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D. MEDICAL INDUSTRIES LTD. 10-Q 2008 Washington, D.C.
20549>
FORM
10-Q
þ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended September 30, 2008
Or
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
Commission
file number 0-21982
ALLEGRO
BIODIESEL CORPORATION
(Exact
name of registrant as specified in its charter)
Registrant’s
telephone number, including area code: (310) 670-2093
(Not
applicable)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by checkmark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ
No o
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12 b-2 of the Exchange Act). Yes þ No
o
As
of October 21, 2008 the registrant had 29,044,739 shares of Common Stock
outstanding.
PART I
-- FINANCIAL INFORMATION
ITEM
I -- FINANCIAL STATEMENTS
ALLEGRO
BIODIESEL CORPORATION
CONSOLIDATED
BALANCE SHEETS
See
accompanying Notes to Consolidated Financial Statements. 1
ALLEGRO
BIODIESEL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
See
accompanying Notes to Consolidated Financial Statements. 2
ALLEGRO
BIODIESEL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
See
accompanying Notes to Consolidated Financial Statements. 3
ALLEGRO
BIODIESEL CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(UNAUDITED)
From
September 20, 2006, through September 9, 2008 Allegro Biodiesel Corporation
(“Allegro”, “we,” “us” or “Company”) owned a biodiesel production facility that
used renewable agricultural-based feedstock (primarily soybean oil) to produce
biodiesel fuel (the “Pollock Facility”).
During
2007, the biodiesel industry experienced a significant increase in the cost of
soybean oil. The increase in the cost of soybean oil had a significant negative
effect on our profit margins and cash flows. Given these economic conditions, on
October 15, 2007 we adopted a Company-wide cost reduction plan to reduce our
costs. We also significantly reduced, and then halted, production at the Pollock
Facility during the fourth quarter of 2007.
Due to
the continuing difficult conditions in the biodiesel industry described above,
during the second quarter of 2008, the independent member of our board of
directors recommended to our stockholders to approve the sale (the “Sale”) of
100% of the membership interests of our wholly owned subsidiary, Vanguard
Synfuels, LLC (“Vanguard”), to Consolidated Energy Holdings, LLC, a Louisiana
limited liability company (“CEH”). Two of our former executive officers, Darrell
Dubroc and Tim Collins hold membership interests in CEH. As reported in our Form
8-K dated September 9, 2008, the Sale was completed on September 9,
2008.
Pursuant
to the Sale, CEH assumed substantially all of the liabilities of Vanguard,
including (i) approximately $2.9 million in senior secured debt with First South
Farm Credit, ACA (“First South”); (ii) approximately $589,000 in trade payables
and accrued liabilities; (iii) obligations of Allegro and/or Vanguard under
existing employment agreements with employees of Allegro and of Vanguard; and
(iv) $258,000 in accrued compensation for certain Allegro employees that
accumulated since our Company-wide expense reduction plan through the date of
the Sale.
As a
consequence of the Sale, we have reduced our outstanding liabilities and
eliminated our secured debt, as described above. While we no longer have any
operating assets, we will continue as a publicly-traded corporation with
non-operating assets, including cash and our equity investment in Community
Power Corporation (“CPC”). We are also pursuing a claim against an
escrow account established in connection with our original acquisition of
Vanguard (the “Escrow Account”). See “Item 2 Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Overview - Escrow
Account Claims.”
On July
31, 2008, a mutual release of cash and shares of our common stock from the
Escrow Account to us and to former members of Vanguard was made in the amounts
of $151,628 and 124,961 shares and $201,129 and 126,250 shares, respectively.
After these disbursements, there is $1,369,732 in cash and 859,789 shares of our
common stock remaining in the Escrow Account. We have not reached an agreement
to settle the remaining claims and are preparing for arbitration which is
anticipated to begin in the fourth quarter. We can provide no assurances that we
will be successful with all or any portion of our claims or that we will receive
any portion of the monies in the Escrow Account.
During
the three and nine months ended September 30, 2008, the Company recorded the
escrow proceeds received, of $152,877 and $200,326 respectively which have been
classified as “Other Expense, net” in the accompanying statement of operations.
