UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Form
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 31, 2009
or
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ______________ to ______________
Commission
File No.
001-32918
GLOBAL ENERGY HOLDINGS
GROUP, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
84-1169517
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
No.)
|
|
|
|
3348
Peachtree Road NE
Tower
Place Building 200, Suite 250
Atlanta, Georgia
|
|
30326
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(404)
814-2500
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name, Former Address and Formal Fiscal Year, If Changed Since Last
Report)
Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
|
|
Non-accelerated
filer
¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
x
No
The
number of outstanding shares of the registrant’s common stock on May 15, 2009
was 29,070,103.
TABLE
OF CONTENTS
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|
PAGE
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
|
3
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PART
I – FINANCIAL INFORMATION
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4
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ITEM
1.
|
FINANCIAL
STATEMENTS
|
4
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|
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ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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18
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ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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24
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ITEM
4T.
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CONTROLS
AND PROCEDURES
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24
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PART
II – OTHER INFORMATION
|
25
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ITEM
1.
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LEGAL
PROCEEDINGS
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25
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ITEM
1A.
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RISK
FACTORS
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25
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ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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26
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ITEM
3.
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DEFAULTS
UPON SENIOR SECURITIES
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26
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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26
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ITEM
5.
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OTHER
INFORMATION
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26
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ITEM
6.
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EXHIBITS
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27
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
report contains “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements relate to future economic performance, plans
and objectives of management for future operations and projections of revenues
and other financial items that are based on the beliefs of our management, as
well as assumptions made by, and information currently available to, our
management.
The words
“may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,”
“intend,” “could,” “estimate,” “predict,” “potential,” “continue,” or the
negative of these terms or other similar expressions are intended to identify
forward-looking statements. We make forward-looking statements in the
Notes to our unaudited consolidated financial statements included in this report
and in Item 2 of this report. Some of the forward-looking statements
relate to our intent, belief or expectation regarding our strategies and plans,
including the following:
|
·
|
development
of our renewable energy business, including landfill gas-to-energy
projects in Georgia and Florida;
|
|
·
|
our
investments in strategically relevant, early stage energy
companies;
|
|
·
|
the
possible sale of one or more of our properties;
and
|
|
·
|
the
ways we may finance our future development and investment
activities.
|
Other
forward-looking statements relate to trends affecting our financial condition
and results of operations, our anticipated capital needs and expenditures, and
how we may address these needs.
These
statements involve risks, uncertainties and assumptions, including industry and
economic conditions, competition and other factors discussed in this report and
our other filings with the SEC. These forward-looking statements are
not guarantees of future performance and involve risks and
uncertainties. Actual results may differ materially from those that
are anticipated in the forward-looking statements. See Item 1A, Risk
Factors, in our Annual Report on Form 10-K for the year ended December 31, 2008
for a description of some of the important factors that may affect actual
outcomes.
For these
forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The cautionary statements made in this report are
intended to be applicable to all related forward-looking statements wherever
they may appear in this report. You should not place undue reliance
on the forward-looking statements, which speak only as of the date of this
report. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART
I - Financial Information
Item
1. Financial Statements
Global
Energy Holdings Group, Inc.
Consolidated
Balance Sheets
(in
thousands, except share data)
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
130
|
|
|
$
|
443
|
|
Short-term
marketable securities
|
|
|
-
|
|
|
|
3,153
|
|
Other
current assets
|
|
|
249
|
|
|
|
520
|
|
Total
current assets
|
|
|
379
|
|
|
|
4,116
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,977
|
|
|
|
2,110
|
|
Property
held for sale
|
|
|
3,500
|
|
|
|
3,500
|
|
Property
previously held for development
|
|
|
966
|
|
|
|
966
|
|
Intangible
assets landfill gas purchase rights
|
|
|
3,450
|
|
|
|
-
|
|
Other
assets
|
|
|
1,209
|
|
|
|
1,619
|
|
TOTAL
ASSETS
|
|
$
|
11,481
|
|
|
$
|
12,311
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,034
|
|
|
$
|
2,647
|
|
Notes
payable – related party
|
|
|
166
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
3,200
|
|
|
|
2,647
|
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
-
|
|
|
|
279
|
|
Minority
interest
|
|
|
-
|
|
|
|
116
|
|
Capitalized
lease obligation
|
|
|
3
|
|
|
|
5
|
|
Total
liabilities
|
|
|
3,203
|
|
|
|
3,047
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000,000 shares authorized; 0 shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized; 29,070,103
shares issued and outstanding in 2009 and 2008
|
|
|
29
|
|
|
|
29
|
|
Additional
paid-in-capital
|
|
|
89,370
|
|
|
|
89,318
|
|
Accumulated
deficit
|
|
|
(81,121
|
)
|
|
|
(80,083
|
)
|
Total
stockholders' equity
|
|
|
8,278
|
|
|
|
9,264
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
11,481
|
|
|
$
|
12,311
|
|
See
Notes to Consolidated Financial Statements
Global
Energy Holdings Group, Inc.
Consolidated
Statements of Operations
(in
thousands, except per share data)
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
|
$
|
3,012
|
|
Cost
of sales, including depreciation of $0 and $115 for 2009 and 2008,
respectively
|
|
|
-
|
|
|
|
3,561
|
|
Gross
loss
|
|
|
-
|
|
|
|
(549
|
)
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,920
|
|
|
|
1,740
|
|
Equity
compensation
|
|
|
52
|
|
|
|
137
|
|
Depreciation
and amortization
|
|
|
133
|
|
|
|
18
|
|
Research
and development
|
|
|
-
|
|
|
|
65
|
|
Total
operating expenses
|
|
|
2,105
|
|
|
|
1,960
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations before other income (expense)
|
|
|
(2,105
|
)
|
|
|
(2,509
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
23
|
|
|
|
72
|
|
Interest
expense
|
|
|
-
|
|
|
|
(13
|
)
|
Gain
on sale of interest in Southeast Biofuels, LLC
|
|
|
394
|
|
|
|
-
|
|
Gain
on sale of investment in New Generation Biofuels Holdings,
Inc.
|
|
|
583
|
|
|
|
757
|
|
Loss
on equity of New Generation Biofuels Holdings, Inc.
|
|
|
-
|
|
|
|
(280
|
)
|
Other
income
|
|
|
67
|
|
|
|
1
|
|
Total
other income (expense)
|
|
|
1,067
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,038
|
)
|
|
$
|
(1,972
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
28,609,103
|
|
|
|
28,609,103
|
|
See
Notes to Consolidated Financial Statements
Global
Energy Holdings Group, Inc.
Consolidated
Statements of Stockholders’ Equity
(Unaudited)
(in
thousands)
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in-
Capital
|
|
|
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
|
28,609
|
|
|
$
|
29
|
|
|
$
|
89,318
|
|
|
$
|
(80,083
|
)
|
|
$
|
9,264
|
|
Options
granted under 2005 Incentive Compensation Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
(15
|
)
|
Issuance
of restricted common stock under 2005 Incentive Compensation
Plan
|
|
|
461
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
Balance
at December 31, 2008 (restated)
|
|
|
29,070
|
|
|
|
29
|
|
|
|
89,318
|
|
|
|
(80,083
|
)
|
|
|
9,264
|
|
Options
granted under 2005 Incentive Compensation Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
-
|
|
|
|
52
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,038
|
)
|
|
|
(1,038
|
)
|
Balance
at March 31, 2009
|
|
|
29,070
|
|
|
$
|
29
|
|
|
$
|
89,370
|
|
|
$
|
(81,121
|
)
|
|
$
|
8,278
|
|
See
Notes to Consolidated Financial Statements
Global
Energy Holdings Group, Inc.
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,038
|
)
|
|
$
|
(1,972
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
133
|
|
|
|
199
|
|
Issuance
of common stock, stock options and warrants for services
rendered
|
|
|
52
|
|
|
|
137
|
|
Gain
on sale of stock in New Generation Biofuels Holdings, Inc.
|
|
|
(583
|
)
|
|
|
(757
|
)
|
Gain
on sale of interest in Southeast Biofuels, LLC
|
|
|
(394
|
)
|
|
|
-
|
|
Loss
on equity of New Generation Biofuels Holdings, Inc.
|
|
|
-
|
|
|
|
280
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
-
|
|
|
|
148
|
|
Inventories
|
|
|
-
|
|
|
|
4
|
|
Other
assets
|
|
|
681
|
|
|
|
(171
|
)
|
Accounts
payable and accrued expenses
|
|
|
386
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(763
|
)
|
|
|
(2,202
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
-
|
|
|
|
(6
|
)
|
Purchase
of intangible assets
|
|
|
(3,450
|
)
|
|
|
-
|
|
Investment
in Carbon Motors Corp.
|
|
|
-
|
|
|
|
(250
|
)
|
Investment
in note receivable Consus Ethanol, LLC
|
|
|
-
|
|
|
|
(500
|
)
|
Cash
received from redemption of short-term marketable
securities
|
|
|
3,153
|
|
|
|
-
|
|
Cash
received from sale of investment in New Generation Biofuels Holdings,
Inc.
