ITEM 1. DESCRIPTION OF BUSINESS
General
Renewable Fuel Corp (A Development Stage Company) is a publicly held entity created as an integrated producer, blender and distributor of biodiesel and glycerine. We intend to initially develop glycerine and biodiesel when financing is in place to complete the Malaysian plant, acquire feedstock and commence operations.
Through Plant Biofuel Corporation Sdn Bhd (“PBC”), we own a biodiesel and glycerine production plant which when completed and fully operational has an anticipated production capacity of thirty million gallons per year on a 24-hour operating basis. The plant is currently in the final stages of preparation to produce biodiesel and technical grade refined glycerine. Upon start up of the plant we will be able to manufacture 800 metric tonnes per month of glycerine. The facility consists of three major process plants: pre-treatment plant, biodiesel plant, and glycerine refining plant. It will be able to produce high-quality biodiesel that complies with the strict European (EN14214) and American (ASTM 6751) biodiesel specifications from a combination of feedstocks including Crude Palm Oil (“CPO”), tallow and Jatropha or other waste vegetable oils. The plant will also be capable of processing and refining U.S. Pharmaceutical Grade (USP) and technical grade glycerin, from crude glycerine which is a bi-product of the biodiesel refining process. The plant, which has a biodiesel manufacturing license from the Ministry of International Trade and Industry of Malaysia, is expected to commence operation and deliver products to customers in the calendar year 2014.
Through Bio Refining Industries Inc (“BRII”), we have two biodiesel production licenses from Badan Koordinasi Penanaman Modal (“BKPM”) in Indonesia, which enable us through subsidiaries to own, construct and operate two biodiesel plants in Indonesia. The licenses expired on August 4, 2011 for the Century Corp Sdn Bhd (“Century”) subsidiary and on August 30, 2012 for Optimis Teguh Sdn Bhd (“Optimis”) subsidiary, respectively. Each facility has complete engineering documentation and no significant additional work will be done until sufficient construction financing is procured and there is no such financing identified at this time. Accordingly, there is no assurance that these plants will ever be constructed or become operational. We believe that if the Indonesian plants were completed we would be able to obtain an extension or renewal of the licenses.
Company management evaluates the appropriateness of the carrying amounts of its long-lived assets when indicators of impairment are deemed to exist. In accordance with these policies, previous valuation of our plants under construction, as well as land, for possible impairment was based on a number of factors including appraisals, comparable valuations, the original investment amount, discounted cash flow models, as well as current and projected operating performance.
Biodiesel
Biodiesel can be defined as “a diesel fuel obtained by the esterification of oil (triglycerides) derived from plants or animals” (International Fuel Standard Biodiesel). Esterification is the conversion of a compound into an ester by a reaction between an acid and an alcohol with the elimination of a molecule of water. In the production of biodiesel, triglycerides (organic fatty acids) are mixed with alcohol in the presence of a catalyst (sodium hydroxide) to produce biodiesel and glycerin. Although biodiesel can be run in any diesel engine as a neat fuel (B100), biodiesel is likely to be blended with diesel fuel for several reasons, including:
1.
Higher production costs and lower production volume potential;
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Concerns that running on B100 can result in fuel gelling problems in very cold weather; and
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Acceptance by many diesel engine manufacturers of a 20% blend (B-20) vs a 100% biodiesel.
Biodiesel is a biodegradable, nontoxic alternative fuel produced from multiple types of vegetable oil and other feedstocks. Biodiesel performs comparably to petroleum diesel, in vehicle, construction, marine, power generation and home heating oil applications. Biodiesel can be used as a direct replacement for diesel and can also be blended with diesel. In comparison to ethanol, which is used primarily as an oxygenate that typically replaces up to 10% of gasoline, biodiesel can be used as a direct replacement for diesel at levels up to 100% (in some instances such use may require minor engine modifications).
Production
We plan to produce and supply pure B100, which is 100% biodiesel, or blend the B100 into various biodiesel blends such as B2, B5 and B10, where B(x) refers to the percentage of biodiesel being blended with diesel fuel, before supplying to markets in the US, Europe, Asia and South America. With respect to our biodiesel products, we anticipate that we will be able to directly source lower cost feedstocks such as tallow (rendered animal fats and oils), waste vegetable oils and virgin oils such as CPO which is produced in the areas near our production plant in Malaysia and planned facilities in Indonesia, as opposed to higher cost feedstocks such as Rapeseed, Soy and Canola Oil being used by other biofuel producers. CPO is a commodity that is traded on the Chicago Board of Trade and in Malaysia, and we can buy it at market when our facilities are ready to begin biodiesel production. There can be no guarantee that the price for feedstocks (animal fats and waste vegetable oil) at that time will be low enough for us to make a profit by shipping our biodiesel to markets in the US, Europe and Asia at competitive prices. We plan to negotiate six month and one year purchase agreements with regional producers and suppliers but we do not have any contracts, agreements or commitments in place at this time. However, we are actively pursuing such agreements and have been acquiring feedstock samples for testing to determine the optimal feedstock and or feedstock combinations that will provide the best product with the lowest input costs resulting in the most competitive product pricing to attract market share.
Glycerine
Glycerine is a byproduct of the manufacture of biodiesel and is part of the transesterification of vegetable oils and fats. As such, the product represents approximately 10% of the production result in the manufacture of biodiesel. The product is used around the world as a versatile and popular chemical component in thousands of diverse products. Because there is constant demand for this product in a wide array of markets and industries, RFC is developing markets and customers to sell glycerine in the US, Europe and select global markets.
RFC currently has letters of intent for the purchase of all production of tech grade refined glycerine from our plant in Kuantan; we anticipate delivery of this product in the calendar year 2014.
Malaysian Production Plant
On January 18, 2007 PBC entered into an agreement with Oil-Line Engineering & Associates Sdn Bhd ("OLEA"), a subsidiary of Oilcorp, whereby OLEA would provide engineering, procurement and construction management of a 30 MGA, CPO feedstock biodiesel facility in Malaysia on a turnkey project basis. The total cost of the Kuantan plant was approximately $45.5 million. As of December 31, 2010 construction on the Kuantan plant was substantially complete and available for glycerine production. As a result of the impairment analysis in fiscal year 2009, the Kuantan plant has been written down to $24.1 million at September 30, 2013.
For the next twelve months, we require additional financing needs of up to $50 million to finance the further set-up of our business and the start of our early operational work and to cover our ongoing working capital needs in order to commence revenue generating operations. There can be no assurance we will be able to raise additional capital.
Our Malaysian biodiesel plant is located on an 11 acre site in the Gebeng Industrial Estate, adjacent to the Kuantan Port in Pahang. It is within close proximity to the world class Kuantan Port Complex. This industrial estate is Pahang’s main petrochemical and palm oil related products cluster and houses domestic and multinational companies with a sufficient and undisrupted supply of electricity and water and backed by good rail and road services.
This particular site is logistically well situated, capable of handling large volumes of feedstock and finished product, with close proximity to port access for vessel loading and offloading. The port is also strategically located with direct access via South China Sea, and passage to the fast growing markets in East Asia and the Pacific regions. Also, this port is connected to the Gebeng Industrial Estate via a common pipe rack facility for transportation of raw materials and finished goods.
Planned Indonesian Production Plants
We have two biodiesel production licenses from BKPM in Indonesia, which enable us through our subsidiaries to own, construct and operate two biodiesel plants in Indonesia. The land for each facility is adjacent to the other, enabling RFC to combine certain operations and use of assets to potentially reduce cost through sharing resources like a jetty.
Our plants will be sited in Kelurahan Guntung, Dumai, in the Province of Riau. Our plants will have access to a sea front and be equipped with a jetty. We have selected this site because it has a sea front and is strategically located at the international shipping route and near to Dumai Town in the Riau Province, Sumatera Island, Indonesia and is strategically located across the Rupat-Straits of Riau. In addition, there is an abundant supply of feedstock and raw materials within the vicinity.
Constructions of these plants are currently not anticipated until the Kuantan plant is operating and construction financing is available.
Sources of Raw Material and Availability
Feedstocks
The choice of fats and oils for biodiesel production largely depends on strategic availability and affordability: Western Europe - rapeseed oil, the US - refined soybean oil, South East Asian countries such as Malaysia and Indonesia - palm kernel and palm seed oil. Tallow from rendered chicken and other processed fats is also available throughout the world, including SE Asia and China. Additionally, governmental decisions can affect the choice of feedstock. Currently most of the world’s biodiesel production is from semi-refined vegetable oils such as rapeseed oil, soybean oil and palm oil, and various other fats such as tallows, used cooking oil and greases. Each of the alternative feedstocks can produce biodiesel with different characteristics that may or may not meet local government specifications.
Feedstock such as palm oil and soy are also used in the food industry and as such biodiesel production competes for their supply. This competition can increase prices and limit supply which can be viewed negatively, so in order not be locked into competing for food-based feedstocks and due to preprocessing capabilities we are able to use, acquire and blend non-food based alternatives such as jatropha and tallow, in the production of our biodiesel.
The Kuantan plant, built utilizing technology provided by Desmet Ballestra (“Desmet”), has a preprocessing unit that allows the use of multiple-feedstocks, and that capability enables our Research and Development group (Research Fuel Corp Sdn Bhd, RFC's subsidiary in Kuala Lumpur, Malaysia) to utilize a blend of available tallows combined with other regional oils that achieves a unique balance of product quality while maximizing margins for our finished goods. When comparing the current market for oil seed biodiesels to the cost inputs of our regional tallow providers, we believe that our price advantage could be improved by up to 40% over currently available oilseed based biodiesel compared to current biodiesel market pricing. Instead of relying upon the volatile oilseed feedstock commodity market, we can contract tallow for a blend feedstock at a fixed price per MT on an annual basis, and the combination will be mixed and refined in our plant. The finished product will be brought to the market as Fatty Acid Methyl Ester (“FAME”), a generic form of biodiesel that we have determined achieves higher quality finished product specifications than a CPO only feedstock for instance. Because our product will be made predominately from waste material and non-food sourced feedstock, we will also be producing a sustainable biodiesel.
Although we have held preliminary discussions concerning acquiring CPO and alternative tallow-based feedstocks from regional suppliers, we have no contracts, agreements or commitments in place at this time. We believe that the combined capacities of these suppliers or alternative available suppliers will be able to meet our production requirement per annum.
Distribution
Generally, ULSD and B100 biodiesel are blended or B100 biodiesel is sold unblended and is then blended by the customer based on their individual requirements. We intend to distribute to customers either FOB at our port facility in Kuantan or through tanker delivery at specified port locations via CIF “Cost, Insurance and Freight” arrangements. CIF is a trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier.
We anticipate that our biodiesel will be shipped from Kuantan, Malaysia or Dumai, Indonesia to US locations including Houston, New York, and New Orleans, European ports such as Rotterdam and to Asian and South American markets as well.
We intend to expand the distribution reach of our biodiesel and blended fuels by leasing storage facilities in strategic ports and adding blending and distribution capability in selected US and global markets which will allow us to store and blend biodiesel and directly distribute to end- user customers. We do not currently have any such agreements in place and do not have a timeline for this activity.
The biodiesel products produced by the Malaysian and Indonesian plants will be logistically compatible with the current US distribution facilities servicing the oil and gas industry. This includes seaport, common carrier pipeline, transportation and storage facilities. As of the date of this filing, we have no agreements with independent tank farm operators to store our biodiesel and blended fuels for customers in the wholesale, fleet and retail markets.
Markets and Marketing
Our target markets for biodiesel are broadly categorized into wholesale, fleet and retail, which include fuel distributors, jobbers, blenders, industrial users, fleet operators, retail fuel station operators, as well as federal, state and local governments. We intend to use our US based sales team to enter into term contracts with these buyers, but to date we have no contracts in place.
The target markets for glycerine are broadly categorized as distributors, manufacturer and other buyers or users of refined glycerine products. We intend to use our US based sales team to enter into term agreements with these buyers, to date we have multiple letters of intent to buy our tech grade refined glycerine and are working towards deliver to fulfill the customer demand.
To help sell and market our products we have as objectives to create awareness and build visibility and incent sales , promote our brand name and products, and where possible support to the mission of the biodiesel industry and its trade organizations which seek to promote and build demand for the use of biodiesel globally. Our key marketing strategies are as follows:
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Promote broad-based adoption of biodiesel
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We plan to participate in numerous trade organizations and conferences and conduct various other public relations activities to promote the adoption of biodiesel globally. In addition, we plan to help promote and support new renewable fuel standards for the industry and lobby the appropriate government agencies regarding the benefits of biodiesel and encourage policies that support its use.
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Select strategic distribution sites to base our sales, marketing and distribution efforts
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We intend to select distribution sites that are strategic to our ability to favorably secure sales and distribution of our biodiesel, blended fuels and glycerin. The sites selected for our facilities will be located near producers of ULSD, users of biodiesel and blended fuels and/or are near domestic and international fuel distribution points, which will improve the efficiency of our marketing, the visibility of our brand and distribution of biodiesel and blended fuels in both domestic and international markets. The planned initial market penetrations will be in high petroleum use locations and facilities including but not limited to New York, Houston, Rotterdam, and New Orleans. Within each of these market areas, we plan to target fleet operators, petroleum jobbers, mid stream refiners, petroleum resellers, independent distributors, rail providers, shippers and other heavy users of diesel products. Within these currently planned locations and market areas, we believe that we will be able to access approximately 25% of the petroleum user base and supply the primary European distribution channels for biodiesel.
For glycerine sales we will initiate efforts similar to our biodiesel program. We intend to actively pursue the largest distributors and users through direct sales efforts and outreach marketing efforts to activate product sales. This effort began in the fourth quarter 2010.
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Support and expand market demand for biodiesel
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We plan to build company and product awareness and leverage high visibility conferences and events to convey the beneficial message of our products and communicate that by using our biodiesel products and resulting byproduct glycerine, users will be supporting environmental responsibility and help reduce the dependence on foreign petroleum.
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Public relations
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We intend to create a public relations plan that will include participation in numerous trade organizations and conferences to build relationships with the press, and industry advocacy groups that create public visibility and coverage for us and the biodiesel products and create a political advocacy to promote the adoption of biodiesel and blended biodiesel fuels both in the US and globally.
Our advertising plan will incorporate elements of the following;
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Business publications
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Trade shows /event direct marketing
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Website advertising and presence
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Web promotions, communications to fuel buyer markets
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Direct marketing
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Newsletters
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Email campaigns
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Marketing promotional tools and programs
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Merchandising and unique trade show reminders
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Public relations programs
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Trade publication advertising in key industry publications
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Key industry website advertising
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Select speaking opportunities for RFC Executives at trade shows and conferences
Through the above, we intend to promote our brand and product attributes as follows:
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Create and establish a positive reputation in biodiesel/biofuel products;
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Support and build the RFC brand position through customer acquisition;
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Adopt a distinctive RFC communications style and message approach.
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Create points of distinction in advertising and public relations with state-of-the-art production capabilities, with product and company-brand distinctions;
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Create pricing advantage through low production costs and gain product acceptance rapidly;
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Focus on growth of US and key international markets distribution capabilities; and
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Build a positive reputation for the Company’s products and reputation with competitive pricing and top level service.
Regulation
Our plants will have and maintain the necessary operating licenses from the Malaysian and Indonesian governments.
The biodiesel from our production facilities will comply with both the European (EN14214) and American (ASTM 6751) biodiesel specifications.
The growth of biodiesel industry will be determined largely as the result of government legislation, mandates and regulation. In general, governments use a variety of subsidies and tax breaks to stimulate demand.
Most governments have three primary concerns in formulating their biofuel policy:
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securing constant energy supply and reducing dependence on fossil fuel imports;
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obtaining environmental benefits and reducing sulfur emissions compared with those of fossil diesel; and
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creating jobs, in especially in rural regions, and boosting the agricultural sector.
Europe
The European Union has implemented a target of 5.75% renewable fuel usage by 2010 ((Directive 2003/30/EC). In March 2007, the European Council adopted as part of the Climate Change and Energy Package a 10% binding target for biofuels consumption to be reached by 2020 by each EU member state. On March 16, 2009 the European Union imposed import taxes on US-manufactured biodiesel. Exporters in the U.S. will have to pay additional anti-dumping tariffs of up to 29 percent, and anti-subsidy duties of up to 41 percent. The EU has explained that the additional tariffs are designed to prevent US manufacturers from selling biodiesel below the real costs of production.
In order to provide the necessary catalyst for the Member States to successfully meet the target, the European Parliament and the Council of the European Union, on October 27, 2003 adopted another EU Directive 2003/96/EC "Restructuring the Community framework for the taxation of energy products and electricity." The Directive establishes a European Community framework to allow Member States to amend the petroleum tax structure via total or partial petroleum tax exemption for biofuel or via reduction in excise duties so as to promote biofuel consumption.
The above policies set targets of a minimum share of 2% of fuels in the transport sector in 2005 to be increased to 5.75% in 2010. At the same time, the Member States are provided with the latitude to implement the directive, which allows the reduction of excise duties on biofuel and choice in the form of tax relief that best fits their situation.
Some EU countries implemented exemptions of the mineral oil tax on biofuel without any limit on blending. For example, in Spain, the exemption applies for both, pure (B100) or blended biofuel, up to the year 2014.