The Company records any proceeds from the Escrow Claim in the period the
consideration is recovered.
As of
September 30, 2008, we had negative working capital of $4,975,013. Included as a
reduction to working capital is $4,155,472 of accrued dividends which the
Company may pay, at its option, in shares of its Series A convertible preferred
stock.
Management
is actively seeking strategic alternatives, including the pursuit of additional
financing for acquisitions and evaluating potential strategic transactions,
either in renewable energy or other industries. However, due to the current
economic environment, we cannot assure our current and future stockholders that
there will be adequate funds available when needed and on acceptable terms, or
that a strategic alternative can be arranged. We are also attempting
to sell our minority interest in CPC and recover amounts from the Escrow
Account, as discussed above. If we are unable to arrange for a
strategic alternative, obtain additional financing, sell our minority interest
in CPC, or recover a significant portion of the amounts in the Escrow Account by
early in the first quarter of fiscal 2009, we may be forced to seek bankruptcy
protection.
The
consolidated financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
4
Basis
of Presentation
The
consolidated financial statements of Allegro are unaudited and have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information, pursuant to the
rules and regulations of the Securities and Exchange Commission. Notes to the
financial statements which would substantially duplicate the disclosures
contained in the audited financial statements for the most recent fiscal year
2007 as reported in the Company's Form 10-K have been omitted. The results
of operations for the three month and six month periods ended June 30, 2008 and
2007 are not necessarily indicative of the results to be expected for the full
year. All accounts and intercompany transactions have been eliminated in
consolidation. In the opinion of management, the consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
necessary to present fairly the Company's financial position, results of
operations and cash flows. These statements should be read in conjunction with
the financial statements and related notes which are part of the Company's
Annual Report on Form 10-K for the year ended December 31, 2007.
Discontinued
Operation
On
September 9, 2008, the Company completed the sale of the Company’s biodiesel
business. The Company accounted for the sale of the business in
accordance with Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment
or Disposal of Long Lived Assets” (“SFAS 144”). Accordingly, the condensed
consolidated financial statements have been revised for all periods presented to
reflect the Vanguard biodiesel business as a discontinued operation. Unless
noted otherwise, discussions in the notes to the unaudited consolidated
financial statements pertain to our continuing operations.
Minority
Investment in Private Company
The
Company accounts for its investment in minority interests of a company over
which it does not exercise significant influence on the cost method in
accordance with Accounting Principles Board (“APB”) No. 18, “The Equity Method of Accounting for Investments in Common
Stock”. Under the cost method, an investment is carried at cost until it is sold
or there is evidence that changes in the business environment or other facts and
circumstances suggest it may be other than temporarily impaired based on
criteria outlined in FAS Staff Position Nos. FAS 115-1 and FAS 124-1 and on
Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments”.
Net
Loss per Share
Basic
loss per share is calculated by dividing net loss by the weighted average common
shares outstanding during the period. Diluted net loss per share reflects the
potential dilution to basic EPS that could occur upon conversion or exercise of
securities, options or other such items to common shares using the treasury
stock method, based upon the weighted average fair value of our common shares
during the period. The following table sets forth potential shares of common
stock that are not included in the diluted net loss per share calculation
because to do so would be anti-dilutive for the periods indicated
below:
In
September 2006, the Company acquired Vanguard. The Company committed to a plan
to sell Vanguard, which was approved by the board of directors, during the
second quarter of 2008. In accordance with SFAS 144, Vanguard’s financial
results have been classified as a discontinued operation in our consolidated
financial statements for all periods presented. The net assets associated with
Vanguard have been classified as “held-for-sale” until the completion of the
Sale.
During
the quarter ended March 31, 2008, the Company recorded impairment charges
of $5,443,586 to the Pollock Facility and intangible assets. During
the year ended December 31, 2007, the Company recorded an impairment of the
goodwill of Vanguard of $19,978,894.
5
The
financial results of Vanguard included in discontinued operation are as
follows:
Included
in the income (loss) from discontinued operations for the three and nine months
ended September 30, 2008 is a gain on the sale of Vanguard of
$614,119.
