Item 1. Business
Business Development
Overview
Good Energy, Inc. is a Delaware corporation formed on May 23, 2007 for the purposes of developing, testing, manufacturing and distributing bio-fuel with energy related plans and pursuits to develop the commercialization of our proprietary fuel product, G2 Diesel, as discussed below.
In October of 2007, our company completed the purchase of an existing biodiesel manufacturer, 11 Good’s Energy, LTD, a limited liability company (becoming our wholly owned subsidiary), formed in the State of Ohio in February 2006. Historically, our subsidiary has been a development stage company, which prior to our acquisition in October 2007 incurred approximately $100,000 in research activities to develop a proprietary manufacturing process to produce bio-fuel additive for diesel applications.
Since October 2007, we have finalized the principal development of our proprietary process and have designed, built and currently operate a bio-fuel manufacturing facility. In addition, the company is in the process of registering to all the necessary regulatory requirements for producing and selling fuel in multiple state jurisdictions. While the Company anticipates revenues will result by the end of 2012, we have yet to attain profitable operations and will need additional financing in 2012 to support our operations.
Our goal is to market and distribute, and improve as we may be able, our G2 Diesel product first nationally and later internationally. In addition, the company is pursuing other alternative energy technologies to complement the bio-fuel product currently offered by the company. Energy is one of our nation’s primary concerns due to a combination of health, commercial and even national security considerations, and the concern includes development of cleaner, cost effective, and safer fuels.
Marketing, Distribution and Testing Programs
As of April 16, 2012, we have no long-term contracts or backlog of orders from customers to purchase our G2 Diesel fuel or our crude glycerin by-product described herein. In general, the testing programs and sales efforts conducted with potential customers have shown a longer order cycle than first anticipated11 Good Energy has allocated its marketing efforts toward fleet users. These are customers that have centralized fueling and their vehicles return to the terminal every day after usage. This allows the vehicles to receive consistent product. 11 Good Energy’s key strategic partner and largest customer is the Kenan Advantage Group (The KAG.) The KAG distributes over 20 billion gallons of liquid fuels and specialty chemicals annually making them the largest transportation company of bulk transport in the United States. After extensive testing, the KAG has commissioned 11 Good Energy to build storage tanks and containment pads at 10 of their almost 200 terminals in the United States as a phase 1 of development. In addition to being a user of G2 Diesel, The KAG also assists 11 Good in providing logistic solutions through the utilization of their fleet to efficiently deliver blended G2 Diesel to the Company’s customer base. In addition, there is a potential marketing fit to integrate G2 Diesel into the KAG’s current customer base.
In December, 2011, the state of California’s weights and measures approved a variance for G2 Diesel to be sold in California to The KAG West and Marquez Brothers International. The KAG West is the KAG’s California subsidiary. The KAG West was a sponsor of the Company’s variance and was approved to purchase G2 Diesel through this variance. Marquez Brothers, the largest importer/distributor of Mexican food products into the United States was also a sponsor of the variance and can now purchase G2 Diesel in California. J. Antonio Marquez, an owner of the Marquez Brothers International, has recently joined the Board of Directors of 11 Good Energy, Inc. See “Item 10.” Now that the variance has been approved, Management believes that adding additional customers to the existing protocol will give the Company an ability to expand its marketing efforts in the state of California.
In 2011, we completed a test with a fleet of urban buses in Mexico. The test compared fuel consumption of busses using our fuel, blended 5% with diesel fuel, with the fuel consumption of busses using regular diesel fuel available in Mexico. This program tested a total of 5,500 gallons of G2 Diesel fuel, enough to blend 110,000 gallons at a 5% G2 Diesel blend. The vehicles tested showed as much as a 17% decrease in total fuel consumption, when using our fuel blended with diesel fuel compared to their original base line fuel consumption using regular diesel fuel. We have also conducted trials with other several metropolitan bus systems and have found similar efficiency gains in overall fuel consumption when blending our fuel with standard diesel fuel. We will continue to target those markets as well. To date, the testing programs with bus fleets have not generated significant orders.
These programs all have in common the testing of our G2 Diesel at various percentage mixtures when blended with traditional #2 Diesel fuel for the purpose of assessing and evaluating under actual usage conditions in buses, marine, trucks and locomotives, each of the following:
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power, performance, maintenance and engine noise;
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emissions and exhaust smell; and
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fuel economy.
From the testing and usage experienced over the past three years, Management believes that our G2 Diesel provides more power, lower emissions of pollutants and better fuel economy when blended with #2 diesel fuel when compared to 100% traditional #2 diesel fuel. Management believes that the current price of approximately $5.00 per gallon for G2 Diesel compared to $3.50 per gallon for #2 traditional diesel fuel; will influence our customers to blend our G2 Diesel fuel with traditional #2 diesel fuel to find the right balance of performance, emissions and fuel economy.
We have also paid $ 200,000 to an independent research laboratory to test our G2 Diesel fuel to issue a report on its findings related to tier one health effects testing. The research laboratory completed the testing in 2010. The tests found that the harmful health effects from the emissions of our fuel are significantly less than the harmful heath emissions of traditional diesel fuel. These results are of interest to the diesel electric locomotive and diesel truck fleet industries that have had health effects regulations thrust upon the emissions from their diesel fuel use in the United States.
We intend to sell our crude glycerin product to dairy farms to use as a base for a disinfectant solution used on a dairy cow’s teats, commonly referred to in the milk industry as “teat dip”. Through research and development efforts, we developed our glycerin for a teat dip base and have been testing our glycerin for use as a potential feed source to the dairy cow. For every gallon of production, 11% is crude glycerin. Since 11 Good Energy’s manufacturing process uses ethanol (natural alcohol), versus methanol (petroleum based alcohol), the product is more desirable and safer to handle than glycerin from traditional biodiesel production. We are currently marketing the product through a partner that services the dairy industry; and, the glycerin has shown great promise as a new revenue stream to the Company.
We can provide no assurances that Management’s plans will be realized, that there will be sufficient order flow of G2 Diesel fuel to support our intended operations or that we will be able to operate profitably and/or on a positive cash flow basis in the future. See “Risk Factors.”
Facilities and Production Capacity
We maintain our corporate office at 4450 Belden Village St., Suite 800, NW, Canton, OH 44718, and our telephone number is 330-492-FUEL. In November 2009, we completed construction of our bio-fuel manufacturing facility in Magnolia, Ohio. The facility is currently configured to produce between 4.6 million and 6.4 million gallons of G2 Diesel per year with an ability to expand capacity as the market for G2 Diesel fuel grows. From November 1, 2009 to December 31, 2011, the Company produced approximately 181,000 gallons of G2 Diesel and 22,246 gallons of glycerin.
As demand will support, we intend to purchase and/or lease a site and to construct a second production facility in the event that construction and initial operational costs can be financed exclusively from proceeds received from new equity and/or debt financing on terms satisfactory to us. In the absence of such financing, the costs of a second production facility estimated at $6,000,000 would exceed our cash reserves, with the actual cost of this new facility depending upon many factors, including, without limitation, the location and cost of the land, demolition costs of existing facilities (if any) on the site, environmental concerns (if any) and the size of the new plant, it being Management’s intention for the second plant to have an annual capacity of at least 30 million gallons. While Management anticipates generating meaningful operating cash flow in 2012, we cannot provide any assurances that this will occur. Accordingly, we must secure additional and immediate financing to continue our business development and before proceeding with the costs of a second production facility. We cannot assure our plans, including establishment of the additional plant, will succeed. See “Risk Factors” under “Item 1A”.
Description of the Traditional Biodiesel Industry and Markets
The biodiesel industry is relatively new and unknown. In 2011, the biodiesel industry reported that it produced an estimated 802 million gallons of biodiesel, constituting only a fraction of the roughly 60 billion gallon per year U.S. diesel fuel market. Due to the recent economic downturn and other factors, many competitors’ plants are currently closed and many do not currently operate at full capacity.
Biodiesel, in general, is a high-lubricity; clean-burning alternative fuel produced from domestic, renewable resources and is primarily used in compression ignition (diesel) engines. Biodiesel is comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats. A chemical process called transesterification removes the free fatty acids from the base oil and creates the desired esters. Transesterification is the reaction of vegetable oil or animal fat with an alcohol, such as methanol or ethanol, in the presence of a catalyst. Biodiesel can be used in neat (pure) form or blended with petroleum-based diesel. Biodiesel that is in neat form is typically designated in the marketplace as B100. The “100” indicates that the fuel is 100% biodiesel. Biodiesel is frequently blended with petroleum-based diesel. When biodiesel is blended, it is typically identified in the marketplace according to the percentage of biodiesel in the blend. For example, “B20” indicates that 20% of the fuel is biodiesel and 80% is petroleum-based diesel.
G2 Diesel compared to Traditional Biodiesel
Proprietary Manufacturing Process
Our manufacturing process uses a proprietary mixture of soybean oil, ethanol alcohol and a secret catalyst at room temperature. Our processing method differs from the traditional forms of producing biodiesel. Traditional producers also use a form of animal or vegetable based oil and a toxic petroleum derived methanol during processing, which must be removed and separated through heating and washing before the completion of the manufacturing process. Our manufacturing process; which does not use water to wash the fuel, eliminates toxic wastewater production, which is a significant cost commonly associated with traditional biodiesel production.
Competitive Advantages
Though we may face competition from larger more established providers of biodiesel with greater resources and penetration, Management believes competitive advantages of the company’s G2 Diesel are multi-faceted. Our proprietary manufacturing process produces a clean natural fuel that testing has shown, reduces harmful emissions produced by diesel engines. The company’s production process is cost efficient, it produces no waste water and it does not require natural gas, which is a costly component used by others in manufacturing biodiesel fuel. Also, our G2 Diesel has a lower Gel Point of -9°F versus competing biodiesel products that have a Gel Point of approximately 27-30°F. The lower Gel Point allows our G2 Diesel to be used under colder driving conditions than other competing products which cannot be used in cold weather months.
Pricing of G2 Diesel
Management believes that our G2 Diesel commands a pricing premium when compared to other biodiesel products due to the competitive advantages outlined above. The selling price per gallon is determined by the cost of soybean oil, ethanol and catalyst. We build our pricing model based primarily on these raw material commodity prices. We have developed our pricing model to trend with the feedstock prices. When our feedstock prices rise or fall, the pricing model adjusts to preserve the desired margins. Soybean Oil has historically trended with petroleum oil. It is anticipated that our selling price would increase or decrease in the same manner as #2 diesel fuel. We can provide no assurances that we will be able to maintain our profit margins and increase the sales price of our G2 Diesel at times of rising feedstock costs. See “Risk Factors” under “Item 1A”
Blending of G2 Diesel with traditional #2 diesel fuel
G2 Diesel blends especially well with traditional #2 diesel fuel. The viscosity of the two fuels are very similar and allow the two fuels to splash blend, which means the fuel blends with no induced agitation. This is one important attribute that differentiates the G2 Diesel product from the rest of the Biodiesel industry. Many of our competitor’s products do not have a viscosity similar to diesel and therefore their product does not splash blend with diesel.
We intend to sell our product as a 99 - 100% bio-fuel and do not plan to blend our product with any traditional #2 diesel fuel at the company’s facilities. We expect that customers may on their own accord choose between a 2% - 5% blend with traditional #2 diesel fuel, with a limit of 5% G2 Diesel blend for on road use. The customer will be responsible for blending their traditional #2 diesel fuel with the G2 Diesel purchased from us and pumping the blended fuel to their vehicle or vessel. This can be done by the end user and/or their current fuel distributor. Our G2 Diesel fuel will be sold as fuel in this regard and will be subject to applicable fuel taxes.
Consistency of feedstock
We currently use soybean oil as our feedstock. We believe that the quality control procedure for our feedstock is essential to the production of a quality fuel. Other producers in the industry will use multiple feedstock of differing quality, mainly to minimize their material costs. This can lead to an inconsistent finished fuel product which performs differently with each change of materials. The control and consistency of feedstock quality is a key attribute to making a high quality fuel.
The effect of cold flow on biodiesel markets
Biodiesel produced from traditional means using various feed stocks have different cold flow properties, depending on the type of feedstock used in its manufacture. “Cold flow” refers to a fuel’s ability to flow easily at colder temperatures and is an important consideration in producing and blending biodiesel for use in colder climates. The pour point or Gel Point for a fuel is the temperature at which the flow of the fuel stops. Therefore, a lower pour point temperature means the fuel flows better in colder temperatures. The pour point of 100% traditional soy oil based biodiesel is approximately 27°F to 30°F. Based on recent independent testing conducted by a third party laboratory, the pour point of 100% G2 Diesel is -9F. G2 Diesel’s pour point provides a great advantage in cold climate markets.
Current Bio-diesel Markets and Competition
Biodiesel Markets
Wholesale Market / Biodiesel Marketers. The wholesale market involves selling biodiesel directly to fuel blenders or through biodiesel marketers. Fuel blenders purchase B100 from biodiesel production plants, mix it with petroleum diesel fuel according to specifications, and deliver a final product to retailers.
Retail Market. The retail market consists of biodiesel distribution primarily through fueling stations to transport trucks and “jobbers,” which buy products from manufacturers and sell them to retailers for the purpose of supplying farmers, maritime customers and home heating oil users. Retail level distributors include oil companies, independent station owners, marinas and railroad operators. The biodiesel retail market is still in its very early stages as compared to other types of fuel. The present marketing and transportation network must expand significantly in order for us to effectively market our biodiesel to retail users. Areas requiring expansion include, but are not limited to:
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additional rail capacity;
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additional storage facilities for biodiesel;
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increases in truck fleets capable of transporting biodiesel within localized markets;
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expansion in refining and blending facilities to handle biodiesel; and
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growth in service stations equipped to handle biodiesel fuels.
Substantial investments required for these infrastructure changes and expansions may not be made or they may not occur on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand or prices for biodiesel, impede delivery of biodiesel, impose additional costs on or otherwise negatively affect our proposed results of operations or financial position.
Government/Public Sector. The government has increased its use of biodiesel since the implementation of the Energy Policy Act of 1992, amended in 1998, which authorized federal, state and public agencies to use biodiesel to meet the alternative fuel vehicle requirements of the Energy Policy Act.
We anticipate that the Renewable Fuel Standard may increase demand for biodiesel, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurance that the Renewable Fuel Standard will increase demand for biodiesel.
Competition from Other Fuel Sources and Additives
If a new fuel is developed to compete with biodiesel; it may be difficult to market our biodiesel, which could result in the loss of some or all of our ability to operate profitably.