The UK has introduced similar incentive whereby a fixed UK20 pence/liter duty incentive / savings applies to Biofuel (whether pure or blended), which represent a partial 40% duty exemption on the total mineral oil tax structure. France also introduced, in 2004, a duty incentive structure on biodiesel of EUR0.33/liter which represents an 80% on total excise duty on petroleum tax. Other European countries are also introducing similar incentives to promote use of biofuel in each respective country to comply with the European Directives.
United States
The EPA’s ULSD regulation went into effect in 2006. The ULSD regulation requires all diesel fuel, diesel fuel additives and distillate fuels blended with diesel for on-road use to contain less than 15 ppm of sulfur content. Biodiesel serves as an alternative and appropriate way to comply with ULSD regulations, as biodiesel has less than 15 parts per million (“ppm”) of sulfur content. Blending biodiesel with ULSD also provides added lubricity, which is lost with the removal of sulphur but is required for peak engine performance. Also, in October 2008, ASTM amended the D975 standard for on-road diesel to allow for 5% biodiesel. The change in the ASTM spec, along with lubricity enhancement, will continue to ease the adoption of RFC's biodiesel by US blenders and marketers.
Federal Blenders Tax Credit
In 2004, Congress passed a provision establishing a tax credit that amounted to 1 cent (.01 USD) per percent of biodiesel blended with petroleum diesel. For example, a blend of 80 percent petroleum diesel and 20 percent biodiesel results in a 20 cent tax credit. Producers and blenders, therefore, blend biodiesel up to the maximum, 99.9%, resulting in an approximate tax credit of 300 USD per metric ton of biodiesel. The IRS requires that in order to qualify for the tax credit, biodiesel must meet the ASTM D 6751 standard.
In 2008, the biodiesel tax credit was extended through December 31, 2009. Domestic and international pressure led to a modification allowing foreign produced biodiesel to entering the US, to still qualify for the blenders tax credit, however, foreign produced biodiesel must be consumed in the US to qualify for the tax credit.
The biodiesel tax credit expired January 1, 2010 until December 16, 2010, when Congress extended the tax credit through 2011, and retroactively applied it to all of 2010. The President signed the legislation into law the next day.
As a result of the extension, demand for biodiesel in 2011 has increased, resulting in more opportunities for RFC in the US market. The biodiesel tax credit has not been extended and expired on December 31, 2011. The loss the of tax credit will affect the price competitiveness of biodiesel in the US market, however, the RINs will continue to offer value.
Renewable Fuel Standard (RFS)
The Congress authorized the EPA to establish a Renewable Fuel Standard when the Energy Policy Act of 2005 amended the Clean Air Act. RFS outlined the use of biodiesel and other renewable fuels by obligated parties.
Further clarification and standards were set in February, 2010 when RFS2 required the use of 1.150 billion gallons of biodiesel by the end of 2010 for the 2009 and 2010 calendar years, increasing to 1 billion gallons per year in 2011. With RFS2, a life cycle green house gas assessment was introduced. Soybean oil, waste oils, tallows and fats qualify under EPA guidelines to meet the GHG reduction criteria, while other virgin oils, such as palm oil, have not.
A credit trading program was also established with RFS, and RFS2, renewable fuels are assigned Renewable Identification Numbers (RINs) that allow obligated parties to comply with the RFS standard through credits they can purchase if they cannot blend renewable fuels. Producers and importers from qualified foreign facilities qualify for 1.5 RINs for every gallon of biodiesel. As of January, 2013, RINS were reportedly trading between $0.55-$0.58 for 2012 RINs and between $0.64 and $0.72 for 2013 RINs. At 1.5 RINs per gallon, the current potential value of RINs for biodiesel is between $247 and $324 per metric ton.
As of January 3, 2013, Congress passed the blending tax credit through 2013 and the current value of the tax credit and the RINs for biodiesel exceed $547 per metric ton in the US. RINs and tax credits significantly reduce the cost of RFC's biodiesel, providing a significant incentive to US blenders and marketers to purchase RFC's product.
Other key regulatory initiatives in the US in relation to biofuels are provided below:
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Environmental Protection Agency (“EPA”) - Has established a goal of 30% alternative fuel usage in government fleets by 2010. Biodiesel is an alternative fuel, and credits can be earned for blends of 20% or greater. The rules also require the federal government, alternative fuel providers, state and local governments, and private fleets to purchase vehicles that employ alternative fuels. Since 2000, 75% of all light-duty vehicles acquired by covered fleets of federal agencies have been required to have alternative fuel capabilities.
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Energy Conservation and Re-Authorization Act 1998 - Allows vehicle fleets that are required to purchase alternative fuel vehicles (“AFVs”), to generate credits toward fulfilling this requirement by purchasing and using biodiesel in conventional-fuel vehicles. Since there are few cost-effective options for purchasing heavy-duty AFVs, federal and state fleet providers can meet up to 50% of the heavy-duty AFV purchase requirements by generating biodiesel fuel use credits.
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Environmental Protection Act (“EPAct”) - Extends through December 2008 the income and excise tax credits for biodiesel promulgated under the Jobs Creation Act of 2004. The EPAct, also mandates procuring AFVs and using alternative fuels, including biodiesel, in federal, state and utility fleets. The EPAct establishes minimum nationwide levels of renewable fuels, including biodiesel, ethanol and liquid fuel produced from biomass or biogas, to be blended into the domestic fuel supply. By 2012, these renewable fuel standards, or (“RFS”), require that the national volume of renewable fuels equal or exceed 7.5 billion gallons. The US EPAct is required, in consultation with the Secretary of Agriculture and the Secretary of Energy, to promulgate regulations for blenders to earn and trade renewable fuel credits for biodiesel blending. The EPAct has established a credit trading program that defines who can generate credits and under what conditions, how credits may be transferred, and the appropriate value of credits. Under this program, blending biodiesel into fuel will earn 50% more credits than blending ethanol.
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State and local biodiesel mandates - According to the DOE, 49 of 50 states currently have various forms of incentives and laws related to alternative fuels, including biodiesel.
Competition
The alternative energy industry is widespread and highly competitive. Numerous entities in the United States and around the world compete with our efforts to through the production, processing and distribution of biodiesel. We face, and expect to continue to face, competition from entities to the extent that they develop products competitive to ours.
Because many of our competitors have substantially greater capital resources and more experience in research and development, manufacturing and marketing than we do, we may not succeed in developing our proposed products and bringing them to market in a cost-effective and timely manner.
We are a development stage company that plans to engage exclusively in the production, processing and distribution of biodiesel and glycerin. We have not yet commenced any operations and have no revenue. Consequently, we may have difficulty competing with larger, more established biodiesel producing companies. These companies have greater financial, technical, research, marketing, sales, distribution, service and other resources than us. Moreover, they may offer broader product lines, services and have greater name recognition than we do, and may offer discounts as a competitive tactic.
The technologies for producing and processing biodiesel and approaches for commercializing those technologies are evolving. Technological developments may result in our products and/or processes becoming obsolete before we recover a significant portion of any capital expenditures that we have incurred. If we are unable to commence production and processing of our products before our competitors, we will be adversely affected. Moreover, any products and technologies that we may develop may be made obsolete by less expensive products or technologies that may be developed from our competitors in the future.
We intend to compete based upon what we believe will be our ability produce and distribute biodiesel, glycerine and blended fuels at lower costs than many of our competitors. In order to do this, we have optimized our biodiesel production facility to incorporate state-of-the-art technology and our biodiesel production facility is designed and being built to be multiple-feedstocks capable, making it more efficient. We also intend to use lower cost feedstocks than some other competitors. Further, our glycerine processing facilities operate independently from our biodiesel production. We can produce technical and pharmaceutical glycerine from crude that is acquired from other biodiesel producers in addition to our own production.
Employees
As of September 30, 2013, RFC and its subsidiaries, collectively, have the following employees:
Full time and part time:
Clerical - 1
Operations - 0
Administrative - 2
Management - 5
In addition, Steve Braasch Vice President of Sales and Marketing, David Slater Vice President of Logistics are currently acting as independent contractors.
ITEM 1A.
ITEM 1A. RISK FACTORS
In addition to the other information provided in this report, you should carefully consider the following risk factors in evaluating our business before purchasing any of our common stock.
Our lack of revenue generation from operations makes it difficult for us to evaluate our future business prospects and to make decisions based on those estimates of our future performance.
Although we have taken significant steps to develop our business plan since our inception, as of the date of this report, we have not commenced revenue generating operations or generated any revenues. Our business plan is still speculative and unproven. There is no assurance that we will be successful in executing our business plan or that even if we successfully implement our business plan, we will ever generate revenues or profits, which makes it difficult to evaluate our business. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical data. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to generate revenues or anticipate and adapt to increases or decreases in sales, revenues or expenses.
There is substantial doubt about our ability to continue as a going concern as a result of our lack of revenues, and if we are unable to generate significant revenue or secure financing we may be required to cease or curtail our operations.
Our lack of revenues and other factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include adjustments that might result from the outcome of this uncertainty and if we are unable to generate significant revenue or secure financing we may be required to cease or curtail our operations.
We will need additional financing to execute our business plan and commence revenue generating operations, and if we do not secure additional financing we may never be able to commence revenue generating operations and you will lose your entire investment.
For the next twelve months, we expect financing needs of up to $50 million to finance the further set-up of our business and the start of our early operational work and to cover our ongoing working capital needs in order to commence revenue generating operations. The company’s Term Loan facilities from a financial institution are due for principal and interest repayment from December 2010, amounting to $623,000 per month. As of October 15, 2013, we had $1,106 in cash. We are funding monthly operations with incremental equity private placements from our shareholders on an as needed basis. In order to cover our cash needs, we are considering raising additional funds in the form of equity capital, mezzanine financing and/or senior loans through private placements, loan applications or any other alternative approach.
We are undertaking various plans and measures to raise capital through debt and equity offerings, which we believe will increase funds available for development and working capital. However, no assurances can be given that those plans and measures will be successful in increasing funds for the development and operations of the Company.
We are currently in non-compliance with debt covenants on the Term Loan facilities and have not made any of the repayment installments due from December 1, 2010 until January 15, 2014. Bank Pembangunan Malaysia Bhd (“The Bank”) has notified us that we are in default and has not taken any action as a result of this default. Because the plant is still non-operational, we did not generate any revenue, and we have insufficient cash flow to fulfill the loan repayment schedule. If the Bank declares a default, which it has the current right to do, the Bank may foreclose on its note as a consequence and we could lose all our assets and could go out of business. As a result of the default, the Bank may foreclose on its note as a consequence and we could lose all of the PBC assets. As of February 1, 2014, the Bank has not declared a default nor taken any other action on the loan.
The management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole with all the players in the industry and to find a solution that will cure the distress.
The Company has held discussions with a number of potential lenders to provide the necessary financing to refinance the debt with the Bank, to complete construction and maintenance of the PBC plant to make it operational for biofuel, to finance the acquisition of feedstock and inventory and to provide additional working capital necessary to operate the plant through 2014. These discussions are in preliminary stages and certain lenders are on process of performing due diligence. The ultimate outcome of these on-going discussions is unknown.
Our ability to obtain needed financing may be impaired by factors such as the capital markets and the fact that we have not commenced operations or generated any revenues, which could impact the availability or cost of future financing. We do not have any contract, agreement or commitment to secure any additional funds. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy capital needs, even to the extent that we have reduced our operations accordingly, we may be required to cease operations.
Additional financing we obtain to execute our business plan and fund operations may be dilutive to existing stockholders, which could reduce the value of your investment.
Our ultimate success will depend upon our ability to raise additional capital. We will be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and could reduce the value of your investment.
The fair value estimates and assumptions on our Kuantan plant could be impacted by changes in the company’s assumptions and estimates and changes in market conditions.
Fair value estimates for the Kuantan plant are based on what management believes a market participant would be willing to pay to purchase the plant based on the discounted cash flows the market participant could reasonably expect to generate operating the plant. The estimates are based on the company’s assumptions that it will be able to operate the plant profitably and includes the company’s estimates of the current status of the biodiesel market, estimates of revenues, costs of sales, general and administrative costs, shipping costs, and incentives.
We believe the potential EBITDA supports approximately $95 million valuation and possible sales price to a willing buyer when the plant is fully operational. The updated projections support an estimated EBITDA of approximately $27 million per year assuming the plant achieves 95% of output capacity (current capacity of 100,000 metric tonnes (MT) per year) at current prices for Biodiesel. There are approximately 300 gallons per MT. We currently have a proposed price to broker our production of biodiesel at $1,550 per MT (or $3.90 per gallon) (with all tax credits and RINs retained by the broker). The two largest factors in projecting cash flows from operating the plant are the prices we receive for selling the biodiesel and the cost of the feedstock necessary to produce the biodiesel. We believe we can obtain animal byproducts for feedstock at favorable prices totaling $715 per MT. A decrease in the ultimate sales price of biodiesel or an increase in the cost of feedstock would result in a significant decline in the fair value of the plant.
The $42 million valuation and possible sales value was discounted to $34 million at September 30, 2013 for the impairment analysis. The carrying value of the plant was $24.1 million at September 30, 2013.
These assumptions and estimates are made without the company having any historical information to rely on. To date, the company has not operated the plant profitably. Any changes in the company’s assumptions and estimates and changes in market conditions could impact the value of the company’s plant assets.
Risks Related to Plant Construction
Because we do not have sufficient financial resources, we may never be able to complete construction of our existing plant in Malaysia or commence or complete construction of our two plants planned for Indonesia, which could reduce our ability to commence generating revenues.
We need approximately $2 million to complete commissioning of our plant in Malaysia and commence production. There is no such financing identified at this time. Accordingly, there is no assurance that this plant will ever be commissioned or become operational.
We have two biodiesel production licenses from BKPM in Indonesia, which enable us through our subsidiaries to own, construct and operate two biodiesel plants in Indonesia. The licenses expired on August 4, 2011 for Century’s subsidiary and on August 30, 2012 for Optimis’ subsidiary, respectively. Each facility has complete engineering documentation and no significant additional work will be done until sufficient construction financing in the amount of at least $97 million is procured and there is no such financing identified at this time. Accordingly, there is no assurance that these plants will ever be constructed or become operational. Should the plants become feasible and construction was to be completed we believe the licenses could be renewed.
Should funding become available and the construction portion of the licenses be re-approved, we believe we will be able to successfully negotiate a new construction contract.
Construction delays could result in reduction of the value of your investment if the production and sales of biodiesel and their byproducts are similarly delayed.
Construction projects often involve delays due to various reasons including delays in obtaining permits, delays due to weather conditions, or other events. In addition, engineering, procurement and construction firms, or any other company involved in the construction of our biodiesel plants, further delays could be created in the construction schedule. If it takes longer to construct any of our biodiesel plants than is anticipated, our ability to generate revenues could be impaired and make it difficult for us to meet our debt service obligations which could reduce the value of your investment.
Risks Related to Plant Operations
Initially, we intended to operate three plants. Any operational disruption at the Malaysian or the Indonesian plants could result in a reduction of our sales volume, and could cause us to incur substantial losses.
Our initial plans called for us to operate three plants, the PBC plant in Malaysia and two planned additional plants in Indonesia. However, our current plans are focused on operating only the Malaysian plant until such time, if ever, the two planned plants in Indonesia become viable. If our operations at those plants experience a significant interruption due to a major accident or damage by severe weather or other natural disasters or other causes, our ability to generate revenues could be adversely impacted. In addition, our operations may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in our industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents, and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not cover or be adequate to fully cover the potential operational hazards described above.
Our financial performance will be dependent on prices for raw material feedstocks and chemicals such as vegetable oil, crude glycerin, tallow, methanol and other chemical or material inputs, which are subject to and determined by market forces outside our control. Any increase in the prices for these input commodities will materially affect our ability to commence generating revenues or operate at a profit.
We are not operational, however should we become operational, our results of operations and financial condition will be significantly affected by the cost and supply of various feedstocks and chemicals. The prices of feedstocks are influenced by weather conditions and other factors affecting crop yields, and general economic, market and regulatory factors. These factors include government policies with respect to agriculture and international trade, and global and local demand and supply. Any event that negatively affects supply prices can potentially harm our business. Such factors could require us to suspend operations until feedstocks and chemicals are available at favorable economical terms, and would have a material adverse effect on our business, results of operations and financial position.
We may purchase feedstocks in the cash market and hedge the price risk through futures contracts and options to reduce short-term exposure to price fluctuations. There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation, which may leave us vulnerable to high fluctuation in prices. Hedging activities themselves can result in costs and price movements. Hedging contracts are volatile and influenced by many factors beyond our control and can create losses. We have no agreements in place or plans to acquire or hedge raw material feedstocks.
Price increases in production material supplies or a lack of supply of such inputs could increase production costs, reduce profit margins and negatively affect cash flow. This is especially true if market conditions do not allow us to pass through increased costs to our customers. In certain instances, we may need to limit or even cease production for a period of time.
Changes and advances in biodiesel production technology could require us to incur costs to update our biodiesel plant or could otherwise hinder our ability to compete in the biodiesel industry or operate profitably.
Advances and changes in biodiesel production technology may make the biodiesel production technology to be installed in the PBC plant less desirable or obsolete. These advances may also allow competitors to produce biodiesel at a lower cost than us. If we are unable to adopt or incorporate technological advances, our biodiesel production methods and processes could end up being less efficient than our competitors, which could cause us to become uncompetitive or completely obsolete. If 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 could also result in significant expenditures. We cannot guarantee or assure that third party licenses will be available or, once obtained, will continue to be available on commercially reasonable terms. These costs could negatively impact our financial performance by increasing our operating costs and reducing our net income.