During
the three months and nine months ended September 30, 2008, CEH funded $128,405
and $308,151, respectively of expenses related to the Company’s discontinued
operations which reduced the operating expenses in these periods.
The
following is the combined, condensed balance sheet of Vanguard immediately
preceding the Sale:
Management
believes there are no contingent liabilities related to discontinued
operations.
In
November 2007, the Company acquired a minority interest in Community Power
Corporation, a developer of biomass power generation technology and products
(“CPC”), for $1,000,000. During the three months ended September 30,
2008, the Company recorded an impairment charge of $211,450 with respect to CPC
which has been classified as "Other Expense, net" in the accompanying statements
of operations. The impairment charge resulted from the sale of stock
by CPC at a lower price per share than that paid by Allegro at the time of its
purchase of the minority interest.
Accrued
expenses consist of the following at:
6
Stock
Options
On
January 29, 2008, the Company granted an aggregate of 454,998 stock options to
certain employees and consultants. Each stock option has an exercise price of
$0.35 which was equal to the closing stock price of the Company common stock on
the date of grant and were valued using the Black-Scholes option pricing
model.
Stock-based
compensation for the three months ended September 30, 2008 and 2007 was $4,668
and $569,461, respectively and $120,316 and $2,733,467 for the nine months ended
September 30, 2008 and 2007, respectively.
Issuance
of Common Stock
On
November 21, 2007, the Company issued a convertible promissory note to Monarch
Pointe Fund, Ltd. (“Monarch Pointe”), a fund managed by M.A.G. Capital, LLC
(“MAG”) for gross proceeds of $1,000,000. On March 31, 2008, the
Company issued 1,577,113 shares of common stock at a conversion price of $0.65
per share as repayment on the note. The conversion price was equal to
the agreed upon conversion price at the date of issuance of the
note.
During
the nine months ended September 30, 2008, 2,852,857 shares of Series A
convertible preferred stock together with of accrued dividends of $545,799 were
converted into 4,305,721 shares of common stock at the original conversion price
of $0.76 per share.
7
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
quarterly report on Form 10-Q of Allegro Biodiesel Corporation (“Allegro”, “we,”
“us” or “Company”) for the three months ended September 30, 2008, contains
forward-looking statements, principally in this Section and “Business.”
Generally, you can identify these statements because they use words like
“anticipates,” “believes,” “expects,” “future,” “intends,” “plans,” and similar
terms. These statements reflect only our current expectations. Although we do
not make forward-looking statements unless we believe we have a reasonable basis
for doing so, we cannot guarantee their accuracy and actual results may differ
materially from those we anticipated due to a number of uncertainties, many of
which are unforeseen, including, among others, the risks we face as described in
this filing. You should not place undue reliance on these forward-looking
statements which apply only as of the date of this annual report. These
forward-looking statements are within the meaning of Section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended, and are intended to be covered by the safe harbors
created thereby. To the extent that such statements are not recitations of
historical fact, such statements constitute forward-looking statements that, by
definition, involve risks and uncertainties. In any forward-looking statement
where we express an expectation or belief as to future results or events, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation of belief will be accomplished.
We
believe it is important to communicate our expectations to our investors. There
may be events in the future, however, that we are unable to predict accurately
or over which we have no control. The risk factors listed in this filing, as
well as any cautionary language in this annual report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Factors that could cause actual results or events to differ materially from
those anticipated, include, but are not limited to: our ability to successfully
develop new products; the ability to obtain financing for product development;
changes in product strategies; general economic, financial and business
conditions; changes in and compliance with governmental healthcare and other
regulations; changes in tax laws; and the availability of key management and
other personnel.
Overview
From
September 20, 2006, through September 9, 2008 we owned a biodiesel production
facility that used renewable agricultural-based feedstock (primarily soybean
oil) to produce biodiesel fuel (the “Pollock Facility”).
During
2007, the biodiesel industry experienced a significant increase in the cost of
soybean oil. The increase in the cost of soybean oil had a significant negative
effect on our profit margins and cash flows. Given these economic conditions, on
October 15, 2007 we adopted a Company-wide cost reduction plan to reduce our
costs. We also significantly reduced, and then halted, production at the Pollock
Facility during the fourth quarter of 2007.