|
|
|
583
|
|
|
|
777
|
|
Net
cash provided by investing activities
|
|
|
286
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
of issuance of note payable-related party
|
|
|
166
|
|
|
|
-
|
|
Payment
of notes payable
|
|
|
-
|
|
|
|
(4
|
)
|
Payment
of capitalized lease obligation
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
164
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(313
|
)
|
|
|
(2,187
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
443
|
|
|
|
12,322
|
|
Cash
and cash equivalents - end of period
|
|
$
|
130
|
|
|
$
|
10,135
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
13
|
|
Income
taxes paid
|
|
|
9
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Cancellation
of debt and minority interest payable relating to the sale
of
|
|
|
|
|
|
|
|
|
Southeast
Biofuels, LLC
|
|
$
|
394
|
|
|
$
|
-
|
|
See Notes to Consolidated Financial
Statements
Global
Energy Holdings Group, Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
|
DESCRIPTION OF BUSINESS,
ORGANIZATION AND GOING
CONCERN
|
Global
Energy Holdings Group, Inc. (the “Company”) is a diversified renewable energy
company based in Atlanta, Georgia. The Company’s principal operating
division is Global Energy Systems, Inc. (“GES”), which is developing renewable
energy projects, including biomass projects, such as gasification, and
landfill-gas-to-energy projects.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of
business. However, the Company has reported net losses of $13.3
million and $31.3 million and negative cash flows from operations of $10.3
million and $9.7 million for the years ended December 31, 2008 and 2007,
respectively. For the three months ended March 31, 2009, the Company
has reported a net loss of $1.0 million and negative cash flows from operations
of $0.8 million. The Company will need substantial additional cash to
pursue its plans and projects, and given the current economic and financial
climate, the Company can give no assurance that it will be able to raise the
additional capital it needs on commercially acceptable terms, or at
all. The Company will need to reduce costs and raise additional
financing to fund operations and long term business objectives. The
Company’s continued existence is dependent upon several factors, including
obtaining additional debt or equity financing, and developing and completing
renewable energy projects. Management is investigating various
sources of debt or equity financing and is developing marketing and production
plans for its products. The matters discussed above, however, raise
substantial doubt about the Company’s ability to continue as a going
concern. The Company’s consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
The
Company’s properties and investments currently include: (1) a former
pharmaceutical plant in Augusta, Georgia and a former fiberboard manufacturing
facility in Spring Hope, North Carolina, both of which the Company is seeking to
sell; (2) an ethanol plant in Blairstown, Iowa that produced ethanol from corn
until May 1, 2008, when the Company ceased ethanol production, and which the
Company is currently trying to sell; (3) the rights to purchase landfill gas
produced at the Hickory Ridge landfill in Conley, Georgia and at the Zemel Road
Landfill in Port Charlotte, Florida; and (4) minority investments in other
renewable energy or clean tech businesses. The Company’s only source
of revenue has been from its sales of ethanol and related products at its
Blairstown corn-based ethanol plant. Due to the high prices for corn
and natural gas, the Company ceased production of ethanol at the Blairstown
plant on May 1, 2008, as mentioned above, to reduce its operating
losses.
NOTE 2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis
of Presentation
The
accompanying consolidated financial statements and related footnotes should be
read in conjunction with the consolidated financial statements and related
footnotes contained in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 filed with the U.S. Securities and Exchange Commission
(the “SEC”) on April 15, 2009.
The
consolidated financial statements have been prepared in accordance with the
rules and regulations of the SEC related to interim statements. The financial
information contained herein is unaudited; however, in the opinion of
management, all adjustments necessary for a fair presentation of such financial
information have been included. All such adjustments are of a normal recurring
nature. The results of operations for the three months ended March 31, 2009 and
2008 are not necessarily indicative of the results expected for the full year.
The balance sheet presented as of December 31, 2008 is derived from audited
financial statements.
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities. Significant estimates include the
valuation of shares and options issued for services or in connection with
acquisitions and the valuation of investments, fixed assets and intangibles,
their estimated useful lives and accruals for litigation and other
contingencies. The Company evaluates its estimates on an ongoing
basis. Actual results could differ from those estimates in the near
term under different assumptions or conditions.
Cash,
Cash Equivalents and Short-Term Marketable Securities
The
Company invests its excess cash in money market funds and in highly liquid debt
instruments of the U.S. government and its agencies. All highly
liquid investments with stated maturities of three months or less from date of
purchase are classified as cash equivalents; all investments with stated
maturities of greater than three months are classified as marketable
securities.
Approximately
$3,153,000 of the Company’s cash as of December 31, 2008 was held in the Reserve
U.S. Government Fund (a money market fund). In September 2008,
redemptions were temporarily suspended from the reserve fund so that an orderly
liquidation could be effected for the protection of the reserve fund’s
investors. During the three months ended March 31, 2009, the Company
received all of its current holdings in the reserve fund at no
loss.
Accordingly,
the Company reclassified the fair value of this fund of $3,153,000 from cash and
cash equivalents to short-term marketable securities on the consolidated balance
sheet at December 31, 2008 because the investment in the reserve fund did not
then meet the definition of a cash equivalent.
Loss
per Common Share
Loss per
share (“EPS”) is computed based on the weighted average number of common shares
outstanding and excludes any potential dilution. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock, which would then share in the earnings of the
Company. The shares issuable upon the exercise of stock options and
warrants are excluded from the calculation of net loss per share, as their
effect would be antidilutive.
During
the periods presented, the Company had securities outstanding that could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted earnings per share, as their effect would have
been anti-dilutive. The anti-dilutive securities are as follows (in
thousands):
|
|
Balance at March 31,
|
|
|
|
2009
|
|
2008
|
|
Employee
stock options
|
|
5,629
|
|
|
5,520
|
|
Unvested
restricted stock
|
|
461
|
|
|
-
|
|
Series
A warrants
|
|
1,517
|
|
|
1,517
|
|
Series
B warrants
|
|
759
|
|
|
759
|
|
Placement
agent warrants
|
|
607
|
|
|
607
|
|
Other
warrants
|
|
1,075
|
|
|
1,213
|
|
|
|
10,048
|
|
|
9,616
|
|
Concentration
of Credit Risk
Cash that
is deposited with major financial institutions or invested in money market funds
is not insured by the Federal Deposit Insurance Corporation.
Costs
Associated with Issuance of Stock
Investment
banking fees and related costs associated with the sale of stock are charged to
stockholders’ equity.
Stock
Issued for Non-Cash Consideration
Shares of
common stock issued for services, and in connection with acquisitions, have been
valued at the estimated fair value of the shares at the time they were
issued.
Investments
The
Company accounts for its investments in accordance with FASB Interpretation 46R,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (“FIN 46R”). A variable interest entity
(“VIE”) is a corporation, partnership, trust, or any other legal structure used
for business purposes where equity investors do not provide sufficient financial
resources for the entity to support its activities as described in FIN
46R. FIN 46R requires a VIE to be consolidated by a company if that
company is the primary beneficiary of the VIE. The primary
beneficiary of a VIE is an entity that is subject to a majority of the risk of
loss from the VIE’s activities, or entitled to receive a majority of the
entity’s residual returns, or both.
For
investments that are not required to be consolidated, the Company follows the
guidance provided by APB 18 “The Equity Method of Accounting for Investments in
Common Stock.”
Costs
of Start-up Activities
Start-up
activities are defined broadly in Statement of Position 98-5,
Reporting on the Costs of Start-Up
Activities
, as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
operation or activities related to organizing a new entity. The
Company’s start-up activities consist primarily of costs associated with new or
potential sites for renewable energy projects, including biomass gasification
and landfill gas-to-energy projects. All the costs associated with a
potential site are expensed, until the site is considered viable by management,
at which time costs would be considered for capitalization based on
authoritative accounting literature. These costs are included in
selling, general, and administrative expenses in the consolidated statement of
operations.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Major additions are
capitalized and depreciated over their estimated useful
lives. Repairs and maintenance costs are expensed as
incurred. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the
assets. The range of useful lives for each category of fixed assets
is as follows: buildings and land improvements – 20 years, process equipment –
10 years, lab equipment – 7 years, office equipment – 5 years, and computers – 3
years.
Impairment
of Long-Lived Assets
The
Company evaluates impairment of long-lived assets in accordance with SFAS No.
144,
Accounting for the
Impairment or Disposal of Long-Lived Assets.
The Company
assesses the impairment of long-lived assets, including property and equipment
and purchased intangibles subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The asset impairment review assesses the fair value of
the assets based on the future cash flows the assets are expected to
generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus
net proceeds expected from the disposition of the asset (if any) are less than
the related asset’s carrying amount. Impairment losses are measured
as the amount by which the carrying amounts of the assets exceed their fair
values. Property held for sale is recorded at the lower of its
carrying amount or fair value less costs to sell. Estimates of future
cash flows are judgments based on management’s experience and knowledge of the
Company’s operations and the industries in which the Company
operates. These estimates can be significantly affected by future
changes in market conditions and the economic environment.
