10-Q 1 v312518_10q.htm 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March, 31, 2012

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-53107

 

ALTERNATE ENERGY SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of incorporation or organization)

26-0830388

(I.R.S. Employer Identification No.)

 

1061 Highway 92 N, Fayetteville, GA 30214

(Address of principal executive offices)

 

(678)489-6055

(Registrant's telephone number)

 

 (Former name, former address and former

fiscal year, if changed since last report)

 

Indicate by check mark 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.  x Yes   ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes   x No

 

Indicate by check mark 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.

 

Large accelerated filer   ¨ Accelerated filer     ¨
Non-accelerated filer     ¨  (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes    x No

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ¨ Yes  ¨ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: At May 17, 2012, there were 15,547,134 shares of common stock outstanding.

 

 
 

 

Alternate Energy Solutions, Inc.

(A Development Stage Company)

Balance Sheets

(Unaudited)

 

   March 31   December 31 
   2012   2011 
ASSETS          
Current Assets          
Cash and Cash Eqivalents  $59   $172 
Total Current Assets   59    172 
           
Equipment (net of depreciation of $8,447 and $7,041 for March 31, 2012 and December 31, 2011 respectively)   19,711    21,117 
           
Total Assets  $19,770   $21,289 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current Liabilities          
Due to Shareholder  $6,685   $6,685 
Accounts Payable   91,450    86,186 
Accounts Payable - Related Party   66,784    63,784 
Accrued Settlement   209,666    209,666 
Accrued Interest - Related Party   1,419    1,285 
Total Current Liabilities   376,004    367,606 
           
Total Liabilities   376,004    367,606 
           
Stockholders' Eqity (Deficit)          
Preferred stock ($0.0001 par value; 10,000,000 shares authorized: no shares issued and outstanding at March 31, 2012 and December 31, 2011 respectively)          
Common stock ($0.0001 par value: 110,000,000 shares authorized; 15,547,134 and 15,547,134  shares issued and outstandiong at March 31, 2012 and December 31, 2011 respectively)   1,555    1,555 
Stock Payable   28,097    28,097 
Additional Paid-in Capital   301,278    301,278 
Deficit accumulated during development stage   (687,164)   (677,247)
           
Total Stockholders' Equity (Deficit)   (356,234)   (346,317)
           
Total Liabilities and Stockholders' Equity (Deficit)  $19,770   $21,289 

 

The accompanying notes are an integral part of these financial statements

 

F-2
 

 

Alternate Energy Solutions, Inc.

(A Development Stage Company)

Statements of Operations

(Unaudited)

 

           August 1, 2008 
   Three Months   Three Months   (Inception) to 
   Ended   Ended   March, 31 
   March 31 2012   March 31 2011   2012 
             
Revenue  $-   $-   $- 
Cost of Sales   -    -    - 
Gross Profit   -    -    - 
                
Operating Expense               
Depreciation Expense   1,408    1,408    14,507 
Operating, general and administrative expense   3,113    23,828    640,307 
Total operating expenses   4,521    25,236    654,814 
                
(Loss) from operations   (4,521)   (25,236)   (654,814)
                
Other income (expense)               
Interest Expense   (5,396)   -    (32,350)
Total other income (expenses)   (9,917)   (25,236)   (687,164)
                
Provision for income taxes   -    -    - 
                
Net (loss)  $(9,917)  $(25,236)  $(687,164)
                
Weighted number of common shares outstanding-basic and fully diluted   15,547,134    15,530,467      
Loss per share basic and fully diluted  $-   $-      

 

The accompanying notes are an integral part of these financial statements

 

F-3
 

 

Alternate Energy Solutions, Inc.

(A Development Stage Company)

Statement of Stockholders' Deficit

(Unaudited)

 

           Additional       Deficit Accumulated     
   Common Stock   Paid-in   Stock   During     
   Shares   Amount   Capital   Payable   Development Stage   Total 
Balance August 1, 2008   -   $-   $-   $-   $-   $- 
Founders shares   13,000,000    1,300    (1,300)        -    - 
Donated rent   -    -    19,366    -         19,366 
Net Loss   -    -    -    -    (89,013)   (89,013)
Balance December 31, 2008   13,000,000    1,300    18,066    -    (89,013)   (69,647)
                               
Stock Payable   -    -    -    25,000    -    25,000 
Stock issued for services   1,170,000    117    58,383    -    -    58,500 
Net Loss   -    -    -    -    (331,444)   (331,444)
Balance December 31, 2009   14,170,000    1,417    76,449    25,000    (420,457)   (317,591)
                               
Stock issued for cash   1,000    -    50    -    -    50 
Stock issued for debt conversion   426,134    43    213,023    3,097    -    216,163 
Stock issued for services   100,000    10    4,990    -    -    5,000 
Effect of reverse merger   700,000    70    (719)        -    (649)
Net Loss   -    -    -    -    (158,106)   (158,106)
Balance December 31, 2010   15,397,134    1,540    293,793    28,097    (578,563)   (255,133)
                               
Stock issued for services   150,000    15    7,485    -    -    7,500 
Net Loss   -    -    -    -    (98,684)   (98,684)
Balance Decermber 31, 2011   15,547,134   $1,555   $301,278   $28,097   $(677,247)  $(346,317)
                               
Net Loss   -    -    -    -    (9,917)   (9,917)
Balance March 31, 2012   15,547,134   $1,555   $301,278   $28,097   $(687,164)  $(356,234)

 

The accompanying notes are an integral part of these financial statements

 

F-4
 

 

Alternate Energy Solutions, Inc.