Due to
the continuing difficult conditions in the biodiesel industry described above,
during the second quarter of 2008, the independent member of our board of
directors recommended to our stockholders to approve the sale (the “Sale”) of
100% of the membership interests of our wholly owned subsidiary, Vanguard
Synfuels, LLC (“Vanguard”), to Consolidated Energy Holdings, LLC, a Louisiana
limited liability company (“CEH”). Two of our former executive officers, Darrell
Dubroc and Tim Collins hold membership interests in CEH. As reported in our Form
8-K dated September 9, 2008, the Sale was completed on September 9,
2008.
Pursuant
to the Sale, CEH assumed substantially all of the liabilities of Vanguard,
including (i) approximately $2.9 million in senior secured debt with First South
Farm Credit, ACA (“First South”); (ii) approximately $589,000 in trade payables
and accrued liabilities; (iii) obligations of Allegro and/or Vanguard under
existing employment agreements with employees of Allegro and of Vanguard; and
(iv) $258,000 in accrued compensation for certain Allegro employees that
accumulated since our Company-wide expense reduction plan through the date of
the Sale.
As a
consequence of the Sale, we have reduced our outstanding liabilities and
eliminated our secured debt, as described above. While we no longer have any
operating assets, we will continue as a publicly-traded corporation with
non-operating assets, including cash and our equity investment in Community
Power Corporation (“CPC”). We are also pursuing a claim against an
escrow account established in connection with our original acquisition of
Vanguard (the “Escrow Account”). See “Escrow Account Claims” below.
On July
31, 2008, a mutual release of cash and shares of our common stock from the
Escrow Account to us and to former members of Vanguard was made in the amounts
of $151,628 and 124,961 shares and $201,129 and 126,250 shares, respectively.
After these disbursements, there is approximately $1,369,732 in cash and 859,789
shares of our common stock remaining in the Escrow Account. We have not reached
an agreement to settle the remaining claims and are preparing for arbitration
which is anticipated to begin in the fourth quarter. We can provide no
assurances that we will be successful with all or any portion of our claims or
that we will receive any portion of the monies in the Escrow
Account.
During
the three and nine months ended September 30, 2008, the Company recorded the
escrow proceeds received, of $152,877 and $200,326 respectively which have been
classified as “Other Expense, net” in the accompanying statement of operations.
The Company records any proceeds from the Escrow Claim in the period the
consideration is recovered.
As of
September 30, 2008, we had negative working capital of $4,975,013. Included as a
reduction to working capital is $4,155,472 of accrued dividends which the
Company may pay, at its option, in shares of its Series A convertible preferred
stock.
8
Management
is actively seeking strategic alternatives, including the pursuit of additional
financing for acquisitions and evaluating potential strategic transactions,
either in renewable energy or other industries. However, due to the current
economic environment, we cannot assure our current and future stockholders that
there will be adequate funds available when needed and on acceptable terms, or
that a strategic alternative can be arranged. We are also attempting
to sell our minority interest in CPC and recover amounts from the Escrow
Account, as discussed above. If we are unable to arrange
for a strategic alternative, obtain additional financing, sell our
minority interest in CPC, or recover a significant portion of the amounts in the
Escrow Account by early in the first quarter of fiscal 2009, we may be forced to
seek bankruptcy protection.
Escrow
Account Claims
On June
13, 2008, we entered into an Agreement to Settle Claims (the “Settlement
Agreement”) with the former members of Vanguard who sold their interests in
Vanguard to us in September 2006 (the “Former Vanguard Members”), including
Darrell Dubroc, our President, Chief Operating Officer, and Director, and Tim
Collins, our Executive Vice President of Business Development and Director, who
together hold 11,110,000 shares of our common stock and 50% of the membership
interests of CEH. The Settlement Agreement relates to certain demands for
indemnification we have made under the Contribution Agreement we entered into
with the Former Vanguard Members on September 20, 2006 (the “Contribution
Agreement”). We notified the Former Vanguard Members of our demand for
indemnification under the Contribution Agreement, and of our claim upon the
escrow deposit under the Escrow Agreement we entered into with them on September
20, 2006 (the “Escrow Account”). In our letter, we alleged that the Former
Vanguard Members made certain misrepresentations with respect to the closing
balance sheet of Vanguard, dated September 15, 2006, namely overstating
inventory assets and understating current liabilities. The total amount of this
claim is approximately $1.1 million. Under the terms of the relevant
agreements, we have demanded that the escrow agent release to us cash and
shares of our common stock from the Escrow Account to satisfy our
claims.
