Strattner Financial Group (SCNG)

[Sbleau]

Sry this report form the other day,,,,,

PART D, ITEM XII FINANCIAL INFORMATION
EVOLUTION FUELS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands except share amounts)
June
30, 2009
December
31, 2008
Current Assets
Cash and cash equivalents, restricted $ — $ 0
Investments in equity securities 75 52
Investments in securities classified as available for sale 1,470 4,700
Prepaid expenses and other current assets 556 760
Total Current Assets 2,101 5,512
Property, Plant and equipment, net of accumulated depreciation 4,790 5,456
Investments and advances 9,405 9,685
Deferred Share Based Compensation 11,067 —
Prepaid and other long term assets 190 199
Total Assets $ 27,553 $ 20,852
Current Liabilities
Accounts payable $ 13,204 $ 15,270
Accrued interest payable 3,674 2,876
Demand Notes 1,846 1,612
Convertible promissory notes 22,973 23,000
Secured note payable 7,500 7,500
Accrued income taxes — 17,610
Total Current Liabilities 49,197 67,868
Commitments and contingencies (Note 14)
Series A-Redeemable preferred stock, $.001 par value, $1.00 issue price, 87,000,000 shares
authorized. 11,525,721 shares issued and outstanding at June 30, 2009; 5,741,991 issued and
outstanding at December 31, 2008 11,526 5,742
Series B-Redeemable preferred stock, $5.00 par value, 13,000,000 shares authorized, 1,903,586
issued and outstanding at June 30, 2009; and 708,596 issued and outstanding as of December 31,
2008 9,518 3,543
Series C-Redeemable preferred stock, $.0001 par value, 500 shares authorized, and 125 shares
issued and outstanding at June 30, 2009, 0 shares issued and outstanding at December 31, 2008. — —
Stockholders’ Equity (Deficiency)
Common Stock, $.0001 par value at June 30, 2009 and $.001 par value at December 31, 2008,
100,000,000,000 shares authorized, 21,165,709,634 shares issued and 21,162,575,500
outstanding at June 30, 2009; 415,253,787 shares issued and 412,119,634 outstanding at
December 31,2008 2,116 415
Additional paid-in capital 162,432 157,881
Accumulated deficit (208,480 ) (219,071 )
Unrealized gain on securities available for sale 1,470 4,700
Treasury stock at cost (3,134,134 shares) (226 ) (226 )
Total Stockholders’ Equity (Deficiency) (42,688 ) (56,301 )
Total Liabilities and Stockholders’ Equity $ 27,553 $ 20,852
The accompanying Notes are an integral part of these consolidated financial statements.
1
EVOLUTION FUELS, INC.
Statements of Operations
(Unaudited)
(Amounts in 000’s)
Three Months Ended
June 30,
Six Months Ended
June 30,
2009 2008 2009 2008
Sales revenue $ — $ 7,383 $ — $ 14,804
Cost of sales 7,275 13,259
Gross profit 108 1,545
Compensation (including share based compensation
of $982 and $710 for the months ended June 30,
2009 and the three months ended June 30, 2009, ,
respectively) 1,172
917
1,789 2,896
Other selling, general and administrative 1,070 5,319 997 8,564
Depreciation and amortization 139 672 279 1,349
Impairment loss — 12,774 — 12,774
Total Operating Expenses 2,381 19,682 3,065 25,583
Net loss from operations (2,381 ) (19,574 ) (3,065 ) (24,083 )
Other income (expense)
Interest expense (729 ) (27,087 ) (1,348 ) (32,305 )
Gain (Loss) on sale of subsidiary 17,610 (18,787 ) 17,610 (18,787 )
Other income (expense) (233 ) 164 1,265 1609
Total other income (expense) 16,648
(45,710 )
17,527
(49,483 )
Net income (loss) 14,267 (65,392 ) 14,462 (75,066 )
Net income (loss) per share - basic and diluted $ .0012 $ (0.27 ) $ .0013 $ (0.31 )
Weighted average number of common shares
outstanding - basic and diluted 11,364,062
204,160
10,790,481 204,160
The accompanying Notes are an integral part of these consolidated financial statements.
2
EVOLUTION FUELS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2009 and 2008
(Unaudited)
($ in thousands)
Cash flows from operating activities: 2009 2008
Net income (loss) $ 14,462 $ (75,066 )
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization of intangibles 279 1,349
Fixed Asset Impairment — 12,774
Impairment of intangibles — 35,533
Debt discount amortization — 27,273
Share-based compensation 982 1,217
Gain on sale of subsidiary (17,610 ) —
Changes in operating assets and liabilities:
Trade accounts receivable — (2,545 )
Inventory — (49 )
Prepaid expenses and other current assets 204 1,088
Other assets 9 —
Accounts payable and accrued expenses (2,066 ) (1,682 )
Accrued interest 798 —
Notes Payable 207 —
Other — 216
Net cash provided by (used in) operating activities (2,735 ) 108
Cash flows from investing activities:
Sale or (Purchase) of equity securities (23 ) —
Sales of property, plant and equipment 387 —
Investments in and advances to related parties, net 281 (400 )
Net cash provided by (used in) investing activities 645 (400 )
Cash flows from financing activities:
Proceeds from issuance of Preferred stock 2,090 500
Treasury stock, net of repurchases — (70 )
Repayments of line of credit — (132 )
Net cash provided by (used in) financing activities 2,090 298
Net decrease in cash and cash equivalents 0 6
Cash and cash equivalents at the beginning of period 0 42
Cash and cash equivalents at the end of period $ 0 $ 48
The accompanying Notes are an integral part of these consolidated financial statements.
3
EVOLUTION FUELS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Six Months Ended June 30, 2009 and For the Year Ended December 31, 2008
(Unaudited)
(Amounts in 000’s)
Common
Stock Shares
Common
Stock at
Par
Additional
Paid in
Capital
Other
Comprehensive
Income (Loss)
Treasury
Stock
Accumulated
Deficit
Note
Receivable
from
Parent Totals
Balance December 31,
2007 276,554 $ 276 $ 154,122 $ — $ (156 ) $ (204,277 ) $ (4,111 ) $ (54,144
Unrealized Gain on
Security held for sale 4,700 — — — 4,700
Shares issued for
Services 45,578 45 1,716 1,760
Shares issued in
connection
with preferred stock
including, common
stock warrants and
beneficial conversion
feature
73,312 73
1,630 — — — —
1,702
Shares issued for
investments 609 1 23 — — — — 24
Treasury Stock (1,299 ) (1 ) — — (70 ) — — (71 )
Parent and affiliate note
receivable — — — — — — 4,111 4,111
Shares issued for
contracts 10,000 10 190 200
Shares issued to Parent 10,500 11 200 — — 143 354
Net loss — — — — — (14,,937 ) (14,937)
Balance
December 31, 2008 415,254 $ 415 $ 157,881 $ 4,700 $ (226 )) $ (219,071) ) $ (56,301)
Unrealized Gain (loss)
on Security held for sale (3,230) — — — (3,230)
Change in Par Value
from $.001 to $.0001 (2,197) 2,197
Shares issued for
Services and contracts 1,398,180
1,965 (1,450) 515
Stock Dividend 9,678,263 967 2,903 (3,870 ) --
Shares issued in
connection
with preferred stock
including, common
stock warrants and
beneficial conversion
feature
1,658,852 165
219 — — — — 384
Shares issued for Debt
Conversion 2,744,328 274 463 — — — — 737
Treasury Stock — — — —
Shares issued for cash 5,270,833 527 219 — 746
Net gain (loss) — — 14,461 — 14,461)
June 30, 2009 21,165,711 $ 2,116 $ 157,481 $ (1,470) $ (226 )) $ (208,480) ) — $ (56,003)
See accompanying notes to consolidated financial statements
4
EVOLUTION FUELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — ORGANIZATION AND MANAGEMENT’S PLANS
Organization
Earth Biofuels, Inc., (“Earth” or “EBOF”) was incorporated in the state of Nevada on July 15, 2002. On September 13, 2005, Earth
issued 146,100,000 shares of common stock to Apollo Resources International, Inc., a Utah corporation, (“Apollo”) in exchange for
80% of the outstanding shares of common stock of Evolution Fuels, Inc., Inc., a Mississippi corporation. With the acquisition, Apollo
owned approximately 88% of the issued and outstanding shares of Earth. This transaction has been accounted for as a recapitalization
effected through a reverse merger, such that Earth Biofuels Operating, Inc. was the “accounting acquirer” for financial reporting
purposes. On October 7, 2005, Earth Biofuels, Inc., Inc. (the Mississippi Company) changed its name to Earth Biofuels Operating, Inc.