Changes in specification standards for biodiesel fuel may increase production costs or require additional capital expenditures to upgrade and/or modify our biodiesel facility to meet them. Such upgrades and/or modifications may entail delays in or stoppages of production.
The European Committee for Standardization (CEN) is the recognized standard-setting body for fuels and additives in the European Union. CEN's specification for pure biodiesel, EN14214, is emerging as the preferred standard for European consumption. CEN and other standard setting bodies have altered their specifications in the past, and are expected to continue to modify the specification in the future as the use of and experience with biodiesel expands. Although PBC currently will meet the EN 14214 standard as well as the ASTM 6751 standards, these standards may change in the future. Recent increases in the “cold flow” property requirements for Biodiesel issued by the US Government required RFC to add incremental new technology to our Kuantan production facility to achieve the new standard. This increased expense was not anticipated and serves as an example of the risks involved in a dynamic and politically controlled regulatory environment. There is no guarantee that our production facility will be able to produce compliant biodiesel fuel in the event of changes to the specification. We may need to invest significant capital resources to upgrade or modify our biodiesel facility, which might cause delays in or stoppages of production and the resultant loss of revenues, or which might not be economically feasible at all. Any modifications to the production facility or to the biodiesel specification may entail increased production costs or reduced production capacity. These consequences could result in a negative impact on our financial performance including our ability to commence generating revenues.
The operation of our plants in Malaysia and Indonesia may subject us to limitations of available resources necessary to operate our plants.
Operation of our initial plant, the PBC plant in Malaysia and our planned plants, the Century and Optimis in Indonesia may subject us to risks relating to dealing with foreign governments and governmental utilities, and the availability of resources, including power, fuel oil, and other utilities necessary to operate the plants. Further, rail, barge, tankage and trucking infrastructure may be inadequate to meet the expanding volume of biodiesel shipments, which could prevent us from shipping our biodiesel to our target markets. These resources and this infrastructure may be unavailable or the availability may be delayed for reasons beyond our control. Any delay in availability of these necessary resources or infrastructure could result in operational downtimes or a decrease in the production capacity of the plants if and when they become operational as well as our ability to deliver products, which could materially impact our ability to implement our business plan, begin generating revenues or operate profitably.
We will depend on third parties to transport our biodiesel, whose failure to perform could force us to abandon business, hinder our ability to generate revenues or operate profitably and decrease the value of your investment.
We will have to secure contracts with third parties to market and transport our products. We have not entered into any agreements as of the date of this filing and if we cannot secure these contracts or if companies with which we secure contracts do not perform their obligations as agreed, our operations and financial performance may be harmed. Our reliance on one or a limited number of marketers may place us at a competitive disadvantage, hinder our ability to generate revenues or operate profitably and decrease the value of your investment.
Changes in environmental regulations or our violation of those regulations could be expensive and hinder our ability to operate profitably.
We will be subject to extensive air, water and other environmental regulations and will need to maintain a number of environmental permits to construct and operate our plants and distribution facilities. If for any reason, any of these permits are not granted, construction costs for the plants may increase. Additionally, any changes in environmental laws and regulations could require us to invest or spend considerable additional resources beyond our current estimates and budget in order to comply with future environmental regulations. Violations of these laws and regulations could result in liabilities that affect our financial condition and the expense of compliance alone could be significant enough to reduce revenues if and when we commence generating revenues.
Risks Related to Sale of Biodiesel Products
Various biodiesel mandates and tax credits in the United States and the European Union could be modified or eliminated in the future, which could hinder our ability to commence revenue generating operations or to operate at a profit.
Although according to the Department of Energy, 49 of 50 states as well as the federal government currently have various forms of use mandates, incentives or laws related to alternative fuels, including biodiesel. The European Union also has similar mandates and incentives. However, these regulations could expire or be modified in the future. Any change in these regulations to make biodiesel less attractive from a financial point of view will inhibit our ability to implement our business plan and commence generating revenues.
Plant compliance with EPA registration requirements.
For foreign produced biodiesel to qualify for US EPA RFS2 RINs (Renewable Identification Numbers), foreign producers are required to register their plant with the EPA. As a foreign producer, we are required to register with the EPA. Our market opportunities and profits can be greatly affected if the EPA delays or withholds our plant registration.
Fluctuations in the prices of biodiesel can have a negative impact on our financial performance.
Our profits could be greatly affected by the price at which we can sell our biodiesel and blended fuels. These prices can be volatile as a result of numerous factors, including but not limited to overall supply and demand, the price of diesel fuel, level of government support, and the availability and price of competing products. Biodiesel prices generally parallel the movement of petroleum oil prices which are difficult to forecast because the market reflects the global economy, which is subject to political upheaval, natural disasters, and a myriad of other factors. Even the slightest rumor of political instability can significantly affect the price of oil.
During the past four years, the price of crude oil rose to a high of $140 per barrel in 2008 and fell below $40 per barrel by December 2008. Since then it has increased to the range of $85 to $95 in October 2013. That dramatic fluctuation was historical in proportion. Lower diesel prices will likely lead to lower prices for biodiesel, and the impact on the biodiesel industry is devastating, and there can be no assurance as to the price of biodiesel in the future. Any downward changes in the price of biodiesel may result in lower revenue and profit margins which could substantially affect our share price.
Competition from the advancement of alternative fuels may lessen the demand for biodiesel and negatively impact our profitability.
Alternative fuels, gasoline oxygenates and biodiesel production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean burning gaseous fuels. Like biodiesel, the emerging fuel cell industry offers a technological option to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Fuel cells have emerged as a potential alternative to certain existing power sources because of their higher efficiency, reduced noise and lower emissions. Fuel cell industry participants are currently targeting the transportation, stationary power and portable power markets in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries continue to expand and gain broad acceptance, and hydrogen becomes readily available to consumers for motor vehicle use, we may not be able to compete effectively. This additional competition could reduce the demand for biodiesel, which would negatively impact our profitability.
If tariffs are imposed on biodiesel imports, such tariffs could have a material impact on our ability to operate profitably.
As of the date of this filing, the US imposed a 4.6% tariff on the importation value of biodiesel and classified it as a chemical, not a transport fuel. Additionally, the EU recently imposed an offsetting tariff for US-manufactured biodiesel. As of the date of this filing, this tariff will only impact US-manufactured biodiesel, although it is possible that this tariff could be expanded by the EU to include biodiesel produced in other countries. Future changes in the valuation or coverage of tariffs could have a material adverse impact on our ability to implement our business plan and operate profitably.
Concerns about fuel quality may impact our ability to successfully market our biodiesel.
Industry standards impose quality specifications for biodiesel fuel. Actual or perceived problems with quality control in the industry may lead to a lack of consumer confidence in the product and hinder our ability to successfully market our biodiesel. Quality control issues could result in a decrease in demand for our product, which could lower the value of your investment.
Winter weather conditions may impact demand for Biodiesel.
Various feedstocks have different output “cloud point” properties. Some of this “cloud point” properties are insufficient for winter grade biodiesel specifications. The “cloud point” is the temperature at which liquids begin to congeal and turn to solids. The company will employ various strategies of biodiesel blending and newer technology in post treatment processes to meet specifications as required. Distribution and storage tanks are usually equipped with heating elements in colder climates to accommodate this factor for biodiesel during the winter. This conditions could have an adverse affect on the market demand for our products in the US and European markets.
Automobile manufacturers and other industry groups have expressed reservations regarding the use of biodiesel, which could negatively impact our ability to market our biodiesel.
Because it is a relatively new product, research regarding the use of biodiesel in automobiles and its effect on the environment is ongoing. Some industry groups and standards, including the World-Wide Fuel Charter, have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems and possible detrimental effects of biodiesel on components and other parts of the engine. Although some manufacturers have encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by others may impact our ability to market our product.
Risks Related to Foreign Operations
You may have difficulty in enforcing any judgment against certain of our executive officers and directors as they are not residents of the U.S., and substantially all the assets of these persons as well as of our company are located outside the U.S.
Certain of our executive officers and our directors are not residents of the U.S., and substantially all the assets of these persons are located outside the U.S. All of our company’s assets are located outside of the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against our foreign management and directors and our foreign operations and subsidiaries.
Operation in and expansion into international markets is important to our long-term success, and our inexperience in operations outside the U.S. increases the risk that our international operations may not be successful.
We believe that our existing operations and ability to generate revenues as well as our future growth depends, in part, on our ability to operate biodiesel production facilities in foreign countries, such as Malaysia and Indonesia, and our ability to produce and sell biodiesel outside the U.S. Although some of our executive officers have experience in international business from prior positions, the Company has little experience with operations outside the U.S. Our goal of selling biodiesel into international markets will require management attention and resources and is subject to inherent risks, which may adversely affect us, including:
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unusual or burdensome foreign laws or regulations and unexpected changes in regulatory requirements, including potential restrictions on the transfer of funds;
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foreign currency risks;
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political and economic instability, including adverse changes in trade policies between countries in which we may maintain operations;
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difficulties in staffing and managing foreign sales and support operations in locations with less developed infrastructures; such as logistical and shipping challenges that we do not have experience
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longer accounts receivable payment cycles and difficulties in collecting payments; and
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less effective protection of our intellectual property.
The noted factors and other factors could adversely affect our ability to execute our international biodiesel production and marketing strategy or otherwise have a material adverse effect on our business and our ability to commence generating revenues.
Ownership by a United States-based company of plants in foreign countries could result in unforeseen consequences, which could have a material adverse impact on our operations.
Under our present structure, we own certain foreign entities. Ownership of Malaysian and Indonesian corporations by a United States-based corporation could result in unforeseen consequences, including additional governmental involvement, restrictions on exports, restrictions on transfer of revenues, and other consequences that could have a material adverse impact on our ability to operate and implement our business plan. Because we anticipate that all of our biodiesel production will be done overseas at least initially, the effect on our operations of any adverse consequences could be significant and adversely affect our ability to commence or continue generating revenues.
Risks Related to Management
None of our officers or directors has experience in the biodiesel industry prior to joining our company, which increases the risk of operating in the biodiesel distribution business and could impair our ability to implement our business plan.
None of our officers or directors had any direct experience in organizing, building or operating biodiesel plants or in the biodiesel industry prior to joining our company. We intend to rely primarily on our resident employees and staff for operations of the biodiesel plants. We may also be required to hire experienced biodiesel production personnel. This increases the risk of operating, selling and distributing in the biodiesel business and could impair our ability to implement our business plan.
We may not be able to effectively control and manage our growth which could reduce our ability to generate revenues.
Our strategy envisions a period of potentially rapid growth. We currently maintain nominal administrative and personnel capacity due to the startup nature of our business, and our expected growth may impose a significant burden on our future planned administrative and operational resources. The growth of our business may require significant investments of capital and increased demands on our management, workforce and facilities. We will be required to substantially expand our administrative and operational resources and attract, train, manage and retain qualified management and other personnel. Failure to do so or satisfy such increased demands would interrupt or would have a material adverse effect on our business and results of operations.
Because insiders control our activities, they may cause us to act in a manner that is most beneficial to them and not to outside shareholders, which could cause us not to take actions that outside investors might view favorably.
Our executive officers, directors, and holders of 5% or more of our outstanding common stock beneficially own approximately 82.2% of our outstanding common stock. As a result, they effectively control all matters requiring director and stockholder approval, including the election of directors, the approval of significant corporate transactions, such as mergers and related party transaction. These insiders also have the ability to delay or perhaps even block, by their ownership of our stock, an unsolicited tender offer. This concentration of ownership could have the effect of delaying, deterring or preventing a change in control of our company that you might view favorably.
Our management decisions are made by our CEO, President and Vice Presidents, if we lose their services, our ability to successfully implement our business plan could be reduced.
Because our management has been involved in all aspects of our business since late 2007 and thus have significant familiarity with our business and plan of operations, they would be difficult to replace. Further, you must rely on their management decisions concerning our operations. They will continue to control our business affairs after this filing. We have not obtained any key man life insurance relating to Mr. William Van Vliet or any of the other officers and directors. If we lose their services, we may not be able to hire and retain other management with comparable general business or management experience. As a result, the loss of any of their services could negatively impact our ability to achieve our business objectives. Other than Mr. William Van Vliet and Mr. Cho Nam Sang, we have no employment agreements with any members of management.
Some of the persons responsible for managing our business will devote less than full time to our business, which may impede our ability to implement our business plan.
Some of our management devotes less than full time to their duties to our business, as follows:
As a result, our management may not currently be able to devote the time necessary to our business to assure successful implementation of our business plan. These officers do not have employment agreements and are contracted employees.
Our management has limited experience in managing the day to day operations of a public company and, as a result, we may incur additional expenses associated with the management of our business.
The management team is responsible for our operations and reporting. The requirements of operating as a small public company are new to the management team and the employees as a whole. This may require us to obtain outside assistance from legal, accounting, investor relations, or other professionals that could be more costly than planned. We may also be required to hire additional staff to comply with additional SEC reporting requirements and compliance under the Sarbanes-Oxley Act of 2002. Our failure to comply with reporting requirements and other provisions of securities laws could negatively affect our stock price and adversely affect our results of operations, cash flow and financial condition.
We will be exposed to increased expenses from being a public company, including recent legislation requiring companies to evaluate internal control over financial reporting.
We anticipate we will incur substantial legal and accounting costs as a public company, perhaps in excess of $100,000 per year. Section 404(a) of the Sarbanes-Oxley Act of 2002 ("Section 404") requires our management to report on the operating effectiveness of our Internal Controls over Financial Reporting for the year ended September 30 in the fiscal year. Currently, we have material weaknesses in financial reporting. We must establish an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We expect that the cost of this program will contribute to the increased expenses we will incur as a public company.
Because we do not have an audit or compensation committee, shareholders will have to rely on the entire board of directors, no members of which are independent, to perform these functions.
We do not currently have an audit or compensation committee comprised of independent directors. Indeed, we do not have any audit or compensation committee. These functions are performed by the board of directors as a whole. None of the members of the board of directors are independent directors under the definition set forth in the listing standards of the NASDAQ Stock Market, Inc. Thus, there is a potential conflict in that board members who are management will participate in discussions concerning management compensation and audit issues that may affect management decisions.
Risks Related to Our Stock
Our stock is currently considered a penny stock. If our stock trades below $5.00 per share, and is quoted on the OTC Bulletin Board, our stock will be considered a "penny stock" which can reduce its liquidity.
Our stock is currently considered a penny stock. The price per share in this offering is $1.00 per share which is less than the price at which our stock will be considered a penny stock. The trading price of our common stock is less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock will be subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
Sales of our common stock under Rule 144 could reduce the price of our stock.
As of February 1, 2014, there were 37,998,449 shares of our common stock held by non-affiliates, and 175,283,994 shares of our common stock held by affiliates, all of which are restricted as per Rule 144 of the Securities Act of 1933 defines as restricted securities. All of the non-restricted shares held by non-affiliates as well as the restricted securities held by affiliates, subject to the limitations on amounts and manner of sale in Rule 144, could be available for sale in a public market. The availability for sale of substantial amounts of common stock under Rule 144 could reduce prevailing market prices for our securities.
Investors may have difficulty in reselling their shares due to the lack of market.
Our common stock is currently quoted on OTCBB and it may not be sustained in the future. Accordingly, our shares should be considered totally illiquid, which inhibits investors’ ability to resell their shares.
The conversion of future issued shares of Preferred Stock or the issuance and exercise of existing or future options and warrants could result in substantial dilution to existing shareholders.
We are authorized to issue 10,000,000 shares of Preferred Stock in series, as fixed by the Directors, with a par value of $0.0001 per share. Preferred Stock may be issued in series, with preferences and designations, as the Board of Directors may, from time to time, determine. The Board may, without shareholders approval, issue Preferred Stock with voting, dividend, liquidation, and conversion rights that could dilute the voting strength of our common shareholders, and may assist management in impeding an unfriendly takeover or attempted changes in control. There are no restrictions on our ability to repurchase or reclaim our preferred shares while there is any arrearage in the payment of dividends on our Preferred Stock.
The issuance of additional shares of common stock or further preferred stock convertible into common stock pursuant to any of the foregoing could result in substantial dilution to existing shareholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Principal offices
The Company’s U.S. head and principal office is located at 7251 West Lake Mead Boulevard, Suite 300, Las Vegas, Nevada 89128. The rent is $250.00 per month, $3,000.00 per year.
The primary office overseas facility are currently occupied under the terms of an operating lease and is located at 31C-3 Kelana Mall, Jalan SS6/12, 47301 Petaling Jaya, Selangor, Malaysia. The lease expires June 30, 2015 and the monthly payment is approximately $1,400/month. The Company occupies 3,500 square feet in this site.
We have no policy with respect to investments in real estate development or interests in real estate, and no policy with respect to investments in real estate mortgages. Further, we have no policy with respect to investments in securities of or interests in persons primarily engaged in real estate activities.
1. U.S. head and principal office
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Address: 7251 West Lake Mead Boulevard, Suite 300, Las Vegas, Nevada 89128.
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Number of Square Feet: virtual office
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Name of Landlord: Regus
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Term of Lease: monthly
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Monthly Rental: $250
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Adequate for current needs: Yes
2. Overseas primary office
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Address: 31C-3 Kelana Mall, Jalan SS6/12, 47301 Petaling Jaya, Selangor, Malaysia.