(A Development Stage Company)

Statements of Cash Flow

(Unaudited)

 

           August 1, 2008 
   Three Months   Three Months   (Inception) to 
   Ended   Ended   March 31 
   March 31 2012   March 31 2011   2012 
             
Cash Flows from operating activities  $(9,917)  $(25,236)  $(687,164)
Net loss               
Adjustment to reconcile net loss to net cash used in operating activities             - 
Stock issued for compensation   -    -    25,000 
Stock issued for services   -    7,500    71,000 
Stock issued for debt   -    -    795 
Effects of reverse merger   -    -    100 
Depreciation expense   1,408    1,408    14,507 
Donated rent   -    -    19,366 
                
Changes in Operating Assets and Liabilities               
Accounts Receivable   -    -    - 
Accrued expenses   -    -    16,787 
Band overdraft        278      
Accrued expenses - Related parties   134    -    669 
Accounts payable   5,263    -    301,115 
Accounts payable - Related parties   3,000    -    31,437 
                
Net Cash Used In Operations   (113)   (16,050)   (206,388)
                
Cash Flows from investing activities               
Used For               
Equipment   -    -    (34,217)
Net cash used in investing   -    -    (34,217)
                
Cash Flows from financing activities               
Proceeds From               
Due to related parties        -    35,347 
Due to shareholder   -    16,007    6,685 
Sale of stock   -    -    50 
Borrowing on debt   -    -    198,582 
Net cash provided by financing   -    16,007    240,664 
                
Net increase (decrease) in cash  $(113)  $(43)  $59 
                
Cash Balance at Beg of Period   172    43    - 
                
Cash Balance at End of Period  $59   $-   $59 
                
Supplemental Cash Flow Information:               
Stock issued for interest expense  $-   $-   $16,787 
Stock issued for debt   -    -    198,582 
Stock issued for services   -    7,500    7,500 

 

The accompanying notes are an integral part of these financial statements

 

F-5
 

 

Alternate Energy Solutions, Inc.

(A Development Stage Company)

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Nature of the Business

 

Nature of the Business – The Forsythe Group Two, Inc. was organized under the laws of the State of Nevada on October 12, 2007.

 

On June 16, 2010, we entered into a share exchange agreement, or the Share Exchange Agreement, with Alternate Energy Solutions, Inc., or BFT, a Georgia corporation, and its shareholders pursuant to which we acquired 100% of the outstanding capital stock of BFT in exchange for 14,697,134 shares of our common stock (the "Share Exchange Agreement"). We included a copy of the Share Exchange Agreement as Exhibit 99.1 to a Current Report on Form 8-K that we filed with the SEC on June 18, 2010. The Share Exchange Agreement was subject to numerous conditions, all of which were satisfied or waived by the respective parties and the Share Exchange Agreement closed on July 27, 2010.

 

On July 27, 2010, our Board of Directors and sole stockholder separately adopted and approved by written consent resolutions approving and authorizing an amendment of our Articles of Incorporation to change our name to "Alternate Energy Solutions, Inc." ("we," "us," or the "Company") to more accurately reflect our new business operations.

 

We propose to construct and operate a biodiesel manufacturing facility that, when completed, will have the capacity to produce up to 80 million gallons per year of biodiesel fuel. We also expect the biodiesel plant to annually produce approximately 750,000 gallons of crude glycerin, which is a co-product of the biodiesel production process. Glycerin has many applications as an ingredient or processing aid in cosmetics, toiletries, personal care, drugs and food products.

 

Biodiesel is a biodegradable, nontoxic alternative fuel produced from multiple types of vegetable oil and other feedstocks. Biodiesel performs comparably to petroleum-based diesel in vehicle, marine, power generation and home heating oil applications. Biodiesel can be used as a direct replacement for diesel fuel at levels up to 100% and can also be blended with diesel in any percentage. On July 1, 2010, rules and accompanying compliance mechanisms, known as renewable fuel standards, went into effect mandating that certain minimum amounts of biofuels, such as biodiesel, are blended into the national transportation fuel supply. We believe that these rules will serve as the impetus for the development and growth of our business. Since our inception, our operations have comprised designing our biodiesel production facility and negotiating to lease or purchase the real property at which we will site our facility. We require significant capital to fund the entire range of our proposed activities.

 

Our plan of operation contemplates that we will construct a temporary facility at a leased site that will have a production capacity of 11.2 MGY upon full build-out. At such time as our financial resources permit and demand for our biodiesel warrants, we will construct a permanent facility near the proposed site of our temporary facility to which we will relocate our operations.

 

The current location of operation is a residential office provided by the Founder, at no cost to the Company, located at 1061 Highway 92 N, Fayetteville, Georgia. We plan on locating the permanent facility in Savannah, Georgia. The Corporate Headquarters, Bio-Diesel Refinery, and a Design/Fabrication Facility, in which we will build our propriety designed Reactor System and interior material storage, will be located at this facility. The facility will be owned by the Company and will allow for progressive growth and expansion. After phase development of our first plant has been completed, we believe we will have the capacity to produce approximately 80 million gallons of finished fuel per year.

 

As of March 31, 2012, the Company is in the development stage and has not generated any revenues.

 

F-6
 

 

Note 2 - Going Concern

 

The Company incurred net losses of $9,917 and $25,236 for the three months ended March 31, 2012 and March 31, 2011 respectively. The Company has a deficit accumulated during development stage of $687,164. As of March 31, 2012 the Company's liabilities exceed its assets by $356,234.  The Company has not generated revenues to date. These factors create substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent on securing additional sources of capital and the success of the Company’s plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Note 3 - Significant Accounting Policies

 

Basis of Presentation - The financial statements included herein are prepared under the accrual basis of accounting.

 

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Significant estimates subject to material changes in the near term include restructuring and impairment charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales returns and allowances, actuarial assumptions of pension plans, the estimated fair value of embedded derivative liabilities, settlement accruals, restructuring, valuation of investments, including other than temporary impairments to such investments, accounting for investments in equity securities, and litigation and defense costs. Actual results could differ from those estimates.

 

Cash and Cash Equivalents - For purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (“FDIC”) insures these balances, up to $250,000. All of the Company’s cash balances as of March 31, 2012 and December 31. 2011 were insured. At March 31, 2012 and December 31, 2011 there were no cash equivalents. Cash was $59 and $172 at March 31, 2012 and December 31, 2011 respectively.

 

Start-Up Cost - Start-up cost and organizational costs are expensed when incurred.

 

Advertising Costs - All cost associated with advertising and promotions are expensed as incurred.

 

Revenue Recognition - There are no current revenues now or expected during the start-up of the Company. Once we start operations and producing bio-diesel our revenue will be recorded when the Company delivers bio-diesel fuel to our customers. Additional revenue will be recognized when we ship glycerin which is our only by-product. Our design and fabrication business will also create additional revenue opportunities by manufacturing components for alternate energy industries such as solar, wind and turbine generation power systems. These revenues will be recognized as work is performed under contractual agreement.

 

Allowance for Doubtful Accounts - There is no current Allowance for Doubtful Accounts. Once we become operational and recording revenue we will evaluate our uncollectible receivables and record an Allowance for Doubtful Accounts as required.

