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D. MEDICAL INDUSTRIES LTD. 10-Q 2008 UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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
o
No þ
As
of July 30, 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.
2
ALLEGRO
BIODIESEL CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
See
accompanying Notes to Consolidated Financial Statements.
3
ALLEGRO
BIODIESEL CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
See
accompanying Notes to Consolidated Financial Statements. 4
ALLEGRO
BIODIESEL CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(UNAUDITED)
1. Business
Through
the acquisition of Vanguard Synfuels, LLC (“Vanguard”) in September 2006,
Allegro Biodiesel Corporation (“Allegro”, “we,” “us” or “Company”) owns a
biodiesel production facility that uses renewable agricultural-based feedstock
(primarily soybean oil) to produce biodiesel fuel, which has been sold in both
blended and unblended form with petroleum diesel. The product has been sold
primarily to regional wholesale bulk fuel distributors and the local Louisiana
market. Vanguard was formed on April 28, 2003 as a limited liability
company. Vanguard purchased assets from Farmland Industries' bankruptcy trustee
on July 31, 2003. These assets included 320 acres of land, an ammonia
plant which was shuttered in 2001, and existing plant
infrastructure. Vanguard converted the existing facility (the “Pollock
Facility”) into a biodiesel production facility. Vanguard began testing of
the Pollock Facility in early 2006, and commenced production and sales of
biodiesel in April 2006. Vanguard was a development-stage company prior to
April
2006.
During
2007, the biodiesel industry experienced a significant increase in the cost
of
soybean oil, with the price increasing from $0.25 per pound in September 2006
to
the current price of approximately $0.60. Although we have been able to improve
the efficiency of our production processes, feedstock is still the primary
production cost of biodiesel fuel. The increase in the cost of soybean oil
had a
significant negative effect on our profit margins and cash flows and caused
an
impairment of goodwill associated with the Pollock Facility of $19.9 million
during the third quarter of 2007. Given these economic conditions, on October
15, 2007 we adopted a Company-wide cost reduction plan to reduce our costs.
Under this plan, we significantly reduced our expenses. We also significantly
reduced, and then halted, production at the Pollock Facility during the fourth
quarter of 2007. Consequently, we have not made any material amount of biodiesel
since the fourth quarter of 2007. We are currently maintaining the plant, but
not producing biodiesel due to the high cost of soybean oil.
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 of 100% of
the membership interests of Vanguard (the “Sale”) to Consolidated Energy
Holdings, LLC, a Louisiana limited liability company (“CEH”). Two
of
our executive officers, Darrel Dubroc and Tim Collins hold membership interests
in CEH. The Sale is pending and is expected to be completed during the
third quarter of 2008. Our decision to sell Vanguard was based on the
following:
As
part
of the Sale, CEH will assume certain liabilities of Allegro and Vanguard
including approximately (i) $2.9 million in senior secured debt with First
South; (ii) approximately $530,000 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) $209,000 in
accrued compensation for certain Allegro employees that has accumulated since
our Company-wide expense reduction plan through June 30, 2008.
IF
WE ARE
UNABLE TO COMPLETE THE SALE OF VANGUARD WE MAY BE FORCED TO FILE FOR BANKRUPTCY
PROTECTION.
5
As
of
June 30, 2008, we had negative working capital of $7,979,098. Included as a
reduction to working capital is $3,951,968 of accrued dividends which the
Company may pay, at its option, in shares of its Series A convertible preferred
stock or in cash and $3,403,901 of liabilities of discontinued
operations.
After
the
completion of the Sale, we will turn our attention to preserving and enhance
shareholder value. We plan to seek strategic alternatives, including the pursuit
of additional financing for acquisitions or a merger with another business.
However, due to the current economic environment, we cannot assure our current
and future stockholders there will be adequate funds available when needed
and
on acceptable terms, or that a strategic alternative can be arranged. Although
we will no longer have operations on the closing date of the Sale, we will
continue as a viable publicly-traded corporation with non-operating assets,
thereby preserving some value for our stockholders. Our non-operating assets
will primarily include cash balances and our equity investment in
Community Power Corporation. We are also actively pursuing claims on the
remaining assets in the escrow account arising out of our original acquisition
of Vanguard. See “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Vanguard Acquisition Escrow Account
Claims.”
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.
2. Basis
of Presentation and Significant Accounting Policies
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
During
the second quarter of 2008, the board of directors approved the sale of
Vanguard. See Note 1 above. The Company 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 condensed consolidated financial statements have been
revised for all periods presented to reflect Vanguard as a discontinued
operation. The Company expects to complete the sale of Vanguard to CEH during
the third quarter of 2008. Unless noted otherwise, discussions in the notes
to
the unaudited consolidated financial statements pertain to our continuing
operations.
