As filed with the Securities and Exchange Commission on October 12, 2006
Registration No. 333_______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
NORTHERN ETHANOL, INC.
(Name of small business issuer in its charter)
Delaware 2869 34-2033194
-------- ---- ----------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization)Classification Code Number) Identification Number)
Northern Ethanol, Inc.
193 King Street East
Suite 300
Toronto, Ontario, M5A 1J5, Canada
(416) 366-5511
--------------
(Address and telephone number of principal executive
offices and principal place of business)
Gordon Laschinger, President
Northern Ethanol, Inc.
193 King Street East
Suite 300
Toronto, Ontario, M5A 1J5, Canada
(416) 366-5511
--------------
(Name, address and telephone number of agent for service)
Copies of all communications to:
Andrew I. Telsey, Esq.
Andrew I. Telsey, P.C.
12835 E. Arapahoe Road
Tower I Penthouse #803
Englewood, Colorado 80112
(303) 768-9221
(303) 768-9224 FAX
Approximate date of proposed sale to public:
As soon as practicable after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
Calculation of Registration Fee
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Share (1) Price (1) Registration Fee
- --------------------------- ---------- --------- --------- ----------------
Common Stock, $.001 par
value per share ........... 4,271,500(2) $1.00 $4,271,500 $457.05
TOTAL ..................... 4,271,500 $1.00 $4,271,500 $457.05
<FN>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(e) under the Securities Act of 1933.
(2) Represents the number of shares of Common Stock issued to the selling
stockholders pursuant to our August 2006 private placement.
</FN>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
Subject to Completion, dated __________, 2006
PRELIMINARY
PROSPECTUS
Northern Ethanol, Inc.
Common Stock
4,271,500 Shares
This Prospectus relates to the resale by the selling stockholders (the "Selling
Stockholders") of 4,271,500 shares of our common stock (the "Common Stock" or
the "Securities"). The Selling Stockholders may sell Common Stock from time to
time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions.
We will pay the expenses of registering these shares. We will not receive any
proceeds from the sale of shares of Common Stock in this Offering. All of the
net proceeds from the sale of our Common Stock will go to the Selling
Stockholders.
Our Common Stock is not currently listed for trading on any exchange. We intend
to cause an application to be filed on our behalf to list our Common Stock for
trading on the OTC Bulletin Board (the "OTCBB"). There can be no assurances that
our Common Stock will be approved for trading on the OTCBB, or any other trading
exchange.
Investing in these Securities involves significant risks. Investors should not
buy these Securities unless they can afford to lose their entire investment.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the registration statement that was filed by Northern
Ethanol, Inc. with the Securities and Exchange Commission. The Selling
Stockholders may not sell these Securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these Securities and
is not soliciting an offer to buy these Securities in any state where the offer
or sale is not permitted.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is [_____________], 200__
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................3
ABOUT THE OFFERING.............................................................4
RECENT DEVELOPMENTS............................................................4
SUMMARY FINANCIAL DATA.........................................................5
RISK FACTORS...................................................................6
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS....................................14
USE OF PROCEEDS...............................................................14
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................15
DESCRIPTION OF BUSINESS.......................................................20
MANAGEMENT....................................................................31
EXECUTIVE COMPENSATION........................................................33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................35
DESCRIPTION OF SECURITIES.....................................................37
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES.......................................37
SELLING STOCKHOLDERS..........................................................38
PLAN OF DISTRIBUTION..........................................................40
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................................43
LEGAL MATTERS.................................................................43
EXPERTS.......................................................................43
AVAILABLE INFORMATION.........................................................44
FINANCIAL STATEMENT INDEX....................................................F-1
2
PROSPECTUS SUMMARY
This summary provides an overview of certain information contained elsewhere in
this Prospectus and does not contain all of the information that you should
consider or that may be important to you. Before making an investment decision,
you should read the entire Prospectus carefully, including the "RISK FACTORS"
section, the financial statements and the notes to the financial statements. In
this Prospectus, the terms "Northern," "Company," "we," "us" and "our" refer to
Northern Ethanol, Inc. and its operating subsidiaries.
We were incorporated as "Beaconsfield I, Inc." in the State of Delaware on
November 29, 2004, to pursue a business combination. In July 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 below. We are currently considered a "development stage" company.
NORTHERN ETHANOL, INC.
As of the date of this Prospectus, we have begun active negotiations with
various parties to facilitate our entry into the business of manufacturing fuel
ethanol for sale to oil refiners and other users. We have secured or are in
advanced stages of securing sites to build ethanol processing facilities at two
locations in Ontario, Canada (our Barrie and Sarnia plants), and one location in
upper New York State for total planned production capacity of 300 million
gallons per annum. Each of these locations will be the site for a
state-of-the-art corn based ethanol processing facility. We have also contracted
with third parties to provide brokerage services for our proposed Barrie and
Sarnia ethanol plants upon the opening of such plants and to provide us with
consulting services in the development of our ethanol plants.
Our principal executive offices are located at 193 King Street East, Suite 300,
Toronto, Ontario, M5A 1J5, Canada, telephone: (416) 366-5511. For more
information on us, prospective investors are encouraged to review the filings
available with the Securities and Exchange Commission at www.sec.gov. All
prospective investors are invited to visit our website at
www.northern-ethanol.com. Prospective investors should be aware that the
information contained on our website is not a part of this Prospectus. Investors
should rely only upon the information contained herein.
3
ABOUT THE OFFERING
Common Stock Offered 4,271,500 shares. This number represents
by Selling Shareholders.............approximately 4% of the total number of
shares outstanding following this Offering.
Common Stock Outstanding
After the Offering..................104,421,500 shares.
Use of Proceeds.....................We will not receive any proceeds from the
sale of the Common Stock.
RECENT DEVELOPMENTS
In April 2006, we adopted a revised business plan for the purpose of developing
three (3) ethanol plants. In conjunction with the adoption of this new business
plan, we retained new management, including Messrs. Gordon Laschinger, our Chief
Executive Officer and President, and Ciaran Griffin, our Chief Financial
Officer. In July 2006, Mr. Steven Reader agreed to become our Chief Operating
Officer. In September 2006, we completed the restructuring of our management by
restructuring our current Board of Directors. See "MANAGEMENT."
On April 20, 2006 we executed a 25 year lease, with an option to renew for 20
years, on property located in Barrie, Canada, that will be the location of our
Barrie ethanol plant. In addition, on July 4, 2006, we executed a Letter of
Intent to acquire a 99 year lease on a brownfield site in Sarnia, Canada to host
a 100 million gallon ethanol production facility. The site comprises
approximately 40 acres and is part of an existing site of a multinational
chemical company.
In July 2006, we engaged in a forward split of our Common Stock whereby we
issued ten (10) shares of our Common Stock for every one (1) share then issued
and outstanding. All references in this Prospectus to our issued and outstanding
Common Stock are provided on a post-forward split basis, unless otherwise
indicated.
Following the aforesaid forward stock split we commenced a private offering of
our Common Stock. This offering was successfully closed in September 2006. We
sold an aggregate of 4,271,500 shares of our Common Stock to 49 "accredited
investors" (as that term is defined in both the Canadian and U.S. securities
laws) at a price of $1.00 per share and received aggregate net proceeds of
$4,021,500 therefrom. Two of these investors are residents of the United States,
with the balance residents of Canada. The proceeds derived from this offering
are to be utilized for the preliminary work relating to development of two
ethanol plants to be located in Canada and one in Upper New York State, as well
as for working capital. We will require additional funds in order to implement
our business plan described herein.
Effective July 24, 2006, we entered into a Project Development Agreement (the
"Delta-Barrie 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
4
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.
In September 2006, we entered into a similar agreement with Delta relating to
our proposed Sarnia ethanol plant (the "Delta-Sarnia Agreement") and paid Delta
an initial amount of $70,000, with the balance of $30,000 due upon issuance of
an air permit by the Province of Ontario. References to the Delta-Barrie
Agreement and Delta-Sarnia Agreement are hereinafter jointly referred to as the
"Delta Agreements," unless otherwise indicated.
The Delta Agreements provides for Delta to assist us in the development and
analysis of the feasibility of each of the respective Plants, 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
Delta Agreements and it is anticipated that the parties shall enter into a
definitive, turnkey, engineering, procurement and construction agreement for
each of the Plants. We have granted Delta a right of first refusal in this
regard. The term of the Delta Agreements is five (5) years for each agreement.
SUMMARY FINANCIAL DATA
Selected Financial Data
The following summary of our financial information for the year ended December
31, 2005, and the period from inception (November 29, 2004) through June 30,
2006, has been derived from, and should be read in conjunction with, our audited
financial statements included elsewhere in this Prospectus. The summary of our
financial information for the six month periods ended June 30, 2006 and 2005 has
been derived from, and should be read in conjunction with, our unaudited
financial statements also included elsewhere in this Prospectus.
Period From
Inception
(Nov. 29, 2004)
Six Months Ended Year Ended Through
June 30, December 31, June 30,
------------------------------ ------------- -------------
Statement of operations: 2006 2005 2005 2006
------------- ------------- ------------- -------------
(unaudited) (unaudited)
------------- -------------
Net revenues $ 0 $ 0 $ 0 $ 0
Gross profit $ 0 $ 0 $ 0 $ 0
Total operating expenses $ 931,115 $ 5,279 $ 27,765 $ 962,588
Loss from operations $ (931,115) $ (5,279) $ (27,765) $ (962,588)
Other expense $ (5,287) $ 0 $ 0 $ (5,287)
Income tax benefit (expense) $ (0) $ 0 $ 0 $ 0
------------- ------------- ------------- -------------
Net loss $ (936,402) $ (5,279) $ (27,765) $ (967,875)
============= ============= ============= =============
Net income per share -
diluted $ (0.01) $ (0.00) $ (0.00) $ (0.00)
============= ============= ============= =============
Weighted common shares
outstanding 101,097,790(1) 101,500,000(1) 101,500,000(1) 101,097,790(1)
============= ============= ============= =============
5
- --------------------------
<FN>
(1) Post forward split. Effective July 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. On July 5, 2006,
the Company effected a 10 for one split of its Common Stock to holders of
record on that date. Throughout this Prospectus, Common Stock amounts have
been adjusted to reflect this change on a retroactive basis.
</FN>
Balance Sheet: December December
June 30, 2006 31, 2005 31, 2004
----------- ----------- -----------
(unaudited)
Cash $ 101,479 $ 13,390 $ 37,515
Current assets $ 1,159,068 $ 23,640 $ 47,015
Total assets $18,075,644 $ 23,640 $ 47,015
Current liabilities $ 79,032 $ 5,098 $ 708
Total liabilities $16,840,597 $ 5,098 $ 708
Total stockholders' equity $ 1,235,047 $ 18,542 $ 46,307
RISK FACTORS
An investment in our Common Stock is a risky investment. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors before purchasing shares of our
Common Stock offered hereby. We believe that we have included all material
risks.
Risks Related to our Proposed Operations
We have incurred losses in the past and expect to incur greater losses until our
- --------------------------------------------------------------------------------
ethanol production begins.
- --------------------------
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
middle of 2008. Until then we expect to rely on 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.
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
facilities, we will require significant additional funding.
- -----------------------------------------------------------
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. In July 2006, we commenced a private
offering of our Common Stock whereby we issued 4,271,500 shares of our Common
Stock at a price of $1.00 per share and received net proceeds of $4,021,500
therefrom. We have no contracts with, or binding commitments from, any
investment banker, bank, lender or financial institution
6
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
- --------------------------------------------------------------------------------
ethanol production facilities through the issuance of a significant amount of
- --------------------------------------------------------------------------------
debt.
- -----
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:
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
- --------------------------------------------------------------------------------
Gordon Laschinger, who is our President and Chief Executive Officer.
- --------------------------------------------------------------------
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.