 

Income Taxes - The Company accounts for income taxes under the liability method and records deferred taxes for the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

 

F-7
 

 

Impairment of Long-Lived Assets - Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

 

Fair Value of Financial Instruments - The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities and long-term debt. The estimated fair value of cash, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. The carrying value of long-term debt also approximates fair value since their terms are similar to those in the lending market for comparable loans with comparable risks. None of these instruments are held for trading purposes.

 

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level one — Quoted market prices in active markets for identical assets or liabilities;

 

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

 

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

 

The following table presents assets and liabilities that are measured and recognized at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011:

 

                   Total 
                   Gain/ 
Description   Level 1    Level 2    Level 3    (Loss) 
Cash and Cash Equivalents  $-   $-   $-    - 
Due to Shareholder  $-   $-   $-    - 
Convertible Note  $-   $-   $-    - 

 

Stock Based Compensation - The Company estimates the fair value of share-based payment awards made to employees and directors, including stock options, restricted stock and employee stock purchases related to employee stock purchase plans, on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods.  We estimate the fair value of each share-based award using the Black-Scholes option pricing model. The Black-Scholes model is highly complex and dependent on key estimates by management. The Company has not issued any options or warrants to date. All transactions in which goods or services are the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

Basic and Diluted Loss per Share - The basic net loss per common share is computed by dividing the net loss by the weighted number of shares outstanding. The diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” by the weighted number of shares outstanding plus potential dilutive securities. For the periods represented, there were no outstanding potential common stock equivalents therefore basic and diluted results per share are the same.

 

F-8
 

 

Recent Accounting Pronouncement - In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on December 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on our financial position or results of operations.

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will become effective for the Company on December 1, 2012. We are currently evaluating ASU 2011-04 and have not yet determined the impact that adoption will have on our financial statements.

 

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. This amendment explains which modifications constitute troubled debt restructurings (“TDR”). Under the new guidance, the definition of a troubled debt restructuring remains essentially unchanged, and for a loan modification to be considered a TDR, certain basic criteria must still be met. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructuring occurring on or after the beginning of the fiscal year of adoption. ASU 2011-02 has become effective for the Company on September 1, 2012. The Company does not believe that the guidance will have a material impact on its financial statements.

 

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our financial statements.

 

F-9
 

 

In December 2010, the FASB issued ASU 2010-28, “Intangible –Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently evaluating the impact of this ASU; however, we do not expect the adoption of this ASU to have a material impact on our financial statements.

 

Note 4 - Property and Equipment

 

Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:

 

Vehicles 2   years
Furniture and Fixtures 7   years
Machinery and Equipment 5   years
Office and Computer Equipment 3   years
Signs 7   years
Buildings 40 years

 

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations for the period. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and betterments are capitalized. Property plant and equipment in the process of being installed and/or modified for production purposes is carried in construction in progress until it becomes operational. Once the property and and/or equipment becomes operational the Company begins depreciated using the useful lives indicated above.

 

Property plant and equipment consists of:

 

   March 31, 2012   December 31, 2011 
         
Machinery  $28,158   $28,158 
Accumulated Depreciation   (8,447)   (7,041)
Net Book Value  $19,711   $21,117 

 

During 2008 the Company began construction of a mobile bio-fuel reactor to use for promotion and advertising purposes. Due to the extended nature of the construction project the Company depreciated the construction project using a five year straight line method. The construction project was completed during October 2010 and the mobile bio-fuel reactor was placed into depreciable machinery and equipment at its net book value of $28,158 and was depreciated using the straight line method over its useful life of five years. The Company had machinery on hand, net of accumulated depreciation, in the amount $19,711 and $21,117 at March 31, 2012 and December 31, 2011, respectively. Depreciation expense totaled $1,408 and $1,408 for the three months ended March 31, 2012 and March 31, 2011 respectively. The Company has incurred depreciation expense in the amount of $14,507 since inception.

 

F-10
 

 

Note 5 – Accounts Payable- Related Party

 

As of December 31, 2010 an officer of the Company paid $35,742 of operating expenses on behalf of the Company of which $7,305 was repaid resulting in a balance of $28,437. For the year ended December 31, 2011, the same officer paid for additional expenses of the Company $35,347 for working capital purpose and for the three months ended March 31, 2012 an additional $3,000 resulting in a balance of $66,784. The loan is interest free and due on demand. The Company did not impute interest as the borrowings relate to operating activity.

 

Note 6– Accrued Settlement

 

The Company had been party to an Employment Agreement with an individual to serve as its chief executive officer. The agreement was dated October 1, 2008.  Under the Employment Agreement, the employee would have been entitled to receive a base salary of $175,000 per year during the five year term of the agreement.  In addition, he would have been entitled to receive an incentive salary at a rate of 14% of the Company's adjusted net profits (as defined in the agreement) upon first revenues, increasing to 20% of adjusted net profits commencing in the fourth year of the agreement.  The Company agreed to issue to the employee a number of shares of stock equal to 14% of the total shares issued, increasing to 20% in the third year of the agreement, subject to anti dilution provisions.  In the event that the Company terminated the employee for cause, he would be entitled to all of the cash compensation payable under the agreement, plus a bonus and to receive an indeterminate number of shares of common stock. On September 1, 2009 the Company terminated the Employment Agreement for cause.  On July 20, 2010, the Company entered into a Settlement Agreement with the employee under which the Company agreed to (i) pay him the sum of $200,000 ($15,000 of which was allocated to payment for equipment contributed to the Company) upon the receipt of capital commitments totaling at least $2.5 million and (ii) issue to the former employee 500,000 shares of common stock. As of September 30, 2011, the $200,000 cash payment is included in Accounts Payable in addition to accrued payroll taxes of $9,667. The 500,000 shares of common stock were valued at $25,000 based on the most recent sale of common stock at $0.05 per share and is included in stock payable at March 31, 2012.

 

The Company terminated a former employee on September 1, 2009 for cause for failing to comply with Company policies and multiple breaches of the Company's code of ethics. The Company has made an offer of settlement to the former employee in connection with his termination for cause under the terms of his employment agreement dated October 8, 2008. Under the employment agreement, the former employee is entitled to receive a base salary of $175,000 per year and incentives based on a certain percentage of the Company's adjusted net profits as defined in the employment agreement beginning in the first quarter in which the Company has revenue. Also, under the employment agreement, the Company agreed to issue to the former employee a number of shares of the Company’s common stock.

