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
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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.
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 and nine-month periods ended September 30, 2017 and 2016, 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 no revenue during the period July 1, 2017 through September 30, 2017.
The Company generated revenues of $75,243 during the period July 1, 2016 through September 30, 2016. Revenue generated during the period was due to sales of biodiesel, RINs, and materials recovered during glycerin purification processing. During the period July 1, 2016 through September 30, 2016, our biodiesel sales to third parties totaled approximately $42 and our sales to related parties amounted to
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$74,585. RINs were transferred to the related party for all such sales transacted during the third quarter of 2016. During the glycerin purification process, acid is added to the crude glycerin. As a result, high fatty acid oil separates from the glycerin and yields high fatty acid oil and recovered methanol. Sales of the recovered methanol sales were $616 for the period under consideration.
Comparing the Company’s activity for the period July 1, 2017 through September 30, 2017 to the activity for the period July 1, 2016 through September 30, 2016, there was a decrease in revenue of $75,243 as the Company generated no revenue during the current quarter. The period-over-period decrease was primarily due to inactivity at the biodiesel production in Lenoir, NC during the third quarter. Depressed benchmark (petroleum) prices, high raw material costs and expiration of the blender tax credit have severely hampered the biodiesel market.
The Company generated revenues of $71,035 during the period January 1, 2017 through September 30, 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 three quarters of 2017 included biodiesel sales totaling $43, diluted methanol sales of $2,904 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 $146,422 during the period January 1, 2016 through September 30, 2016. Revenue generated during the period was due to sales of biodiesel, RINs, and materials recovered during glycerin purification processing. Our third party biodiesel sales totaled $2,615 in the first nine months of 2016. We had biodiesel sales to related parties totaling $98,945 during the period under consideration. RIN sales transacted to related parties during the first three quarters of 2016 totaled $43,043. Recovered methanol sales were $1,819 for the period January 1, 2016 through September 30, 2016.
Comparing the Company’s activity for the period January 1, 2017 through September 30, 2017 to the activity for the period January 1, 2016 through September 30, 2016, there was a decrease in revenue of $75,387 from $146,422 to $71,035. The period-over-period activities differed during the periods under consideration. In the nine months ended September 30, 2017, revenue was primarily attributable to $64,655 in related party kerosene sales. There were no kerosene sales during the same period in 2016. The largest revenue contributor during the first nine months of 2016 was $43,043 in RIN sales. There were no RIN sales during the same period in 2017. Third party biodiesel sales totaled $2,615 in the first nine months of 2016, but only amounted to $43 for the same period in 2017. Related party biodiesel sales totaled $98,495 during the first nine months of 2016 while there were no related party biodiesel sales during the same period in 2017. Also impacting comparative revenues were sales of glycerin, and recovered methanol. The Company had glycerin sales of $2,775 during the first nine months of 2017, but had no glycerin sales during the same period in 2016. The Company recognized $1,819 in recovered methanol sales during the first nine months of 2016 and had $658 in recovered methanol sales during the same period in 2017. Also during 2017, the Company had diluted methanol sales totaling $2,904 but did not have diluted methanol sales during 2016.
Cost of Revenue
Cost of revenue totaled $13,428 during the period July 1, 2017 through September 30, 2017. For the same period, cost of revenue consisted of costs associated with payroll, overhead, and utilities.
Cost of revenue totaled $110,782 during the period July 1, 2016 through September 30, 2016. For the same period, cost of revenue consisted of costs associated with raw material (feedstocks, methanol, and catalyst) purchases, labor, overhead, and utilities.
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Comparing the Company’s activity for the period July 1, 2017 through September 30, 2017 to the activity for the period July 1, 2016 through September 30, 2016, there was a decrease in cost of revenues of $97,354 from $110,782 to $13,428. The period-over-period decrease was in line with reduced production activity and also affected by operating with a leaner production crew at the biodiesel facility in Lenoir, NC.