- -----------------------------------------------------------------------
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 greater
7
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
- --------------------------------------------------------------------------------
burden on our administrative and operational resources.
- -------------------------------------------------------
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 decrease 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
- --------------------------------------------------------------------------------
protection from the negative financial effects of a decline in the demand for
- --------------------------------------------------------------------------------
ethanol.
- --------
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 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
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
- --------------------------------------------------------------------------------
gasoline, which is in turn dependent on the price of petroleum.
- ---------------------------------------------------------------
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.
8
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.
Our business is subject to extensive regulation by federal, state and local
- --------------------------------------------------------------------------------
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 in the U.S. 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.
9
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.
Delays in the construction of our planned ethanol production facilities or
- --------------------------------------------------------------------------------
defects in materials and/or workmanship may occur.
- --------------------------------------------------
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 with other related construction costs of
approximately $25 million at each location. 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
- --------------------------------------------------------------------------------
energy, primarily corn, water, electricity and natural gas.
- -----------------------------------------------------------
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 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 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.
- ---------------------
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
10
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 to 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.
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
- --------------------------------------------------------------------------------
such a market will develop in the future.
- -----------------------------------------
We intend to undertake efforts to cause a market to develop in our Common Stock
on the OTC Electronic Bulletin Board ("OTCBB") 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.
Financial reporting requirements are complex and time sensitive.
- ----------------------------------------------------------------
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 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 and when our Common Stock is approved for trading,
of which there can be no assurance.
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
- --------------------------------------------------------------------------------
for the price of a stock to go up or down significantly during a lapse of time
- --------------------------------------------------------------------------------
between placing a market order and its execution, which may affect your trades
- --------------------------------------------------------------------------------
in our Securities.
- ------------------
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 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
- --------------------------------------------------------------------------------
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
11
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.
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.
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.
- -----------------
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
- --------------------------------------------------------------------------------
at a time and at a price that we deem appropriate.
- --------------------------------------------------
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 is 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 Stock may fluctuate significantly in the future.
- -------------------------------------------------------------------------------
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;
12
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;
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 oxygenated
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.
Risks Related to the Offering
Provisions of our Certificate of Incorporation and Bylaws may delay or prevent a
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take-over that may not be in the best interests of our stockholders.
- --------------------------------------------------------------------
Provisions of our Certificate of Incorporation, as amended, and Bylaws may be
deemed to have anti-takeover effects, which include when and by whom special
meetings of our stockholders may be called, and may delay, defer or prevent a
takeover attempt. In addition, certain provisions of the Delaware General
Corporation Law also may be deemed to have certain anti-takeover effects which
include that control of shares acquired in excess of certain specified
thresholds will not possess any voting rights unless these voting rights are
approved by a majority of a corporation's disinterested stockholders.
In addition, our Certificate of Incorporation authorizes the issuance of up to
100,000,000 shares of Preferred Stock with such rights and preferences
determined from time to time by our Board of Directors. No shares are currently
outstanding. Our Board of Directors may, without stockholder approval, issue
Preferred Stock with
13
dividends, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of our Common Stock.
Our 5% or greater shareholders have the ability to significantly influence
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matters requiring a shareholder vote and other shareholders may not have the
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ability to influence corporate transactions.
- --------------------------------------------
Currently, our existing 5% or greater shareholders in the aggregate beneficially
own approximately 95% of our outstanding stock. Upon completion of this
Offering, this group will continue to own approximately 95% of our outstanding
stock. As a result, such persons, acting together, will have the ability to
significantly influence the vote on all matters requiring approval of our
shareholders, including the election of directors and approval of significant
corporate transactions.
This Prospectus permits Selling Stockholders to resell their shares. If a market
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develops in our Common Stock and these Selling Shareholders resell their shares,
- --------------------------------------------------------------------------------
the market price for our shares may fall and purchasers of our shares may be
- --------------------------------------------------------------------------------
unable to resell them.
- ----------------------
This Prospectus includes up to 4,271,500 shares being offered by existing
stockholders. If a market does develop in our Common Stock and to the extent
that these shares are sold into the market there may be an oversupply of shares
and an undersupply of purchasers. If this occurs the market price for our shares
may decline significantly and investors may be unable to sell their shares at a
profit, or at all.
We cannot predict whether we will successfully effectuate our current business
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plan. Each prospective purchaser is encouraged to carefully analyze the risks
- --------------------------------------------------------------------------------
and merits of an investment in our Common Stock and should take into
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consideration when making such analysis, among others, the Risk Factors
- --------------------------------------------------------------------------------
discussed above.
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SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
We have made some statements in this Prospectus, including some under "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "DESCRIPTION OF BUSINESS" and elsewhere, which
constitute forward-looking statements. These statements may discuss our future
expectations or contain projections of our results of operations or financial
condition or expected benefits to us resulting from acquisitions or transactions
and involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any results, levels of activity, performance or
achievements expressed or implied by any forward-looking statements. These
factors include, among other things, those listed under "RISK FACTORS" and
elsewhere in this Prospectus. In some cases, forward-looking statements can be
identified by terminology such as "may," "should," "could," "expects,"
"intends," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. Although we believe that the expectations reflected in
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. All of the net proceeds from the sale of our Common Stock will go
to the Selling Stockholders.
14
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
As of the date of this Prospectus there is no market for our Common Stock. We
expect to cause an application to be filed on our behalf to list our Common
Stock for trading on the OTCBB. There can be no assurances that our Common Stock
will be approved for listing on the OTCBB, or any other existing trading market.
See "RISK FACTORS."
As of the date of this Prospectus there were 104,421,500 shares of our Common
Stock outstanding.
As of the date of this Prospectus there were 59 stockholders of record of our
Common Stock.
We have not paid cash dividends in the past, nor do we expect to pay cash
dividends for the foreseeable future. We anticipate that earnings, if any, will
be retained for the development of our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the information in this Prospectus contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "RISK FACTORS" and
"DESCRIPTION OF BUSINESS" and elsewhere in this Prospectus. See "RISK FACTORS."
Overview
We were incorporated as "Beaconsfield I, Inc." in the State of Delaware on
November 29, 2004, to pursue a business combination. In April 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 July 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.
15
Results of Operations
Comparison of Results of Operations for the six-month periods ended June 30,
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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.
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 Prospectus 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 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 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 25 year lease with two ten year 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. As of the
date of this Prospectus we are proceeding with the finalization of a
lease incorporating the aforementioned provisions.
In addition, we are actively negotiating for the acquisition and development of
a site at the following location:
16
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.
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
"Delta-Barrie 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.
In September 2006, we entered into a similar agreement with Delta relating to
our proposed Sarnia ethanol plant (the "Delta-Sarnia Agreement") and paid Delta
an initial amount of $70,000, with the balance of $30,000 due upon issuance of
an air permit by the Province of Ontario. References to the Delta-Barrie
Agreement and Delta-Sarnia Agreement are hereinafter jointly referred to as the
"Delta Agreements," unless otherwise indicated.
The Delta Agreements provides for Delta to assist us in the development and
analysis of the feasibility of each of the respective Plants, 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
Delta Agreements and it is anticipated that the parties shall enter into a
definitive, turnkey, engineering, procurement and construction agreement for
each of the Plants. We have granted Delta a right of first refusal in this
regard. The term of the Delta Agreements is five (5) years for each agreement.
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 the facility at
such location. 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 this required financing. However, in September 2006 we closed
a private offering wherein we sold an aggregate of 4,271,500 shares of our
Common Stock at a price of $1.00 per share and received aggregate net proceeds
of $4,021,500 therefrom. See "Liquidity and Capital Resources" and "RISK
FACTORS."
We were in negotiations to acquire an existing ethanol plant site in the
Province of Quebec, Canada. We made a fully refundable deposit to the
prospective sellers in the amount of $750,000 (US). In this regard, as of the
date of this Prospectus, we have not been satisfied with the progress of these
negotiations and have requested return of our deposit.
We are implementing a growth strategy by:
o Building state of the art processing plants;
o Negotiating stable long term contracts with key suppliers;
o Securing long term sales agreements;
17
o Pursuing acquisitions of existing ethanol producers; and
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 an agreement with Parrish & Heimbecker, Limited, a
privately held grain merchant corporation ("P&H"), which owns and operates grain
elevators and has extensive domestic and international experience in
international grain origination and co-product merchandizing. We engaged 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. P&H will manage the sale
of our dried distiller grain by-product.
We are currently in the process of finalizing contracts covering the Barrie and
Sarnia facilities with ECO Energy Inc., a privately held Tennessee corporation
that provides ethanol marketing capability across North America ("ECO"). ECO 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. We
have engaged this marketing company to handle the sales and transportation
logistics of our ethanol production.
The manner in which we intend to develop future sites beyond the initial
aforementioned locations will depend on 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.
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.
18
Liquidity and Capital Resources
At June 30, 2006, we had $101,479 in cash and cash equivalents.
In September 2006, we closed a private offering of our Common Stock whereby we
sold an aggregate of 4,271,500 shares of our Common Stock at a price of $1.00
per share and received aggregate net proceeds of $4,021,500 therefrom. We intend
to utilize the proceeds of this offering to cover the costs associated with
planned construction of our Barrie facility until additional financing is
obtained, as well as general and administrative expenses and for general working
capital. Except as discussed below, we believe we have sufficient capital
available to continue our operations over the next 12 months.
We intend to initially begin demolition of existing structures on the Barrie
property that are not germane to our proposed operations at an estimated cost of
approximately $1.2 million (US). Thereafter, we expect to commence construction
at both the Barrie and Sarnia locations within the next 12 months. We estimate
that we will require an additional $372 million in additional debt or equity
capital to complete the construction and commissioning of these two facilities,
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 Prospectus, 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.
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 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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily
19
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
DESCRIPTION OF BUSINESS
History
Northern Ethanol, Inc. ("we," "us," "our" or the "Company") was incorporated as
"Beaconsfield I, Inc." in the State of Delaware on November 29, 2004. We were
initially formed as a vehicle to pursue a business combination.
In April 2006 our then Board of Directors elected to change our business plan to
the development and operation of ethanol plants in Canada and the Northeastern
United States, with the goal of becoming a leading, low cost supplier of ethanol
to the Ontario and Northeastern United States fuel market. In conjunction with
the adoption of this new business plan, we retained new management, including
Messrs. Gordon Laschinger, our Chief Executive Officer and President, and Ciaran
Griffin, our Chief Financial Officer. In July 2006, Mr. Steven Reader agreed to
become our Chief Operating Officer. From inception we have been engaged in
organizational efforts and obtaining initial financing.
As of the date of this Prospectus, we have two wholly owned subsidiaries,
Northern Ethanol, LLC, a New York limited liability company ("NELLC"), and
Northern Ethanol (Canada), Inc., a Canadian corporation, which has three wholly
owned subsidiaries, Northern Ethanol (Barrie), Inc., Northern Ethanol (Sarnia),
Inc. and Northern Ethanol Investments, Inc., ("NEI") each of which is also a
Canadian corporation. All references to our Company in this Prospectus include
our subsidiaries, unless otherwise indicated. NELLC and NEI are currently
dormant companies.
In July 2006, we engaged in a forward split of our Common Stock whereby we
issued ten (10) shares of our Common Stock for every one (1) share then issued
and outstanding. All references in this Prospectus to our issued and outstanding
Common Stock are provided on a post forward split basis, unless otherwise
indicated.
Thereafter, in July 2006, we commenced a private offering of our Common Stock.
This offering was successfully closed in September 2006. We sold an aggregate of
4,271,500 shares of our Common Stock to 49 "accredited investors" (as that term
is defined in both the Canadian and US securities laws) at a price of $1.00 per
share and received aggregate net proceeds of $4,021,500 therefrom. Two of these
investors are residents of the United States, with the balance residents of
Canada. The proceeds derived from this offering are to be utilized for the
preliminary work relating to development of two ethanol plants to be located in
Canada and one in Upper New York State, as well as for working capital. We will
require additional funds in order to implement our business plan described
herein. See "RISK FACTORS."