 

Note 7 – Due to Shareholder

 

During 2010, an officer of the Company loaned the Company $6,685 for working capital purposes. The Company imputed interest at 8% per annum. The Company imputed interest in the amount of $134 at March 31, 2012. The amount is included in accrued interest of $1,419 at March 31, 2012.

 

Note 8 - Related Party Transactions

 

On July 20, 2010, the Company entered into a Settlement Agreement with the employee under which the Company agreed to (i) pay him the sum of $200,000 ($15,000 of which was allocated to payment for equipment contributed to the Company) upon the receipt of capital commitments totaling at least $2.5 million and (ii) issue to the former employee 500,000 shares of common stock. As of the period ended, the $200,000 cash payment is included in Accrued Settlement in addition to accrued payroll taxes of $9,667. The 500,000 shares of common stock were valued at $25,000 based on the most recent sale of common stock at $0.05 per share and is included in stock payable at March 31, 2012.

 

During 2010, an officer of the Company loaned the Company $6,685 for working capital purposes. The Company imputed interest at 8% per annum. The Company imputed interest in the amount of $134 at March 31, 2012. The amount is included in accrued interest of $1,419 at March 31, 2012

 

F-11
 

 

As of December 31, 2010 an officer of the Company paid $35,742 of operating expenses on behalf of the Company of which $7,305 was repaid resulting in a balance of $28,437. For the year ended December 31, 2011, the same officer paid for additional expenses of the Company $35,347 for working capital purpose and for the three months ended March 31, 2012 an additional $3,000 resulting in a balance of $66,784. The loan is interest free and due on demand. The Company did not impute interest as the borrowings relate to operating activity.

 

Note 9 – Stockholders’ Equity

 

Upon incorporation, the Company was authorized to issue 500 shares of common stock, no par value per share. On September 14, 2009, the Company amended its articles of incorporation to increase the number of shares of common stock it is authorized to issue to 20,000,000 shares of common stock. On May 24, 2010, the Company amended its articles of incorporation to increase the number of shares of common stock it is authorized to issue from 20,000,000 shares to 25,000,000 shares and affect a 1.3-for-1 split of the outstanding shares of common stock. All information has been adjusted to reflect the stock split as it took place as of the earliest period presented.

 

Common Stock

From inception to January 15, 2009, 13,000,000 shares were issued to the founders of the Company.

 

On May 15, 2009 the Company issued 1,170,000 shares of common stock to two related parties for professional services rendered. The aggregate value of the shares on the date of grant was $58,500 based upon the fair value of services provided of $0.05 per share of common stock.

 

On May 12, 2010, the Company sold 1,000 shares of its common stock to a third party for $0.05 per share

 

On June 10, 2010, the Company’s Board of Directors approved an issuance of 100,000 shares of common stock to two third parties for services rendered for a total $5,000 based upon the most recent sale of common stock at $0.05 per share.

 

On June 15, 2010, the Company issued 426,134 shares of common stock and recorded 6,194 shares in stock payable to convertible promissory note holders for conversion of principal of $198,582 and accrued interest of $16,787 at a conversion price of $0.50 per share.

 

On June 16, 2010, we entered into a share exchange agreement, or the Share Exchange Agreement, with Alternate Energy Solutions, Inc., or BFT, a Georgia corporation, and its shareholders pursuant to which we acquired 100% of the outstanding capital stock of BFT in exchange for 14,697,134 shares of our common stock (the "Share Exchange Agreement"). The Share Exchange Agreement was subject to numerous conditions, all of which were satisfied or waived by the respective parties and the Share Exchange Agreement closed on July 27, 2010. BFT became our wholly-owned subsidiary and we assumed the business and operations of BFT; which, after giving effect to the cancellation of 300,000 shares of common stock by Quality Investment Services, LLC, the sole stockholder, 15,397,134 shares of our common stock were outstanding. This transaction was accounted for as a reverse merger in accordance with current accounting guidance.

 

The Company issued 500,000 shares of common stock to a former employee under the terms of a Settlement Agreement dated July 20, 2010. The fair market value on the date of grant was $25,000 based upon the recent sales price of common stock of $0.05 per share. The amount was recorded in stock payable.

 

On January 10, 2011 the Company issued 150,000 shares of common stock to three related parties for professional services rendered. The aggregate value of the shares on the date of grant was $7,500 based upon the most recent sale price of $0.05 per share of common stock.

 

F-12
 

 

Note 10 – Income Taxes

 

Company incurred net losses for the three months ended March 31, 2012 and therefore had no tax liability. The net deferred tax asset generated by the loss carry forward has been fully reserved. The cumulative net loss carry forward is approximately $109,839 and $107,776 as of March 31, 2012 and December 31, 2011 respectively. The Company’s loss carry forward will expire beginning in the year 2028.

 

At March 31, 2012, the net deferred tax asset consisted of the following:

 

   March 31, 2012   December 31, 2011 
Net Operating Loss  $(109,839)  $(107,776)
Less: Valuation Allowance   109,839    107,773 
Net Deferred Tax Asset  $-   $- 

 

Note 11 - Subsequent Events

 

Management reported that there were no reportable events through the date of this filing.

 

F-13
 

 

Item 2. Management’s Discussion and Analysis or Plan of Operation.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission, or SEC, on April 16, 2012.

 

Overview

 

We are a development stage company that has not generated any revenues or conducted any substantive operations.  We have designed and propose ultimately to construct a biodiesel production plant having a stated nameplate capacity of 80 MGY.  Our plans are contingent upon the receipt of financing adequate to construct our plants.

 

Our goals are to:

 

·produce consistently high quality fuels that satisfy the requirements of a wide range of customers;

 

·achieve maximum yield to cost ratios – both with respect to capital investments and operating expenses;

 

·maintain flexibility to balance production volumes to customer demand;

 

·manage our business in a way that reflects our sensitivity to environmental sustainability.

 

We believe that our approach to biodiesel production and the proprietary equipment and processes we have developed will allow us to achieve these goals and be profitable immediately upon first biodiesel production.