Renewable diesel is another form of diesel with which we may be required to compete. Renewable diesel has characteristics similar to that of petroleum-based diesel fuel and can be co-processed at traditional petroleum refineries from vegetable oils or animal fats mixed with crude oil through a thermal de-polymerization process. According to a February 2009 report from the DOE’s Alternative Fuels & Advanced Vehicles Data Center, renewable diesel is close to full commercialization as manufacturers continue to modify and expand research and development.
We may choose to compete with producers of other diesel additives, such as petroleum-based lubricity additives. Some major oil companies produce these petroleum-based lubricity additives and strongly favor their use because they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure in place is for petroleum-based additives. As a result, petroleum-based additives may be more cost-effective than biodiesel. Therefore, it may be difficult to market our biodiesel as a lubricity additive and, thus, we are unlikely to enter this market in the future.
Competition with Other Biodiesel Producers
We operate in a very competitive environment. We face competition for capital, labor, Management, feedstock (such as soy oil) and other resources. Some of our competitors may be substantially larger than us and may have significantly greater name recognition and financial, sales and marketing, technical, and other resources. These competitors may also have more established distribution channels and may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to biodiesel development, promotion and sale of their products. In 2011, approximately 802 million gallons of biodiesel was reported to be produced in the United States compared to 312 million gallons in 2010. The main reason for the increased production was the reinstatement of the federal tax incentive for biodiesel for 2011, which expired at the end of 2011. It is uncertain whether congress will reenact the tax incentive for 2012. Biodiesel plants are currently operating throughout the United States. We expect that additional biodiesel producers will enter the market if the demand for biodiesel increases.
We must compete with other biodiesel producers not just in the sale of our bio-fuel, but also in the acquisition of soybean oil and other raw materials. A majority of plants, and many of the largest producers, utilize soybean oil. This may change over time as high soybean oil prices are encouraging biodiesel producers to find ways to utilize alternative and less costly types of feedstock. We also compete with food manufacturers to obtain our supply of soy oil as feedstock.
Some of our competitors have soy-crushing facilities and are thus not reliant upon third parties for their feedstock supply. As a result, we face a competitive challenge from biodiesel plants owned and operated by the companies that supply our feedstock. Such vertical integration provides certain competitors with greater control over their feedstock supplies, thereby providing them with a competitive advantage over plants like ours that do not have soy-crushing capabilities, especially as prices and competition for soybean oil and other feedstock increase.
Currently, there are other active biodiesel plants in Ohio. Because of recent adverse economic conditions and other factors affecting the biodiesel industry, a few plants in Ohio and many across the country have either curtailed production or stopped production completely. Nevertheless, Management believes that with an increase in the public’s desire to use bio-fuels, the current environment allows a new product like G2 Diesel to obtain a market share in a struggling industry.
Glycerin Competition
It is estimated that every million gallons of biodiesel produced adds approximately another one hundred thousand gallons of crude glycerin into the market. Over the past few years, as biodiesel production has increased, the glycerin market has become increasingly saturated. Management believes the demand for our glycerin within the dairy industry has provided a competitive advantage over other biodiesel producers in regards to our glycerin’s profitability.
Sources and Availability of Raw Materials
Soybean Oil Costs and Supply
The cost of oil feedstock is the largest single component of the cost of biodiesel production. We expect that soybean oil will continue to be our primary feedstock unless we are able to successfully procure and process alternative feedstock and achieve the desired performance of the fuel. As a result, our pricing per gallon has been, and will likely continue to be, particularly susceptible to changes in the price of soybean oil. The twenty-year average price for soybean oil is approximately $0.23 per pound. However, over the past few months, soybean oil price per pound reached $0.56 per pound and are expected to remain volatile.
U.S. Soybean Oil Prices
Data provided by USDA, Oil Crops Outlook Report, May 12, 2012
We believe that continued increases in the price of soybean oil will result in us increasing the selling price of G2 Diesel. G2 Diesel pricing has historically trended with petroleum diesel fuel pricing. If crude oil should increase by 10%, our pricing model will generate a very similar percentage increase in G2 Diesel price, as the result of a similar percentage increase in soybean oil. Management believes that the benefits in fuel efficiency and maintenance costs exceed the incremental cost increase to the customer of a 5% blend of G2 Diesel with traditional #2 diesel fuel. We have explored the possibility of acquiring technology for or otherwise obtaining other feedstock for our G2 Diesel production process. However, our research thus far has determined that the performance characteristics are best achieved through the use of soybean oil. We expect to purchase our soybean requirements from multiple available sources in the United States.
Ethanol and Catalyst Costs and Supply
The production of biodiesel at our plant requires ethanol and a catalyst. We have experienced no difficulties in obtaining adequate supplies of ethanol or our catalysts used to produce finished products. As we have in the past, we expect to purchase our ethanol and a catalyst from multiple qualified sources.
Patents, Trademarks and Licenses
Our proprietary products and processes are protected primarily by a combination of trademark, patent applications and trade secret rights.
We have filed patent pending applications with the United States Patent and Trademark Office and in Canada, each under an application number of #12/680,526 as well as an application pending in Geneva, Switzerland (case # PCT/US2008/054204 with an international publication #WO/2009/042242) and applications pending in the European Patent Office (application #08730077.8), Columbia (application # 10051.71), Ecuador (application # sp-10-10134), India (application # 2857/Delnp 12010), Australia (application # 2008305557), Brazil (application #PI0817449-0), Chile (application #315-2010), China (application # 200880116324.4), Hong Kong (application #11102335.7), Indonesia (application # W00201001360), Israel (application #204704), Japan (application #2010-526975) and Mexico (application #MX/a/2010/003469). Due to a lack of cash resources, one or more of our international patent pending applications may lapse and we may not be able to renew same. We can provide no assurances that we will be able to preserve and protect our intellectual property from unauthorized use throughout the world.
We will consider additional filings in the future as conditions permit. We place considerable importance on appropriately protesting our technologies, products and/or processes. Our success will depend at least in part on our ability, and the ability of any of our licensees, to obtain and keep property rights in our products and processes, which permit us to exclude others from taking commercial advantage of what we consider to be our inventions, and prevent others from using our trade secrets; if we fail to secure patents and other intellectual property rights that cover our products and technologies, we may be unable to derive as much financial return on commercialization of our products as we would if such rights were obtained. The standards which the United States Patent and Trademark Office and similar offices of other countries utilize in deciding whether to grant patents can change, which may result in us being unable to determine the type and extent of any future patent claims that will be issued to us or to our licensees in the future, if any patent claims are issued at all, and the fees associated with filing and prosecuting patent applications may increase significantly, which might result in us incurring higher expenses and adversely affect our intellectual property strategy.
The commercial success of our products might also be affected by the intellectual property rights of others. We intend to operate in a way that does not result in willful infringement of the patent, trade secret or other intellectual property rights of other parties. Nevertheless, there can be no assurance that a claim of infringement will not be asserted against us or that any such assertion will not result in a judgment or order requiring us to obtain a license in order to make, use, or sell our products. There can be no assurance that third parties will not assert infringement claims against us in the future with respect to any products or processes. Any such claims or litigation, with or without merit, could be costly and a diversion of Management’s attention, which could have a material adverse effect on our business, operating results and financial condition. Adverse determinations in such claims or litigation could harm our business, operating results and financial condition.
There is a risk that the court will decide that we are infringing the third party’s patents and order us to stop the infringing activities. In addition, there is a risk that a court will order us to pay the other party damages for having infringed their patents. Moreover, there is no guarantee that the prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to our products, technologies or other matters. See “Risk Factors” under “Item 1A”.
Should third parties file patent applications, or be issued patents, claiming technology also claimed by us in pending applications or in issued patents, we may be required to participate in interference proceedings in the USPTO to determine priority of invention. An adverse outcome in an interference proceeding could require us to cease using the technology, to license rights from prevailing third parties, and/or to lose exclusive rights in our products or processes. There is no guarantee that any prevailing party would offer us a license or that such a license, if made available to us, could be acquired on commercially acceptable terms.
We maintain confidentiality agreements with our employees, consultants, affiliates, customers and business partners. Any confidentiality agreements required of our employees and that we enter into with other parties may not provide adequate protection for our future trade secrets, know-how or other confidential information or prevent any unauthorized use or disclosure or the unlawful development by others. If any of our confidential intellectual property is disclosed, our business may suffer. In addition, certain of our present and future scientific and Management personnel may have been previously employed by other companies where they conducted research in areas similar to those that we now pursue. As a result, we could be subject to allegations of trade-secret violations and other claims relating to the intellectual property rights of these companies.
Government Regulations
Renewable Fuel Standard
The Energy Policy Act of 2005 created the Renewable Fuel Standard (“RFS”) which required refiners to use 7.5 billion gallons of renewable fuels by 2012. The Energy Independence and Security Act (“EISA”) expanded the existing Renewable Fuel Standard to require the use of 9 billion gallons of renewable fuel in 2008, increasing to 36 billion gallons of renewable fuel by 2022. The EISA requires that 600 million gallons of renewable fuel used in 2009 must come from advanced biofuels other than corn-based ethanol, such as ethanol derived from cellulose, sugar or crop residue and biomass-based diesel (which includes biodiesel and renewable diesel), increasing to 21 billion gallons in 2022. The EISA further includes a requirement that 500 million gallons of biodiesel and biomass-based diesel fuel be blended into the national diesel pool in 2009, gradually increasing to one billion gallons by 2012. However, in November 2008, the Environmental Protection Agency (“EPA”) announced that the RFS program in 2009 will continue to be applicable to producers and importers of gasoline only. This means that the 500 million gallons of biomass-based diesel required by the RFS, as amended by the EISA, does not have to be blended into U.S. fuel supplies in 2009. This is due to the fact that the regulatory structure of the original RFS program does not provide a mechanism for implementing the EISA requirement for the use of 500 million gallons of biomass-based diesel. The EPA intends to propose options and develop mechanisms for implementing the EISA biomass-diesel requirements.
We anticipate that the Renewable Fuel Standard may increase demand for biodiesel in the long-term, as it sets a minimum usage requirement for biodiesel and other types of biomass-based diesel. However, there can be no assurances that demand for biodiesel will be increased by the RFS. Accordingly, there is no assurance that additional production of biodiesel and biomass-based diesel will not continually outstrip any additional demand for biodiesel that might be created by this new law. Furthermore, any additional delays in the EPA’s implementation of the EISA biomass-based diesel requirements could hinder the stimulation of additional biodiesel demand. We also anticipate that the expanded RFS will be primarily satisfied by ethanol, including both corn-based and other types of ethanol. The amount of corn-based ethanol that may be used to satisfy the RFS requirements is capped at 15 million gallons starting in 2015 and, accordingly, other types of ethanol, including cellulose-based ethanol, will likely be used to satisfy any requirements over and above the 15 million gallon corn-based ethanol cap.
The Renewable Fuel Standard system will be enforced through a system of registration, recordkeeping and reporting requirements for obligated parties, renewable producers (RIN generators), as well as any party that procures or trades
Renewable Identification Numbers (RINs), either as part of their renewable purchases or separately. Any person who violates any prohibition or requirement of the RFS program may be subject to civil penalties for each day of each violation. For example, under the final rule, a failure to acquire sufficient RINs to meet a party’s renewable fuels obligation would constitute a separate day of violation for each day the violation occurred during the annual averaging period. The enforcement provisions are necessary to ensure the RFS program goals are not compromised by illegal conduct in the creation and transfer of RINs. The Environmental Protection Agency has assigned “equivalence values” to each type of renewable energy fuel in order to determine compliance with the RFS. The equivalence values used ethanol as the base-line measurement (such that one gallon of ethanol is equivalent to one credit towards RFS compliance) and assigned biodiesel an equivalence value of 1.5 (so that for each gallon of biodiesel used, the obligated party will receive one and one-half gallons credit towards its RFS compliance).
Biodiesel Tax Credits
The Volumetric Ethanol Excise Tax Credit (VEETC) provides a tax credit of $1.00 per gallon for biodiesel, This includes esters derived from crude vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambo, rapeseeds, safflowers, flaxseeds, rice bran, and mustard seeds. The VEETC also provides a tax credit of $0.50 per gallon for non agribiodiesel blended with petroleum diesel, which is biodiesel made from non-virgin or recycled vegetable oil and animal fats. The excise tax credit may be claimed in both taxable and nontaxable markets, including exempt fleet fuel programs and off-road diesel markets. The desired effect of the excise tax credit is to streamline the use of biodiesel and encourage petroleum blenders to blend biodiesel as far upstream as possible, which will allow more biodiesel to be used in the marketplace. The VEETC expired on December 31, 2009; however, in 2011 Congress granted an extension of the agrbiodiesel credit through December 31, 2011. Regarding this matter, we believe there is uncertainty about whether new legislation will be passed to extend this credit beyond 2011. See “Risk Factors.”
State Legislation
Several states are currently researching and considering legislation to increase the amount of biodiesel used and produced in their states. Minnesota is one such state to mandate biodiesel use. The legislation, which became effective in September 2005, requires that all traditional #2 diesel fuel sold in the state contain a minimum of 2% biodiesel. The G2 Diesel blend has nearly the same cold flow properties as No. 2 petroleum diesel, which allows it to be used in Minnesota’s colder climate much the same as petroleum diesel throughout the year.
Other states have enacted legislation to encourage (but not require) biodiesel production and use. Several states provide tax incentives and grants for biodiesel-related studies and biodiesel production, blending and use.
Effect of Government Regulation
Environmental laws aimed at lowering fuel emissions may also promote biodiesel consumption. The Clean Air Act Amendments of 1990 required the EPA to regulate air emissions from a variety of sources. In a 2001 rule, the EPA provided for the decrease of emissions from vehicles using on-road diesel by requiring the reduction in the sulfur content of diesel fuel from 500 parts per million (ppm) to a significantly lower 15 ppm commencing in June 2006, and 10 ppm by 2011. Reducing the sulfur content of petroleum-based diesel leads to a decrease in lubricity of the fuel, which may adversely impact diesel engines. However, biodiesel is able to supply lubricity, which makes biodiesel an attractive blending stock to satisfy the requirements.
Furthermore, environmental regulations that may affect our company change frequently. It is possible that the government could adopt more stringent federal or state environmental rules or regulations which could increase our operating costs and expenses, or might eliminate provisions such as the Clean Air Act Amendments that may promote the use of biodiesel. The government could also adopt federal or state environmental rules or regulations that may have an adverse effect on the use of biodiesel. Furthermore, the Occupational Safety and Health Administration (“OSHA”) governs our plant operations. OSHA regulations may change such that the costs of the operation of the plant may increase. Any of these regulatory factors may result in higher costs or other materially adverse conditions affecting our operations, cash flows and financial performance.
