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ICNN > SEC Filings for ICNN > Form 10-K on 12-Apr-2013All Recent SEC Filings

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Form 10-K for INCOMING, INC.


12-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

The following discussion and analysis of the results of operations and financial condition of the Company is an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance and gives effect to the acquisition of NABE by the Company, and should be read in conjunction with the financial statements included in this Annual Report on Form 10-K, and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors described throughout this Annual Report.

Company Overview

NABE is a refiner and producer of commercial-grade biodiesel as specified by the American Society of Testing and Materials (ASTM D6751). Our refining and production facility is located in Lenoir, North Carolina with a nameplate annual capacity of five million gallons. Our facility produces biodiesel from virgin, agri-based feedstock using commercial specifications. The biodiesel we produce is sold throughout North Carolina, South Carolina and Virginia directly or through wholesale distributors. During 2012, we also refined and sold crude glycerin, a byproduct of our biodiesel production.

Our production process starts with purchasing the most cost effective and suitable agri-based feedstock (e.g., soy, canola, sunflower, cotton seed and chicken/pork fat). A sample of every feedstock is then tested by our in-house laboratory in order to develop the proper recipe of catalysts for the transesterification process. Glycerin, a byproduct, is then separated from the biodiesel and any excess methanol is recovered. The recovered methanol is reused in the production process and the glycerin is sold on the open market. While biodiesel is our main product, glycerin is a popular chemical used in pharmaceutical and hygiene applications and serves as an additional source of revenue, about 1% of annual gross revenue.

Our facility is capable of producing biodiesel from a wide range of agri-based feedstocks: soy, canola, sunflower, cottonseed and chicken/pork fat. Biodiesel production costs are highly dependent on the cost of feedstock, and we believe the ability to utilize a variety of feedstocks efficiently and interchangeably is imperative to gaining a competitive advantage in the biodiesel production market.

Our goal is to become one of the leading, diversified energy companies with divisions in production, blending, marketing and distribution.

Going Concern

The financial statements presented in this Annual Report have been prepared on a going-concern basis. As of December 31, 2012, the Company has a working capital deficiency of $395,522, and has an accumulated deficit of $6,050,574. Its ability to continue as a going concern is dependent upon the ability of the Company to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These factors raise substantial doubt that the Company will be able to continue as a going concern.


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The Company to date has funded its initial operations through the issuance of capital stock and common stock options, loans from related parties, and revenue generated in the normal course of business. Management plans to continue to provide for the Company's capital needs by the issuance of common stock and related party loans. However, no assurance can be given that financing on the same or similar favorable terms and conditions will be available to the Company in the future. The financial statements presented in this Annual Report do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

Revenue

We derive the majority of our revenue from the sale of biodiesel and the balance is derived from the sale of glycerin. Revenue may be affected by the following factors:

- Price volatility of petroleum diesel;
- Price volatility of RINs;
- Government incentives;
- Processing capacity; and
- Market demand.

Price volatility of petroleum diesel. Biodiesel is primarily used in blends with petroleum diesel as a fuel for trucks, automobiles, heating oil and marine transportation. Biodiesel can be mixed at any level with petroleum diesel to create a biodiesel blend. Unlike ethanol, where engines need to be modified to handle blend ratios above 10%, biodiesel blends can be used in diesel engines without modifications. Petroleum diesel is a traded commodity and subject to daily pricing swings. The price that we can charge our customers for biodiesel needs to be competitive with the price of petroleum diesel fuel, regardless of our cost to produce.

Price volatility of RINs. Under certain circumstances, the EPA allows producers to separate RINs from the biodiesel to which it was initially assigned. The production facility in Lenoir, NC has successfully registered with EPA to generate RINs (type: D-Code = 4 and D-Code = 6) along with the biodiesel it produces. For those RINs that NABE is able to separate and sell, the selling price is subject to factors affecting the RIN market, which performs much like a commodity market with daily price swings.