 

We believe that our principal competitive advantage will derive from the price at which we can purchase feedstock from which to produce biodiesel.  Given the prevailing prices for soybean oil, the most common feedstock used by domestic biodiesel producers, we do not believe that they can produce or sell biodiesel at prices competitive with diesel fuel.  We believe that the viability of these producers has been made possible only by the application of the $1.00 per gallon biodiesel production credit.   We believe that the prices we expect to pay for PKO in combination with our other operating and production efficiencies will allow us to produce biodiesel at a price per gallon substantially less than other domestic biodiesel manufacturers.  Our production costs will allow us to sell biodiesel at prices competitive with the current market price for a gallon of diesel fuel, an operating efficiency that we believe currently cannot be matched by most other domestic biodiesel producer.  Though the price for our biodiesel will be competitive with the market price for diesel, we will be able to charge the premium in affect for biodiesel generally in effect.  In addition, our results of operations and profits will be enhanced by the $1.00 per gallon biodiesel production credit.

 

Our approach to biodiesel production and the proprietary equipment and processes we have developed will allow us to construct our plants more economically and more quickly than existing greenfield biodiesel plant designs of comparable capacity.  We could begin biodiesel production at a temporary facility capable of producing approximately 3.744 MGY of biodiesel within eight weeks after the receipt of funding.  We would increase the production capacity of the temporary facility gradually, as demand warrants, so that within one year, its finished capacity could be as high as 30 MGY.  We intend to reinvest our profits along with any third party investments to construct our 80 MGY plant.  We will be able to build our 80 MGY stated nameplate capacity plant for a total cost of approximately $20.5 million, or $0.2562 per gallon of nameplate capacity.  We believe that this plant could be producing approximately 42 MGY within twelve to fourteen months after we commence construction.  Our plans contemplate operating at maximum capacity approximately three years after we commence construction.  If demand warrants, we believe that we could reach maximum proposed capacity within approximately 32 months.

 

F-14
 

 

Our ability to effectuate our business plan and our future sales and operating results are, to some degree, predicated on the EPA’s approval of palm oil as a qualified pathway for producing renewable fuel under RFS2.  In the preamble to the RFS2 regulations, the EPA noted that it has the data needed for analysis but that it did not have sufficient time to complete the necessary lifecycle GHG impact assessment for the final rule.  The EPA noted that its analyses project that palm-oil will be used in meeting the RFS2 volume standard in the near-term; however, we cannot be certain that it will be approved as a qualified pathway for the production of biofuels.  The EPA indicated that it would complete its analysis in 2010; however, it has not completed its review, which remains in process.

 

We believe that the EPA’s delay in completing its analysis of palm oil has negatively impacted our financing efforts and ability to obtain the cash required to fund the construction of our temporary facility.

 

If palm oil/PKO is not approved as a pathway to produce RIN-generating biodiesel, we expect to continue to produce biodiesel using that feedstock and certify that the fuel is ASTM D – 6751 compliant, which would allow us to sell it in numerous other markets we have identified.  Depending upon the results of our operations under this revised business model, we may be required to scale back the speed at which we increase capacity of our temporary and permanent plants to correspond with demand for and actual revenues generated from the sale of our biodiesel in these other markets, which could prevent us from achieving our planned capacity and anticipated operating results.  Also, depending upon the extent of sales and our results of operations under such a revised business model, we may seek to identify other economical feedstocks, though we cannot assure investors that we will be able to purchase other feedstocks at the prices at which we can purchase PKO.

 

In view of the EPA’s delay in concluding its analysis of palm oil/PKO as a qualified pathway for producing biodiesel under RFS2 and the impact such delay has had on our ability to fund our operations,  we intend to construct a single reactor facility capable of producing approximately 624,000 gallons of biodiesel per year.  We will site the unit at existing laboratory space provided to us free of charge by our President.  Eventually, upon receipt of additional funding, we would relocate this reactor our temporary plant at the Port of Savannah.  We believe that in this time frame we could obtain all local permits required to sell fuel in Georgia and obtain ASTM – D 6751 certification for our biodiesel fuel, which would apply to the fuel we would produce at our temporary facility to be located at the Port of Savannah.  We also may utilize biomasses other than PKO to demonstrate the multi-feedstock capabilities of our production equipment.  We would seek to qualify our biodiesel for sale under state department of transportation regulations and sell it into numerous other markets in which there is a demand for ASTM D-6751 qualified biodiesel, which we describe under the heading “ Our Biodiesel Production Facilities ,” above.

 

Thereafter, as revenue generated from sales of fuel and third party funding permitted, we would relocate to the Port of Savannah and commence construction of our temporary facility.

 

Components of Revenues and Expenses

 

Total revenues

 

Our primary source of revenue will be the sale of biodiesel.  We will also receive revenue from the sale of glycerin, which is a co-product of the biodiesel production process and which has many applications as an ingredient or processing aid in cosmetics, toiletries, personal care products, drugs and food products.

 

The selling prices we will realize for our biodiesel are largely determined by the demand for biodiesel, which, in turn, is influenced by industry factors over which we have little if any control.  See "Our Industry."   Selling prices for glycerin also are subject to the forces of supply and demand and, since the advent of commercial biodiesel production, glycerin prices have tended to rise as biodiesel production decreases and decline as biodiesel production increases.

 

The supply of and demand for biodiesel have declined during over the last two years.  These trends have been attributed to the recession and the failure to pass the biodiesel production tax credit for 2010 along with the uncertainty as to the implementation of the RFS.  As a result, biodiesel prices have suffered.

 

Because the industry is new, average national biodiesel prices have been difficult to track and pricing statistics and information has been sporadically released.  The EIA's Monthly Biodiesel Production Report for the period January 2009 through December 2009 (the last period for which such report is available) demonstrated that biodiesel typically sold at a premium to petroleum diesel during the covered period.  In 2009, the average price received by biodiesel producers on the sale of blends containing 98% or more biodiesel and sold net of the federal tax credit was $1.89 per gallon.  The average diesel wholesale price during this period was $2.17 per gallon.

 

F-15
 

 

Since we expect to produce biodiesel at prices less than the market price for diesel fuel, we may elect to sell biodiesel at less than prevailing market prices to ensure disposition of our entire output.

 

Cost of Goods Sold and Gross Profit

 

Our gross profit will be derived from our total revenues less our cost of goods sold.  Our cost of goods sold will be affected primarily by the cost of feedstock, methanol, electricity and distribution cost (tanker truck rental and fuel requirements).