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 three month periods indicated below:
3. Discontinued
Operation
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 are classified as “held-for-sale” until the completion of the Sale.
6
During
the quarter ended March 31, 2008, the Company recorded an impairment charge
of $3,395,250
to
intangible assets and $19,978,894
to
goodwill during the year ended December 31, 2007, respectively.
The
financial results of Vanguard included in discontinued operation are as follows
(in thousands):
During
the three months ended June 30, 2008, CEH funded $179,745 of expenses related
to
the Company’s discontinued operations.
The
following table presents the carrying amounts of major classes of assets and
liabilities relating to the discontinued operation as of:
4.
Accrued Expenses
Accrued
expenses consist of the following at:
5. Common
Stock
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 June 30, 2008 and 2007 was $6,224 and
$1,132,998, respectively and $116,898 and $2,164,006 for the six months ended
June 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.
7
During
the six months ended June 30, 2008, 568,091 shares of Series A convertible
preferred stock were converted into 833,560 shares of common
stock.
6.
Subsequent Events On
July
7, 2008, 2,136,094 shares of Series A Convertible Preferred Stock together
with
accrued dividend of $326,885 were converted into 3,246,083 shares of common
stock. On July 10, 2008, 148,672 shares of Series A Convertible Preferred
Stock
together with accrued dividend of $22,865 were converted into 226,078 shares
of
common stock.
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 for the three
months ended June 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
Through
the acquisition of Vanguard Synfuels, LLC (“Vanguard”) in September 2006,
Allegro Biodiesel Corporation (“Allegro”, “we,” “us” or “Company”) owns a
biodiesel production facility that uses renewable agricultural-based feedstock
(primarily soybean oil) to produce biodiesel fuel, which has been sold in both
blended and unblended form with petroleum diesel. The product has been sold
primarily to regional wholesale bulk fuel distributors and the local Louisiana
market. Vanguard was formed on April 28, 2003 as a limited liability
company. Vanguard purchased assets from Farmland Industries' bankruptcy trustee
on July 31, 2003. These assets included 320 acres of land, an ammonia
plant which was shuttered in 2001, and existing plant
infrastructure. Vanguard converted the existing facility (the “Pollock
Facility”) into a biodiesel production facility. Vanguard began testing of
the Pollock Facility in early 2006, and commenced production and sales of
biodiesel in April 2006. Vanguard was a development-stage company prior to
April
2006.
During
2007, the biodiesel industry experienced a significant increase in the cost
of
soybean oil, with the price increasing from $0.25 per pound in September 2006
to
the current price of approximately $0.60. Although we have been able to improve
the efficiency of our production processes, feedstock is still the primary
production cost of biodiesel fuel. The increase in the cost of soybean oil
had a
significant negative effect on our profit margins and cash flows and caused
an
impairment of goodwill associated with the Pollock Facility of $19.9 million
during the third quarter of 2007. Given these economic conditions, on October
15, 2007 we adopted a Company-wide cost reduction plan to reduce our costs.
Under this plan, we significantly reduced our expenses. We also significantly
reduced, and then halted, production at the Pollock Facility during the fourth
quarter of 2007. Consequently, we have not made any material amount of biodiesel
since the fourth quarter of 2007. We are currently maintaining the plant, but
not producing biodiesel due to the high cost of soybean oil.
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 of 100% of the
membership interests of Vanguard (the “Sale”) to Consolidated Energy Holdings,
LLC, a Louisiana limited liability company (“CEH”). The Sale is pending and is
expected to be completed during the third quarter of 2008. Our decision to
sell
Vanguard was based on the following:
8
As
part
of the Sale, CEH will assume certain liabilities of Allegro and Vanguard
including approximately (i) $2.9 million in senior secured debt with First
South; (ii) approximately $530,000 in trade payables and accrued expenses;
(iii)
obligations of Allegro and/or Vanguard under existing employment agreements
with
employees of Allegro and of Vanguard; and (iv) $209,000 in accrued compensation
for certain Allegro employees that has accumulated since our Company-wide
expense reduction plan through June 30, 2008.
CEH
also agreed to indemnify us for 50% of any judgment, settlement or other
resolution of claims made against Allegro and Vanguard in a lawsuit filed by
a
former employee. Such lawsuit was recently dismissed by the employee with
prejudice. See “Part II - Item 1. Legal Proceedings.”
