As of July 14, 2014, the registrant has 11,435,431 shares of Common Stock issued and outstanding.
NOTE 8 - STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 75,000,000 shares of Common Stock with a par value of $0.001 and had 7,231,417 and 11,435,431 shares of Common Stock issued and outstanding as of November 30, 2013 and May 31, 2014, respectively.
| |
|
No. of Shares
|
|
|
Price per Share
|
|
|
Common Stock
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Balance as at November 30, 2013
|
|
|
7,231,417
|
|
|
|
|
|
|
December 2013 Private Placement
|
|
|
1,081,161
|
|
|
$
|
2.00
|
|
|
January 3, 2014 Issuance for services rendered
|
|
|
25,000
|
|
|
$
|
3.49
|
|
|
January 10, 2014 Issuance for cash and services rendered
|
|
|
50,000
|
|
|
$
|
2.50
|
|
|
January 17, 2014 Issuance for loan settlement
|
|
|
34,688
|
|
|
$
|
3.69
|
|
|
January 28, 2014 Issuance for services rendered
|
|
|
25,000
|
|
|
$
|
3.55
|
|
|
March 13, 2014 Series A-2 Preferred Stock conversions and accrued dividends
|
|
|
21,648
|
|
|
$
|
2.27
|
|
|
March 17, 2014 Series A-1 Preferred Stock conversions and accrued dividends
|
|
|
123,528
|
|
|
$
|
2.25
|
|
|
May 1, 2014 Issuance for services rendered
|
|
|
25,000
|
|
|
$
|
2.45
|
|
|
May 9, 2014 Series A-2 Preferred Stock conversion and accrued dividends
|
|
|
10,989
|
|
|
$
|
2.27
|
|
|
May 9 and 19, 2014 Placement Agent Warrant exercises
|
|
|
7,000
|
|
|
$
|
2.00
|
|
|
May 27, 2014 Underwritten public offering issuance
|
|
|
2,500,000
|
|
|
$
|
2.00
|
|
|
May 28, 2014 Underwritten public offering over-allotment issuance
|
|
|
300,000
|
|
|
$
|
2.00
|
|
|
Balance as at May 31, 2014
|
|
|
11,435,431
|
|
|
|
|
|
December 2013 Private Placement
During the month of December 2013 the Company issued a total of 1,081,161 units (each a “Unit”) to accredited investors at a price of $2.00 per Unit under a private placement and raised net proceeds of approximately $1.87 million, after deducting the sales commission and fees (the “December 2013 Private Placement”). Each Unit consists of one share of Common Stock and one five year Common Stock Warrant to purchase one share of Common Stock at an exercise price of $4.00 per share (“Common Stock Warrant”). (see Stock Warrant Table below).
In connection with the December 2013 Private Placement, the Company issued compensatory warrants (the “Placement Agent Warrant”) to the Placement Agents for the offering exercisable for an aggregate of 108,116 Units. Each of these warrants is exercisable to acquire a Unit at an exercise price of $2.00 per Unit. The fair value of these warrants at the grant date was $257,553. This amount was estimated using the Black-Scholes option pricing model with an expected life of 5 years, risk free interest rates between 1.66% and 1.74%, a dividend yield of 0%, and an expected volatility of 75%. (see Stock Warrant Table below).
January 3, 2014 Issuance for services rendered
On January 3, 2014, the Company issued 25,000 shares of Common Stock in the second installment quarterly payment of consulting fees for services to be rendered by a consultant which were valued at $87,250, based on the closing market price of $3.49 per share on the day of issuance.
January 10, 2014 Issuance for cash and services rendered
On January 10, 2014, the Company sold 50,000 Units to an accredited investor in a private placement for a purchase price of $125,000 (or $2.50 per Unit) of which $100,000 was paid in cash and $25,000 was settled through services rendered to the Company, which was included in the selling, general and administrative expenses. The aggregate fair value of the Units sold in this offering was $310,000 (or $6.20 per Unit), based on the closing market price of $3.58 per share of Common Stock on the day of issuance, and the fair value of the Common Stock Warrants of $2.62 per warrant. The fair value of the Common Stock Warrants was estimated using the Black-Scholes option pricing model with an expected life of 5 years, risk free interest rates of 1.64%, a dividend yield of 0%, and an expected volatility of 100%. The excess of the estimated fair value over the purchase price in the amount of $185,000 is included in the selling, general and administrative expenses. (see Stock Warrant Table below).
January 17, 2014 Issuance for loan payment
On January 17, 2014, the Company issued 34,688 shares of Common Stock to a note holder at $3.69 per share of Common Stock in conversion of $128,000 of a note payable by the Company (See Note 6, Promissory - (ii)).
January 28, 2014 Issuance for services rendered
On January 28, 2014, the Company issued 25,000 shares of Common Stock in payment of consulting fees for services to be rendered by a consulting corporation for a term of one year. These shares of Common Stock were valued at $88,750, based on the closing market price of $3.55 per share on the date of issuance, of which $29,583 is included in prepaid expenses as at May 31, 2014.
March 13, 2014 Series A-2 Preferred Stock Conversions
On March 13, 2014, two holders of our Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”) converted 20,876 shares of outstanding Series A-2 Preferred with an aggregate stated value of approximately $49,139 (including accrued dividends of $1,750) into 21,648 shares of Common Stock at a price of $2.27 per share.
March 17, 2014 Series A-1 Preferred Stock Conversions
On March 17, 2014, two holders of our Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”) converted 117,646 shares of outstanding Series A-1 Preferred with an aggregate stated value of approximately $293,235 (including accrued dividends of $13,235) into 123,528 shares of Common Stock at a price of $2.25 per share.
May 1, 2014 Issuance for services rendered
On May 1, 2014, the Company issued 25,000 shares of Common Stock in the third quarterly installment payment of consulting fees for services to be rendered by a consultant which were valued at $61,250, based on the closing market price of $2.45 per share on the date of issuance, of which $45,813 is included in prepaid expenses as at May 31, 2014.
May 9, 2014 Series A-2 Preferred Stock Conversion
On May 9, 2014, a holder of our Series A-2 Preferred converted 10,438 shares of outstanding Series A-2 Preferred with an aggregate stated value of approximately $26,250 (including accrued dividends of $1,250) into 10,989 shares of Common Stock at a price of $2.27 per share.
May 9 and 19, 2014 Placement Agent Warrants Exercises
On May 9 and 19, 2014, two holders of Placement Agent Warrants exercised their warrants for an aggregate of 7,000 Units at a price of $2.00 per Unit or an aggregate stated value of $14,000, which included 7,000 shares of Common Stock and 7,000 Warrants (each at an exercise price of $4.00).