The EPA has issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality. The removal of sulfur from diesel fuel reduces its lubricity which must be corrected with fuel additives. G2 Diesel, as well as other biodiesel fuels on the market, has inherent lubricating properties when blended with #2 Diesel fuel.
EMPLOYEES
As of April 15, 2012, we have three full-time employees.
Item 1.A Risk Factors
An investment in our Common Stock involves major risks. Before you invest in our Common Stock, you should be aware that there are various risks described below. You should carefully consider these risk factors together with all of the other information included in this Form 10-K before you decide to purchase shares of our Common Stock. You should carefully consider the following risk factors, in addition to the other information presented in this Form 10-K, in evaluating us and our business. Any of the following risks could harm our business and financial results and cause the value of our securities to decline, which in turn could cause you to lose all or part of your investment.
We have a limited operating history, and our business may not be as successful as we envision.
We are currently in an early stage of our current business plan. We have limited operating history with respect to the construction and operation of biodiesel refineries for our own use. Our limited sales to date have resulted from government organizations, municipalities and corporations testing our bio-fuel product as described herein. In this respect, from May 23, 2007 (date of inception) through December 31, 2011, our revenues have totaled $707,765 and our deficit accumulated during our development stage was $22,987,265. Our limited operating history makes it difficult for potential investors to evaluate our business. Therefore, our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the biodiesel industry in general. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success.
Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to enter into agreements with third parties for necessary financing, the provision of necessary feedstock sources, engineering, procurement and construction services and the sale and distribution of our biodiesel fuel on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.
We have yet to attain profitable operations and may need additional financing to support our sales and marketing efforts.
We have a history of losses from operations and an accumulated deficit of $22,987,265 at December 31, 2011. As of December 31, 2011, we are operating one production facility, with a burn rate of approximately $85,000 per month, which is expected to increase upon receiving additional financing. While the Company anticipates more substantial revenues will result by the end of 2012 as a result of the completion of product testing, our ability to remain a going concern and to achieve profitable operations will depend on our ability to immediately raise additional financing, on terms satisfactory to us. Further, there is no guarantee that we will ever be able to operate profitably or derive any significant revenues from our operations.
We have a need for substantial additional financing to build a second production facility.
Our plan of operation contemplates our locating, purchasing (or leasing) and building a second production facility, the costs of which will vary based upon the size of the plant, but together with initial operating capital to run the plant, is estimated at approximately $6,000,000. The second production facility will be built only if we are able to locate a suitable site and obtain sufficient additional debt and/or equity financing on terms satisfactory to us. The costs of a new production facility could exceed projected costs, with the actual cost of this new facility depending upon many factors, including, without limitation, the location and cost of the land, demolition costs of existing facilities (if any) on the site, environmental concerns (if any) and the size of the new plant. Accordingly, we will require additional
financing for the construction of a second facility and to support our expanded operations. We can provide no assurances the company will be able to obtain adequate additional financing on terms satisfactory to us, if at all. Failure to obtain the required additional financing will cause us to be unable to have a second production facility necessary to meet our anticipated growth in production capacity and sales projections, adversely affecting our ability to meet our profitability goals for future years.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our consolidated financial statements as of December 31, 2011 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm issued a report that was included in this annual report which included an explanatory paragraph expressing substantial doubt to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern ultimately is dependent of our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to achieve profitable operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our products may not be accepted by the biodiesel industry as a premium product, if at all.
The company’s proprietary manufacturing process and resulting G2 Diesel product is new to the biodiesel industry and is unproven in the industry as a biodiesel fuel product and premium fuel product. In the past, we paid a total of $200,000 for tier one health effects testing in comparison with other fuels. As a new and unproven fuel product, the industry may not accept our G2 Diesel fuel as a premium product, if at all.
We need sales orders to support our operations.
In the past, many corporate and governmental organizations and municipalities have completed testing of our G2 Diesel fuel. We also conducted a test with a fleet of urban buses in Mexico. These programs all had in common the testing of our G2 Diesel at various percentage mixtures when blended with traditional #2 Diesel fuel for the purpose of assessing and evaluating under actual usage conditions in buses, car ferry services, trucks and railroads, each of the following:
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power, performance, maintenance and engine noise;
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emissions and exhaust smell; and
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fuel economy.
Management believes that our G2 Diesel (B100) will provide more power, lower emissions of pollutants and better fuel economy than 100% traditional #2 diesel fuel. However, the current price of about $5.00 per gallon for G2 Diesel in comparison to $3.50 per gallon for traditional #2 diesel fuel will influence customers of our products to blend our G2 Diesel fuel with traditional #2 diesel fuel to find the right balance of cost, performance, emissions and fuel economy. We can provide no assurances that additional testing by our prospective clients of our fuel products will be successful and result in sufficient sales orders to support our operations.
Consistency of feedstock is a key attribution in making a high quality fuel product.
We currently use soybean oil as our feedstock. We believe that the quality control procedure for our feedstock is essential to the production of a quality fuel. Other producers in the industry will use multiple feedstock of differing quality, mainly to minimize their material costs. This can lead to an inconsistent finished fuel product which performs differently with each change of materials. The control and consistency of our feedstock quality is a key attribute to making a high quality fuel product that customers will buy.
There may not be an adequate supply of soybean oil feedstock to supply the demands of the food and biodiesel industries, which could threaten the viability of our operations.
In the future, there may not be an adequate supply of soybean oil feedstock to supply the demand of the food products and biodiesel industries. In this respect, any growing season disruptions, such as drought or natural disaster(s), could cause the availability of soybean oil to become more costly and difficult to procure. Consequently, the price of feedstock may rise to the point where it threatens the viability of our pricing model. If we experience a sustained period of shortages of feedstock and high feedstock costs, such pricing may significantly limit our ability to market our product and to compete effectively.
We have no firm contracts to purchase our G2 Diesel or crude glycerin by-product and we can provide no assurances that we will be able to sell our products at or near its stated capacity, if at all.
As of December 31, 2011, we have no significant firm long-term contracts or backlog of orders to purchase our G2 Diesel fuel or our crude glycerin by-product. 11 Good Energy’s key strategic partner and largest customer is the Kenan Advantage Group (The KAG.) The KAG distributes over 20 billion gallons of liquid fuels and specialty chemicals annually making them the largest transportation company of bulk transport in the United States. After extensive testing, the KAG has commissioned 11 Good Energy to build storage tanks and containment pads at 10 of their almost 200 terminals in the United States as a phase 1 of development. In addition to being a user of G2 Diesel, The KAG also assists 11 Good in providing logistic solutions through the utilization of their fleet to efficiently deliver blended G2 Diesel to the Company’s customer base. In addition, there is a potential marketing fit to integrate G2 Diesel into the KAG’s current customer base. We are currently building relationships with trucking and bus fleets, marine diesel and rail companies requiring locomotive diesel fuel. We can provide no assurances that there will be sufficient order flow of G2 Diesel fuel or glycerin by-product to support our intended operations or that we will be able to operate profitably and/or on a positive cash flow basis in the future.
Our business is not diversified and we are dependent upon the operation of our existing plant in Magnolia, Ohio to produce biodiesel and glycerin for sale.
Our success depends largely on our ability to profitably operate our existing biodiesel plant in Magnolia, Ohio. We do not have any other lines of business or other sources of revenue if we are unable to operate our biodiesel plant and manufacture biodiesel. If we are forced to continue to operate at significantly less than capacity or cease operations at our biodiesel plant for any reason, our ability to produce sales revenue would be adversely affected. In such an event, our stockholders could lose some or all of their investment.
New and unproven market for glycerin by-product launches in 2012
Recently, as a result of two years of research and development, the Company has brought to market its glycerin, which is a byproduct of the G2 Diesel manufacturing process. The Company is now selling its Glycerin to dairy farms to use as a base for a disinfectant solution used on a dairy cow’s teats, commonly referred to in the milk industry as “teat dip”. We are currently marketing the product through a partner that services the dairy industry; and, it has shown great promise as a new high profit revenue stream to the Company. We can provide no assurances that the dairy community will accept our glycerin by-product as a disinfectant solution and/or that the Company’s operations will be operated profitably in the future.
Volatility in pricing, supply and demand could harm our ability to generate sales and profits.
Our revenues will be greatly affected by the price at which we can sell our biodiesel and crude glycerin by-product. These prices can be volatile as a result of a number of factors over which we have no control. These factors include overall supply and demand, level of government support, and the availability and price of competing products, such as diesel fuel. Increased production of biodiesel may lead to lower prices. Any lowering of biodiesel prices may negatively impact our ability to generate profits. Over supply of our crude glycerin by-product could result in us being forced to pay third parties to dispose of our crude glycerin by-product.
Technological advances could cause our plant to become uncompetitive or obsolete.
It is possible that technological advances in the procedures for processing biodiesel could make the processes that we utilize at our plant less efficient or obsolete. Our Magnolia, Ohio plant is a single-purpose facility and has no use other than the production of biodiesel and crude glycerin. Much of the cost of the plant is attributable to the cost of production technology which may be impractical or impossible to update. If we are unable to adopt or incorporate technological advances, our biodiesel production methods could be in the future less efficient than those of our
competitors. If our competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our biodiesel production remains competitive. Alternatively, we may be required to seek third-party licenses, which may be unavailable and/or could result in significant expenditures. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.
Intense competition in the biodiesel industry may affect our ability to sell biodiesel at profitable prices.
We operate in a very competitive environment. We face competition for capital, labor, Management, feedstock (such as soy oil) and other resources. Some of our competitors may be substantially larger than us and may have significantly greater name recognition and financial, sales and marketing, technical, and other resources. These competitors may also have more established distribution channels and may be able to respond more rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to biodiesel development, promotion and sale of their products.
Competition from other sources of fuel and diesel fuel lubricity additives may decrease the future demand for our biodiesel.
The EPA has issued regulations to reduce the amount of sulfur in diesel fuel in order to improve air quality. The removal of sulfur from diesel fuel reduces its lubricity which must be corrected with fuel additives. G2 Diesel, as well as other biodiesel fuels on the market, has inherent lubricating properties when blended with #2 Diesel fuel. Although we have no current plans, our G2 Diesel may compete with producers of diesel additives having similar lubricity values as biodiesel, such as petroleum-based lubricity additives. Many major oil companies produce these petroleum-based lubricity additives and strongly favor their use because they may be used in lower concentrations than biodiesel. In addition, much of the infrastructure in place is for petroleum-based additives. As a result, petroleum-based additives may be more cost-effective than biodiesel. Due to such competition, it may be difficult in the future to market our biodiesel to function in lieu of petroleum-based additives, which could adversely affect our ability to generate revenues.
Because our activities may involve the use of hazardous materials, we may be subject to claims relating to improper handling, storage or disposal of these materials that could be time consuming and costly.
If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages. Our future research and development activities may involve the controlled use of potentially harmful biological materials as well as hazardous materials or chemicals. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant. Our proven practices when handling these materials has shown to mitigate these risks.
Cold weather may cause biodiesel to gel, which could have an adverse impact on our ability to successfully market our biodiesel.
In colder temperatures, lower percentage biodiesel blends are recommended to avoid fuel system plugging. This may cause the demand for biodiesel products in northern markets to diminish during the colder months. The tendency of biodiesel to gel in colder weather may also result in long-term storage problems. At low temperatures, fuel may need to be stored in a heated building or heated storage tanks, which could result in higher storage costs.
Excess production of glycerin may cause the price of glycerin to decline, thereby adversely affecting our ability to generate revenue from the sale of glycerin.
As biodiesel production increases, the glycerin market becomes more saturated, resulting in significant declines in the price of glycerin. Excess glycerin production capacity may limit our ability to market our glycerin by-product, and even result in us paying for the disposal of glycerin, which would negatively impact our revenues and gross profit margins.
Increased insurance risk could negatively affect our business.
Insurance and surety companies may take actions that could negatively affect our business, including increasing insurance premiums, requiring higher self-insured retentions and deductibles, requiring additional collateral or covenants on surety bonds, reducing limits, restricting coverages, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these would adversely affect our ability to obtain appropriate insurance coverage at reasonable costs which would have a material adverse effect on our proposed business.
The loss of key management personnel could harm the company’s business and prospects.
The Company has entered into an agreement with its Chief Executive Officer, Frederick C. Berndt, and with its Chief Financial Officer, Daniel T. Lapp, for them to resign as executive officers and directors of the Company following shortly after the filing of this Form 10-K. Gary R. Smith, Chief Operating Officer and a directors, has tentatively agreed to act as interim Chief Executive Officer. E. Jamie Schloss, a director of the Company, has tentatively agreed to serve as interim Chief Financial Officer. As both of these appointments are expected to be for a short term, the success of the Company and its ability to pursue its business strategy will depend upon the successful recruitment and retention of highly skilled and experienced managerial, marketing and technical personal. We can provide no assurances that such personnel will be obtained by us on terms satisfactory to us, if at all.
Loss of or ineligibility for favorable tax benefits for biodiesel production could hinder our ability to operate at a profit and reduce the value of our units.
The biodiesel industry and our business are assisted by various federal biodiesel incentives such as the subsidy biodiesel producers. These tax incentives for the biodiesel industry may not continue, or, if they continue, the incentives may not be at the same level. The elimination or reduction of tax incentives to the biodiesel industry could reduce the market for biodiesel, which could reduce profits by making it more costly or difficult to produce and sell biodiesel.
Business expansion poses numerous risks that could limit the company’s growth and financial prospects.
The company’s management intends to aggressively expand the company’s business as capital resources permit. The company may not be successful in managing any future growth or raising additional capital. In order to manage this expansion and to grow in the future, the company will need to expand or enhance management, manufacturing, research and development and sales and marketing capabilities. The company may not be able to hire the management, staff or other personnel required to do so. As the company grows it may not be able to install adequate control systems in an efficient and timely manner, and current or planned operational systems, procedures and controls may not be adequate to support future operations or new acquisitions. Difficulties in installing and implementing new systems, procedures and controls may significantly burden management and internal resources.
Our operations are subject to various regulatory schemes, including environmental regulations, and failure to comply with such regulations could harm our business, results of operations and financial condition.