Government incentives . Initiatives and incentives at the federal, state and local government levels that benefit our blending and retail customers have played a major role in the demand for our product. The primary federal economic incentive was the biodiesel blenders excise tax credit, which was available to registered blenders of biodiesel and petroleum diesel. Our customers are registered biodiesel blenders; they purchase the biodiesel from us at a price of $1.00 in excess of the market price of petroleum diesel and then our customers were reimbursed the $1.00 from the federal government. In January of 2013, Congress retroactively restored the biodiesel tax credit for all of 2012 and further extended it through December 31, 2013. Although Congress has extended this credit on multiple occasions, it has not been further extended and no assurance can be given that the tax incentive will be reinstated by Congress beyond December 31, 2013.

Processing capacity . Our current annual maximum (assuming the facility is running 24 hours a day, 350 days per year) or "nameplate" capacity is 5.0 million gallons; however, our highest production output was 914,000 gallons in 2009.

Market demand. The growth potential of our revenue depends on the market demand for our products. We believe there is high growth potential for our sales given the increase of national "green" initiatives, the cooperation of U.S. auto manufacturers and the mandate by the EPA to require the use of 1.28 billion gallons of biodiesel in 2013.

Cost of Sales

The cost of sales is composed of the following items: raw materials, blending materials, labor and overhead. Raw materials refer to feedstock, which accounts for approximately 62% of the total cost of sales. Blending materials refer to methanol and catalyst, which combined account for a small portion of the total cost of sales. Labor cost makes up approximately 27% of the cost of sales. Overhead includes utilities, maintenance costs, and inspections, and accounts for approximately 11% of the total cost of sales.

Cost of sales is, directly or indirectly, determined by the following factors:

- The availability and pricing of feedstock; and
- Operating efficiency of the production facility.


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The availability and pricing of feedstock. Our ability to produce or refine biodiesel from a variety of agri-based feedstocks allows us to shift production to the highest yielding feedstocks based on market prices. While this diversity limits exposure to volatile markets, feedstock remains the major cost of sales and its fluctuation will have a material impact on our total cost. Transportation costs also affect the overall feedstock cost, but are minimized due to the location of our facility in North Carolina. There is a readily available supply of local feedstocks including soy oil, and poultry/pork fat. We are currently working with vendors in Georgia, South Carolina and North Carolina to source used cooking oil as a cost competitive feedstock. Competition with the food and animal feed industries may keep feedstock prices high even while biodiesel prices fall.

Operating efficiency of the production facility. Our onsite laboratory saves us significant time and expense during the biodiesel production and refining process and it also allows us to ensure a high quality finished product. All feedstocks are tested for quality and for their fatty acid levels upon receipt, allowing us to adjust the mix of catalysts and methanol in a quick and efficient manner. At multiple times during the refining process, additional samples are taken and tested for quality on site. The finished product is ultimately tested to ensure that it meets the latest version of the ASTM-D6751 standards. With the frequency of testing needed, an onsite laboratory saves money and time that would have been spent sending samples off and waiting for results. We are continuing to search for process improvements to increase the efficiency of our production plant.

Operating Expenses

Operating expenses consist of selling expenses and general and administrative expenses. Generally, operating expenses are only a small portion of total costs and expenses.

Selling expenses are nominal as we have no advertising expenses and no sales staff due to our verbal off-take agreements with related party distributors.

General and administrative expenses consist of payroll for our plant manager and clerical staff in addition to professional fees, telephone, tax, and licenses and related fees. Professional fees include consultants and service providers necessary for compliance with SEC reporting requirements.

Results of Operations

The following is a discussion and analysis of our results of operations for the twelve-month period ended December 31, 2012, and the factors that could affect our future financial condition. This discussion and analysis should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in this report. Our financial statements are prepared in accordance with United States generally accepted accounting principles. All references to dollar amounts in this section are in United States dollars unless expressly stated otherwise.

Revenue
The Company generated revenues of $476,398 for the period January 1, 2012 through December 31, 2012. Revenue was generated during the period through biodiesel sales, through RIN sales, through recovered methanol sales, and through the sale of methylated glycerin. During the period January 1, 2012 through December 31, 2012, our biodiesel sales to third parties totaled approximately $157,425 and our sales to related parties amounted to $154,821. Sales of RINs to third parties totaled $164,152 during the period January 1, 2012 through December 31, 2012. During the period under consideration, sales of recovered methanol totaled $2,116 while methylated glycerin sales amounted to $12,450.