Our principal executive offices are located at 193 King Street East, Suite 300,
Toronto, Ontario, M5A 1J5, Canada, telephone: (416) 366-5511.
Proposed Business
We have begun to facilitate our entry into the business of manufacturing fuel
ethanol for sale to oil refiners and other users. We have secured or are in the
advanced stages of securing sites to build ethanol processing facilities at two
locations in Ontario, Canada, and one location in upper New York State for total
planned production
20
capacity of 300 million US gallons per annum. Each of these locations will be
the site for a state-of-the-art corn based ethanol processing facility.
We are implementing a strategy to grow by:
o Building state of the art processing plants;
o Negotiating stable long term contracts with key suppliers;
o Securing long term sales agreements;
o Pursuing acquisitions of existing ethanol producers
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 executed an agreement with Parrish & Heimbecker, Limited, a privately
held grain merchant corporation that owns and operates grain elevators and has
extensive domestic and international experience in international grain
origination and co-product merchandizing. We have engaged 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 expect that Parish & Heimbecker, Limited will assist us
with the sale of our dried distillers grain by-product through spot sales or
long-term contracts to major purchasers.
We expect a portion of the CO2 production to be sold, with the balance either
vented, or recovered for disposal.
Effective July 24, 2006, we entered into a Project Development Agreement (the
"Delta-Barrie 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.
In September 2006, we entered into a similar agreement with Delta relating to
our proposed Sarnia ethanol plant (the "Delta-Sarnia Agreement") and paid Delta
an initial amount of $70,000, with the balance of $30,000 due upon issuance of
an air permit by the Province of Ontario. References to the Delta-Barrie
Agreement and Delta-Sarnia Agreement are hereinafter jointly referred to as the
"Delta Agreements," unless otherwise indicated.
The Delta Agreements provides for Delta to assist us in the development and
analysis of the feasibility of each of the respective Plants, 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
Delta Agreements and it is anticipated that the parties shall enter into a
definitive, turnkey, engineering, procurement and construction agreement for
each of the Plants. We have granted Delta a right of first refusal in this
regard. The term of the Delta Agreements is five (5) years for each agreement.
21
The two facilities currently envisaged for Ontario are expected to be built over
the next two years. The Upper New York State facility is expected to be built
one year later, but the discussions related to the acquisition of this site are
at a relatively early stage. While no assurances can be provided, we anticipate
that each of the facilities will achieve profitability during their first year
of operations.
Utilizing the best of breed production technology, we intend to maintain a
competitive lead through internal development, synergistic joint ventures,
technology licensing and acquisitions. Initially using corn as a feedstock, we
are also developing a roadmap to integrate cellulosic ethanol production to
ensure that it remains an efficient and low cost producer of fuel ethanol well
into the future. Through these efforts, we expect to assist in reducing harmful
greenhouse gas emissions and help end North America's dependence on foreign
petroleum.
We will be engaged in the business of producing and selling ethanol in Ontario,
and the Northeastern and Mid-Western United States and Europe where there is
limited supply of ethanol currently available. While no assurances can be
provided, we anticipate that the long-term growth in demand for ethanol will
ensure a strong market for all of the output of our facilities.
Through our wholly owned subsidiaries, we are currently in the planning stages
to build ethanol production capacity totaling 300 million gallons, with sites
secured or in late stage acquisition negotiations in Sarnia and Barrie, Ontario,
Canada and New York State.
These initial locations have been chosen due to their proximity to fuel ethanol
markets in Ontario and the Northeastern United States, as well as providing
efficient access to grain, natural gas and water. Additionally, all three sites
are well located for the transportation of feedstock and products, being located
on existing major rail lines, and are either directly accessible by Great Lakes
freighters, or in close proximity to a terminal facility.
We are currently finalizing the selection of a General Contractor that will be
responsible for the construction of our initial facilities that is expected to
be on a fixed price, performance guaranteed basis utilizing the Delta
technology. We expect to break ground on our initial two facilities in Barrie
and Sarnia, Ontario in early 2007 with ethanol production scheduled to begin
mid-2008.
Sarnia, Ontario, Canada
[GRAPHIC OMITTED]
We have executed non-binding a Letter of Intent to acquire a 99 year lease on a
brownfield site in Sarnia, Canada to host a 100 million gallon ethanol
production facility. The site comprises approximately 40 acres and is part of an
existing site of a multinational chemical company. We also expect to enter into
an agreement with a local provider of steam for use in the production of ethanol
at this site on terms that are expected to be materially favorable compared to
the costs of generating the steam from our own equipment. The site is located on
a major rail line, has access to a waterway dock, has excellent highway access
and is fully zoned and serviced with existing utility connections. From this
location, we believe we will be in a strong position to serve the ethanol
markets of Michigan, Ontario, Ohio, New York and other Northeastern U.S. metro
areas.
22
Barrie, Ontario, Canada
[GRAPHIC OMITTED]
We have executed a 25 year lease with an option to renew for an additional 20
years on a site located in Barrie, Canada. This location is a former beer
brewery operated by Molson Canada that was decommissioned in 2000. The Barrie
location is well suited for ethanol production due to its close proximity to
Toronto's gasoline markets, has excellent rail and road transportation access,
is within close driving distance of a Great Lakes terminal and has readily
available water, electricity and natural gas. The lease allows us to utilize all
existing site infrastructure and demolish or modify existing structures to
optimize plant operations.
Upper New York State
[GRAPHIC OMITTED]
We are in negotiations to acquire a third site in an industrial park, the Empire
Zone of New York State. The site has major rail and interstate highway access
and is fully zoned and utility serviced. We believe that this location will
become one of the leading ethanol producers to the Eastern U.S. marketplace, to
which there is almost no regional supply currently available.
Each of these locations will be the site for a state-of-the-art ethanol
processing facility, using corn as the feedstock. We will begin construction at
each location as soon as we are able to secure all the necessary financing to
complete construction of each 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 and there
are no assurances that we will obtain this financing. Failure to obtain the
necessary financing will have a significant negative impact on our proposed
operations. See "RISK FACTORS."
Upon our successful construction of multiple manufacturing facilities in Canada
and the United States, we expect to realize significant cost savings in raw
materials purchasing, transportation, engineering and operations that will
provide a profitability advantage vis-a-vis other smaller and single-site
ethanol producers because of the opportunity to centralize key functions
including risk management, procurement and executive management. Also we expect
that these multiple sites will provide us with greater influence in plant design
and new technologies, as well as access to capital markets. However, there can
be no assurances that our expectations will be met and we will, in fact, realize
these benefits.
The manner in which we will develop future sites beyond the initial
aforementioned locations will depend upon the nature of the opportunity, the
respective needs of the parties involved, and our then corporate objectives. We
have set up a separate wholly owned 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.
We are also actively exploring opportunities to make strategic acquisitions of
existing or pending ethanol production facilities where our management
determines that the acquisition represents an opportunity to accelerate our
expansion goals. While no agreements have been reached, 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.
23
In the case of an 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 obtain the approval of the holders of a majority of the
outstanding shares. The necessity to obtain such stockholder approval may result
in delay and additional expense in the consummation of any proposed transaction
and will also give rise to certain appraisal rights to dissenting stockholders.
Most likely, management will seek to structure any such transaction so that we
will not require stockholder approval.
We are continuously evaluating new technologies for reduced costs, greater
manufacturing yields and improved energy balance. We are evaluating new
technologies enabling the conversion of cellulose, predominantly from wood waste
and agricultural waste, into ethanol that would reduce or eliminate our
dependency on corn as a primary feedstock and help ensure a low cost production
structure in the long-term. We regularly review and analyze developments and
investment opportunities in cellulosic technology.
Sales and Marketing
Ethanol
- -------
We have entered into discussions with major oil refiners and selected ethanol
marketers for the sale of our anticipated ethanol production. We expect to
execute non-binding agreements in the near term with one or more of these
parties for up to 100% of expected production volume for at least three (3)
years from the Barrie and Sarnia facilities. The selling price under these
agreements is expected to be relative to the local fuel wholesale (rack)
unleaded gasoline daily spot market.
Dried Distillers Grains and Solubles (DDGS)
- -------------------------------------------
We have entered into discussions with major marketers and users of DDGS for the
sale of our DDGS by-products. We expect to execute non-binding agreements in the
near term with these parties for all of our anticipated production volume for at
least three (3) years. The selling price under these agreements is expected to
be at the local and international spot market.
Carbon Dioxide (CO2)
- --------------------
We have entered into discussions with major local users of CO2 for the sale of
our CO2 by-product. The selling price under these agreements is expected to be
at the local spot market. We expect a portion of the CO2 production to be sold,
with the balance either vented, or recovered for disposal.
Industry Overview
- -----------------
In 1908, Henry Ford commenced building the Model T and it had the ability to run
on ethanol as well as gasoline. He had a vision of affordable fuel for North
American drivers, which was to be produced by farmers and therefore would be a
shot in the arm to rural economies.
Ethanol cuts the emissions of unburned hydrocarbons and carbon monoxide. There
is a net reduction in harmful ozone forming emissions and greenhouse gases with
the use of ethanol blended gasoline since growing corn removes carbon dioxide
from the air and in the manufacturing process, carbon dioxide is extracted and
commercially utilized. Ethanol use is approved by all vehicle manufacturers and
is used across Canada and the United States.
24
Producing ethanol increases the supply of high protein animal feed ingredients
through the distillation process; this creates new agricultural business
opportunities centered on the plant, and helps offset imports of soybean meal
and other animal feeds.
Fuel ethanol benefits the economy as well as the environment. Production of fuel
ethanol in Canada (and around the world) has produced a new market for
agricultural products, improving financial stability and security for farmers,
in addition to direct and indirect employment opportunities from farming to
transportation and manufacturing.
Brazil is a world leader in the use of fuel ethanol with nearly half of its cars
operating on pure ethanol. In response to the oil crisis of the mid 1970's, the
Brazilian government in cooperation with private industry created a national
program to produce alcohol from sugar cane and to build ethanol compatible
engines.
According to the Canadian Renewable Fuels Association, the United States ethanol
industry continues to set ethanol production records and this past February set
another production record surpassing 126,000 barrels per day - an increase of
16% over last year - and trends indicate a record year of production totaling
over 1.8 billion gallons. The current demand for ethanol globally is estimated
at 10 billion U.S. gallons per year.
Today, many countries around the world are testing oxygenated and (near 100%)
alcohol fuels. In the U.S. ethanol blends make up about 12% of the total
gasoline market. In some parts of the U.S., projects are underway to test the
viability of replacing diesel fuel with ethanol.
North American governments have been engaged in creating programs to encourage
the use of ethanol to reduce dependence on oil, to achieve higher environmental
standards and to stimulate rural economies and as a result, ethanol production
has been growing steadily in recent years. The health of the ethanol industry
remains closely tied to government programs that provide tax incentives, tariff
exemptions and regulatory mandates that favour ethanol's use as a fuel additive.
Effective January 1, 2007, the Ontario Government has mandated a minimum average
of 5 percent ethanol in gasoline as a way to support agriculture, improve air
quality, and reduce dependence on petroleum. It is widely believed that ethanol
blenders will blend ethanol at greater than 5% for optimal gasoline-ethanol
stability. The Government of Canada is also considering legislation which would
mandate the use of 5% ethanol nationally by 2010. If this comes into effect,
then Quebec would also become a target market.
As illustrated in the graph below, the demand for fuel ethanol in Canada has
grown substantially in the last decade, and currently stands at approximately
300 million litres (79 million gallons) per annum.