Cost of revenue totaled $132,191 during the period January 1, 2017 through September 30, 2017. For the same period, cost of revenue consisted of costs associated with kerosene purchases, labor, overhead, and utilities.
Cost of revenue totaled $195,588 during the period January 1, 2016 through September 30, 2016. For the same period, cost of revenue consisted of costs associated with raw material (feedstocks, methanol, and catalyst) purchases, labor, overhead, and utilities.
Comparing the Company’s activity for the period January 1, 2017 through September 30, 2017 to the activity for the period January 1, 2016 through September 30, 2016, there was a decrease in cost of revenues of $63,397 from $195,588 to $132,191. The period-over-period decrease was due to operating with a leaner production crew at the biodiesel production facility in Lenoir, NC. During the first nine months of 2016, the Company recognized an offset to the cost of goods sold totaling $48,994 as a result of filing for the blender tax credit associated with blended gallons. The Company did not recognize and blender tax credits during the same period in the current year. Further impacting the year-over-year increase was the newly implemented strategy for selling kerosene during the current year. Kerosene cost of sales totaled $46,895 during the first nine months of 2017 while there were no such transactions during the same period in 2016.
Gross Loss
The Company had a gross loss of $29,278 for the period July 1, 2017 through September 30, 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, including lower petroleum benchmark prices.
The Company had a gross loss of $54,563 for the period July 1, 2016 through September 30, 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, including lower petroleum benchmark prices.
The Company had a gross loss of $110,688 for the period January 1, 2017 through September 30, 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, including lower petroleum benchmark prices.
The Company had a gross loss of $106,156 for the period January 1, 2016 through September 30, 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, including lower petroleum benchmark prices.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses totaled $10,659 for the period July 1, 2017 through September 30, 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 $46,265 for the period July 1, 2016 through September 30, 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 July 1, 2017 through September 30, 2017 to the activity for the period July 1, 2016 through September 30, 2016, there was a decrease in SG&A expenses of $35,606 as SG&A decreased from $46,265 to $10,659. The period-over-period decrease was due primarily to reduced plant personnel at the biodiesel production facility in Lenoir, NC.
SG&A expenses totaled $47,080 for the period January 1, 2017 through September 30, 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 $87,289 for the period January 1, 2016 through September 30, 2016. During the period under consideration, SG&A expenses primarily consisted of costs associated with payroll, office overhead and professional fees.
Comparing the Company’s activity for the period January 1, 2017 through September 30, 2017 to the activity for the period January 1, 2016 through September 30, 2016, there was a decrease in SG&A expenses of $40,209 as SG&A declined from $87,289 to $47,080. The period-over-period decrease is in line with reduced personnel at the biodiesel production facility in Lenoir, NC. Otherwise, general overhead remained stable considering the first half of the current year compared with the first half of the prior year.
Other Income (Expense)
Other Income totaled $1,464 during the period July 1, 2017 through September 30, 2017. During the third quarter of 2017, this amount was attributable to a rebate from our insurance carrier. The $1,464 of Other Income recognized during the current quarter was related to a refund from our insurance carrier. Our carrier performed an audit of 2016 and determined that we were eligible for a refund. The refund was recorded in Other Income, instead of an offset to insurance expense, since its basis was an audit of a prior year
Other Income totaled $558 during the period July 1, 2016 through September 30, 2016. During the third quarter of 2016, this amount was attributable to $34 in funding received from the USDA Biofuel Program and to a $524 rebate from our insurance carrier. 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 $1,666 during the period January 1, 2017 through September 30, 2017. During the first nine months of 2017, this amount was attributable to funding received from the USDA Biofuel Program and from $1,464 in rebates from our insurance carrier.
Other Income totaled $720 during the period January 1, 2016 through September 30, 2016. During the first nine months of 2016, this amount was attributable to $196 in funding received from the USDA Biofuel Program and from $524 in rebates from our insurance carrier.