The Company generated revenues of $2,114,158 for the period January 1, 2011 through December 31, 2011. Revenue was generated during the period through biodiesel sales, through RIN sales, through recovered methanol sales, and through the sale of methylated glycerin. During the period January 1, 2011 through December 31, 2011, our biodiesel sales to third parties totaled approximately $788,467 and our sales to related parties amounted to $441,653. Sales of RINs to third parties totaled $855,519 during the period January 1, 2011 through December 31, 2011. During the period under consideration, sales of recovered methanol totaled $6,527 while methylated glycerin sales amounted to $21,992.

Comparing the activity for the period January 1, 2012 through December 31, 2012 to the activity for the period January 1, 2011 through December 31, 2011, there was a decrease in revenue of $1,637,760 from $2,114,158 to $476,398. The period-over-period decrease was due primarily to small producers, like NABE, being adversely impacted through fraudulent RIN transactions executed by Maryland and Texas companies in Q4 of 2011. The Company was not involved in any fraudulent RIN transactions, but the effects


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of the acts carried out by others severely hindered our ability to sell products. Not only were RIN sales negatively affected, but, by extension, biodiesel sales were also hampered. Biodiesel sales experienced a decrease of approximately 335,461 gallons sold during the period January 1, 2012 through December 31, 2012 compared to the period January 1, 2011 through December 31, 2011. Slightly offsetting the decreased revenue was the increase in selling price from an average of about $2.93 per gallon during the period under consideration in 2011 to an average of about $3.04 per gallon during the period under consideration in 2012. The Company had RIN sales of $855,519 during the period January 1, 2011 through December 31, 2011, but transacted $164,152 in RIN sales during the period January 1, 2012 through December 31, 2012.

Cost of Revenue
The Company's cost of revenue was $638,459 during the period January 1, 2012 through December 31, 2012. For the same period, cost of revenue consisted of raw materials, labor, overhead, and costs associated with processing glycerin. During the fiscal year 2012 period under consideration, there were no offsets to the cost of revenue associated with filing for tax credits, which were available during the fiscal year 2011. Tax credits, available to biodiesel blenders, amounting to $1 per gallon of biodiesel blended expired at December 31, 2011. The credits were not renewed during 2012 and, therefore, were not available for offsetting cost of sales during the period January 1, 2012 to December 31, 2012. Cost of revenue for the period January 1, 2012 through December 31, 2012 was solely attributable to third party activity.

The Company's cost of revenue was $1,986,341 during the period January 1, 2011 through December 31, 2011. For the same period, cost of revenue consisted of raw materials, labor, overhead, and costs associated with processing glycerin. Offsetting the cost of revenue was the filing for tax credits available to biodiesel blenders, which amounted to $261,324 during the period, net of the establishment of a valuation allowance on the tax credits receivable of $224,059 during the period. Total cost of revenue for the period January 1, 2011 through December 31, 2011 includes $1,721,364 from third party activity and $264,977 in related party activity.

Comparing the activity for the period January 1, 2012 through December 31, 2012 to the activity for the period January 1, 2011 through December 31, 2011, there was a decrease in cost of revenues of $1,347,882 as the cost of revenues declined from $1,986,341 to $638,459. The period-over-period decrease was primarily due to the volumetric decrease in raw materials purchases as a result of deflated sales. Prior year results included purchasing raw feedstocks for which the Company approximately paid an average of $0.402 per pound (or $3.02 per gallon based on a density of 7.5 pounds per gal). Current year activity during the period under consideration included purchasing raw feedstocks for which the Company approximately paid an average of $0.497 per pound (or $3.73 per gallon based on a density of 7.5 pounds per gal). Furthermore, the lack of tax credits available for the period January 1, 2012 through December 31, 2012 contributed to the difference in cost of revenues period-over-period.

Depreciation
Depreciation expense totaled $118,404 for the period January 1, 2012 through December 31, 2012.

Depreciation expense totaled $72,676 for the period January 1, 2011 through December 31, 2011.

Gross Profit
Gross profit for the Company was a loss totaling ($280,465) for the period January 1, 2012 through December 31, 2012. The primary reason for the loss during the period under consideration was directly related to the adversely affected RIN market, which reduced demand for biodiesel from small producers. Consumers (i.e. obligated parties) were reluctant to purchase biodiesel and associated RINs from small, non-vertically integrated biodiesel producers for fear of being sold invalid RINs. Also contributing to the gross loss was the fact that the biodiesel blender tax credit expired at December 31, 2011 and was not available as an offset to the Company's cost to produce during the period January 1, 2012 to December 31, 2012.