Effective November 14, 2005; the domicile of Earth was moved to Delaware by means of a merger of Earth with and into Earth
Biofuels, Inc., a Delaware corporation. In April 2009 the Company changed its name to Evolution Fuels, Inc (“Evolution” or
“Company”)
The principal business of Evolution Fuels, Inc. (“Evolution”, or, the “Company”), a Delaware corporation, currently is the
development of retail renewable fuel stations which will provide blends of ethanol from 10% to 85% (E10 to E85), and to establish
truck stops modeled after the Willie’s Place Truck Stop in Carl’s Corner, TX. The Company intends to supply biodiesel to these retail
locations from its own biodiesel production facility. Evolution’s primary plants and operations are located in Texas and Oklahoma,
with certain other operations planned in Mississippi.
On June 30, 2008, the Company sold its wholly owned subsidiary New ELNG to PNG Ventures Inc. (“PNG”) via a Share Exchange
Agreement (the “Exchange Agreement”), in exchange for the issuance of 7,000,000 shares of the of common stock of the PNG. Prior
to the completion of the Share Exchange, Earth LNG, Inc, a Texas corporation (“ELNG”) had transferred to New ELNG all right and
marketable title to the member interests of Applied LNG Technologies USA, LLC and Arizona LNG, L.L.C. and all their other assets
(other than receivables from EBOF and other subsidiaries of EBOF) that, together, comprise the LNG business, resulting in the
characterization of the transfer as an asset sale of EBOF’s subsidiary. The investors holding $52.5 million in senior unsecured notes
were granted an irrevocable proxy regarding the 7 million shares EBOF received in the exchange. In addition, the notes to the
investors were amended with new conversion rates to EBOF shares, and/or are exchangeable into the PNG shares with limitations on
the exchanges. Accordingly, EBOF did not have voting control over the 7,000,000 shares of PNG Ventures, Inc. and a change of
control has occurred with regard to the LNG business.
As a result, earnings from the LNG business through the date of disposition and gain on sale have been included in the financial
statements. for the year ended December 31, 2008. The financial statements of the LNG business are reported as discontinued
operations in the statement of operations and its associated assets and liabilities are classified separately in the balance sheet. Prior
periods have been reclassified to conform to the current-period presentation.
On December 24, 2008, the Company and the holders of the Company's Amended and Restated Senior Secured Convertible
Exchangeable Notes and Series B Senior Secured Convertible Exchangeable Notes entered into an Amendment and Exchange
Agreement (the “Amendment and Exchange Agreement”) and consummated the transactions contemplated thereby, pursuant to
which, among other things:
The Company exchanged:
• $26,000,000 of an Amended and Restated Senior Secured Convertible Exchangeable Note held by three investors for a senior
secured convertible note in the aggregate principal amount of $13,235,000 (the “Series C Note”), which is convertible in
shares of common stock, par value $0.001 per share (the “Common Stock”), of the Company, in accordance with the terms
thereof and
• $3,000,000 of the outstanding principal amount of existing Series B Senior Secured Convertible Exchangeable Note issued to
one Investor for a senior secured convertible note in the aggregate principal amount of $1,765,000 (the “Series D Note),
which is convertible in shares of Common Stock in accordance with the terms thereof.
• Neither the Series C Note nor the Series D Note is exchangeable into shares of common stock, par value $0.001 per share of
PNG Ventures, Inc., a Nevada corporation;
• In addition to the above transactions, one investor exchanged $56,000,000 of an Amended and Restated Senior Secured
Convertible Exchangeable Note for 5.6 million shares of common stock of PNG corporation. This left the Company with
1,400,000 shares of PNG stock which is pledged to other investors holding Amended and Restated Senior Secured
Convertible Exchangeable Note
• Subject to the satisfaction of certain equity conditions, the Company may at any time, at its option, require the Investor to
convert the remaining aggregate principal amount of $5,000,000 of the Amended and Restated Senior Secured Convertible
Exchangeable Note of the Investor in Common Stock, in whole or in part; and
• The Company, certain of its subsidiaries and the Investor entered into a reaffirmation agreement (the “Reaffirmation
Agreement”), which reaffirms the security interest granted by the Company and certain of its subsidiaries with respect to the
Amended and Restated Senior Secured Convertible Exchangeable Notes, the Series B Senior Secured Convertible
Exchangeable Notes, the Series C Note and the Series D Note.
The Series C Note ranks pari passu with the Amended and Restated Senior Secured Convertible Exchangeable Notes and the Series D
Note ranks pari passu with the existing Series B Senior Secured Convertible Exchangeable Notes.
The holders of the Company's Amended and Restated Senior Secured Convertible Exchangeable Notes and Series B Senior Secured
Convertible Exchangeable Notes consented to the transactions contemplated by the Exchange Agreement.
As a result of all of the above December 24, 2008 transactions, the Company recognized a gain on the exchanges totaling
$74,774,435. The gain is included in the financial statements for the period ending December 31, 2008.
Going Concern
Evolution has incurred significant losses from operations through June 30, 2009 and has limited financial resources. The Company
has a significant accumulated deficit, negative current ratios and negative tangible net worth at June 30, 2009 and December 31, 2008.
These factors raise substantial doubt about our ability to continue as a going concern.
Management intends to raise capital through other offerings, secure collateralized debt financing and use these sources of capital to
grow and enhance its alternative fuel production and distribution operations. If additional funds are raised by issuing debt, we may be
subject to restrictive covenants that could limit our operating flexibility. Evolution’s performance will also be affected by prevailing
economic conditions. Many of these factors are beyond Evolution’s control. There can be no assurance that adequate funds will be
available when needed and on acceptable terms, or that a strategic alternative can be arranged. The accompanying financial statements
do not reflect any adjustments that might result from the outcome of this uncertainty.
These items, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
There can be no assurance that any of management’s plans as described above will be successfully implemented or that the Company
will continue as a going concern.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements and the supporting and supplemental material are the responsibility of the
management of Evolution Fuels, Inc., Inc.
Principles of Consolidation — Evolution’s consolidated financial statements include the accounts of Evolution and it’s wholly and
majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates — The preparation of consolidated 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 and 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. Actual results could differ from those estimates.
Cash Equivalents — Evolution considers all highly liquid investments with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable — Evolution uses the allowance method of accounting for doubtful accounts. The balance is based on historical
collections and management’s review of the current status of existing receivables and estimate as to their collectability.
Accounts Receivable — Tax Credits — Evolution files federal excise tax returns each quarter, claiming refundable biodiesel mixture
tax credits. These credits are accounted for on a gross basis and included as part of sales revenues when earned.
Marketable Securities — In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”,
securities are marked to market with gains and losses being reflected as unrealized for “available for sale” securities, and realized
gains or losses for “trading securities”. At June 30, 2009 and December 31, 2008, securities available for sale consisted of the
1,400,000 shares of PNG stock previously discussed as part of the December 24, 2008 transactions. The market value of securities
held for sale was $1,400,000 and $4,760,000 at June 30, 2009 and December 31, 2008, respectively. The change in fair value has
been included as a separate line item in the equity section of the balance for the respective periods
Inventory — Inventories of fuel purchased and processed are stated at the lower of cost (on a first-in, first-out, moving-average basis)
or market.
Property, Plant and Equipment — Property, plant and equipment are carried at cost. Depreciation of property, plant and equipment is
provided using the straight line method at rates based on the following estimated useful lives:
Asset Life
Buildings and improvements 8 - 39 years
Fixtures and equipment 4 - 20 years
The cost of asset additions and improvements that extend the useful lives of property and equipment are capitalized. Routine
maintenance and repairs items are charged to current operations. The original cost and accumulated depreciation of asset dispositions
are removed from the accounts and any gain or loss is reflected in the statement of operations in the period of disposition.
Impairment of Long-Lived Assets — In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets”, Evolution reviews the carrying value of its long-lived assets annually or whenever
events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. Evolution
assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset’s carrying value and fair value. The net asset balance after recordation of an impairment loss
becomes the new cost basis and is depreciated over the remaining useful life of the asset in accordance with Financial Accounting
Standards No. 144.
Goodwill and Other Intangible Assets — Evolution accounts for goodwill and other intangible assets in accordance with SFAS No.
142, “Goodwill and Other Intangible Assets.” Goodwill and other intangible assets are periodically tested for impairment. Evolution
assesses goodwill for impairment by periodically comparing the fair value of its reporting units to their carrying amounts to determine
if there is potential impairment. Fair values for reporting units are determined based on discounted cash flows, market multiples or
appraised values as appropriate. The fair value of definite lived intangible assets is determined by using a “relief from royalty”
approach.
Revenue — Sales are recorded at net realizable value, net of allowances for returns, upon shipment of products to customers.
Evolution records revenue from federal incentive programs related to the production of biodiesel when Evolution has produced and
sold the biodiesel and completed all the requirements of the applicable incentive program.