IF
WE ARE
UNABLE TO COMPLETE THE SALE OF VANGUARD WE MAY BE FORCED TO FILE FOR BANKRUPTCY
PROTECTION.
After
the
completion of the Sale, we will turn our attention to preserving and enhance
shareholder value. We plan to seek strategic alternatives, including the pursuit
of additional financing for acquisitions or a merger with another business.
However, due to the current economic environment, we cannot assure the current
and future stockholders there will be adequate funds available when needed
and
on acceptable terms, or that a strategic alternative can be arranged. Although
we will no longer have operations on the closing date of the Sale, we will
continue as a viable publicly-traded corporation with non-operating assets,
thereby preserving some value for our stockholders. Our non-operating assets
will include the remaining cash balances and our equity investment in Community
Power Corporation. We are also actively pursuing claims on the remaining assets
in the escrow account arising out of our original acquisition of Vanguard.
See
“Vanguard Acquisition Escrow Account Claims” below.
Vanguard
Acquisition 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
our
claim is approximately $1.2 million. Under the terms of the relevant agreements,
we have demanded that the escrow agent release to us $905,993 in cash and
619,003 shares of our common stock from the Escrow Account.
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 was approximately $1.3 million
in
cash and 878,741 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 provide no assurances whether we will
be
successful with our claims.
9
Unless
otherwise noted, the following discussions of Allegro’s results
of operations include the results from continuing operations
only.
Results
of Operations for the Three Months Ended June 30, 2008 Compared to the Three
Months Ended June 30, 2007
Sales
and Gross Profit
During
the second quarter of 2008, as compared to the second quarter of 2007, we did
not have sales or generate gross profit from continuing operations
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 $433,970 in the second quarter
of 2008, from $1,719,022 in the second quarter of 2007. The decrease resulted
from restructuring efforts implemented during the fourth quarter of 2007 to
reduce our operating expenses and a decrease in stock stock-based compensation
of $1,126,774.
Interest
Income
During
the second quarter of 2008 we generated interest income of $5,224 compared
to
$16,228 during the second quarter of 2007. The decrease was
attributable to lower average cash balances resulting from the negative trends
in our business discussed above.
Registration
Rights Penalties
Penalties
payable under our Series A convertible preferred stock registration rights
agreement were $0
during
the second quarter of 2008, compared to $143,750 during the second quarter
of
2007. Such penalties ceased upon the effectiveness of our
registration statement in June 2007.
Other
Income
Other
income was $47,449 during the second quarter of 2008, compared to $0 for the
same period in 2007. During the second quarter of 2008, we received
proceeds from the Escrow Account with respect to
certain IRS tax penalties incurred by Vanguard. See “Vanguard Acquisition Escrow
Account Claims” above.
Discontinued
Operations
During
the second quarter of 2008, the board of directors approved the sale of
Vanguard. The Company 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. The Company
expects to complete the sale of Vanguard to CEH during the third quarter of
2008. Unless noted otherwise, discussions in the notes to the unaudited
consolidated financial statements pertain to our continuing operations. See
Note
3 Discontinued Operation to the consolidated financial statements for further
information regarding the classification of Vanguard as a discontinued
operation.
During
the second quarter of 2008, Vanguard did not generate revenues. Its operating
expenses were partially offset by proceeds of $179,745 received from CEH to
fund
Vanguard’s operations pending the completion of the sale, resulting in a loss
from discontinued operations of $78,707 compared to a loss of $1,019,303 during
the same period in 2007.
Results
of Operations for the Six Months Ended June 30, 2008 Compared to the Six Months
Ended June 30, 2007
Sales
and Gross Profit
During
the first half of 2008, as compared to the first half quarter of 2007, we did
not have sales or generate gross profit from continuing operations
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 $973,530 in the first half
quarter of 2008, from $3,266,862 in the first half of 2007. The decrease
resulted from the non-recurrence in the second quarter of 2008 of restructuring
activities implemented during the fourth quarter of 2007 to reduce our operating
expenses and a decrease in stock-based compensation of $2,047,108.
Interest
Expense
During
the first half of 2008, we incurred interest expense of $67,904 compared to
$853
during the first half of 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 to CPC during the fourth quarter of 2007.
10
Interest
Income
During
the first half of 2008 we generated interest income of $13,774 compared to
$43,225 during the first half of 2007. The decrease was attributable
to lower average cash balances resulting from the negative trends in our
business discussed above.