Liquidity and Capital Resources
Working Capital
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|
|
|
As of
September 30, 2017
|
|
As of
December 31, 2016
|
|
Current Assets
|
$
|
20,356
|
$
|
54,567
|
|
Current Liabilities
|
$
|
660,109
|
$
|
601,758
|
|
Working Capital Deficiency
|
$
|
(639,753)
|
$
|
(547,191)
|
|
Accumulated Deficit
|
$
|
(6,669,541)
|
$
|
(6,513,176)
|
Cash Flows
|
|
|
Nine Months
Ended
September 30, 2017
|
|
Nine Months
Ended
September 30, 2016
|
|
Cash used in operating activities
|
$
|
(59,902)
|
$
|
(60,804)
|
|
Cash provided by investing activities
|
|
14,271
|
|
-
|
|
Cash provided by (used in) financing activities
|
|
34,921
|
|
(9,298)
|
|
Net (decrease) in cash
|
$
|
(10,710)
|
$
|
(70,102)
|
As of September 30, 2017, our current assets totaling $20,356 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 $660,109 as of September 30, 2017. As a result, we had a working capital deficiency of $639,753.
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.
Comparing the working capital deficiency at September 30, 2017 to the deficiency at December 31, 2016, there was an increase of $92,562 as the deficiency increased from $547,191 to $639,753. The biggest contributor to the overall increase in the deficit was operating in an environment of unfavorable market conditions – lower benchmark petroleum prices while feedstock prices have not reduced commensurately.
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 $11,818 with no amounts written off.
To date, cash flow requirements have been primarily met through sales of biodiesel related products and kerosene, through collections of accounts receivable, through share issuances, and through gross proceeds from bank and related party loans. For the nine months ended September 30, 2017, the Company generated a gross loss of $110,688 on sales of $71,035 over the same period. For the nine months ended June 30, 2016, the Company generated a gross loss of $106,156 on sales of $146,422 over the same period.
A portion of the Company’s operations have been funded through the issuance of common stock shares. As of September 30, 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
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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. Our ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These factors raise substantial doubt that the Company will be able to continue as a going concern.
Cash Used In Operating Activities
During the period January 1, 2017 through September 30, 2017, the Company’s cash used in operating activities totaled $59,902. For the same period, the Company’s cash used in operating activities was primarily attributable to collecting trade receivables, and to making transactions on trade payables. Third party trade receivables decreased $11,818 while inventories decreased $13,787. Third party trade payables and accrued expenses increased $9,111 and $5,869, respectively, for the same period. Related party payables decreased $31,154 due to a conversion of trade payables to notes payable (see Cash Provided By Financing Activities below). Depreciation expense was $49,532 for the first nine months of 2017.
During the period January 1, 2016 through September 30, 2016, the Company’s cash used in operating activities totaled $60,804. For the same period, the Company’s cash provided by operating activities was primarily attributable to generating trade receivables associated with biodiesel and RIN sales, and making payments on trade payables. Third party trade receivables decreased $28 and related party receivables decreased $57,205 while inventories decreased $3,253. Trade payables increased $6,601 for the same period. Depreciation expense was $56,990 for the first nine months of 2016.
Cash Provided By Investing Activities
During the period January 1, 2017 through September, 2017, the Company’s cash flows provided by investing activities totaled $14,271. Cash provided by investing activity resulted from the sale of equipment comprising the diesel exhaust fluid (DEF) production system. The equipment was sold to a third party at book value, therefore, no gain or loss was recorded on the sale.
During the period January 1, 2016 through September, 2016, the Company had no cash flows related to investing activities.
Cash Provided By Financing Activities
During the period January 1, 2017 through September 30, 2017, the Company’s cash flow related to financing activities totaled $34,921. This amount represents proceeds provided from short-term financing from a related party and employee loan during the period under consideration. At December 31, 2016, the Company recognized a related party payable totaling $31,154. This amount was converted to a note payable during the current year.
During the period January 1, 2016 through September 30, 2016, the Company’s cash flow related to financing activities totaled $9,298. This amount represents funds paid for short-term debt during the current period.
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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.