Cost of Product Sales — Cost of sales consists primarily of raw materials costs incurred to produce or process our product.
Shipping and handling costs are included as a component of costs of product sales in our consolidated statements of operations
because we include in revenue the related costs that we bill our customers.
Accounting for Share-Based Compensation — Evolution measures all share-based payments, including grants of employee stock
options, using a method in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payments.” The
cost of services received in exchange for awards of equity instruments is recognized in the statement of operations based on the grant
date of those awards amortized over the requisite service period. Evolution utilizes a standard option pricing model, the Black-Scholes
model, to measure the fair value of stock options granted.
Evolution determines the measurement date for share-based transactions with non-employees according to the terms of EITF 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services”. Evolution measures the value of equity instruments using the stock price and other measurement assumptions as of the
earlier of either of the date at which a commitment for performance by the counterparty to earn the equity instruments is, or the date at
which the counterparty’s performance is complete.
Share Based Compensation for Officers and Directors vests over a ten year period. Unvested shares are recorded as Deferred Share
Based Compensation in the applicable period.
Income Taxes — Evolution and its subsidiaries file a consolidated federal tax return. Income taxes are provided based upon the asset
and liability method of accounting. Deferred tax assets and liabilities are recognized for temporary differences between financial
statement carrying amounts and the tax bases of assets and liabilities, and are measured using the tax rates expected to be in effect
when the differences reverse. Deferred tax assets are also recognized for operating loss and tax credit carry forwards. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the
enactment date. A valuation allowance is used to reduce deferred tax assets when uncertainty exists regarding their realization.
Net Loss Per Common Share — Basic and diluted net loss or gain per common share are presented in conformity with the SFAS No.
128, “Earnings Per Share”. Diluted net loss per share is the same as basic net loss per share as the inclusion of outstanding options and
warrants until their exercise would be anti-dilutive. Basic net income per share is computed by dividing net income available to
common shareholders (numerator) by the weighted average number of common shares outstanding during the year (denominator).
Diluted net income per share is computed using the weighted average number of common shares and dilutive potential common shares
outstanding during the year. Outstanding options and warrants were not included in the computation of diluted loss per share for
the three months ended March 31, 2009 and the year ended December 31, 2008 because their inclusion would be anti-dilutive.
Treasury Stock — The Company accounts for treasury stock using the cost method. Under the cost method, the gross cost of the
shares reacquired is charged to a contra equity account. The stock was acquired for reasons other than its retirement, however, its
ultimate disposition has not yet been decided.
NOTE 3 — INVENTORIES
At June 30, 2009 and December 31, 2008, the Company had no inventory.
NOTE 4 — PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following at March 31, 2009 and year ended December 31, 2008:
June
30,
2009
December
31,
2008
Description ($ in 000’s) ($ in 000’s)
Deposits on business related assets and office spaces 195
Escrowed interest related to term debt facilities $ 566 $ 760
Other prepaid assets 4
Total 566 959
Less current portion (566) (760)
Long term prepaid expenses and other assets $ 0 $ 199
NOTE 5 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of June 30, 2009 and year ended December 31, 2008 consist of the following:
June
30, 2009
December
31, 2008
Property, Plant and Equipment
($ in
000’s)
($ in
000’s)
Land $ 681 $ 681
Buildings and improvements 6,753 16,952
Fixtures and equipment 157 157
Total cost 7,591 17,790
Fixed asset impairment (9,622 )
Accumulated Depreciation (2,801 ) (2,711
Net property, plant and equipment $ 4,790 $ 5,456
As part of the share exchange, $6,950,000 of the debt related to the Durant plant facility was
transferred as part of the sale of the subsidiary, and amended into the new debt on the LNG plant. As a
result, the Durant plant was deemed impaired and is recorded at net realizable value, with a charge to
earnings for plant impairment of $9,622,000 during the year ended December 31, 2009.
NOTE 6 — INVESTMENTS AND ADVANCES
Amounts representing the Corporation’s percentage interest in the underlying net assets of other
significant subsidiaries, and less-than-majority-owned companies in which a significant ownership
percentage interest is held, are included in “Investments and advances”. For the year ended December
31, 2008, the Company recorded a $724,879 loss for WN Truck Stop, LLC. All other subsidiaries
were dormant. For the six months ended June 30, 2009, the Company recorded an $117,758 loss on
its ownership in WN Truck Stop, LLC. Evidence of loss in value that might indicate impairment of
investments in companies accounted for on the equity method is assessed to determine if such evidence
represents a loss in value of the Company’s investment that is other than temporary. Examples of key
indicators include a history of operating losses, negative earnings and cash flow outlook, and the
financial condition and prospects for the investee’s business segment or geographic region. If evidence
of another than temporary loss in fair value below carrying amount is determined, impairment is
recognized. In the absence of market prices for the investment, discounted cash flows are used to
assess fair value.
The Issuer has several subsidiaries, most of which are now dormant:
SUBSIDIARY BUSINESS PURPOSE METHOD OF
OPERATION OWNERSHIP INCLUDED IN
FINANCIALS
WN Truck Stop, LLC Owns Willie’s Place Truck Stop LLC 50% Yes
Earth Biofuels
Distribution Company Dormant Corporation 100% Yes
Earth Biofuels
Operating, Inc. Dormant Corporation 100% Yes
Earth Ethanol, Inc. Dormant Corporation 100% Yes
Earth Biofuels of
Cordele, LLC Dormant LLC 100% Yes
B20 Customs, LLC Dormant LLC 100% Yes
Vertex Processing, LP Dormant Partnership 49% Yes
EBOF GP, LLC Dormant LLC 100% Yes
Earth Biofuels Retail
Fuel Company Dormant Corporation 100% Yes
Earth Biofuels, LLC Dormant LLC 100% Yes
Durant Biofuels, LLC Holds the Durant biodiesel
facility LLC 100% Yes
Earth Ethanol of
Washington, LLC Dormant LLC 100% Yes
Investments —
The Company owns a 50% interest in a large truck stop located near Hillsboro, Texas. The remaining 50% of “Willie’s Place at
Carl’s Corner” is owned by Truckers Corner, LP, of which Willie Nelson is a partner. The truck stop includes a 12 lane
diesel/biodiesel truck fuel island, a gas/E85 car island, 2 sit-down restaurants (similar to Texas Roadhouse), a saloon, a 500 seat live
performance theater, a large convenience store with numerous private-branded items and Willie Nelson merchandise, and large
acreage for truck parking. The truck stop commenced fuel and convenience store operations during December 2008.
The Company owns 1,400,000 shares of stock in PNG Ventures Inc. The Company originally obtained the shares as part of a sale of
its subsidiary, LNG. The Company has classified the shares as Available for Sale and therefore records the investment at market
value at each quarter end. Changes in fair market value are recorded as unrealized gain or loss in the equity section of the balance
sheet. The fair market value of the shares was $1,470,000 and $4,760,000 at June 30, 2009 and December 31, 2008, respectively.
NOTE 9 — LINE OF CREDIT
The Company has no lines of credit outstanding as of March 31, 2009 and December 31, 2008.
NOTE 10 — CONVERTIBLE DEBT
On June 30, 2008, the Company sold its wholly owned subsidiary New ELNG to PNG Ventures Inc. (“PNG”) via a Share Exchange
Agreement (the “Exchange Agreement”), in exchange for the issuance of 7,000,000 shares of the of common stock of the PNG. Prior
to the completion of the Share Exchange, Earth LNG, Inc, a Texas corporation (“ELNG”) had transferred to New ELNG all right and
marketable title to the member interests of Applied LNG Technologies USA, LLC and Arizona LNG, L.L.C. and all their other assets
(other than receivables from EBOF and other subsidiaries of EBOF) that, together, comprise the LNG business, resulting in the
characterization of the transfer as an asset sale of EBOF’s subsidiary. The investors holding $52.5 million in senior unsecured notes
were granted an irrevocable proxy regarding the 7 million shares EBOF received in the exchange. In addition, the notes to the
investors were amended with new conversion rates to EBOF shares, and/or are exchangeable into the PNG shares with limitations on
the exchanges. Accordingly, EBOF did not have voting control over the 7,000,000 shares of PNG Ventures, Inc. and a change of
control has occurred with regard to the LNG business.
As a result, earnings from the LNG business through the date of disposition and gain on sale have been included in the financial
statements. for the year ended December 31, 2008. The financial statements of the LNG business are reported as discontinued
operations in the statement of operations and its associated assets and liabilities are classified separately in the balance sheet. Prior
periods have been reclassified to conform to the current-period presentation.