Registration
Rights Penalties
Penalties
payable under our Series A convertible preferred stock registration rights
agreement were $0 during the first half of 2008, compared to $381,250 during
the
first half of 2007. Such penalties ceased upon the effectiveness of
our registration statement in June 2007.
Other
Income
Other
income was $47,449 during the first half of 2008 as compared to $0 for the
same
period in 2007. During 2008, we received proceeds from the Escrow
Account with respect to
certain IRS tax penalties incurred by Vanguard. See “Vanguard Acquisition Escrow
Account Claims” above.
Liquidity
and Capital Resources
Our
principal sources of liquidity consist of cash and cash equivalents. In addition
to funding operations, our principal short-term and long-term liquidity include
costs to operate a publicly-traded company and the exploration of strategic
alternatives, including potential mergers or acquisitions.
During
the second quarter of 2008, we received proceeds of $179,745 from CEH to fund
the operations of Vanguard from May 16, 2008, the date we signed the letter
of
intent for the CEH transaction, through June 30, 2008. CEH has also agreed
to
fund the ongoing operations of Vanguard until the closing of the Sale. At June
30, 2008, our cash and cash equivalents totaled $443,624, and we had negative
working capital of $4,575,187, exclusive of the assets and liabilities held
for
sale related pending sale of Vanguard. Included in working capital is $3,951,968
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 “Vanguard Acquisition
Escrow Account Claims” above.
At
June
30, 2008, we had $2,872,379 in bank debt outstanding under our credit agreement
with First South which will be assumed by CEH upon the closing of the Sale.
First South has provided their consent to permit us to transfer the credit
agreement to CEH and provide us with a full release. The credit agreement
provides for borrowings of up to $3,500,000, which includes a line of credit
and
a term loan. As of December 31, 2007, Vanguard failed to comply with a covenant
under the credit agreement, relating to the maintenance of minimum level of
working capital of $500,000. On March 27, 2008, Vanguard received a waiver
of
its non-compliance with this covenant from First South through September 1,
2008, and an acknowledgement that Vanguard was no longer in default of the
credit agreement as of December 31, 2007.
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 through the fourth quarter of 2008 to early in the
first quarter of 2009 . We are currently seeking additional financing to fund
our business after the Sale. We cannot assure you that such financing or a
strategic transaction can be obtained or completed by us on favorable terms,
or
at all.
IF
WE ARE
UNABLE TO COMPLETE THE SALE OF VANGUARD WE MAY BE FORCED TO FILE FOR BANKRUPTCY
PROTECTION. ADDITIONALLY, IF WE COMPLETE THE SALE BUT CANNOT OBTAIN ADDITIONAL
FINANCING OR COMPLETE A STRATEGIC TRANSACTION AFTER THE SALE, WE MAY BE FORCED
TO FILE FOR BANKRUPTCY PROTECTION.
Operating
Activities
Cash
used
in operating activities was $764,468 for
the
first six months of fiscal 2008, compared to cash used of $3,665,537 for the
same period in fiscal 2007. Operating cash flows for the first six months of
fiscal 2008 reflect our net loss of $6,713,434 as discussed above, offset by
changes in working capital and $5,676,558 for non-cash expenses (primarily
the
impairment charges related our discontinued operations).
Operating
cash flows for the six months of fiscal 2007 reflect our net loss of $5,694,795,
offset by working capital requirements of $935,045 and non-cash expenses
(depreciation, amortization of intangible assets and stock-based compensation)
of $2,860,501. The working capital requirements resulted from increases in
accounts receivable and inventory.
Investing
Activities
Cash
used
in investing activities was $15,435 for the first six months of fiscal 2008
compared to cash used of $456,718 for the same period in fiscal
2007. During the first six months of 2008, we received proceeds from
the sale of our investment in PAA.
11
Financing
Activities
Cash
provided by financing activities was $350,000 for the first six months of fiscal
2008, compared to cash used of $150,000 for the comparable period of fiscal
2007. During the first six months of fiscal 2008, we made a contractual
principal payment of $150,000 on our term loan with First South and 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.
ITEM
4. CONTROLS AND PROCEDURES
As
of
June 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 June 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 June 30, 2008, that materially affected or are reasonably likely
to materially affect our internal control over financial
reporting.
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings.
John
T.
McDaniel v. Vanguard Synfuels and Allegro Biodiesel Corporation,
Civil Suit No. 19029, Thirty Fifth Judicial District Court of the Parish of
Baton Rouge, Louisiana.
On
July
16, 2008, the plaintiff dismissed this lawsuit with prejudice.
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.
13
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