Intangible
Assets-Landfill Gas Purchase Rights
The
Company accounts for intangible assets with finite lives in accordance with SFAS
No. 142,
Goodwill and Other
Intangible Assets,
which
requires
an annual review for impairment, or more frequently if impairment indicators
arise.
The
Company’s intangible assets at March 31, 2009 consists of landfill gas purchase
rights acquired during the three months ended March 31, 2009. Due to
lack of adequate capital, the Company’s board of directors has decided to seek a
buyer or significant equity partner for the landfill gas rights and
projects. The Company is currently in negotiations with potential
buyers and equity partners for the landfill gas rights with respect to its
Hickory Ridge landfill project. The Company paid an aggregate
purchase price of $3,350,000 to acquire the landfill gas purchase rights at the
Hickory Ridge landfill in Conley, Georgia. The Company agreed to pay
an aggregate purchase price of $350,000 to acquire the landfill gas purchase
rights at the Zemel Road landfill in Port Charlotte, Florida, with $100,000
already paid by the Company and the remaining $250,000 payable by the Company
when certain milestones with respect to the Port Charlotte landfill gas project
are met.
Revenue
Recognition
The
Company follows a policy of recognizing sales revenue at the time the product is
shipped to its customers.
Research
and Development
Research
and development costs are expensed as incurred. Research and
development costs were $0 and $65,000 for the three months ended March 31, 2009
and 2008, respectively, consisting of amortization expense relating to a
research agreement acquired in connection with the Company’s acquisition of
Advanced Biomass Gasification Technologies, Inc. in 2006.
Income
Taxes
Deferred
tax assets and liabilities are computed based on the difference between the book
and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on changes in
the assets and liabilities from period to period. These differences
arise primarily from the Company’s net operating losses. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Fair
Value of Financial Instruments
The
carrying amount of cash and cash equivalents, accounts payable and accrued
expenses approximate fair value because of the short-term nature of these
instruments.
Segment
Reporting
The
Company has operated as a single segment. The Company’s only source
of revenue has been from its sales of ethanol and related products at its
Blairstown corn-based ethanol plant, which ceased ethanol production as of May
1, 2008.
Recently
Issued Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value Measurements (“SFAS 157”), which clarifies that fair value is
the amount that would be exchanged to sell an asset or transfer a liability in
an orderly transaction between market participants. Further, the
standard establishes a framework for measuring fair value in generally accepted
accounting principles and expands certain disclosures about fair value
investments. SFAS 157 became effective for financial assets and
liabilities on January 1, 2008. The FASB deferred the implementation
of the provisions of SFAS 157 relating to certain nonfinancial assets and
liabilities until January 1, 2009. The adoption of SFAS 157 did not
materially affect how the Company determines fair value.
In
December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
141R”). SFAS 141R broadens the guidance of SFAS 141, extending its
applicability to all transactions and other events in which one entity obtains
control over one or more other businesses. It broadens the fair value
measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations; and stipulates that
acquisition related costs be expensed rather than included as part of the basis
of the acquisition. SFAS 141R expands required disclosures to improve
the ability to evaluate the nature and financial effects of business
combinations. SFAS 141R is effective for all transactions entered
into on or after January 1, 2009. This standard could materially
impact the Company’s future financial results to the extent that the Company
makes significant acquisitions, as related acquisition costs will be expensed as
incurred compared to the Company’s previous practice of capitalizing those costs
and amortizing them over the estimated useful life of the assets
acquired.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS 160”). SFAS 160 will require
noncontrolling interests (previously referred to as minority interests) to be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. SFAS 160 is effective for periods
beginning on or after December 15, 2008. This statement results in
minority interest currently classified in the “mezzanine” section of the balance
sheet to be reclassified as a component of stockholders’ equity, and minority
interest expense will no longer be recorded in the consolidated statement of
operations. The adoption of SFAS 160 did not have a material impact
on the Company’s financial position, results of operations or cash
flows.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (“SFAS 161”). The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, results of operations and cash
flows. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008. The adoption of SFAS 161 did not have a material impact on the
Company’s financial position, results of operations or cash
flows.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements that are presented in conformity with
GAAP. SFAS 162 became effective on November 15, 2008. The
adoption of SFAS 162 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
NOTE 3.
|
PROPERTY AND
EQUIPMENT
|
Property
and equipment at the Company’s ethanol plant in Blairstown, Iowa, consists of
the following:
|
|
March
31,
2009
|
|
|
December 31,
2008
|
|
Land
|
|
$
|
28,000
|
|
|
$
|
28,000
|
|
Buildings
|
|
|
732,000
|
|
|
|
732,000
|
|
Machinery
and equipment
|
|
|
2,162,000
|
|
|
|
2,162,000
|
|
Land
improvements
|
|
|
569,000
|
|
|
|
569,000
|
|
|
|
|
3,491,000
|
|
|
|
3,491,000
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
1,702,000
|
|
|
|
1,587,000
|
|
|
|
$
|
1,789,000
|
|
|
$
|
1,904,000
|
|
Property
and equipment at the Company’s corporate office consists of the
following:
|
|
March
31,
2009
|
|
|
December 31,
2008
|
|
Furniture,
fixtures and equipment
|
|
$
|
324,000
|
|
|
$
|
324,000
|
|
Less
accumulated depreciation and amortization
|
|
|
136,000
|
|
|
|
118,000
|
|
|
|
$
|
188,000
|
|
|
$
|
206,000
|
|
NOTE 4.
|
PROPERTY HELD FOR
SALE
|
Property
held for sale consists of the following fixed assets at:
|
|
March
31,
2009
|
|
|
December 31,
2008
|
|
Land
|
|
$
|
371,000
|
|
|
$
|
371,000
|
|
Buildings,
machinery and equipment
|
|
|
3,129,000
|
|
|
|
3,129,000
|
|
|
|
$
|
3,500,000
|
|
|
$
|
3,500,000
|
|
The
Company has decided that its facility in Augusta, Georgia does not fit within
its long-term corporate strategy. The Company’s board of directors has decided
to seek a buyer for the facility. The Company can offer no assurance regarding
how long it will take to sell the facility or the price the Company might
receive. The carrying value of this property at March 31, 2009 and at December
31, 2008, is $3.5 million.
During
the year ended December 31, 2008, the Company recorded an impairment charge of
$554,000 on the fixed assets purchased in connection with the proposed citrus
waste-to-ethanol demonstration plant in Bartow, Florida. The carrying
value of this property at December 31, 2008 was $0 (zero dollars). On
January 19, 2009, the Company sold its interest in these assets to Renewable
Spirits, LLC in return for cancellation of the remaining balance on the note the
Company issued to Renewable Spirits in connection with the acquisition of the
assets. The remaining balance on the note at the time of the
agreement was $279,000. As a result of this agreement, the Company
recorded a gain on the sale of $394,000 during the three months ended March 31,
2009. The Company no longer has an interest in these
assets.
NOTE
5.
|
PROPERTY
PREVIOUSLY HELD FOR
DEVELOPMENT
|
Property
previously held for development at the Blairstown II and Spring Hope sites
consists of the following fixed assets:
|
|
March
31,
2009
|
|
|
December 31,
2008
|
|
Land
|
|
$
|
966,000
|
|
|
$
|
966,000
|
|
|
|
$
|
966,000
|
|
|
$
|
966,000
|
|
NOTE 6.
|
INTANGIBLE ASSETS – LANDFILL GAS
PURCHASE RIGHTS
|
On
February 2, 2009, the Company acquired, pursuant to a Landfill Gas Sale and
Purchase Agreement dated November 14, 2008 (as amended, the “Hickory Ridge
Agreement”), the right to purchase from a subsidiary of Republic Services, Inc.
(“Republic”) all of the landfill gas generated at Republic’s Hickory Ridge
landfill located in Conley (DeKalb County), Georgia (“Hickory Ridge”) through
December 31, 2029. Due to lack of adequate capital, the Company’s
board of directors has decided to seek a buyer or significant equity partner for
this landfill gas purchase right and project. The Company is
currently in negotiations with potential buyers and equity partners for the
landfill gas purchase rights and project. The Company paid an
aggregate purchase price of $3,350,000 to acquire the Hickory Ridge landfill gas
purchase rights.
On
January 20, 2009, GES-Port Charlotte, LLC, an indirect wholly-owned subsidiary
of the Company, entered into a project assignment agreement (the “Port Charlotte
Project Assignment Agreement”) with North American Natural Resources-Southeast,
LLC (“NANR”). Under the Port Charlotte Project Assignment Agreement,
the Company acquired (a) all of NANR’s rights to purchase from Charlotte County,
Florida all the landfill gas generated by or at its Zemel Road Landfill site
(the “Port Charlotte landfill”) and (b) the exclusive right to construct and
operate a landfill gas-to-energy project at the Port Charlotte
landfill. At the closing, the Company paid NANR $100,000, which
included a credit for the Company’s previous non-refundable deposit of
$10,000. In addition, the Company agreed to pay the remaining balance
of $250,000 to NANR in cash upon certain events or milestones that triggers the
Company’s obligation to make payments.