On December 24, 2008, the Company and the holders of the Company's Amended and Restated Senior Secured Convertible
Exchangeable Notes and Series B Senior Secured Convertible Exchangeable Notes entered into an Amendment and Exchange
Agreement (the “Amendment and Exchange Agreement”) and consummated the transactions contemplated thereby, pursuant to
which, among other things:
The Company exchanged:
• $26,000,000 of an Amended and Restated Senior Secured Convertible Exchangeable Note held by three investors for a senior
secured convertible note in the aggregate principal amount of $13,235,000 (the “Series C Note”), which is convertible in
shares of common stock, par value $0.001 per share (the “Common Stock”), of the Company, in accordance with the terms
thereof and
• $3,000,000 of the outstanding principal amount of existing Series B Senior Secured Convertible Exchangeable Note issued to
one Investor for a senior secured convertible note in the aggregate principal amount of $1,765,000 (the “Series D Note),
which is convertible in shares of Common Stock in accordance with the terms thereof.
• Neither the Series C Note nor the Series D Note is exchangeable into shares of common stock, par value $0.001 per share of
PNG Ventures, Inc., a Nevada corporation;
• In addition to the above transactions, one investor exchanged $56,000,000 of an Amended and Restated Senior Secured
Convertible Exchangeable Note for 5.6 million shares of common stock of PNG corporation. This left the Company with
1,400,000 shares of PNG stock which is pledged to other investors holding Amended and Restated Senior Secured
Convertible Exchangeable Note
• Subject to the satisfaction of certain equity conditions, the Company may at any time, at its option, require the Investor to
convert the remaining aggregate principal amount of $5,000,000 of the Amended and Restated Senior Secured Convertible
Exchangeable Note of the Investor in Common Stock, in whole or in part; and
• The Company, certain of its subsidiaries and the Investor entered into a reaffirmation agreement (the “Reaffirmation
Agreement”), which reaffirms the security interest granted by the Company and certain of its subsidiaries with respect to the
Amended and Restated Senior Secured Convertible Exchangeable Notes, the Series B Senior Secured Convertible
Exchangeable Notes, the Series C Note and the Series D Note.
The Series C Note ranks pari passu with the Amended and Restated Senior Secured Convertible Exchangeable Notes and the Series D
Note ranks pari passu with the existing Series B Senior Secured Convertible Exchangeable Notes.
The holders of the Company's Amended and Restated Senior Secured Convertible Exchangeable Notes and Series B Senior Secured
Convertible Exchangeable Notes consented to the transactions contemplated by the Exchange Agreement.
As a result of all of the above December 24, 2008 transactions, the Company recognized a gain on the exchanges totaling
$76,549,435. The gain is included in the financial statements for the period ending December 31, 2008.
NOTE 11 — TERM DEBT FACILITIES
The Company has no term debt facilities as of June 30, 2009
NOTE 12 — CONVERTIBLE PREFERRED SHARES
Preferred Stock
The Company has three classes of Preferred Stock outstanding. Redeemable preferred stock Series A, $.001 par value, $1.00 issue
price, 87,000,000 shares authorized, 11,525,721 shares issued and outstanding at June 30, 2009; 5,741,991 issued and outstanding
at December 31, 2008. Redeemable preferred stock, Series B, $5.00 par value, 13,000,000 shares authorized, 1,903,586 issued and
outstanding at June 30, 2009; and 708,596 issued and outstanding as of December 31, 2008. Redeemable preferred stock, Series C,
$.0001 par value, 500 shares authorized, and 125 shares issued and outstanding at June 30, 2009, 0 shares issued and outstanding at
December 31, 2008.
NOTE 13 — STOCKHOLDERS’ EQUITY
Common Stock
At December 31, 2008, the company had 415,253,787 shares of Common Stock issued with 2,500,000 shares authorized. The par
value was $.001. On April 22, 2009, the Company changed the authorized shares to 100,000,000,000 and the par value to $.0001.
This change in par value resulted in a $ 2,199,798 decrease in Common Stock par value and a corresponding increase in Additional
Paid in Capital. At June 30, 2009, all shares of Common Stock are recorded at a $.0001par value.
On June 17, 2009, the Company declared a one for one stock dividend to all common stock shareholders. This resulted in the issuance
of 9,678,263,373 shares of common stock at a current market value of $.0004. This resulted in an increase in common stock par
value of $967,826 and additional paid in capital of $2,903,479 for a total value of $3,871,305.
Warrants
Warrants granted by the Company consisted of the following for the six months ended June 30, 2009 and the year ended December
31, 2008.
Description Remaining Life
Exercise
Price Warrants
May 4, 2006 convertible debt-(debt repaid), warrants issued to
investor 8 - 9 years $ 2.00 920,810
May 26, 2006 convertible debt-(debt repaid), warrants issued to
investor and placement agent 8 - 9 years $ 3.84 768,750
June 7, 2006 convertible debt-(debt repaid), warrants issued to
investor and placement agent 8 - 9 years $ 2.93 1,545,000
July 10, 2006 convertible debt (debt repaid), warrants issued to
investor and placement agent 9-10 years $ 2.50 1,515,000
July 21, 2006 warrants issued for consulting fees 9-10 years $ 0.25 4,000,000
July 24, 2006 convertible debt, warrants issued to investors 9-10 years $ 2.90 9,051,725
January 19, 2007 notes payable, warrants issued to note holders 10 years $ .01 375,000
February , 2008 warrants issued to investor 10 years $ .10 1,000,000
March 28, 2008 Preferred share issuance 5 years $ .0375 2,000,000
A summary of the Company’s stock warrant activity and related information at June 30, 2009 and December 31, 2008 is as follows:
Number of
Shares
Under
Warrant
Exercise
Price
Weighted
Average
Exercise
Price
Warrants outstanding at December 31, 2007 17,990,940 $ .25 - 3.84 $ 2.27
Issued 20,699,724 $ .01 - .36 $ . 25
Exercised (439,655 ) $ .01 $ (1.26 )
Repurchased (20,324,724 ) $ .30-.3 6 $ (.25 )
Warrants outstanding and exercisable at December 31, 2008 17,926,285 $ .01 - $3.84 $ 2.25
Issued 3,000,000 $ .0375-.10 $ .06
Cancelled due to Amended debt agreements (11,051,725 ) .0375-2.90 $ (2.38 )
Warrants outstanding and exercisable at June 30, 2009 9,874,560 $ .01 - $3.84 $ 1.43
All warrants have a five-year or ten year expiration. The warrant fair value was determined by using the Black Scholes option pricing
model. Variables used in the Black-Scholes option-pricing model include (1) risk-free interest rate, (2) expected warrant life is the
actual remaining life of the warrants as of the year end, (3) expected volatility was 100%-400%, and (4) zero expected dividends.
Due to net losses or anti-dilutive features these warrants and conversion options were not presented on the Consolidated Statement of
Operations.
NOTE 14 — COMMITMENTS AND CONTINGENCIES
Leases —
The Company leased a truck stop in Grenada, Mississippi from RBB Properties, LLC which is controlled by R. Bruce Blackwell, a
shareholder and Director of the Company. The lease agreement provided for monthly payments of $3,110 over a five year term.
Total rent expense for the six months ended June 30, 2009 and the year ended December 31, 2008 was $ 34,211 and $ 24,831
respectively. The remaining obligation under the lease is $119,291 as of June 30, 2009.
Litigation —
On May 2, 2006, Evolution Fuels entered into a letter of intent with Vertex Energy, L.P., which contemplated a joint venture in which
a newly created company would own and operate a biodiesel production facility on the Houston Ship Channel in Houston, Texas. As
contemplated by the letter of intent, Vertex Energy would acquire a 49% interest in the newly created company in exchange for
contributing to the new operating company real property and improvements, including an existing chemical processing facility. The
Company would acquire a 51% interest in the operating company in exchange for the payment of $2,500,000 and the issuance of
1,500,000 shares of its common stock to Vertex Energy. In Harris County District Court, Vertex Energy, LP & Benjamin P. Cowart
alleged breach of contract on January 26, 2007, and a motion for new trial was granted. Vertex Energy filed its First Amended Petition
on February 8, 2008, enjoining Jason Gehrig to the case. A settlement had been reached in 2008; however, due to lack of cash flow the
settlement amount was not paid. Subsequent thereto Vertex was awarded a judgment against Evolution. The investment in this
company and related plant was deemed impaired due to lack of operations and was charged to earnings totaling $2,435,000 during
2006, and $2,543,000 during 2007, resulting in total estimated impairments of $4,978,000. During the third quarter 2008,
approximately $3.3 million was accrued regarding this contingency. The Court granted Vertex a Turnover Order on the assets owned
by Evolution on September 26, 2008. Due to the secured assets of Evolution, Vertex was unable to collect any assets. On March 20,
2009 a Second Motion for Turnover was granted to Vertex. The Second Motion for Turnover was for the membership interest in WN
Truck Stop, LLC, at this time the Second Turnover has not been enforced due security interest on the Companies’ ownership in the
truck stop. Evolution made payments totaling $195,000 during the six months ended June 30, 2009 and is working in good faith with
Vertex to reach a mutually agreeable settlement.