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Number of Square Feet: 3,500
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Name of Landlord: Goh Chau Yit
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Term of Lease: 2 years with option to renew.
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Monthly Rental: $1,400
Plant sites
In Malaysia we have an 11 acre site in the Gebeng Industrial Estate, adjacent to the Kuantan Port in Pahang. The land is acquired under a 99 year lease. Near Dumai, Indonesia we have two 10 acre sites adjacent to each other that are acquired under 20 year renewable agreements with unlimited timeframes. To date, individual issued document of title have not been issued by the relevant authorities for the said land. The category of land use of the said land is for “industry”. There is a restriction-in-interest on the said land in that the said land shall not be transferred, charged, lease, sub-lease or otherwise in any manner dealt with or disposed off without the written sanction of the relevant authority.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceedings in which we are involved except as follows:
Terence Joseph Peter Daley v. Century Corp. Sdn Bhd, Ng Huat Chai and Oil-Line Engineering & Associates Sdn Bhd, Seremban High Court, Summons No. 22-338-2009. In 2009, Plaintiff Terence Joseph Peter Daley filed suit against Century Corp, Ng Huat Chai and Oil-Line, Century Corp a subsidiary of BRII, which is a subsidiary of RFC, for denied access to a facilities at a property developed by Century Corp. By way of background, Century Corp had developed certain parcels of land, and as part of the development, had built a club house for use by owners of the properties, in exchange for payment of certain fees. Subsequently in year 2001 the club house and the said land was transferred to Oil-Line. When the fees were not paid, Oil-Line closed the clubhouse and denied access to the property owners. The plaintiffs are seeking restoration of the clubhouse to its original condition and usage.
The Court has on October 30, 2012, rule in favor of the Company. On November 22, 2012, Plaintiff Terence Joseph Peter Daley filed Notice of Appeal against Century Corp, Ng Huat Chai and Oil-Line, Century Corp a subsidiary of BRII, which is a subsidiary of RFC.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET PRICE FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
RFC Common Stock trades on the OTCBB Markets under the symbol: RWFC. Our common stock began trading on the OTC market on September 6, 2012. Our stock has traded thinly for the periods represented from September 6, 2012 to September 30, 2013. Our stock has experienced only 3 trading days with aggregate of 3,200 shares traded on those days.
The following sets forth the range of high and low trades for the periods indicated.
(b) Our Stockholders
As of September 30, 2013, there were approximately 57 holders of record of RFC common stock.
(c) Our Dividend Policy
We have never paid, and do not intend to pay, any cash dividends on our common stock for the foreseeable future. Therefore in all likelihood, an investor in this offering will only realize a profit on his investment, in the short term, if the market price of our common stock increases in value.
(d) Securities Authorized to be Issued Under our Equity Compensation Plans
The following table provides certain information as of September 30, 2013, with respect to our equity compensation plans:
Options exercisable by the Directors and Executive Officers.
Warrant exercisable by common stockholder - Eow Chai Huat
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected for any future periods.
Corporate Information
Renewable Fuel Corp (A Development Stage Company) is a public reporting entity originally planned to be an integrated producer, blender and distributor of biodiesel and blended fuels. Renewable Fuel Corp ("Renewable Fuel" or the "Company") was incorporated in the State of Nevada on September 11, 2007. Renewable Fuel owns a license to produce biodiesel products in Malaysia and two additional biodiesel licenses in Indonesia. Renewable Fuel Corp anticipates entering the biofuel production and distribution business during fiscal year 2014.
We have incurred losses since inception, have not commenced operations, substantially all of our assets are impaired and our auditors have issued a going concern opinion on our audited financial statements for the most recent fiscal year ended September 30, 2013.
Renewable Fuel conducts its Indonesian operations through its two wholly-owned Malaysian subsidiaries, Century Corp Sdn Bhd ("Century") and Optimis Teguh Sdn Bhd ("Optimis"). Century and Optimis own two Indonesian entities, PT Plant Biofuel Indonesia ("PTPBI") and PT Optimis Teguh Indonesia ("PTOTI"), respectively, which own the licenses for the Company's planned biodiesel production in Indonesia.
Renewable Fuel acquired Century and Optimis through a transaction with their original parent Bio Refining Industries Inc. ("BRII") on September 5, 2008, through a share exchange agreement in a transaction accounted for as a reverse merger, with BRII as the accounting acquirer of Renewable Fuel. Since the original shareholders of Century received the largest portion of ownership and control of BRII, Century was treated as the accounting acquirer.
Renewable Fuel will conduct its Kuantan operations through its two Malaysian subsidiaries, Plant Biofuels Corporation Sdn. Bhd. ("PBC") and Research Fuel Corp Sdn. Bhd. ("Research"). PBC and Research were acquired by Renewable Fuel Corp through an acquisition accounted for as a reverse merger in December 2007.
The accounts of Optimis, PTOTI, Renewable Fuel, PBC and Research have been included in Renewable Fuel’s consolidated financial statements from the acquisition date of September 5, 2008, the date of the share exchange agreement between Renewable Fuel and BRII. The historical financial statements for the year ended September 30, 2008 and the period from inception (October 1, 2006) through September 5, 2008 are those of the accounting acquirer, Century. The historical financial results of the accounting acquirer consist of the combined operating results of Century, and its 99% owned subsidiary, PTPBI ("Century Consolidated").
Renewable Fuel’s biodiesel plant in Malaysia was substantially completed and available for glycerine production at its location in Kuantan. The Kuantan plant has a nameplate capacity license and underlying infrastructure to produce 60 million gallons annually (MGA), twice the current production capacity. The refinery is designed to produce biodiesel from multiple feedstocks. The plant, operated by Renewable Fuel’s subsidiary PBC is capable of producing 30 MGA of Palm Oil Methyl Ester ("PME") biodiesel and 2.4 MGA of refined glycerin. The glycerine refining unit has been designed to operate independently from the biodiesel production unit.
We are currently in non-compliance with debt covenants on the term loan facilities of approximately $29.9 million as of September 30, 2013 and have not made any installment repayments beginning with the due date of December 1, 2010. The term loans are secured by First Priority Interest over all existing property, plant and equipment, and all fixed and floating assets of PBC. The facilities are jointly and severally guaranteed by both of the PBC directors.
The Bank may take action against PBC, and may foreclose on the note as a consequence and we could lose all PBC assets. As of January 16, 2014, the Bank has not declared a default nor taken any other action on the loan.
The Management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole, including all key industry participants and to find a solution that would cure the distress.
We are confident that our feedstock strategy using non-food based material, will lead the Company to a sustainable operation. Although we have held preliminary discussions concerning acquiring CPO and alternative tallow-based feedstocks from regional suppliers, we have no contracts, agreements or commitments in place at this time. We believe that the combined capacities of these suppliers or alternative available suppliers will be able to meet our production requirement per annum.
In addition, Renewable Fuel leases, under 20-year leases, two adjacent 10 acre sites, each with 60 MGA nameplate licenses and deep water access in Dumai, Indonesia. Plant construction has been minimal to date and primarily consists of design and engineering plans to accept multiple feedstock types.
Renewable Fuel's business strategy is to begin operations in the Kuantan plant, first producing and marketing only refined (pharmaceutical and technical grade) glycerine from purchased crude glycerine. Subsequently, Renewable Fuel plans to begin producing and selling refined glycerine from crude glycerine produced in the Kuantan plant, refined, bleached and deodorized ("RBD") Crude Palm Oil ("CPO") and biodiesel from tallow-based feedstocks. Management has impaired the asset value of the plant in Kuantan, and the fair value estimate, at the time of the impairment, for the Kuantan plant was based on what management believes a market participant would be willing to pay to purchase the plant based on the discounted cash flows the market participant could reasonably expect to generate operating the plant. The estimates are based on the company’s assumptions that it will be able to operate the plant profitably and includes the company’s estimates of the current status of the biodiesel market, estimates of revenues, costs of sales, general and administrative costs, shipping costs, and incentives. These assumptions and estimates are made without the company having any historical information to rely on. To date, the company has not operated the plant profitably. The two largest factors in projecting cash flows from operating the plant are the prices we receive for selling biodiesel and the cost of the feedstock necessary to produce the biodiesel. Any changes in the company’s assumptions and estimates and changes in market conditions could impact the value of the company’s plant assets. Details of the impairment are further discussed in the paragraph "Impairment of Long-Lived Assets" in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
After the Kuantan plant is fully operational, management plans to leverage cash flows from operations to fund the Kuantan expansion of a second production unit, doubling production to the nameplate capacity and in turn fund sequential completion of the two plants in Dumai. Construction on the two Indonesian facilities is not anticipated until after the Kuantan plant is fully operational and construction financing is available.
It is currently not determinable when conditions will exist, if ever, to continue construction of the two Indonesian plants. The contract period for PTPBI Indonesian plant construction expired and both Century Corp, owner of PTPBI, and Plant & Offshore Technology Sdn Bhd, the contractor, mutually agreed to terminate the construction contract on August 23, 2011. Should funding become available and the construction portion of the licenses be re-approved, we believe we will be able to successfully negotiate a new construction contract.
We maintain a website at www.rfuelcorp.com. Nothing on that website is part of this Report.
The business strategy is dependent upon Renewable Fuel obtaining additional financing to acquire feedstock and to make the plant operational. Renewable Fuel is in discussion with the Bank to extend the existing loan and provide additional funds to fund start-up of the plant. If Renewable Fuel and the Bank cannot come to terms then the Company will look at refinancing the loan and obtaining a working capital line with another entity.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies that we follow are set forth in Note 1 to our financial statements as included in this filing. These accounting policies conform to accounting principles generally accepted in the United States, and have been consistently applied in the preparation of the financial statements.
Recent Accounting Pronouncements
See Note 1 to our audited consolidated financial statements included elsewhere in this report.
Result of Operations
Year Ended September 30, 2013 compared to September 30, 2012
During the year ended September 30, 2013, we reported $0 revenue, and a net loss attributable to common shareholders of approximately $1.8 million or $0.009 per share, compared to revenue of $187,000, and a net loss attributable to common shareholders of approximately $4.3 million or $0 .02 per share for the year ended September 30, 2012.
Total costs of sales during the year ended September 30, 2013 and 2012 was $0 and approximately $103,000 respectively, operating expenses of approximately $0.8 million and $2.2 million respectively of which approximately $0.4 million and $1.5 million contributed by payroll and share based compensation related expense, $163,000 and $312,000 respectively contributed by legal and professional fees, the remaining operating expenses incurred during the period were approximately $271,000 and $349,000 respectively.
Payroll and share based compensation related expense registered a decrease of $1,153,000, mainly resulted from an decrease in the CEO’s share based compensation related expense of approximately $1,215,000, however we have an approximate increase of $62,000 from the increase of employee head count and employee compensation.
Legal and professional fees decreased by approximately $149,000 from the Company fund raising activities, including engaging an investment banker.
During the year ended September 30, 2013 and 2012, the Company recognized a net loss attributable to non-controlling interest of approximately $1,392,000 and $1,300,000.
During the year ended September 30, 2013 and 2012, the Company accrued dividends of $0 and approximately $1.2 million respectively related to 8% preferred stock. The reduction in dividend is a result of the conversion of the preferred stock to common stock.
Operating Comparison for the year ended:
Liquidity and Capital Resources
The Company has experienced cumulative losses of approximately $67.1 million from October 1, 2006 (inception), through September 30, 2013, and has net negative equity of approximately $7.6 million. As of the date of this report the Company has not commenced operations; rather, it is still in the development stages. Accordingly, this raises substantial doubt about the Company’s ability to continue as a going concern.
As of September 30, 2013, the Company has raised its $63.5 million of equity through a combination of its initial capitalization, various share exchanges as it acquired its operating subsidiaries and the conversion of $31.3 million of debt for preferred shares with two related party vendors, $7.5 million in advances conversion to equity, and private placements from individual shareholders resulting in actual cash of $4.7 million. In addition, the Company also borrowed $29.9 million under its credit facility with a Malaysian bank. These funds have been used to acquire certain capital equipment and infrastructure to support development and implementation of its business plan, payment of salaries and fees of technical and marketing personnel, marketing and promoting activities, working capital and general corporate purposes. Additional funds will need to be generated by the Company to complete the three biodiesel plants currently under construction and to further support the development of its business model.
We are currently in non-compliance with debt covenants on the term loan facilities and have not made any installment repayments as they become due beginning on December 1, 2010. The term loans are secured by first priority interest over all existing property, plant and equipments, and all fixed and floating assets of Plant Biofuels Corporation Sdn Bhd (“PBC”). The facilities are jointly and severally guaranteed by both the PBC directors.
The Bank may take action against PBC, and may foreclose on the note as a consequence and we could lose all PBC assets. As of January 16, 2014, the Bank has not declared a default nor taken any other action on the loan.
The management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole with all the players in the industry and to find a solution that will cure the distress.
We are confident that our feedstock which is non-food based, will lead the Company to a sustainable operation.
Renewable Fuel is undertaking various plans and measures to raise capital through debt and equity offerings, which it believes will increase funds available for development and working capital. However, no assurances can be given that those plans and measures will be successful in increasing funds for the development and operations of the Company. We believe that we will obtain an extension of our current loan and additional financing from the Bank to fund the start-up and biodiesel production of the plant. If the Company and the Bank cannot come to terms then Renewable Fuel will look at options for refinancing the loan and obtaining a working capital line with another entity.
For the next twelve months, we expect cash needs of up to $6,100,000 to finance the further set-up of our business and the start of our early operational work and to cover our ongoing working capital needs in order to commence operations. The company’s Term Loan facilities from a financial institution are due for principal and interest repayment beginning December 2010, amounting to $623,000 per month. As of October 15, 2013, we had $1,106 in cash. We are funding monthly operations with incremental equity private placements from our shareholders on an as needed basis. The Company has held discussions with a number of potential lenders to provide the necessary financing to refinance the debt with the Bank, to complete construction and maintenance of the PBC plant to make it operational for biofuel, to finance the acquisition of feedstock and inventory and to provide additional working capital necessary to operate the plant through 2014. These discussions are in preliminary stages and certain lenders are on process of performing due diligence. The ultimate outcome of these on-going discussions is unknown.
Our ability to obtain needed financing may be impaired by factors such as the capital markets, and the fact that we are not profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
Cash Flows
Net cash used in operating activities was approximately $175,000 for the year ended September 30, 2013 compared to approximately $645,000 for the same periods in 2012. Which is a result of the net loss offset by non cash interest accrued.
Net cash used in operating activities was approximately $5,581,000 for the period from inception (October 1, 2006), through the year ended September 30, 2013.
Net cash used in investing activities was $0 and $1,000 for year ended September 30, 2013 and 2012. This mainly due to reduce fixed assets acquired. Net cash gained from investing activities was approximately $16,000 for the period from inception (October 1, 2006) through the year ended September 30, 2013.
Net cash provided by financing activities for the year ended September, 2013 was approximately $149,000 compared to $634,000 for the same periods in 2012, and $5,500,000 for the period from inception (October 1, 2006) through the year ended September 30, 2013. The majority of the net cash provided by financing activities is from proceeds from common share issuances.
Financing Activities
From October 1, 2012 through September 30, 2013 the Company issued 33,950 shares of its restricted common stock to individuals at $1.00 per share for consideration totaling $33,950.
In connection with these transactions the Company's CEO was granted 678 shares of common stock and options to acquire 1,696 shares of common stock in accordance with the terms of his employment agreement.
Term Loans Payable
Term Loans in Default
In October 2007, PBC entered into a $21,595,000 facilities agreement (the “Facilities”) with a bank, which provided available borrowings under two individual term loans totaling $18,465,000 and a revolving line with available credit of $3,294,000. At September 30, 2013, and 2012, $3,130,000 was available under the revolving line of credit; however, any disbursements are restricted for purchases of raw materials and repayable within six months from date of disbursement. A total of $29,896,687 is outstanding under the Facilities at September 30, 2013 and $28,823,421 at September 30, 2012, respectively, which includes two term loans and $0 borrowed under the revolving credit facility.
The term loans under the Facilities bear interest at the bank’s effective costs of funds +1.25% in year one, increasing to +2% in year two and beyond. The bank’s effective cost of fund is 6.30%. Therefore, at September 30, 2013 and 2012, the interest rate for the term loans was 8.3%. The interest rate for the revolving line of credit is the bank’s cost of funds +2%. At September 30, 2013 and 2012, the interest rate for the revolving line of credit was 8.3%.
In January 2013 and 2012, the Bank advanced a total of $118,656 and $144,240 respectively to the Company for expenses incurred on the Malaysian plant for its Industrial All Risks insurance policy, and the plant’s independent assessment. This amount is accumulated into the total term loan outstanding by the Bank and carrying the same interest rate as the term loan.
The Company has recognized approximately $2.5 million and $2.3 million in interest charges related to the term loans for the year ended September 30, 2013 and 2012, respectively, all of which has been recognized and recorded as interest expense on the PBC plant. Accrued interest payable at September 30, 2013 and 2012 was approximately $11.1 million and $8.6 million, respectively. Interest payments will be made with the commencement of monthly installments beginning on each term loans respective date as described above. The term loans under the Facilities are secured by a first priority interest over all existing property, plant and equipment and all assets of PBC. In addition, the term loans are jointly and severally guaranteed by directors of PBC.