May 27, 2014 Underwritten Public Offering Issuance
On May 27, 2014, the Company closed an underwritten public offering of 2,500,000 shares of Common Stock and raised net proceeds of $4.5 million, after deducting Underwriter’s fees and estimated offering expenses. Under the terms of the Underwriting Agreement, the Underwriter had an option through June 26, 2014, to purchase up to an additional 375,000 shares of Common Stock under the same terms as the public offering to cover over-allotments (the “Over-Allotment Option”), if any.
May 28, 2014 Underwritten Public Offering Over Allotment Issuance
On May 28, 2014, the Underwriter partially exercised the Over-Allotment Option for 300,000 shares of Common Stock raising approximately $550,000 of additional net proceeds for the Company.
PREFERRED STOCK
The Company is also authorized to issue up to 10,000,000 shares of preferred stock with a par value of $0.001 per share, from time to time in one or more series, without shareholder approval, when authorized by its board of directors (the “Board”). As of each of November 30, 2013 and May 31, 2014, the Board has designated 152,519 shares of Series A-1 Preferred and 134,341 shares of Series A-2 Preferred. As of November 30, 2013, 138,654 shares of Series A-1 Preferred and 122,128 shares of Series A-2 Preferred were issued and outstanding (for a total of 260,782 shares outstanding as of November 30, 2013). During the six months ended May 31, 2014, 117,646 shares of Series A-1 Preferred and 31,314 shares of Series A-2 Preferred were converted into shares of Common Stock. As of May 31, 2014, 21,008 shares of Series A-1 Preferred and 90,314 shares of Series A-2 Preferred were issued and outstanding (for a total of 111,822 shares outstanding as of May 31, 2014). Collectively, the Series A-1 Preferred and the Series A-2 Preferred are referred to herein as the “Series A Preferred Stock.”
As at May 31, 2014, on the Series A Preferred Stock had total accumulated dividends of $16,668, none of which have been declared by the Board or accrued (May 31, 2013 - $nil).
STOCK WARRANT TABLE:
| |
Grant Date
|
|
Exercise Period
|
|
No of Warrants
|
|
|
Exercise Price per share
|
|
|
Fair Value of Broker Warrants
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at November 30, 2013
|
|
|
|
|
|
2,678,872
|
|
|
|
|
|
|
|
|
Common Stock Warrants issued – Private Placement
|
Dec. 20, 2013
|
|
5 years from grant date
|
|
|
1,081,161
|
|
|
$
|
4.00
|
|
|
|
|
|
Placement Agent Warrant – Private Placement
|
Dec. 20 2013
|
|
5 years from grant date
|
|
|
108,116
|
|
|
$
|
2.00
|
|
|
$
|
257,553
|
|
|
Placement Agent Warrant – Private Placement (November 27, 2013)
|
Dec. 20 2013
|
|
5 years from grant date
|
|
|
5,000
|
|
|
$
|
2.00
|
|
|
$
|
6,403
|
|
|
Common Stock Warrant issued-accredited investor
|
Jan. 10, 2014
|
|
5 years from grant date
|
|
|
50,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
Placement Agent Warrant exercise
|
|
|
|
|
|
(7,000)
|
|
|
$
|
2.00
|
|
|
|
|
|
|
Common Stock Warrant issued upon exercise of Placement Agent Warrant
|
May 9 and 14, 2014 |
|
Dec. 20, 2018
|
|
|
7,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
Balance as at May 31, 2014
|
|
|
|
|
|
3,923,149
|
|
|
|
|
|
|
|
|
|
NOTE 9 - STOCK-BASED COMPENSATION
The Company's Amended and Restated the 2008 Directors, Officers and Employees Stock Option Plan, which was originally approved by the stockholders at the annual general meeting of the Company held on December 5, 2007, and subsequently amended by the stockholders on July 23, 2008. This plan was established to enable the Company to attract and retain the services of highly qualified and experienced directors, officers, employees and consultants and to give such persons an interest in the success of the Company and its subsidiaries. The total number of shares currently authorized under the plan is 391,134. The options and awards will be granted at the discretion of the Board of Directors. Options issued under the plan that are deemed to be incentive stock options will be priced at not less than 100% of the fair market value of the common shares at the date of the grant, subject to certain limitations for 10 percent stockholders. The fair value of each option granted was estimated at the time of grant using the Black-Scholes option pricing model. There were no options granted during the six months ended May 31, 2013 and 2014.
All the grants vest quarterly over a two year period and expire on the tenth anniversary of the grant date. The following table summarizes the stock option activities of the Company.
| |
|
Number of options
|
|
|
Outstanding as of November 30, 2012
|
|
|
383,310
|
|
|
Granted
|
|
|
10,000
|
|
|
Exercised
|
|
|
—
|
|
|
Cancelled/forfeited
|
|
|
(27,379)
|
|
|
Outstanding as of November 30, 2013
|
|
|
365,931
|
|
|
Granted
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
Cancelled/forfeited
|
|
|
(5,215)
|
|
|
Outstanding as of May 31, 2014
|
|
|
360,716
|
|
The stock-based compensation for the three and six months ended May 31, 2014 was $2,824 and $7,696 (six months ended May 31, 2013 - $28,150 and $66,632). The Company recorded this in selling, general and administrative expenses with the corresponding credit to additional paid-in capital.
As of November 30, 2013 the Company has a total of 365,931 options outstanding to purchase Common Stock held by employees, directors and advisory board members, of which 353,922 are vested and exercisable. All of these outstanding stock options have an exercise price above the average market price. As of November 30, 2013, the total fair value of the options granted to employees at the respective grant dates was $1,476,973, of which the unrecognized portion of $13,088 related to the unvested shares associated with these stock option grants will be recognized over a period of two years.
As of May 31, 2014 the Company has a total of 360,716 options outstanding to purchase Common Stock held by employees, directors and advisory board members, of which 354,466 are vested and exercisable. All of these outstanding stock options have an exercise price above the average market price. As of May 31, 2014, the total fair value of the options granted to employees at the respective grant dates was $1,476,973, of which the unrecognized portion of $5,392 related to the unvested shares associated with these stock option grants will be recognized over a period of 18 months.
2012 Option Plan:
Under the Company’s 2012 Directors, Officers and Employees Stock Option Plan (the “2012 Plan”), the Company granted a total of 100,000 options to purchase Common Stock to its four independent directors and chief financial officer on April 2, 2013. The total number of shares currently authorized under the plan is 400,000. The options and awards will be granted at the discretion of the Board. Options issued under this plan that are deemed to be incentive stock options will be priced at not less than 100 percent of the fair market value of the shares of Common Stock underlying the options at the date of the grant, subject to certain limitations for 10 percent stockholders. The fair value of each option granted was estimated at the time of grant using the Black-Scholes option pricing model.