All phases of designing, constructing and operating biodiesel production facilities present environmental risks and hazards. We are subject to environmental regulation implemented or imposed by a variety of federal, state and municipal laws and regulations as well as international conventions. Among other things, environmental legislation provides for restrictions and prohibitions on spills and discharges, as well as emissions of various substances produced in association with biodiesel fuel operations. Legislation also requires that facility sites be operated, maintained, abandoned and reclaimed in such a way that would satisfy applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner we expect may result in stricter standards and enforcement, larger fines, penalties and liability, as well as potentially increased capital expenditures and operating costs. The discharge of pollutants into the air, soil or water may give rise to liabilities to governments and third parties, and may require us to incur costs to remedy such discharge.
Failure to comply with government regulations could subject us to civil and criminal penalties require us to forfeit property rights and may affect the value of our assets or our ability to conduct our business. We may also be required to take corrective actions, including, but not limited to, installing additional equipment, which could require us to make substantial capital expenditures. We could also be required to indemnify our directors, officers and employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. These could result in a material adverse effect on our business, financial condition and results of operations.
The obstacles to procurement and enforcement of our intellectual property and proprietary rights that we have or may develop could harm our competitive position by allowing competitors access to our proprietary technology that we may develop and to introduce competing products. Costly litigation may be necessary to protect our intellectual property rights. We may be subject to claims alleging the violation of the intellectual property rights of others.
Our products and related intellectual property rely primarily on a combination of trademark, copyright, patent and trade secret laws and other methods to protect our proprietary rights. We have filed for and have pending patent applications under the U.S., international Patent Cooperation Treaty (PCT) in various countries. Due to a lack of cash resources, one or more of our international patent pending applications may lapse and we may not be able to renew same. We can provide no assurances that we will be able to preserve and protect our intellectual property from unauthorized use throughout the world. We place considerable importance on obtaining patent and trade secret protection for our technologies, products and/or processes. Our success will depend at least in part on our ability, and the ability of any of our licensors, to obtain and keep proprietary rights in our products and processes, which permit us to exclude others from taking commercial advantage of what we consider to be our inventions, and prevent others from using our trade secrets; if we fail to secure patents and other intellectual property rights that cover our products and technologies, we may be unable to derive as much financial return on commercialization of our products as we would if such rights were obtained. The standards which the United States Patent and Trademark Office and similar offices of other countries utilize in deciding whether to grant patents can change, which may result in us being unable to determine the type and extent of any future patent claims that will be issued to us or to our licensors in the future, if any patent claims are issued at all, and the fees associated with filing and prosecuting patent applications may increase significantly, which might result in us incurring higher expenses and adversely affect our intellectual property strategy.
The commercial success of our products might also be affected by the intellectual property rights of others. We intend to operate in a way that does not result in willful infringement of patent, trade secret or other intellectual property rights of other parties. Nevertheless, there can be no assurance that a claim of infringement will not be asserted against us or that any such assertion will not result in a judgment or order requiring us to obtain a license in order to make, use, or sell our products. There can be no assurance that third parties will not assert infringement claims against us in the future with respect to any products. Any such claims or litigation, with or without merit, could be costly and a diversion of Management’s attention, which could have a material adverse effect on our business, operating results and financial condition. Adverse determinations in such claims or litigation could harm our business, operating results and financial condition.
A third party may claim that we are using inventions in which it has patent rights and may go to court to stop us from engaging in our normal operations and activities, such as research, development and the sale of any future products. Such lawsuits are expensive and would consume time and other resources. There is a risk that the court will decide that we are infringing the third party’s patents and order us to stop the infringing activities. In addition, there is a risk that a court will order us to pay the other party damages for having infringed their patents. Moreover, there is no guarantee that the prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to our products, technologies or other matters.
International patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums and management resources.
Patent law outside the United States is even more uncertain than in the United States and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as United States laws. We may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and diversion of our efforts.
We are subject to government regulations creating burdensome costs.
Various aspects of our operations are or may become subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Costs arising out of any regulatory developments could be time-consuming, expensive and could divert management resources and attention and, consequently, could adversely affect our business operations and financial performance.
We may suffer losses from product liability claims if our products cause harm.
Any of our products that we may sell and develop in the future could cause adverse events and could lead to product liability lawsuits. If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products. Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale of bio-fuel products. We do have insurance policies in place to mitigate these risks. We may not be able to avoid product liability claims. A successful product liability claim brought against us may cause us to incur substantial liabilities and, as a result, our business plan may fail.
Our securities have no public market.
Our common stock are “restricted securities” and may not be sold and/or transferred except pursuant to an effective registration statement or an exemption under the Securities Act of 1933, as amended (the “Securities Act”) Act and applicable state or “blue sky” laws. There is currently no market for any of our common stock. In the event that no public market develops for our common stock, then investors may have to hold on to their investment in our securities for an indefinite period of time. There are no current or future plans to attempt to establish a public market for the company’s outstanding warrants.
We have never declared or paid dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital requirements, applicable contractual restrictions and other such factors as our Board of Directors may deem relevant.
If an established trading market for our common stock does develop, trading prices may be volatile.
In the event that an established trading market develops in the future, of which there can be no assurances given, the market price of our shares of common stock may be based on factors that may not be indicative of future market performance. Consequently, the market price of our common stock may vary greatly. If a market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control:
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variations in our quarterly operating results;
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announcements that our revenue or income/loss levels are below analysts’ expectations;
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general economic slowdowns;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts; and/or
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strategic partnerships, joint ventures or capital commitments.
Our common stock may be considered to be a “penny stock” and, as such, the market for our common stock may be further limited by certain Commission rules applicable to penny stocks.
To the extent the price of our common stock may in the future have a public market price below $5.00 per share or we have a net tangible assets of $5,000,000 or less, our common shares will be subject to certain “penny stock” rules promulgated by the Commission. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common shares in the public market should one develop and they limit the liquidity of our shares of common stock.
The perception of future sales of registered securities by security holders could lead to a decline in the price, if any, of our common stock.
Future sales of substantial amounts of our currently outstanding common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity-related securities. We cannot predict what effect, if any, future sales of our common stock, or the availability of shares for future sales, will have on the market price of our stock.
The price of common stock may fluctuate significantly, which could result in substantial losses for our stockholders and subject us to litigation.
The market price, if any, of our common stock also may be adversely impacted by broad market and industry fluctuations regardless of our operating performance, including general economic and technology trends. The various stock markets in general have, from time to time, experienced extreme price and trading volume fluctuations, and the market prices of alternative energy technology companies such as ours have been extremely volatile. In addition, some companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. We may be involved in securities class action litigation in the future. This litigation often results in substantial costs and a diversion of Management’s attention and resources.
The requirements of being a public company may strain our resources and distract our Management.
As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls for financial reporting. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires regular Management assessments of the effectiveness of our internal controls over financial reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and Management oversight will be required. This may divert Management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge, and we cannot assure you that we will be able to do so in a timely fashion.
Item 3.
Item 3. Legal Proceedings
In February 2012, a stockholder “Plaintiff” commenced a lawsuit against the Company and other Defendants in the Circuit Court in Orange County, Florida. The lawsuit pertains to the stockholders’ investment of $400,000 in the Company’s securities. Prior to the filing of the lawsuit, Frederick C. Berndt, Chief Executive Officer of the Company, verbally agreed with the stockholder to return his $400,000 in periodic payments against the return and cancellation of the related securities. The Company made a payment of $108,519 before ceasing of making any additional payments. The Plaintiff has failed to return to the Company the securities which relate to the monies received by Plaintiff. Plaintiff is alleging fraud in the inducement as it pertains to his investment in the Company as well as fraudulent and negligent misrepresentations, breach of contract and conversion. Plaintiff is seeking damages which include, but are not limited to $400,000 (less payments received by Plaintiff), attorney, court costs and interest. The Company’s agreement with Plaintiff require a binding arbitration in New York City and the Company expects to deny the allegations of the lawsuit, move the complaint to arbitration, and cross complain for the breach of promise in the future. The Company anticipates that upon receipt of funding and/or its common stock begins trading on a public market, this shareholder would be able to sell their common stock. In the absence of a public market, the Company may purchase the shares back from the investor and record the shares to Treasury Stock as we have with the $108,519 paid to date.
In September 2011, William L. Miller “Plaintiff” commenced an action in the Court of Common Pleas, Stark County, Ohio, against Frederick C. Berndt and 11 Good Energy, Inc. “Defednants”. Plaintiff alleges that Mr. Berndt incurred charges for expenses relating to the business of the Corporation utilizing Plaintiff’s credit card account with American Express, which card Plaintiff allegedly permitted Mr. Berndt to utilize so long as Defendants would repay Plaintiff prior to the time he became liable for interest and penalties. The cause of action for breach of contract and unjust enrichment seeks the return of approximately $81,000 allegedly loaned by Plaintiff to the Defendants. From monies the Company owes Frederick C. Berndt, the Company recorded the $81,000 liability due to the filed judgment Mr. Berndt has agreed to reduce the balance due to him, in the amount of $81,000, from the funds he advanced to the Company. In 2012, the Company paid approximately $11,000 to Mr. Miller and Mr. Berndt paid approximately $13,500 to Mr. Miller. The Company anticipates this liability to be paid in 2012, either through the Company or Mr. Berndt personally.
On March 7, 2012, Jason A. Weiss “Plaintiff” commenced an action in the Court of Common Pleas, Stark County, Ohio against Defendants, 11 Good Energy and Frederick C. Berndt “Defendants”. Mr. Weiss alleges that he was employed by the Company for a term of one year at a salary of $15,000 per month, that he was entitled to receive relocation expenses and reimbursement of certain expenses and he was entitled to receive 130,000 shares of Common Stock of the Company upon his commencing of employment with Defendant, 11 Good Energy, in January 2011. Plaintiff alleges that Defendants made various representations to him pertaining to his employment and otherwise which were false and misleading. Plaintiff is suing the Defendants for breach of contract, unjust enrichment, promissory estoppel, fraudulent inducement, seeking to pierce the corporate veil, wrongful termination in violation of public policy and Defendants’ liability under the whistle blower provisions of Ohio law. The amount of money being sought by Plaintiff will be the amount allegedly damaged and proven at trial. The Company believes this suit to be from a disgruntled former consultant. We had no written agreement with Mr. Weiss and worked with him on certain marketing efforts on the condition of performance. He performed none of his promised actions and we terminated our relationship with the Plaintiff. The Company plans to vigorously contest these allegations and is contemplating a countersuit for damages to the Company.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings other than described above that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 4.
Item 4. Mining Safety Disclosure
Not applicable.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
On September 30, 2010, the Company became a reporting company under the Securities Exchange Act of 1934. Subsequent to that date, a member of Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a Form 211 to have our securities listed for trading on the OTC Bulletin Board. A symbol of “ELVN” had been assigned to our Common Stock; however, trading has not commenced on the OTC Bulletin Board as of the filing date of this Form 10-K. Management believes that a current Form 211 needs to be filed by a FINRA member prior to the commencement of trading and assignment by FINRA of a definitive trading symbol. No market information is being provided since our Common Stock had no public market during the past two fiscal years.
As of April 15, 2012, there were 139 stockholders of record for our common stock. The Company’s transfer agent for the Common Stock is Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New York, NY 10004.
Dividend Policy
To date, the Company has not declared or paid any dividends on its Common Stock. The payment by the Company of dividends, if any, is within the discretion of the Board of Directors and will depend on the Company’s earnings, if any, its capital requirements and financial condition, as well as other relevant factors. The Board of Directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain earnings, if any, for use in the Company’s business operations.
Recent Sales of Unregistered Securities
From January 1, 2011 through March 2012, we had limited private sales of our securities, summarized as follows:
Date of
Sale
Title of
Security
Number Sold
Consideration
Received and
Description of
Underwriting or
Other Discounts
to
Market Price or
Convertible
Security,
Afforded to
Purchasers
Exemption
from
Registration
Claimed (3)
If Option,
Warrant or
Convertible
Security, terms of
exercise or
conversion
January -June 2011
Options
935,000
Services rendered; no commissions paid
Section 4(2)
Exercisable through June 22, 2014 at $3.00 to $5.00 per share.
April, 2011
Common Stock and Warrants
45,000 Shares and 22,500 Warrants
$225,000; $22,500 commissions paid.
Rule 506
Warrants exercisable at $7.50 per share through June 30, 2013
June -July
Notes and Warrants
$350,000 principal amount of notes;87,500 Warrants
$350,000: $35,000 commissions paid.
Rule 506
Notes are convertible at $5.00 per share. Warrants are exercisable at $5.00 per share through June 30, 2013.
July 2011
Common Stock and Warrants
6,667 shares and 6,667 Warrants
$20,000; no commissions paid
Rule 506
Warrants expiring in July 2014 and exercisable at $5.00 per share.
August 2011
Notes and Warrants
$236,000 principal amount; 180,000 Warrants
$236,000; no commissions paid
Section 4(2)
Exercisable at $3.00 per share through August 2014
September
Notes and Warrants
$200,000 principal amount; 180,000 Warrants
$200,000; no commissions paid
Rule 506
Exercisable at $3.00 per share through September2014
October 2011
Common Stock and Warrants
50,000 Shares and 50,000 Warrants
$150,000; no commissions paid
Rule 506
Exercisable at $5.00 per share through October 2014
October 2011
Common Stock and Warrants
33,334 Shares and 33,334 warrants
$100,000; no commissions paid
Rule 506
Exercisable at $5.00 per share through October 2014
January 2012
Notes and Warrants
$100,000 principal amount; 60,000 warrants
$100,000; no commissions paid
Rule 506
Exercisable at $5.00 per share through December 2014
Recent Purchases of Securities
From May 23, 2007 (date of inception) through December 31, 2011, there have been 955,322 shares repurchased pursuant to transactions described under “Certain Transactions” and in the table below.
(1) At the time of each transaction, the company did not plan to repurchase any additional shares of our common stock.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Form 10-K. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and its representatives may from time to time make written or verbal forward-looking statements, including statements contained in this report and other Company filings with the Securities and Exchange Commission and in our reports to stockholders. Statements that relate to other than strictly historical facts, such as statements about the Company’s plans and strategies and expectations for future financial performance are forward-looking statements within the meaning of the Act. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will” and other similar expressions identify forward-looking statements. The forward-looking statements are and will be based on Management’s then current views and assumptions regarding future events and operating performance, and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See “Risk Factors” for a discussion of events and circumstances that could affect our financial performance or cause actual results to differ materially from estimates contained in or underlying our forward-looking statements.
Overview
11 Good Energy, Inc. is a Delaware corporation formed on May 23, 2007 for the purposes of developing, testing, manufacturing and distributing bio-fuel with energy related plans and pursuits relying on the commercialization of our proprietary fuel product, G2 Diesel, as discussed herein.