In May 2010, PBC negotiated modifications to its loan facility with the Malaysian bank. The modifications, effective November 2009, extended the availability period of the revolving line of credit from December 2009 to December 2010, the maturity of the term loans from six years to seven years and the first monthly payment date from January 2010 to November 2010. These modifications resulted in the Company being in compliance with the terms of the loan.
However, since December 2010 PBC was unable to remit its first installment repayment to the Bank in accordance with the repayment schedule. PBC has been served with a second reminder notice from the Bank, which will potentially put PBC in default.
The Bank may take action against PBC, and may foreclose on the note as a consequence and we could lose all PBC assets. As of February 1, 2014, the Bank has not declared a default nor taken any other action on the loan.
The Company has held discussions with a number of potential lenders to provide the necessary financing to refinance the debt with the Bank, to complete construction and maintenance of the PBC plant to make it operational for biofuel, to finance the acquisition of feedstock and inventory and to provide additional working capital necessary to operate the plant through 2014. These discussions are in preliminary stages and certain lenders are on process of performing due diligence. The ultimate outcome of these on-going discussions is unknown.
The management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole with all the players in the industry and to find a solution that will cure the distress.
Convertible Preferred Stock
On September 24, 2008, the Company issued POGL 917,168 shares of its Series A Convertible Preferred Stock (“Series A”). The $9,171,680 purchase price for the Series A was paid to the Company by POGL by exchanging $9,171,680 of the Company’s trade payables due to POGL for these shares. In addition, on August 23, 2011, the Company issued POGL 100,710 shares of its Series A. The $1,007,100 purchase price for the Series A was paid to the Company by POGL by exchanging $1,007,100 of the Company’s payables due to POGL for these shares. As of February 14, 2011, the Company in total issued POGL 1,017,878 shares Series A. POGL is a vendor currently engaged by the Company to provide engineering and design services in connection with the on-going construction of a biodiesel plant in Indonesia.
Effective March 1, 2012, POGL converted their 1,017,878 shares of the Company preferred stock with the entitled 8% cumulative accrued dividends as of February 29, 2012, into 11,965,875 shares of the Company common stock. The conversion is based on the price of $1.00 per common stock as per the preferred stock subscription agreement.
On July 20, 2009, the Company issued Oilcorp International Limited ("Oilcorp") 2,211,166 shares of its Series A Preferred Stock in exchange for $22,111,660 in trade payables due Oilcorp by the Company.
On March 20, 2012, Oilcorp disposed off the preferred stock and its rights to Well Crown Investments Limited.
Effective March 31, 2012, Well Crown Investments Limited converted their 2,211,166 shares of the Company preferred stock with the entitled 8% cumulative accrued dividends as of March 31, 2012, into 26,890,203 shares of the Company common stock. The conversion is based on the price of $1.00 per common stock as per the latest common stock subscription’s price and the lack of trading activity during a 10 days period.
Off-Balance Sheet Transactions
As of September 30, 2013 and September 30, 2012, we did not have any off-balance sheet arrangements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, RFC is not required to provide this information.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplemental data required by this Item 8 follow the index of financial statements that appears at the end of Part I of this Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Renewable Fuel Corp
Las Vegas, NV
We have audited the accompanying consolidated balance sheets of Renewable Fuel Corp and subsidiaries (the “Company”) (a development stage company) as of September 30, 2013 and 2012, and the related consolidated statements of operations and other comprehensive loss, changes in shareholders’ equity (deficit) and cash flows for the years ended September 30, 2013 and 2012 and the period from October 1, 2006 (Inception) through September 30, 2013. 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 audits to obtain reasonable assurance about whether the consolidated 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also 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 above present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2013 and 2012 and the results of their operations and their cash flows for the years ended September 30, 2013 and 2012 and the period from Inception through September 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the risk that the Company may not successfully raise the necessary capital and the risk that the Company may not have adequate liquidity to fund their operations raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The accumulated deficit during the development stage for the period from inception to September 30, 2013 is $67,107,938.
/s/ PMB Helin Donovan, LLP
Austin, Texas
February 1, 2014
Renewable Fuel Corp
(A Development Stage Entity)
Consolidated Balance Sheets
As of September 30, 2013 and September 30, 2012
Renewable Fuel Corp
(A Development Stage Entity)
Consolidated Statements of Operations and Other Comprehensive Loss
Renewable Fuel Corp
(A Development Stage Entity)
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
For the Periods form Inception (October 1, 2006) to September 30, 2013
Renewable Fuel Corp
(A Development Stage Entity)
Consolidated Statements of Cash Flow
For the Periods Ended
Renewable Fuel Corp
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Organization
Renewable Fuel Corp (A Development Stage Company) is a public reporting entity originally planned to be an integrated producer, blender and distributor of biodiesel and blended fuels. Renewable Fuel Corp ("Renewable Fuel" or the "Company") was incorporated in the State of Nevada on September 11, 2007. Renewable Fuel owns a license to produce biodiesel products in Malaysia and two additional biodiesel licenses in Indonesia. Renewable Fuel Corp anticipates entering the biofuel production and distribution business during fiscal year 2014.
Renewable Fuel conducts its Indonesian operations through its two wholly-owned Malaysian subsidiaries, Century Corp Sdn. Bhd. ("Century") and Optimis Teguh Sdn. Bhd. ("Optimis"). Century and Optimis own two Indonesian entities, PT Plant Biofuel Indonesia ("PTPBI") and PT Optimis Teguh Indonesia ("PTOTI"), respectively, which own the licenses for the Company's planned biodiesel production in Indonesia.
Renewable Fuel acquired Century and Optimis through a transaction with their original parent Bio Refining Industries Inc. ("BRII") on September 5, 2008, through a share exchange agreement in a transaction accounted for as a reverse merger, with BRII as the accounting acquirer of Renewable Fuel. Since the original shareholders of Century received the largest portion of ownership and control of BRII, Century was treated as the accounting acquirer.
Renewable Fuel will conduct its Kuantan operations through its two Malaysian subsidiaries, Plant Biofuels Corporation Sdn. Bhd. ("PBC") and Research Fuel Corp Sdn. Bhd. ("Research"). PBC was acquired by Renewable Fuel Corp through an acquisition accounted for as a reverse merger in December 2007, and Research was incorporated by Renewable Fuel in Malaysia on March 13, 2008.
The accounts of Optimis, PTOTI, Renewable Fuel, PBC and Research have been included in Renewable Fuel’s consolidated financial statements from the acquisition date of September 5, 2008, the date of the share exchange agreement between Renewable Fuel and BRII. The historical financial statements for the year ended September 30, 2008 and the period from inception (October 1, 2006) through September 5, 2008 are those of the accounting acquirer, Century. The historical financial results of the accounting acquirer consist of the combined operating results of Century, and its 99% owned subsidiary, PTPBI ("Century Consolidated").
Renewable Fuel’s biodiesel plant in Malaysia was substantially completed and available for glycerine production at its location in Kuantan, Malaysia on leasehold interest land, under a 99-year lease, is expected to be operational during fiscal year 2014, subject to obtaining financing.. The Kuantan plant has a nameplate capacity license and underlying infrastructure to produce 60 million gallons annually (MGA), twice the current production capacity. The refinery is designed to produce biodiesel from multiple feedstocks. The plant, operated by Renewable Fuel’s subsidiary PBC is capable of producing 30 MGA of Palm Oil Methyl Ester ("PME") biodiesel and 2.4 MGA of refined glycerin. The glycerine refining unit has been designed to operate independently from the biodiesel production unit.
We are currently in non-compliance with debt covenants on the term loan facilities of approximately $29.9 million as of September 30, 2013 and have not made any installment repayments beginning with the due date of December 1, 2010. The term loans are secured by First Priority Interest over all existing property, plant and equipment, and all fixed and floating assets of PBC. The facilities are jointly and severally guaranteed by both of the PBC directors.
The Bank may take action against PBC, and may foreclose on the note as a consequence and we could lose all PBC assets. As of January 16, 2014, the Bank has not declared a default nor taken any other action on the loan.
The Management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole, including all key industry participants and to find a solution that would cure the distress.
We are confident that our feedstock strategy using non-food based material, will lead the Company to a sustainable operation. Although we have held preliminary discussions concerning acquiring CPO and alternative tallow-based feedstocks from regional suppliers, we have no contracts, agreements or commitments in place at this time. We believe that the combined capacities of these suppliers or alternative available suppliers will be able to meet our production requirement per annum.
In addition, Renewable Fuel leases, under 20-year leases, two adjacent 10 acre sites, each with 60 MGA nameplate licenses and deep water access in Dumai, Indonesia. Plant construction has been minimal to date and primarily consists of design and engineering plans to accept multiple feedstock types.
Renewable Fuel's business strategy is to begin operations in the Kuantan plant, first producing and marketing only refined (pharmaceutical and technical grade) glycerine from purchased crude glycerine. Subsequently, Renewable Fuel plans to begin producing and selling refined glycerine from crude glycerine produced in the Kuantan plant, refined, bleached and deodorized ("RBD") Crude Palm Oil ("CPO") and biodiesel from tallow-based feedstocks. Management has impaired the asset value of the plant in Kuantan, and the fair value estimate, at the time of the impairment, for the Kuantan plant was based on what management believes a market participant would be willing to pay to purchase the plant based on the discounted cash flows the market participant could reasonably expect to generate operating the plant. The estimates are based on the company’s assumptions that it will be able to operate the plant profitably and includes the company’s estimates of the current status of the biodiesel market, estimates of revenues, costs of sales, general and administrative costs, shipping costs, and incentives. These assumptions and estimates are made without the company having any historical information to rely on. To date, the company has not operated the plant profitably. The two largest factors in projecting cash flows from operating the plant are the prices we receive for selling biodiesel and the cost of the feedstock necessary to produce the biodiesel. Any changes in the company’s assumptions and estimates and changes in market conditions could impact the value of the company’s plant assets. Details of the impairment are further discussed in the paragraph "Impairment of Long-Lived Assets" in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
After the Kuantan plant is fully operational, management plans to leverage cash flows from operations to fund the Kuantan expansion of a second production unit, doubling production to the nameplate capacity and in turn fund sequential completion of the two plants in Dumai. Construction on the two Indonesian facilities is not anticipated until after the Kuantan plant is fully operational and construction financing is available.
It is currently not determinable when conditions will exist, if ever, to continue construction of the two Indonesian plants. The contract period for PTPBI Indonesian plant construction expired and both Century Corp, owner of PTPBI, and Plant & Offshore Technology Sdn Bhd, the contractor, mutually agreed to terminate the construction contract on August 23, 2011. Should funding become available and the construction portion of the licenses be re-approved, we believe we will be able to successfully negotiate a new construction contract.
The business strategy is dependent upon Renewable Fuel obtaining additional financing to acquire feedstock and to make the plant operational. Renewable Fuel is in discussion with the Bank to extend the existing loan and provide additional funds to fund start-up of the plant. If Renewable Fuel and the Bank cannot come to terms then the Company will look at refinancing the loan and obtaining a working capital line with another entity.
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements are presented using the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP") in the United States of America whereby revenues are recognized in the period earned and expenses when incurred, and include the accounts of Renewable Fuel consolidated with the accounts of all of its subsidiaries in which Renewable Fuel holds a controlling financial interest as of the financial statement date. All intercompany accounts and transactions have been eliminated in consolidation. We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”).
Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that give them the power to make significant decisions relating to the entity’s operations. The usual condition for a controlling financial interest in a voting entity is ownership of a majority voting interest. Accordingly, we consolidate our majority-owned subsidiaries and other voting interest entities in which we hold, directly or indirectly, more than 50% of the voting rights or where we exercise control through other contractual rights.
VIEs are entities that lack one or more of the characteristics of a voting interest entity. Either the entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties or the equity investors do not have the characteristics of a controlling financial interest. The entity that has a controlling financial interest in a VIE is referred to as the primary beneficiary and is required to consolidate the VIE.
In determining whether we are the primary beneficiary of a VIE, we consider both qualitative and quantitative factors regarding the nature, size and form of our involvement with the VIE, such as our role in establishing the VIE and our ongoing rights and responsibilities; our economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE; the design of the VIE, including the capitalization structure, subordination of interests, payment priority, relative share of interests held across various classes within the VIE’s capital structure and the reasons why the interests are held by us.
We perform on-going reassessments of whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and are therefore subject to the VIE consolidation framework and whether changes in the facts and circumstances regarding our involvement with a VIE result in a change in our consolidation conclusion regarding the VIE to change. Our reassessment process considers whether we have acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether we have acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the VIEs with which we are involved may change as a result of such reassessments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain amounts in prior period financial statements have been reclassified to conform to the 2013 presentation. These reclassifications had no effect on the previously reported financial position or results of operations.
A Development Stage Company
The accompanying financial statements have been prepared in accordance with FASB ASC Topic 915 Development Stage Entities. A development stage enterprise is one in which planned principal operations have not commenced; or if its operations have commenced, there have been no significant revenues derived there from. As of September 30, 2013, Renewable Fuel has not fully commenced operations nor has it received significant revenues from its planned principal operations.
Financial Instruments and Credit Risk
Financial instruments that potentially subject Renewable Fuel to credit risk include cash and cash equivalents and accounts receivable. Domestic cash is deposited in demand accounts in US federal insured domestic institutions to minimize risk. The balances in these accounts from time to time exceed federally insured limits. In addition, Renewable Fuel maintains bank deposits at state-owned banks within Malaysia and Indonesia, which were covered by local government insurance at September 30, 2013.
The carrying value of Renewable Fuel’s accounts receivable, net of allowance for doubtful accounts; represent their estimated net realizable value. A provision for doubtful accounts is provided based on historical experience. Accounts deemed uncollectible are applied again the allowance. At September 30, 2013 and 2012, the allowance for doubtful accounts was $0.
The carrying amounts of financial instruments including cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of their short maturities. The carrying amounts of notes payable approximated their fair value as the interest rates on the notes payable are tied to market adjusted bank rates and the notes are at market terms.
Renewable Fuel’s operations carried out in Malaysia and Indonesia may be influenced by the political, economic and legal environment in these countries.
Inventories
Inventories, consisting of raw materials and finished goods are recorded using the lower of cost or market value with cost, determined using primarily the first in-first out (FIFO) method.
Fair Value Measurement
The Company adopted ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that prioritizes valuation inputs into three broad levels based on the characterization of the underlying inputs, and each fair value measurement is then assigned to one of the three levels. These levels are:
•
Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.
•
Level 2 - Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 - Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.
A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. The notion that a transaction resulting from a forced liquidation or distressed sale does not represent fair value.
If the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability (or similar assets or liabilities), transactions or quoted prices may not be determinative of fair value (for example, there may be increased instances of transactions that are not orderly). Further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
Property, Plant and Equipment, Net
Property and equipment are stated at historical cost net of accumulated depreciation and accumulated impairment charges. Maintenance and repairs are charged against operations as incurred and major replacements or betterments are capitalized. Depreciation is provided using the straight-line method based on the estimated useful lives of the assets as follows:
Construction in progress represents costs associated with property, plant and equipment under construction at Renewable Fuel’s production facilities. Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the production facility construction, including a portion of interest costs incurred during the related construction period, as well as direct labor and related benefits. The amount of capitalized interest in a period is determined by applying an interest rate, which is based upon borrowings outstanding during the period, to the average amount of accumulated expenditures during the period not to exceed the total amount of interest cost incurred during the period. Such costs are reclassified to an appropriate fixed asset classification and depreciated when the asset is placed into service.
Impairment of Long-Lived Assets
Long-lived assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of, consisting of land plots held for sale, are reported at the lower of the carrying amount or fair value less costs to sell.
As discussed in Note 4, the Company provided an impairment charge for plants in progress and land held for sale during fiscal year end September 30, 2009.
Other Non-current Assets
Other non-current assets include land held for sale by Century, the Company’s wholly owned subsidiary.
Leases
Leases are evaluated to determine whether they are capital or operating in nature, as defined under the U.S. GAAP. Rent expense under operating leases is recorded on a straight line basis over the term of the lease, as adjusted for any rent holidays, abatements, tenant allowances or other adjustments to monthly rental payments. Capital leases are recorded as fixed assets and depreciated over the respective useful life of the leased asset. Obligations under capital leases are recorded at the present value of future lease payments, with interest expense recorded over the term of the lease.
Debt Modifications
Debt modifications are evaluated to determine if resulting cash flows have been significantly affected by changes in principal amounts, interest rates, terms or maturity. Restructurings are evaluated for treatment as debt extinguishments or simple modifications. Restructurings to date have all been treated as modifications as the net present value of cash flow requirement s have not been significantly affected.
Preferred Stock Classification
FASB establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.
A financial instrument issued in the form of shares is mandatorily redeemable if it embodies an unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur. A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable-and, therefore, becomes a liability-if that event occurs, the condition is resolved, or the event becomes certain to occur.
The Series A Preferred Stock provides the holder the right to require the Company to redeem the preferred stock if the holder elects to convert all of their shares of Series A preferred stock into a debt obligation. Under FASB standards, the Company’s Series A preferred stock is not considered mandatorily redeemable. However, SEC reporting requirements provide that any possible redemption outside of the control of the Company requires the preferred stock to be classified outside of permanent equity.
As such the Company had classified the Series A Preferred Stock as temporary equity in the financial statements. In 2012, the Series A preferred stock was converted to common stock.