All the options granted under the 2012 Plan, vest yearly at the rate of one-third per year, starting on the first year anniversary of the grant date and expire on the fifth anniversary of the grant date. The following table summarizes the stock option activities of the Company.
|
Outstanding as of November 30, 2012
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
Exercised
|
|
|
—
|
|
|
Cancelled/forfeited
|
|
|
—
|
|
|
Outstanding as of November 30, 2013
|
|
|
100,000
|
|
|
Granted
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
Cancelled/forfeited
|
|
|
—
|
|
|
Outstanding as of May 31, 2014
|
|
|
100,000
|
|
The share-based compensation for the three and six months ended May 31, 2014 was $44,026 and $88,052 (three and six months ended May 31, 2013 - $nil and $nil). The Company recorded this in selling, general and administrative expenses with the corresponding credit to additional paid-in capital.
As of November 30, 2013 the Company has granted options to purchase a total of 100,000 shares of Common Stock at an exercise price of $3.94 per share, to its four independent directors and chief financial officer, all of which are currently outstanding and of which none are vested and exercisable. All of these outstanding stock options have an exercise price equal to the fair market price on the date of grant. As of November 30, 2013, the total fair value of the options granted to the independent directors and chief financial officer at the respective grant dates was $292,174, of which the unrecognized portion of $186,022 related to the unvested shares associated with these stock option grants will be recognized over a period of three years.
As of May 31, 2014 the Company has granted a total of 100,000 options to purchase Common Stock to employees, directors and advisory board members, all of which are currently outstanding and of which none are vested and exercisable. All of these outstanding stock options have an exercise price above the average market price. As of May 31, 2014, the total fair value of the options granted at the respective grant dates was $292,174, of which the unrecognized portion of $97,970 related to the unvested shares associated with these stock option grants will be recognized over a period of two years.
NOTE 10 - FAIR VALUE MEASUREMENTS, CONCENTRATIONS AND RISK
a) The Company's cash and cash equivalents, which are carried at fair values, are classified as a level 1 financial instrument at November 30, 2013 and May 31, 2014.
b) The Company is exposed to the following concentrations of risk:
Major Customers
Two major customers comprised 66% and 68% of total revenue for the three and six months ended May 31, 2014 (three and six months ended May 31, 2013 - two major customers comprised 66% and 22% of total revenue).
As at November 30, 2013, the accounts receivable balance from the two major customers was $659,902 and $26,083 respectively. As at May 31, 2014, the accounts receivable balance from two major customers was $Nil and $39,740 respectively.
Major Vendors
The Company has an exclusive agreement to manufacture biodiesel processor equipment with a third party equipment manufacturer. During the three and six months ended May 31, 2014, the Company made purchases of $nil and $nil (three and six months ended May 31, 2013 - $nil and $45,893) from this equipment manufacturer. As of November 30, 2013 and May 31, 2014, the Company had accounts payable of $21,856 and $6,837 owing to this equipment manufacturer, respectively.
The Company’s major purchases of feedstock oil and biodiesel from third parties for the three and six months ended May 31, 2014 were $nil and $nil (three and six months ended May 31, 2013 – three major vendors comprising total purchases of $1,051,843 and $1,566,918).
As at November 30, 2013, the accounts payable balance to the three major vendors were $nil, $1,053,479 and $575,043.
As at May 31, 2014, the accounts payable balance from the three major vendors was $1,046,453 (balance includes interest incurred on outstanding balance of $97,973), $nil and $352,670. These balances were paid in full subsequent to quarter end.
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having primary operations and marketing in Canada and sales in the United States. Changing political climates in Canada and the United States could have a significant effect on the Company’s business.
c) The Company's financial instruments are exposed to certain financial risks, including credit risk, currency risk and liquidity risk.
Credit Risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with institutions of high creditworthiness. The carrying value of the financial assets represents the maximum credit exposure.
The Company minimizes credit risk by routinely reviewing the credit risk of the counterparty to the arrangement and has maintained an allowance for doubtful accounts of $65,662 related to credit risk as at May 31, 2014 (as at November 30, 2013 - $30,000), which is considered adequate.
Currency Risk
The Company is exposed to the financial risk related to the fluctuation of foreign exchange rates. The Company's functional currency is U.S. dollars. A significant change in the currency exchange rates between the U.S. dollar relative to the Canadian dollar could have an effect on the Company's results of operations, financial position and cash flows. The Company has not entered into any derivative financial instruments to manage exposures to currency fluctuations.
Included in selling, general and administrative expenses are foreign currency gains (losses) for the three and six months ended May 31, 2014 of $49,576 and ($30,210) (three and six months ended May 31, 2013 of $1,579 and $75,959).
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has a planning and budgeting process in place to help determine the funds required to support the Company's normal operating requirements on an ongoing basis and its expansionary plans. The Company ensures that there are sufficient funds to meet its short-term business requirements, taking into account its anticipated cash flows from operations and its holdings of cash.
As at May 31, 2014, due in large part to the funds spent to develop and build the Sombra facility as well as minimal sales of biodiesel, the Company had a working capital deficiency of $1,270,469.
The Company anticipates that its Sombra facility will generate positive cash flows from operations and will operate profitably once full-scale commercial operations are achieved in the second half of fiscal year 2014. It is management’s opinion that the anticipated positive cash flows from operations and cash from additional financing completed in May 2014 will be sufficient to meet the Company’s cash requirements for at least the next 12 months.
As at May 31, 2014, the Company received customer deposits of $9,104 (November 30, 2013 - $8,185) against equipment to be shipped in the subsequent quarter.
NOTE 11 - COMMITMENTS
Building Leases:
Methes Canada is a party to a lease agreement for the Mississauga facility and to a sublease agreement for a unit adjacent to its Mississauga facility. On September 28, 2012, the Company re-negotiated and renewed a combined five year lease term for both of these facilities starting from January 1, 2013 to December 31, 2017. The renewed lease term provides for a two month rent free period in 2013.