25
Canadian Ethanol Consumption and Production
1996-2010F
Millions of Liters
------------------------------
Year Consumption Production
---- ----------- ----------
1996 90 90
1997 90 90
1998 100 90
1999 200 175
2000 200 185
2001 225 185
2002 200 200
2003 300 200
2007F 700 700
2010F 1,400 700
Source: Economic, Financial, Social Analysis and Public
Policies for Fuel Ethanol - Phase 1; Natural Resources
Canada, November 2004
Historically, production capacity in Canada has closely tracked demand, however,
with the recently introduced Ontario government legislation, demand is forecast
to outstrip supply. Based on the current 14 billion litres (3.7 billion gallons)
annual gasoline consumption, ethanol demand will be 700 million litres (185
million gallons) in 2007 and could reach 1.4 billion litres (370 million
gallons) by 2010 based on a 10% ethanol blend.
The U.S. ethanol industry is the fastest growing energy industry in the world.
Ethanol is blended in 30% of our nation's gasoline. An annual record of 3.4
billion gallons of ethanol was produced in 2004 from the 81 plants in operation
across the United States. Production will be increased by another 800 millions
gallons from the 16 additional plants currently under construction.
U.S. Ethanol Production
1997-2004
Year Billons of Gallons
---- ------------------
1997 1.3
1998 1.4
1999 1.5
2000 1.6
2001 1.8
2002 2.2
2003 2.8
2004 3.9
26
According to the U.S. Department of Energy, ethanol is typically blended at 5.7%
to 10% by volume in the United States, but is also blended at up to 85% by
volume for vehicles designed to operate on 85% ethanol. Compared to gasoline,
ethanol is generally considered to be less expensive and cleaner burning and has
higher octane. Ethanol is widely marketed across the United States as a high
quality octane enhancer and oxygenate capable of reducing air pollution and
improving automobile performance. In spark ignition engines, ethanol emits
significantly less carbon monoxide and air toxic pollution than gasoline
therefore reducing the amount of harmful emissions released into the atmosphere.
We anticipate that the increasing demand for transportation fuels coupled with
limited opportunities for gasoline refinery expansions and the growing
importance of reducing CO2 emissions through the use of renewable fuels will
generate additional growth in the ethanol market.
In August 2005, President George W. Bush signed into the law the Renewable Fuels
Standard that mandated the use of 4.0 billion gallons of renewable fuels by oil
refiners in 2006, increasing to 7.5 billion gallons in 2012. The vast majority
of this renewable fuel will be ethanol.
Gasoline is oxygenated because the oxygen makes gasoline burn cleaner thereby
reducing ozone forming compounds and carbon monoxide.
The U.S. Clean Air Act Amendments of 1990 ("CAAA90") established special
standards effective January 1, 1995, for the most polluted ozone non-attainment
areas: Los Angeles Basin, Baltimore, Chicago Area, Houston Area, Milwaukee Area,
New York-New Jersey, Hartford Region, Philadelphia Area and San Diego, with
provisions to add other areas in the future if conditions warrant. California's
Central Valley was added in 2002. At the outset of the program there were a
total of 96 Metropolitan Statistical Areas ("MSAs") not in compliance with clean
air standards for ozone, which currently represents approximately 60% of the
national market.
The legislation requires a minimum of 2.0% oxygen by weight in reformulated
gasoline as a means of reducing carbon monoxide pollution and replacing octane
lost by reducing aromatics which are high octane portions of refined oil. The
Reformulated Gasoline Program ("RFG") also includes a provision that allows
individual states to "opt into" the federal program by request of the governor,
to adopt standards promulgated by California that are stricter than federal
standards, or to offer alternative programs designed to reduce ozone levels.
Nearly the entire Northeast and middle Atlantic areas from Washington, D.C. to
Boston not under the federal mandate have "opted into" the federal standards.
The two available oxygenates to meet both oxy-fuel and RFG requirements have
been MTBE (methyl tertiary butyl ether) and ethanol. MTBE is an ether made from
methanol produced from natural gas and, until recently, has been the most widely
used oxygenate to meet CAAA90 requirements.
Because of its favorable handling qualities and the fact that it is a petroleum
product, MTBE has been the preferred oxygenate for the petroleum industry.
However, MTBE has shown significant adverse environmental and health safety
characteristics that have led to the decision by several key states to ban its
use. Specifically, MTBE is highly persistent (i.e. it has a very long half-life)
and has been identified as a potential carcinogen. MTBE has been detected in
drinking water supplies in almost all areas where it is used. Reflecting these
issues, California, New York, Connecticut, New Jersey and more than twenty other
states have banned the use of MTBE.
Competition
The ethanol production industry is becoming increasingly competitive. We believe
that our ability to successfully compete depends on many factors including but
not limited to the economics of feedstock supply, proximity to major customers
and extent of transportation infrastructure.
27
We expect our principal competition will or may be as follows:
Ethanol Production (Gallons)
---------------------------------------------------------------------------
Total Total
Expansion Estimated Likely Possible
or New Startup Future Possible Future
Company Location Current Construction Date Production Construction Production
- --------------------------------- --------------- ----------- ------------ --------- ----------- ------------ -----------
Commercial Alcohols Chatham, ON 55,000,000 Operating 55,000,000 55,000,000
Commercial Alcohols Tiverton, ON 7,000,000 Operating 7,000,000 7,000,000
Commercial Alcohols Windsor, ON 53,000,000 53,000,000
Commercial Alcohols Varennes, QC 33,000,000 Late 2006 33,000,000 33,000,000
Greater Ohio Ethanol Lima, OH 54,000,000 54,000,000
Integrated Grain Processors Co-Op Brantford, ON 33,000,000 33,000,000
Michigan Ethanol Caro, MI 50,000,000 Operating 50,000,000 50,000,000
Midwest Grain Processors Riga, MI 57,000,000 Late 2006 57,000,000 57,000,000
Northeast Biofuels Syracuse, NY 100,000,000 100,000,000
Northern Ethanol Barrie, ON 100,000,000 Early 2008 100,000,000 100,000,000
Northern Ethanol Sarnia, ON 100,000,000 Mid 2008 100,000,000 100,000,000
Northern Ethanol Upstate NY 100,000,000 2009 100,000,000 100,000,000
Power Steam Energy Services Collingwood, ON 14,000,000 14,000,000
Suncor Energy Products Sarnia, ON 53,000,000 Mid 2006 53,000,000 53,000,000
The Andersons Albion Ethanol Albion, MI 55,000,000 Late 2006 55,000,000 55,000,000
US BioEnergy Lake Odessa, MI 45,000,000 Late 2006 45,000,000 45,000,000
Total 112,000,000 543,000,000 655,000,000 254,000,000 909,000,000
Our most significant competitor is expected to be Commercial Alcohols Inc.
headquartered in Brantford, Ontario, with 49% of the total existing and
estimated planned competitive ethanol production in Ontario/Quebec of 148
million gallons. We believe that Commercial Alcohols Inc. is actively pursuing
other production sites in Canada and the United States.
We believe that upon the completion of construction of our Barrie and Sarnia
ethanol production plants, we will have a competitive advantage in the Ontario
market when selling to oil refiners due to the following:
o Our facilities are strategically located near refiners' gasoline
blending terminals;
o We will have full rail transport infrastructure in place;
o Our facilities are near major highways providing efficient road
transport; and
o We will benefit from strong economies in purchasing and distribution
through large production volume.
There can be no assurances that we will be successful in developing our proposed
ethanol plants, or if so developed, that we will become a competitive force in
the industry.
Government Regulations
Our existing and proposed business operations are subject to extensive and
frequently changing federal, state, provincial and local laws and regulations
relating to the protection of the environment. These laws, their underlying
regulatory requirements and the enforcement thereof, some of which are described
below, impact, or may impact, our existing and proposed business operations by
imposing:
o Restrictions on our existing and proposed business operations and/or
the need to install enhanced or additional controls;
o The need to obtain and comply with permits and authorizations;
o Liability for exceeding applicable permit limits or legal requirements
in certain cases for the remediation of contaminated soil and
groundwater at our facilities, contiguous and adjacent properties and
other properties owned and/or operated by third parties; and
28
o Specifications for the ethanol we market and plan to produce.
In addition, some of the governmental regulations to which we are subject are
helpful to our ethanol marketing business and proposed ethanol production
business. The ethanol fuel industry is greatly dependent upon tax policies and
environmental regulations that favor the use of ethanol in motor fuel blends in
North America. Some of the governmental regulations applicable to our ethanol
marketing business and proposed ethanol production business are briefly
described below.
Ontario Renewable Fuels Standard
- --------------------------------
In November 2005, the Ontario Government enacted legislation known as the
Renewable Fuel Standard ("RFS") which mandates a 5% ethanol blend in all
gasoline sold in the province after January 1, 2007. The RFS is a flexible,
market orientated means of achieving increased ethanol content in the Ontario
gasoline pool. The RFS will increase the demand for fuel ethanol in Ontario to
approximately 700 million liters per year.
U.S. Federal Excise Tax Exemption
- ---------------------------------
In the U.S., ethanol blends have been either wholly or partially exempt from the
federal excise tax ("FET") on gasoline since 1978. The exemption has ranged from
$0.04 to $0.06 per gallon of gasoline during that 25-year period. Current law
provides a $0.051 per gallon exemption from the $0.183 per gallon FET on
gasoline if the taxable product is blended in a mixture containing at least 10%
ethanol. The FET exemption was revised and its expiration date was extended for
the sixth time since its inception as part of the Jumpstart Our Business
Strength ("JOBS") Act enacted in October 2004. The new expiration date of the
FET exemption is December 31, 2010. We believe that it is highly likely that
this tax incentive will be extended beyond 2010 if Congress deems it necessary
for the continued growth and prosperity of the ethanol industry.
Clean Air Act Amendments of 1990 ("CAAA90")
- -------------------------------------------
In November 1990, a comprehensive amendment to the Clean Air Act of 1977
established a series of requirements and restrictions for gasoline content
designed to reduce air pollution in identified problem areas of the United
States. The two principal components affecting motor fuel content are the
Oxygenated Fuels Program, which is administered by states under federal
guidelines and a federally supervised RFG.
Oxygenated Fuels Program
- ------------------------
Federal law requires the sale of oxygenated fuels in certain carbon monoxide
non-attainment MSAs during at least four winter months, typically November
through February. Any additional MSA not in compliance for a period of two
consecutive years in subsequent years may also be included in the program. The
EPA Administrator is afforded flexibility in requiring a shorter or longer
period of use depending upon available supplies of oxygenated fuels or the level
of non-attainment.
Reformulated Gasoline Program ("RFG")
- -------------------------------------
The CAAA090 established special standards effective January 1, 1995 for the most
polluted ozone non-attainment areas: Los Angeles Basin, Baltimore, Chicago Area,
Houston Area, Milwaukee Area, New York-New Jersey, Hartford Region, Philadelphia
Area and San Diego, with provisions to add other areas in the future if
conditions warrant. California's Central Valley was added in 2002. At the outset
of the program there were a total of 96 MSAs not in compliance with clean air
standards for ozone, which currently represents approximately 60% of the
national market.
29
The legislation requires a minimum of 2.0% oxygen by weight in reformulated
gasoline as a means of reducing carbon monoxide pollution and replacing octane
lost by reducing aromatics that are high-octane portions of refined oil. The RFG
also includes a provision that allows individual states to "opt into" the
federal program by request of the governor, to adopt standards promulgated by
California that are stricter than federal standards, or to offer alternative
programs designed to reduce ozone levels. Nearly the entire Northeast and middle
Atlantic areas from Washington, D.C. to Boston not under the federal mandate
have "opted into" the federal standards.
National Energy Bill Legislation
- --------------------------------
A national Energy Bill was signed into law in August 2005 by President Bush. The
Energy Bill substitutes the existing oxygenation program in the RFG with a
national "renewable fuels standard." The standard sets a minimum amount of
renewable fuels that must be used by fuel refiners. Beginning in 2006, the
minimum amount of renewable fuels that must be used by fuel refiners is 4.0
billion gallons, which increases progressively to 7.5 billion gallons by 2012.