On October 23, 2007, we completed the purchase of an existing biodiesel manufacturer, 11 Good’s Energy, LTD, a limited liability company (becoming our subsidiary), formed in the State of Ohio in February 2006. Historically, our subsidiary has been a development stage company, which has primarily engaged in research activities to develop a proprietary manufacturing process to produce bio-fuel for diesel applications.
In early 2008, we began construction of our current manufacturing facility at the location of our operating subsidiary in Magnolia, Ohio (Magnolia Plant). This plant opened in November 2009 and is capable of producing between 4,600,000 and 6,400,000 gallons of G2 Diesel fuel. Since opening the plant, we have produced approximately 181,000 gallons of G2 Diesel fuel.
Acquisition of 11 Good’s Energy, LTD
As a result of the purchase of 11 Good’s Energy, LTD all of the assets, liabilities and proprietary technology of 11 Good’s were transferred to us by the former partners of 11 Good’s in exchange for cash of $611,900, $111,230 in assumed liabilities and 4,285,714 shares of common stock of the Company valued at $429. The assets and liabilities of 11 Good’s were recorded at fair market value at the time of acquisition. 11 Good’s is our sole subsidiary and operations and the Management of 11 Good’s and us are the same. The consolidated financial statements include the accounts of us and our wholly-owned subsidiary and all intercompany balances and transactions have been eliminated.
The Company accounts for acquisitions in accordance with the provisions of ASC 805-10. The Company assigns to all identifiable assets acquired a portion of the cost of the acquired company equal to the estimated fair value of such assets at the date of acquisition. The Company records the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired as goodwill. Management determined the fair values assigned to inventory based upon selling prices less cost of disposal and the Company’s profit allowance and the case of work in process less cost to complete. The Fair value of plant and equipment are based on current replacement costs. The Company does not amortize goodwill. The Company recorded goodwill in the amount of $639,504 as a result of the acquisition of 11 Good’s Energy LTD during the year ended December 31, 2007. The Company accounts for and reports acquired goodwill under Accounting Standards Codification subtopic 350-10, Intangibles-Goodwill and Other (“ASC 350-10”). In accordance with ASC 350-10, the Company tests its intangible assets for impairment on an annual basis or more often if events and circumstances warrant. The entire balance of goodwill, $639,504, was written off in the year ended December 31, 2011.
Development Stage Company - Product Development
We are currently in the development stage of our current business plan. We have limited operating history with respect to the construction and operation of biodiesel refineries for our own use. In this respect, from May 23, 2007 (date of inception) through December 31, 2011, our revenues have totaled $707,765 and our deficit accumulated during our development stage was 22,987,265. Further, our operating subsidiary incurred from February 2006 through October 2007, costs of approximately $100,000 in the development of our subsidiary’s proprietary manufacturing process and G2 Diesel product which are not reflected in
our accumulated deficit since their costs were incurred prior to the acquisition date of our subsidiary. These costs were primarily comprised of feedstock materials, labor and facilities costs. Since the acquisition, we have further developed our process and product through testing and trials and have expended money on labor, consulting, facilities and media productions in order to further our product development. As of the filing date of this Form 10-K, the development of the fuel’s functionality is complete, although we continue to incur research and development costs to develop new feedstock alternatives and to improve materials procurement and fuel manufacturing techniques.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of consolidated financial statements requires Management to make estimates and disclosures on the date of the consolidated financial statements. On an on-going basis, we evaluate our estimates including, but not limited to, those related to revenue recognition. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition. We recognize revenue from product sales in accordance with ASC 605 “Revenue Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists (through written sales documentation); (2) delivery has occurred (through delivery into customer’s tanks and acceptance); (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. For criteria (1) we generate a sales order and a shipping document defining number of gallons of fuel ordered, delivery and payment terms based on standing customer data and the customers purchase order. For criteria (2) we ensure delivery has occurred by documented delivery terms defining where the customer accepts the fuel delivery. Fuel stored off-site by the company remains as inventory until the customer receives the fuel from the offsite storage facility. For criteria (3) Management determines the selling price based on feedstock costs and our desired margin level. Our selling price fluctuates as feedstock prices increase or decrease, primary the cost of soybean oil. Currently, Management determines our selling price on a weekly basis. For criteria (4) we establish creditworthiness of the customer based on a review of established credit limits and current financial health of the entity placing the fuel order. Provisions for estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded, although we have not experienced any such items to date and do not expect any significant provisions in the future. We have no discount, rebate or warranty programs. Payments received in advance are deferred until revenue recognition is appropriate. We have no post-delivery obligations related to our products.
Inventory Valuation. We are required to make judgments based on historical experience and future expectations, as to the realizability of our inventory. We make these assessments based on the following factors: (a) existing orders and usage, (b) age of the inventory, and (c) historical experience.
Property and Equipment. We are required to make judgments based on historical experience and future expectations, as to the realizability of our property and equipment. We made these assessments based on the following factors: (a) the estimated useful lives of such assets, (b) technological changes in our industry, and (c) the changing needs of our customers.
Fair Value of Intangible Assets. We have adopted Statement of Accounting Standards Codification subtopic 805-10 (“ASC 805-10”). ASC 805-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.
We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 805-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Stock-Based Compensation
We account for our stock based compensation under ASC 718 “Compensation - Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
There were no employee stock options and employee stock purchases granted to employees and directors during the period from May 23, 2007 (date of inception) through December 31, 2008. On July 22, 2009, the Company granted 500,000 stock options to outside directors at an exercise price of $3.00 per share. We recorded the fair value of $200,205 as compensation expense for the year ended December 31, 2009, as a result of this transaction. These options are for a period of three years and are fully vested. On June 23, 2011, the Company granted 550,000 stock options to consultants and 35,000 options to employees at an exercise price of $5.00 per share. We recorded the fair value of $693,871 as operating expense for the year ended December 31, 2011, as a result of this transaction. These options are for a period of three years and are fully vested. In December 2011, the Company vested 200,000 previously granted options to consultants at an exercise price of $5.00 per share. We recorded the fair value of $852,414 as consulting expense for the year ended December 31, 2011, as a result of this transaction. These options are for a period of three years and are fully vested. There were no unvested options outstanding as of the date of adoption of FASB ASC Topic 718.
We use the fair value method for equity instruments granted to non-employees (if any) and will use the Black-Scholes model for measuring the fair value of options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
Results of Operations
The Company is considered to be in the development stage in accordance with the FASB ASC Topic 915 - Development Stage Enterprises. Since its inception, the Company has devoted substantially all of its time to raising capital, obtaining financing, research and development activities and obtaining many governmental organizations, municipalities and corporations to test our G2 Diesel and its performance as a blend with traditional #2 diesel fuel.
The following table sets forth certain selected condensed consolidated statement of operations data for the periods indicated:
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
The decrease in revenues in 2011 of $54,301, or 19%, is primarily due to retracting our business due to cash restraints. Most of our testing programs completed in mid-2011 did not generate the demand originally anticipated. Our largest customer, the Kenan Advantage group completed their testing and agreed to convert 10 terminals in the Ohio area to sell G2 Diesel. However the build out requires approximately $150,000 to complete and we have not had the capital to do so. Therefore we have been unable to operate our plant without the capital to purchase raw materials leading to an inventory allocation requirement with the Kenan advantage group. We currently deliver to one of their terminals using the finished fuel we have on hand to keep that terminal using G2 Diesel. Once the Company receives a cash infusion, Management believes that the Kenan Advantage Group will order fuel for the other 9 terminals they agreed to convert to purchase G2. Also, Management continues to believe that the completed testing programs will result in increased demand and sales orders for our G2 Diesel at premium prices which as of December 31, 2011 is approximately $5.00 per gallon compared to traditional #2 diesel fuel currently priced at approximately $3.50 per gallon.
Cost of goods sold was $530,691 and $747,783 for 2011 and 2010, respectively, or 223% of revenues for the year ended 2011 and 256% of revenues for the year ended 2010. Costs of goods sold primarily consist of the procurement and transportation of soybean oil, ethanol and other raw materials used in the manufacture of G2 Diesel; including payroll costs associated with labor, depreciation of manufacturing equipment, manufacturing facilities expense, insurance costs and other operating costs directly related to production. The decrease in cost of goods sold as a percentage of sales for 2011 is primarily due to the Company’s increased margins on the fuel sold in 2011. In mid-2011, the testing programs completed and the Kenan Advantage Group began purchasing G2 Diesel at retail prices increasing the Company’s margins. Manufacturing depreciation was $266,659 in 2011 and $275,277 in 2010 all of which was recorded as Cost of Goods Sold.
Gross loss was $(292,926) in 2011 and $(455,717) in 2010. Gross loss as a percentage of revenues was 123% and 156% for the years ended December 31, 2011 and 2010, respectively. Gross margin percentages will vary from period to period depending upon the extent of fuel testing with potential customers and the pricing offered by the Company. Also, we experience a significant amount of manufacturing depreciation that is recorded entirely to COGS. The gross margin for 2011 and 2010 is not necessarily indicative of the margins that may be realized in future periods.
Research and development costs decreased $21,313 from $543,401 in 2010 to $522,088 in 2011 as a result of continued research for our use of Glycerin in a dairy farm application and the research in the algae technologies of Kai BioEnergy, Inc. In 2010, we recorded $200,000 in R&D expenses relating to the Southwest Research test compared to $0 in 2011. In 2010, we also recorded $200,000 in R&D expense for payments made to Kai Bio Energy compared to $459,256 recorded to R&D expense in 2011. Lastly, in 2010, we recorded R&D expense totaling $115,397 to Chosen Acres, LLC, developing the dairy industry use of our glycerin, compared to $58,912 in 2011. The decrease is largely due to the research completing in mid 2011.
For the year ended December 31, 2011, the Company recorded an impairment expense of $639,504 to write off the goodwill recorded as compared to no impairment expense in 2010.
Depreciation and amortization decreased by $18,818 or 15% in 2011 when compared to the same period of 2010. The decrease is primarily due to some assets becoming fully depreciated in 2011. We also did not purchase any new fixed assets in 2011.
Selling, general, and administrative expenses (i.e. operating expenses) for 2011 were $4,181,805 as compared to $6,054,480 for the comparable period of the prior year. Such costs include, among others, payroll and related expenses, insurance costs and occupancy costs. The decrease in operating expenses of $1,870,827 in 2011 is primarily due to the following: (i) 2011 payments of common stock and options to consultants and employees from the Company, CEO and a founding shareholder on behalf of the Company, which was treated for accounting purposes as operating expenses and donated capital totaling $1,546,284 when compared to the same charges of $1,212,693 in 2010, (ii) decreases in consulting fees totaling $860,465 and (iii) decreases in provider fees such as advisory, legal and accounting aggregating $249,500, (iv) decreases in payroll and bonus related expenses totaling $612,014, (v) decreases in promotional and marketing expense of $669,010 and (vi) increases in facility cost and insurances of $190,543.
Interest expense, net was $477,210 in 2011 compared to $6,932 in 2010 or a net increase of $470,278. Between August 2009 and March 2010, the company had raised $11,932,000 through the sale of its Common Stock at a price of $3.00 per share, for a total of 3,977,333 shares, resulting in net proceeds to us of $10,353,069. In 2010, the company converted $6,498,709 of Convertible notes payable to Common Stock to be issued at a price of $2.55 per share, or 2,548,513 shares to be issued and warrants to purchase 3,228,523 shares of Common Stock and the entire remaining balance of convertible notes was redeemed, with principal and accrued interest paid to each redeeming note holder. Once the notes from 2009 were redeemed, we did not have significant interest expense for 2010. In 2011, we entered into three convertible notes that generated interest expense and amortization of debt discount relating to the derivative nature of the warrants attached to these convertible notes. .
Net loss was $(6,435,698) in 2011 compared to $(7,165,625) in 2010. Basic and fully diluted net loss per share for 2011 and 2010 was $(0.32) and $(0.41), respectively. Basic and fully diluted weighted average shares outstanding for 2011 and 2010 were 19,884,348 and 17,351,350 shares, respectively.
As of April 16, 2012, we have no long-term contracts or backlog of orders from customers to purchase our G2 Diesel fuel or our crude glycerin by-product described herein. In general, the testing programs and sales efforts conducted with potential customers have shown a longer order cycle than first anticipated 11 Good Energy has allocated its marketing efforts toward fleet users. These are customers that have centralized fueling and their vehicles return to the terminal every day after usage. This allows the vehicles to receive consistent product. 11 Good Energy’s key strategic partner and largest customer is the Kenan Advantage Group (The KAG.) The KAG distributes over 20 billion gallons of liquid fuels and specialty chemicals annually making them the largest transportation company of bulk transport in the United States. After extensive testing, the KAG has commissioned 11 Good Energy to build storage tanks and containment pads at 10 of their almost 200 terminals in the United States as a phase 1 of development. In addition to being a user of G2 Diesel, The KAG also assists 11 Good in providing logistic solutions through the utilization of their
fleet to efficiently deliver blended G2 Diesel to the Company’s customer base. In addition, there is a potential marketing fit to integrate G2 Diesel into the KAG’s current customer base.
In December, 2011, the state of California’s weights and measures approved a variance for G2 Diesel to be sold in California to The KAG West and Marquez Brothers International. The KAG West is the KAG’s California subsidiary. The KAG West was a sponsor of the Company’s variance and was approved to purchase G2 Diesel through this variance. Marquez Brothers, the largest importer/distributor of Mexican food products into the United States was also a sponsor of the variance and can now purchase G2 Diesel in California. J. Antonio Marquez, an owner of the Marquez Brothers International, has recently joined the Board of Directors of 11 Good Energy, Inc. See Management “Item 10.” Now that the variance has been approved, Management believes that adding additional customers to the existing protocol will give the Company an ability to expand its marketing efforts in the state of California.
In 2011, we completed a test with a fleet of urban buses in Mexico. The test compared fuel consumption of busses using our fuel blended 5% with diesel fuel, with the fuel consumption of busses using regular diesel fuel available in Mexico. This program tested a total of 5,500 gallons of G2 Diesel fuel, enough to blend 110,000 gallons at a 5% G2 Diesel blend. The vehicles tested showed as much as a 17% decrease in total fuel consumption, when using our fuel blended with diesel fuel compared to their original base line fuel consumption using regular diesel fuel. We have also conducted trials with other several metropolitan bus systems and have found similar efficiency gains in overall fuel consumption when blending our fuel with standard diesel fuel. We will continue to target those markets as well. No assurances can be given that our test marketing will result in significant sales of G2 Diesel fuel.
