U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under
the Securities Exchange Act of 1934
For Quarter Ended: June 30, 2006
Commission File Number: 000-51564
NORTHERN ETHANOL, INC
---------------------
(Exact name of small business issuer as specified in its charter)
Delaware
--------
State or other jurisdiction
of incorporation)
34-2033194
----------
(IRS Employer ID No.)
193 King Street East
Suite 300
Toronto, Ontario, M5A 1J5, Canada
---------------------------------
(Address of principal executive offices)
(416) 366-5511
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: Yes
X No .
- ----- -----
The number of shares of the registrant's only class of common stock issued and
outstanding as of August 14, 2006, was 102,751,500 shares.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes X No
----- -----
1
PART I
ITEM 1. FINANCIAL STATEMENTS.
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-1
Consolidated Statements of Operations - 6 months F-2
Consolidated Statements of Operations - 3 months F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows - 6 months F-5 to F-6
Consolidated Statements of Cash Flows - 3 months F-7 to F-8
Notes to Unaudited Consolidated Interim Financial Statements F-9 to F-16
See notes to unaudited consolidated interim financial statements
2
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Consolidated Balance Sheet
As at: June 30, 2006 December 31, 2005
(Unaudited) (Audited)
- -----------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 101,479 $ 13,390
Accounts receivable 33,659 -
Deposits 750,000 -
Prepaid expenses 273,930 10,250
------------- ------------
Total current assets 1,159,068 23,640
Property and equipment (note 3) 155,011 -
Capital lease (note 7) 16,761,565 -
------------- ------------
$ 18,075,644 $ 23,640
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 72,334 $ 2,000
Accrued expenses 6,698 3,098
------------- ------------
Total current liabilities 79,032 5,098
Obligation under capital lease (note 7) 16,761,565 -
------------- ------------
16,840,597 5,098
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value;
100,000,000 shares authorized;
none issued and outstanding (note 6) - -
Common stock, $.0001 par value;
250,000,000 shares authorized; 100,700,000
shares issued and outstanding (note 6) 10,070 10,150
Additional paid-in capital (note 6) 2,197,324 39,865
Deficit accumulated during the development stage (967,875) (31,473)
Accumulated comprehensive income (4,472) -
------------- ------------
1,235,047 18,542
------------- ------------
$ 18,075,644 $ 23,640
============= ============
See notes to unaudited consolidated interim financial statements
F-1
3
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Consolidated Statements of Operations
(Unaudited)
- ----------=----------------------------------------------------------------------
Six Months ended June 30 Nov 29, 2004
--------------------------- (Inception)
2006 2005 to June 30, 2006
----------- ----------- ----------------
REVENUES $ -- $ -- $ --
COST OF GOODS SOLD -- -- --
----------- ----------- ----------------
GROSS MARGIN -- -- --
OPERATING EXPENSES
Salaries and benefits (note 5) 755,352 -- 755,352
General and administrative 161,858 5,279 193,331
Occupancy costs 13,905 -- 13,905
----------- ----------- ----------------
931,115 5,279 962,588
Depreciation 5,287 -- 5,287
----------- ----------- ----------------
NET LOSS $ 936,402 $ 5,279 $ 967,875
=========== =========== ================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.00)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 101,097,790 101,500,000
=========== ===========
See notes to unaudited consolidated interim financial statements
F-2
4
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Consolidated Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------
Three Months ended June 30 Nov 29, 2004
------------------------ (Inception)
2006 2005 to June 30, 2006
----------- ----------- ----------------
REVENUES $ - $ - $ -
COST OF GOODS SOLD - - -
----------- ----------- ----------------
GROSS MARGIN - - -
OPERATING EXPENSES
Salaries and benefits (note 5) 755,352 - 755,352
General and administrative 152,410 2,500 193,331
Occupancy costs 13,905 - 13,905
----------- ----------- ----------------
921,667 2,500 962,588
Depreciation 5,287 - 5,287
----------- ----------- ----------------
NET LOSS $ 926,954 $ 2,500 $ 967,875
=========== =========== ================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.00)
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 100,700,000 101,500,000
=========== ===========
See notes to unaudited consolidated interim financial statements
F-3
5
- -------------------------------------------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Consolidated Statement of Stockholders' Equity
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------------ Additional Accumulated
Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss) Total
------------- ------------- ------------- ------------- ------------- -------------
Inception, November 29, -- $ -- $ -- $ -- $ -- $ --
Stock issued for cash 101, 500,000 10,150 39,865 -- -- 50,015
Net loss for the period
November 29, 2004
(Inception) to December -- -- -- (3,708) -- (3,708)
31, 2004
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 2004 101,500,000 10,150 39,865 (3,708) -- 46,307
Net loss for the year ended -- -- -- (27,765) -- (27,765)
December 31, 2005
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 2005 101,500,000 10, 150 39,865 (31,473) -- 18,542
Shares cancelled (note 6) (800,000) (80) 80 -- -- --
Options issued for services -- -- 657,379 -- -- 657,379
Proceeds of sales under
unit subscription
agreements, net of fees -- -- 1,500,000 -- -- 1,500,000
Cumulative translation -- -- -- -- (4,472) (4,472)
adjustment
Net (loss) for the six
months ended June 30, 2006 -- -- -- (936,402) -- (936,402)
(unaudited)
------------- ------------- ------------- ------------- ------------- -------------
Balances, June 30, 2006 100,700,000 $ 10,070 $ 2,197,324 $ (967,875) $ (4,472) $ 1,235,047
(unaudited) ============= ============= ============= ============= ============= =============
See notes to unaudited consolidated interim financial statements
F-4
6
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Nov 29, 2004
Ended June 30 (Inception)
-------------------------- to June 30
2006 2005 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (936,402) $ (5,279) $ (967,875)
Items not involving cash:
Depreciation 5,287 -- 5,287
Stock-based compensation 657,379 -- 657,379
Changes in non-cash working capital balances:
Accounts receivable (33,659) -- (33,659)
Deposits (750,000) -- (750,000)
Prepaid expenses (263,680) -- (263,680)
Accounts payable 70,334 -- 72,334
Accrued liabilities 3,600 (94) 6,698
Other (4,472) 4,641 (14,722)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,251,613) (732) (1,288,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- -- 50,015
Unit subscriptions, received in advance,
(net of fees) 1,500,000 -- 1,500,000
----------- ----------- -----------
Net cash (used in) provided
by financing activities 1,500,000 -- 1,550,015
See notes to unaudited consolidated interim financial statements
F-5
7
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Nov 29, 2004
Ended June 30 (Inception)
---------------------------- to June 30
2006 2005 2006
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) of capital assets (160,298) -- (160,298)
------------ ------------ ------------
Net cash (used in) provided
by investing activities (160,298) -- (160,298)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 88,089 (732) 101,479
CASH AND CASH EQUIVALENTS:
Beginning of period 13,390 37,515 --
------------ ------------ ------------
End of period $ 101,479 $ 36,783 $ 101,479
============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Assets acquired under capital lease $ 16,761,565 $ -- $ 16,761,565
Cash paid for income taxes -- -- 353
See notes to unaudited consolidated interim financial statements
F-6
8
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Nov 29, 2004
Ended June 30 (Inception)
-------------------------- to June 30
2006 2005 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (926,954) $ (2,500) $ (967,875)
Items not involving cash:
Depreciation 5,287 -- 5,287
Stock-based compensation 657,379 -- 657,379
Changes in non-cash working capital balances:
Accounts receivable (33,659) -- (33,659)
Deposits (750,000) -- (750,000)
Prepaid expenses (266,805) -- (263,680)
Accounts payable 72,334 -- 72,334
Accrued liabilities -- (353) 6,698
Other (4,472) 2,141 (14,722)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,246,890) (712) (1,288,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- -- 50,015
Unit subscriptions, received in advance,
(net of fees) 1,500,000 -- 1,500,000
----------- ----------- -----------
Net cash (used in) provided
by financing activities 1,500,000 -- 1,550,015
See notes to unaudited consolidated interim financial statements
F-7
9
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Nov 29, 2004
Ended June 30 (Inception)
---------------------------- to June 30
2006 2005 2006
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) of capital assets (160,298) -- (160,298)
------------ ------------ ------------
Net cash (used in) provided
by investing activities (160,298) -- (160,298)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 92,812 (712) 101,479
CASH AND CASH EQUIVALENTS:
Beginning of period 8,667 37,495 --
------------ ------------ ------------
End of period $ 101,479 $ 36,783 $ 101,479
============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Assets acquired under capital lease $ 16,761,565 $ -- $ 16,761,565
Cash paid for income taxes -- -- 353
See notes to unaudited consolidated interim financial statements
F-8
10
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Beaconsfield I, Inc. (the "Company"), a development stage company, located in
Toronto, Canada, was incorporated in Delaware on November 29, 2004 for the
purpose of engaging in the potential future merger or acquisition of an
unidentified target business. Since its inception, the Company's operations have
primarily included raising capital and the performance of certain administrative
functions.