On
February 22, 2008, we notified the Former Vanguard Members of an additional
demand for indemnification under the Contribution Agreement, and of our further
claim upon the Escrow Account. In our second letter we alleged that the Former
Vanguard Members made certain misrepresentations with respect to certain IRS tax
penalties. The total amount of this additional claim is $47,449. Under the terms
of the relevant agreements, we have demanded that the escrow agent release to us
$47,449 of cash from the Escrow Account. On May 23, 2008, we received a payment
from the Escrow Account for the above mentioned amount in full satisfaction of
this claim. On March 18, 2008, we notified the Former Vanguard Members of a
third demand for indemnification under the Contribution Agreement, and of our
further claim upon the Escrow Account.
In our
third letter we alleged that the Former Vanguard Members made certain
misrepresentations with respect to the Vanguard biodiesel plant and certain
liabilities relating to the disposal of glycerin produced at such plant. The
total amount of this claim is $972,525. Under the terms of the relevant
agreements, we have demanded that the escrow agent release to us $782,436 of
cash and 491,139 shares of our common stock from the Escrow
Account.
The
Former Vanguard Members have disputed each of the demands we have made for
indemnification other than the above mentioned IRS tax liability claim. Upon
mailing our definitive Information Statement to our shareholders on July 31,
2008, a mutual release of cash and shares of our common stock from the Escrow
Account to us and to the Former Vanguard Members was made in the amounts of
$151,628 and 124,961 shares and $201,129 and 126,250 shares, respectively. After
these disbursements, there is approximately $1,369,732 million in cash and
859,789 shares of our common stock remaining in the Escrow Account. The
Settlement Agreement also provides that if we and the Former Vanguard Members
have not reached a settlement of the remaining claims by July 15, 2008, then a
binding arbitration will take place during September 2008. On July 17, 2008, we
agreed to extend the deadline for reaching an agreement on the settlement of the
remaining claims to August 15, 2008. We have not reached an agreement to settle
the remaining claims and are preparing for arbitration which is anticipated to
begin in the fourth quarter. We provide no assurances whether we will be
successful with our claims.
Unless
otherwise noted, the following discussions of our results of operations include
the results from continuing operations only.
Results
of Operations for the Three Months Ended September 30, 2008 Compared to the
Three Months Ended September 30, 2007
Sales
and Gross Profit
During
the third quarter of 2008, as compared to the third quarter of 2007, we did not
have sales or generate gross profit from continuing operations due to the
halting of production at the Pollock Facility.
Selling,
General and Administrative
Our
selling, general and administrative expenses include personnel costs, the costs
of corporate functions, accounting, transaction costs, legal, insurance,
consulting, and non-cash stock-based compensation.
Selling,
general and administrative expenses decreased to $411,910 during the third
quarter of 2008, from $1,610,405 in comparable period in 2007. The
change was primarily attributable to a reduction in stock-based compensation of
$564,793 and the absence of $682,690 of abandoned acquisition costs incurred
during the 2007 period, partially offset by $89,279 in salaries. As a
result of the Sale, these salaries have ceased.
9
Interest
Expense
Interest
expense decreased to $0 during the third quarter of 2008 from $24,984 in the
same period in 2007 due to lower average debt balance during the 2008
period.
Interest
Income
During
the third quarter of 2008 we generated interest income of $1,537 compared to
$9,336 during the comparable period in 2007. The decrease was
attributable to lower average cash balances resulting from the cessation of
business operations discussed above.