Marc Weill, Tom Gross, and Josh Cohen (“Weill et al.”) were investors of Evolution pursuant to convertible promissory notes. Weill
et al. sued the Company on March 3, 2008 for $1,500,000.00, plus accrued interest, damages suffered, court costs, and attorney fees.
On February 24, 2009 Weill et al. filed a Motion for Summary Judgment that was to be heard by the Court on March 25, 2009. Prior
to the Summary Judgment Hearing Weill et al. and Evolution entered into a Rule 11 Agreement regarding the structure of an Agreed
Judgment to be executed. On April 4, 2009 Weill et al. and the Company entered into an Agreed Judgment by which Evolution will
pay Weill et al. $2,100,000.00.
The Company has become subject to various claims and other legal matters in the course of conducting its business. The company has
recorded approximately $1 million in regards to various other claims deemed likely in accounts payable and accrued expenses as of
June 30, 2009. The Company is actively pursuing settlement agreements with all parties.
During the course of our operations, we are subject to audit by tax authorities for varying periods in various federal, state, local, and
foreign tax jurisdictions. Disputes may arise during the course of such audits as to facts and matters of law. It is impossible at this time
to determine the ultimate liabilities that we may incur resulting from any lawsuits, claims and proceedings, audits, commitments,
contingencies and related matters or the timing of these liabilities, if any. If these matters were to be ultimately resolved unfavorably,
an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect upon our consolidated
financial position or results of operations. However, we believe that the ultimate resolution of such actions will not have a material
adverse affect on our consolidated financial position, results of operations, or liquidity.
NOTE 15 — INCOME TAXES
In 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). As such, the Company determined at June 30, 2008 that certain tax liabilities relating to a supply contract relating
to the Apollo Resources purchase of the LNG Business in December 2005 should be recorded in the accompanying financial
statements totaling $17,610,412. The Company's tax years for 2005 through 2008 are subject to examination by various tax
authorities. A number of years may elapse before an uncertain tax position is finally resolved. It is often difficult to predict the final
outcome or the timing of resolution of any particular uncertain tax position, but the Company believes that its reserves for income
taxes reflect the most probable outcomes. The Company adjusts the reserve, as well as the related interest, in light of changing facts
and circumstances. Settlement of any particular position would usually require the use of cash and result in the reduction of the related
reserve. The resolution of a matter would be recognized as an adjustment to the provision for income taxes and the effective tax rate in
the period of resolution.
As of June 30, 2009 the Company has determined that the $17.6 million accrued tax liability should be reversed and recognized as an
adjustment to the provision for income taxes during the six month period ending June 30, 2009. The Company has reviewed the
circumstances giving rise to the recording of the uncertain tax liability from December 2005 and determined that the circumstances no
longer warrant the accrued liability.
In addition to the above FIN 48 income tax liabilities, the Company has net deferred tax assets resulting from differences between the
financial statement carrying amounts and the tax bases of existing assets and liabilities. As the ultimate realization of this net tax asset
is uncertain, the Company has provided a valuation allowance for the entire amount at June 30, 2009 and December 31, 2008.
NOTE 16 – SUBSEQUENT EVENT
On August 31, 2009, Evolutions Fuels was issued 2,000,000 shares of Evolution Resources, Inc. (ticker EVLN) from PATB,LLC in
exchange for management services to be provided to Evolution Resources and the assumption of a contingent liability from Evolution
Resouces by Evolution Fuels. The Company has estimated the total potential liability of the contingent liability to be less than
$200,000. As of August 31, 2009, the market value of Evolution Resources was $5 per share for a total amount of $10,000,000..
PATB, LLC is owned by Kit Chambers, Executive Vice President of Evolution Fuels and PATB owns stock in Evolution Resources,
Inc. In addition, on the same date, Evolution Fuels issued 400,000 shares of Series B Preferred Stock , par value $5 to PATB, LLC.
The total par value of the preferred shares was $2,000,000.
.
ITEM 4 Management’s Discussion and Analysis
Forward Looking Statements
This Quarterly Report and all other reports filed by Evolution Fuels, Inc., Inc , a Delaware corporation (“Evolution”), filed from time
to time (collectively the “Filings”) contain or may contain forward looking statements and information that are based upon beliefs of,
and information currently available to, the management of Evolution as well as estimates and assumptions made by Evolution
management. When used in the filings the words “may”, “will”, “should”, “estimates”, “anticipate”, “believe”, “estimate”, “expect”,
“future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to Evolution or its management, identify
forward looking statements. Such statements reflect the current view of Evolution and with respect to future events and are subject to
risks, uncertainties, assumptions and other factors relating to Evolution, its ability to raise capital, its ability to market to
biodegradable diesel fuel and other risk factors. Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected,
intended or planned.
Although Evolution believes that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of
the United States, management does not intend to update any of the forward-looking statements to conform these statements to actual
results. The following discussion should be read in conjunction with Evolution’s consolidated financial statements and the related
notes filed herewith.
The following discussion and analysis should be read in conjunction with Evolution’s Financial Statements, together with the notes to
those statements.
Results of Operations
Comparison of Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008
Revenue. Total revenue and cost of sales decreased $1,545,000 for the six months ended June 30, 2009 due to the sale of the
Companies subsidiary, LNG at June 30, 2008. Therefore no net revenue was recorded for the six months ended June 30, 2009.
Cost of Sales. The types of expenses included in the cost of sales line item include the cost of raw materials, inbound freight charges,
purchasing and receiving costs, terminal fees for storage and loading of biodiesel, petro fees, chemicals, and related costs of
production.
Compensation. Compensation decreased $1,107,000 for the six months ended June 30, 2009 as compared with June 30, 2008. This
decrease was primarily due to a change at January 1, 2009 to the companies share based compensation to officers and directors.
Shares issued to officers and directors are valued at market consistent with SFAS No. 123(R), “Share-Based Payment” (“SFAS
No. 123(R)”). However, commencing January 1, 2009, officer and directors share based compensation vests over a ten year period.
Therefore, charges for the six months ended June 30, 2009 primarily represent amortization of the deferred share based compensation.
Other Selling, General and Administrative Expenses. The types of expenses included in the selling, general and administrative
expenses, office expenses, insurance, professional services, travel and other miscellaneous expenses. Other selling, general and
administrative expenses for the six months ended June 30, 2009decreased approximately $7.6million from the same period in 2008.
The decrease was primarily a result of certain expenses incurred in 2008 relating to the sale of the subsidiary and reduced legal
expenses.
Interest expense. Interest expense decreased by approximately $30.9 million in 2009 compared to 2008. This was primarily due to the
significant debt reduction as a result of the share exchange which occurred at December 24, 2008. Please refer to Note 10 of the
financial statements.
Depreciation and amortization Depreciation and Amortization expense decreased approximately $1.1 million at June 30, 2009
compared to 2008. This decrease was primarily due to sale of the subsidiary at June 30, 2008.
Impairment Loss The impairment loss decreased $12.7 million from June 30, 2008 to June 30 2009. Concurrent with the sale of the
subsidiary, certain debt amounts associated with the Companies Durant, OK facility was transferred to the purchaser of the subsidiary.
In addition, due to market conditions, the Durant plant produced virtually nothing during the past two years. The Company
determined that the Durant Facility was impaired and therefore took a $12.7 million write-down..
Overview
The principal business of Evolution Fuels, Inc. (“Evolution”, or, the “Company”), a Delaware corporation, is the development of retail
renewable fuel stations which will provide blends of ethanol from 10% to 85% (E10 to E85), and to establish truck stops modeled
after the Willie’s Place Truck Stop in Carl’s Corner, TX. The Company intends to supply biodiesel to these retail locations from its
own biodiesel production facility. Evolution’s primary plans and operations are located in Texas and Oklahoma, with certain other
operations planned in Mississippi.
The Company was originally organized as a Nevada corporation on July 15, 2002 under the name, Meadows Springs, Inc. Its fiscal
year end is December 31, and it has not been in a bankruptcy, receivership, or similar proceeding. On November 9, 2005 a merger
with Earth Biofuels, Inc. (“Earth Biofuels”), a Delaware corporation, occurred resulting in a change of name and domicile to
Delaware. As part of this merger shares of common stock were issued to shareholders pursuant to a 6 for 1 forward split of the
Company’s common stock.