On December 15, 2004, the Company issued 150,000 shares of its common stock for
a total of $15 in cash in accordance with a Stock Purchase Agreement.
Additionally on that date, the Company issued 10,000,000 shares of its common
stock, for a total of $50,000 in cash.
On April 6, 2006, the Company incorporated Northern Ethanol, Inc., a 100% owned
subsidiary under the laws of the State of Delaware. Effective May 3, 2006, the
Company merged with this subsidiary, and was the surviving entity. As permitted
by Delaware law, the Company has adopted Northern Ethanol, Inc. as its corporate
name on May 3, 2006. On April 11, 2006, the Company incorporated two 100% owned
Canadian subsidiaries, Northern Ethanol (Canada) Inc. and Northern Ethanol
(Barrie) Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying interim financials statements of the Company as of June 30,
2006, for the three months ended June 30, 2006 and 2005 and for the period from
November 29, 2004 (Inception) to June 30, 2006 have been prepared in accordance
with accounting principles generally accepted for interim financial statement
presentation and in accordance with the instructions to Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statement presentation. In the opinion of management, all
adjustments necessary for a fair statement of the results of operations and
financial position for the interim period presented have been included. All such
adjustments are of a normal recurring nature. The results of operations for the
three months ended June 30, 2006 are not necessarily indicative of the results
to be expected for the full year ended December 31, 2006. This financial
information should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-KSB for the year ended December
31, 2005.
Basis of preparation
These unaudited interim consolidated financial statements have been prepared on
a going concern basis, which assumes that the Company will continue in operation
for the foreseeable future and accordingly will be able to realize its assets
and discharge its liabilities in the normal course of operations. Since the
beginning of 2006, the Company has concentrated on activities that will enable
it to acquire facilities to produce ethanol. It has had no net earnings, minimal
revenue and negative operating cash flows, and has financed its activities
through the issuance of shares. The Company's ability to continue as a going
concern is dependent on obtaining additional investment capital and the
achievement of profitable operations. There can be no assurance that the Company
will be successful in increasing revenue or raising additional investment
capital to generate sufficient cash flows to continue as a going concern. These
unaudited interim consolidated financial statements do not reflect the
adjustments that might be necessary to the carrying amount of reported assets,
liabilities and revenue and expenses and the balance sheet classification used
if the Company were unable to continue operation in accordance with this
assumption.
Certain items in the comparative statements have been reclassified to be
consistent with the presentation in the current year.
F-9
11
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Cash and cash equivalents - The Company considers all highly-liquid investments
with an original maturity of three months or less to be cash equivalents.
Leases - The Company follows the guidance in SFAS No 13 "Accounting for Leases",
which requires the Company to evaluate the leases it signs to determine whether
they represent operating or capital leases at the inception of the lease.
Stock based compensation - Effective January 1, 2006, the Company adopted
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standard (SFAS) No. 123R, "Share Based Payment". SFAS 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost is recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). SFAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost is measured based on the fair value of the equity or
liability instruments issued. .
Foreign currency translation - The Company has determined that the functional
currency of its Canadian subsidiaries is the Canadian dollar. All transactions
initiated in Canadian dollars are translated into U.S. dollars in accordance
with SFAS No. 52 "Foreign Currency Translation" as follows:
(i) Assets and liabilities at the rate of exchange in effect at the balance
sheet date; and
(ii) Revenue and expense items at the average rate of exchange prevailing
during the period Adjustments arising from such translations are deferred until
realization and are included as a separate component of stockholders' equity
(deficiency) as a component of comprehensive income or loss. Therefore,
translation adjustments are not included in determining net income (loss) but
are reported as a component of other comprehensive income (loss).
The Company translates foreign currency transactions into the Company's
functional currency at the exchange rate effective on the invoice date. If the
exchange rate changes between the time of purchase and the time actual payment
is made, a foreign exchange transaction gain or loss results which is included
in determining net income for the period.
Income taxes - Deferred income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and are measured using enacted tax rates expected to
apply in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided when it is more likely
than not that the full benefit of the deferred tax assets will not be realized.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the reported amounts of revenues and expenses
and the disclosure of contingent liabilities. Actual results may differ from
these estimates
Earnings (loss) per common share - The Company computes net loss per common
share using SFAS No. 128 "Earnings Per Share." Basic loss per common share is
computed based on the weighted average number of shares outstanding for the
period. Diluted loss per share is computed by dividing net loss by the weighted
average common shares outstanding assuming all dilutive potential common shares
were issued.
F-10
12
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments - The carrying value of cash and cash
equivalents, other current assets, accrued expenses and accounts payable
approximates fair value due to the short period of time to maturity.
Property and equipment - Computer equipment is recorded at cost and is
depreciated on a straight-line basis over its estimated useful life.
Leasehold improvements are capitalized at cost and amortized on a straight line
basis over the term of the lease.
Depreciation and amortization commences at the time when the assets are
substantially being used in operations.
F-11
13
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. Property and equipment
- --------------------------------------------------------------------------------
Accumulated Net book
June 30, 2006 Cost depreciation value
- --------------------------------------------------------------------------------
Computer equipment and software $ 29,582 $ 2,417 $ 27,165
Furniture and equipment 116,982 2,870 114,112
Leasehold improvements 13,734 - 13,734
------------------------------------
$ 160,298 $ 5,287 $ 155,011
- --------------------------------------------------------------------------------
Accumulated Net book
December 31, 2005 Cost depreciation value
- --------------------------------------------------------------------------------
Computer equipment and software $ - $ - $ -
Furniture and equipment - - -
Leasehold improvements - - -
------------------------------------
$ - $ - $ -
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2006, the Company repaid Corsair Advisors,
Inc., an entity owned by a stockholder, for advances it had made on behalf of
the Company prior to December 31, 2005. Additionally, the Company utilized the
office space and equipment of a stockholder at no cost, until April 2006, when
the Company entered into a lease for office space, as further discussed in Note
6.