As at May 31, 2014, Methes Canada must pay, in addition to other amounts such as it’s pro rata share of taxes, the following amounts over the term of the lease:
| |
|
Annual
|
|
| |
|
Minimum Rent
|
|
| |
|
|
|
|
2014
|
|
$
|
68,129
|
|
|
2015
|
|
$
|
136,259
|
|
|
2016
|
|
$
|
136,259
|
|
|
2017
|
|
$
|
136,259
|
|
|
2018
|
|
$
|
11,355
|
|
Railroad Car Leases:
As at May 31, 2014, the Company is a party to the following lease agreements for railcars at its Sombra facility:
| |
Start Date
|
|
End Date
|
|
Term
|
|
Four railcars at $3,100 per month
|
August 1, 2013
|
|
July 31, 2018
|
|
60 months
|
|
Four railcars at $3,100 per month
|
April 1, 2013
|
|
March 31, 2018
|
|
60 months
|
|
Four railcars at $ 3,600 per month
|
July 1, 2013
|
|
June 30, 2018
|
|
60 months
|
|
Four railcars at $3,140 per month
|
December 1, 2011
|
|
November 30, 2016
|
|
60 months
|
|
One railcar at $575 per month
|
January 1, 2012
|
|
December 31, 2016
|
|
60 months
|
|
One railcar at $575 per month
|
May 1, 2012
|
|
June 30, 2015
|
|
36 months
|
|
Ten railcars at $8,460 per month
|
May 1, 2013
|
|
April 30, 2018
|
|
60 months
|
|
Ten railcars at $8,510 per month
|
May 1, 2013
|
|
April 30, 2018
|
|
60 months
|
| |
|
Annual
Minimum Rent
|
|
| |
|
|
|
|
2014
|
|
$
|
186,360
|
|
|
2015
|
|
$
|
369,845
|
|
|
2016
|
|
$
|
365,820
|
|
|
2017
|
|
$
|
321,815
|
|
|
2018
|
|
$
|
147,250
|
|
NOTE 12 - CONTRIBUTION AGREEMENTS WITH MINISTER OF NATURAL RESOURCES OF CANADA
Mississauga Facility:
In 2009, the Company entered into a Non-Refundable Contribution Agreement with the Minister of Natural Resources of Canada for the Mississauga facility under the ecoENERGY for Biofuels program. Under this agreement, the Company may receive up to $4,989,643 (CDN$5,410,000) in the years from 2009 to 2016 from the Canadian government in biodiesel production incentives when biodiesel is produced and sold. The contribution from the Canadian Government is non-refundable by the Company.
For the three and six months ended May 31, 2014, the Company claimed incentives of $nil and $nil (three and six months ended May 31, 2013 - $8,559 and $10,170). Since entering into the program to May 31, 2014, the Company has claimed total incentives of $1,485,285 and has received a total of $1,458,286.
Included in accounts receivable as at November 30, 2013 and May 31, 2014, is an amount receivable of $nil and $nil, respectively, due from the Minister of Natural Resources of Canada.
Sombra Facility:
In 2010, the Company applied for an incentive under the ecoENERGY for Biofuels program for its Sombra facility and was approved by the Canadian government. The final Contribution Agreement with the Minister of Natural Resources of Canada for the Sombra facility under the ecoENERGY for Biofuels program was signed by the Company and the Canadian Government on December 6, 2011. Under this agreement as amended, the Company may receive up to $13,636,390 (CDN$14,785,200) from the years 2012 to 2017 from the Canadian government in biodiesel production incentives when biodiesel is produced and sold. The contribution from the Canadian Government is non-refundable by the Company.
For the three and six months ended May 31, 2014, the Company claimed incentives of $25,557 and $38,592 (three and six months ended May 31, 2013 - $161,565 and $168,833). Since entering into the program to May 31, 2014, the Company has claimed total incentives of $575,467 and has received a total of $549,910.
Included in accounts receivable as at November 30, 2013 and May 31, 2014, is an amount receivable of $277,573 and $25,557, respectively, due from the Minister of Natural Resources of Canada.
NOTE 13 - SEGMENT INFORMATION
The Company reports a single operating segment, being a producer and seller of biodiesel fuel and biodiesel processing equipment.
Geographic segments:
The Company's assets and operating facilities, other than cash balances of $16,066 at November 30, 2013 and $822,978 at May 31, 2014, are all located in Canada. The Company services the majority of its customers in the United States. The Company derives its revenue geographically as follows:
| |
|
Three Months Ended May 31, 2013 |
|
|
Three Months Ended May 31, 2014 |
|
|
Six Months Ended
May 31,
2013
|
|
|
Six Months Ended
May 31,
2014
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
2,071,344 |
|
|
$ |
289,778 |
|
|
$ |
2,171,133 |
|
|
$ |
570,972 |
|
|
Canada
|
|
|
257,010 |
|
|
|
149,627 |
|
|
|
367,332 |
|
|
|
246,911 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,328,354 |
|
|
$ |
439,405 |
|
|
$ |
2,538,465 |
|
|
$ |
817,883 |
|
NOTE 14 - SUBSEQUENT EVENTS
In June 2014, the Working Capital Facility of $1,500,000, described in Note 7 was discontinued, as the Company’s management believes it no longer requires this facility.
In June 2014, the Company entered into certain derivative contracts to hedge its exposure to price risk related to feedstock oil.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report. Some of the statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. See “Cautionary Statement Regarding Forward-Looking Information” following the Table of Contents of this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a renewable energy company that offers an array of products and services to a network of biodiesel fuel producers. We also market and sell in the U.S. and Canada biodiesel fuel produced at our small-scale production and demonstration facility in Mississauga, Ontario, Canada, and at our intermediate scale production facility in Sombra, Ontario, Canada. The first of two Denami 3000 processors, designed to produce up to 6.5 million gallons per year, or mgy, of biodiesel, was placed in substantially full time production in the fourth quarter of 2013. In October 2013 we shipped more than 18 railcars (over 485,000 gallons) of biodiesel from our Sombra facility which is significantly higher than our previous highest monthly total of 8 railcars in April 2013. During the quarter ended May 31, 2014, our largest source of revenue was from the sale biodiesel fuel.
Among other services, we sell feedstock to our network of biodiesel producers, sell their output in the U.S. and Canada, provide them with proprietary software used to operate and control their processors, remotely monitor the quality and characteristics of their output, upgrade and repair their processors, and advise them on adjusting their processes to use varying feedstock and improve their output. Through the accumulation of production data from our network, we are equipped to provide consulting services to network members and other producers for operating their facilities, maintaining optimum production and solving production problems. For our network services and the license of our operating and communications software, we receive a royalty from network members based on the gallons of biodiesel produced.
Our revenue sources include the sale of biodiesel produced at our own facility, the sale of biodiesel that we purchase from network members and other third-party producers, the sale of biodiesel equipment, the sale of feedstock to network members and other third-party biodiesel producers, Canadian government incentive payments, royalties from our network members, and revenue from other services we provide related to the production of biodiesel.
As of May 31, 2014, due in large part to our investment of capital to develop, build and commission our Sombra facility as well as minimal sales of biodiesel, we had a working capital deficiency of $1,270,469. During the six months ended May 31, 2014, we incurred a loss of $3,048,284 and had negative cash flow from operations of $1,947,750. Our Sombra facility is approved by the U.S. Environmental Protection Agency ("EPA") as a Foreign Renewable Fuel Producer and as a result the biodiesel produced at this facility is eligible for export to the United States. Obtaining this approval from the EPA enables us to sell our biodiesel into the U.S., and provides our U.S. importers the ability to generate Renewable Identification Numbers ("RINs"). RINs are used in the U.S. to track compliance with Renewable Fuel Standard 2 (“RFS2”) and are generated when a gallon of biodiesel is produced or imported into the U.S. We began commercial operation at the Sombra plant in November 2012.