Gross profit for the Company totaled $55,141 for the period January 1, 2011 through December 31, 2011. The primary reason for the gross profit during the period under consideration was the sale of RINs to third parties amounting to $855,519. Also impacting the gross profit was the fact that the cost to produce was reduced by $261,324 during the period, net of the establishment of a valuation allowance on the tax credits receivable of $224,059, as NABE filed for biodiesel blending credits with the IRS.

Selling, General and Administrative Expenses (SG&A) SG&A expenses totaled $110,251 for the period January 1, 2012 through December 31, 2012. During the period under consideration, the Company's SG&A expenses were primarily consisted of costs associated with payroll, office overhead and consulting fees.


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SG&A expenses totaled $1,507,565 for the period January 1, 2011 through December 31, 2011. During the period under consideration, the Company's SG&A expenses were primarily comprised of payroll, auditing and accounting fees ($154,640), legal fees ($21,781), travel expenses ($13,888), consulting fees ($1,243,375), and fees associated with filing financial reports in XBRL format ($15,175).

Comparing the activity for the period January 1, 2012 through December 31, 2012 to the activity for the period January 1, 2011 through December 31, 2011, there was a decrease in SG&A expenses of $1,397,314 as SG&A declined from $1,507,565 to $110,251. The period-over-period decrease was due primarily to reduced consulting expenses that were recognized during the prior year as part of a stock grant. A portion of the stock grant was recognized during the current year, but the amount was much less on a comparative basis. During the period January 1, 2011 through December 31, 2011, the Company paid fundraising and consulting fees of approximately $1,243,375. During the period January 1, 2012 through December 31, 2012, the Company recognized $16,667 in consulting fees associated with a stock grant.

Gain on Forgiveness of Trade Payables
Gain on forgiveness of trade payables was $30,000 for the period January 1, 2012 through December 31, 2012. During the period, $30,000 of the Company's payable balance to a third party was forgiven.

The Company had no gain on forgiveness of trade payables for the period January 1, 2011 through December 31, 2011.

Loss on Disposal of Fixed Assets and Impairment of Construction in Progress Loss on disposal of fixed assets was $71,120 for the period January 1, 2012 through December 31, 2012. The assets that were disposed of were totes that the biodiesel production facility in Lenoir, North Carolina had used for storage of methylated glycerin and recovered methanol. During the first quarter of 2012, new storage tanks were placed into service that had previously been reflected as construction in progress assets. These new storage tanks rendered the totes useless. Given the condition of the totes, it was determined that they were unsuitable for selling and the assets were fully impaired. This loss was partially offset by a $2,670 gain on disposal of fixed assets recorded during the year ended December 31, 2012.

Loss on impairment of construction in progress during the period January 1, 2012 to December 31, 2012 is $170,700 associated with filtration equipment. As of December 31, 2011, NABE was in the process of paying third parties to construct a biodiesel resin purification system and other biodiesel production equipment. The amounts associated with these projects were included in Construction in Progress in the balance sheet at December 31, 2011. During FY2012, NABE was unable to obtain grant financing necessary to complete the projects and declared the assets fully impaired as of December 31, 2012.

The Company had no loss on disposal of fixed assets or impairment of construction in progress for the period January 1, 2011 through December 31, 2011.

Other Income
Other Income totaled $93,559 for the period January 1, 2012 through December 31, 2012. The primary sources of Other Income included $18,738 in funding provided by the Western Piedmont Council of Governments, $48,616 in funding provided by the North Carolina Green Business Fund grant, $17,193 in funding provided by the Carolina Land & Lakes Grant, and $9,012 in funding provided by the USDA's Biofuel Program.

Other Income totaled $74,794 for the period January 1, 2011 through December 31, 2011. The primary sources of Other Income included $49,878 in funding provided by the North Carolina Green Business Fund grant and $24,876 in funding provided by the USDA's Biofuel Program.

Interest Income
The Company had no interest income for the period January 1, 2012 through December 31, 2012.