We intend to sell our crude glycerin product to dairy farms to use as a base for a disinfectant solution used on a dairy cow’s teats, commonly referred to in the milk industry as “teat dip”. Through research and development efforts, we developed our glycerin for a teat dip base and have been testing our glycerin for use as a potential feed source to the dairy cow. For every gallon of production, 11% is crude glycerin. Since 11 Good Energy’s manufacturing process uses ethanol (natural alcohol), versus methanol (petroleum based alcohol), the product is more desirable and safer to handle than glycerin from traditional biodiesel production. We are currently marketing the product through a partner that services the dairy industry; and, the glycerin has shown great promise as a new revenue stream to the Company.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $12,895 at December 31, 2011. Net cash was used in operating activities of $1,939,077 for the year ended December 31, 2011. Cash used in operations was primarily attributable to the net loss for the period of $6,435,698; a decrease in inventory of $301,317, and partially offset by depreciation and amortization of $373,893, amortization of debt discount of $302,771, fair value of warrants issued in connection with related party debt of $139,145, fair value of options delivered for services of $1,578,889, Impairment of goodwill of $639,504, realized loss of sale of securities available for sale of $213,083, increase in accounts payable and accrued expenses of $938,970. Net cash provided in investing activities of $558,666 for the year ended December 31, 2011, included purchase of patents of $21,602, proceeds from property and equipment of $19,500 and proceeds from the sale of securities available for sale of $560,768. Net cash provided by financing activities of $1,363,427, for the year ended December 31, 2011, included proceeds from the sale of Common Stock and stock subscriptions of $495,000, partially offset by the purchase of treasure stock and due from related party of $55,000, issuance of convertible notes of $550,000 and issuance of related party note payable of $306,000 and proceeds from a related party advance of $67,427.
The Company had cash and cash equivalents of $29,879 at December 31, 2010. Net cash was used in operating activities of $5,235,978 for the year ended December 31, 2010. Cash used in operations was primarily attributable to the net loss for the period of $7,165,625; an increase in inventory of $350,260, and partially offset by depreciation and amortization of $401,329, compensation of services by a related party of $1,493,840, decrease in other assets of $243,697, and increase in accounts payable and accrued expense of $132,357. Net cash used in investing activities of $118,719 for the year ended December 31, 2010, included purchase of property, plant and equipment of $149,073 and the purchase of Securities available for sale of $254,369 and proceeds from the sale of securities available for sale of $342,995, and acquisition of patent in the amount of $58,272. Net cash provided by financing activities of $514,827, for the year ended December 31, 2010, included proceeds from the sale of Common Stock of $805,846, partially offset by the purchase of treasure stock and due from related party of $251,019, payments of related party note payable of $25,000 and payments of convertible notes of $15,000.
From May 23, 2007 (date of inception) through December 31, 2009, the Company raised $7,930,000 by issuing notes payable convertible into Common Stock, bearing 8% interest per annum. These Notes (including principal and accrued interest thereon) became convertible at a price of $2.55 per share (the “Conversion Price”) based upon a 15% discount to the Company’s equity raise which was completed at an offering price of $3.00 per share between August 2009 and March 2010. In addition to the number of conversion shares to be delivered to each Holder of this Note, upon conversion of the Principal Amount and accrued interest thereon, the Company also delivered Unclassified Warrants expiring June 30, 2012 to purchase a number of shares of Common Stock equal to the number of Conversion Shares. As of December 31, 2011 and 2010, the Company had $0 outstanding of these convertible notes.
In 2010, the Company converted $6,498,709 of Convertible notes payable to Common Stock to be issued at a price of $2.55 per share, or 2,548,513 shares issued and warrants to purchase 3,228,523 shares of Common Stock and the entire remaining balance of convertible notes was redeemed, with principal and accrued interest paid to each redeeming note holder.
Between August 2009 and March 2010, the Company had raised $11,932,000 through the sale of its Common Stock at a price of $3.00 per share, for a total of 3,977,333 shares, resulting in net proceeds to us of $10,253,069.
We have a history of losses from operations and deficit accumulated during development stage of $22,987,265 at December 31, 2011. As of April 15, 2012, we are operating one production facility with a burn rate of approximately $85,000 per month, which is anticipated to increase upon receipt of additional financing. While our G2 Diesel fuel and its related manufacturing process is fully developed in both 2010 and 2011, we paid $60,000 toward research and development activities to a vendor to find ways to improve the cost effectiveness of the manufacturing process and the feedstock utilized therein. In addition, we paid $459,256, to further develop the Kai BioEnergy, Inc. potential for expansion and possible acquisition by 11 Good Energy, Inc.. (Note: In July 2011, we entered into an agreement to acquire Kai, but we failed to close due to lack of cash resources.) Total research and development expenditure was $522,088 and $543,401 for the years ended December 31, 2011 and 2010, respectively. While the Company anticipates more substantial revenues will result by the end of 2012 as a result of the completion of product testing, our ability to achieve profitable operations will depend on our ability to raise additional financing, on terms satisfactory to us. Further, there is no guarantee that we will ever be able to operate profitably or derive any significant revenues from our operations. See “Risk Factors” under “Item 1A”.
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred net losses attributable to common shareholders of $6,435,698 and used of $1,939,077 in cash for operating activities for the year ended December 31, 2011, incurred negative working capital (current liabilities exceeded current assets) of $1,804,369 and deficit accumulated during development stage of $22,987,265 as of December 31, 2011. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
We anticipate that our future liquidity requirements will arise from the need to finance our accounts payable and inventories, and from the need to fund our current obligations and capital expenditures. The primary sources of funding for our current operations will be cash on hand, cash generated from operations, and, if needed, raising additional capital either from the sale of equity and/or debt securities. We are attempting to raise up to $11,000,000 in a private placement offering. We can provide no assurances that additional financing will be completed on terms satisfactory to us, if at all. See “Risk Factors.”
Our future plans include purchasing and/or leasing a site for the purpose of constructing a second production facility with an estimated annual output capacity of 30,000,000 gallons of G2 Diesel. To date, we have completed engineering and construction plans for such a facility and have made inquiries into potential sites in the State of Ohio for such a facility. However, detailed milestones of these plans and the specific steps needed to accomplish each milestone do not currently exist. Management estimates that once a site is secured, that construction permitting and all the other steps necessary to have such a site constructed and operational would take approximately one year to complete. Management has adopted a board resolution that no further material costs will be expended on a potential second production facility until the construction and operational costs of such a facility, which are estimated at approximately $6,000,000, are first secured so that our plans for a new production facility will not be a burden to our current liquidity and capital resource needs.
The actual costs of this new facility will depend upon many factors, including, without limitation, the location and cost of the land, demolition costs of existing facilities (if any) on the site, environmental concerns (if any) and the size of the new plant. We can provide no assurances that the company will be able to obtain adequate financing for its second production facility on terms satisfactory to us, if at all. See “Risk Factors.”
Recent Accounting Developments
There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposures are the interest rate risk associated with our short term money market investments and market risk associated with equity investments available for sale. These are highly liquid investments on an exchange with a readily available market. The Company does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure. The Company does not have any credit facilities with variable interest rates.
Item 8.
Item 8. Financial Statements
The report of the Independent Registered Public Accounting Firm, Financial Statements and Schedules are set forth beginning on page of this Annual Report on Form 10-K following this page.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 and for the period from May 23, 2007 (date of inception) to December 31, 2011
Consolidated Statement of Stockholders’ Equity for the period from May 23, 2007 (date of inception) to December 31, 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010 and for the period from May 23, 2007 (date of inception) to December 31, 2011
Notes to Consolidated Financial Statements
-F-29
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of 11 Good Energy, Inc.
We have audited the accompanying consolidated balance sheets of 11 Good Energy, Inc. and Subsidiary (the “Company”), a development stage company as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2011 and for the period from May 23, 2007 (date of inception) to December 31, 2011.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to the above present fairly, in all material respects, the financial position of 11 Good Energy, Inc. and Subsidiary as of December 31, 2011 and 2010, and the consolidated results of operations and cash flows for each of the years in the two year period ended December 31, 2011 and for the period from May 23, 2007 (date of inception) to December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the consolidated financial statements, the Company has incurred net losses since its inception. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ RBSM LLP
New York, New York
April 16, 2012
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
See the accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FROM MAY 23, 2007 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2011
See the accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FROM MAY 23, 2007 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2011
See the accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FROM MAY 23, 2007 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2011
See the accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FROM MAY 23, 2007 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2011
See the accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See the accompanying notes to these consolidated financial statements
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the presentation of the accompanying consolidated financial statements follows:
Basis and business presentation
11 Good Energy, Inc. (the “Company”, “We”, “Us”, “Our”) was incorporated under the laws of the State of Delaware on May 23, 2007. The Company is in the development stage, as defined by Accounting Standards Codification subtopic 915-10, Development Stage Entities (“ASC 915-10”) and is developing alternative fuel sources, particularly the manufacture and distribution of Bio-fuel products for diesel engine applications. To date, the Company has generated minimal sales revenues, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from inception through December 31, 2011, the Company has accumulated a deficit through its development stage of $22,987,265.
The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary 11 Good’s Energy, LTD (“11 Good’s”). All significant intercompany balances and transactions have been eliminated in consolidation.
Acquisition of 11 Good’s Energy, LTD
On October 23, 2007 the Company acquired all outstanding membership interests of 11 Good’s Energy, LTD (“11 Good’s”) for a purchase price of $723,559. The Company acquired all the assets and assumed all liabilities of 11 Good’s. There were no contingent payments, options or commitments associated with the acquisition. A summary of consideration is as follows:
11 Good’s was an existing biodiesel manufacturer formed in the State of Ohio in February 2006. Historically, 11 Good’s has been in development stage primarily engaged in research activities to develop a proprietary manufacturing process to produce bio-fuel for diesel applications.
The allocation of the purchase price is as follows:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The Company accounts for acquisitions in accordance with the provisions of ASC 805-10. The Company assigns to all identifiable assets acquired, a portion of the cost of the acquired company equal to the estimated fair value of such assets at the date of acquisition. The Company records the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired as goodwill.
Management determined the fair values assigned to inventory based upon selling prices less cost of disposal and the Company’s profit allowance and the case of work in process less cost to complete. The Fair value of plant and equipment are based on current replacement costs.
The Company does not amortize goodwill. The Company recorded goodwill in the amount of $639,504 as a result of the acquisition of 11 Good’s Energy LTD during the year ended December 31, 2007.
The Company accounts for and reports acquired goodwill under Accounting Standards Codification subtopic 350-10, Intangibles-Goodwill and Other (“ASC 350-10”). In accordance with ASC 350-10, the Company tests its intangible assets for impairment on an annual or more often if events and circumstances warrant. Any write-downs will be included in results from operations.
During the year ended December 31, 2011, the Company management performed an evaluation of its goodwill for purposes of determining the implied fair value of the assets at the end of the year. The test indicated that the recorded remaining book value of its goodwill exceeded its fair value for the year ended December 31, 2011 and therefore recorded an impairment charge to current period operations of $639,504 ($0.03 per share) reducing the carrying value to $0.0. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s estimates.
Unaudited proforma information for the acquisition of 11 Good’s has not been presented at the acquisition is not significant to the result of operations for the period from May 23, 2004 (date of inception) through December 31, 2011.
Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosure. Accordingly, actual results could differ from those estimates. Such estimates include management’s assessments of useful lives of assets and related depreciation and amortization methods applied.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Revenue Recognition
The Company recognize revenue from product sales in accordance with ASC 605 “Revenue Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists (through written sales documentation); (2) delivery has occurred (through delivery into customer’s tanks and acceptance); (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. For criteria (1) the Company generate a sales order and a shipping document defining number of gallons of fuel ordered, delivery and payment terms based on standing customer data and the customers purchase order. For criteria (2) the Company ensure delivery has occurred by documented delivery terms defining where the customer accepts the fuel delivery. Fuel stored off site by the company remains as inventory until the customer receives the fuel from the offsite storage facility. For criteria (3) management determines the selling price based on feedstock costs and the Company’s desired margin level. The Company’s selling price fluctuates as feedstock prices increase or decrease, primary the cost of soybean oil. Currently, management determines the Company’s selling price on a weekly basis. For criteria (4) the Company establish creditworthiness of the customer based on a review of established credit limits and current financial health of the entity placing the fuel order. Provisions for estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded, although the Company have not experienced any such items to date and do not expect any significant provisions in the future. The Company has no discount, rebate or warranty programs. Payments received in advance are deferred until revenue recognition is appropriate. The Company has no post-delivery obligations related to our products.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.
Fair Values
In the first quarter of fiscal year 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”). ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company’s financial position or operations. Refer to Footnote 13 for further discussion regarding fair valuation.
Accounts Receivable
The Company assesses the realization of its receivables by performing ongoing credit evaluations of its customers’ financial condition. Through these evaluations, the Company may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. The Company’s reserve requirements are based on the best facts available to the Company and are reevaluated and adjusted as additional information is received. The Company’s reserves are also based on amounts determined by using percentages applied to certain aged receivable categories. These percentages are determined by a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. Allowance for doubtful accounts for accounts receivable was $-0- as of December 31, 2011 and 2010.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Available for Sale Securities
Available-for-sale securities are recorded at fair value with the net unrealized gains and losses (that are deemed to be temporary) reported, net of tax, as a component of other comprehensive income. Realized gains and losses and charges for other-than-temporary impairments are included in determining net income, with related purchase costs based on the first-in, first-out method.
Segment information
Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”) which establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company applies the management approach to the identification of our one reportable operating segment as provided in accordance with ASC 280-10. The information disclosed herein materially represents all of the financial information related to the Company’s principal operating segment.
Research and Development
The Company accounts for research and development costs in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development cost must be charged to expense as incurred. Accordingly, internal research and developments cost is expensed as incurred.
The Company incurred expenditures of $522,088, $543,401 and $1,334,070 on research and product development for the years ended December 31, 2011, 2010 and from May 23, 2007 (date of inception) through December 31, 2011, respectively.
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 10 years.
Patents
Patents are capitalized at incurred costs and are amortized ratably over the lesser of their economic or legal life. The patents are currently in development stage not subject to current period amortization.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Long-Lived Assets
The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Income Taxes
The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes include, but not limited to, accounting for intangibles, debt discounts associated with convertible debt, equity based compensation and depreciation and amortization.