As of May 30, 2014, subsequent to the consummation of our initial public offering (“IPO”) on October 30, 2012, we have raised aggregate net proceeds of approximately $9.5 million from the sale of our equity securities including the following (also see Note 8):
|
●
|
net proceeds of approximately $1.5 million from our private placement completed in February 2013;
|
|
●
|
net proceeds of approximately $50,000 from our Regulation S private placement completed in August 2013;
|
|
●
|
net proceeds of approximately $473,000 from our private placement of Series A Preferred Stock completed in October 2013;
|
|
●
|
net proceeds of approximately $2.24 million from our private placement completed in December 2013;
|
|
●
|
net proceeds of approximately $125,000 (including, $25,000 of services rendered to us) from our private placement completed in January 2014; and
|
|
●
|
net proceeds of approximately $5.05 million from our public offering completed in May 2014.
|
Factors Influencing Our Results of Operations
The principal factors affecting our results of operations are as follows:
Biodiesel and feedstock price fluctuations
Biodiesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biodiesel prices have historically been correlated to petroleum-based diesel fuel prices. Accordingly, biodiesel prices have generally been affected by the same factors that affect petroleum prices, such as worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters. Recently enacted government requirements and incentive programs, such as RFS2 and the blenders' tax credit, which expired on December 31, 2013, have reduced this correlation, although it remains a significant factor in the market price of our product.
Our operating results also generally reflect the relationship between the price of biodiesel and the price of the feedstock used to produce biodiesel. Spot market prices for virgin vegetable oil or used vegetable oil or rendered animal fat may increase, which would adversely affect our gross margins. The price of vegetable oil, as with most other products made from crops, is affected by weather, disease, changes in government incentives, demand and other factors. A significant reduction in the supply of vegetable oil because of weather or disease, or increases in the demand for vegetable oil, could result in higher feedstock prices. The price of vegetable oil and other feedstock has fluctuated significantly in the past and may fluctuate significantly in the future.
Government programs related to biodiesel production and use
Biodiesel has been more expensive to produce than petroleum-based diesel fuel and as a result the industry depends on Canadian and U.S. federal and, to a lesser extent, provincial and state usage requirements and tax incentives.
On July 1, 2010, RFS2 was implemented, stipulating Renewable Volume Obligations (“RVOs”) requirements for the amount of biomass-based diesel that must be utilized in the United States each year. Under RFS2, obligated parties, including petroleum refiners and fuel importers, must show compliance with these standards. The RFS2 program required the domestic use of 800 million gallons of biodiesel in 2011, one billion gallons in 2012 and 1.28 billion gallons in 2013. The 2014 RVO was set at 1.7 billion gallons under RSF2 but the EPA is considering keeping the 2014 and 2015 RVOs at 1.28 billion gallons. The delay by the EPA in establishing the 2014 RVOs has greatly affected the demand for biodiesel so far this year. According to the National Biodiesel Board (“NBB”), 57% of their biodiesel producing members were not producing as of early June 2014.
Renewable Identification Numbers (“RINs”)
RINs are used to track compliance with RFS2 and are generated when a gallon of biodiesel is produced or imported into the U.S. In late 2011 and early 2012 the EPA announced that some U.S. producers had generated and sold invalid RINs. The loss of integrity and confidence in the RINs market affected the demand as well as the price of biodiesel. As a result, the demand for RINs from small and medium size biodiesel producers declined dramatically. As a small and medium size producer, we and our existing customers have been directly affected by this situation. A portion of the price of a gallon of biodiesel includes a dollar value attributed to RINs. If a buyer of biodiesel cannot verify the integrity of the RINs attached to the biodiesel the buyer might not want to purchase or might ask for a discount creating a situation for the producer where it is not profitable to produce biodiesel.
In February 2013, the EPA introduced a new Quality Assurance Program (“QAP”) that would allow for buyers of RINs to verify their validity. The QAP provides a clear path and system for independent third parties, approved by the EPA, to audit and monitor, on an ongoing basis, the production of biodiesel and verify that RINs have been correctly generated. The QAP, once fully in place, will be retroactive to January 1, 2013.
Seasonal fluctuations
Our operating results are influenced by seasonal fluctuations in the price of biodiesel. Our sales tend to decrease during the winter season due to perceptions that biodiesel will not perform adequately in colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean, canola or inedible corn oil. Reduced demand in the winter for our higher cloud point biodiesel may result in excess supply of such higher cloud point biodiesel or lower prices for such higher cloud point biodiesel. In addition, our production facilities are located in Canada and our costs of shipping biodiesel to warmer climates generally increase in cold weather months.
Dependence on significant customers
A large part of our revenue is generated from a few large customers. The sales to these customers are made at spot market prices, and we have no binding purchase agreements for our biodiesel, which could affect the consistency of our revenues. Potential customers for biodiesel regularly bid for biodiesel in the spot market at prices that are quoted on a daily basis. As a matter of convenience, we prefer to deal with customers with whom we have had a past relationship, although the specific customers to whom we sell have varied over time. The loss of one or more customers who have been among our largest customers historically would not have a material adverse effect on our business because we believe that a customer or customers could be replaced by one or more new customers regularly bidding for biodiesel, and we believe this will continue to be the case. For example, in the six months ended May 31, 2014, 57% of our total revenue was from one major customer who was also our largest customer during the year ended November 30, 2013. This customer accounted for 24% of our total revenue during the same period in fiscal 2013.
Lengthy sales cycle
The sale of one of our Denami processors in a particular financial period would have a significant effect on our quarter-to-quarter and year-to-year results. The purchase of our Denami processors involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with our Denami processors is typically lengthy, varying from 6 to 18 months. The lengthy sales cycles of our equipment sales, as well as the size and timing of orders, make it difficult to forecast our future results of operations.