NOTE 7.
|
OTHER
INVESTMENTS
|
In
January 2008, the Company invested $250,000 in Carbon Motors Corporation, a
development stage American automaker developing a specially-built law
enforcement vehicle featuring a clean diesel engine that can run on biodiesel
fuel. For its investment, the Company received 200,000 shares of
Carbon Motors ’ Series B Preferred Stock and a warrant that is initially
exercisable for 30,000 shares of Series B Preferred Stock at a price of $1.05
per share with a term of five years. This amount is included in other
assets in the consolidated balance sheets at March 31, 2009 and December 31,
2008.
In
January 2008, the Company made a $500,000 investment in Consus Ethanol, LLC of
Pittsburgh, Pennsylvania, a development stage company, pursuant to a convertible
promissory note. Consus Ethanol has a permitted site in western
Pennsylvania, where it plans to build the first of several ethanol
plants. Its business model calls for a cogeneration plant using waste
coal to power the companion ethanol plant. The note bears interest at
the rate of 10% per annum and had an initial term of six
months. During July 2008, the Company and Consus agreed to extend the
note an additional six months through December 31, 2008. At December
31, 2008, the Company and Consus agreed to extend the note, including accrued
interest to date in the amount of $548,493, until December 31,
2009. An additional 160,000 warrants were issued with an exercise
price of $1.25 per unit and an expiration date four years from the signing of
the note. The Company may also convert the outstanding principal and accrued
interest to shares of common stock by providing 30 days written notice to Consus
before the maturity date or in the event Consus proposes to enter into certain
transactions. Northeast Securities, Inc. is a financial advisor
to Consus Ethanol; the chairman of the Company’s board of directors was also
vice chairman of Northeast Securities until September 2008. The
Company’s investment in Consus is included in other assets in the consolidated
balance sheets at March 31, 2009 and December 31, 2008.
NOTE 8.
|
GAIN ON SALE OF NEW GENERATION
BIOFUELS HOLDINGS, INC.
SHARES
|
The
Company considered its investment in New Generation Biofuels Holdings, Inc.
(“NGBF”), formerly named H2Diesel Holdings, Inc., as a variable interest in a
variable interest entity (“VIE”). NGBF is the licensee of a
proprietary vegetable oil-based diesel biofuel to be used as a substitute for
conventional petroleum diesel and biodiesel, heating and other fuels under an
exclusive license agreement with the inventor of the biofuel. NGBF
had in turn sublicensed this technology to the Company. Because the
Company was not the primary beneficiary of the VIE, the Company had accounted
for its investment in NGBF utilizing the equity method of accounting pursuant to
Accounting Principles Board (“APB”) Opinion No. 18,
The Equity Method of Accounting for
Investments in Common Stock
. At December 31, 2008, the
Company owned 5,301,300 shares of NGBF common stock. On March 18,
2009, the Company sold its remaining 5,301,300 shares of NGBF common stock,
which represented 26.1% of the outstanding common stock of NGBF, based on
20,280,614 shares reported to be outstanding as of January 14, 2009
in NGBF’s Pre-Effective Amendment No.1 to its Registration Statement on
Form S-3 filed with the SEC on January 15, 2009, to 2020 Energy, LLC, an
Arizona limited liability company, for an aggregate purchase price of
$583,143. In connection with the March 18, 2009 stock sale, the
Company agreed to assign its rights in the sublicense for the NGBF additive
technology to 2020 Energy, LLC, conditioned upon 2020 Energy, LLC obtaining the
written consent of NGBF to the assignment.
NOTE 9.
|
INCENTIVE COMPENSATION
PLAN
|
The
Company’s 2005 Incentive Compensation Plan (the “Plan”) provides for grants of
stock options, stock appreciation rights or SARs, restricted or deferred stock,
other stock-related awards and performance awards that may be settled in cash,
stock or other property. On February 12, 2008, at the Company’s
annual meeting, the Company’s stockholders approved an amendment to the Plan to
increase the number of shares of common stock available for issuance under the
Plan from 4,000,000 to 6,500,000, which covered options that were previously
granted under the Plan subject to stockholder approval of the increase in the
number of shares available under the Plan. Persons eligible to
receive awards under the Plan are the officers, directors, employees and
consultants to the Company and its subsidiaries.
During
the three months ended March 31, 2009, the compensation committee granted to
directors, options to purchase 345,000 shares of common stock under the Plan at
a purchase price per share equal to the closing price of the common stock on the
NYSE Amex exchange on the date of grant (which was $0.25 per
share). Using a Black-Scholes option pricing model, the fair value of
these options on the date of grant was $56,000 using a closing price of the
common stock on the date of grant, or $0.25 per share, and is being amortized as
compensation expense over the estimated vesting period of the options. The
options have a term of ten years and vest in two equal installments: 50% of the
shares vested on March 31, 2009 and the remaining 50% of the shares will vest on
June 16, 2009. During the three months ended March 31, 2009, total
compensation expense related to options and restricted common stock awarded
under the Plan was $52,000.During the three months ended March 31, 2008, options
to purchase 275,000 shares of common stock were granted to
directors.
As of
March 31, 2009 and 2008, options to purchase 5,629,000 and 5,520,000 shares of
common stock were outstanding under the Plan, respectively. As of
March 31, 2009, 778,070 shares of common stock were outstanding under the Plan,
and a total of 92,930 shares were available for future awards under the
Plan.
The
weighted average fair value of stock options is estimated at the grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Exercise
price
|
|
$
|
.25
|
|
|
$
|
.42
|
|
Risk-free
interest rate
|
|
|
1.73
|
%
|
|
|
2.36
|
%
|
Expected
life of options (in years)
|
|
|
10.0
|
|
|
|
10.0
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
55.0
|
%
|
|
|
55.0
|
%
|
During
the three months ended March 31, 2009 and 2008, the Company issued no
warrants. At March 31, 2009 and 2008, there were warrants to purchase
3,958,056 and 4,095,834 shares of common stock, with weighted average exercise
prices of $5.84 and $5.80, respectively,
outstanding.
NOTE 11.
|
JOINT VENTURE AND
ACQUISITIONS
|
Landfill Gas Sale and Purchase
Agreement.
On February 2, 2009, the Company acquired the right to
purchase from a subsidiary of Republic Services, Inc. (“Republic”) all of the
landfill gas generated at Republic’s Hickory Ridge landfill located in Conley
(DeKalb County), Georgia (“Hickory Ridge”) through December 31,
2029. Subsequent to the acquisition of these rights and due to a
lack of adequate capital available to the Company, the Company’s board of
directors has decided to seek a buyer or significant equity partner for the
landfill gas purchase rights and this project. The Company is currently in
negotiations with potential buyers and equity partners for the
property. The Company paid an aggregate purchase price of
$3,350,000 to acquire the Hickory Ridge landfill gas purchase
rights.
Pursuant
to the Hickory Ridge Agreement, the Company’s original intent was to lease a
portion of the Hickory Ridge property on which the Company would, at the
Company’s cost, acquire or construct a processing facility to process the
landfill gas collected at Hickory Ridge. If at any time the Company
decided to proceed as originally intended, the Company would be required, at the
Company’s cost, to obtain all necessary permits and to construct all required
pipelines and ancillary facilities to transport the collected landfill gas to
the processing facility and the processed gas to any purchaser, as well as to
install all metering and measuring equipment. If the Company does not
complete the processing facility, pipelines and ancillary facilities by December
31, 2010, subject to the Company’s right to extend the completion date through
December 31, 2012 under certain circumstances, Republic will have the right to
terminate the Hickory Ridge Agreement.
If the
Company proceeds as originally intended and acquires or constructs a processing
facility, once the Company’s processing facility commences commercial operation,
the Company will pay Republic for landfill gas received at the processing
facility a percentage royalty on the sum of the revenue that the Company
collects from the sale of gas from the processing facility plus the value of
certain environmental allowances, credits and offsets attributable to the
Company’s processing facility’s displacement of conventional energy generation.
If the Company is unsuccessful in obtaining financing to complete this project,
it could lose its rights under the agreement.
North American Natural
Resources-Southeast, LLC Agreement.
On January 20, 2009,
GES-Port Charlotte, LLC, an indirect wholly-owned subsidiary of the Company,
entered into a project assignment agreement (the “Port Charlotte Project
Assignment Agreement”) with North American Natural Resources-Southeast, LLC
(“NANR”). Under the Port Charlotte Project Assignment Agreement, the
Company acquired (a) all of NANR’s rights to purchase from Charlotte County,
Florida all the landfill gas generated by or at its Zemel Road Landfill site
(the “Port Charlotte landfill”) and (b) the exclusive right to construct and
operate a landfill gas-to-energy project at the Port Charlotte
landfill.
In
consideration of payments the Company agreed to make as described in the
paragraph below, NANR transferred and assigned to the Company all of its rights
related to the Port Charlotte landfill gas project, which it had previously
acquired from Charlotte County in July 2008 pursuant to an Agreement Between
Charlotte County and North American Natural Resources-Southeast for Landfill Gas
Purchase and a Site Lease Agreement (the “assigned contracts”). The
Company, Charlotte County and NANR subsequently approved the assignment and
executed a novation agreement substituting GES-Port Charlotte for NANR as the
party to each of the assigned contracts.