Repurchase of Common Shares into Treasury
The Company utilizes the cost method to account for all treasury stock transactions, which are valued at the Company’s estimate of the consideration granted in return for the shares.
Non-controlling Interest
Non-controlling interest accounting is applied for any entities where the Company maintains less than 100% ownership. The Company clearly identifies the non-controlling interest in the balance sheet and income statement including all measures of: net loss, net loss attributable to non-controlling interest, and net loss attributable to Renewable Fuel. Operating cash flows in the consolidated statements of cash flows reflect net loss, while basic and diluted earnings per share calculations reflect net loss attributable to Renewable Fuel.
The net loss attributable to non-controlling interest of PBC contributed approximately $1.4 million, $1.3 million and $4.6 million for the year ended September, 2013, 2012 and from Inception October 1, 2006 to September 30, 2013, respectively from RFC’s 49% ownership in PBC upon its spin-off of the 51% ownership to DCSB on February 2, 2010. (see Note 3: Spin Off of Plant Biofuels Corporation)
Warrants
The Company reviews the key terms of warrants issued, including all conversion rates and down round provisions which protect the holder from changes to the our capitalization or future declines in our share price.
On October 1, 2009, the Company reclassified warrants granted through September 30, 2009 from paid in capital to a derivative liability. Holders of those warrants are generally protected from anti-dilution by adjustments for any stock dividends, stock splits, combinations or other recapitalization. The Company reviewed the terms of the warrants and determined that they represented an embedded derivative due to the fact that the warrant is not indexed to its own stock and it was previously presented as stockholders equity. The fair value of the related warrants is determined at the end of each accounting period, with any changes in fair value being recorded as other income or expense.
Revenue Recognition
The Company recognizes revenues from the sale of biodiesel, refined glycerine and related byproducts produced by the Company. Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured.
The Company also earns revenue for consulting services rendered to other companies in the industry. Revenues under these contracts are recognized during the period when related services are rendered.
Stock-Based Compensation
Stock options and stock grants are awarded in return for service. The fair value of the award is measured at the grant-date and recognized as either compensation expense or a reduction to additional paid-in capital over the vesting period. Renewable Fuel records expense based upon the service period related to the grant.
Foreign Currency Translation and Other Comprehensive Income
The reporting currency of Renewable Fuel is the US Dollar. The functional currency of Renewable Fuel’s Malaysian subsidiaries is the Malaysian Ringgit (RM) while the functional currency of the Indonesian subsidiaries is the Indonesian Rupiah (IDR).
For the subsidiaries whose functional currencies are other than the US Dollar, all assets and liabilities accounts were translated at the exchange rate on each respective balance sheet date; stockholders' equity (deficit) is translated at the historical rates and items in the income and cash flow statements are translated at the average rate for the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of changes in shareholders' equity (deficit). The resulting translation gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
The average and closing rates used in the translated of foreign currency amounts are as follow:
Income Taxes
Renewable Fuel recognizes deferred taxes under the asset and liability method. Under this method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established if necessary to reduce deferred tax assets to amounts expected to be realized.
Net Loss per Common Share
Renewable Fuel presents earnings basic net loss per common share computed by dividing net loss attributable to the Company's common stockholders by the weighted-average number of commons shares outstanding during the period. Diluted net loss per common share is computed by giving effect to all potential dilutive common shares, including options, warrants, and convertible preferred stock. Basic and diluted net loss per common share was the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.
New Accounting Pronouncements
The following accounting standards which may impact our financial statements were issued as of September 30, 2013. A description of the standards and an assessment of its impact on our financial reporting are noted below:
In March 2013, the Financial Accounting Standards Board issued ASU 2013-05: Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Susidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force).
In February 2013, Financial Accounting Standards Board issued ASU 2013-04: Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force).
In February 2013, Financial Accounting Standards Board issued ASU 2013-03: Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities.
In February 2013, Financial Accounting Standards Board issued ASU 2013-02: Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.
NOTE 2-LIQUIDITY AND GOING CONCERN CONSIDERATIONS
The accompanying consolidated condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced cumulative losses of $67.1 million from October 1, 2006 (inception) through September 30, 2013, has net negative equity of $7.6 million and has not commenced operations. This raises substantial doubt about the Company’s ability to continue as a going concern.
We are currently in non-compliance with debt covenants on the term loan facilities and have not made any installment repayments as they become due beginning on December 1, 2010. The term loans are secured by first priority interest over all existing property, plant and equipments, and all fixed and floating assets of Plant Biofuels Corporation Sdn Bhd (“PBC”). The facilities are jointly and severally guaranteed by both the PBC directors.
The Bank may take action against PBC, and may foreclose on the note as a consequence and we could lose all PBC assets. As of February 1, 2014, the Bank has not declared a default nor taken any other action on the loan.
The management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole with all the players in the industry and to find a solution that will cure the distress.
The Company has held discussions with a number of potential lenders to provide the necessary financing to refinance the debt with the Bank, to complete construction and maintenance of the PBC plant to make it operational for biofuel, to finance the acquisition of feedstock and inventory and to provide additional working capital necessary to operate the plant through 2014. These discussions are in preliminary stages and certain lenders are on process of performing due diligence. The ultimate outcome of these on-going discussions is unknown.
Renewable Fuel is undertaking various plans and measures to raise capital through debt and equity offerings, which it believes will increase funds available for development and working capital. However, no assurances can be given that those plans and measures will be successful in increasing funds for the development and operations of the Company.
Should the Company be unsuccessful in obtaining debt or equity financing by early 2014, it is likely that the Bank will foreclose on the PBC plant.
The accompanying 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. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3-BUSINESS COMBINATIONS & DISPOSITION
Acquisition of Plant Biofuels Corporation Sdn Bhd
On December 31, 2007, Renewable Fuel entered into a share exchange agreement to acquire Plant Biofuels Corporation Sdn. Bhd. ("PBC").
As of the date of the transaction, Renewable Fuel had 6,500,000 outstanding shares of common stock, which were held by the following individuals or entities:
In connection with this share exchange agreement, Renewable Fuel issued 73,000,000 common shares to shareholders of PBC, as follows:
In return RFC received 24,000,000 shares of PBC’s common stock.
In connection with this transaction, Renewable Fuel's CEO was granted 1,460,000 shares of common stock and options to acquire 3,650,000 shares common stock. As such, Renewable Fuel’s shareholders consisted of the following individuals and entities upon closing:
The original owners of PBC received approximately 90% ownership and voting interest in the combined entity. As such, Renewable Fuel has determined that this transaction represented a reverse merger, with PBC as the accounting acquirer.
As the accounting acquirer, the assets and liabilities of PBC were recorded using their historical amounts and the assets and liabilities of Renewable Fuel were accounted for using the purchase method of accounting, at their fair market value at the date of acquisition. Renewable Fuel’s assets and liabilities approximated their historical costs.
The carrying value of PBC’s net assets consisted of the following as of December 31, 2007, the date of acquisition:
The fair value of the Renewable Fuel’s net assets consisted of the following as of December 31, 2007:
Formation of Research Fuel Corp Sdn Bhd
On March 13, 2008, the Company incorporated its wholly own subsidiary, Research Fuel Corp Sdn Bhd, as their branch office in Malaysia.
Formation of BRII and the Acquisition of Century, PTPBI, Optimis and PTOTI by BRII
On August 15, 2008, Bio Refining Industries, Inc. (“BRII”), was incorporated as a wholly owned subsidiary of Caerus, Ltd., (“Caerus”), a British West Indies corporation, through the issuance of 51,000,000 common share of BRII to. On the date of formation, Caerus was owned by the following individuals: owned by the following individuals was by the owners of the following entities:
BRII was formed as a holding company to roll-up and consolidate the ownership of the following entities, which were in the business of building biodiesel plants located in Dumai, Indonesia.
*Century maintained 99% ownership of PTPBI
**Optimis maintained a 95% ownership of PTOTI.
At the time of the formation of BRII, the shareholders of Century consisted of the following individuals:
At the time of the formation of BRII, the shareholders of Optimis consisted of the following individuals:
On September 5, 2008, BRII entered into individual share exchange agreements with the shareholders of Century and of Optimis, whereby they received common shares of BRII in exchange for 100% of their common shares of Century and Optimis. The following table outlines the number of BRII common shares received by the previous owners of Century and Optimis:
Century assets and liabilities in connection with the September 5, 2008 share exchange with BRII:
As a result of this roll-up on September 5, 2008, BRII had the following shareholders:
Subsequent to the consummation of the above transaction, the three individuals who previously owned Century and Optimis transferred their BRII common shares to Caerus, which resulted in Caerus holding all 60,454,000 outstanding common shares of BRII on September 5, 2008. Their effective ownership of BRII was as follows:
As noted above, Badrul Hisham B Md Isa controlled each of these entities prior to this transaction, however he did not control BRII after the September 5, 2008 roll-up. Since the original shareholders of Century received the largest portion of the ownership and control of BRII, Century Consolidated was determined to be the accounting acquirer and the transactions were accounted for using the purchase method of accounting for business combinations.
The assets and liabilities of BRII and Optimis and its 95% owned subsidiary, PTOTI, were recorded at their fair value (which approximated their historical cost) on the date of acquisition. The assets and liabilities of Century, as the acquirer, continued to be recorded at their historical values.
Century, as the accounting acquirer, received the following assets and liabilities in connection with the September 5, 2008 share exchange with BRII.
Acquisition of Bio Refining Industries Inc ("BRII")
On September 5, 2008, and simultaneous with the formation of BRII and the acquisition previously noted, Renewable Fuel entered into a share exchange agreement with Caerus to acquire 100% of the outstanding shares of BRII in exchange for 120,908,000 common shares of Renewable Fuel. In return RFC received 60,454,000 shares of BRII’s common stock.
Simultaneous with this exchange, Caerus issued 31,400,000 of its 120,908,000 common shares of Renewable Fuel to four entities which performed legal and advisory services in connection with the transaction.
Upon closing of this transaction, Renewable Fuel shareholders consisted of the following individuals and entities:
As a result of the purchase of BRII through the issuance of Renewable Fuel’s common stock, the original owners of BRII collectively owned and had voting rights of approximately 59% of the combined entity. The transaction was accounted for as a reverse merger, with BRII as the accounting acquirer of Renewable Fuel. Since the original shareholders of Century received the largest portion of the ownership and of the control of BRII, Century was determined to be the accounting acquirer. The assets and liabilities of Renewable Fuel, PBC and Research were recorded at their fair value (all of which approximated their historical cost) on the date of acquisition.
Century, as the accounting acquirer, received the following assets and liabilities in connection with the September 5, 2008 share exchange between BRII and Renewable Fuel:
As required by the purchase method of accounting for business combinations, the above BRII consolidated information includes the assets and liabilities of Century, the accounting acquirer, at their historical costs and the assets and liabilities of BRII, the parent, and Optimis, at the fair market values (all of which approximated their historical cost) at the date of acquisition.
At the completion of the reverse merger the majority of the assets were centered in plants in progress which were valued at the historical cost of the plants in their local currencies translated to United States Dollars. The primary liabilities were trade payable and term loan payables, both of which were recorded at their outstanding balances in their local currencies translated to United States Dollars.
Spin off of PBC
As a result of Renewable Fuel's purchase of PBC in December 2007, PBC was not in compliance with several debt covenants, and in technical default on its primary loan facility with a Malaysian bank (see "Note 6 - Term Loans In Default" for additional information regarding the loan facility). The primary issue involved the stipulation that the obligor on the loan facility, PBC, must be owned by at least a simple majority of domiciled Malaysian citizens. In order to cure the default the Company transferred 51% of the common shares of PBC to Dakap Capaian Sdn. Bhd. ("DCSB"), a company wholly-owned and controlled by two of the Company's directors.
The transaction to transfer PBC shares to DCSB was completed on February 2, 2010 as follows:
1.
Each of the two companies that formerly owned PBC, transferred 51% of the Renewable Fuel stock they received as consideration for the sale of PBC.
2.
Renewable Fuel transferred 51% of the PBC shares it acquired in December 2007 to DCSB.
These transfers are intended to be temporary, were undertaken for the sole purpose of curing the debt covenant default, and per the share exchange agreement will unwind and revert to prior ownership levels at the time that the debt with the bank is extinguished. The Company has classified the common shares it received in exchange as Treasury Stock, to revert back to the original owners in the future. The Company reviewed the valuation of the 51% ownership in PBC and in turn determined that the fair value of the consideration of this transaction was equal to $3,723, which is the par value of the Company’s common shares.
The transfer of 51% of the stock of PBC to DCSB, among other obligations in the transfer agreement, states that at such time the bank debt is satisfied, 100% ownership of PBC will be transferred back to the Company. Based upon terms of the share exchange agreement, management has determined that PBC is a wholly owned subsidiary for accounting purposes as a variable interest entity to the Company. In addition, the Company is providing full management, operational and financial support to PBC.
In addition, PBC executed a loan agreement for $19.8 million to recognize advances made by Renewable Fuel to date. This loan is to be paid together with estimated interest of $5.5 million in 48 equal monthly installments, beginning January 1, 2015. The loan balances have been eliminated in the Company’s consolidated financial statements.
Summary of Reporting Entities
The following table reflects a summary of operations included in the consolidated financial statements for the years ended September 30, 2013 & 2012:
NOTE 4-IMPAIRMENT OF LONG-LIVED ASSETS
In 2008, the U.S. and world economies moved into an economic recession. The financial crisis intensified in September 2008 following the collapse of several leading investment banks. In response to the weaker demand, businesses cut production and employment, and postponed capital spending plans. In addition, the price of oil declined substantially.
Market dislocations throughout 2008, including the severe volatility, illiquidity and credit dislocations that were experienced in the fourth quarter of 2008, adversely affected the market value of the Company’s long term assets. The market dislocations have continued to affect the market values of the Company’s long term assets into 2009.
In a market that is not active and in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales. However, it is also not appropriate to automatically conclude that any transaction price determines fair value. Determining fair value in a dislocated market depends on facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales. Accordingly, the degree of judgment that the Company exercised in determining fair value is greatest for securities categorized in Level 3. In determining fair value for an asset, the use of a reporting entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks. However, a reporting entity’s intention to hold the asset or liability is not relevant in estimating fair value. Fair value is a market-based measurement, not an entity-specific measurement.
The Company estimated the fair value of its investments in plants in progress and land held for sale. This estimation was based on a number of factors, including appraisals, comparable valuations of plants by other publicly-traded bio-fuels companies, the original investment amounts, discounted cash flow models, as well as current and projected operating performance.
These estimated values do not necessarily represent the amounts that the Company may ultimately realize because of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, the estimated values may differ from the actual fair values that may or may not be ultimately realized. Such values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the estimates presented herein do not necessarily indicate the amounts that the Company could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts.
Under current market conditions, the Company’s investment in plants in progress and land held for sale may be deemed to be illiquid. Illiquid investments are generally those that cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. The Company may be required to dispose of illiquid assets at a price significantly lower than the recorded value since the market price of illiquid assets generally is more volatile than that of more liquid securities. This illiquidity may result in the Company incurring greater losses on the sale of some securities than under more stable market conditions.
During 2009 the Company performed a fair value assessment on the plants in progress and land held for sale. These assets are not carried at fair value on a recurring basis. These assets were valued using significant unobservable inputs (Level 3).
The fair value measurement of the Company’s investments in plants in progress and land held for sale, using present value, captures the following elements from the perspective of market participants as of the measurement date:
a.
An estimate of future cash flows for the asset being measured.
b.
Expectations about possible variations in the amount and/or timing of the cash flows representing the uncertainty inherent in the cash flows.
c.
The time value of money, represented by the rate on risk-free monetary assets that have maturity dates or durations that coincide with the period covered by the cash flows (risk-free interest rate).
d.
The price for bearing the uncertainty inherent in the cash flows (risk premium or credit spread).
e.
Other case-specific factors that would be considered by market participants.
The Company evaluated the fair value of the Kuantan, Malaysia plant by determining a holding period of 4 years to sale the plant in progress. The sales value was assumed to approximate the appraised value of the property at November 2008 (158,000,000 Malaysian Ringgit). This value was also supported by projected Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). The EBITDA amount was determined based on a financial projection which assumes sales price, cost of goods sold, general costs and other costs necessary to get the plant operational. The property was assumed to operate under limited operations for the holding period. There was assumed to be a sales cost of the property of approximately 5% of the sales price. The estimated cash flows were discounted at 20% per annum which the Company’s management believes represents the rate required on risk free assets plus a risk premium for this particular asset. Based on this impairment analysis the Kuantan plant was written down to its fair value of $20.4 million during the fiscal year ended September 30, 2009.
Estimated plant useful life is 15 years and depreciation will begin once the plant is placed in service.
As of September 30, 2013, the Company has reassessed its impairment analysis and believes no additional impairment is required as of September 30, 2013.
These assumptions and estimates are made without the company having any historical information to rely on. To date, the company has not operated the plant profitably. Any changes in the company’s assumptions and estimates and changes in market conditions could impact the value of the company’s plant assets.
The value of the two Indonesian plants in progress were determined to be $0 as the ability to resale the land is determined to be limited and the carrying value of the plants were primarily in engineering and planning costs which are project specific. The estimated costs to complete the projects would exceed the value of the property as of September 30, 2009. There is no salvage value for the materials acquired for the plants, which were not significant, at September 30, 2013 and 2012.