 

Biomass will be our most significant raw material cost.  In general, higher biomass prices will result in lower profit margins because biodiesel producers are unable to pass along increased biomass costs to customers because of the correlation of the price of biodiesel to diesel.  The price of biomass is subject to significant volatility.  We believe that as the EPA qualifies additional biomass pathways for the production of biofuels under RFS2, it recently approved canola oil as a qualified pathway, the price of the commodities from which biodiesel is manufactured will not be as sensitive to increases in demand resulting from increased biodiesel production and prices will come down, which would render other feedstocks economically practical.

 

We have received commitment letters from three PKO growers under which they have committed to supply us with and we are entitled to purchase from them feedstock in an amount in excess of our annual requirements (when we are operating at full capacity) at favorable prices when compared to current domestic feedstock prices that are fixed during the year after our first purchase.  These commitments are not contracts to sell PKO to us and it is unlikely we would be able to compel the growers to sell PKO to us at previously quoted prices.  The price of biomass is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors in the countries where they are grown.  These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply.  The significance and relative effect of these factors on the price of vegetable oils is difficult to predict.  In addition, because we will purchase biomass from vendors located in Africa and the Far East, we will be subject to all of the risks of doing business in developing countries.  Our supply of feedstock from these sources could be delayed, interrupted or discontinued at any time as a result of political or social unrest, economic factors, including the imposition of tariffs or taxes, or natural conditions, such as weather, in these countries.  In addition, transit problems could delay or interrupt shipments and deliveries of the product.  If these sources fail to supply the agreed upon amount of feedstock under the terms of their commitment letters or any extensions thereof, we may have difficulty in sourcing vegetable oils on economical terms.  If we are required to purchase feedstock on short notice to satisfy our customers' requirements for biodiesel, we may have to do so on the spot markets at significantly higher prices.  All of the foregoing factors could have a negative impact on the cost of biomass, our cost of goods and reduce our competitive position. 

 

The price of methanol is subject to significant volatility.  Between 2005 and June 2010, the price of methanol ranged from $.60 per gallon (March 2009) to $2.50 per gallon (in December 2009 and January 2010).  The price per gallon of methanol in North America for May 2011 is $1.27.  (All prices provided by Methanex Corporation, the world's largest producer of methanol and related products.)  At the high extreme of the price ranges reported above, the additional cost to produce a gallon of biodiesel would be $38 more than at the lowest cost reported in the period.

 

We will purchase electricity to power our biodiesel production systems.  We expect that electricity will represent our second largest operating cost after biomass, and electricity prices can be volatile.

 

Initially, we will distribute our biodiesel by tanker truck to customers who we expect will lie in an approximately 150 mile radius of our operations.  We will incur significant cost to lease and fuel these trucks.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses will consist of salaries and benefits paid to our management and administrative employees, expenses relating to third-party services, insurance, travel, marketing and other expenses, including certain expenses associated with being a public company, such as costs associated with compliance with Section 404 of the Sarbanes-Oxley Act and transfer agent fees.

 

F-16
 

 

Liquidity and Capital Resources

 

We are a new company with no material operating results to date.

 

We have not generated any revenue to date and will not generate any revenues unless and until we complete the construction of our biodiesel production facilities, as described below.  We will continue to incur operating costs in connection with the development of our business, including for travel expenses, professional fees and general and administrative expenses.  Our efforts to develop our business will be constrained until we obtain financing to construct our production facilities.

 

At March 31, 2012, we had total assets of $19,770, which included cash of $59 as compared to total assets of $21,289, including cash of $172, at December 31, 2011.

 

We have a deficit accumulated during development stage of $687,164.  As March 31, 2011, our liabilities exceed our assets by $356,234 and we had a working capital deficit of $37,945.

 

Since our inception, we have financed our operations through contributions and loans from management and from the sale of short term convertible promissory notes, the entire amount of which was converted into the stock of the Company upon the consummation of a share exchange in July 2010.  Since our inception, our management has paid operating expenses on behalf of the Company in the amount of $74,089, including $3,000 during the three months ended March 31, 2012, of which $7,305 has been repaid as of said date, and donated rent in the amount of $19,366 (accounted for as additional paid in capital) to fund our operations.

 

We do not have available any lines of credit or other bank facilities.

 

Over the next twelve months, we will require capital for the entire range of our activities, including the construction of our temporary biodiesel production plant, the permitting process, engaging personnel, purchasing raw material, general and administrative expenses and working capital, as described below under the heading ” Capital Requirements and Plan of Operation .”

 

Our existing cash reserves will not be sufficient to cover our operating costs and expenses over the next twelve months.  We will not commence revenue generating activities until we raise the funds we require to construct a single biodiesel reactor and commence producing and selling fuel.  We cannot provide investors with any assurance that we will have sufficient capital resources to fund our operations and realize our business objectives.

 

The Company’s financial conditions and its failure to generate revenues to date create substantial doubt about its ability to continue as a going concern.  The ability of the Company to continue as a going concern is dependent on securing additional sources of capital and the success of the Company’s business plan.  The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Capital Requirements and Plan of Operation

 

The development and construction of a biodiesel plant is capital intensive and we will require financing for the entire range of our proposed activities.  Moreover, we will be subject to all of the risks and uncertainties of a new business, including the factors described under “Item 1A. Risk Factors” appearing in the 2011 Annual Report.  Our success will be predicated on our ability to navigate and surmount these risks and will be determinative as to whether and when we commence generating revenue.

 

We can construct a biodiesel processing system, comprising three reactors and associated equipment, in-house at a cost of approximately $165,000 in two to three weeks.  Each system can produce approximately 1.872 million gallons of biodiesel per year at a cost of $0.17 per gallon of annual capacity (based solely on the cost of the equipment).  The nature of our technology is such that we can integrate new biodiesel processing systems easily with and into existing systems, allowing us to grow our plant progressively, as demand for our fuel warrants and our financial resources permit.

 

F-17
 

 

Initially, we had planned to raise approximately $750,000 to construct the first phase of our temporary plant, comprising three biodiesel processing systems.  We had planned to reinvest the net revenues generated from sales of biodiesel produced by these processing systems and any further investment in our Company to fund the progressive expansion of our temporary plant until we reached our projected capacity of 31.2 MGY.