Comprehensive income (loss)
The Company adopted Accounting Standards Codification subtopic 220-10, Comprehensive Income (Loss) (“ASC 220-10”) which establishes standards for the reporting and displaying of comprehensive income (loss) and its components. Comprehensive income (loss) is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. ASC 220-10 requires other comprehensive income (loss) to include foreign currency translation adjustments and unrealized gains and losses on available for sale securities.
Loss per share
The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation and disclosure requirements of earnings (loss) per share information. Basic loss per share has been calculated based upon the weighted average number of common shares outstanding. As of December 31, 2011 and 2010, common equivalent shares of 4,560,663 and 6,404,029, respectively, are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.
Intangible assets
The Company accounts for acquisitions in accordance with the provisions of ASC 805-10. The Company assigns to all identifiable assets acquired (including identifiable intangible assets), and to all identifiable liabilities assumed, a portion of the cost of the acquired company equal to the estimated fair value of such assets and liabilities at the date of acquisition. The Company records the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed, if any, as goodwill.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
As a result of the acquisition 11 Good’s Energy LTD on October 23, 2007, the Company acquired goodwill in the aggregate amount of $639,504.
During the year ended December 31, 2011, the Company management performed an evaluation of its goodwill for purposes of determining the implied fair value of the assets at the end of the year. The test indicated that the recorded remaining book value of its goodwill exceeded its fair value for the year ended December 31, 2011 and therefore recorded an impairment charge to current period operations of $639,504 ($0.03 per share) reducing the carrying value to $0.0. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s estimates.
Concentrations of credit risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit.
During the year ended December 31, 2011, the Company had sales to one customer that represented approximately 50% of consolidated revenue. Accounts receivable due from this customer amounted to $27,046 or 62% of the consolidated accounts receivable.
During the year ended December 31, 2010, the Company had sales to two customers that represented approximately 46% and 27% (respectively) of consolidated revenue. Accounts receivable due from these customers amounted to $37,992 or 73% of the consolidated accounts receivable.
During the year ended December 31, 2011, the Company purchased approximately 5.5% of consolidated cost of sales of its product from its one vendor.
During the year ended December 31, 2010, the Company purchased approximately 57%, 26% and 10% of consolidated cost of sales of its product, respectively, from its three largest vendors. The loss of any of these vendors could have a material adverse impact on the operations of the Company.
Dependency on key management
The Company has entered into an agreement with its Chief Executive Officer, Frederick C. Berndt, and with its Chief Financial Officer, Daniel T. Lapp, for them to resign as executive officers and directors of the Company following shortly after the filing of this Form 10-K. Gary R. Smith, Chief Operating Officer and a directors, has tentatively agreed to act as interim Chief Executive Officer. E. Jamie Schloss, a director of the Company, has tentatively agreed to serve as interim Chief Financial Officer. As both of these appointments are expected to be for a short term, the success of the Company and its ability to pursue its business strategy will depend upon the successful recruitment and retention of highly skilled and experienced managerial, marketing and technical personal. The Company can provide no assurances that such personnel will be obtained by us on terms satisfactory to us, if at all.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Stock based compensation
The Company follows Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in ASC 505-50. From May 27, 2007 (date of inception) through December 31, 2011, the Company granted an aggregate of 585,000 options to acquire the Company’s common stock. For the years ended December 31, 2011 and 2010, the Company charged $1,578,899 and $34,091 to current period operations for vesting employee options.
Reclassifications
Certain reclassifications have been made to prior year’s consolidated financial statements and notes thereto for comparative purposes to conform with current year’s presentation. These reclassifications have no effect on previously reported results of operations.
Recent accounting pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 2 - GOING CONCERN MATTERS
The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred net losses attributable to common shareholders of $6,435,698 and used of $1,939,077 in cash for operating activities for the year ended December 31, 2011, incurred negative working capital (current liabilities exceeded current assets) of $1,804,369 and deficit accumulated during development stage of $22,987,265 as of December 31, 2011. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
NOTE 3 - INTANGIBLE ASSETS
Patents
Patents are capitalized at incurred costs and are amortized ratably over the lesser of their economic or legal life. The patents are currently in development stage not subject to current period amortization.
Goodwill
The Company does not amortize goodwill. The Company recorded goodwill in the amount of $639,504 as a result of the acquisition of 11 Good’s Energy LTD during the year ended December 31, 2007.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 3 - INTANGIBLE ASSETS (CONT’D)
During the year ended December 31, 2011, the Company management performed an evaluation of its goodwill for purposes of determining the implied fair value of the assets at the end of the year. The test indicated that the recorded remaining book value of its goodwill exceeded its fair value for the year ended December 31, 2011 and therefore recorded an impairment charge to current period operations of $639,504 ($0.03 per share) reducing the carrying value to $0.0. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s estimates.
NOTE 4 - INVENTORIES
Inventory is stated at the lower of cost or market. The cost is determined using the first-in first-out method. Costs of finished goods inventory include costs associated with the procurement and transportation of Soybean oil and other raw materials used in the manufacture of G2 Diesel.
As of December 31, 2011 and 2010, inventories are comprised of the following:
NOTE 5 - OTHER CURRENT ASSETS
Other current assets as of December 31, 2011 and 2010 are comprised of the following:
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
The Company’s property, plant and equipment at December 31, 2011 and 2010 consist of the following:
Property and equipment are recorded on the basis of cost. For financial statement purposes, property, plant and equipment are depreciated using the straight-line method over their estimated useful lives.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT (CONT’D)
The Company retired fully depreciated fixed assets in an aggregate of $62,754. The Company also recorded a loss on disposal of fixed assets of $1,848 from the sale of automobiles with recorded gross value of $68,712 during the year ended December 31, 2011.
Depreciation expense was $393,393 and $401,329 for the year ended December 31, 2011 and 2010, respectively, of which $266,659 and $275,277 was included as part of cost of sales, respectively.
NOTE 7 - AVAILABLE-FOR-SALE SECURITIES
Cost and fair value of marketable equity securities at December 31, 2011 and 2010 are as follows:
During the year ended December 31, 2011 and 2010, the Company sold securities for $560,767 and $342,995 and realized an aggregate (loss) gain of $(213,083) and $20,957 with the sales of marketable securities, respectively. Unrealized losses are accounted for as other comprehensive income (loss).
NOTE 8 - CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable as of December 31, 2011 and 2010 are as follows:
(1) As of March 8, 2012, this note went into default. As of the date of this filing the note remains in default.
During the year ended December 31, 2011 the Company issued an aggregate of $550,000 in unsecured Convertible Promissory Notes that mature from December 31, 2011 to March 8, 2012. The Promissory Notes bear interest at a rate of 11% per annum and will be convertible into 183,333 shares of the Company’s common stock, at a conversion rate of $3.00 per share. Interest can also be converted into common stock at the conversion rate of $3.00 per share. In connection with the issuance of the Convertible Promissory Notes, the Company issued 267,500 warrants to purchase the Company’s common stock from $3.00 to $7.50 per share over 2 to 3 years.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 8 - CONVERTIBLE NOTES PAYABLE (CONT’D)
In accordance ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $188,955 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.
In connection with the issuance of the promissory notes, the Company issued detachable warrants granting the holder the right to acquire an aggregate of 267,500 shares of the Company’s common stock from $3.00 to $7.50 per share. The warrants expire two to three years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $188,955 to additional paid in capital and a discount against the note. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 2 to 3 years, an average risk free interest rate of 0.31% to 0.50%, a dividend yield of 0%, and volatility of 108% to 129.65%. The debt discount attributed to the value of the warrants issued is amortized over the notes’ maturity period as interest expense.
The Company amortized debt discount of $302,771 to current period operations as interest expense for the year ended December 31, 2011.
NOTE 9 - RELATED PARTY TRANSACTIONS
Due to related party
During the year ended December 31, 2011, the Company’s officers advanced an aggregate of $67,427 for working capital purposes to the Company. The advances are short term, non-interesting bearing and are due upon demand.
Notes payable, related party
A summary of notes payable, related party as of December 31, 2011 and 2010 are as follows:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 9 - RELATED PARTY TRANSACTIONS (CONT’D)
In connection with the issuance of the August promissory notes, the Company issued detachable warrants granting the holders the right to acquire an aggregate of 180,000 shares of the Company’s common stock at $3.00 per share. The warrants expire three years from the issuance. In accordance with ASC 470-20, the Company recognized the value attributable to the warrants in the amount of $139,145 to additional paid in capital and a charge to current period interest. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, an average risk free interest rate of 0.34% to 0.49%, a dividend yield of 0%, and volatility of 126.31% to 127.23%.
Facilities
Since April 1, 2008, the Company has occupied warehouse space provided by one of the Company’s founders. The Company agreed to pay a total of $1 per month for the space. The Company records this fee as rent expense when incurred. During this time period, the Company constructed a leasehold improvement to the leased warehouse space for the purpose of locating our bio-fuel manufacturing facility.
Receivable from purchase of treasury stock
Pursuant to his employment agreement, Frederick C. Berndt entered into a revolving note agreement with the Company beginning on November 11, 2007. The Company initiated the note arrangement to allow Mr. Berndt to assist the Company, primarily in the early stages of development, personally with operating capital as required. In addition, the Company initiated the note to allow the Company to assist Mr. Berndt with cash advances used for costs incurred during the process of improving the Company’s marketing, political and regulatory exposure. The cash advances exceeded the amounts of reimbursable costs resulting in amounts Mr. Berndt owed back to the Company. Mr. Berndt has agreed to reimburse the Company for the excess costs of these promotions. These costs consisted primarily of travel and sponsorship costs. The Company charges 5% interest per annum calculated on the last day of the year based on a average of the quarterly balance of the note. The balance of the note including interest of $27,915 becomes due on December 31, 2009, with a term of 30 days to settle the note payable.
On December 15, 2009, the Company accepted 425,000 shares of the Company’s common stock held by Mr. Berndt in full settlement of the outstanding note receivable and related accrued interest for $787,144 and recorded an accrued liability due to Mr. Berndt for $62,856. The fair value of the shares issued was determined based on the recent sale of the Company’s common stock. The amount due Mr. Berndt was repaid in full subsequent to the year ended December 31, 2009.
In November 2010, the Company advanced $53,519 to acquire the Company’s common stock (treasury stock).
During the year ended December 31, 2011, the Company advanced an additional $55,000 to acquire the Company’s common stock (treasury stock). As of December 31, 2011 and 2010, the common stock has not been received and accordingly was accounted for as due from shareholder and included in the stockholders’ equity.
Consistent with ASC 505-10-45 (“Equity-Other Presentation”), the amount recorded on the balance sheet is presented as a deduction from stockholders’ equity. This is also consistent with Rule 5-02.30 of Regulation S-X of the Code of Federal Regulations.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 10 - CAPITAL STOCK
Preferred stock
On June 22, 2007, the Board of Directors designated 11,000,000 shares as Series A preferred stock (“Series A Preferred Stock”), with a par value of $0.0001 per share. This is the total number of authorized preferred Series A shares outstanding. The preferred stock is not entitled to any preference upon liquidation, dividend rights and has no conversion rights into the Company’s common stock. The Series A Preferred Stock is entitled to one vote equivalent to one share of common stock on the record date for the vote or consent of shareholders, and with respect to such vote, each holder of Series A Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of the holders of the Company’s common stock.
On June 22, 2007, the Company issued at par value an aggregate of 11,000,000 shares of preferred stock to founders for activities prior to the formation of the Company and relating to its incorporation.
As of December 31, 2011 and 2010, there were 11,000,000 Series A preferred stock issued and outstanding.
Common stock
In March 2010, the Board approved and the stockholders ratified an increase in the number of authorized common shares to 65,000,000. To reflect this change, a certificate of amendment to the company’s certificate of incorporation was filed with the Secretary of state of the state of Delaware on March 22, 2010.
On May 23, 2007, the Company issued at par value an aggregate of 9,700,000 shares of common stock to founders for activities prior to the formation of the Company and relating to its incorporation.
On June 27, 2007, the Company issued an aggregate of 300,000 shares of common stock in exchange for future services valued at $156,000. The fair value of the common stock was determined based upon the quoted market price on the date of issuance of the shares. Management assumes all responsibility for the amounts recorded as a result of the consulting services performed.
On October 23, 2007, the Company issued an aggregate of 4,285,714 shares of its common stock in connection with the acquisition of 11 Good’s at par value.
Between August 2009 and February 2010, the Company has received net proceeds of $10,253,069, through the subscription for common stock consisting of 3,977,333 shares of common stock and 1,988,667 warrants. All common shares subscribed were issued during the year ended December 31, 2010. Between April and May 2011, the Company received additional gross proceeds of $225,000 from the sale of 45,000 shares of Common Stock at $5.00 per share and two year Warrants to purchase 22,500 shares, exercisable at $7.50 per share from date of issuance through June 30, 2013. Between July 2011 and December 2011, the Company received $270,000 from the sale of 90,000 shares of common stock at $3.00 per share and Warrants to purchase 90,000 shares, exercisable at $5.00 per share from two years from the date of issuance. The 90,000 shares of common stock have not been issued as of December 31, 2011 and were accounted for as common stock subscription payable, which have been issued March 20, 2012.
As of December 31, 2011 and 2010, there were 20,856,561 and 20,811,561 shares issued and 19,901,238 and 19,856,239 shares outstanding; respectively.
NOTE 11 - OPTIONS AND WARRANTS
Non Employee Stock Options
The following table summarizes in options outstanding and the related prices for the shares of the Company’s common stock issued to non employees at December 31, 2011:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 11 - OPTIONS AND WARRANTS (CONT’D)
Transactions involving stock options issued to non employees are summarized as follows:
During the year ended December 31, 2011, the Company granted an aggregate of 900,000 non employee stock options in connection services rendered at the exercise prices of $3.00 to $5.00 per share.
The fair values of the vesting non employee options for the year ended December 31, 2011 were determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 108.0% to 160.0%; and Risk free rate: 0.25% to 1.02%.
The fair value of all non employee options vesting during the year ended December 31, 2011 of $1,534,581 was charged to current period operations.
Employee Stock Options
The following table summarizes in options outstanding and the related prices for the shares of the Company’s common stock issued to employees at December 31, 2011:
Transactions involving stock options issued to employees are summarized as follows:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 11 - OPTIONS AND WARRANTS (CONT’D)
During the year ended December 31, 2011, the Company granted 35,000 employee stock options in connection with services rendered at the exercise price of $5.00 per share.
The fair values of the employee options for the year ended December 31, 2011 were determined using the Black Scholes option pricing model with the following assumptions: Dividend yield: 0%; Volatility: 108.0% and Risk free rate: 1.02%.