The Company had interest income of $1,203 for the period January 1, 2011 through December 31, 2011.

Interest Expense
Interest expense was $8,619 for the period January 1, 2012 through December 31, 2012.

Interest expense was $12,592 for the period January 1, 2011 through December 31, 2011.


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Net Loss
The Company had a net loss of $517,596 for the period January 1, 2012 through December 31, 2012.

The Company had a net loss of $1,389,019 for the period January 1, 2011 through December 31, 2011.

Debt Obligations and Commitments

                                                 Less than                                           More than 5
Contractual Obligations             Total        one year        1 - 2 Years       2 - 5 Years          Years
Term loan (1)                     $ 122,313          52,403            55,313            14,597                 -
Term loan (2)                           856             856                 -                 -                 -

Total                             $ 123,169          53,259            55,313            14,597                 -


_______________________


(1) Variable rate term loan dated November 7, 2006 in the original principal amount of $250,000 payable to BB&T Bank by NABE in monthly principal and interest installments of $4,805. Interest is calculated at a variable rate equal to prime plus one percent, with an interest rate floor of 5.25%. For purposes of calculating total obligations due under this term loan, the interest rate, as of December 31, 2012, the date of calculation, was five and a quarter percent (5.25%). This note matures on April 25, 2015, is secured, and contains a cross default provision that will result in the imposition of a default interest rate equal to the lender's prime rate plus 5% in the event of default of any loan agreement. This note was amended on April 27, 2010 to convert it from a line-of-credit loan to a term loan. The proceeds from this note were used to purchase additional processing equipment. The information presented regarding this term loan is as of December 31, 2012. The foregoing description constitutes all of the material terms of this loan and is qualified in its entirety by reference to Exhibit 4.3, which is incorporated herein by reference.

(2) NABE entered into a term note in April 2012 that matured in April 2013. The note was payable in monthly principal and interest installments of $898. Interest is payable monthly at a rate of 10.73%. The balance outstanding at December 31, 2012 was $856.

Liquidity and Capital Resources

Working Capital
                               As of December 31, 2012       As of December 31, 2011
 Current Assets               $                 293,373     $                 739,112
 Current Liabilities                            688,895                       931,351

 Working Capital Deficiency                    (395,522 )                    (192,239 )

 Accumulated Deficit                         (6,050,574 )                  (5,532,978 )




Cash Flows
                                                                 Twelve          Twelve
                                                                 months          months
                                                                  ended           ended
                                                                December        December
                                                                   31,             31,
                                                                  2012            2011
Cash used in operating activities                              $   (25,252 )   $  (150,240 )
Cash used in investing activities                                  (25,681 )       (68,899 )
Cash provided by (used in) financing activities                    (69,446 )       150,594
Net decrease in cash                                              (120,379 )       (68,545 )

As of December 31, 2012, our current assets totaling $293,373 consisted of cash, accounts receivable, inventory, other current assets and prepaid expenses. Our accounts payable and accrued liabilities and current portion of amounts due to related parties and third parties were $688,895 as of December 31, 2012. As a result we had a working capital deficiency of $395,522 at December 31, 2012.

Current assets for the Company totaled $739,112 as of December 31, 2011. Current liabilities for the Company totaled $931,351 as of December 31, 2011. As a result the Company had a working capital deficiency of $192,239 at December 31, 2011.

To December 31, 2012, the Company has funded its initial operations through the issuance of 31,254,332 shares of capital stock (29,274,332 shares of Class A stock and 1,980,000 shares of Class B stock), loans from the former director, loans from related parties, and loans from third parties.


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During the twelve months ended December 31, 2012, the Company repaid $10,000 in debt due to related parties. As of December 31, 2012, the Company had no related party debt.

We expect to incur losses as the business continues to develop. To date, our cash flow requirements have been primarily met by equity financings and cash advances from the Company's former Director and related parties. Management expects to keep operational costs to a minimum until cash is available through financing or operating activities. Management plans to continue to seek other sources of financing on favorable terms; however, there are no assurances that any such financing can be obtained on favorable terms, if at all. If we are unable to generate sufficient profits or are unable to obtain additional funds for our working capital needs, we may need to cease or curtail operations. . . .

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