The land held for sale was valued at zero because the discounted value of the potential sales price of the land, less sales cost, was less than the estimated cost to prepare the land for sale.
Plants under construction - As of September 30, 2008, the Company had plants under construction of $65.8 million which had decreased to $64.9 million as of December 31, 2008 due to foreign currency translation adjustments during the period. The following table outlines the carrying value and fair value of these assets as of December 31, 2008, along with the related impairment expense determined under this assessment:
Leasehold interests in land - As of September 30, 2008, the Company had leasehold interests in land of $1.6 million which had decreased to $1.4 million as of December 31, 2008 due to foreign currency translation adjustments during the period. The following table outlines the carrying value and fair value of these assets as of December 31, 2008, along with the related impairment expense determined under this assessment:
Freehold land - As of September 30, 2008 and December 31, 2008, the Company’s wholly owned subsidiary, Century, had undeveloped land plots available for sale with a carrying value of $0.6 million.
Century was not actively marketing these land plots for sale. Given the lack of market demand due to the aforementioned global credit crunch, coupled with the incremental development and selling expenses required to bring them to market, the Company determined that the plots had negligible value. As such, Renewable Fuel recorded a complete valuation allowance of $0.6 million.
The above impairment analysis of plants in progress, leasehold land rights and freehold land plots, resulted in a total impairment expense of $46.5 million during the 1st quarter ended December 31, 2008.
No additional impairment expense was recorded in 2009, 2010, 2011, 2012 or 2013. Changes in the impairment allowance are a result of foreign currency translation adjustments.
NOTE 5-PROPERTY, PLANT AND EQUIPMENT, NET
Property and equipment, net consisted of the following at:
Plants in progress consisted of the following at:
The change in the carrying value of the plants in progress and the accumulated impairment losses are primarily the result of foreign currency translation adjustments.
Renewable Fuel leases the land for its plants under 20 and 99 year agreements and capitalizes the upfront payments for the leasehold interests. The carrying amount for the land includes these upfront lease payments and land costs, duties and professional fees incurred in relation to the acquisition of the land. Both of the lands are only for industrial purposes, and entitle to tenure renewal upon lease tenure maturity.
Plant in progress at September 30, 2013 and 2012 includes approximately $1.0 million of interest cost which has been capitalized into plants in progress related to the PBC plant.
During 2009, the Company performed a fair value assessment on the plants and leasehold interest in land which resulted in substantial impairment. No additional impairment expense has been recorded since 2009. Changes in the accumulated impairment losses are a result of foreign currency translation adjustments.
Real estate held for sale consisted of the following as of September 30, 2013 and 2012:
The Company incurred depreciation expense of $20,000 and $22,000 during the years ended September 30, 2013 and 2012, respectively.
The Company sold no land plot during the year ended September 30, 2013 any sales will then resulted in a potential gain as the cost basis of all land plots had been written off during the year ended September 30, 2009.
Estimated plant useful life is 15 years and depreciation will begin once the plant is placed in service.
The costs basis of long-lived assets located in foreign locations, as well as the respective accumulated impairment and depreciation are translated into the reporting currency based on the foreign exchange rates as of each reporting date. As such, the gross value of the long lived assets and the accumulated impairment and depreciation will generally fluctuate from period to period in amount which may not be in line with the associated depreciation and impairment expense recorded in the income statement.
NOTE 6-TERM LOANS IN DEFAULT
In October 2007, PBC entered into a loan agreement with a Malaysian bank (the "Facilities"), which provided debt financing under two individual term loans totaling $18.5 million and revolving line of credit of $3.1 million. Disbursements under the revolving line of credit are restricted for purchases of raw materials, such as feedstock for plant operations, and are repayable within six months from date of disbursement. At September 30, 2013 and 2012 total amounts borrowed under the revolver was $0.
The term loans under the Facilities bear interest at the bank's effective costs of funds + 1.25% in year one, increasing to +2% in year two and beyond. From August 1, 2010, the bank’s effective costs of funds have been revised from 6.25% to 6.30%. Therefore, at September 30, 2012, the interest rate for the term loans was 8.30% per annum. On a monthly basis the bank adds accrued interest into the principal balance outstanding. The subsequent monthly interest accrued is based on the new outstanding principal balance. Consequently, all accrued interest related to this loan has been reclassified by the Company as debt; in prior period statements this amount was reflected in accrued liabilities. Total accrued interest on the term loans, added to the principal balances was $11.1 million and $8.6 million at September 30, 2013 and 2012 respectively, resulting in debt of $29.9 million and $28.8 million for the two term loans at September 30, 2013 and 2012.
Interest payments will be made with the commencement of monthly installments beginning on each term loan's respective date as described below. The term loans under the Facilities are secured by a first priority interest over all existing property, plant and equipment and all assets of PBC. In addition, the term loans are jointly and severally guaranteed by the directors of PBC.
PBC was in default which stemmed from a debt covenant requiring the Company to obtain the Bank approval prior to engaging in activities that would change ownership of PBC. The Company's acquisition of PBC in December, 2007 occurred without the Bank's approval. The Bank requires that majority ownership of creditors be domiciled Malaysian. The Company cured this default by engaging in a divesture of 51% of the legal ownership to a wholly-owned Malaysian entity in February 2010.
In May 2010, PBC negotiated modifications to its loan facility with the Malaysian bank. The modifications, effective November 2009, extended the availability period of the revolving line of credit from December 2009 to December 2010, the maturity of the term loans from six years to seven years and the first monthly payment date from January 2010 to November 2010. These modifications resulted in the Company being in compliance with the terms of the loan.
However, since December 2010 PBC was unable to remit its first installment repayment to the Bank in accordance with the repayment schedule. PBC has been served with a second reminder notice from the Bank, which will potentially put PBC in default.
The Bank may take action against PBC, and may foreclose on the note as a consequence and we could lose all PBC assets. As of February 1, 2014, the Bank has not declared a default nor taken any other action on the loan.
The management of PBC is actively negotiating with the Bank to restructure the facilities or reschedule the facilities repayment. The Bank has verbally indicated their willingness to review and assess the biodiesel industry as a whole with all the players in the industry and to find a solution that will cure the default and facilitate PBC in getting the plant operational by either advancing funds or subordinating its debt.
Debt consisted of the following as of:
Future contractual principal payments on the term loans are as follows:
The Company has classified the term loans as a current liability due to the fact that planned principal payments were not made following the year ended September 30, 2013. As of the year ended September 30, 2013, the term loan payable in default amounted to $18,994,997.
In January 2013 and 2012, the Bank advanced a total of $118,656 and $144,240 respectively to the Company for expenses incurred on the Malaysian plant for its Industrial All Risks insurance policy, and the plant’s independent assessment. This amount is accumulated into the total term loan outstanding by the Bank and carrying the same interest rate as the term loan.
The Company incurred interest expense of $2.5 million and $2.3 million during the year ended September 30, 2013 and 2012, respectively.
NOTE 7-STOCKHOLDERS' EQUITY
Common Stock
On October 1, 2006 Century began operations in the biodiesel industry. The Company had 2,510,404 of restated shares of common stock outstanding and paid in capital of $117,213.
On January 22, 2007, Century issued 7,414,445 restated shares of common stock for total proceeds of $358,862.
On July 28, 2008, Century issued 110,983,152 restated Renewable Fuel shares of restricted common stock to Badrul Hisham Bin Md Isa in exchange for the forgiveness of $5,530,000 of advances made to the company during the period March 2007 through July 2008.
On September 5, 2008, the Company consummated a share exchange agreement to acquire BRII. The Company exchanged 120,908,000 shares of its restricted common stock for 100% of the issued and outstanding ordinary shares of BRII, and BRII became a 100% owned subsidiary of the Company. The Company had 80,960,000 outstanding shares of common stock prior to its acquisition of BRII.
On February 3, 2009 the Company issued 1,961,570 shares of restricted common stock to individuals in exchange for the forgiveness of $1,961,570 in advances made to various Renewable Fuel subsidiaries from November 2007 through January 2009.
In addition, from October 1, 2008 through September 30, 2009 the Company issued 2,026,196 shares of its restricted common stock to individuals at $1.00 per share for consideration totaling $2,026,196.
In addition, from October 1, 2009 through September 30, 2010 the Company issued 1,156,971 shares of its restricted common stock to individuals at $1.00 per share for consideration totaling $1,156,971.
In addition, from October 1, 2010 through September 30, 2011 the Company issued 628,022 shares of its restricted common stock to individuals at $1.00 per share for consideration totaling $628,022.
In addition, from October 1, 2011 through September 30, 2012 the Company issued 491,740 shares of its restricted common stock to individuals at $1.00 per share for consideration totaling $491,740.
In addition, from October 1, 2012 through September 30, 2013 the Company issued 33,950 shares of its restricted common stock to individuals at $1.00 per share for consideration totaling $33,950.
The Company has also issued 3,489,915 shares of common stock for compensation or services rendered.
Common Stock Options
During fiscal year 2008, the Company granted 3,600,000 stock options to certain key employees with an exercise price of $0.10 per share (the "Employee Options"). The Employee Options are exercisable to purchase shares of Renewable Fuel common stock at a price equal to or greater than the fair value of the stock at the time the options were granted. The Employee Options issued vest ratably over three years on the anniversary dates of the grants and have a ten year contractual life.
The calculated fair value of the 3,600,000 Employee Options issued was $318,000 at the date of the grant. Of that amount, $81,000 was recorded as share-based compensation expense in the separate company Renewable Fuel statement of operations for the period October 1, 2007 through September 5, 2008 and $237,000 was the unamortized balance of share-based compensation expense was recognized over the remaining vesting period for the Employee Options (2.2 years). However, on September 5, 2008, Renewable Fuel was acquired in a reverse merger in connection with a share exchange agreement with BRll. As such, the $81,000 expense amount is not included in the accompanying consolidated statement of operations for the accounting acquirer, BRII (see Note 3). Share-based compensation expense recognized for the Employee Options during the year ended September 30, 2013 was $0. During the year ended September 30, 2009, 400,000 stock options were forfeited leaving 3,200,000 stock options outstanding at September 30, 2013 and 2012.
From October 1, 2006 (inception) through September 30, 2013, stock options totaling 11,624,816 with immediate vesting terms were issued to the current CEO in connection with certain equity transactions as described above in accordance with his employment agreement (the "CEO Options").
The exercise prices for the CEO Options are as follows:
Compensation expense recognized in the accompanying consolidated statement of operations related to the Employee Options and CEO Options for the years ended September 30, 2013 and 2012 and for the period from October 1, 2006 (inception) through September 30, 2013, were approximately $1,200, $17,000 and $1,508,000, respectively. Amounts expensed as a result of the immediate vesting of CEO Options represent the fair value of the options granted. In connection with the share exchange agreement with PBC 3,650,000 options were granted to the CEO. On September 5, 2008 Renewable Fuel and PBC were acquired in a reverse merger in connection with a share exchange agreement between Renewable Fuel and BRII. As such, the calculated fair value of the 3,650,000 CEO Options, or $319,000, is not included in the historical accompanying consolidated statement of operations for the accounting acquirer, Century Consolidated (see Note 3).
The fair value of the common stock used in the computation of the fair value of the options issued was determined based on third party purchases of the Company's common stock. The Company applied the simplified method in estimating the average expected life of the options. Because the Company's stock is not actively traded, the Company used the average historical volatility rate for publicly traded companies that are engaged in similar alternative fuel activities to those of the Company. In order to estimate the expected volatility as of the grant date, the Company used a simple average of the volatility for a similar time period as the expected life of the options and the current implied volatility of exchange traded options.
The following table summarizes information about common stock options granted, exercised, forfeited, vested and exercisable:
On July 20, 2012, the Company extended the term of options issued prior to July 20, 2012 an additional three (3) years from the date of vesting. As a result the Company recorded approximately $1.1 million of stock based compensation during the fourth quarter of fiscal 2012.
The following is a summary of options outstanding and exercisable at September 30, 2013:
The following table summarizes additional information about stock options as of September 30, 2013 & 2012:
The common stock options are generally protected from anti-dilution via adjustments for any stock dividends, stock splits, combination or other recapitalization.
The intrinsic value of all vested and unvested options at September 30, 2013 and September 30, 2012 is $0 and the Company intends to issue new shares upon stock option exercises.
Common Stock Warrants
On February 20, 2009, the Company issued a warrant to purchase 600,000 shares of the Company's common stock, to an individual as compensation for services rendered in connection with equity capital raising activities. Under the warrant the holder may purchase up to 600,000 shares of common stock for $1.00 per share. Holders of the Company's common stock warrants are generally protected from anti-dilution by adjustments for any stock dividends, stock splits, combinations or other recapitalization. On July 20, 2012 the Company extended the warrant expiration date for an additional three (3) years.
For purposes of determining the fair value of the common stock warrant, the Company used the Black-Scholes option pricing model and the assumptions set forth in the table below.
The fair value of the warrant was determined using the deemed fair value of the underlying common stock of $1.00 per common share at February 20, 2009. Because the Company's stock is not actively traded, the Company used the average historical volatility rate for publicly traded companies that are engaged in similar alternative fuel activities to those of the Company for a similar time period as the expected life of the warrant. The expected life of the warrant was derived as the midpoint between its five year contractual life and it’s immediately exercisability. The fair value of the warrant determined was included in additional paid-in capital as a transaction cost.
The Company reviewed the terms of the warrants and determined that they represented an embedded derivative due to the fact that the warrant is not indexed to its own stock and it was previously presented as stockholders equity. The Company reclassified the value of the warrants from paid in capital to derivative liability on October 1, 2009.
As of September 30, 2013, the fair value of the derivative liability was valued at $206,345, which resulted in other income of approximately $26,000. The Company used the Black-Scholes option pricing model to determine the fair value of the warrants as of September 30, 2013
Mandatorily Convertible Preferred Stock
The Company’s restated certificate of incorporation filed on September 18, 2008 authorizes 10,000,000 shares of Preferred Stock with a par value of $0.0001 and a stated value of $10.00. The Mandatorily Convertible Preferred Stock had the following terms:
Preferred Stock Issued During 2008:
On September 24, 2008, the Company issued Plant Offshore Group Limited ("POGL") 917,168 shares of its Series A Preferred Stock in exchange for $9,171,680 of trade payables due POGL by the Company.
Preferred Stock Issued During 2009:
On July 20, 2009, the Company issued Oilcorp International Limited ("Oilcorp") 2,211,166 shares of its Series A Preferred Stock in exchange for $22,111,660 in trade payables due Oilcorp by the Company.
Preferred Stock Issued During 2011:
On August 23, 2011, the Company issued Plant Offshore Group Limited ("POGL") 100,710 shares of its Series A Preferred Stock in exchange for $1,007,100 of trade payables due POGL by the Company.
Effective March 20, 2012, Oilcorp disposed off 100% of the preferred stock and its rights to Well Crown Investments Limited.
Effective March 1, 2012, Plant Offshore Group Limited converted their 1,017,878 shares of the Company preferred stock with the entitled 8% cumulative accrued dividends as of February 29, 2012, into 11,965,875 shares of the Company’s common stock. The conversion is based on the price of $1.00 per common stock as per the preferred stock subscription agreement.
Effective March 31, 2012, Well Crown Investments Limited converted their 2,211,166 shares of the Company preferred stock with the entitled 8% cumulative accrued dividends as of March 31, 2012, into 26,890,203 shares of the Company common stock. The conversion is based on the price of $1.00 per common stock as per the latest common stock subscription’s price and the lack of trading activity during a 10 days period.
Dividend Provisions
The holders of the Series A Preferred Stock accrue dividends at the rate of 8% per share per annum. Dividends are cumulative, accrue on a quarterly basis commencing one year from the date of issuance (the "Commencement Date") and when declared will be paid with the Company's common stock at a conversion rate of $1.00 per common share. Dividends will accrue from the commencement date until the preferred shares have been converted into debt or common stock as described below. If dividends on the Series A Preferred Stock have not been paid or declared, the deficiency shall be paid or declared before any dividend is declared for common stock. Dividends in arrears do not bear interest. The Company has not declared any dividends on the Series A Preferred Stock outstanding. All of the accumulated dividends totaling $6,565,638 were converted into common stock in 2012.
Liquidation Rights
Upon the occurrence of a voluntary or involuntary liquidation (including consolidations, mergers or sale of assets as defined by the Preferred Stock agreement), if the remaining net assets of the Company are sufficient, the holders of the Series A Preferred Stock shall be paid no less than liquidation value plus all dividends in arrears (whether or not declared), out of the assets of the Company legally available for distribution to its stockholders, before any payment or distribution is made to any holders of Common Stock.
If upon any liquidation or dissolution, the remaining net assets of the Company are insufficient to pay the amount that the Series A Preferred Stock holders are due as indicated above, the holders of Series A Preferred Stock will share ratably in any distribution of the remaining assets of the Company.
Voting Rights
Series A Preferred Stock holders do not have voting rights, however the Company is prohibited, without obtaining the approval of the each of the holders of the preferred stock, from altering or adversely changing the powers, preferences or rights given to the preferred stock, or amended the certificate of designation governing the preferred stock.
Automatic Conversion into Common Stock
If at any time during the first 12 months following the issuance of preferred stock, the Company's common stock begins trading on a stock exchange, market or other trading facility, the issued and outstanding Preferred Stock will immediately convert, on a 10:1 basis, into shares of common stock. If at any time afterward, until such time as the preferred stock has been converted into debt, as described below, the Company's common stock begins trading on a stock exchange, market or other trading facility, the issued and outstanding Preferred Stock will immediately convert, on a 10:1 basis, into shares of common stock.