Results of Operations
Three and six months ended May 31, 2013 and May 31, 2014
Set forth below is a summary of certain financial information for the periods indicated:
| |
|
Three Months Ended
May 31,
2013
|
|
|
Three Months Ended
May 31,
2014
|
|
|
Six Months Ended
May 31,
2013
|
|
|
Six Months Ended
May 31,
2014
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Biodiesel sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resales
|
|
$
|
415,782
|
|
|
$
|
—
|
|
|
$
|
463,496
|
|
|
$
|
124,764
|
|
|
Internal production
|
|
|
1,664,522
|
|
|
|
316,294
|
|
|
|
1,747,244
|
|
|
|
501,067
|
|
|
Feedstock sales
|
|
|
40,802
|
|
|
|
69,719
|
|
|
|
84,988
|
|
|
|
96,341
|
|
|
Glycerin sales
|
|
|
22,635
|
|
|
|
10,649
|
|
|
|
36,441
|
|
|
|
23,847
|
|
|
Government incentives
|
|
|
170,124
|
|
|
|
25,557
|
|
|
|
179,004
|
|
|
|
38,592
|
|
|
Equipment sales
|
|
|
2,657
|
|
|
|
750
|
|
|
|
2,657
|
|
|
|
1,397
|
|
|
Royalties
|
|
|
2,793
|
|
|
|
11,454
|
|
|
|
6,775
|
|
|
|
11,454
|
|
|
Others
|
|
|
9,039
|
|
|
|
4,982
|
|
|
|
17,860
|
|
|
|
20,421
|
|
| |
|
|
2,328,354
|
|
|
|
439,405
|
|
|
|
2,538,465
|
|
|
|
817,883
|
|
|
Cost of goods sold
|
|
|
2,221,184
|
|
|
|
371,921
|
|
|
|
2,410,713
|
|
|
|
664,540
|
|
|
Gross profit
|
|
|
107,170
|
|
|
|
67,484
|
|
|
|
127,752
|
|
|
|
153,343
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,476,838
|
|
|
|
1,442,291
|
|
|
|
2,767,926
|
|
|
|
2,907,700
|
|
|
Loss before interest and taxes
|
|
|
(1,369,668
|
)
|
|
|
(1,374,807)
|
|
|
|
(2,640,174
|
)
|
|
|
(2,754,357)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(122,143
|
)
|
|
|
(192,035)
|
|
|
|
(242,969
|
)
|
|
|
(293,927)
|
|
|
Loss before income taxes
|
|
|
(1,491,811
|
)
|
|
|
(1,566,842)
|
|
|
|
(2,883,143
|
)
|
|
|
(3,048,284)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(1,491,811)
|
|
|
$
|
(1,566,842)
|
|
|
$
|
(2,883,143)
|
|
|
$
|
(3,048,284)
|
|
Three and six months ended May 31, 2013 compared to the three and six months ended May 31, 2014
Revenue. Our total revenues for the three months ended May 31, 2013 and May 31, 2014 were $2.33 million and $439,000, respectively, representing a decrease of $1.89 million or 81%. Our total revenues for the six months ended May 31, 2013 and May 31, 2014 were $2.54 million and $818,000, respectively, representing a decrease of $1.72 million or 68%. The reasons for this decrease are outlined below.
Biodiesel. Biodiesel sales for the three months ended May 31, 2013 and May 31, 2014, excluding government incentives, were $2.08 million and $316,000, respectively, a decrease of approximately $1.76 million or 85%. For the three months ended May 31, 2013 and May 31, 2014, our resales of biodiesel purchased from third party producers were $416,000 and $125,000, respectively, a decrease of approximately $291,000 or 70%. Revenue from our internal production, excluding government incentives, for the three months ended May 31, 2013 and May 31, 2014 was $1.66 million and $316,000, respectively, a decrease of $1.34 million or 81%. For the three months ended May 31, 2013 and May 31, 2014, our average sales price per gallon for 100 percent biodiesel (“B100”) was $4.11 and $4.08, respectively, a decrease of $0.03 per gallon, or 0.73%. Gallons sold for the three months ended May 31, 2013 and 2014 were 506,000 and 77,600 gallons, respectively, a decrease of 428,400 gallons, or 85%.
Biodiesel sales for the six months ended May 31, 2013 and May 31, 2014, excluding government incentives, were $2.21 million and $625,800, respectively, a decrease of approximately $1.6 million or 72%. For the six months ended May 31, 2013 and May 31, 2014, our resales of biodiesel purchased from third party producers were $463,000 and $125,000, respectively, a decrease of approximately $338,000, or 73%. Revenue from our internal production, excluding government incentives, for the six months ended May 31, 2013 and May 31, 2014 was $1.75 million and $501,000, respectively, a decrease of $1.2 million, or 71%. For the six months ended May 31, 2013 and May 31, 2014, our average sales price per gallon for B100 was $4.13 and $4.52, respectively, an increase of $0.39 per gallon, or 9%. Gallons sold for the six months ended May 31, 2013 and 2014 were 535,447 and 138,529 gallons, respectively, a decrease of 396,918 gallons, or 74%.
The overall decrease in revenue from the sales of our biodiesel and the resales of biodiesel purchased from others was primarily due to a very low demand as a result of the expiration of the blender’s tax credit (“BTC”) on December 31, 2013 which, combined with an extremely cold winter, reduced the demand for biodiesel in the first half of 2014. Furthermore, the delay, by the EPA, in establishing the 2014 RVOs has greatly affected the demand for biodiesel so far this year. According to the National Biodiesel Board (“NBB”), 57% of their biodiesel producing members were not producing as of early June 2014.
Feedstock. For the three months ended May 31, 2013 and May 31, 2014, feedstock sales were $41,000 and $70,000, respectively, an increase of $29,000, or 71%. For the six months ended May 31, 2013 and May 31, 2014, feedstock sales were $85,000 and $96,300, respectively, an increase of $11,350, or 13%. In the more recent period, with some variations in quantities, we were able to source additional feedstock as well as other products related to the production of biodiesel on the spot market that we resold immediately to our customers in Canada at a profit. We intend to continue with this strategy as opportunities arise to generate additional profit.
Glycerin. For the three months ended May 31, 2013 and May 31, 2014, Glycerin sales were $22,600 and $10,600, respectively, a decrease of $12,000. For the six months ended May 31, 2013 and May 31, 2014, Glycerin sales were $36,000 and $24,000, respectively, a decrease of $12,000.
Government incentives. For the three months ended May 31, 2013 and May 31, 2014 we received $170,000 and $25,000, respectively, a decrease of $145,000, or 85%. For the six months ended May 31, 2013 and May 31, 2014 we received $179,000 and $39,000, respectively, a decrease of $140,000, or 78%. This decrease was due to the decrease in the sales volume of biodiesel.
Equipment sales. For the three months ended May 31, 2013 and May 31, 2014 we generated $2,600 and $750, respectively, from equipment sales. For six months ended May 31 2013 and May 31, 2014 we generated $2,700 and $1,400, respectively, from equipment sales. Effective January 30, 2014, we entered into a sale and licensing agreement with an Aruba company pursuant to which they agreed to the purchase of a Denami 600 processor and license our software and monitoring system. We believe that the Denami 600 will be used for the local production of biodiesel in Aruba and is expected to be built and delivered to Aruba by about November 2014.
Royalties. For the three months ended May 31, 2013 and May 31, 2014 we received royalties of $2,800 and $11,000, respectively. For six months ended May 31, 2013 and May 31, 2014 we received royalties of $6,700 and $11,000, respectively. Our customers own the Denami 600 processors, but license the software and monitoring system from us in exchange for an ongoing royalty payment $0.11 per gallon of biodiesel produced by their Denami 600 processors.