Also during April 2006, the Company, through a Canadian subsidiary, entered into
a lease for property to be used as an ethanol processing facility, as further
discussed in Note 6. These leases were entered into with an entity affiliated
with a stockholder of the Company.
F-12
14
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. Stock Options
On April 12, 2006, pursuant to an employment agreement, the Company granted
options to purchase an aggregate of 2,000,000 shares of the Company's common
stock at an exercise price equal to $1.00, to its Chief Executive Officer. The
options vest in equal amounts each quarter over 2 years. The options expire 5
years following the date of grant.
On April 21, 2006, pursuant to an employment agreement, the Company granted
options to purchase an aggregate of 500,000 shares of the Company's common stock
at an exercise price equal to $1.00, to its Chief Financial Officer. The options
vest in equal amounts each quarter over 2 years. The options expire 5 years
following the date of grant.
On May 1, 2006 and on June 8, 2006, the Company awarded options to purchase an
aggregate of 224,000 shares of the Company's common stock at an exercise price
equal to $1.00, to certain new employees. The options vest in equal amounts each
quarter over 2 years. The options expire 5 years following the date of grant.
The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes fair value option pricing model with the following
assumptions:
---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
Risk Free Rate interest rate 4.02 - 5.2%
Volatility factor of the future expected market price 86.56%
of the Company's common shares
Weighted average expected life in years 5.0
Expected dividends None
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fair value of the options granted as determined above was $1,770,268, of
which $1,274,042 will be expensed in fiscal 2006. Of this amount, $657,379 was
expensed during the three months ended June 30, 2006.
F-13
15
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. Capital Stock
Holders of shares of common stock are entitled to cast one vote for each share
held at all stockholders' meetings for all purposes, including the election of
directors.
The preferred stock of the Company shall be issued by the Board of Directors of
the Company in one or more classes or one or more series within any class, and
such classes or series shall have such voting powers, full or limited or no
voting powers, and such designations, preferences, limitations or restrictions
as the Board of Directors of the Company may determine, from time-to-time.
Holders of shares of stock of any class shall not be entitled as a matter of
right to subscribe for or purchase or receive any part of any new or additional
issue of shares of stock of any class, or of securities convertible into shares
of stock of any class, whether now hereafter authorized or whether issued for
money, for consideration other than money, or by way of dividend.
a) During the quarter ended June 30, 2006, the Company has received gross
proceeds of $1,700,000 under the terms of a unit subscription agreement which
provides for the purchase of one share of common stock for $1.00. Cost of
issuance related to raising these funds amounted to $200,000. As at June 30,
2006, 1,700,000 shares of the Company's common stock are issuable under the
terms of this agreement. The Company is authorized to issue, to accredited
investors only, up to 5,000,000 shares of common stock under the terms of the
Unit Subscription agreement. Sales of units of the Company's stock under these
agreements will continue during the third quarter.
b) On April 1, 2006, shares certain founding shareholders of the Company, each
owing 50,000 shares of the Common Stock of the Company, agreed to surrender a
portion of their stock ownership to the Company for cancellation. In total,
80,000 shares were surrendered.
c) Effective April 3, 2006, the Company's shareholders approved an increase in
the authorized capital stock of the Company from 80,000,000 shares of $0.0001
par value stock to 350,000,000 shares of authorized capital stock, consisting of
250,000,000 shares of Common Stock having a par value of $0.0001 per share, and
100,000,000 shares of Preferred Stock, having a par value of $0.0001 per share.
d) On April 5, 2006, the Company effected a 10 for one split of its common stock
to holders of record on that date. Throughout this report, common stock amounts
have been adjusted to reflect this change on a retroactive basis.
F-14
16
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. LEASE AGREEMENTS
At April 20, 2006, the Company entered into a lease agreement through its wholly
owned subsidiary, Northern Ethanol (Barrie) Inc, for a 25 year lease, with
optional renewal periods, on an industrial property located in Barrie, Ontario,
Canada, (the "Barrie Lease"), on which it intends to construct an ethanol
processing facility. The Company also entered into a 5 year lease on April 20,
2006 through its wholly owned subsidiary, Northern Ethanol (Canada) Inc., for
office premises located in Toronto, Ontario, Canada to be used for its head
office (the "Head Office Lease"). The Company has analyzed these leases and
determined that the terms of the property lease at the Barrie industrial
location require it to be accounted for as a capital lease. The Company
determined the value of the capital lease acquired, by calculating the present
value of the lease payments over the 25 year term of the lease, discounted at
12% per annum. The terms of the office lease at the Toronto location require it
to be accounted for as an operating lease.
As the Barrie location was acquired for the purposes of constructing an ethanol
processing facility, and the plant is not yet operational, no amortization or
interest expense related to this lease is reflected in the income statement. The
interest during the construction period will be capitalized.
The terms of the leases require the following minimum payments:
Fiscal Year Barrie Lease Head Office Lease Total
2006 $ 323,916 $ 89,897 $ 413,813
2007 1,943,493 154,110 2,097,603
2008 1,943,493 154,110 2,097,603
2009 1,943,493 154,110 2,097,603
2010 1,943,493 154,110 2,097,603
Thereafter 46,515,177 64,212 46,579,389
----------------------------------------------------------
$54,613,065 $ 770,549 $55,383,614
8. INCOME TAXES
The Company has approximately $100,000 in tax assets at June 30, 2006 resulting
from start-up costs. A valuation allowance has been recorded to fully offset
these tax assets because the future realization of the related income tax
benefits is uncertain. The change in the valuation allowance from December 31,
2005 to June 30, 2006 amounted to approximately $94,000.
F-15
17
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. SUBSEQUENT EVENTS
a) On July 15, 2006, pursuant to an employment agreement, the Company granted
options to purchase an aggregate of 300,000 shares of the Company's common stock
at an exercise price equal to $1.00, to its Chief Operating Officer. The options
will vest in equal amounts each quarter over the next 2 years. The options
expire 5 years following the date of grant.
The fair value of each option granted was estimated on the date of the grant
using the Black-Scholes fair value option pricing model with the following
assumptions:
------------------------------------------------------------------
2006
------------------------------------------------------------------
Risk Free Rate interest rate 5.1 - 5.2%
Volatility factor of the future expected market price 86.56%
of the Company's common shares
Weighted average expected life in years 5.0
Expected dividends None
------------------------------------------------------------------
------------------------------------------------------------------
The fair value of the options granted as determined above was $180,649, of which
$95,578 will be expensed in fiscal 2006.
(b) Subsequent to the quarter end, the Company has received an additional
$351,500 under the terms of a unit subscription agreement which provides for the
purchase of one share of common stock for $1.00. As at August 7, 2006, 351,500
shares of the Company's common stock are issuable under the terms of this
agreement. The Company is authorized to issue to accredited investors only up to
5,000,000 shares of common stock under the terms of the Unit Subscription
agreement. Sales of units of the Company's stock under these agreements will
continue during the third quarter.
(c) Effective July 24, 2006, the Company entered into a Project Development
Agreement with Delta-T Corporation, of Williamsburg, Virginia, ("Delta"),
wherein Delta shall provide the Company with professional advice, business and
technical information, design and engineering and related services in order to
assist the Company in assembling all of the information, permits, agreements and
resources necessary for construction of an ethanol plant having the capacity to
produce 100 million gallons per year in Barrie, Ontario, Canada (the "Plant").
The Company paid Delta the sum of $100,000 for their services.
