene. During the current quarter, the Company did not recognize an offset to the cost of goods sold due to expiration of the blender tax credit associated with blended gallons (as of December 31, 2016). During the same period in the prior year, the Company recognized an offset to the cost of goods sold totaling $48,994 resulting from blender tax credit activity.
Gross Profit (Loss)
The Company had a gross loss of $48,013 for the period January 1, 2017 through March 31, 2017. The primary reason for the gross loss during the period was the Company’s inability to produce and sell biodiesel under adverse market conditions.
The Company had a gross loss of $29,275 for the period January 1, 2016 through March 31, 2016. The primary reason for the gross loss during the period was the Company’s inability to produce and sell biodiesel under adverse market conditions.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses totaled $17,193 for the period January 1, 2017 through March 31, 2017. During the period under consideration, SG&A expenses primarily consisted of costs associated with payroll, office overhead and professional fees.
SG&A expenses totaled $19,373 for the period January 1, 2016 through March 31, 2016. During the period under consideration, SG&A expenses primarily consisted of costs associated with payroll, office overhead and professional fees.
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Comparing the Company’s activity for the period January 1, 2017 through March 31, 2017 to the activity for the period January 1, 2016 through March 31, 2016, there was a decrease in SG&A expenses of $2,180 as SG&A declined from $19,373 to $17,193. The slight period-over-period indicates that general overhead remained stable considering the first quarter of the current year compared with the first quarter of the prior year.
Other Income (Expense)
Other income totaled $155 during the period January 1, 2017 through March 31, 2017. During the first quarter of 2017, this amount was attributable to funding received from the USDA Biofuel Program. Each quarter, the Company submits a Payment Request (Form RD-4288) and supporting documents to the USDA delineating those gallons produced/sold. Along with the documentation, the Company informs the USDA regarding the type and quantity of feedstocks utilized. These payment requests are reviewed by an agent of the USDA and then submitted as part of the “pool” for funding. Biodiesel producers compete for whatever funding is available from the USDA’s pool. Since it is difficult to predict the amount of funding that may be received, the Company only recognizes Other Income associated with the USDA Biofuel Program when the funds are received.
Other income totaled $105 during the period January 1, 2016 through March 31, 2016. During the first quarter of 2016, this amount was attributable to funding received from the USDA Biofuel Program.
Liquidity and Capital Resources
Working Capital
|
|
|
As of
March 31, 2017
|
|
As of
December 31, 2016
|
|
Current Assets
|
$
|
16,486
|
$
|
54,567
|
|
Current Liabilities
|
$
|
611,937
|
$
|
601,758
|
|
Working Capital Deficiency
|
$
|
(595,451)
|
$
|
(547,191)
|
|
Accumulated Deficit
|
$
|
(6,578,315)
|
$
|
(6,513,176)
|
Cash Flows
|
|
|
Three Months
Ended
March 31, 2017
|
|
Three Months
Ended
March 31, 2016
|
|
Cash used in operating activities
|
$
|
(8,556)
|
$
|
(19,217)
|
|
Cash used in investing activities
|
|
-
|
|
-
|
|
Cash used in financing activities
|
|
(2,176)
|
|
(3,286)
|
|
Net increase (decrease) in cash
|
$
|
(10,732)
|
$
|
(22,503)
|
As of March 31, 2017, our current assets totaling $16,486 consisted of cash, accounts receivable, inventory, other current assets and prepaid expenses. Our accounts payable and accrued liabilities and current portion of amounts due to related parties and third parties were $611,937 as of March 31, 2017. As a result, we had a working capital deficiency of $595,451.
Current assets for the Company totaled $54,567 as of December 31, 2016. Current liabilities for the Company totaled $601,758 as of December 31, 2016, which resulted in a working capital deficiency of $547,191.
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Comparing the working capital deficiency at March 31, 2017 to the deficiency at December 31, 2016, there was an increase of $48,260 as the deficiency increased from $547,191 to $595,451. The biggest contributor to the overall increase was the Company’s reduced production activity. Production activity was negatively impacted by lower petrodiesel (benchmark) market prices, and due to relatively higher feedstock prices. Kerosene sales of $64,655 during the current year did, however, mitigate the level of increase in the working capital deficiency. Since there were no kerosene sales during the same period in the prior year, the kerosene sales were comparatively significant.
On a short-term basis, it is anticipated that the Company’s liquidity needs will be met through selling biodiesel related products and RIN-gallons, through borrowing from related parties and through the sale of common stock. Considering the long-term view, the Company intends to provide liquidity through operation of its biodiesel plant in Lenoir, North Carolina. Since the December 31, 2016 balance sheet date, total receivables have decreased $11,782 with no amounts written off.
To date, cash flow requirements have been primarily met through sales of biodiesel related products, through collections of accounts receivable, through share issuances, and through gross proceeds from bank and related party loans. For the three months ended March 31, 2017, the Company generated a gross loss of $48,013 on sales of $68,131 over the same period. For three months ended March 31, 2016, the Company generated a gross loss of $29,275 on sales of $624 over the same period.
A portion of the Company’s operations have been funded through the issuance of common stock shares. As of March 31, 2017, the Company has issued 33,754,332 shares of common stock (31,774,332 shares of Class A stock and 1,980,000 shares of Class B stock).
To date, our cash flow requirements have been primarily met by equity financings and from operating the Company's biodiesel production facility in Lenoir, NC. Management expects to keep operational costs to a minimum until cash is available through financing or operating activities. Management plans to continue to seek other sources of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if at all.
Cash Used In Operating Activities
During the period January 1, 2017 through March 31, 2017, the Company’s cash used in operating activities totaled $8,556. For the same period, the Company’s cash used in operating activities was primarily attributable to collecting trade receivables associated kerosene sales, and making payments on trade payables. Trade receivables decreased $11,782 while inventories decreased $11,585. Trade payables increased $6,692 for the same period. Depreciation expense was $16,879 for the first three months of 2017.
During the period January 1, 2016 through March 31, 2016, the Company’s cash used in operating activities totaled $19,217. For the same period, the Company’s cash used in operating activities was primarily attributable to collecting trade receivables associated with biodiesel sales, and making payments on trade payables. Trade receivables decreased $22,528 while inventories decreased $29. Trade payables decreased $16,345 for the same period. Depreciation expense was $19,063 for the first three months of 2016.
Cash Used In Investing Activities
During the period January 1, 2017 through March 31, 2017, the Company had no cash flow related to investing activities.
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During the period January 1, 2016 through March 31, 2016, the Company had no cash flow related to investing activities.
Cash Used In Financing Activities
During the period January 1, 2017 through March 31, 2017, the Company’s cash flow related to financing activities totaled $2,176. This amount represents funds paid for short-term debt during the current period.
During the period January 1, 2016 through March 31, 2016, the Company’s cash flow related to financing activities totaled $3,286. This amount represents funds paid for short-term debt during the current period.
Future Financings
We anticipate that additional funding will be required in the form of equity financing from the sale of our common stock in order to proceed with our acquisition and expansion plan. However, we cannot provide investors with any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our marketing and acquisition plans. At this time, we do not have any arrangements in place for any future equity financing.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Recent Accounting Pronouncements
Management does not expect any financial statement impact from any recently-issued pronouncements.