Other. Other revenue for the six months ended May 31, 2013 and May 31, 2014 was $9,000 and $5,000, respectively, a decrease of $4,000, or 44%. Other revenue for the six months ended May 31, 2013 and May 31, 2014, was $18,000 and $20,000, respectively, an increase of $2,000, or 11%, primarily due to recovery of accounts receivable previously written-off. Other revenue includes recovery of prior year sales and other miscellaneous sales.
Cost of goods sold. Our cost of goods sold for the three months ended May 31, 2013 and May 31, 2014 were $2.22 million and $372,000, respectively, a decrease of $1.8 million, or 83%. Our cost of goods sold for the six months ended May 31, 2013 and May 31, 2014 were $2.41 million and $665,000, respectively, a decrease of $1.7 million, or 71%. This decrease was primarily due to minimum sales of biodiesel in the six months ended May 31, 2014 as a result of very low demand.
Biodiesel cost of goods sold decreased by $1.7 million to $285,000, or 86%, for the three months ended May 31, 2014 compared to cost of goods sold of $1.98 million for the three months ended May 31, 2013. If the average feedstock price and the price paid for biodiesel purchased from other biodiesel producers in Canada remained constant for the three months ended May 31, 2014 compared to the same fiscal period in 2013, the decrease in gallons of biodiesel sold would have resulted in $1.68 million decrease in the related biodiesel cost of goods sold. For the three months ended May 31, 2014, the decrease in cost of goods sold was lower because of a $19,000 decrease in average feedstock prices.
Biodiesel cost of goods sold decreased by $1.53 million to $515,000, or 75%, for the six months ended May 31, 2014 compared to cost of goods sold of $2.05 million for the six months ended May 31, 2013. If the average feedstock price and the price paid for biodiesel purchased from other biodiesel producers in Canada remained constant for the six months ended May 31, 2014 compared to the same fiscal period in 2013, the decrease in gallons of biodiesel sold would have resulted in $1.52 million decrease in the related biodiesel cost of goods sold. For the six months ended May 31, 2014, the decrease in cost of goods sold was lower because of a $22,000 decrease in average feedstock prices, which was offset by an $8,600 increase in the price paid for biodiesel purchased from others.
All other costs of goods sold, excluding biodiesel cost of goods sold, for the three months ended May 31, 2013 and May 31, 2014 were $241,000 and $87,000, respectively, and for the six months ended May 31, 2013 and May 31, 2014 were $363,000 and $149,000, respectively. The decrease was mainly due to lower sales of feedstock as a result of lower feedstock demand.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months ended May 31, 2013 and May 31, 2014, were $1.48 million and $1.44 million, respectively, a decrease of $40,000, or 2%. This decrease was mainly related to a decrease in salaries and wages of $171,000 as a result of layoffs which was offset by an increase in professional fees of $150,000 as a result of an increase in consulting services and audit fees.
Our selling, general and administrative expenses for the six months ended May 31, 2013 and May 31 2014, were $2.77 million and $2.9 million, respectively, an increase of $130,000, or 5%. This increase was mainly related to an increase in professional fees of $490,000 as a result of an increase in consulting services and audit fees which was offset by a decrease in operating expenses including, but not limited to, a decrease in salaries and wages of $172,000, decrease in utilities of $94,000, a decrease in shop supplies of $62,000 and a decrease in travel expenses of $40,000.
Other expenses and income. For the three months ended May 31, 2013 and May 31, 2014, we incurred interest expenses of $122,000 and $192,000, respectively. These amounts relate to accruals for interest expense associated with our outstanding loans. The increase in interest expense in the second quarter of 2014 was mainly due to the interest of $97,000 on feedstock oil payable to a vendor which was offset by a decrease in interest rate on our term loan from 23% in 2013 to 12% in the same period in 2014. For the three months ended May 31, 2013 and May 31, 2014, we paid term loan interest of $84,900 and $43,900, respectively.
For the six months ended May 31, 2013 and May 31, 2014, we incurred interest expenses of $243,000 and $294,000, respectively. These amounts relate to accruals for interest expense associated with our outstanding loans. The increase in interest expense in the second quarter of 2014 was mainly due to the interest of $97,000 on feedstock oil payable to a vendor which was offset by a decrease in the interest rate on our term loan from 23% in fiscal 2013 to 12% in fiscal 2014. For the six months ended May 31, 2013 and May 31, 2014, we paid term loan interest of $169,000 and $88,000, respectively.
Income taxes. No income tax expense or benefit was recorded during the three and six months ended May 31, 2013 and May 31, 2014 due to ongoing taxable losses. As of May 31, 2014, we were not subject to any uncertain tax exposures.
Net loss. For the three months ended May 31, 2014, our net loss increased by $75,000 to $1.56 million from $1.49 million for the three months ended May 31, 2013. The increase in net loss for the three months ended May 31, 2014 was primarily due to the decrease of $40,000 of gross profit and an increase of $70,000 of interest expense, which was offset by a decrease of $34,000 in selling, general and administrative expenses. For the six months ended May 31, 2014, our net loss increased by approximately $165,000 to $3.05 million from $2.88 million for the six months ended May 31, 2013. The increase in net loss for the six months ended May 31, 2014 was primarily due to the $140,000 increase in selling, general and administrative expenses and $50,000 increase in interest expense offset by a $26,000 increase in gross profit.
Liquidity and Capital Resources
Sources of liquidity. Since inception, a significant portion of our operations was financed through the sale of our capital stock. At November 30, 2013 and May 31, 2014, we had cash and cash equivalents of $174,084 and $4.048 million respectively.
As of May 30, 2014, subsequent to the consummation of our IPO on October 30, 2012, we have raised aggregate net proceeds of approximately $9.5 million from the sale of our equity securities including the following (also, see Note 8 of the unaudited condensed consolidated financial statements elsewhere in this report):
|
●
|
net proceeds of approximately $1.5 million from our private placement completed in February 2013;
|
|
●
|
net proceeds of approximately $50,000 from our Regulation S private placement completed in August 2013;
|
|
●
|
net proceeds of approximately $473,000 from our private placement of Series A Preferred Stock completed in October 2013;
|
|
●
|
net proceeds of approximately $2.24 million from our private placement completed in December 2013;
|
|
●
|
net proceeds of approximately $125,000 (including, $25,000 of services rendered to us) from our private placement completed in January 2014; and
|
|
●
|
net proceeds of approximately $5.05 million from our public offering completed in May 2014.
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On December 16, 2013, Methes Canada entered into a one year term Mortgage Loan Agreement for $1,806,000 ($2,000,000 CDN) bearing interest at 9% per annum (the “December 2013 Loan”) for the purposes of discharging the July 2013 Facility ($1,600,000 (CDN)), described in Note 6 of the unaudited condensed consolidated financial statements elsewhere in this report. The difference will be used to upgrade the Mississauga facility for the production of biodiesel.