Other
Expense, net
Other
expense was $58,745 during the third quarter of 2008, compared to $0 for the
same period in 2007 due the impairment of our equity investment in CPC of
$211,450, partially offset by the receipt of $152,878 in proceeds and common
stock from the Escrow Account. See Note 4 to Notes to Consolidated Financial
Statements and “Escrow Account Claims” above.
Discontinued
Operations
During
the second quarter of 2008, the board of directors approved the Sale and on
September 9, 2008, we completed the Sale. We accounted for the planned sale of
Vanguard as a discontinued operation in accordance with Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” (“SFAS
144”). Accordingly, the consolidated financial statements have been revised for
all periods presented to reflect Vanguard as a discontinued operation. Unless
noted otherwise, discussions in the notes to the unaudited consolidated
financial statements pertain to our continuing operations.
During
the third quarter of 2008, Vanguard did not generate revenues. We incurred
income from discontinued operations and the sale of Vanguard of
$589,459. Included in this amount are proceeds received of $128,405
from CEH to fund Vanguard’s operations pending the completion of the Sale and
the recognition of a gain on the Sale of $614,119. During the
comparable period in 2007, we incurred a loss from discontinued operations of
$21,042,023 which included a goodwill impairment charge of
$19,978,894. See Note 3 to the consolidated financial statements for
further information regarding the classification of Vanguard as a discontinued
operation.
Results
of Operations for the Nine Months Ended September 30, 2008 Compared to the Nine
Months Ended September 30, 2007
Sales
and Gross Profit
During
the first nine months of 2008, as compared to same period in 2007, we did not
have sales or generate gross profit from continuing operations due to the
halting of production at the Pollock Facility.
Selling,
General and Administrative
Our
selling, general and administrative expenses include personnel costs, the costs
of corporate functions, accounting, transaction costs, legal, insurance,
consulting, and non-cash stock-based compensation.
Selling,
general and administrative expenses decreased to $1,385,440 in the first nine
months of 2008, from $4,891,783 in same period in 2007. The change was primarily
attributable to a reduction in stock-based compensation ($2,611,901), a
reduction in management fees paid to Ocean Park Advisors, LLC (“OPA”)
($235,000), and the absence of abandoned acquisition costs ($682,690) incurred
during the 2007 period, partially offset by $323,748 in salaries. As
a result of the Sale, these salaries have ceased.
Interest
Expense
During
the first nine months of 2008, we incurred interest expense of $67,094 compared
to $19,590 during the comparable period in 2007. The change was
primarily attributable to non-cash interest expense related to the accretion of
a debt discount of $49,834 incurred in connection with our issuance of a
convertible promissory note during the fourth quarter of 2007.
Interest
Income
During
the first nine months of 2008 we generated interest income of $15,311 compared
to $60,830 during the comparable period in 2007. The decrease was
attributable to lower average cash balances resulting from the cessation of
business operations discussed above.
Registration
Rights Penalties
Penalties
payable under our Series A convertible preferred stock registration rights
agreement were $0 during the first nine months of 2008, compared to $381,250
during the comparable period in 2007. Such penalties ceased upon the
effectiveness of our registration statement in June 2007.
10
Other
Expense, net
Other
expense was $11,234 during the first nine months of 2008 as compared to $0 for
the same period in 2007 due the impairment of our equity investment in CPC of
$211,450, partially offset by the receipt of $200,326 in proceeds and common
stock from the Escrow Account. See Note 4 to Notes to Consolidated Financial
Statements and “Escrow Account Claims” above.
Discontinued
Operations
During
the first nine months of 2008, Vanguard did not generate revenues. We incurred
losses from discontinued operations and the sale of Vanguard of
$5,140,011. Included in this amount are impairment charge of
$5,443,586, partially offset by proceeds received of $308,151 from CEH to fund
Vanguard’s operations pending the completion of the Sale and the recognition of
a gain on the Sale of $614,119. During the comparable period in 2007,
we incurred a loss from discontinued operations of $23,131,078, which includes a
goodwill impairment charge of $19,978,894. See Note 3 to Consolidated
Financial Statements.
Liquidity
and Capital Resources
Our
principal sources of liquidity consist of cash and cash equivalents. Our
principal short-term and long-term liquidity requirements include costs to
operate a publicly-traded company and the exploration of strategic alternatives,
including potential mergers or acquisitions.