Under the
terms of the Port Charlotte Project Assignment Agreement, the aggregate purchase
price for the rights related to the Port Charlotte landfill gas project is
$350,000, subject to certain conditions as described below. At the
closing, the Company paid NANR $100,000, which included a credit for the
Company’s previous non-refundable deposit of $10,000. In addition,
the Company agreed to pay the remaining balance of $250,000 to NANR in cash upon
the occurrence of each event or milestone that triggers the
Company’s obligation to make payments as follows:
|
|
a
$100,000 payment within 10 business days after the Company procures the
air construction permit and solid waste permit for the
project;
|
|
|
a
$50,000 payment on the Company’s installation of a landfill gas collection
system as provided in the assigned contracts;
|
|
|
a
$50,000 payment on the Company’s execution of a purchase power agreement
with a local electric utility and the agreement that utility for the
construction of the necessary interconnect; and
|
|
|
a
$50,000 payment within 10 business days after the first anniversary of the
commencement of operation of the
project.
|
For
purposes of the last $50,000 payment, the “commencement of operation” means the
day upon which the project has been generating electricity for sale to a local
utility for at least 24 hours per day for 7 consecutive days. If any
of the events or milestones listed in the bullet points above is unachievable or
unattainable within a reasonable period of time due to no fault of the Company,
the Company is not obligated to make the payment to NANR associated with the
event or milestone, and the Company will not be obligated to pursue, nor make
any payments associated with, any subsequent events or
milestones. However, if the Company fails to complete construction of
the landfill gas collection system and the facility to convert the landfill gas
at Zemel Road into energy by January 22, 2010, the Company will become liable to
Charlotte County for liquidated damages equal to $1,000 per day for each day of
delay in completing the collection system and $200 per day for each day of delay
in completing the energy facility.
In
connection with the Port Charlotte Project Assignment Agreement, the Company
assumed and agreed to perform all commitments and obligations of NANR under the
assigned contracts as of the close of business on January 23,
2009. Subject to certain conditions, NANR and the individual who is
its sole member agreed to indemnify us for up to $350,000 for a period of 5
years after the commencement of operation for any loss the Company incurs as a
result of fees and expenses imposed on NANR and any breach of representation,
warranty or covenant made by NANR under the Port Charlotte Project Assignment
Agreement. If the Company is unsuccessful in obtaining financing to
complete this project, it could lose its rights under the
agreement.
Sale of Southeast Biofuels
Interest.
On January 19, 2009, the Company entered into an
agreement with Renewable Spirits, LLC to exchange the Company’s 78% interest in
Southeast Biofuels, LLC in return for cancellation of the remaining balance on
the note the Company issued to Renewable Spirits in connection with the 2006
acquisition of Renewable Spirits’ assets. The remaining balance on
the note at the time of the 2008 agreement was $279,000. As a result
of this agreement and transaction, the Company no longer has an interest in
Southeast Biofuels.
NOTE 12.
|
RELATED PARTY
TRANSACTIONS
|
During
the three months ended March 31, 2009, the Company borrowed $166,000 from David
Ames, the Company’s president and chief executive officer at the time of the
loans. Subsequently, the Company borrowed an additional $78,000
during April, 2009. Mr. Ames received a promissory notes bearing
interest at 8% per annum. The notes have a maturity date of December
31, 2009.
NOTE 13.
|
LEGAL
PROCEEDINGS
|
The
Company is a party to the Jacoby Energy Development and the Global Energy
Management lawsuits as described below. An adverse result in
either litigation matter could have a material adverse effect on the Company’s
business, results of operations and financial condition.
Jacoby Energy Development, Inc.
Lawsuit
. On July 28, 2008, Jacoby Energy Development, Inc.
(“JEDI”), Geoplasma, LLC and Georecover-Live Oak, LLC filed an action in the
Superior Court of Fulton County of the State of Georgia against the Company, its
subsidiary Global Energy Systems, Inc. (“GES”), and six current or former
officers and employees of the Company. The six individual defendants are
Romilos Papadopoulos, the Company’s former Chief Operating Officer, Chief
Financial Officer, Executive Vice President and Secretary; Michael Ellis,
President of GES; and four other employees of GES. The complaint alleges,
among other things, that the Company breached a mutual nondisclosure agreement
related to previous negotiations for a possible merger between the Company and
JEDI and its affiliates. The plaintiffs allege that the Company breached
the agreement by soliciting and hiring the six individual defendants, who were
previously employed by the plaintiffs, and by using the plaintiffs’ confidential
and proprietary information for its own business purposes. The plaintiffs
also allege that the Company tortiously interfered with the plaintiffs’ business
and misappropriated the plaintiffs’ trade secrets. The plaintiffs seek,
among other things, a permanent injunction, unspecified compensatory damages
plus costs and expenses incurred in connection with the litigation, including
attorneys’ fees, and general and punitive damages in an amount not less than $10
million. The Company denied the allegations in the complaint, and the
individual defendants have asserted counterclaims against the
plaintiffs. Pursuant to a scheduling order entered by the court on
December 30, 2008, discovery is scheduled to end on July 31, 2009, and
dispositive motions, including motions for summary judgment, must be filed by
August 17, 2009. The parties have refrained from conducting discovery
while they attempt to reach a business resolution of the issues, but as of the
date of this report, the parties have not yet reached a
settlement. The parties are continuing their discussions, but the
discovery may resume shortly if a resolution is not reached.
Global Energy and Management, LLC
Lawsuit.
In December 2007, Global Energy and Management, LLC
(“GEM”) filed an action in the federal court for the Southern District of New
York against the Company and nine of the Company’s current or former officers,
directors and affiliates entitled Global Energy and Management v. Xethanol
Corporation, et al. The lawsuit alleges fraud by the defendants in
connection with GEM’s alleged investment of $250,000 in NewEnglandXethanol, LLC,
a joint venture of the Company and GEM. Initially, GEM sought more
than $10,000,000 in damages plus pre-judgment interest and
costs. After the Company asked the District Court in May 2008 for
leave to move to dismiss the complaint, GEM served the Company with its third
amended complaint, seeking damages of only $250,000. Upon the
Company’s motion, the Court dismissed that complaint on February 23, 2009,
holding that GEM could file an amended complaint only upon payment to the
Company of $5,000 towards its legal fees. On March 17, 2009, GEM paid
the Company $5,000 and filed its Fourth Amended Complaint against the Company
and four former directors and officers seeking in damages repayment of its
alleged $250,000 investment, lost profits, consequential damages, interest and
costs. The Company has asked the Court for leave to move to dismiss
the Fourth Amended Complaint and intends to defend against this action
vigorously.
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
|
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve future events, our
future performance and our expected future operations and actions. In
some cases, you can identify forward-looking statements by the use of words such
as “may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,”
“intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or
the negative of these terms or other similar expressions. These
forward-looking statements are only our predictions and involve numerous
assumptions, risks and uncertainties. Our actual results or actions
may differ materially from these forward-looking statements for many reasons,
including the matters discussed in this report under the caption “Risk
Factors.” We urge you not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to publicly update any forward
looking-statement, whether as a result of new information, future events or
otherwise.
You
should read the following discussion of our financial condition and results of
operation in conjunction with our financial statements and the related notes
included in this report.
Overview
Change
in Name and New Corporate Structure
On
October 27, 2008, we changed our name to Global Energy Holdings Group, Inc. from
Xethanol Corporation. The Company’s principal operating division is
Global Energy Systems, Inc. (“GES”), which is developing renewable energy
projects, including biomass projects, such as gasification, and
landfill-gas-to-energy projects.
Source
of Revenue until May 1, 2008
Our only
source of revenue has been from our sales of ethanol and related products at our
corn-based ethanol plant in Blairstown, Iowa. As a result of high
prices for corn and natural gas, on May 1, 2008 we ceased production of ethanol
at our Blairstown plant to reduce our operating losses, and we are actively
seeking a purchaser of the Blairstown plant. As of March 31, 2009, we
had no source of revenue. It is anticipated that our future revenues
will be generated from assets and businesses that we acquired and plan to
acquire in 2009.
Cash
and Liquidity Position
We had cash of approximately $130,000
as of March 31, 2009 and $13,000 as of May 13,
2009.
Investment
Activities
For the
three months ended March 31, 2009, net cash of $286,000 was provided by
investing activities. During 2009, we received $3,153,000 from the
redemption of short-term marketable securities, $583,000 from the sale of New
Generation Biofuels Holdings, Inc. (“NGBF”) common stock, and we purchased
intangible assets of $3,450,000. As discussed below, we completed the
sale of our 5,301,300 shares of NGBF stock on March 18, 2009.