The Agreement provides for Delta to assist the Company in the development and
analysis of the feasibility of the Plant, including location, operating costs,
Plant specifications, compliance with environmental issues, product marketing,
industry economics, technical and other assistance. The relationship between
Delta and the Company is deemed exclusive during the term of the Agreement and
anticipates that the parties shall enter into a definitive, turnkey,
engineering, procurement and construction agreement for the entire Plant. The
Company has granted Delta a right of first refusal in this regard. The term of
the Agreement is five years.
F-16
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited
financial statements and notes thereto included herein. In connection with, and
because we desire to take advantage of, the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, we caution readers regarding
certain forward looking statements in the following discussion and elsewhere in
this report and in any other statement made by, or on our behalf, whether or not
in future filings with the Securities and Exchange Commission. Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward-looking
statements made by, or on, our behalf. We disclaim any obligation to update
forward-looking statements.
OVERVIEW
We were incorporated as "Beaconsfield I, Inc." in the State of Delaware on
November 29, 2004, to pursue a business combination. In May 2006, we attempted
to change our name to "Northern Ethanol, Inc." by effecting a merger of a
subsidiary company into Beaconsfield I, Inc. However, we were unable to
accomplish our objectives in this regard. Subsequently, in April 2006, the
holders of a majority of our then issued and outstanding common stock approved
an amendment to our Certificate of Incorporation wherein we did change our name
to "Northern Ethanol, Inc." to better reflect our current business plan that is
described under "Plan of Operation" below. We are currently considered a
"development stage" company.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the six-month periods ended June 30,
2006 and 2005
During the six-month period ended June 30, 2006, we did not generate any
revenues. We do not expect to begin generating revenues until such time as the
ethanol plants described below under "Plan of Operation" become operational.
During the six month period ended June 30, 2006, we incurred costs and
expenses totaling $931,115, including $755,352 in salaries and benefits and
$175,763 in general and administrative expense and occupancy cost. During the
six-month period ended June 30, 2005, our total costs and expenses were $5,279.
This significant increase in operating expenses was a direct result of our
commencement of our new business plan, described below.
19
As a result, we incurred a net loss of $(936,402) during the six month
period ended June 30, 2006, compared to a net loss of $(5,279) for the similar
period ended June 30, 2005. Because we did not generate revenues during the six
month period ended June 30, 2006, following is our Plan of Operation.
PLAN OF OPERATION
As of the date of this report we have begun entry into the business of
manufacturing fuel ethanol for sale to oil refiners and other users. Our goal is
to produce, market and sell ethanol and other renewable fuels in the Eastern
United States and Canada. In this regard we have retained new management
experienced in this industry. Further, we have secured or are in advanced stages
of securing sites to build ethanol processing facilities at two locations in
Ontario, Canada (Barrie and Sarnia), and one location in upper New York State
for total planned production capacity of 300 million US gallons per annum. Each
of these locations will be the site for a corn-based ethanol processing
facility. The two facilities currently envisaged for Ontario are expected to be
completed and operational over the next two years. The Upper New York State
facility is expected to be operational one year later.
We have secured, or are in the advanced stages of securing, sites to
build ethanol processing facilities at the following locations, in the
capacities indicated:
o Barrie, Ontario, Canada; 100 million gallons - The site has been
obtained under a 45 year lease including renewal options. The lease
allows us to utilize all existing site infrastructure and demolish or
modify existing structures to optimize plant operations. The site is
owned by an affiliate of one of our shareholders.
o Sarnia, Ontario, Canada; 100 million gallons - This site comprises
approximately 40 acres. We have entered into a non-binding letter of
intent with the owner of this location that provides us with a 99 year
lease with an annual rental payment of $10 (CN), plus payment by us of
all real estate and property taxes and other operating expenses,
including utilities. The terms are subject to our reaching an
agreement for the owner to supply steam to our proposed plant for a
minimum of 15 years. The proposed terms also include a right of first
refusal for us to acquire this land at a price to be agreed in the
future and also provides for us to receive $4 million (CN) as a tenant
inducement to enter into a definitive agreement. This site is adjacent
to a major rail line, has good highway access, access to the Great
Lakes for shipping purposes and is fully zoned and serviced.
In addition, we are actively negotiating for the acquisition and
development of a site at the following location:
o New York State; 100 million gallons. This site is undergoing a
comprehensive evaluation for a 100 million gallon facility and
business terms of the site acquisition are currently under discussion.
20
Each of these locations will be the site for a state-of-the-art ethanol
processing facility using corn as the feedstock. The Barrie location represents
a conversion of an existing site from a former brewery. The Sarnia and Upstate
New York locations represent new construction.
Effective July 24, 2006, we entered into a Project Development Agreement
(the "Agreement") with Delta-T Corporation, Williamsburg, Virginia, ("Delta"),
wherein Delta shall provide us professional advice, business and technical
information, design and engineering and related services in order to assist us
in assembling all of the information, permits, agreements and resources
necessary for construction of an ethanol plant having the capacity to produce
100 million gallons per year in Barrie, Ontario, Canada (the "Plant"). We paid
Delta the sum of $100,000 for their services.
The Agreement provides for Delta to assist us in the development and
analysis of the feasibility of the Plant, including location, operating costs,
Plant specifications, compliance with environmental issues, product marketing,
industry economics, technical and other assistance. The relationship between
Delta and us is deemed exclusive during the term of the Agreement and
anticipates that the parties shall enter into a definitive, turnkey,
engineering, procurement and construction agreement for the entire Plant. We
have granted Delta a right of first refusal in this regard. The term of the
Agreement is five (5) years.
We will begin construction at each location as soon as we are able to
secure all the necessary financing and permits to complete construction of this
facility. We expect this financing to take the form of both debt and equity.
However, it is our intention to use leverage to the greatest extent feasible as
is typical with larger energy infrastructure projects. To date, we have not
obtained all of this required financing. However, as of August 8, 2006, we have
raised $2,051,500 by selling shares of our common stock at a price of $1.00 per
share. We intend to raise up to $5 million in this offering. See "Liquidity and
Capital Resources" and "Risk Factors" below.
We are also in negotiations to acquire an existing ethanol plant in the
Province of Quebec, Canada. However, these negotiations are in the preliminary
stage and there can be no assurance that we will consummate this acquisition. We
have made a fully refundable deposit to the prospective sellers in the amount of
$750,000 (US).
We are implementing a growth strategy by:
o Building state of the art processing plants on brown field and green
field sites;
o Negotiating stable long term contracts with key suppliers;
o Securing long term sales agreements;
o Pursuing acquisitions of existing ethanol producers
21
o Pursuing acquisitions and/or strategic alliances with ethanol
technology companies.
We are committed to investing in the latest technology to ensure that the
processing costs are as low as possible, and the outputs are of the highest
quality. The initial locations have been chosen due to proximity to supply of
corn, natural gas, and water and are well located for the transportation of
inputs and products.
We have also entered into a letter of intent with a privately held grain
merchant's corporation (the "Grain Merchant"), which owns and operates grain
elevators and has extensive domestic and international experience in
international grain origination and co-product merchandizing. We expect to
engage them to source all of the corn required for the operation of the Barrie
and Sarnia ethanol facilities at competitive prices. We expect they will assist
us in negotiations with major corn suppliers to guarantee supply and price by
committing to long-term purchase agreements or opportunistic purchases on the
spot market when this can be done at favorable rates.