The fair value of all employee options vesting during the year ended December 31, 2011 of $44,318 was charged to current period operations.
Warrants
The following table summarizes in warrants outstanding and related prices for the shares of the Company’s common stock issued to shareholders at December 31, 2011:
Transactions involving warrants issued are summarized as follows:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 11 - OPTIONS AND WARRANTS (CONT’D)
During the year ended December 31, 2010, in connection with the sale of the common stock, the Company issued an aggregate of 2,674,906 warrants to shareholders and placement agent to purchase the Company ‘s common stock from $2.55 to $4.50 per share expiring from June 2012 to April 2015.
During the year ended December 31, 2011, in connection with the sale of the common stock, the Company issued an aggregate of 22,500 warrants to shareholders to purchase the Company’s common stock for $7.50 per share expiring in June 2013 and paid $22,500 commission to the placement agent (See Note 10).
In connection with the issuance of convertible notes (see Note 8 above), the Company issued detachable warrants during the year ended December 31, 2011 granting the holders the right to acquire an aggregate of 267,500 shares of the Company’s common stock at $3.00 to $7.50 per share. The warrants have expiration dates between two to three years from the date of issuance. The Company valued the warrant commitments in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 2 to 3 years, an average risk free interest rate of 0.31% to 0.50%, a dividend yield of 0%, and volatility of 108% to 129.65%. The debt discount attributed to the value of the warrant commitment issued is amortized over the notes’ maturity period as interest expense.
In connection with the issuance of related party notes (see Note 9 above), the Company issued 180,000 detachable warrants during the year ended December 31, 2011 granting the holder the right to acquire an aggregate of shares of the Company’s common stock at $3.00 to $7.50 per share. The warrants expire three years from the date of issuance. The Company valued the warrant commitments in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 2 to 3 years, an average risk free interest rate of 0.34% to 0.49%, a dividend yield of 0%, and volatility of 126.31% to 127.23%. The value of the warrant commitment issued was charged to current period operations as interest expense.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Employment and consulting contracts
The Company entered into employment agreements with certain officers and employees of the Company each for a term ranging from 12 to 36 months. Total annual base salaries under these agreements are $551,000.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONT’D)
In the event certain employment agreements are terminated other than for cause, the Company shall pay a lump sum on the date of termination, severance compensation to the executive in an amount equal to the sum of executive’s salary and bonus paid in the prior fiscal year. In the event the employment contract expires and the executive is not rehired in the same position under the terms and conditions of a new executive employment agreement mutually acceptable to the parties or in the event executive dies or becomes disabled, the Company shall pay in lump sum on the date of termination severance compensation in an amount equal to the sum of executive’s salary and bonus paid in the prior fiscal year. In addition, executive (except in the case of his death) shall be entitled to continue health benefits for a period of 18 months or until the executive is employed full time with another employer.
The Company had entered into consulting agreements with individuals responsible for creating political liaisons, government agency and investor relations. The agreements are generally for a term of one year or less from inception and renewable unless either the Company or the consultant terminates such agreement by written notice. The Company incurred $792,696 and $1,643,161 in fees to these individuals for the years ended December 31, 2011 and 2010, respectively, in a consulting role.
As of December 31, 2011 and 2010, all commitments for business consulting services has expired and are on a month to month basis.
Lease contracts
The Company leased its office space and warehouse facility for $4,501 per month through August 31, 2011, month to month thereafter. The Company has determined not to record deferred rent in order to recognize rent expense over the term of the lease on a straight line basis, as the amount has been determined to be immaterial to the overall consolidated financial statements. Rent expense for the twelve months ended December 31, 2011 and 2010 was $54,000 and $62,917, respectively. The renegotiated lease payments are reflected in the table below.
The Company also leases rail cars for storing and shipping finished fuel. The lease term for each rail car expires periodically in 2012.
Future minimum lease payments are as follows for the years ending December 31:
Litigation
In September 2011, William L. Miller “Plaintiff” commenced an action in the Court of Common Pleas, Stark County, Ohio, against Frederick C. Berndt and 11 Good Energy, Inc. “Defendants” Plaintiff alleges that Mr. Berndt incurred charges for expenses relating to the business of the Corporation utilizing Plaintiff’s credit card account with American Express, which card Plaintiff allegedly permitted Mr. Berndt to utilize so long as Defendants would repay Plaintiff prior to the time he became liable for interest and penalties. The cause of action for breach of contract and unjust enrichment seeks the return of approximately $81,000 allegedly loaned by Plaintiff to the Defendants. From monies the Company owes Frederick C. Berndt, the Company recorded the $81,000 liability due to the filed judgment Mr. Berndt has agreed to reduce the balance due to him in the amount of $81,000 from the funds he advanced to the Company. In 2012, the Company paid approximately $11,000 to Mr. Miller and Mr. Berndt paid approximately $13,500 to Mr. Miller. The Company anticipates this liability to be paid in 2012, either through the Company or Mr. Berndt personally.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONT’D)
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings other than described above that it believes will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
NOTE 13 - FAIR VALUE
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of December 31, 2011:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 13 - FAIR VALUE (CONT’D)
The following table provides a summary of changes in fair value of the Company’s Level 1 financial assets as of December 31, 2011:
The Company adopted the provisions of ASC 825-10 prospectively effective as of the beginning of Fiscal 2008. For financial assets and liabilities included within the scope of ASC 825-10, the Company will be required to adopt the provisions of ASC 825-10 prospectively as of the beginning of Fiscal 2009. The adoption of ASC 825-10 did not have a material impact on our consolidated financial position or results of operations.
The fair value of the assets, securities available for sale, at December 31, 2011 was grouped as Level 1 valuation as the market price was readily available.
NOTE 14 - INCOME TAXES
The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes include, but not limited to, accounting for intangibles, debt discounts associated with convertible debt, equity based compensation and depreciation and amortization.
At December 31, 2011, the Company has available for federal income tax purposes a net operating loss carryforward of approximately $16,404,904, of which $7,020,406 expiring through the year 2031, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Based upon the change in ownership rules under section 382 of the Internal Revenue Code of 1986, if in the future the Company issues common stock or additional equity instruments convertible in common shares which result in an ownership change exceeding the 50% limitation threshold imposed by that section, all of the Company’s net operating losses carryforwards may be significantly limited as to the amount of use in a particular years. Components of deferred tax assets as of December 31, 2011 are as follows. All or portion of the remaining valuation allowance may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 14 - INCOME TAXES (CONT’D)
At December 31, 2011, the significant components of the deferred tax assets (liabilities) are summarized below:
The Company recognizes interest and penalties related to uncertain tax positions in general and administrative expenses. As of December 31, 2011 and 2010, the Company has no unrecognized tax benefit from uncertain tax positions, including interest and penalties.
The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:
Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:
11 GOOD ENERGY, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND 2010
NOTE 15 - SUBSEQUENT EVENTS
Litigation
In January 2012, the Company issued a convertible note for $100,000 exercisable at $3.00 per share and 60,000 warrants to purchase common stock at $5.00 per share. The note is due on April 18, 2012 and charges 11% interest.
In February 2012, a stockholder “Plaintiff” commenced a lawsuit against the Company and other Defendants in the Circuit Court in Orange County, Florida. The lawsuit pertains to the stockholders’ investment of $400,000 in the Company’s securities. Prior to the filing of the lawsuit, the Company verbally agreed with the stockholder to return his $400,000 in periodic payments against the return and cancellation of the related securities. The Company made payment of $108,519 before ceasing of making any additional payments. The Plaintiff has failed to return to the Company the securities which relate to the monies received by Plaintiff. Plaintiff is alleging fraud in the inducement as it pertains to his investment in the Company as well as fraudulent and negligent misrepresentations, breach of contract and conversion. Plaintiff is seeking damages which include, but are not limited to $400,000 (less payments received by plaintiff), attorney, court costs and interest. The Company anticipates that upon receipt of funding and/or its common stock begins trading on a public market, this shareholder would be able to sell their common stock. In the absence of a public market, the Company may purchase the shares back from the investor and record the shares to Treasury Stock as we have with the $108,519 paid to date.
On March 7, 2012, Jason A. Weiss “Plaintiff” commenced an action in the Court of Common Pleas, Stark County, Ohio against Defendants, 11 Good Energy and Frederick C. Berndt “Defendants”. Mr. Weiss alleges that he was employed by the Company for a term of one year at a salary of $15,000 per month, that he was entitled to receive relocation expenses and reimbursement of certain expenses and he was entitled to receive 130,000 shares of Common Stock of the Company upon his commencing of employment with Defendant, 11 Good Energy, in January 2011. Plaintiff alleges that Defendants made various representations to him pertaining to his employment and otherwise which were false and misleading. Plaintiff is suing the Defendants for breach of contract, unjust enrichment, promissory estoppel, fraudulent inducement, seeking to pierce the corporate veil, wrongful termination in violation of public policy and Defendants’ liability under the whistle blower provisions of Ohio law. The amount of money being sought by Plaintiff will be the amount allegedly damaged and proven at trial. The Company believes this suit to be from a disgruntled former consultant. We had no written agreement with Mr. Weiss and worked with him on certain marketing efforts on the condition of performance. He performed none of his promised actions and we terminated our relationship with the Plaintiff. The Company plans to vigorously contest these allegations and is contemplating a countersuit for damages to the Company.
On March 8, 2012 a convertible note payable for $200,000 exercisable at $3.00 per share and paying 11% interest entered into default. As of the date of this filing, the note remains in default.
On April 9, 2012, the Company entered into an agreement with its Chief Executive Officer, Frederick C. Berndt, and with its Chief Financial Officer, Daniel T. Lapp, for them to resign as executive officers and directors of the Company following shortly after the filing of this Form 10-K. Gary R. Smith, Chief Operating Officer and a directors, has tentatively agreed to act as interim Chief Executive Officer. E. Jamie Schloss, a director of the Company, has tentatively agreed to serve as interim Chief Financial Officer. As both of these appointments are expected to be for a short term, the success of the Company and its ability to pursue its business strategy will depend upon the successful recruitment and retention of highly skilled and experienced managerial, marketing and technical personal. We can provide no assurances that such personnel will be obtained by us on terms satisfactory to us, if at all.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9.A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or “1934 Act,” is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to help ensure such information 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. For the year ended December 31, 2011, we carried out an evaluation, under the supervision and with the participation of our Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, Management concluded that our disclosure controls and procedures were not effective based on certain respects, as of December 31, 2011.
Management’s Report on Internal Control over Financial Reporting
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
With the participation of our Chief Executive Officer and Chief Financial Officer, our Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation and the material weaknesses described below, Management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2011 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.
To mitigate the current limited resources and limited employees, we rely heavily on direct Management oversight of transactions, along with the use of legal and outsourced accounting professionals. As we grow, we expect to increase our number of employees, which, we believe, will enable us to implement adequate segregation of duties within the internal control framework.
In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidate financial statements for the year ended December 31, 2011 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, Management believes that, despite our material weaknesses, our consolidated financial statements for the year ended December 31, 2011 are fairly stated, in all material respects, in accordance with GAAP.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only Management’s report in this Annual Report on Form 10-K.
Changes in Internal Controls
During the fiscal year ended December 31, 2011, there have been no changes to our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Item 9.B. Other Information
Not Applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference from the Company’s Proxy Statement to be filed with the SEC on or before April 30, 2012, or filed in an amendment to this Form 10-K prior to April 30, 2012.
Item 11.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference from the Company’s Proxy Statement to be filed with the SEC on or before April 30, 2012, or filed in an amendment to this Form 10-K on or before April 30, 2012.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference from the Company’s Proxy Statement to be filed with the SEC on or before April 30, 2012, or filed in an amendment to this Form 10-K on or before April 30, 2012.
Item 13.
Item 13. Certain Relationships, Related Transactions and Director Independence.
The information required by this item is incorporated by reference from the Company’s Proxy Statement to be filed with the SEC on or before April 30, 2012, or filed in an amendment to this Form 10-K on or before April 30, 2012.
Item 14.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference from the Company’s Proxy Statement to be filed with the SEC on or before April 30, 2012, or filed in an amendment to this Form 10-K on or before April 30, 2012.
Part IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
The following documents are filed under “Item 8. Financial Statements and Supplementary Data,” pages through, and are included as part of this Form 10-K as the consolidated financial statements of the Company for the years ended December 31, 2011 and 2010:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits
The following exhibits were previously filed under a Form S-1 Registration Statement, file No. 333-166149 unless otherwise noted:
Exhibit
No.
Description of Exhibit
2.1
Agreement and Plan of Organization between Registrant and 11 Good’s Energy, LTD.
2.2
Corrections to Exhibit 2.1
3.1
Certification of Incorporation
3.2
By-Laws
3.3
Certificate of Amendment to Certificate of Incorporation
3.4
Certificate of Designation
10.1
Employment Contract - Frederick C. Berndt
10.2
Employment Contract - Daniel Lapp
10.3
Employment Contract - Aaron Harnar
10.4
Consulting Agreement with Clayton R. Livengood
10.5
Employment Agreement - Gary R. Smith
10.6
Finder’s Agreement - Jessup Lamont
10.7
Consulting Agreement with Capital Keys
10.8
Consulting Agreement with California Strategies
10.9
Office Lease dated April 25, 2007 between the Registrant and Triad Realty, LLC, including a First Lease
Amendment dated June 21, 2007 and a Second Amendment dated July 15, 2009.
21.1
Subsidiary of Registrant
31.1
Principal Executive Officer Rule 13a-14(a)/15d-14(a) Certification (*)
31.2
Principal Financial Officer Rule 13a-14(a)/15d-14(a) Certification (*)
32.1
Principal Executive Officer and Principal Financial Officer Section 1350 Certification (*)
* Filed herewith.
** Furnished herewith
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) 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.
Dated: Canton, Ohio
April 16, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures
Title
Date
/s/ Frederick C. Berndt
Chairman of the Board
Principal Executive Officer
April 16, 2012
Frederick C. Berndt
/s/ Daniel T. Lapp
Principal Financial Officer
Secretary and Treasurer
April 16, 2012
Daniel T. Lapp
/s/ Gary R. Smith
Director and Chief Operating Officer
April 16, 2012
Gary R. Smith
/s/ John D. Lane
Director
April 16, 2012
John D. Lane
/s/ E. Jamie Schloss
Director
April 16, 2012
E. Jamie Schloss
/s/ Antonio
Director
April 16, 2012
Marquez
Antonio Marquez
The aforementioned directors represent all the current members of the Board of Directors.