On June 30, 2008, the Company sold its wholly owned subsidiary New ELNG to PNG Ventures Inc. (“PNG”) via a Share Exchange
Agreement (the “Exchange Agreement”), in exchange for the issuance of 7,000,000 shares of the of common stock of the PNG. Prior
to the completion of the Share Exchange, Earth LNG, Inc, a Texas corporation (“ELNG”) had transferred to New ELNG all right and
marketable title to the member interests of Applied LNG Technologies USA, LLC and Arizona LNG, L.L.C. and all their other assets
that, together, comprise the LNG business, resulting in the characterization of the transfer as an asset sale of the Company’s
subsidiary. The investors holding $52.5 million in senior unsecured notes were granted an irrevocable proxy regarding the 7 million
shares the Company received in the exchange. In addition, the notes to the investors were amended with new conversion rates to
Company shares, and/or are exchangeable into the PNG shares with limitations on the exchanges. Accordingly, the Company did not
have voting control over the 7,000,000 shares of PNG Ventures, Inc. and a change of control has occurred with regard to the LNG
business.
As a result, earnings from the LNG business through the date of disposition and gain on sale have been included in the financial
statements. for the year ended December 31, 2008. The financial statements of the LNG business are reported as discontinued
operations in the statement of operations and its associated assets and liabilities are classified separately in the balance sheet. Prior
periods have been reclassified to conform to the current-period presentation.
On December 24, 2008, the Company and the holders of the Company's Amended and Restated Senior Secured Convertible
Exchangeable Notes and Series B Senior Secured Convertible Exchangeable Notes entered into an Amendment and Exchange
Agreement (the “Amendment and Exchange Agreement”) and consummated the transactions contemplated thereby, pursuant to
which, among other things:
The Company exchanged:
• $26,000,000 of an Amended and Restated Senior Secured Convertible Exchangeable Note held by three investors for a senior
secured convertible note in the aggregate principal amount of $13,235,000 (the “Series C Note”), which is convertible in shares of
common stock, par value $0.001 per share (the “Common Stock”), of the Company, in accordance with the terms thereof and
• $3,000,000 of the outstanding principal amount of existing Series B Senior Secured Convertible Exchangeable Note issued to
one Investor for a senior secured convertible note in the aggregate principal amount of $1,765,000 (the “Series D Note), which is
convertible in shares of Common Stock in accordance with the terms thereof.
• Neither the Series C Note nor the Series D Note is exchangeable into shares of common stock, par value $0.001 per share of
PNG Ventures, Inc., a Nevada corporation;
• In addition to the above transactions, one investor exchanged $56,000,000 of an Amended and Restated Senior Secured
Convertible Exchangeable Note for 5.6 million shares of common stock of PNG corporation. This left the Company with 1,400,000
shares of PNG stock which is pledged to other investors holding Amended and Restated Senior Secured Convertible Exchangeable
Note
• Subject to the satisfaction of certain equity conditions, the Company may at any time, at its option, require the Investor to
convert the remaining aggregate principal amount of $5,000,000 of the Amended and Restated Senior Secured Convertible
Exchangeable Note of the Investor in Common Stock, in whole or in part; and
• The Company, certain of its subsidiaries and the Investor entered into a reaffirmation agreement (the “Reaffirmation
Agreement”), which reaffirms the security interest granted by the Company and certain of its subsidiaries with respect to the Amended
and Restated Senior Secured Convertible Exchangeable Notes, the Series B Senior Secured Convertible Exchangeable Notes, the
Series C Note and the Series D Note.
The Series C Note ranks pari passu with the Amended and Restated Senior Secured Convertible Exchangeable Notes and the Series D
Note ranks pari passu with the existing Series B Senior Secured Convertible Exchangeable Notes.
The holders of the Company's Amended and Restated Senior Secured Convertible Exchangeable Notes and Series B Senior Secured
Convertible Exchangeable Notes consented to the transactions contemplated by the Exchange Agreement.
As a result of all of the above December 24, 2008 transactions, the Company recognized a gain on the exchanges totaling
$76,549,435. The gain is included in the financial statements for the period ending December 31, 2008.
In February 2008 the Company closed a financing for the construction of the Willie’s Place at Carl’s Corner truck stop located near
Hillsboro, TX, which was completed and opened for business in January 2009. The Company is partnered with country music legend
Willie Nelson and a small group of individuals in the project.
Mission
The mission of Evolution Fuels, Inc. (the “Company” or “Evolution”) is to help the United States achieve energy independence by
focusing on the creation of downstream renewable fuels retail fuel stations. To do so, the Company plans to establish a chain of retail
fuel station/convenience stores and truck stops that offer varying blends of renewable fuels, supplied in part by the Company’s own
production of biodiesel.
Evolution is a partner in the Willie’s Place Truck Stop near Hillsboro, TX, built to establish a high profile flagship truck stop and
convenience store that offers renewable fuels. Willie’s Place, which opened in December 2008, offers blends of biodiesel fuel to
truckers and other travelers, and is a popular travel destination due to its unique design as a tribute to country music legend, Willie
Nelson.
The Company is in the early stages of establishing retail fueling/convenience store stations that will provide blends of ethanol from
10% (“E10”) up to 85% (“E85”), with an emphasis on promoting mid-range blends such as E20, as well as blends of biodiesel to fuel
passenger vehicles on the road today.
Evolution plans to supply the retail fuel outlets with biodiesel fuel produced from its own production facility in Durant, OK.
Current Situation
Evolution is currently in the process of locating existing fuel station/convenience stores in the Dallas metroplex area that the Company
may lease or acquire for the purpose of offering varying blends of ethanol and biodiesel fuel.
Evolution’s management strongly believes that one of the paths toward U.S. energy independence must involve the creation of
stronger demand for ethanol at the pump. Recent studies performed by the U.S. Department of Energy and others have shown that
ethanol blends of up to 20% may be used by many legacy non-“Flexfuel” vehicles without damage to the engine or fuel systems. The
Company intends to promote the use of ethanol blends above 10% that can be used today by “Flexfuel” vehicles which are designed to
use ethanol fuel blends of up to 85% (“E85”). Further, the Company anticipates that depending upon the make of the truck or
automobile, certain vehicles may incur no reduction in fuel efficiency, and possibly might experience an improvement in fuel
efficiency by using blends such as E20 or E30.
The Company’s management believes that the increased use of ethanol blends of over 10% by the motoring public will help push the
demand for ethanol beyond the current “blend wall” caused by the existing limitation of ethanol blends with gasoline of 10%. If more
fuel stations are established that offer mid-range blends of ethanol at prices that would likely undercut petroleum gasoline prices,
Evolution believes that public demand would increase, thereby creating more market for increased domestic production of ethanol,
ideally from cellulosic feedstock sources.
One aspect of the Company’s plan is to partner with a local town car service that will fuel its fleet of vehicles at such renewable fuels
stations that are established. Evolution has investigated the possibility of working with the federal EPA in providing ongoing
maintenance records from the town car fleet as a way to assist efforts to raise ethanol blend standards above the current 10%.
The Company owns a facility located in Durant, Oklahoma, approximately 75 miles from the Dallas – Fort Worth metroplex, which
was designed for 10 million gallons per year of biodiesel fuel biodiesel production. The plant was built to use soybean oil as its
primary feedstock and has been mostly idle for the past two years due to the high price of virgin oils such as soybean oil against the
price of domestic petroleum diesel fuel. In short, the cost of production of biodiesel at the Durant facility has been significantly higher
than the domestic market for diesel fuel. This has had a negative effect on the vast majority of biodiesel producers over the course of
2007 and 2008.
The Company owns a 50% interest in a large truck stop located near Hillsboro, Texas. The remaining 50% of “Willie’s Place at
Carl’s Corner” is owned by Truckers Corner, LP, of which Willie Nelson is a partner. The truck stop includes a 12 lane
diesel/biodiesel truck fuel island, a gas/E85 car island, 2 sit-down restaurants (similar to Texas Roadhouse), a saloon, a 500 seat live
performance theater, a large convenience store with numerous private-branded items and Willie Nelson merchandise, and large
acreage for truck parking. The truck stop commenced fuel and convenience store operations during December 2008.
Key Success Factors
A key factor to the Company’s success revolves around the Company’s ability to establish retail renewable fuel stations, either
through acquisition or leases, and the Company’s ability to introduce mid-range blends of ethanol and biodiesel to the consuming
public. Another factor is the Company’s ability to produce quality biodiesel in reasonably close proximity to its intended end use –
the Company’s retail truck stops and third party fuel distributors outside the local truck stop market. Firm fuel off take agreements
with these third parties will form a base load demand for the fuel. The following factors are most important:
• The establishment of retail renewable fuel stations, either through acquisition or leases.
• The introduction of mid-range blends of ethanol and biodiesel to the consuming public.
• The ability of the Company to manage the fuel station/convenience store operations.
• A successful Durant biodiesel production facility upgrade project in order to produce efficiently and implement a multifeedstock
pretreatment system in order to produce from multiple, lowest-cost feedstock.
• The Durant biodiesel plant operational by the first quarter of 2010.