We have also been in discussion with a privately held corporation that
provides ethanol marketing capability across North America. The ethanol
marketing company is a fully integrated marketing company supported by an
experienced sales force, a knowledgeable logistics and scheduling department,
customer service, and an online computer system that we will be able to access
to streamline all necessary correspondence for daily shipments and
transportation transactions. The Company expects to engage this marketing
company to handle the sales of our ethanol production. We expect that the Grain
Merchant would assist us with the sale of our dried distillers grain by-product
through spot sales or long-term contracts to major purchasers.
The manner in which we intend to develop future sites beyond the initial
aforementioned locations will depend upon the nature of the opportunity, the
respective needs of the parties involved, and ourselves. We have set up a
separate subsidiary to own each ethanol plant. We may purchase assets outright,
acquire an ownership interest in companies controlling key assets, or issue
shares in the subsidiary company that controls the site to outside parties who
control key assets.
It is likely that we will finance our participation in a business
opportunity through the issuance of common stock or other securities and through
the issuance of senior debt secured against the assets of each operating
location.
In the case of cash acquisition, the transaction may be accomplished upon
the sole determination of management without any vote or approval by
stockholders. In the case of a statutory merger or consolidation directly
involving us, it will likely be necessary to call a stockholders' meeting or
otherwise obtain the approval of the holders of a majority of our outstanding
shares. The necessity to obtain such stockholder approval may result in delay
and additional expense in the consummation of any proposed transaction and may
also give rise to certain appraisal rights to dissenting stockholders.
22
We plan to identify and exploit new technologies for reduced costs and
greater manufacturing yields. For example, we are examining new technologies
enabling the conversion of cellulose, which is generated predominantly from wood
waste, paper waste and agricultural waste, into ethanol which would reduce or
eliminate our dependency on corn as a primary feedstock, while also helping
local municipalities deal with ever increasing demands on their garbage disposal
sites.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, we had $101,479 in cash and cash equivalents.
As of August 8, 2006, we have sold an aggregate of 2,051,500 shares of our
common stock to investors and received aggregate gross proceeds of $2,051,500
therefrom (net proceeds of $1,951,500). This offering has been authorized to
raise up to $5 million and is continuing as of the date hereof. We intend to
utilize the proceeds of this offering to support the possible acquisition of
existing ethanol plants, on expenses related to obtaining and building other
ethanol facilities, and on general and administrative expenses, as well as for
general working capital.
As a result of our obtaining equity capital in the aforesaid private
offering, we believe that we currently have sufficient funds available for us to
continue to implement our business plan for the next 12 months. However, we
estimate that we will require an additional $372.5 million in additional debt or
equity capital to fully implement our initial business plan in the future and
there are no assurances that we will be able to raise this capital when needed.
However, while there are no definitive agreements in place as of the date of
this Report, we are currently engaged in various discussions with interested
parties to provide these funds or otherwise enter into a strategic alliance to
provide such funding. The inability to obtain sufficient funds from external
sources when needed will have a material adverse affect on our implementation of
our plan of operation, results of operations and financial condition.
INFLATION
Although our operations are influenced by general economic conditions, we
do not believe that inflation had a material affect on our results of operations
during the six-month period ended June 30, 2006.
RISK FACTORS
An investment in our Common Stock is a risky investment. Prospective investors
should carefully consider the following risk factors before purchasing shares of
our Common Stock.
RISKS RELATED TO OUR PROPOSED OPERATIONS
We have incurred losses in the past and expect to incur greater losses until our
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ethanol production begins.
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23
As of June 30, 2006 and December 31, 2005, we had an accumulated deficit of
$967,875 and $31,473, respectively. For the six months ended June 30, 2006 and
for the year ended December 31, 2005, we incurred net losses of $936,402 and
$27,765, respectively. We expect to incur significantly greater losses at least
until the completion of our initial ethanol production facility in Barrie,
Ontario. We estimate that the earliest completion date of this facility and, as
a result, our earliest date of ethanol production will not occur until the first
quarter of 2008. We expect to rely on cash from operations and debt and equity
financing to fund all of the cash requirements of our business. If our net
losses continue, we will experience negative cash flow, which may hamper current
operations and may prevent us from expanding our business. We may be unable to
attain, sustain or increase profitability on a quarterly or annual basis in the
future.
Our revenue will be derived primarily from sales of ethanol.
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Ethanol competes with other existing products and other alternative
products could also be developed for use as fuel additives. We expect to be
completely focused on the production and marketing of ethanol and its
co-products for the foreseeable future. We may be unable to shift our business
focus away from the production and marketing of ethanol to other renewable fuels
or competing products. Accordingly, an industry shift away from ethanol or the
emergence of new competing products may reduce the demand for ethanol. A
downturn in the demand for ethanol would significantly and adversely affect our
sales and profitability.
In order to complete the construction of our planned ethanol production
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facilities, we will require significant additional funding.
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We anticipate that we will need to raise approximately $372.5 million in
equity and/or debt financing to complete construction of our first ethanol
production facilities in Barrie and Sarnia, Ontario. As of August 8, 2006, we
have undertaken an initial private offering of our common stock whereby we have
issued 2,015,500 shares of our common stock at a price of $1.00 per share and
received proceeds of $2,015,500 therefrom. We have no contracts with, or binding
commitments from, any investment banker, bank, lender or financial institution
for the balance of the capital required. We may not be able to obtain any
funding from one or more investors or lenders, or if funding is obtained, that
it will be on terms that we have anticipated or that are otherwise acceptable to
us. If we are unable to secure adequate financing, or financing on acceptable
terms is unavailable for any reason, we may be forced to abandon our
construction of one or more, or even all, of our planned ethanol production
facilities.
We plan to fund a substantial majority of the construction costs of our planned
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ethanol production facilities through the issuance of a significant amount of
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debt.
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As a result, our capital structure will be highly leveraged. Our debt
levels and debt service requirements could have important consequences which
could reduce the value of your investment, including:
24
o limiting our ability to borrow additional amounts for operating
capital or other purposes and causing us to be able to borrow
additional funds only on unfavorable terms;
o reducing funds available for operations and distributions because a
substantial portion of our cash flow will be used to pay interest and
principal on our debt;
o making us vulnerable to increases in prevailing interest rates;
o placing us at a competitive disadvantage because we may be
substantially more leveraged than some of our competitors;
o subjecting all or substantially all of our assets to liens, which
means that there may be no assets left for our stockholders in the
event of a liquidation; and
o limiting our ability to adjust to changing market conditions, which
could increase our vulnerability to a downturn in our business or
general economic conditions.
If cash flow from operations are insufficient to pay our debt service
obligations it is possible that we could be forced to sell assets, seek to
obtain additional equity capital or refinance or restructure all or a portion of
our debt on substantially less favorable terms. In the event that we are unable
to refinance all or a portion of our debt or raise funds through asset sales,
sales of equity or otherwise, we may be forced to liquidate and you could lose
your entire investment.
Our success depends, to a significant extent, upon the continued services of
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Gord Laschinger, who is our President and Chief Executive Officer.
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Mr. Laschinger has developed key personal relationships with our expected
suppliers and customers. We greatly rely on these relationships in the conduct
of our operations and the execution of our business strategies. The loss of Mr.
Laschinger could, therefore, result in the loss of our favorable relationships
with one or more of our suppliers and customers. Although we have entered into
an employment agreement with Mr. Laschinger, that agreement is of limited
duration and is subject to early termination by Mr. Laschinger under certain
circumstances. In addition, we do not maintain "key person" life insurance
covering Mr. Laschinger or any other executive officer. The loss of Mr.