On August 16, 2013, Methes Canada entered into and closed on a working capital loan facility from a Toronto, Ontario lending firm (the “Working Capital Facility”). Under the Working Capital Facility, Methes Canada may borrow up to $1,500,000 for its Sombra, Ontario biodiesel manufacturing plant, of which up to $750,000 may be from cash advances against Methes Canada’s accounts receivables through factoring of accounts receivable with full recourse and up to an additional $750,000 in cash advances for use exclusively to purchase feedstock for the production of biodiesel. The Working Capital Facility is secured by a pledge of the accounts receivable and inventory of Methes Canada and Methes USA. The balance outstanding as of November 30, 2013 of $1,019,513 was fully repaid during the first quarter of fiscal 2014 through factoring of accounts receivable and cash from operations. Accordingly, as of May 31, 2014 the balance outstanding was $nil.
Cash flow. The following table presents information regarding our cash flows and cash and cash equivalents for the six months ended May 31, 2013 and May 31, 2014:
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(Amounts rounded to nearest thousands)
Six Months Ended
May 31 and May 31,
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2013
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2014
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Net cash flows used in operating activities
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$
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(2,137
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)
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$
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(1,948)
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Net cash flows used in investing activities
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(352
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)
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(90)
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Net cash flows provided by financing activities
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2,275
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5,912
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Net change in cash and cash equivalents
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(214)
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3,874
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Cash and cash equivalents, end of period
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$
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188
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$
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4,048
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Operating activities. Net cash used in operating activities was $2.137 million for the six months ended May 31, 2013. For the six months ended May 31, 2013, the net loss was $2.88 million, which includes total non-cash items for depreciation, amortization, stock compensation expense and unrealized foreign exchange gain of $338,000. The net cash used in operating activities included a net working capital decrease of $408,000.Working capital decreases were a result of an increase in accounts payable and accrued liabilities of $440,000, a decrease in inventories of $97,000 offset by an increase in accounts receivable of $113,000 and an increase in prepaid expenses and deposits of $16,000. The net result was cash used in operations of $2.14 million.
Net cash used in operating activities was $1.948 million for the six months ended May 31, 2014. For the six months ended May 31, 2014, the net loss was $3.05 million, which includes total non-cash items for depreciation, amortization, stock compensation expense, unrealized foreign exchange gain, deferred financing fees amortization, accrued interest and issuance of common stock for services of $818,000. The net cash used in operating activities included a net working capital increase of $282,000. Working capital increases were a result of a decrease in customer deposits of $900, a decrease in inventories of $551,000, a decrease in accounts receivable of $983,000 offset by a decrease in accounts payable and accrued liabilities of $1.013 million, and an increase of prepaid expenses and deposits of $240,000. The net result was cash used in operations of $1.948 million. Our current operating cash requirement is approximately $314,000 per month. However, once our Sombra facility commences full-scale production, we expect to generate positive cash flow from operations.
Investing activities. Net cash used in investing activities for the six months ended May 31, 2013 was $352,000, consisting of additions to property, plant and equipment, mainly representing costs related to our Sombra facility. Net cash used in investing activities for the six months ended May 31, 2014 was $90,000, consisting of additions to property, plant and equipment, mainly representing costs related to our Sombra facility.
Financing activities. Net cash provided from financing activities for the six months ended May 31, 2013 was $2.27 million, which mainly included cash proceeds received from private placements of our equity securities of $1.37 million, financing from related parties of $519,000 and short-term loan of $386,000. Net cash provided by financing activities for the six months ended May 31, 2014 was $5.91 million, which mainly included cash proceeds from the private and public offering of our equity securities of $6.8 million offset by payment of financing from credit facility of $1.02 million.
As of May 31, 2014, due in large part to the funds spent to develop, build and commission our Sombra facility as well as minimal sales of biodiesel, we had a working capital deficiency of $1,270,469.
During the six months ended May 31, 2014, we took steps to improve our cash and working capital positions by: (i) obtaining the December 2013 Loan; (ii) raising net cash proceeds of approximately $1.97 million from the private placements of our equity securities; and (iii) converting $128,000 USD (CDN $139,845) of the outstanding principal due on the January 2013 Note, described in Note 6 of the unaudited consolidated financial statements elsewhere in this report, into 34,688 shares of Common Stock based on the closing market price of $3.69 per share of Common Stock on January 17, 2014.
We anticipate that our Sombra facility will generate positive cash flow from operations and will operate profitably once sufficient level of commercial operation is achieved in the second half of the current fiscal year. It is management’s opinion that our cash and cash equivalents and the anticipated positive cash flow from operations will be sufficient to meet our cash requirements for at least the next 12 months.
Capital Expenditures. We have expended $8.48 million to purchase our Sombra facility, retrofit that facility and equip it so it can begin full scale production of biodiesel. These funds were expended as follows: $2.03 million for the original purchase price of the facility; $1.56 million for the costs of retrofitting and $4.89 million for Denami 3000 processors, storage tanks and other production equipment. The funds used to purchase and complete the Sombra facility were provided by the cash proceeds from sale of our equity securities, monies borrowed from a stockholder and a term loan.
Future commitments. We otherwise have no material commitments for future capital expenditures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recent Accounting Pronouncements
For a discussion of new accounting pronouncements affecting the Company, refer to “Note 2 - Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statements included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
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(a)
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Evaluation of Disclosure Controls and Procedures
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Our management, with the participation of both of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and chief financial officer each concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s (SEC) rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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(b)
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Changes in Internal Control over Financial Reporting
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There were no changes in our internal controls over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 5. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
Unless otherwise stated, the sales of the securities described below were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) and 4(a)(5) of the Securities Act (or Regulation D or Regulation S promulgated thereunder), or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The purchasers of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and, other than with respect to the non-transferable options, appropriate legends were placed on the securities issued in these transactions. All purchasers had adequate access, through their relationships with us, to information about our company. The sales of these securities were made without any general solicitation or advertising.
Private Placements
On May 1, 2014, we issued 25,000 shares of Common Stock in the third quarterly installment payment of consulting fees for services to be rendered by a consultant, which were valued at $61,250, based on the closing market price of $2.45 per share on the date of issuance, of which $45,813 is included in prepaid expenses as at May 31, 2014.
ITEM 6. EXHIBITS
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Exhibit Number
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Description
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Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
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Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
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Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
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Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
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101.INS
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XBRL Instance Document**
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101.SCH
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XBRL Taxonomy Extension Schema Document**
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document**
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document**
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document**
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document**
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_______
* Filed herewith.
** Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Methes Energies International Ltd.
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Dated: July 14, 2014
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/s/ Michel G. Laporte
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Michel G. Laporte, Chief Executive Officer
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(Principal Executive Officer)
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Dated: July 14, 2014
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/s/ Edward A. Stoltenberg
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Edward A. Stoltenberg, Chief Financial Officer
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(Principal Financial Officer)
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