• Appropriate staffing and training for safe operations of Durant biodiesel plant by the first quarter of 2010.
• Off take biodiesel sales agreements by December 2009 from third party fuel distributors and/or brokers.
• Feedstock supply agreements with multiple suppliers of animal fats, used oils, and vegetable oils by December 2009.
• Launch of additional Company truck stops based on the success of the initial Willie’s Place Truck Stop in Hillsboro, TX over
the course of the next 24 months.
The Durant facility currently carries approximately $7.5 million of debt. Once these initial projects are complete and the model is
verified, the Company plans to build out additional renewable fuel stations and truck stops over a staged timeline, using a combination
of debt and equity.
The Overall Market
The Renewable Fuel Standard (RFS), passed by Congress in December 2007, increased the minimum quantity of renewable fuel
required for blending into gasoline from 9 billion gallons in 2008 to 36 billion gallons by 2022.
The American Coalition for Ethanol, in reference to the Biomass Research and Development Board’s National Biofuels Action Plan
published in October of 2008, says, "Mid-range ethanol blends are a critical pathway to reducing [the nation's] dependence on
gasoline."
Research and testing has been conducted by groups in collaboration with the DOE that show blends of up to 20% ethanol can be used
in most legacy automobiles. Specifically, in the summer 2007, the U.S. Department of Energy (DOE) initiated a test program to
evaluate the potential impacts of intermediate ethanol blends on legacy vehicles and other engines. Results of those tests can be found
in the National Renewable Energy Laboratory’s report (Effects of Intermediate Ethanol Blends on Legacy Vehicles and Small Non-
Road Engines) published in February, 2009: (http://feerc.ornl.gov/publications/Int_blends_Rpt1_Updated.pdf). The American
Coalition for Ethanol refers to this report by saying "...a report from the DOE's National Laboratories on the successful use of midrange
ethanol blends in vehicles and small engines."
The Company believes that a 20% to 30% blend of ethanol is something that this country can achieve and will cause a meaningful
decline in the country’s reliance on foreign oil.
According to the Energy Information Administration, total US consumption of diesel fuel for 2007 was over 64 billion gallons.
Oklahoma accounted for 2.1% of the total for the year prior, Texas accounted for 9.3%.
The market for biodiesel should not be thought of as a replacement for diesel, rather it is utilized as a fractional adder to diesel fuel,
typically in blends of 5% to 20%.
In 2005, a $1.00 per gallon federal blending tax credit was developed to incentivize distributors of diesel fuel to blend biodiesel with
their diesel product before shipping to their customers. The $1.00 per gallon is a credit against their federal excise tax payable each
month. This credit helps to create a price advantage for marketers and retailers of biodiesel.
Today, most domestic biodiesel consumption is provided by distributors/wholesalers of diesel fuel as 5% to 20% biodiesel/diesel
blends delivered to fleet customers and retail fueling stations.
Additional demand exists along the gulf coast as a result of biodiesel export to a strong European market, although recent US
legislation has closed a tax credit loophole that had existed for several months.
Taking the diesel consumption numbers from above, a biodiesel market penetration rate of 3% would yield a demand of over 200
million gallons from Oklahoma and Texas fuel markets, and over 49 million gallons within 150 miles of the Durant facility. However,
the Evolution Fuels model creates biodiesel demand from its own truck stop business. The Company plans to sell 20%
biodiesel/diesel (B20) blends at its truck stop fuel pumps, which equates to an average of 2 million gallons per year of biodiesel per
truck stop.
Quantitative and Qualitative Disclosures About Market Risk
Any forward-looking statements are subject to certain events, circumstances, assumptions, risks and uncertainties that may cause
Evolution’s actual results to be materially different from any future results expressed or implied by Evolution in those statements.
Some of these risks might include, but are not limited to, the following:
• Volatility or decline of Evolution’s stock price;
• Potential fluctuation in quarterly results;
• Ability of Evolution to earn revenues or profits;
• Sufficiency of revenues to cover operating costs;
• Availability and cost of raw materials;
• Any impact of competition, competitive products, and pricing;
• Adequacy of capital to continue or expand its business, inability to raise additional capital or financing to implement its
business plans;
• Ability to commercialize its technology or to make sales;
• Overall expected growth in the alternative fuels industry;
• Changes in interest rates and capital market conditions;
• Changes in laws and other regulatory actions;
• Acquisitions of business enterprises, including the ability to integrate acquired businesses effectively;
• Litigation with or legal claims and allegations by outside parties; and
• Other assumptions described in this report, as well as other reports filed with the United States Securities and Exchange
Commission, underlying such forward-looking statements.
There is no assurance that Evolution will be profitable, Evolution may not be able to successfully develop, manage or market its
products and services, Evolution may not be able to attract or retain qualified executives and technology personnel, Evolution’s
products and services may become obsolete, government regulation may hinder Evolution’s business, and additional dilution in
outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of
warrants and stock options, and other risks inherent in Evolution’s businesses.
Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures and internal controls that are designed to provide reasonable, but not absolute,
assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision of and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not
effective.
The Company did not maintain a sufficient complement of personnel with an appropriate level of technical accounting knowledge,
experience, and training in the application of generally accepted accounting principles commensurate with the Company’s complex
financial accounting and reporting requirements and low materiality thresholds.
Our management does not expect that our Disclosure Controls or our internal controls will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance.
There were no changes in our internal controls (except as noted above) that have materially affected, or are reasonably likely to
materially affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Legal Proceedings
On May 2, 2006, Evolution Fuels entered into a letter of intent with Vertex Energy, L.P., which contemplated a joint venture in which
a newly created company would own and operate a biodiesel production facility on the Houston Ship Channel in Houston, Texas. As
contemplated by the letter of intent, Vertex Energy would acquire a 49% interest in the newly created company in exchange for
contributing to the new operating company real property and improvements, including an existing chemical processing facility. The
Company would acquire a 51% interest in the operating company in exchange for the payment of $2,500,000 and the issuance of
1,500,000 shares of its common stock to Vertex Energy. In Harris County District Court, Vertex Energy, LP & Benjamin P. Cowart
alleged breach of contract on January 26, 2007, and a motion for new trial was granted. Vertex Energy filed its First Amended Petition
on February 8, 2008, enjoining Jason Gehrig to the case. A settlement had been reached in 2008; however, due to lack of cash flow the
settlement amount was not paid. Subsequent thereto Vertex was awarded a judgment against Evolution. The investment in this
company and related plant was deemed impaired due to lack of operations and was charged to earnings totaling $2,435,000 during
2006, and $2,543,000 during 2007, resulting in total estimated impairments of $4,978,000. During the third quarter 2008,
approximately $3.3 million was accrued regarding this contingency. The Court granted Vertex a Turnover Order on the assets owned
by Evolution on September 26, 2008. Due to the secured assets of Evolution, Vertex was unable to collect any assets. On March 20,
2009 a Second Motion for Turnover was granted to Vertex. The Second Motion for Turnover was for the membership interest in WN
Truck Stop, LLC, at this time the Second Turnover has not been enforced due security interest on Evolution’s ownership in the truck
stop. Evolution made payments totaling $195,000 during the six months ended June 30, 2009 and is working in good faith with
Vertex to reach a mutually agreeable settlement.
Marc Weill, Tom Gross, and Josh Cohen (“Weill et al.”) were investors of Evolution pursuant to convertible promissory notes. Weill
et al. sued the Company on March 3, 2008 for $1,500,000.00, plus accrued interest, damages suffered, court costs, and attorney fees.
On February 24, 2009 Weill et al. filed a Motion for Summary Judgment that was to be heard by the Court on March 25, 2009. Prior
to the Summary Judgment Hearing Weill et al. and Evolution entered into a Rule 11 Agreement regarding the structure of an Agreed
Judgment to be executed. On April 4, 2009 Weill et al. and the Company entered into an Agreed Judgment by which Evolution will
pay Weill et al. $2,100,000.00.
During the normal course of business the Company is party to other litigation, both as defendant and plaintiff. The total amount in
dispute for other litigation is less than $1 million and the Company is actively pursuing settlement agreements with all parties.
Risk Factors
Feed stocks, natural gas, petroleum products and chemical prices have fluctuated in response to changing market forces. The impacts
of these price fluctuations on earnings have varied. For any given period, the extent of actual benefit or detriment will be dependent on
the price movements of individual types of feed stocks, taxes and other government impacts, price adjustment lags in long-term
contracts, and natural gas production volumes. Accordingly, changes in benchmark prices for these raw materials only provide a broad
indicator of changes in the earnings experienced in any particular period. In these very competitive environments, earnings are
primarily determined by margin capture rather than absolute price levels of products sold. Operating margins are a function of the
difference between what a produces pays for its raw materials and the market prices for the range of products produced. These prices
in turn depend on global and regional supply/demand balances, inventory levels, plant operations, import/export balances and weather.