Laschinger could also significantly delay or prevent the achievement of our
business objectives.
The ethanol production and marketing industry is extremely competitive.
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Many of our significant competitors in the ethanol production and marketing
industry, such as Archer-Daniels-Midland Company, or ADM, have substantially
greater production, financial, research and development, personnel and marketing
resources than we do. In addition, we are not currently producing any ethanol.
As a result, our competitors, who are presently producing ethanol, may have
greater relative present and future advantages resulting from
25
greater capital resources and operating history. As a result, our competitors
may be able to compete more aggressively and sustain that competition over a
longer period of time than we could. Our lack of resources relative to many of
our significant competitors may cause us to fail to anticipate or respond
adequately to new developments and other competitive pressures. This failure
could reduce our competitiveness and cause a decline in our market share, sales
and profitability.
Our strategy envisions a period of rapid growth that may impose a significant
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burden on our administrative and operational resources.
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The growth of our business, and in particular, the completion of
construction of our planned ethanol production facilities, will require
significant investments of capital and management's close attention. Our ability
to effectively manage our growth will require us to substantially expand the
capabilities of our administrative and operational resources and to attract,
train, manage and retain qualified management, technicians and other personnel.
We may be unable to do so. In addition, our failure to successfully manage our
growth could result in our sales not increasing commensurately with our capital
investments. If we are unable to successfully manage our growth, we may be
unable to achieve our goals.
Should we become involved in reselling ethanol, we anticipate that our
purchases and sales of ethanol may not always match with sales and purchases of
ethanol at prevailing market prices. We may commit from time to time to the sale
of ethanol to our customers without corresponding and commensurate commitments
for the supply of ethanol from our suppliers that subject us to the risk of an
increase in the price of ethanol. We may also commit from time to time to the
purchase of ethanol from our suppliers without corresponding and commensurate
commitments for the purchase of ethanol by our customers, which subjects us to
the risk of a decline in the price of ethanol.
In addition, we may increase inventory levels in anticipation of rising
ethanol prices and decreases inventory levels in anticipation of declining
ethanol prices. As a result, we are subject to the risk of ethanol prices moving
in unanticipated directions, which could result in declining or even negative
gross profit margins for this segment of our business. Accordingly, this segment
of our business would be subject to fluctuations in the price of ethanol and
these fluctuations may result in lower or even negative gross margins and which
could materially and adversely affect our profitability.
We cannot rely on long-term ethanol orders or commitments by our customers for
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protection from the negative financial effects of a decline in the demand for
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ethanol.
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The limited certainty of ethanol orders can make it difficult for us to
forecast our sales and allocate our resources in a manner consistent with our
actual sales. Moreover, our expense levels are based in part on our expectations
of future sales and, if our expectations regarding future sales are inaccurate,
we may be unable to reduce costs in a timely manner to adjust for sales
shortfalls. Furthermore, because we expect to depend on a small number of
customers for
26
the vast majority of our sales, the magnitude of the ramifications of these
risks is greater than if our sales were less concentrated within a larger number
of customers. As a result of our lack of long-term ethanol orders and
commitments, we may experience a rapid decline in our sales and profitability.
We have not conducted any significant business operations as yet and have been
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unprofitable to date.
- ---------------------
Accordingly, there is no prior operating history by which to evaluate the
likelihood of our success or our contribution to our overall profitability. We
may never complete construction of an ethanol production facility and commence
significant operations or, if we do complete the construction of an ethanol
production facility, it may not be successful in contributing positively to our
profitability.
The market price of ethanol is dependent on many factors, including the price of
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gasoline, which is in turn dependent on the price of petroleum.
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Petroleum prices are highly volatile and difficult to forecast due to
frequent changes in global politics and the world economy. The distribution of
petroleum throughout the world is affected by incidents in unstable political
environments, such as Iraq, Iran, Kuwait, Saudi Arabia, the former U.S.S.R. and
other countries and regions. The industrialized world depends critically on oil
from these areas, and any disruption or other reduction in oil supply can cause
significant fluctuations in the prices of oil and gasoline. We cannot predict
the future price of oil or gasoline and may establish unprofitable prices for
the sale of ethanol due to significant fluctuations in market prices. For
example, the price of ethanol declined by approximately 25% from its 2004
average price per gallon in only five months from January 2005 through May 2005.
In recent years, the prices of gasoline, petroleum and ethanol have all reached
historically unprecedented high levels. If the prices of gasoline and petroleum
decline, we believe that the demand for and price of ethanol may be adversely
affected. Fluctuations in the market price of ethanol may cause our
profitability to fluctuate significantly.
We believe that the production of ethanol is expanding rapidly. There are a
number of new plants under construction and planned for construction, both
inside and outside Ontario. We expect existing ethanol plants to expand by
increasing production capacity and actual production. Increases in the demand
for ethanol may not be commensurate with increasing supplies of ethanol. Thus,
increased production of ethanol may lead to lower ethanol prices. The increased
production of ethanol could also have other adverse effects. For example,
increased ethanol production will lead to increased supplies of co-products from
the production of ethanol, such as DDGS and CO2. Those increased supplies could
lead to lower prices for those co-products. Also, the increased production of
ethanol could result in increased demand for corn. This could result in higher
prices for corn and cause higher ethanol production costs and, in the event that
we are unable to pass increases in the price of corn to our customers, will
result in lower profits. We cannot predict the future price of ethanol or DDGS.
Any material decline in the price of ethanol, DDGS or CO2 will adversely affect
our sales and profitability.
27
Our business is subject to extensive regulation by federal, state and local
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governmental agencies.
- ----------------------
We cannot predict in what manner or to what extent governmental regulations
will harm our business or the ethanol production and marketing industry in
general. For example the recent energy bill signed into law by President Bush
includes a national renewable fuels standard that requires refiners to blend a
percentage of renewable fuels into gasoline. Similar regulations were recently
introduced in Ontario. If changes in government regulations reduce the demand
for ethanol, our sales and profitability may decline.
The fuel ethanol business benefits significantly from tax incentive
policies and environmental regulations that favor the use of ethanol in motor
fuel blends in the United States. Currently, a gasoline marketer that sells
gasoline without ethanol must pay a federal tax of $0.18 per gallon compared to
$0.13 per gallon for gasoline that is blended with 10% ethanol. Smaller credits
are available for gasoline blended with lesser percentages of ethanol. The
repeal or substantial modification of the federal excise tax exemption for
ethanol-blended gasoline or, to a lesser extent, other federal or state policies
and regulations that encourage the use of ethanol could have a detrimental
effect on the ethanol production and marketing industry and materially and
adversely affect our sales and profitability.
We will be subject to extensive air, water and other environmental
regulations in connection with the construction and operation of our planned
ethanol production facilities. The production of ethanol involves the emission
of various airborne pollutants, including particulates, carbon monoxide, oxides
of nitrogen and volatile organic compounds. We also may be required to obtain
various other water-related permits, such as a water discharge permit and a
storm-water discharge permit, a water withdrawal permit and a public water
supply permit. If for any reason we are unable to obtain any of the required
permits, construction costs for our planned ethanol production facilities are
likely to increase. In addition, the facilities may not be fully constructed at
all. It is also likely that operations at the facilities will be governed by
other regulations. Compliance with regulations may be time-consuming and
expensive and may delay or even prevent sales of ethanol in Ontario or in other
jurisdictions.
The production and sale of ethanol is subject to regulation by agencies of
the Federal Government, including, but not limited to, the Environmental
Protection Agency, or the EPA, in the US as well as other agencies in each
jurisdiction in which ethanol is produced, sold, stored or transported.