Additional Environmental Regulations
- ------------------------------------
In addition to the governmental regulations applicable to the ethanol marketing
and production industries described above, our business is subject to additional
federal, state, provincial and local environmental regulations, including
regulations established by the EPA, the California Air Quality Management
District, the San Joaquin Valley Air Pollution Control District and the
California Air Resources Board, or CARB. We cannot predict the manner or extent
to which these regulations will harm or help our business or the ethanol
production and marketing industry in general.
Employees
As of the date of this Prospectus, we employ eight persons, including three
members of management, two in administration and three in operations. Upon the
development of our proposed ethanol plants, we anticipate that the number of
persons we employ will increase significantly, specifically in the areas of
plant operations. We expect to recruit additional employees of high skill, and
our success will depend in part upon our ability to retain such employees and
attract new qualified employees who are in great demand. None of our employees
are members of a union. We consider our employee labor relations to be good.
Property
Our headquarters are located at 193 King St. East, Suite 300, Toronto, Ontario,
Canada M5A 1J5. This space consists of approximately 7,200 square feet of office
space and is leased through April 2011, at a monthly rental rate of $15,000
(CN). We believe that this location will meet our requirements for the
foreseeable future. We also believe our leases are on terms competitive with
similar locations in the respective areas.
We have also acquired a 25-year lease with an option to renew for an additional
20 years on real property located in Barrie, Ontario, consisting of a building
of approximately 350,000 square feet and a total land area of 30 acres, on which
we expect to construct our first ethanol production facility. This lease
requires a monthly base rental payment of $189,167 (CN).
We are in the final stage of negotiations to execute a 99 year lease for real
property located in Sarnia, consisting of approximately 40 acres on which we
intend to construct another ethanol production facility. In addition, we are in
negotiations to acquire a parcel of real property located in New York State on
which we expect to construct an additional ethanol production facility.
30
Legal Proceedings
We are not a party to, nor are we aware of any pending legal proceeding.
Management believes there is no litigation threatened in which we face potential
loss or exposure or which will materially affect shareholders' equity or our
business or financial condition upon completion of this offering.
MANAGEMENT
Executive Officers, Directors and Key Personnel
The following table sets forth information regarding our executive officers and
directors:
Name Age Position
---- --- --------
Gordon Laschinger 59 Chief Executive Officer, President and
Chairman of the Board
Andrew I. Telsey 53 Corporate Secretary and Director
Andrew M. Gertler 46 Director
Robert Richards 55 Director
Paul T. Durst 54 Director
Frank F. Klees 55 Director
Ciaran Griffin 49 Chief Financial Officer
Steven Reader 50 Chief Operating Officer, Vice President -
Development
Our Certificate of Incorporation and Bylaws provide that the number of members
of our Board of Directors shall be established from time to time by our Board of
Directors. As of the date of this Prospectus, we have six (6) members of our
Board. Directors are elected by the shareholders at the annual meeting and serve
until their successors are duly elected and qualified. Directors are elected for
a term of one (1) year. All our officers serve at the discretion of our Board of
Directors.
The following is a biographical summary of the business experience of our
directors and executive officers:
Gordon Laschinger assumed his position as our CEO and President in April 2006.
He was named Chairman of our Board of Directors in June 2006. In addition to his
position with us, since May 2006 he has also been CEO and President of Northern
Granite Energy, Inc., a developmental stage company that intends to engage in
the oil and gas business. Prior to his assuming his positions with us, from July
1997 through February 2006, he was Vice President - Investments of J.J. Barnicke
Limited, Toronto, Canada, a licensed real estate brokerage firm. Mr. Laschinger
is also Chairman of William Osler Health Centre, the largest community hospital
in Ontario, Canada. He devotes a substantial portion of his time to our affairs.
31
Andrew I. Telsey was appointed as our Corporate Secretary and a director in
September 2006. Since 1984 Mr. Telsey has been President and sole shareholder of
Andrew I. Telsey, P.C., Englewood, Colorado, a law firm emphasizing securities
law, business transactions, mergers and acquisitions and general corporate
matters. This firm is also our securities and corporate counsel. Mr. Telsey
received a Juris Doctor degree from Syracuse University College of Law in 1979
and a Bachelor of Arts degree from Ithaca College in 1975. He intends to devote
only such time as necessary to our business, which is not expected to exceed 20
hours per month.
Andrew M. Gertler has been a director of our Company since November 2004. From
November 2004 through June 2006, he was our Chairman of the Board. From November
2004 through April 2006, he was our President and Chief Executive Officer. In
addition to his positions with us, since July 2006 Mr. Gertler has been a
principal of Lester Asset Management, Inc., Montreal, Quebec, a discretionary
money management and advisory firm where he engaged in portfolio management,
merger and acquisition activities, corporate reorganization and private equity
investments. In addition, since August 2004, he has been the Chairman of the
Board of Neutron Enterprises, Inc., a public media company. He also has been a
director of Avicena Group, Inc. since February 2005. Prior, from April 2001
through April 2004, he was the Managing Director of Gestion Jean-Paul Auclair
Inc., a privately held money management company. Mr. Gertler obtained an MBA
degree from the University of Western Ontario in 1984 and a Bachelor of Commerce
degree in finance from McGill University in 1982. He devotes only such time as
necessary to our business.
Paul T. Durst assumed his position as a director of our Company in September
2006. In addition, he has been the Controller and Chief Financial Officer of
Schickedanz Bros. Limited, Ontario, Canada since November 2000. This company is
a developer of real estate as well as a property manager, with assets in excess
of $250 million. Mr. Durst has over 24 years of experience in finance and
administration. He has been a Certified General Accountant since 1982. He
devotes only such time as necessary to our business.
Frank F. Klees assumed his position as a director of our Company in September
2006. In addition, he has been President of Klees & Associates, Ltd, Ontario,
Canada, since January 1982, a company engaged in financial services consulting.
In addition to insurance and employee benefit services, this company also
provides contract negotiation and agency services for professional athletes in
the Canadian and National Football Leagues. Also, since July 1995, Mr. Klees has
been a sitting Member of the Provincial Parliament Legislative Assembly in
Canada and has held numerous government positions, including a member of the
Cabinet in 1999, Ontario's Tourism Minister and Minister of Transportation. Mr.
Klees also currently sits as a member of the Board of Directors for numerous
private and public companies, including Roxul, Inc. and Tribute Resources, Inc.
He obtained a Theology diploma from Toronto Baptist Seminary in 1973. Mr. Klees
also acts as a consultant to our company and devotes approximately 5% of his
time to our business affairs.
Robert Richards assumed his position as a director of our Company in September
2006. In addition, he has been the President and CEO of the William Oster Health
Centre, Brampton, Ontario, since March 2005. Prior, from March 2004 through
March 2005, he was retired. From 1998 through March 2004, he was the President
and CEO of the Municipal Property Placement Corporation, Pickering, Ontario. He
received a Master of Business Administration degree in 1982 from York
University, Toronto, and a Bachelor of Arts degree from the University of
Windsor, with a combined mathematics and economics major, in 1972. He devotes
only such time as necessary to our business.
Ciaran Griffin assumed his position as our Chief Financial Officer in April
2006. In addition to his position with our Company, since February 2006, Mr.
Griffin has been the Chief Financial Officer of Neutron Enterprises, Inc., a
public media company. Prior, from December 2003 through January 2006, Mr.
Griffin was the Director of Finance for Envoy Communications Group, Inc., a
NASDAQ listed marketing company based in Toronto, Canada. From November 2002
through December 2003, Mr. Griffin was an independent accounting consultant, and
his most significant client during this period was Canada Life Assurance. From
October 1998 through
32
October 2002, he was the Financial Controller for ADIA, Abu Dhabi, UAE. He
obtained a Bachelor of Commerce degree from the University of Toronto in 1980.
He devotes approximately 20% of his business time to our affairs.
Steven Reader assumed his position as our Chief Operating Officer and Vice
President - Development in July 2006. Prior to his assuming his positions with
our Company, from 1992 through July 2006, Mr. Reader was the President of
Chartwell Energy, Toronto, Canada, an energy company with operations throughout
North America. He also spent a total of eleven years as a contractor for DTE
Energy Services, Ann Arbor, Michigan, and TransCanada Pipelines, Toronto,
Canada, where he was involved in power development for Canada and the U.S. He
devotes substantially all of his business time to our operations.
Board Committees
In July 2006 our Board established an audit committee. As of the date of this
Prospectus, the Audit Committee is composed of Mr. Gertler and it is expected
that Messrs. Durst and Richards will be formally appointed at the next Board
meeting. The function of the Audit Committee is to review our internal controls,
our financial reporting and the scope and results of the audit engagement. It
meets with appropriate financial personnel and independent public accountants in
connection with these reviews. The Committee also recommends to the Board the
appointment of the independent public accountants, who have access to the
Committee at any time.
We expect to form a Compensation Committee in the near future. The function of
this Committee will be to establish the amount and form of compensation awarded
to our executive officers, including salary, bonuses and stock option awards,
and to administer our 2006 Stock Plan.
Family Relationships
There is no family relationship between any of our directors or executive
officers.
EXECUTIVE COMPENSATION
Remuneration
During our fiscal years ended December 31, 2005 and 2004, no executive officer
or any other employee received any compensation.
Compensation of Directors
In September 2006, our Board of Directors adopted a policy whereby a
non-salaried Director shall be paid the following compensation for their
services while acting in the capacity of a Director: (i) the sum of Ten Thousand
(CDN$10,000) Dollars, payable quarterly, (ii) the sum of Five Hundred (CDN $500)
Dollars for attendance at or participation in each meeting of the Board of
Directors; (iii) out-of-pocket expenses incurred by such Director for attendance
at or participation in each meeting of the Board of Directors; and (iv) the
granting of options under the Company's 2006 Stock Plan to purchase 25,000
shares of our Common Stock at an option price of One (US$1.00) Dollar per share,
such options to expire five (5) years from the date of issuance.
33
Employment Agreements
Beginning in April 2006, we entered into employment agreements with Gord
Laschinger, our CEO and President, and Ciaran Griffin, our CFO. In July 2006 we
entered into an employment agreement with Steven Reader, our COO.
Each of these employment agreements provide for a three year term (except for
Mr. Reader's agreement, which is for a four year term) vacation time,
reimbursement of expenses relating to our business and provides for each
employee to participate in benefit plans maintained by us that provide for
health, dental and disability insurance. The agreements further provide for
termination upon their death or a final determination of their disability. The
agreements may be further terminated upon cause, defined in the agreements as
any material failure by the employee to perform the services for which they were
retained if they do not cure the same within two weeks after receipt of notice
of such default, the voluntary or involuntary bankruptcy of the employee, fraud
and dishonesty, gross negligence, unethical or immoral conduct or willful
malfeasance by the employee in connection with the performance of his duties
under the agreement, or the conviction of the employee of a felony.
During the initial nine-month period of the agreement, we cannot terminate the
employee except for cause. Thereafter, we have the right to terminate the
respective agreement provided that we pay an amount equal to each employee's
base salary, fixed expenses and benefits, if any, on three months notice.
Pursuant to the terms of each relevant agreement, the base salary payable to Mr.
Laschinger was initially $15,000 per month (CN). This base salary has since
increased to $25,000 per month (CN). The base salaries payable to Messrs.
Griffin and Reader are $5,000 (CN) and $22,000 (CN), respectively. Mr. Reader's
and Mr. Laschinger's agreements provide for an escalating salary upon the
occurrence of certain events. All employees may receive an annual bonus equal to
50% of their base salary, in the discretion of our Compensation Committee, or
our Board of Directors if no Compensation Committee has been formed.