On March
17, 2009, the Company entered into a Stock Purchase Agreement (the “NGBF
Purchase Agreement”) with 2020 Energy, LLC, an Arizona limited liability company
(“2020 Energy”), pursuant to which the Company sold to 2020 Energy, in a private
transaction, all of the Company’s 5,301,300 shares of common stock of
NGBF. We completed the sale of the NGBF shares to 2020 Energy on
March 18, 2009, and 2020 Energy paid us an aggregate purchase price of $583,143
for the NGBF shares. Based on the number of shares of NGBF common
stock reported to be outstanding in NGBF’s Pre-Effective Amendment No. 1 to
NGBF’s Registration Statement on Form S-3 filed with the SEC on January 15,
2009, the 5,301,300 NGBF shares sold by us to 2020 Energy constituted
approximately 26.1% of NGBF’s outstanding common stock.
In
addition to the sale of the NGBF shares described above, under the NGBF Purchase
Agreement, we agreed to assign to 2020 Energy all of our interest in and rights
under that certain Amended and Restated Sublicense Agreement, dated as of June
15, 2006, between us and NGBF (the “Sublicense Agreement”), pursuant to which
NGBF granted us a sublicense to certain technology and rights related to the
manufacture of a vegetable oil based biodiesel product. The
assignment of the Sublicense Agreement, however, is conditioned on 2020 Energy
obtaining the written consent of NGBF to the assignment.
Possible
Asset Sales
We have
reevaluated our Augusta, Georgia and Spring Hope, North Carolina facilities and
have decided that they no longer fit within our long-term corporate
strategy. On March 20, 2008, our board authorized management to
pursue the sale of each facility, which we are doing. We are also
pursuing the sale of our ethanol facilities in Blairstown, Iowa. We
can offer no assurance regarding how long it will take to sell any of these
facilities or the price we might receive for them. In the interim,
while we still hold these real estate assets, we are also seeking to obtain a
credit facility secured by these assets.
Due to
lack of adequate capital, the Company’s board of directors has decided to seek a
buyer or significant equity partner for its landfill gas purchase rights
acquired during 2009. The Company is currently in negotiations with potential
buyers and equity partners for the landfill gas purchase rights and
projects. The Company paid an aggregate purchase price of $3,350,000
to acquire the Hickory Ridge landfill gas purchase rights and $100,000 to
acquire the Port Charlotte landfill rights (with obligations to pay and
additional $250,000 if certain milestones are met with respect to the Port
Charlotte project).
Going
Concern and Anticipated Funding Needs
The
Company will need substantial additional capital to pursue its plans and
projects, and given the current economic and financial climate, the Company can
give no assurance that it will be able to raise the additional capital that it
needs on commercially acceptable terms, or at all. The Company will
need to reduce costs and raise additional financing to fund operations and long
term business objectives. The Company’s continued existence is
dependent upon several factors, including obtaining additional debt or equity
financing and developing and completing renewable energy
projects. Management is investigating various sources of debt or
equity financing and is developing marketing and production plans for its
products. These matters raise substantial doubt about the Company’s
ability to continue as a going concern.
As noted
above, in June 2008, we formed a new operating division, Global Energy Systems,
Inc. (“GES”). We will need substantial additional capital to pursue
our plans, which, among other things, include the construction of landfill gas
capture and processing facilities in Georgia and Florida, if we do not sell the
landfill gas projects. We have decided not to pursue our previously
announced plans to construct a demonstration plant for converting citrus peel
waste into ethanol, and we sold the remaining fixed assets associated with the
demonstration plant project to our lender, Renewable Spirits, LLC, in exchange
for the forgiveness of $279,000 in debt on January 19, 2009. We also
ceased production of ethanol at our Blairstown ethanol plant to reduce our
operating losses. Our capital requirements, however, remain
substantial in order to pursue our business strategy.
GES
generated no revenues during the three months ended March 31,
2009. As discussed above, we ceased production of ethanol at our
Blairstown ethanol plant in May 2008, which was our only revenue producing
facility, and we currently have no operating source of revenue. We
also currently have no commitments for additional financing. Our only
recent source of cash was from the sale of all of our 5,301,300 shares of NGBF
common stock on March 18, 2009 to 2020 Energy for an aggregate purchase price of
$583,143, and there can be no assurance that we will be able to obtain
additional debt or equity financing on commercially acceptable terms, or at all,
when needed. If we are unable to access the capital markets to
finance our various projects, we may be unable to continue our
operations. See Item 1A, “Risk Factors.” We are pursuing
the sale of the Blairstown ethanol plant and our facilities in Augusta, Georgia
and Spring Hope, North Carolina, as discussed above, although we can provide no
assurance regarding how long it will take to sell these facilities or the price
we will receive for them.
Acquisitions
and Terminated Acquisition
On
February 2, 2009, we acquired the right to purchase from a subsidiary of
Republic Services, Inc. (“Republic”) all of the landfill gas generated at
Republic’s Hickory Ridge landfill located in Conley (DeKalb County), Georgia
(“Hickory Ridge”) through December 31, 2029. The Company had intended
to process and convert the landfill gas collected at Hickory Ridge into a
saleable energy product. Subsequent to the acquisition of these
rights and due to a lack of adequate capital available to the Company, the
Company’s board of directors has decided to seek a buyer or equity partner for
this landfill gas purchase right and project. The Company is
currently in negotiations with potential buyers and equity partners for the
Hickory Ridge landfill gas rights and project. The Company paid
an aggregate purchase price of $3,350,000 to acquire the Hickory Ridge landfill
gas purchase rights.
On
January 20, 2009, we entered into a project assignment agreement with North
American Natural Resources—Southeast, LLC (“NANR”) to acquire (1) rights to
purchase from Charlotte County, Florida all the landfill gas generated by or at
its Zemel Road Landfill site (“Port Charlotte landfill”) and (2) the exclusive
right to construct and operate a landfill gas-to-energy project at the Port
Charlotte landfill.
Under the
terms of the agreement, the aggregate purchase price for the rights related to
the Port Charlotte landfill gas project was $350,000, subject to certain
conditions as described in more detail below. At the closing, we paid
NANR $100,000, which included a credit for our previous non-refundable deposit
of $10,000. In addition, we agreed to pay the remaining balance of
$250,000 to NANR in cash upon the occurrence of each event or milestone that
triggers our obligation to make payments as follows:
|
|
a
$100,000 payment within 10 business days after we procure the air
construction permit and solid waste permit for the
project;
|
|
|
a
$50,000 payment upon our installation of a landfill gas collection system
as provided in the assigned contracts;
|
|
|
a
$50,000 payment upon our execution of a purchase power agreement with a
local electric utility and the agreement with that utility for the
construction of the necessary interconnect; and
|
|
|
a
$50,000 payment within 10 business days after the first anniversary of the
commencement of operation of the
project.
|
Our
failure to complete construction of the landfill gas collection system and the
facility to convert the landfill gas at the Port Charlotte landfill into energy
by January 22, 2010 will result in us becoming liable to Charlotte County for
liquidated damages equal to $1,000 per day for each day of delay in completing
the collection system and $200 per day for each day of delay in completing the
energy facility. Our plans for the Port Charlotte landfill site will
require financing, and we cannot assure that such financing will be readily
available; see Item 1A, “Risk Factors.”
On
January 28, 2009, we entered into an agreement to acquire Wood-Tech, LLC and
certain of its affiliated entities (the “WoodTech Companies”), which include a
wood fuel recycler and landscape materials manufacturing business that recycles
wood waste into mulch, topsoil, potting soils and fuel for industrial customers
and the generation of renewable energy. Under the agreement, either
we or the WoodTech Companies could terminate the agreement under certain
circumstances if the acquisition was not completed on or prior to February 17,
2009. The Company did not complete the acquisition of the WoodTech
Companies due to capital constraints, and on May 13, 2009, the Company entered
into a termination agreement (the “Termination Agreement”) with respect to the
WoodTech Companies acquisition agreement. Under the terms of the
Termination Agreement, the Company agreed to reimburse the WoodTech Companies
for up to $280,000 in legal fees and financial audit fees incurred by the
WoodTech Companies in contemplation of a closing of the WoodTech acquisition
agreement, payable by the Company upon the closing of the sale of any asset of
the Company resulting in net proceeds paid to the Company in an amount of at
least $1 million. The Company’s obligation to reimburse the WoodTech
Companies for these fees is secured by a security interest in the Company’s
Augusta, Georgia facility. For more information regarding the
termination agreement, see our Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 15, 2009.
Possible
Effects of Current Business Climate
The
continuing “credit crunch” has affected or may affect us in several
ways. We face difficulties in obtaining the necessary debt and equity
capital we need to pursue our business plan, which requires a significant amount
of capital. The difficult credit environment may also affect our
plans to sell one or more of our facilities to the extent that purchasers need
to finance the purchase of those facilities with borrowings. In
addition, the bankruptcy filing of ethanol producer VeraSun Energy Corporation
in the fourth quarter of 2008 may also further depress the value of ethanol
plants like our Blairstown ethanol facilities, which we are trying to
sell. The substantial and rapid decline in the price of natural gas
and other traditional energy sources, including coal and oil, may also affect
our business adversely by causing our landfill gas products to become
uncompetitive from a pricing standpoint and given that the business viability
of, and political support for, renewable energy has generally in the past been
inversely correlated with the price of traditional energy fuels. In
summary, like many businesses in America, we face a difficult and uncertain
market.