Environmental laws and regulations that affect our operations, and that are
expected to affect our planned operations, are extensive and have become
progressively more stringent. Applicable laws and regulations are subject to
change, which could be made retroactively. Violations of environmental laws and
regulations or permit conditions can result in substantial penalties, injunctive
orders compelling installation of additional controls, civil and criminal
sanctions, permit revocations and/or facility shutdowns. If significant
unforeseen liabilities arise for corrective action or other compliance, our
sales and profitability could be materially and adversely affected.
28
Delays in the construction of our planned ethanol production facilities or
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defects in materials and/or workmanship may occur.
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Any defects could delay the commencement of operations of the facilities,
or, if such defects are discovered after operations have commenced, could halt
or discontinue operation of a particular facility indefinitely. In addition,
construction projects often involve delays in obtaining permits and encounter
delays due to weather conditions, fire, the provision of materials or labor or
other events. In addition, changes in interest rates or the credit environment
or changes in political administrations at the federal, provincial, state or
local levels that result in policy change towards ethanol or our project in
particular, could cause construction and operation delays. Any of these events
may adversely affect our sales and profitability.
We may encounter hazardous conditions at or near each of our planned
facility sites, including the Barrie site that may delay or prevent construction
of a particular facility. If we encounter a hazardous condition at or near a
site, work may be suspended and we may be required to correct the condition
prior to continuing construction. The presence of a hazardous condition would
likely delay construction of a particular facility and may require significant
expenditure of resources to correct the condition. If we encounter any hazardous
condition during construction, our sales and profitability may be adversely
affected.
We have based our estimated capital resource needs on a preliminary design
for an ethanol production facility in Barrie Ontario. Based on this preliminary
budget, we estimated that the construction cost of each of our facilities will
be approximately $160 million. The estimated cost of these facilities is based
on preliminary discussions and estimates, but the final construction cost of the
facility may be significantly higher. Any significant increase in the final
construction cost of the facility will adversely affect our profitability,
liquidity and available capital resources.
The production of ethanol requires a significant amount of raw materials and
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energy, primarily corn, water, electricity and natural gas.
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In particular, we estimate that our Barrie and Sarnia ethanol production
facilities will require approximately 78 million bushels of corn each year and
significant and uninterrupted supplies of water, electricity and natural gas.
The prices of corn, electricity and natural gas have fluctuated significantly in
the past and may fluctuate significantly in the future. In addition, droughts,
severe winter weather and other problems may cause delays or interruptions of
various durations in the delivery of corn to our facilities, reduce corn
supplies and increase corn prices. Local water, electricity and gas utilities
may not be able to reliably supply the water, electricity and natural gas that
our Barrie and Sarnia facilities will need or may not be able to supply such
resources on acceptable terms. In addition, if there is an interruption in the
supply of water or energy for any reason, we may be required to halt ethanol
production. We may not be able to successfully anticipate or mitigate
fluctuations in the prices of raw materials and energy through the
implementation of hedging and contracting techniques. Our hedging and
contracting activities may not lower our prices of raw materials and energy, and
in a period of declining raw
29
materials or energy prices, these hedging and contracting strategies may result
in our paying higher prices than our competitors. In addition, we may be unable
to pass increases in the prices of raw materials and energy to our customers.
Higher raw materials and energy prices will generally cause lower profit margins
and may even result in losses. Accordingly, our sales and profitability may be
significantly and adversely affected by the prices and supplies of raw materials
and energy.
We have not voluntarily implemented various corporate governance measures, in
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the absence of which, stockholders may have reduced protections against
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interested director transactions, conflicts of interest and other matters.
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We are not subject to any law, rule or regulation requiring that we adopt
any of the corporate governance measures that are required by the rules of
national securities exchanges or Nasdaq such as independent directors and audit
committees. It is possible that if we were to adopt some or all of the corporate
governance measures, stockholders would benefit from somewhat greater assurances
that internal corporate decisions were being made by disinterested directors and
that policies had been implemented to define responsible conduct. Prospective
investors should bear in mind our current lack of corporate governance measures
in formulating their investment decisions.
We may be exposed to potential risks relating to our internal controls over
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financial reporting and our ability to have those controls attested to by our
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independent auditors.
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As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"),
the Securities and Exchange Commission adopted rules requiring public companies
to include a report of management on the company's internal controls over
financial reporting in their annual reports, including Form 10-KSB. In addition,
the independent registered public accounting firm auditing a company's financial
statements must also attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting as
well as the operating effectiveness of the company's internal controls. We have
not yet been subject to these requirements. We are evaluating our internal
control systems in order to allow our management to report on, and our
independent auditors attest to, our internal controls, as a required part of our
annual report on Form 10-KSB beginning with our reports for the fiscal year
ended December 31, 2007. A recent release from the SEC has indicated that newly
public companies may be granted an additional year, after becoming public to
demonstrate the effectiveness of their internal controls as required under SOX
404.
While we expect to expend significant resources in developing the necessary
documentation and testing procedures required by SOX 404, there is a risk that
we will not comply with all of the requirements imposed thereby. At present,
there is no precedent available with which to measure compliance adequacy.
Accordingly, there can be no positive assurance that we will receive a positive
attestation from our independent auditors.
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In the event we identify significant deficiencies or material weaknesses in
our internal controls that we cannot remediate in a timely manner or we are
unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements and our ability to obtain equity or
debt financing could suffer.
RISKS RELATED TO OUR COMMON STOCK
There is no trading market for our securities and there can be no assurance that
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such a market will develop in the future.
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Management expects that we will file a registration statement with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, in the near future. Thereafter, we intend to undertake efforts to cause
a market to develop in our common stock on the OTC Electronic Bulletin Board
operated by the National Association of Securities Dealers, Inc. There is no
assurance such a market will develop in the future or, if developed, that it
will continue. In the absence of a public trading market, an investor may be
unable to liquidate his investment in our company.
We do not have significant financial reporting experience, which may lead to
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delays in filing required reports with the Securities and Exchange Commission
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and suspension of quotation of our securities on the OTCBB, which will make it
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more difficult for you to sell your securities.
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If we are successful in listing our common stock for trading on the OTCBB,
of which there can be no assurance, the OTCBB limits quotations to securities of
issuers that are current in their reports filed with the Securities and Exchange
Commission. These limitations may be impediments to our quotation on the OTCBB.
Because we do not have significant financial reporting experience, we may
experience delays in filing required reports with the Securities and Exchange
Commission following the effectiveness of the registration statement to which
this prospectus is a part. Because issuers whose securities are qualified for
quotation on the OTCBB are required to file these reports with the Securities
and Exchange Commission in a timely manner, the failure to do so may result in a
suspension of trading or delisting from the OTCBB.
If we are successful in listing our common stock for trading on the OTCBB, there
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are no automated systems for negotiating trades on the OTCBB and it is possible
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for the price of a stock to go up or down significantly during a lapse of time
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between placing a market order and its execution, which may affect your trades
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in our securities.
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Because there are no automated systems for negotiating trades on the OTCBB,
they are conducted via telephone. In times of heavy market volume, the
limitations of this process may result in a significant increase in the time it
takes to execute investor orders. Therefore, when
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investors place market orders, an order to buy or sell a specific number of
shares at the current market price, it is possible for the price of a stock to
go up or down significantly during the lapse of time between placing a market
order and its execution.