Stock Plan
On April 4, 2006, our Board of Directors and a majority of our shareholders
approved by consent our "2006 Stock Plan" (the "Plan"). This Plan provides for
the grant of incentive and non-qualified stock options that may be issued to key
employees, non-employee directors, independent contractors and others, and we
have reserved 8,000,000 shares of our Common Stock for issuance under the Plan.
The options are to be granted for a term of not more than ten (10) years for
Non-qualified Stock Options and not more than five (5) years for Incentive Stock
Options and other terms and conditions that are usual and customary. As of the
date of this Prospectus, the following options have been issued pursuant to the
Plan. Each option may be exercised at a price of $1.00 per share.
Name No. of Options
---- --------------
Gord Laschinger 2,000,000
Fraser Laschinger 200,000
Ciaran Griffin 500,000
Steven Reader 300,000
Natalie Horrell 24,000
Andrew Gertler 175,000
Paul Durst 25,000
Frank Klees 200,000
Robert Richards 25,000
Andrew Telsey 25,000
34
The purpose of the Plan is to aid us in retaining the services of executive and
key employees and in attracting new management personnel when needed for future
operations and growth, and to offer such personnel additional incentive to put
forth maximum efforts for the success of our business and opportunities to
obtain or increase proprietary interest and, thereby, to have an opportunity to
share in our success.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Related Party Transactions
From inception through April 2006, we utilized the office space and equipment of
a stockholder at no cost. Management estimates such amounts to be immaterial.
Andrew I. Telsey, our Corporate Secretary and one of our directors, is also the
sole shareholder of Andrew I. Telsey, P.C., our corporate and securities
counsel. Subsequent to our fiscal year ended December 31, 2005, we paid Andrew
I. Telsey, P.C. an aggregate of $41,686.25 in fees and expenses.
There are no other related party transactions that are required to be disclosed
pursuant to Regulation S-B promulgated under the Securities Act of 1933, as
amended.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The table below lists the beneficial ownership of our voting securities as of
the date of this Prospectus by each person known by us to be the beneficial
owner of more than 5% of such securities, as well as each of our officers and
directors and our officers and directors as a group. Unless otherwise indicated,
the shareholders listed possess sole voting and investment power with respect to
the shares shown. Included in the table are shares of our Common Stock that
underlie outstanding options that may be exercised over the next year.
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
Common Ronald Wyles 10,000,000 9.6%
2170 Lakeshore Road, #204
Burlington, Ontario, Canada L7R 1A6
Common Robert Watson 10,000,000 9.6%
6 Buerkle Crescent
Kitchener, Ontario, Canada N2P 2S1
Common Robert Mark Young 10,000,000 9.6%
204 Pandora Crescent
Kitchener, Ontario, Canada N2H 3E6
35
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
Common Boris Emanuel 10,000,000 9.6%
PO Box W325
Woods Center, Antigua
Common Karen Georgiou 10,000,000 9.6%
10150 Pineview Trail
Campbellville, Ontario, Canada L0P 1B0
Common Zoran Bakich 10,000,000 9.6%
1200 Don Mills Rd, Suite 517
Toronto, Ontario, Canada M3B 3N8
Common Richard Brezzi 10,000,000 9.6%
209 Shirley Dr
Richmond Hill, Ontario, Canada L4S 1T4
Common Lou Pupolin 10,000,000 9.6%
2951 Highway #7, Unit 7
Concord, Ontario, Canada L4K 1W3
Common 1019562 Ontario Limited (1) 10,000,000 9.6%
1 St. Paul Street, Unit 10
St. Catherines, Ontario, Canada L2R 7L2
Common Rosten Investments Inc. (2) 10,000,000 9.6%
193 King Street East
Suite 200
Toronto, Ontario, M5A 1J5, Canada
Common Gordon Laschinger (3) 1,750,000 (4) 1.7%
193 King Street East
Suite 300
Toronto, Ontario, M5A 1J5, Canada
Common Ciaran Griffin (3) 437,000 (4) *
193 King Street East
Suite 300
Toronto, Ontario, M5A 1J5, Canada
Common Steven Reader (3) 150,000 (4) *
193 King Street East
Suite 300
Toronto, Ontario, M5A 1J5, Canada
36
Name and Address Amount and Nature of Percent of
Title of Class of Beneficial Owner Beneficial Ownership Class
- -------------- ------------------- -------------------- -----
Common All Officers and Directors as a Group (8 2,237,000 (4) 2.4%
persons)
- ---------------------
* Less than 1
<FN>
(1) Nicola DeRosa is the sole shareholder and principal officer of this company.
(2) Vince DeRosa is the sole shareholder and principal officer of this company.
(3) Officer and/or director of our Company.
(4) Shares subject to option at an exercise price of $1.00 per share. See
"EXECUTIVE COMPENSATION - Stock Plan."
</FN>
DESCRIPTION OF SECURITIES
The stock being registered under this Form SB-2 is Common Stock of Northern
Ethanol, Inc., having a par value of $0.0001 per share. The total number of
shares of Common Stock that we have authority to issue is two hundred fifty
million (250,000,000) shares, par value of $0.0001 per share. All of the Common
Stock authorized under our Certificate of Incorporation, as amended, has equal
voting rights and powers without restrictions in preference. The holder of any
of our Common Stock shall possess voting power for the election of directors and
for all other purposes, subject to such limitations as may be imposed by law and
by any provision of the Certificate of Incorporation in the exercise of their
voting power. The holders of our Common Stock shall have neither pre-emption nor
dividend rights pursuant to our Certificate of Incorporation, as amended.
Our Certificate of Incorporation, as amended, also authorizes one hundred
million shares of Preferred Stock, par value of $0.0001 per share, none of which
has been issued. The Preferred Stock is entitled to preference over the Common
Stock with respect to the distribution of assets of our Company in the event of
liquidation, dissolution, or winding-up of our Company, whether voluntarily or
involuntarily, or in the event of the any other distribution of assets of
Northern Ethanol, Inc. among its stockholders for the purposes of winding-up
affairs. The authorized but unissued shares of Preferred Stock may be divided
into and issued in designated series from time to time by one or more
resolutions adopted by the Board of Directors. The directors, in their sole
discretion, have the power to determine the relative powers, preferences, and
rights of each series of Preferred Stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Certificate of Incorporation, as amended, subject to certain limited
exceptions, eliminates the personal liability of a director to our Company or
our shareholders for monetary damage for any breach of duty as a director. There
is no elimination of liability for (i) any breach of a duty of loyalty, (ii) an
act or omission which includes intentional misconduct or knowing violation of
law, or (iii) any transaction from which a director derives an improper personal
benefit. In addition, if at any time the General Corporation Law of Delaware is
amended to authorize further elimination or limitation of the personal liability
of a director, then the liability of each director shall be eliminated or
limited to the fullest extent permitted by such provisions, as so amended,
without further action by the shareholders, unless the provisions of the
Delaware statute require such action.
37
Insofar as indemnification for liability arising under the Securities Act may be
permitted to officers and directors of our Company pursuant to the foregoing
provisions, we have been told that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
Common Stock by the Selling Stockholders. We will not receive any proceeds from
the resale of the Common Stock by the Selling Stockholders. Assuming all the
shares registered below are sold by the Selling Stockholders, none of the
Selling Stockholders will own one percent or more of our Common Stock.
None of the Selling Shareholders are officers, directors or principal
shareholders of our Company, or have held any material relationship with us for
the three-year period prior to the date of this Prospectus. Unless otherwise
indicated, to the best of our knowledge none of the Selling Shareholders own any
additional shares of our Common Stock.
This Prospectus, as it may be amended or supplemented from time to time, is
deemed to relate to the 4,271,500 shares of Common Stock. Each investor has
executed and delivered to us a confirmation that they are each an "accredited
investor," as that term is defined under the Securities Act of 1934, as amended,
or pursuant to Canadian securities laws, as applicable. The Selling Stockholders
and the number of shares of our Common Stock they currently own that are being
registered herein are as follows. Each Selling Shareholder owns less than 1% of
our issued and outstanding Common Stock.
No. of
Name Shares
---- ------
PES Realty (1) 300,000
Walter Rigobon 100,000
Fossil Investments (2) 300,000
John Audia 50,000
Audia Investments Limited (3) 250,000
Silvio Marsili 150,000
Paul Salerno 275,000
Tony Guglietti 200,000
Rita Rigobon 100,000
Sandy Falconi 2,500
Lisa Falconi 2,500
Anna Sleva 35,000
Joseph Sleva 20,000
Anna Luciani-Marzo 5,000
Carlo Marzo 5,000
Anthony Pascale 8,000
Michele Axelrod 5,000
Lawrence McCuaig 18,000
Max Luthardt 2,500
Joe Clasadonte 5,000
38
No. of
Name Shares
---- ------
Caninco Inc. (4) 50,000
Rowan Management Limited (5) 50,000
Cindy C. Hodgkinson 25,000
Alfredo Asda 5,000
Domenic Gallizzi 10,000
Zodiac Landen Mgmt Inc. (6) 50,000
Marco Stancato 3,000
Citiprop Holdings Inc. (7) 50,000
Brian D. Nelson 50,000
Kenneth Rovinelli 15,000
Thomas G. McCarthy 200,000
Vojin Vasic 100,000
Joanne Guidi 25,000
Lisa Guidi 10,000
Len Watson 25,000
Nada Morra 35,000
Paola Petrella 10,000
Ann-Gus Holdings Limited (8) 250,000
Wagema Holdings Limited (9) 250,000
Kurt Schickedanz
Holdings Limited (10) 250,000
Daniel Schickedanz
Holdings Limited (11) 250,000
Lisa Steuer Family
Limited Partnership (12) 100,000
Tina Schickedanze 50,000
Heidi & Brendan Matthias 100,000
Susanne Flaig 50,000
David Snell 75,000
Mario Salerno 100,000
Anne Marie Salerno 100,000
Angelo Antoniazzi 150,000
---------
Total 4,271,500
- ------------------------
(1) Paul Salermo is the sole officer and director.
(2) Walter Rigobon is the sole officer and director.
(3) John Audia is the sole officer and director.
(4) Harry J. Carmichael is the sole officer and director.
(5) Roger Rowan is the sole officer and director.
(6) Attilio Lio is the sole officer and director.
(7) George Mamolity is the sole officer and director.
(8) Gustau Schickedanz is the sole officer and director.
(9) Gerhard Schickedanz is the sole officer and director.
(10) Johanna Schickedanz is the sole officer and director.
(11) Daniel Schickedanz is the sole officer and director.
(12) Lisa Steuer is the general partner.
39
PLAN OF DISTRIBUTION
Each Selling Stockholder of our Common Stock and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this Prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
None of the Selling Stockholders is a registered broker dealer or associated
with an NASD member firm.
In connection with the sale of our Common Stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our Common Stock short and deliver these
Securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these Securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this Prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
Prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by
40
them may be deemed to be underwriting commissions or discounts under the
Securities Act. Each Selling Stockholder has informed the Company that it does
not have any agreement or understanding, directly or indirectly, with any person
to distribute the Common Stock.
In order to comply with the securities laws of some states, the Selling
Stockholders must sell the shares in those states only through registered or
licensed brokers or dealers. In addition, in some states the Selling
Stockholders must sell the shares only if we have registered or qualified those
shares for sale in the applicable state or an exemption from the registration or
qualification requirement is available and the selling shareholder complies with
the exemption.
We are required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act. As of the date of this Prospectus, no event has
occurred that gives rise to any liability.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any Securities covered by this
Prospectus that qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this Prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
NASD Notice to Members 88-101 states that in the event a Selling Stockholder
intends to sell any of the shares registered for resale in this Prospectus
through a member of the NASD participating in a distribution of our Securities,
such member is responsible for insuring that a timely filing is first made with
the Corporate Finance Department of the NASD and disclosing to the NASD the
following:
o it intends to take possession of the registered Securities or to
facilitate the transfer of such certificates;
o the complete details of how the Selling Stockholders shares are and
will be held, including location of the particular accounts;
o whether the member firm or any direct or indirect affiliates thereof
have entered into, will facilitate or otherwise participate in any
type of payment transaction with the Selling Stockholders, including
details regarding any such transactions; and
o in the event any of the Securities offered by the Selling Stockholders
are sold, transferred, assigned or hypothecated by Selling Stockholder
in a transaction that directly or indirectly involves a member firm of
the NASD or any affiliates thereof, that prior to or at the time of
said transaction the member firm will timely file all relevant
documents with respect to such transaction(s) with the Corporate
Finance Department of NASD for review.