Results
of Operations
Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
Net Loss.
We
incurred a net loss of $1.0 million, or $.04 per share, for the three months
ended March 31, 2009 versus a net loss of $2.0 million, or $.07 per share, for
the three months ended March 31, 2008.
The
decrease in net loss of $1.0 million for the three months ended March 31, 2009
as compared to the prior year resulted primarily from:
|
|
a
$0.5 million decrease in gross loss on sales;
|
|
|
a
$0.4 million increase in gain on the sale of Southeast Biofuels,
LLC interest; and
|
|
|
a
$0.3 million decrease in loss on equity of New Generation
Biofuels;
|
partially
offset by
|
|
a
$0.2 million increase in general and administrative
expenses.
|
Net Sales.
There
were no net sales for the three months ended March 31, 2009 as compared to $3.0
million for the three months ended March 31, 2008. This decrease was
due to the May 1, 2008 cessation of ethanol production at our Blairstown
plant. In 2008, our Blairstown plant sold 1.4 million gallons of
ethanol at monthly prices ranging between $1.89 and $2.02 per gallon with an
average price of $1.94 per gallon and generated revenue of $0.2 million from the
sales of by-products. Total average revenue per gallon including
by-products was $2.13.
Cost of Sales.
Cost of sales was comprised of direct materials, direct labor and
factory overhead. Included in factory overhead are energy costs,
depreciation, and repairs and maintenance. There was no cost of cost
of sales for the three months ended March 31, 2009. Cost of sales for the three
months ended March 31, 2008 was $3.6 million. The decrease in cost of
sales was due to the May 1, 2008 cessation of ethanol production at our
Blairstown plant. The average monthly cost of sales during the three
months ended March 31, 2008 was $2.57 per gallon.
Gross Loss.
There was no gross
profit or loss on sales for the three months ended March 31,
2009. Gross loss for the three months ended March 31, 2008 was $0.5
million, or 18% of net sales.
General and Administrative
Expenses.
General and administrative expenses (“G&A”)
were $1.9 million for the three months ended March 31, 2009 compared to $1.7
million for the three months ended March 31, 2008, reflecting a $0.2
million increase from the prior year. The primary components of
2009 G&A expenses were:
|
·
|
$0.7
million for payroll expenses or 37% of G&A;
|
|
·
|
$0.4
million of accounting and legal expenses or 21% of
G&A;
|
|
·
|
$0.3
million for expenses of the Spring Hope facility or 16% of
G&A;
|
|
·
|
$0.1
million of G&A expenses related to our Blairstown facility or 5% of
G&A.
|
|
·
|
$0.1
million for expenses of CoastalXethanol or 5% of G&A;
and
|
|
·
|
$0.1
million for insurance expenses or 5% of
G&A.
|
Significant
increases and decreases in components of G&A in 2009 compared to 2008 were
primarily attributable to:
|
·
|
a
$0.4 million increase in payroll expenses due principally to a new
management team hired in June 2008; and
|
|
·
|
a
$0.3 million increase in expenses of the Spring Hope facility;
and
|
partially offset by
|
·
|
a
$0.2 million decrease in consulting and outside service
expenses; and
|
|
·
|
a
$0.1 million decrease in accounting and legal
expenses.
|
Equity Compensation.
Equity compensation for the three months ended March 31, 2009 was
$52,000 compared to $137,000 for the three months ended March 31,
2008. The significant items in equity compensation
include:
|
·
|
$8,000
in compensation expense for the three months ended March 31, 2009 related
to stock options granted to employees and consultants under the 2005
Incentive Compensation Plan, representing a decrease of $80,000 in similar
expenses from $88,000 in the prior year; and
|
|
|
|
|
·
|
$44,000
in compensation expense for the three months ended March 31, 2009 related
to stock options granted to outside directors under the 2005 Incentive
Compensation Plan, representing a decrease of $5,000 from $49,000 in the
prior year.
|
Depreciation and Amortization.
Depreciation expense for the three months ended March 31, 2009 was
$133,000 compared to $15,000 for the three months ended March 31, 2008,
resulting in a $118,000 increase for the period. This increase is
attributable to depreciation expense on the fixed assets of our Blairstown plant
which included $115,000 in G&A for the three months ended March 31, 2009 and
$115,000 included in cost of sales for the three months ended March 31,
2008.
Amortization
expense for the three months ended March 31, 2009 was $0 (zero dollars) compared
to $3,000 for the prior year. The $3,000 decrease was as a result of
amortization of our license agreement in 2008 that had been fully amortized last
year.
Research and Development.
Research and development expenses for the three months ended March
31, 2009 decreased by $65,000 to $0 (zero dollars) from $65,000 for the three
months ended March 31, 2008. Our research and development expense in
2008 was due to amortization on our research agreements and payments made under
consulting arrangements. We have fully satisfied all financial
obligations due to National Renewable Energy Laboratory, the USDA Forest
Products Laboratory, Virginia Tech and the Energy & Environmental Research
Center under existing research agreements.
Interest Income.
Interest income for the three months ended March 31, 2009 was
$23,000, representing a decrease of $49,000 from $72,000 for the three months
ended March 31, 2008. This decrease is primarily due to the decrease
in our average cash and cash equivalent balances compared to the prior
year.
Interest Expense.
Interest expense was $0 (zero dollars) for the three months ended
March 31, 2009, a slight decrease from $13,000 for the prior year.
Gain on Sale of Interest in Southeast
Biofuels, LLC.
We recorded a gain of $394,000 on the sale of
our remaining interest in Southeast Biofuels, for the three months ended March
31, 2009.
Gain on Sale of Investment in New
Generation Biofuels Holdings, Inc.
We recorded a gain on the
sale of our remaining 5,301,300 shares of New Generation Biofuels common stock
of $583,000 for the three months ended March 31, 2009, compared to a gain of
$757,000 on 180,000 shares of New Generation Biofuels common stock for the three
months ended March 31, 2008.
Other Income.
Other income for the three months ended March 31, 2009 increased by $66,000 to
$67,000 from $1,000 for the corresponding period in 2008.
Liquidity
and Capital Resources
We had
cash of approximately $130,000 as of March 31, 2009 and approximately $13,000 as
of May 13, 2009. Our working capital deficit as of March 31, 2009 was
$2.8 million, representing a decrease in working capital of $4.3 million
compared to $1.5 million at December 31, 2008.
During
the three months ended March 31, 2009, we used net cash of $0.8 million for
operating activities. During the three months ended March 31, 2009,
$0.3 million in net cash was provided by investing activities. During
the three months ended March 31, 2009, we received cash of $3.2 million from the
redemption of short-term marketable securities; received $0.6 million in cash
from the sale of our investment in NGBF; and purchased intangible assets for
$3.5 million. During the three months ended March 31,
2009, we received $166,000 from the issuance of a note payable and made $2,000
in capitalized lease payments.
In
December 2006, we formed a joint venture to invest in a research project to
produce ethanol from citrus waste. We agreed to pay $600,000 to our
joint venture partner over the next ten years. We have decided not to
pursue the construction of a demonstration plant for converting citrus peel
waste into ethanol. On January 19, 2009, we sold our fixed assets
associated with this project, and the buyer cancelled the remaining $279,000 of
debt we had outstanding.
We will
need substantial additional capital to fund the business of the Company,
including the development of energy-related projects and the funding of any
other growth opportunities we pursue. If we are unable to obtain
sufficient additional capital, we may lose our investments in our energy-related
projects, including our Hickory Ridge and Port Charlotte landfill gas
projects. The Company is seeking buyers or significant equity
partners for these landfill gas rights and projects and is currently in
negotiations with potential buyers or equity partners for the landfill gas
rights and project at Hickory Ridge. Due to capital constraints, the
Company did not complete the acquisition of the WoodTech Companies pursuant to
the purchase agreement entered into on January 28, 2009. The Company
entered into a termination agreement, terminating the WoodTech Companies
acquisition agreement on May 13, 2009. For more information regarding
the termination agreement, see our Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 15, 2009.
Our
primary sources of capital are as follows:
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·
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We
have reevaluated our Augusta, Georgia and Spring Hope, North Carolina
facilities and have decided that they no longer fit within our long-term
corporate strategy. On March 20, 2008, our board of directors
authorized our management to pursue the sale of each facility, which we
are doing. We are also pursuing the sale of our ethanol
facilities in Blairstown, Iowa. We can offer no assurance
regarding the proceeds we may receive from the sales of one or more of
these facilities or the timing of any such sale or
sales.
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We may
also seek to raise capital through additional equity offerings, debt financing,
bond financing or a combination of these methods.
To
conserve our cash and cash equivalents or generate positive cash flow, we have
taken or expect to take several actions, including:
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·
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If
we are successful in selling our Augusta, Georgia facility, we estimate
that such sale would reduce our annual overhead by approximately
$500,000.
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·
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If
we are successful in selling our Spring Hope, North Carolina facility, we
estimate that such sale would reduce our annual overhead by
approximately $150,000.