If our stock trades below $5.00 per share and is quoted on the OTCBB, our stock
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would be considered a "penny stock" which can adversely affect its liquidity.
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If and when trading commences and the trading price of our Common Stock is
less than $5.00 per share, our Common Stock would be considered a "penny stock,"
and trading in our Common Stock would be subject to the requirements of Rule
15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers
who recommend low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements. The
broker/dealer must make an individualized written suitability determination for
the purchaser and receive the purchaser's written consent prior to the
transaction.
SEC regulations also require additional disclosure in connection with any
trades involving a "penny stock," including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and its associated risks. These requirements severely limit the liquidity of
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities. In addition to the applicability of the
penny stock rules, other risks associated with trading in penny stocks could
also be price fluctuations and the lack of a liquid market.
"Penny Stock" rules may make buying or selling our securities difficult.
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The Securities and Exchange Commission has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. These rules require
that any broker-dealer who recommends our securities to persons other than prior
customers and accredited investors must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our securities and consequently
adversely affect the market price for our securities.
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We do not anticipate payment of dividends, and investors will be wholly
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dependent upon the market for the Common Stock to realize economic benefit from
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their investment.
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As holders of our Securities, you will only be entitled to receive those
dividends that are declared by our board of directors out of surplus. We do not
expect to have surplus available for declaration of dividends in the foreseeable
future. Indeed, there is no assurance that such surplus will ever materialize to
permit payment of dividends to you as holders of the Securities. The board of
directors will determine future dividend policy based upon our results of
operations, financial condition, capital requirements, reserve needs and other
circumstances.
Any adverse effect on the market price of our common stock could make it
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difficult for us to raise additional capital through sales of equity securities
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at a time and at a price that we deem appropriate.
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We intend to file a registration statement with the Securities and Exchange
Commission to register shares of our common stock and thereafter, cause our
common stock to be listed for trading on the OTCBB, or other exchange. If and
when this registration statement declared effective, holders of these shares
will be permitted, subject to few limitations, to freely sell these shares of
common stock. At that time, sales of substantial amounts of common stock,
including shares issued upon the exercise of stock options or warrants, or in
anticipation that such sales could occur, may materially and adversely affect
prevailing market prices for our common stock.
The market price of our common may fluctuate significantly in the future.
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If our Common Stock is approved for trading, of which there can be no
assurance, the market price of our common stock may fluctuate in response to one
or more of the following factors, many of which are beyond our control:
o the volume and timing of the receipt of orders for ethanol from major
customers;
o competitive pricing pressures;
o our ability to produce, sell and deliver ethanol on a cost-effective
and timely basis;
o our inability to obtain construction, acquisition, capital equipment
and/or working capital financing;
o the introduction and announcement of one or more new alternatives to
ethanol by our competitors;
o changing conditions in the ethanol and fuel markets;
33
o changes in market valuations of similar companies;
o stock market price and volume fluctuations generally;
o regulatory developments;
o fluctuations in our quarterly or annual operating results;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.
Furthermore, adverse economic conditions in Ontario and other jurisdictions
could have a negative impact on our results of operations. Demand for ethanol
could also be adversely affected by a slow-down in overall demand for oxygenate
and gasoline additive products. The levels of our ethanol production and
purchases for resale will be based upon forecasted demand. Accordingly, any
inaccuracy in forecasting anticipated revenues and expenses could adversely
affect our business. Furthermore, we recognize revenues from ethanol sales at
the time of delivery. The failure to receive anticipated orders or to complete
delivery in any quarterly period could adversely affect our results of
operations for that period. Quarterly results are not necessarily indicative of
future performance for any particular period, and we may not experience revenue
growth or profitability on a quarterly or an annual basis.
The price at which you purchase shares of our common stock may not be
indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you and which may include the complete
loss of your investment. In the past, securities class action litigation has
often been brought against a company following periods of stock price
volatility. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and our resources away from our business. Any of the risks described above could
adversely affect our sales and profitability and also the price of our common
stock.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules, regulations and related forms, and
that such information is accumulated and communicated to the our
34
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
As of June 30, 2006, we carried out an evaluation, under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective.
CHANGES IN INTERNAL CONTROLS.
There have been no changes in our internal controls or in other factors
that could significantly affect these controls and procedures during the quarter
ended June 30, 2006.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES.
On April 1, 2006, certain of our founding shareholders agreed to surrender
a portion of their stock ownership back to us for cancellation. In total,
800,000 shares were surrendered.
Effective April 5, 2006, we effectuated a forward split of our issued and
outstanding common stock whereby ten (10) shares of common stock were issued in
exchange for every one (1) share of common stock issued and outstanding on the
record date of April 5, 2006. All references in this report to our issued and
outstanding common stock are reflected on a post forward split basis, unless
otherwise indicated.
As of August 8, 2006, we have sold an aggregate of 2,051,500 shares of our
common stock to investors and received aggregate gross proceeds of $2,051,500
therefrom (net proceeds of $1,951,500) ($1.00 per share (US)). Our Board of
Directors has authorized issuance of up to 5,000,000 shares of our common stock
in this offering, which are being offered to accredited investors only. Sales of
shares of our Common Stock will continue during our third fiscal quarter.
All of the investors who participated and who will participate in this
offering were and will be non-US residents. We relied upon the exemption from
registration provided by Regulation S promulgated under the Securities Act of
1933, as amended, to issue these securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 3, 2006, the holders of a majority of our issued and outstanding
common shares approved an amendment to our Certificate of Incorporation,
changing our name to "Northern Ethanol, Inc." and increasing the number of
authorized shares from 80,000,000 shares of $.0001 par value stock to
350,000,000 shares of authorized capital stock, consisting of 250,000,000 shares
of Common Stock having a par value of $.0001 per share and 100,000,000 shares of
Preferred Stock having a par value of $.0001 per share.
On April 6, 2006, the holders of a majority of our issued and outstanding
common shares approved the adoption of a Stock Option Plan, reserving from the
authorized but unissued common shares an aggregate of 8,000,000 shares that
shall underlie stock options to be granted pursuant to the Stock Plan.
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the three-month period ended
June 30, 2006.
SUBSEQUENT EVENTS
On July 21, 2006, as amended August 3 2006, we filed a report on Form 8-K
advising that effective July 19, 2006, the firm of Raich Ende Malter & Co. LLP
("REM"), our independent accountant during the period from November 29, 2004
(inception) through July 18,
36
2006, was dismissed. Effective July 19, 2006 we retained the firm of KPMG as our
independent accountant, to review our unaudited financial statements for the
interim periods ended June 30, 2006, September 30, 2006, and to audit our
financial statement for our fiscal year ending December 31, 2006, and include
such report as part of our annual report on Form 10-KSB for our fiscal year
ending December 31, 2006.
On August 7, 2006, we filed a report on Form 8-K advising that effective
July 24, 2006, we entered into a Project Development Agreement (the "Agreement")
with Delta-T Corporation, Williamsburg, Virginia, ("Delta"), wherein Delta shall
provide us professional advice, business and technical information, design and
engineering and related services in order to assist us in assembling all of the
information, permits, agreements and resources necessary for construction of an
ethanol plant having the capacity to produce 100 million gallons per year in
Barrie, Ontario, Canada.
This report also advised that we had retained Steven Reader as our Chief
Operating Officer.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NORTHERN ETHANOL, INC.
(Registrant)
Dated: August 14, 2006
By:s/ Gordon Laschinger
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Gordon Laschinger, Chief Executive Officer
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