Such conditions, along with the capital-intensive nature of the industry and very long lead times associated with many of our projects,
underscore the importance of obtaining a strong financial position.
Our business is highly dependent on commodity prices, which are subject to significant volatility and uncertainty, and on the
availability of raw materials supplies, so our results of operations, financial condition and business outlook may fluctuate
substantially. Our results of operations depend substantially on the prices of various commodities, particularly the prices for biodiesel,
feedstock, such as soybean, corn, natural gas and unleaded gasoline. The prices of these commodities are volatile and beyond our
control. As a result of the volatility of the prices for these items, our results may fluctuate substantially. We may experience periods
during which the prices of our products decline and the costs of our raw materials increase, which in turn may result in operating
losses and adversely affect our financial condition. We may attempt to offset a portion of the effects of such fluctuations by entering
into forward contracts to supply biodiesel, corn, feedstock, such as soybean, natural gas or other items or by engaging in transactions
involving exchange-traded futures contracts, but these activities involve substantial costs, substantial risks and may be ineffective to
mitigate these fluctuations. If a substantial imbalance occurs, our results of operations, financial conditions and business outlook could
be negatively impacted. Our ability to operate at a profit is largely dependent on market prices for biodiesel, and the value of your
investment in us may be directly affected by these market prices.
Evolution’s revenue and operating results may vary significantly from quarter-to-quarter due to a number of factors. In future quarters,
operating results may be below the expectations of public market analysis or investors, and the price of its common stock may decline.
Factors that could cause quarterly fluctuations include:
• The ability to quickly bring new production capacity on stream;
• the fluctuating prices of feed stocks and natural gas;
• the ability to raise the necessary capital to fund working capital, execute mergers, acquisitions and asset purchases; The
market in which Evolution competes is intensely competitive and actions by competitors could render its services less
competitive, causing revenue and income to decline; The ability to compete depends on a number of factors outside of
Evolution’s control, including:
o the prices at which others offer competitive services, including aggressive price competition and discounting;
o actions taken by the Federal Government or State Governments to remove subsidies and tax credits associated with the
biodiesel business;
o large swings in the price of oil which will affect the price at which Evolution can purchase fuel supplies;
o the ability of competitors to undertake more extensive marketing campaigns;
o the extent, if any, to which competitors develop proprietary tools that improve their ability to compete; and
o the extent of competitors’ responsiveness to customer needs.
Evolution may not be able to compete effectively on these or other factors. If Evolution is unable to compete effectively, market
position, and therefore revenue and profitability, would decline. Evolution must continually enhance its services to meet the changing
needs of its customers or face the possibility of losing future business to competitors.
Our gross margins will be partially dependent on the spread between ethanol and corn prices. Any reduction in the spread between
ethanol and corn prices, whether as a result of an increase in corn prices or a reduction in ethanol prices, would adversely affect our
financial performance.
Our profit margins may be adversely affected by fluctuations in the selling price and production cost of gasoline. Ethanol is marketed
both as a fuel additive to reduce vehicle emissions from gasoline and as an octane enhancer to improve the octane rating of the
gasoline with which it is blended. As a result, ethanol prices are influenced by the supply of and demand for gasoline. Our results of
operations may be materially adversely affected if the demand for or the price of gasoline decreases. Conversely, a prolonged increase
in the price of or demand for gasoline could lead the U.S. government to relax import restrictions on foreign ethanol that currently
benefit us.
Future success will depend upon Evolution’s ability to enhance existing products and to introduce new products to meet the
requirements of customers in a rapidly developing and evolving market. Present or future products may not satisfy the needs of the
market. If Evolution is unable to anticipate or respond adequately to its customers’ needs, lost business may result and financial
performance will suffer.
Evolution is dependent on a limited number of key personnel, and the loss of these individuals could harm its competitive position and
financial performance. Our future success depends, to a significant extent, on the continued services of our key personnel.
Competition for personnel throughout the industry is intense and we may be unable to retain our current management and staff or
attract, integrate or retain other highly qualified personnel in the future. If we do not succeed in retaining our current management and
our staff or in attracting and motivating new personnel, our business could be materially adversely affected.
Evolution’s business consists of the marketing and sale of ethanol and biodiesel blended fuels through Evolution’s network of retail
outlets and, accordingly, its success depends upon the efforts, abilities, business generation capabilities and project execution of its
executive officers. Evolution’s success is also dependent upon the managerial, operational and administrative skills of its executive
officers. The loss of any executive officer could result in a loss of customers or revenue, and could therefore harm Evolution’s
financial performance.
Evolution’s ability to secure debt and equity financing could have an adverse effect on Evolution’s financial health.
The inability to raise capital to fund working capital needs may:
• Increase Evolution’s vulnerability to general adverse economic and industry conditions;
• Limit Evolution’s ability to fund future working capital and other general corporate requirements; and
• Limit Evolution’s flexibility in planning for, or reacting to, changes in Evolution’s business and the industry in which it
operates.
Our limited operating history makes evaluating our business and prospects difficult. Our limited operating history and recent
acquisitions make it difficult to evaluate our current business and prospects or to accurately predict our future revenues or results of
operations. Our revenue and income potential are unproven, and our business plan is constantly evolving. The market for
alternative fuels is evolving and we may need to continue to modify our business plan to adapt to these changes. As a result, we are
more vulnerable to risks, uncertainties, expenses and difficulties than more established companies. Some of these risks relate to our
potential inability to: effectively manage our business and operations; successfully maintain our low-cost structure as we expand the
scale of our business; and manage rapid growth in personnel and operations.
Because our common stock is listed on the Other OTC Pink sheets Bulletin Board, many investors may not be willing or allowed to
purchase it or may demand steep discounts. Sufficient additional financing may not be available to us or may be available only on
terms that would result in further dilution to the current owners of our common stock. If we are unable to raise additional funds when
we need them, we may have to severely curtail our operations and expansion plans.
As a result of being a public company, we have incurred and will continue to incur significant legal, accounting and other expenses.
We have incurred and will continue to incur costs associated with our public company reporting requirements and costs associated
with related corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
implemented by the SEC. In addition, complying with these rules, regulations and requirements will occupy a significant amount of
the time of our board of directors and management. We also expect these rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and
retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
There is significant volatility in our stock price. The trading price of our common stock on the over-the-counter bulletin board has
been and continues to be subject to wide fluctuations. The market price of our common stock could be subject to significant
fluctuations in response to various factors and events, including, among other things, the depth and liquidity of the trading market of
our common stock, quarterly variations in actual or anticipated operating results, growth rates, changes in estimates by analysts,
market conditions in the industry, announcements by competitors, regulatory actions and general economic conditions. In addition,
the stock market from time to time experiences significant price and volume fluctuations, which may be unrelated to the operating
performance of particular companies. As a result of the foregoing, our operating results and prospects from time to time may be
below the expectations of public market analysts and investors. Any such event would likely result in a material adverse effect on the
price of our common stock. In addition, the trading price of our common stock will continue to be volatile in response to factors
including the following, many of which are beyond our control: variations in our operating results; announcements of technological
innovations, new products or new services by us or our competitors; changes in expectations of our future financial performance,
including financial estimates by securities analysts and investors; our failure to meet analysts’ expectations; changes in operating and
stock price performance of other energy companies similar to us; fluctuations in oil and gas prices; conditions or trends in the oil and
gas and alternative fuels industry; additions or departures of key personnel; and future sales of our common stock.
There is a limited market for our common stock. If a substantial and sustained market for our common stock does not develop, our
stockholders’ ability to sell their shares may be materially and adversely affected.
Any disruption in our operations could result in a reduction of sales volume and could cause us to incur substantial losses.
We are subject to various stringent federal, state and local environmental laws and regulations, including those relating to the
discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous
materials, and the health and safety of our employees. In addition, some of these laws and regulations require our facilities to operate
under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution
control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and
regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or
facility shutdowns. We cannot assure you that we will be at all times in complete compliance with these laws, regulations or permits.
In addition, we expect to make significant capital expenditures on an ongoing basis to comply with these stringent environmental
laws, regulations and permits.
In addition, the hazards and risks associated with producing and transporting our products (such as fires, natural disasters, explosions,
abnormal pressures and spills) may result in personal injury claims or damage to property, natural resources and third parties. As
protection against operating hazards, we will maintain insurance coverage against some, but not all, potential losses. The occurrence
of events which result in significant personal injury or damage to our property, natural resources or third parties that is not fully
covered by insurance could have a material adverse impact on our results of operations and financial condition.
There can be no assurance that Evolution’s business will generate sufficient cash flow from operations or that future borrowings will
be available to it in an amount sufficient to enable it to obtain debt or to fund other liquidity needs.