No persons associated with us or the Selling Stockholders may participate in the
distribution of the shares to be offered by Selling Stockholders unless they
meet the safe harbor provisions of the SEC Rule 3a4-1 promulgated under the
Securities Exchange Act of 1934 with respect to exemption from registration as a
broker/dealer.
We agreed to keep this Prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule
41
144(e) under the Securities Act or any other rule of similar effect, or (ii) all
of the shares have been sold pursuant to the Prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our Common Stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our Common Stock by the
Selling Stockholders or any other person. We will make copies of this Prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this Prospectus to each purchaser at or prior to the time of
the sale.
Any Selling Stockholder may from time to time pledge or grant a security
interest in some or all of the shares of Common Stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of Common Stock from time to time under
this Prospectus, or under an amendment to this Prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act of 1933 amending the list of
Selling Stockholders to include the pledgee, transferee or other successors in
interest as Selling Stockholders under this Prospectus.
The Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this Prospectus.
At the time a Selling Stockholder makes a particular offer of shares we will, if
required under applicable rules and regulations, distribute a Prospectus
supplement that will set forth:
o the number of shares that the Selling Stockholder is offering;
o the terms of the offering, including the name of any underwriter,
dealer or agent;
o the purchase price paid by any underwriter;
o any discount, commission and other underwriter compensation;
o discount, commission or concession allowed or reallowed or paid to any
dealer; and
o the proposed selling price to the public.
We will not receive any proceeds from sales of any shares by the Selling
Stockholders.
42
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On 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 19, 2006, was dismissed. Our Board of Directors authorized this
action. REM had audited our financial statements for the fiscal year ended
December 31, 2005, and for the period from November 29, 2004 (inception) to
December 31, 2004, and reviewed our financial statements for the period ended
March 31, 2006.
In connection with the audits of our financial statements from November 29, 2004
(inception) to December 31, 2004 and for the year ended December 31, 2005 and
during the interim period through July 19, 2006, there were no disagreements
with REM on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedures, which disagreements, if
not resolved to the satisfaction of REM, would have caused them to make
reference in connection with its reports to the subject matter of the
disagreements.
The audit report of REM on our financial statements from November 29, 2004
(inception) to December 31, 2004 and as of and for the year ended December 31,
2005, did not contain an adverse opinion or disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope, or accounting principles.
Effective July 19, 2006, we retained the firm of KPMG as our auditors. There
were no consultations between us and KPMG prior to their appointment.
LEGAL MATTERS
Andrew I. Telsey, P.C., Englewood, Colorado, will issue an opinion with respect
to the validity of the shares of Common Stock being offered hereby. Andrew I.
Telsey, sole shareholder of Andrew I. Telsey, P.C., who is also one of our
directors and our Corporate Secretary, has been issued an option to purchase
25,000 shares of our Common Stock at an exercise price of $1.00 per share, which
option shall expire in September 2011 unless exercised prior thereto.
EXPERTS
The financial statements as of December 31, 2005 and 2004, and for the year
ended December 31, 2005 and for the period from November 29, 2004 (inception)
through December 31, 2004, are included in this Prospectus, to the extent and
for the periods indicated in their reports, have been audited by Raich Ende
Malter & Co. LLP, Certified Public Accountants, and are included herein in
reliance upon the authority of this firm as experts in accounting and auditing.
43
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of Common Stock being offered by this
Prospectus, and reference is made to such registration statement. This
Prospectus constitutes the Prospectus of Northern Ethanol, Inc. filed as part of
the registration statement and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are currently subject to the informational requirements of the Securities
Exchange Act of 1934 that require us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at the public reference
facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed
rates. The public could obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at
1-800-SEC-0330. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
44
Northern Ethanol, Inc.
4,271,500 Shares
--------------------------
PROSPECTUS
--------------------------
[________________________], 2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under the Delaware General Corporation Law and our Certificate of Incorporation,
as amended, our directors and officers will have no personal liability to us or
our shareholders for monetary damages incurred as the result of the breach or
alleged breach by a director or officer of his "duty of care." This provision
does not apply to the directors': (i) acts or omissions that involve intentional
misconduct, fraud or a knowing and culpable violation of law, or (ii) approval
of an unlawful dividend, distribution, stock repurchase or redemption. This
provision would generally absolve directors of personal liability for negligence
in the performance of his duties, including gross negligence.
The effect of this provision in our Certificate of Incorporation is to eliminate
the rights of our Company and our shareholders (through shareholder's derivative
suits on behalf of our Company) to recover monetary damages against a director
for breach of his fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) and (ii) above. This provision does not limit nor
eliminate the rights of our Company or any shareholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. Section 145 of the Delaware General Corporation Law
provides corporations the right to indemnify their directors, officers,
employees and agents in accordance with applicable law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
Estimates of fees and expenses incurred or to be incurred in connection with the
issuance and distribution of the Securities being registered, all of which are
being paid exclusively by the Company are as follows:
Securities and Exchange Commission registration fee $ 457.05
Printing and mailing costs and fees 1,000.00 *
Legal fees and costs 50,000.00 *
Accounting fees and costs 10,000.00 *
Transfer Agent fees 1,000.00 *
Miscellaneous expenses 2,000.00 *
----------
TOTAL $64,457.05 *
- ---------------------
* Estimated
Item 26. Recent Sales of Unregistered Securities.
In July 2006, we commenced a private offering of our Common Stock. This offering
was successfully closed in September 2006. We sold an aggregate of 4,271,500
shares of our Common Stock to 49 "accredited investors" (as that term is defined
in both the Canadian and US securities laws) at a price of $1.00 per share and
received
aggregate net proceeds of $4,021,500 therefrom. Two of these investors are
residents of the United States, with the balance residents of Canada. We relied
upon the exemptions from registration provided by Regulation S and Regulation D,
each promulgated under the Securities Act of 1933, as amended, to issue these
shares.
We paid Union Capital, Inc., an advisory service located in Nassau, Bahamas,
commissions totaling $250,000 for their assistance in this offering.
We issued 150,000 shares of Common Stock (pre-forward split) on December 15,
2004, to Andrew Gertler, Joseph Galda and Eric Boyd for cash consideration of
$0.0001 per share for an aggregate investment of $15. We also issued 10,000,000
shares (pre-forward split) on December 15, 2004, to ten individuals for cash
consideration of $0.005 per share for an aggregate consideration of $50,000. We
sold these shares of Common Stock under the exemption from registration provided
by Section 4(2) of the Securities Act.
Neither we nor any person acting on our behalf offered or sold the aforesaid
Securities by means of any form of general solicitation or general advertising.
Purchasers, or the beneficial owners of purchasers that are entities, are
friends or business associates of our officers and directors who held those
offices at the time of the share issuance.
In May 2006, Messrs. Gertler, Boyd and Galda voluntarily surrendered 35,000,
45,000 and 35,000 shares (pre-forward split), respectively, of our Common Stock
that had been previously issued to them back to us for cancellation. In
September 2006, Messrs. Gertler and Boyd voluntarily surrendered 150,000 and
50,000 shares (post-forward split), respectively, of our Common Stock that had
been previously issued to them, back to us for cancellation. In September 2006,
Mr. Galda also agreed to surrender 150,000 shares (post-forward split) that had
been previously issued to him, although he has not formally executed the
documentation to effectuate such surrender but did execute the consent of the
board of directors authorizing the acceptance of the surrender and cancellation
of such shares.
Except as stated above, we did not use any underwriter or placement agent in the
issuance of our Securities and no commissions were paid.
We did not issue any other of our Securities during the previous three year
period.
Item 27. Exhibits.
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation*
3.2 Bylaws*
3.3 Amendment to Certificate of Incorporation dated August 2, 2006
5.1 Opinion of Andrew I. Telsey, P.C.
10.1 Lease dated April 20, 2006 for proposed Barrie facility**
10.2 Lease dated April 11, 2006 for Toronto offices**
10.3 Employment Agreement of Gordon Laschinger dated April 12, 2006**
10.4 Employment Agreement of Ciaran Griffin dated April 21, 2006**
10.5 Employment Agreement of Steven Reader dated July 17, 2006***
10.6 Project Development Agreement with Delta-T Corporation,
Williamsburg, Virginia dated July 27, 2006
10.7 Project Development Agreement with Delta-T Corporation,
Williamsburg, Virginia dated September 7, 2006
10.8 Agreement with Parrish & Heimbecker, Limited dated August 18, 2006
21.1 List of Subsidiaries
23.1 Consent of Andrew I. Telsey, P.C. (see Exhibit 5.1 hereto)
23.2 Consent of Raich Ende Malter & Co. LLP
* Filed as an exhibit to the Company's registration statement on Form
10-SB/A, as filed with the Securities and Exchange Commission on November
10, 2005, and incorporated herein by this reference.
** Filed as an exhibit to the Company's Form 10-QSB for the period ended March
31, 2006, as filed with the Securities and Exchange Commission on May 24,
2006, and incorporated herein by this reference.
*** Filed as an exhibit to the Company's Form 8-K, as filed with the Securities
and Exchange Commission on August 7, 2006, and incorporated herein by this
reference.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material changes as such information in the Registration Statement.
2. That for the purpose of determining any liability under the Securities
Act, such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered herein, and the offering of such
securities at the time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered hereby which remain unsold at the termination
of the Offering.
4. To file during any period in which we offer or sell securities, a post
effective amendment to this registration statement, to reflect in the prospectus
any facts or events which, or individually or together, represent a fundamental
change in the information in the registration statement.
5. In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer or expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
6. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, Northern
Ethanol, Inc., the Registrant, certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form SB-2 and
authorized this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Toronto, Province of
Ontario, Canada, on October 12, 2006.
NORTHERN ETHANOL, INC.
By: s/Gordon Laschinger
----------------------------------------------
Gordon Laschinger, Principal Executive Officer
and President
By: s/Ciaran Griffin
----------------------------------------------
Ciaran Griffin, Principal Financial Officer
and Accounting Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gordon Laschinger his attorney-in-fact and agent,
with full power of substitution and resubstitution, for him in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully as to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
s/Gordon Laschinger Chief Executive Officer, October 12, 2006
- ----------------------------- President and Director
Gordon Laschinger
s/Andrew I. Telsey Corporate Secretary October 12, 2006
- ----------------------------- and Director
Andrew I. Telsey
s/Ciaran Griffin Chief Financial Officer October 12, 2006
- -----------------------------
Ciaran Griffin
s/Andrew M. Gertler Director October 12, 2006
- -----------------------------
Andrew M. Gertler
s/Robert Richards Director October 12, 2006
- -----------------------------
Robert Richards
s/Paul T. Durst Director October 12, 2006
- -----------------------------
Paul T. Durst
s/Frank F. Klees Director October 12, 2006
- -----------------------------
Frank F. Klees
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
December 31, 2005 and 2004:
- ---------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS:
Balance Sheets F-2
Statements of Operations F-3
Statements of Changes in Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6-F-8
June 30, 2006 and 2005:
- -----------------------
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-9
Consolidated Statement of Operations - 6 months F-10
Consolidated Statements of Operations - 3 months F-11
Consolidated Statement of Stockholders' Equity F-12
Consolidated Statements of Cash Flows - 6 months F-13-F-14
Consolidated Statements of Cash Flows - 3 months F-15-F-16
Notes to Unaudited Consolidated Interim Financial Statements F-17-F-25
RAICH 90 Merrick Avenue 1375 Broadway 330 Fifth Avenue
ENDE East Meadow, NY 11554 New York, NY 10018 Suite 1300
MALTER & 516.228.9000 212.944.4433 New York, NY 10001
CO. LLP 516.228.9122 (fax) 212.944.5404 (fax) 212.686.2224
cpa@rem-co.com 212.481.3274 (fax)
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Beaconsfield I, Inc.