 

In view of the EPA’s delay in concluding its analysis of palm oil/PKO as a qualified pathway for producing biodiesel under RFS2 and the impact such delay has had on our ability to fund our operations, we intend to construct a single reactor facility capable of producing approximately 624,000 gallons of biodiesel per year.  Accordingly, we are seeking to obtain financing in the amount of approximately $200,000 with which we would (i) purchase the equipment and parts required to construct a single reactor, (ii) purchase raw materials sufficient to produce approximately 10,000 gallons of biodiesel, (iii) obtain state license and ASTM D – 6751 qualification of our fuel, (iv) satisfy certain outstanding obligations, and (v) provide working capital until we are producing and selling a sufficient quantity of biofuel to support our operations (approximately 3 months).  We would utilize PKO as our feedstock and sell RINless biodiesel into markets in which there is a demand for ASTM D-6751 qualified biodiesel.  We would establish a skeletal operation requiring only our existing employees.  We believe that we could complete construction of this site within four weeks after receiving funding and that this site could become self sustaining and generate net revenues four weeks after commencing production.

 

We will continue to operate the single reactor system until we have the cash necessary to commence construction of the first phase our temporary facility to be sited at the Port of Savannah, comprising two biodiesel processing systems, either generated from revenues or received from financing activities.  We believe that our financing efforts would be more fruitful if the EPA were to approve palm oil as a qualified pathway for the production of renewable fuel under RFS.  We believe that we will require approximately $1.8 million to complete the development, construction and commissioning of the first phase of our temporary plant and acquire raw materials to produce approximately 295,200 gallons of biodiesel, without giving effect to revenue we may generate from the sale of fuel from then current operations that we may reinvest in the construction of the temporary plant..  Given our projected overhead and operating budget, we believe that a plant of this size could provide revenue sufficient to support the growth of our Company.

 

When our weekly backlog consistently averages 30,000 gallons of biodiesel per week, we will increase capacity at our temporary plant by adding a new production unit.  We believe that the profit to be derived from the sale of such quantity of biodiesel would both justify the increase in capacity and provide us with sufficient internally generated capital to allow us to fabricate an additional production unit.  We intend to follow this production model until we are operating sixteen processing units, at which time-our temporary plant will enjoy annual production capacity of 30,000,000 MGY.

 

We hope that by the time we commission our temporary plant, the EPA will have completed its modeling analysis of and approved palm oil as a compliant pathway for biofuel production.  In the event that the EPA has not qualified palm oil as a pathway for biofuel production upon completion of our temporary plant, our biodiesel will not generate RINs, which could be a disincentive to purchase our biofuel.  However, in view of anticipated plant economics, based principally on the competitive advantage that we will derive from the price we will pay for feedstock and the price at which we can produce and sell biodiesel, we believe that we will be able to produce and sell our biodiesel at a price less than the current price for diesel fuel and that we will be able to compete with diesel fuel on price alone.  We believe that these factors will allow us to sell our entire biodiesel output at a profit.  We believe that there are numerous markets in which there is a demand for ASTM D-6751 qualified biodiesel, such as fleet owners in the agricultural, marine and trucking industries, who are required to meet clean air regulations.

 

We will not commence development efforts with respect to the first phase of our permanent plant until we have available cash in the amount of $10,000,000, either generated from operations or made available through outside financing.  This sum will permit us to complete the design and engineering of the plant, complete the construction of the infrastructure, fabricate and install six production units, relocate our temporary plant, engage required personnel and obtain all operating permits and consents.  Assuming we receive no additional financing of any kind and that we sell 90% of our monthly biodiesel output at current market prices, we believe that we can accumulate sufficient retained earnings equal to $10 million within 24 months of commencing operations at our temporary facility.  This model would substantially extend the time to achieve full capacity at our permanent plant.  However, if management determines that accelerated expansion is desirable, we likely would seek to raise capital to supplement any available cash that we generate internally to complete the plant and achieve our maximum nameplate capacity more quickly.

 

F-18
 

 

We believe that we can complete the build-out of our permanent plant in twelve to fourteen months from groundbreaking.  The transition from our temporary location to the new facility will take approximately one to two months, during which time our temporary facility will continue uninterrupted biodiesel production.  We expect that we will have acquired many of the environmental and other permits required to operate our permanent plant in connection with the construction and operation of our temporary plant.  However, we will be required to register our permanent facility under RFS2 regulations, including providing the EPA with an independent engineer's report, before our biodiesel can generate RINs.  This process may take some time and may cause us to incur significant costs, particularly if we are required to modify elements of our plant to comport with the engineer's suggestions.  We believe that the total cost to commission the permanent plant at its initial capacity of 30.2 MGY will be approximately $13.5 million.  We expect that net profits from operations will be sufficient to fund any capital shortfall.

 

We will stage the introduction of each production unit at our permanent facility to correspond with demand for our product.  As we relocate to our permanent facility, we will be able to add capacity quickly and inexpensively by building new production systems as demand for our product warrants and our financial condition permits.  The staged, calculated expansion of our facility will allow us to maintain a close balance between production capacity and market demand for our product.  We believe that the total cost to achieve our proposed maximum capacity will be approximately $20 million.

 

We will seek to secure the capital necessary to fund our operations through equity or debt financing.  We currently are focusing on raising capital through the sale of equity in a private placement of our securities to one or more accredited investors, though we have not identified any definitive purchasers or made any offers to sell securities as of the date of this Report.  We cannot assure investors that we will be successful in raising all or any part of the capital we require to initiate our operations.

 

Our future capital requirements will depend on many factors, including:

 

·the approval of PKO as a qualified pathway under RFS2; the uninterrupted supply of feedstock at prices commensurate with the commitment letters we have received from PKO growers;

 

·the level of cash flows from product sales;

 

·the development and execution of an effective sales marketing plan;

 

·our ability to secure transportation to deliver our finished product on acceptable terms;

 

·the development of strategic relationships with distributors and other supply chain participants to attract potential customers;

 

·the continued availability of the property at which we propose to construct our permanent plant on the terms at which we have discussed with the current owner, or if such property is not available the ability to identify and enter into an agreement to purchase other property that satisfies our operational and strategic requirements; the continuation of the biodiesel production credit, which will enhance our operating results and bottom line;

 

·the costs to comply with RFS2 regulations;

 

·the costs of maintaining and operating our plant; and

 

·the ability to avoid costly and time consuming litigation.