Optional Conversion into Debt Instrument
One year after issuance date, preferred Stockholders have the right to convert all their shares of Preferred Stock into a debt obligation of the Company (the "Debt Conversion") at the rate of $10 per preferred share. Interest on the principal amount of the debt will be paid at the rate of 8%, payable quarterly in arrears, by issuing Company common shares at a conversion rate of $1.00 per common share. The holder has the right to receive up to 25% of the Company's net income after taxes, as defined in the Company's annual audited financial statements until the full amount of the debt has been repaid or until the Company's common stock begins trading on a stock exchange, market or other trading facility, at which time the remaining outstanding debt amount will automatically convert in shares of the Company's common stock at a conversion price of $1.00 per common share.
Oilcorp Supplemental Agreement
At the time of the signing of the subscription agreement, the Company entered into a Supplemental Agreement with Oilcorp agreeing to preferential debt service payments in the case of Oilcorp's optional conversion from preferred stock to debt as well as certain price protections in the case of Oilcorp's automatic conversion from preferred stock or debt to the Company's common stock. The terms of the Supplemental Agreement also requires that dividends at rate of 8% per annum are to be accrued as of the date of closing, July 20, 2009.
If Oilcorp decides to take the optional conversion to debt they are contractually entitled to 50% of the Company's net income after tax for payment of principal on the debt until either the debt is fully paid or until the Company begins trading on a stock exchange, market or other trading facility.
If the Company is declared effective as a full-reporting company by the Securities and Exchange Commission and begins trading on a stock exchange, market or other trading facility, whatever amount of Oilcorp's debt or preferred stock may be outstanding will automatically convert to the Company's common stock.
NOTE 8-RELATED PARTY TRANSACTIONS
The Company has significant contracts with subsidiaries which are also common stockholders to construct its biodiesel plants (see "Note 12 - Commitments and Contingencies" for additional information regarding these contracts). Cash flows remitted by the Company to the contractors are treated as financing in nature given the significant lag time between the timing of work completed, and the payment or conversion of outstanding billings.
Advances totaling $24,494 and $25,779 from Plant & Offshore Technology Sdn. Bhd., an indirect subsidiary of Plant Offshore Group Limited (“POGL”), are included in accounts payable, related parties at September 30, 2013 and 2012, respectively.
Oilcorp is a vendor currently engaged by the Company to provide engineering and design services in connection with the on-going construction of a biodiesel plant in Indonesia (see "Note 7 - Stockholders' Equity" for additional information with respect to the terms of the Company's Series A Preferred Stock issued to Oilcorp in exchange for trade payables related to these services). Accounts payable to various subsidiaries of Oilcorp, totaled $68,027 and $71,594 are included in accounts payable, related parties at September 30, 2013 and 2012, respectively.
Accounts payable, related party in the Company's accompanying balance sheet includes $808,810 and $538,966 of amounts payable to directors or shareholders of Renewable Fuel's consolidating companies as of September 30, 2013 and 2012, respectively.
Amounts payable to other related parties were $1,021 and $1,099 as of September 30, 2013 and 2012, respectively.
On February 2, 2010 the Company entered into a share exchange agreement with Dakap Capaian Sdn. Bhd., a company wholly-owned and controlled by two of the Company's shareholder-directors (see "Note 3 - Spin off Plant Biofuels Corporation" for additional information in respect to the transaction). As of September 30, 2013, the Company has accounts receivable totaling $11,493 from Dakap Capaian Sdn Bhd related to expenses incurred in connection with the February 2010 share exchange agreement.
NOTE 9-INCOME TAXES
The Company conducts all of its operating business through its United States parent, Renewable Fuel, and its seven operating subsidiaries as follows: United States (2), Malaysia (3) and Indonesia (2). The Company plans to file a consolidated United States income tax return for Renewable Fuel. The Company's five foreign subsidiaries are governed by the tax laws of the local country and file local returns, as required.
The Company recorded no US Federal income tax for the years ended September 30, 2013 and 2012 and for the period October 1, 2006 (inception) through September 30, 2013. The income tax is different from applying the statutory US income tax rate of 34% to the net loss before taxes as a result of the following items:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of September 30 are as follows:
Based on continuing losses, management has determined that it is more likely than not that the Company will not realize the benefits of its domestic deferred tax assets and therefore has recorded a valuation allowance against the deferred tax asset.
At September 30, 2013, the Company had approximately $4.6 million in net operating loss carry forwards, of which $1.3 million was generated in the Company's US operations. The US federal net operating loss carry-forwards, if not utilized, will begin to expire in 2028, while the Indonesian related net operating losses begin to expire after five years and the Malaysian net operating losses can be carried forward indefinitely.
The Company is not in compliance with all income tax filings. The Company may be subject to fines and penalties of up to $120,000 related to certain late filings. RFC plans to file all necessary returns during FY2014 and will appeal any fines assessed. The Company has reviewed the range of likely outcomes and determined that it is more likely than not that they will not ultimately be required to pay such penalties. As such, the Company has not accrued any liability for these potential fees in the accompanying financial statements.
NOTE 10-OPERATING SEGMENTS
The Company reports its operating segments based on geographical location of future biodiesel refining activities, which include Malaysia, Indonesia and corporate activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy and other administrative costs, including management service expenses.
The following table represents the significant items by operating segment for the results of operations for the years ended and as of September 30, 2013 and 2012:
(a)
Corporate and other includes income/(expense) not associated with the business segments, such as corporate general and administrative expenses, shared service expenses, interest expense and interest income, all reflected on an accrual basis of accounting.
(b)
Corporate and other includes cash and other assets not associated with the business segments.
NOTE 11-LEASES
The Company leases equipment and vehicles from various parties under capital lease agreements that expire through October 2015. The total amount financed through under these capital leases was $84,000 and $88,000 at September 30, 2013 and 2012, respectively. Accumulated amortization on these leases was $95,000 and $89,000 at September 30, 2013 and 2012, respectively. Amortization of assets recorded under capital leases is included in depreciation expense. The current and long-term portion of the capital leases have been recorded in "Other current liabilities" and "Other long-term liabilities," respectively on the consolidated balance sheets. The current and long-term portions of capital leases as of September 30, 2013 and 2012 were as follows:
The Company also has non-cancelable operating leases that expire through June 2016. Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent and rent concessions.
In addition, the Company owns fully-paid-up leasehold interests in land in Kuantan, Malaysia and Dumai, Indonesia under 99-year and 20-year leases. To date, individual issued document of title have not been issued by the relevant authorities for the said land. The category of land use of the said land is for “industry”. There is a restriction-in-interest on the said land in that the said land shall not be transferred, charged, lease, sub-lease or otherwise in any manner dealt with or disposed off without the written sanction of the relevant authority.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and the future minimum lease payments as of September 30, 2013 are as follows:
Rental expense for operating leases was $20,500 for the years ended September 30, 2013 and 2012, respectively.
NOTE 12-CAPITAL COMMITMENTS AND CONTINGENCIES
On January 18, 2007 PBC entered into an agreement with Oil-Line Engineering & Associates Sdn Bhd ("OLEA"), a subsidiary of Oilcorp, whereby OLEA would provide engineering, procurement and construction management of a 60 MGA, CPO feedstock biodiesel facility in Malaysia. The contract price indicated a cost of approximately $38 million. At September 30, 2012 construction on the Kuantan plant was substantially complete.
On March 6, 2007 Optimis entered into an agreement with OLEA, whereby OLEA would provide engineering, procurement and construction management of a 60 MGA, CPO feedstock biodiesel facility in Indonesia. The contract price indicated a cost of approximately $38 million. On August 5, 2008 the Company entered into a Supplement Agreement with OLEA to expand the capabilities of the subject plant to accept multiple types of feedstock. The adjusted contract indicates a cost of approximately $65 million.
On December 12, 2008 Century entered into an agreement with Plant & Offshore Technology Sdn Bhd, an indirect subsidiary of POGL, whereby POGL would provide engineering, procurement and construction management of a 60 MGA, multi-feedstock biodiesel facility in Indonesia. The contract price indicates a cost of approximately $66 million. On August 23, 2011 the contract has been terminated due to the contract period has expired.
As of September 30, 2013, the Company was not subject to any material legal proceedings. From time to time, however the Company is named as a defendant in legal actions arising from normal business activities with customers, vendors and business partners. Although the Company cannot accurately predict the amount of its liability, if any, that could arise with respect to currently pending legal actions, it is not expected that any such liability will have a material adverse effect on the Company's financial position, operating results or cash flows.
NOTE 13-SUBSEQUENT EVENTS
The Company has performed an evaluation of subsequent events through the date the financial statements were issued.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), the Chief Executive Officer and Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report.
The management has evaluated the effectiveness of the disclosure controls and procedures as of September 30, 2013 (under the supervision and with the participation of the Chief Executive Officer and the Principal Accounting Officer), pursuant to Rule13a-15(b) promulgated under the Exchange Act. As part of such evaluation, management considered the matters discussed below relating to internal control over financial reporting. Based on this evaluation, the Company's Chief Executive Officer and Principal Accounting Officer have concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2013 due to lack of employees to segregate duties related to preparing the financial reports. Management is attempting to correct this weakness by raising additional funds to hire additional employees.
(b) Management’s Annual Report on Internal Control over Financial Reporting.
The management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of 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 due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness relates to the lack of segregation of duties in financial reporting, as accounting functions in Malaysia are performed by individuals lacking appropriate oversight by those with accounting and financial reporting expertise. The officers of the Company do not possess accounting expertise and our company does not have an audit committee. This weakness is due to the company’s lack of working capital to hire additional staff. To remedy this material weakness, management is considering hiring additional staff or outsourcing some or all of the Company’s accounting functions to those with the appropriate level of accounting expertise.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
The Company’s management carried out an assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2013. The Company’s management based its evaluation on criteria set forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management has concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2013.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our directors and executive officers are as follows:
Mr. Van Vliet joined us in November 2007 as Chairman of the Board and Chief Executive Officer and continues to serve in those positions. In January, 1994 Mr. Van Vliet was founder and CEO of Universal Communications Network which grew to one of the top 10 technology companies in the Telecommunications / IT Sector in the late 90’s. He sold the company in November 1998. In April 1999 Mr. Van Vliet founded Bridgeport Energy Corp. which provided consulting services to start-up companies and investors interested in acquisitions in the technology sector and he currently maintains private interests in several businesses involved in the telecommunications, technology and ornamental agriculture industries. As a member of the Board Mr. Van Vliet’s experience launching successful international startup companies in other industries brings valuable leadership to our Board
Mr. Henderson joined us in December 2007 as President and Director and continues to serve in those positions. From November 2003 to December 2007, he was Executive Vice President and Director of Global Touch Telecom LLC, a Voice over Internet technology provider and is currently a principal in White Buffalo Ventures LLC a social networking company, and SV Partners LLC, a management consulting company. He received a Bachelor of Science in Marketing, N. Illinois Univ., 1968. Mr. Henderson has significant senior management experience in other companies and he contributes the benefit of his executive leadership and management experience to our Board.
Mr. Cho joined us in November 2007 as Director & VP International Affairs. From July 2006 to November 2007, he was Director & General Manager of Konsortium Perikanan Nasional Berhad, a fisheries business. From May 1989 to March 2006, he was General Manager of JVC Video Malaysia Sdn Bhd, a manufacturing company. He earned a B. Econs, University of Malaya, 1985 and an MBA (Finance), Malaysia Multimedia University, 2007. As a member of the board, Mr. Cho contributes the benefits of his executive leadership and management experience
Mr. Tan joined us from November 2007 to September 2012 as Director. From August 2003 to date, he has been Director of Plant Biofuels Corp Sdn Bhd. A company involved in production of biodiesel and refined glycerin. From March 1995 to June 2001, he was Sales Director of Unimech Project Sdn Bhd, a trading company. As a member of the board, Mr. Tan contributes his knowledge of the operating company and his substantial experience developing corporate strategy, assessing emerging industry trends, and business operations. On September 29, 2012, Mr. Tan passed away peacefully.
Term of Office
The board of directors elects our executive officers annually. A majority vote of the directors who are in office is required to fill vacancies. Each director shall be elected for the term of one year, and until his successor is elected and qualified, or until his earlier resignation or removal according to our bylaws and the provisions of the Nevada Revised Statutes.
Legal Proceedings Involving Directors, Executive Officers and Certain Beneficial Owners
Except as set forth above, no officer, director, or persons nominated for such positions, promoter or significant employee has been involved in the last ten years in any of the following:
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Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time,
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Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses),
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Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities,
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Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
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Having any government agency, administrative agency, or administrative court impose an administrative finding, order, decree, or sanction against them as a result of their involvement in any type of business, securities, or banking activity.
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Being the subject of a pending administrative proceeding related to their involvement in any type of business, securities, or banking activity.
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Having any administrative proceeding been threatened against you related to their involvement in any type of business, securities, or banking activity.
Family Relationships
There are no family relationships between or among any of our officers and directors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, all executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports in a timely manner during fiscal year ended September 30, 2014.
Code of Ethics and Business Conduct
RFC has not yet adopted a code of ethics applicable to our chief executive officer, who is our principal executive officer, our chief financial officer, principal accounting officer or controller or persons performing similar functions. The Board of Directors intends to adopt a Code of Ethics in the near future, which will be filed with the Securities and Exchange Commission.
Directors Independence
The Company’s common stock is quoted on the OTC Bulletin Board inter-dealer quotation system, which does not have director independence requirements. Under NASDAQ Rule 4200(a)(15), a director is not considered to be independent if he or she is also or has been an executive officer or employee of the corporation. As such, currently none of the Company’s directors are classified as independent directors under this definition.
Committees of the Company’s Board of Directors
We currently have no compensation committee or other board committee performing equivalent functions. Currently, all members of our board of directors participate in discussions concerning executive officer compensation.
Meetings of Directors
There were no meetings of the Board of Directors during the last full fiscal year and all actions taken by the Board of Directors were taken by consent resolution. The Company did not hold an annual meeting of the Company’s security holders during the prior fiscal year and does not have a policy requiring attendance by members of the Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows the compensation paid or accrued during the fiscal years ended September 30, 2013 and 2012, to our corporate officers.
SUMMARY COMPENSATION TABLE
(1)
Cho Nam Sang’s salary was 62,400 MYR & 250,000 MYR (Malaysian Ringgit) for 2013 and 2012, approximately $19,529 and $94,288 respectively based on the exchange rate of RM > USD = 3.1952 and RM > USD = 3.03597 as of September 30, 2013 and 2012 respectively.
The above compensation amounts include amounts paid and accrued. However, not all compensation amounts have been paid at September 30, 2013. At that date collectively, William Van Vliet is owed $138,848, Cho Nam Sang is owed approximately $68,181 and Richard is owed $62,139 in salaries.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information for our executive officers concerning unexercised options, stock that has not vested, and equity incentive plan awards as of September 30, 2013.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END SEPTEMBER 30, 2013
* Expiration Dates range from November 2014 through June 2025.
Employment Contracts
On November 1, 2007, the Company entered into employment agreements with our Chief Executive Officer to formalize the Company’s arrangement. The term of the contract is five years unless terminated by either party. Compensation for William Van Vliet are set at cash of $10,000 per month, together with 2% Share Bonus Compensation and 5% Option Compensation respectively, in the event the Company enters into an equity transaction.
Director Compensation
We currently have no formal plan for compensating our directors for their services in their capacity as directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
At October 19, 2012 we had 213,282,443 shares of our common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of October 19, 2012, by:
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each person known by us to be the beneficial owner of more than 5% of our common stock;
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each of our directors;
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each of our named executive officers; and
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our named executive officers, directors and director nominees as a group.
Unless otherwise indicated, the business address of each person listed is 7251 West Lake Boulevard Suite 300, Las Vegas, Nevada 89128, USA and 31C-3 Kelana Mall, Jalan SS6/12, 47301 Petaling Jaya, Selangor, Malaysia. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
(1)
Mr. Ahmad’s shareholdings include (a) 5.4 million shares held individually; and (b) as a corporate representative of Bio-Aspect Sdn Bhd which held 25 million shares.
(2)
Mr. Badrul’s shareholding is held via Richway International Group Limited.
(3)
Mr. Raghbir’s shareholding is held via Premium Oleo Industries Sdn Bhd.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended September 30, 2013 and 2012 were $20,000 and $38,600, respectively.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Company currently does not have a designated Audit Committee, and accordingly, the Company’s Board of Directors’ policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company’s Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements of Renewable Fuel Corp under Item 8 of Part II hereof.
(2) Consolidated Financial Statement Schedules
(i) Report Of Independent Registered Public Accounting Firm on Financial Statement Schedule:
PMB Helin Donovan, LLP, as of September 30, 2013 and the year then ended.
(3) Exhibits
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Company caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 1, 2014
By:
/s/ William Van Vliet
William Van Vliet,
Chairman, CEO.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints William Van Vliet and Teo Guan Joo, and each of them individually, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, including among other things, all amendments thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them individually, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Date: February 1, 2014
By:
/s/ William Van Vlietr
William Van Vliet,
Principal Executive Officer
Date: February 1, 2014
By:
/s/ Teo Guan Joo
Teo Guan Joo,
Principal Financial Officer