Buffalo, New York
We have audited the accompanying balance sheets of Beaconsfield I, Inc. (a
development stage company) as of December 31, 2005 and 2004 and the related
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 2005 and the periods November 29, 2004 (inception)
through December 31, 2004 and 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Beaconsfield I, Inc. as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
for the year ended December 31, 2005 and the periods November 29, 2004
(inception) through December 31, 2004 and 2005 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Raich Ende Malter & Co. LLP
RAICH ENDE MALTER & CO. LLP
East Meadow, New York
March 29, 2006, except for Note 6, as to which the date is July 5, 2006
F-1
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, December 31,
2005 2004
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,390 $ 37,515
Other current assets 10,250 9,500
-------- --------
Total current assets $ 23,640 $ 47,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 3,098 $ 708
Accounts payable - related party 2,000 --
-------- --------
Total current liabilities 5,098 708
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value;
100,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.0001 par value;
250,000,000 shares authorized;
101,500,000 shares issued and outstanding 10,150 10,150
Additional paid-in capital 39,865 39,865
Deficit accumulated during the development stage (31,473) (3,708)
-------- --------
18,542 46,307
-------- --------
$ 23,640 $ 47,015
======== ========
F-2
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the Periods
-------------------------------
November 29, November 29,
For the 2004 2004
Year Ended (Inception) to (Inception) to
December 31, December 31, December 31,
2005 2004 2005
------------- ------------- -------------
REVENUES $ -- $ -- $ --
GENERAL AND ADMINISTRATIVE EXPENSES 27,765 3,708 31,473
------------- ------------- -------------
NET LOSS $ (27,765) $ (3,708) $ (31,473)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE:
$ -- $ -- $ --
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING: 101,500,000 52,287,880 97,419,600
============= ============= =============
F-3
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Deficit
Accumulated
Additional During the Total
Preferred Common Paid-in Development Stockholders'
Stock Stock Capital Stage Equity
--------- -------- -------- -------- --------
BALANCE:
November 29, 2004 (Inception) $ -- $ -- $ -- $ -- $ --
Issuance of 101,500,000
shares of common stock -- 10,150 39,865 -- 50,015
Net loss -- -- -- (3,708) (3,708)
--------- -------- -------- -------- --------
BALANCE:
December 31, 2004 -- 10,150 39,865 (3,708) 46,307
Net loss -- -- -- (27,765) (27,765)
--------- -------- -------- -------- --------
BALANCE:
December 31, 2005 $ -- $ 10,150 $ 39,865 $(31,473) $ 18,542
========= ======== ======== ======== ========
F-4
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
For the Periods
------------------------------
November 29, November 29,
For the 2004 2004
Year Ended (Inception) to (Inception) to
December 31, December 31, December 31,
2005 2004 2005
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,765) $ (3,708) $(31,473)
Adjustments to reconcile net loss to net
cash used in operating activities:
Changes in operating assets and liabilities:
Other current assets (750) (9,500) (10,250)
Accrued expenses 2,390 708 3,098
Accounts payable - related party 2,000 -- 2,000
-------- -------- --------
Net cash used in operating activities (24,125) (12,500) (36,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 50,015 50,015
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (24,125) 37,515 13,390
CASH AND CASH EQUIVALENTS:
Beginning of period 37,515 -- --
-------- -------- --------
End of period $ 13,390 $ 37,515 $ 13,390
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ 353 $ 353
======== ======== ========
F-5
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
Beaconsfield I, Inc. (the "Company"), located in Buffalo, New York, 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 in accordance with Rule 419 of the Securities Act of 1933 (the
"Securities Act"). 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 1,500,000 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 100,000,000 shares
of its common stock in a private offering, pursuant to Section 4(2) of the
Securities Act, for a total of $50,000 in cash.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.
Cash and Cash Equivalents - The Company considers all highly-liquid
investments with an original maturity of three months or less to be cash
equivalents.
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. The accounting estimate that
requires management's most difficult and subjective judgment is the
recognition and measurement of deferred tax assets and liabilities.
Loss Per Common Share - Basic loss per share is calculated using the
weighted average number of common shares outstanding during each reporting
period. Diluted loss per share includes potentially dilutive securities
such as outstanding options and warrants, using various methods such as the
treasury stock or modified treasury stock method in the determination of
dilutive shares outstanding during each reporting period. The Company does
not have any potentially dilutive instruments.
Fair Value of Financial Instruments - The carrying value of cash and cash
equivalents, other current assets, accrued expenses and accounts payable -
related party approximates fair value due to the short period of time to
maturity.
3. EQUITY SECURITIES
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 common stock does not have cumulative voting
rights.
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.
F-6
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. EQUITY SECURITIES (Continued)
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.
4. INCOME TAXES
The provision for (benefit from) income taxes consists of the following for
the year ended December 31, 2005 and the periods November 29, 2004
(inception) to December 31, 2004 and November 29, 2004 (inception) to
December 31, 2005:
For the Year For the Periods November 29, 2004
---------------------------------
Ended (Inception) to (Inception) to
December 31, December 31, December 31,
2005 2004 2005
----------- ------------- -------------
Current:
State minimum tax $ - $ 355 $ 355
Deferred:
State 200 (200) -
Federal (4,200) (500) (4,700)
Valuation allowance 4,000 700 4,700
----------- ------------- -------------
$ - $ 355 $ 355
=========== ============= =============
The Company has approximately $4,700 and $700 in gross deferred tax assets
at December 31, 2005 and 2004, respectively, resulting from net operating
loss carryforwards. A valuation allowance has been recorded to fully offset
these deferred tax assets because the future realization of the related
income tax benefits is uncertain. At December 31, 2005, the Company has
federal net operating loss carryforwards of approximately $31,000 available
to offset future taxable income through 2025.
The difference between the tax provision at the statutory federal income
tax rate and the tax provision attributable to loss before income taxes is
as follows (in percentages):
For the Year For the Periods November 29, 2004
---------------------------------
Ended (Inception) to (Inception) to
December 31, December 31, December 31,
2005 2004 2005
------------ -------------- --------------
Statutory federal income tax rate (34)% (34)% (34)%
State taxes, net of federal benefits (5)% (5)% (5)%
Valuation allowance 39% 28% 38%
------------ -------------- --------------
Income tax rate 0% (11)% (1)%
============ ============== ==============
F-7
BEACONSFIELD I, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
Accounts payable - related party represents amounts paid on behalf of the
Company by Corsair Advisors, Inc., an entity owned by a stockholder. The
amount was subsequently paid in January 2006. Additionally, the Company
utilizes the office space and equipment of a stockholder at no cost.
Management estimates such amounts to be immaterial.
6. SUBSEQUENT EVENT
Effective July 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.
On July 5, 2006, the board of directors approved a ten for one forward
stock split with respect to the Company's common stock pursuant to which
the Company issued ten shares of common stock for every one share then
issued and outstanding. All share and per share data give retrospective
effect to the stock split.
F-8
- --------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Consolidated Balance Sheets
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 $ 0
Accounts payable - related party 0 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
and 101,500,000 shares issued and outstanding
as of June 30, 2006 and December 31, 2005,
respectively (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 other comprehensive income (loss) (4,472) -
------------- ------------
1,235,047 18,542
------------- ------------
$ 18,075,644 $ 23,640
============= ============
See notes to unaudited consolidated interim financial statements
F-9
- --------------------------------------------------------------------------------
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-10
- --------------------------------------------------------------------------------
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-11
- -------------------------------------------------------------------------------------------------------------------
Northern Ethanol, Inc.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
Consolidated Statement of Stockholders' Equity
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------------------ Additional Other
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-12
- --------------------------------------------------------------------------------
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-13
- --------------------------------------------------------------------------------
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-14
- --------------------------------------------------------------------------------
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-15
- --------------------------------------------------------------------------------
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-16
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 (pre-forward split)
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 (pre-forward split) 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 consolidated interim financial statements of the Company
as of June 30, 2006, and for the three-month and six-month periods 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 rules and regulations of the United
States Securities and Exchange Commission for small business issuers.
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 interim periods are not necessarily
indicative of the results to be expected for a full year. 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 and capital lease arrangements. 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-17
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.
Capital Leases - The fair value of the land acquired at the Barrie site is
less than 25% of the fair value of the leased property and was therefore
considered with the building as one lease when determining that the lease
should be classified as a capital lease. The assets acquired at the Barrie
site cannot currently be used to carry out the business of the Company
without extensive renovation and construction activities. As such,
management considers that they are not available for their intended use.
Specifically, management expects to make substantial renovations to
portions of the existing building to provide the space needed to construct
the ethanol processing facility. The portion of the building that will
eventually serve as the administrative offices requires extensive
renovation in order to bring it up to an appropriate standard for
occupation. Management's initial examination of the infrastructure items
has indicated that substantial additional expenditures will be required to
ensure that the rail lines are serviceable, and in the correct locations,
and that the gas and water lines can be expanded to provide the required
capacity for the plant operations. Before commencing demolition and
construction activities, we will use the findings of an engineering study
that will be performed, with detailed recommendations on the usefulness of
the individual assets. Depreciation of capital assets will commence once
they are determined to be available for their intended use. The assets will
be depreciated over the lesser of their useful life or the remaining lease
term.
Impariment of long-lived assets - Long lived assets are reviewed for
impairment at least annually or whenever events or changes in circumstance
indicate that the carrying amount of the asset may not be recoverable.
Recoverability is measured by a comparison of the carrying amount of an
asset to estimated undiscounted cash flows expected to be generated by the
long lived asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount that
the carrying amount exceeds the fair value of the particular assets.
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).
F-18
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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 and furniture and equipment are recorded
at cost and depreciated on a straight-line basis over their 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-19
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 7.
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 7. These leases were entered into with an entity
affiliated with a stockholder of the Company.
F-20
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 five 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 two years. The options expire five 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-21
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 July 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 July 5, 2006, the Company effected a 10 for one forward stock 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-22
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 two ten year 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 five 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 $ 338,948 $ 80,631 $ 419,579
2007 2,033,686 161,261 2,194,947
2008 2,033,686 161.261 2,194,947
2009 2,033,686 161,261 2,194,947
2010 2,033,686 161,261 2,194,947
Thereafter 48,673,826 67,192 48,741,018
-------------------------------------------------------
$57,147,518 $ 792,867 $57,940,385
The lease payments are due on a monthly basis starting in November 2006.
Upon commissioning of the ethanol facility at the Barrie location, the
value of the capital lease asset will be amortized on a straight line basis
over the period remaining in the 25 year term. The interest expense
implicit in the capital lease obligation will be recognized at the 12% rate
implicit in the lease, and will be calculated on a monthly basis on the
balance outstanding at each month end. Since the leases are in Canadian
dollars, the actual amortization and interest expense reflected in the
account will vary as the exchange rate changes.
The lease provides for two renewal periods of ten years under the same
terms and conditions, at the market rates for similar properties in the
area at the time of renewal. The lease requires total payments of
$57,147,518 over 25 years, of which $40,385,953 is interest, and
$16,761,565 is the repayment of the capital lease amount. The capital lease
will be paid down by $15,111 as a result of monthly lease payments that
will be made over the next year.
F-23
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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
two 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.
F-24
NORTHERN ETHANOL, INC.
(A DEVELOPMENT STAGE COMPANY)
(Formerly BEACONSFIELD I, INC.)
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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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-25