 

F-19
 

 

We cannot provide investors with any assurance that we will have sufficient capital resources to fund our proposed activities.

 

Results of Operations

 

Three Months Ended March 31, 2012 and 2011

 

Our operating, general and administrative expenses decreased by $20,715 from $23,838 for the period ended March 31, 2011 to $3,113 for the period ended March 31, 2012, or 87%.  The decrease is primarily attributable to decreases in professional fees, primarily legal fees

 

For the three months ended March 31, 2012, we suffered a net loss of $9,917 as compared to a net loss of $25,236 for the corresponding period, a decrease of $15,319.  The decrease in net loss is attributable to decreases in professional fees.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements of any kind that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Contractual Obligations

 

During the three month period ended on March 31, 2012, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business from those specified in our 2011Annual Report.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for sales returns and doubtful accounts, inventory valuation, business combination purchase price allocations, our review for impairment of long-lived assets, intangible assets and goodwill, income taxes and stock-based compensation expense.  Actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements.  We refer readers to Note 1 to our audited financial statements for the year ended December 31, 2011 contained in our 2011 Annual Report.

 

Recent Accounting Pronouncements

 

We refer readers to Note 1 to our audited financial statements for the year ended December 31, 2011 contained in our 2011 Annual Report for a discussion of new and recently adopted accounting pronouncements.

 

Statements, other than historical facts, contained in this Quarterly Report on Form 10-Q, including statements of potential acquisitions and our strategies, plans and objectives, are "forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Although we believe that our forward looking statements are based on reasonable assumptions, we caution that such statements are subject to a wide range of risks, trends and uncertainties that could cause actual results to differ materially from those projected.  Among those risks, trends and uncertainties are important factors that could cause actual results to differ materially from the forward looking statements, including, but not limited to;

 

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·our lack of an operating history makes it difficult to evaluate our business and prospects in an emerging market;

 

·the absence of operations and revenues raises substantial doubt about our ability to continue as a going concern;

 

·our ability to obtain financing to initiate any portion of our business plan and to implement our sales and marketing programs;

 

·the efficacy of our products and service offerings;

 

·customer acceptance of our products and service offerings;

 

·all of the other risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on April 16, 2012 (the “2010 Annual Report”).

 

We undertake no duty to update or revise these forward-looking statements.

 

When used in this Form 10-Q, the words, "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The Company is not required to provide the information required by this item because it is a smaller reporting company.

 

Item 4(T). Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2012, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer, who is the Company’s principal executive officer and principal financial officer, who we refer to herein as our CEO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act), pursuant to Exchange Act Rule 13a-15.  As a result of our continuing efforts to remediate the material weaknesses in our internal control over financial reporting that existed as of December 31, 2010 and which remained extant as of the close of the period covered by this Report, our CEO concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2012.

 

The weaknesses in our disclosure and procedures encompassed weaknesses in certain elements of our internal control over financial reporting (ICFR) that our subsumed within our disclosure controls and procedures.  A material weakness is defined in Section 210.1-02(4) of Regulation S-X as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.  The specific weaknesses relate to elements of our ICFR that provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and comprise the following:

 

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1.We did not maintain effective controls over the control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

 

2.We did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.

 

3.We did not maintain effective controls over financial reporting. Specifically, controls were not designed and in place to ensure that the financial impact of certain complex equity transactions were appropriately and correctly reported. The transactions were identified by the auditors and calculated and reported correctly as of March 31, 2012.

 

Corrective Measures.

 

The Company has not yet taken any actions to remediate the material weaknesses in our ICFR and disclosure controls and procedures.  The Company will explore and consider the options available to us to remediate the material weaknesses.  The remediation measures we ultimately implement may include:

 

·Creating a position to segregate duties consistent with control objectives that would increase our personnel resources and technical accounting expertise within the accounting function.
   
·Retaining a third party accounting firm to assist in developing and establishing internal controls and procedures.
   
·Organizing an audit committee and appointing one or more outside directors to our board of directors who would serve on the audit committee and be responsible for undertaking the implementation and oversight of internal controls and procedures.

 

The measures we implement will necessarily reflect our resource constraints.  We are a development stage company, have not generated any revenue from operations and possess limited financial resources.  For the time being, our limited financial resources will constrain our ability to implement and support the entire range of corrective measures we ultimately may elect to deploy.  Accordingly, we anticipate that we will introduce the corrective measures that we select over time as our resources permit and our business grows.

 

We cannot assure you at this time that the actions and remediation measures we ultimately implement will effectively remediate the material weaknesses described above or prevent the incidence of other significant deficiencies or material weaknesses in our internal control over financial reporting in the future.

 

Changes in Internal Controls

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There are presently no material pending legal proceedings to which the Company, any of its subsidiaries, any executive officer, any owner of record or beneficially of more than five percent of any class of voting securities is a party or as to which any of its property is subject, and no such proceedings are known to the Registrant to be threatened or contemplated against it.

 

Item 1A. Risk Factors.

 

Smaller reporting companies are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a) On January 10, 2011 the Company issued an aggregate of 150,000 shares of common stock to three individuals without registration under the Securities Act in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering.  The Company issued the shares at a price of $0.0001 per share, the par value thereof, for an aggregate price of $15.

 

(b) Not applicable.

 

(c) During the three months ended March 31, 2012, neither the Company nor any ”affiliated purchaser,” as defined in Rule 10b-18(a)(13), purchased any shares or other units of any class of the issuer's equity securities.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. (Reserved).

 

Item 5. Other Information.

 

(a) None.

 

(b) The Company has not adopted any procedures by which security holders may recommend nominees to the registrant's board of directors.

 

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Item 6. Exhibits.

 

Exhibit Description
31.1 Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012
32.1* Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS1 XBRL Instance Document
101.SCH1 XBRL Taxonomy Extension Schema Document
101.CAL1 XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB1 XBRL Taxonomy Extension Label Linkbase Document
101.PRE1 XBRL Taxonomy Extension Presentation Linkbase Document
   
1 To be filed by amendment.

 

*  Pursuant to Commission Release No. 33-8238, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of Section 18 of the Securities Exchange Act of 1934, as amended, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    ALTERNATE ENERGY SOLUTIONS, INC.
     
Dated: May 18, 2012   /s/ Kenneth Rakestraw
    Kenneth Rakestraw
   

President, Principal Executive Officer

and Principal Financial Officer

 

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