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·
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We
are pursuing the sale of all or a portion of our Hickory Ridge and Port
Charlotte landfill gas rights.
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·
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As
a result of the high prices for corn and natural gas, on May 1, 2008 we
ceased production of ethanol at our Blairstown plant to reduce our
operating losses.
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·
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We
are pursuing utility energy service projects for organizations that
include government agencies and the U.S. military, and we expect that any
project of that nature will generate positive cash
flow.
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We
currently have no commitments for any additional financing, and we can give no
assurance that we will be able to raise the additional capital we need on
commercially acceptable terms or at all. We are seeking to obtain one or more
credit facilities secured by one or more of our real estate
properties. Our only recent source of funding was on March 18, 2009,
when we completed the sale of our 5,301,300 shares of NGBF common stock to 2020
Energy for a purchase price of $583,143. Our failure to raise capital as
needed would significantly restrict our growth and hinder our ability to
continue as a viable business. We will need to curtail expenses
further, reduce investments we would otherwise make through Global Energy
Ventures and defer or forgo business opportunities. Additional equity
financings may be dilutive to holders of our common stock, and debt financing,
if available, may involve significant payment obligations and covenants that
restrict how we operate our business.
Off-Balance
Sheet Arrangements
We have
not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
Critical
Accounting Policies
The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an ongoing basis, including
those related to valuation of intangible assets, investments, property and
equipment; contingencies and litigation; and the valuation of shares issued for
services or in connection with acquisitions. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions. The
accounting policies that we follow are described in Note 2 to our consolidated
financial statements included in this report.
With
regard to our policies surrounding the valuation of shares issued for services
or in connection with acquisitions, we rely on the fair value of the shares at
the time they were issued. After considering various trading aspects
of our stock, including volatility, trading volume and public float, we believe
that the price of our stock as reported on NYSE Amex exchange (formerly known as
the American Stock Exchange) is the most reliable indicator of fair
value. The fair value of options and warrants issued for services is
determined at the grant date using a Black-Scholes option pricing model and is
expensed over the respective vesting periods. A modification of the
terms or conditions of an equity award is treated as an exchange of the original
award for a new award in accordance with SFAS No. 123R.
We
evaluate impairment of long-lived assets in accordance with SFAS No. 144, “
Accounting for the Impairment or
Disposal of Long-Lived Assets.”
We assess the impairment of
long-lived assets, including property and equipment and purchased intangibles
subject to amortization, whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
asset impairment review assesses the fair value of the assets based on the
future cash flows the assets are expected to generate. We recognize
an impairment loss when estimated undiscounted future cash flows expected to
result from the use of the asset plus net proceeds expected from the disposition
of the asset (if any) are less than the related asset’s carrying
amount. Impairment losses are measured as the amount by which the
carrying amounts of the assets exceed their fair values. Property
held for sale is recorded at the lower of its carrying amount or fair value less
costs to sell. Estimates of future cash flows are judgments based on
management’s experience and knowledge of our operations and the industries in
which we operate. These estimates can be significantly affected by
future changes in market conditions, the economic environment, capital spending
decisions of our customers and inflation.
Item
3.
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Quantitative
and Qualitative Disclosures About Market
Risk.
|
Not
required for smaller reporting companies.
Item
4T.
|
Controls
and Procedures.
|
Based on
our management’s evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, as of March 31, 2009, the end of the period
covered by this report, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”)) were effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC and is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There was
no change in our internal control over financial reporting that occurred during
the quarter ended March 31, 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
The
design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings.
|
The
Company is a party to the Jacoby Energy Development and Global Energy Management
lawsuits described below. An adverse result in either lawsuit could
have a material adverse effect on the Company’s business, results of operations
and financial condition.
Jacoby Energy Development, Inc.
Lawsuit.
On July 28, 2008, Jacoby Energy Development, Inc.
(“JEDI”), Geoplasma, LLC and Georecover-Live Oak, LLC filed an action in the
Superior Court of Fulton County of the State of Georgia against the Company, its
subsidiary Global Energy Systems, Inc. (“GES”), six current or former officers
and employees of the Company. The six individual defendants are Romilos
Papadopoulos, the Company’s former Chief Operating Offer, Chief Financial
Officer, Executive Vice President and Secretary; Michael Ellis, President of
GES; and four other employees of GES. The complaint alleges, among other
things, that the Company breached a mutual nondisclosure agreement related to
previous negotiations for a possible merger between the Company and JEDI and its
affiliates. The plaintiffs allege that the Company breached the agreement
by soliciting and hiring the six individual defendants, who were previously
employed by the plaintiffs, and by using the plaintiffs’ confidential and
proprietary information for its own business purposes. The plaintiffs also
allege that the Company tortiously interfered with the plaintiffs’ business and
misappropriated the plaintiffs’ trade secrets. The plaintiffs seek, among
other things, a permanent injunction, unspecified compensatory damages plus
costs and expenses incurred in connection with the litigation, including
attorneys’ fees, and general and punitive damages in an amount not less than $10
million. The Company denied the allegations in the complaint, and the
individual defendants have asserted counterclaims against the
plaintiffs. Pursuant to a scheduling order entered by the court on
December 30, 2008, discovery is scheduled to end on July 31, 2009, and
dispositive motions, including motions for summary judgment, must be filed by
August 17, 2009. The parties have refrained from conducting discovery
while they attempt to reach a business resolution of the issues, but as of the
date of this report, the parties have not yet reached a
settlement. The parties are continuing their discussions, but the
discovery may resume shortly if a resolution is not reached.
Global Energy and Management, LLC
Lawsuit.
In December 2007, Global Energy and Management, LLC
(“GEM”) filed an action in the federal court for the Southern District of New
York against the Company and nine of the Company’s current or former officers,
directors and affiliates entitled Global Energy and Management v. Xethanol
Corporation, et al. The lawsuit alleges fraud by the defendants in
connection with GEM’s alleged investment of $250,000 in NewEnglandXethanol, LLC,
a joint venture of the Company and GEM. Initially, GEM sought more
than $10,000,000 in damages plus pre-judgment interest and
costs. After the Company asked the District Court in May 2008 for
leave to move to dismiss the complaint, GEM served the Company with its third
amended complaint, seeking damages of only $250,000. Upon the
Company’s motion, the Court dismissed that complaint on February 23, 2009,
holding that GEM could file an amended complaint only upon payment to the
Company of $5,000 towards its legal fees. On March 17, 2009, GEM paid
the Company $5,000 and filed its Fourth Amended Complaint against the Company
and four former directors and officers seeking in damages repayment of its
alleged $250,000 investment, lost profits, consequential damages, interest and
costs. The Company has asked the Court for leave to move to dismiss
the Fourth Amended Complaint and intends to defend against this action
vigorously.
In
addition to the other information set forth in this quarterly report, you should
carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in
our Annual Report on Form 10-K for the year ended December 31,
2008. These risk factors could materially affect our business,
financial condition or future results. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
None.
Item
3.
|
Default
Upon Senior Securities.
|
None.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
Item
5.
|
Other
Information.
|
Loan from David R.
Ames
.
During
April 2009, the Company borrowed $78,000 from David Ames, the Company’s
president and chief executive officer at the time of the loans. Mr.
Ames received a promissory note from the Company bearing interest at 8% per
annum. The Company had previously borrowed $166,000 from Mr. Ames
during the period ended March 31, 2009, pursuant to which the Company issued Mr.
Ames promissory notes, also bearing interest at 8% per annum. The
promissory notes have a maturity date of December 31,
2009.
Item
6. Exhibits.
Exhibit
No.
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|
Description
of Exhibit
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4.1
|
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Promissory
Note issued to David Ames by the Company, dated April 10,
2009.
|
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4.2
|
|
Promissory
Note issued to David Ames by the Company, dated April 13,
2009.
|
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10.1
|
|
Termination
Agreement, dated May 13, 2009, by and between James Bobo, David Bobo, Ball
Ground Recycling, LLC, Wood-Tech, LLC, Bobo Grinding Equipment, LLC,
Georgia National Trucking, LLC, BGR Trucking, LLC, Bobo Grinding, Inc., BG
Land, LLC, Prime Management, LLC, and Global Energy Holdings Group, Inc
[Incorporated by reference to Exhibit 10.1 of our current report on Form
8-K dated May 13, 2009 and filed with the SEC on May [15],
2009.]
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31.1
|
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Certification
of Principal Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
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31.2
|
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
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|
32
|
|
Joint
Certifications of Principal Executive Officer and Principal Financial
Officer Pursuant to 10 U.S.C. Section 1350, Section 906 of the
Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
GLOBAL
ENERGY HOLDINGS GROUP, INC.
|
|
|
|
Date:
May 20, 2009
|
By:
|
/s/
Jimmy L. Bobo
|
|
|
Jimmy
L. Bobo
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
Date:
May 20, 2009
|
By:
|
/s/
Steven Paulik
|
|
Steven
Paulik
Interim
Chief Financial Officer
(Principal
Financial Officer)
|
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