During
the first nine months of 2008, we received an aggregate of $308,151 in proceeds
from CEH to fund the operations of Vanguard from May 16, 2008, the date we
signed the letter of intent for the Sale, through the closing date of the Sale
on September 9, 2008.
At
September 30, 2008, our cash and cash equivalents totaled $307,240, and we had
negative working capital of $4,975,013. Included in working capital
is $4,155,472 of accrued dividends on our Series A preferred stock, which we may
pay at our option in shares of stock or cash. We are also actively pursuing
claims on the remaining assets in the Escrow Account arising out of our original
acquisition of Vanguard. See “Escrow Account Claims” above.
On
November 21, 2007, we issued a convertible promissory note to Monarch Pointe
Fund, Ltd. (“Monarch Pointe”), a fund managed by M.A.G. Capital, LLC (“MAG”) for
$1,000,000. The proceeds of this loan were used to make a minority investment in
CPC. The note was due on March 31, 2008, and was convertible into our common
stock at any time at either party’s election at a conversion price of $0.65 per
share. On March 31, 2008, we converted the principal of the note, together with
accrued interest, into 1,577,113 shares of our common stock.
We
believe that our existing sources of liquidity should be sufficient to fund our
continuing operations until early in the first quarter of 2009. We are
currently seeking additional financing to fund our business and are attempting
to sell our minority interest in CPC and recover amounts from the Escrow
Account. We cannot assure you that such a financing can be obtained
or completed by us on favorable terms, or at all, or that we will be successful
in selling our minority interest in CPC or recovering any significant amounts
from the Escrow Account. If we cannot accomplish any of these
actions, or complete a strategic transaction by early in the first quarter of
fiscal 2009, we will be forced to file for bankruptcy protection.
Operating
Activities
Cash used
in operating activities was $901,636 for the first nine months of 2008,
compared to cash used of $4,167,608 for the same period in 2007. Operating cash
flows for the 2008 period reflects our net loss of $6,593,093 as discussed
above, offset by changes in working capital of $415,532 and $5,275,925 for
non-cash expenses (primarily the impairment charges related our discontinued
operations). The changes in working capital are primarily
attributable to the deferral of amounts due to OPA and the amortization of
certain prepaid expenses.
Operating
cash flows for the nine months of fiscal 2007 reflect our net loss of
$28,362,871, offset by changes in working capital of $468,308 and non-cash
expenses (impairment of goodwill, depreciation, amortization of intangible
assets and stock-based compensation) of $23,726,955. The working capital change
primarily resulted from a decrease in inventory.
Investing
Activities
Cash used
in investing activities was $15,817 for the first nine months of 2008 compared
to cash used of $600,124 for the same period in 2007. As a result of
the Sale, management halted the majority of capital expenditures for
Vanguard.
Financing
Activities
Cash
provided by financing activities was $350,000 for the first nine months of 2008,
compared to cash used of $150,000 for the comparable period in 2007. During the
2008 and 2007 periods, we made our contractual principal payment of $150,000 on
our previously outstanding term loan with First South. During the 2008 period,
we received $500,000 in proceeds from the repayment of a note receivable from
Community Power Corporation.
Off
Balance Sheet Arrangements
We have
no off-balance sheet arrangements.
11
ITEM
4. CONTROLS AND PROCEDURES
As of
September 30, 2008, we carried out an evaluation, under the supervision and with
the participation of management, including our Chief Executive Officer and
Principal Financial and Accounting Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based
upon that evaluation, our Chief Executive Officer and Principal Financial and
Accounting Officer concluded that our disclosure controls and procedures were
effective as of September 30, 2008, to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 2008, that materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.
PART
II — OTHER INFORMATION
Item
6. Exhibits
12
ALLEGRO
BIODIESEL CORPORATION
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ALLEGRO
BIODIESEL CORPORATION
By: /s/
W. Bruce Comer III
W. Bruce
Comer III
Chief
Executive Officer (Principal Executive Officer and Principal Financial and
Accounting Officer
Date:
October 22, 2008
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