[LETTERHEAD OF RUTAN & TUCKER, LLP]
October 31, 2005
LARRY A. CERUTTI
Direct Dial: (714) 641-3450
E-mail: lcerutti@rutan.com
VIA FEDEX AND
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EDGAR CORRESPONDENCE
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Jennifer Hardy, Esq.
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
Mail Stop 7010
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pacific Ethanol, Inc.
Registration Statement on Form S-1
Filed on August 19, 2005
File No. 333-127714
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Dear Ms. Hardy:
This letter responds to the comments of your letter dated September 20,
2005 relating to Pacific Ethanol, Inc. (the "Company"), a copy of which letter
is enclosed for your convenience.
The enclosed clean and marked-to-show-changes copies of Amendment No. 1
to the Company's Registration Statement on Form S-1, Reg. No. 333-127714 (the
"Registration Statement") contain revisions that are directly in response to
your comments. We have reproduced below in bold font each of your comments set
forth in your letter of September 20, 2005, together with the Company's
responses in regular font immediately following each reproduced comment. The
Company's responses in this letter correspond to the numbers you placed adjacent
to your comments in your letter of September 20, 2005. We have indicated below
whether the comment has been responded to in the Registration Statement or the
reasons why the Company believes a response is either inapplicable or
inappropriate. The page numbers referenced below correspond to the marked
versions of the documents enclosed herewith.
General
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1. PLEASE PROVIDE US YOUR ANALYSIS OF WHY THE $21 MILLION PRIVATE
PLACEMENT TO 63 INVESTORS WAS EXEMPT FROM REGISTRATION UNDER SECTION
4(2) OF THE SECURITIES ACT.
Jennifer Hardly, Esq.
October 31, 2005
Page 2
The $21 million private placement to 63 accredited investors in March
2005 (the "Private Placement") was conducted by Pacific Ethanol California, Inc.
("PEI California"), which is now a wholly-owned subsidiary of the Company. PEI
California became a wholly-owned subsidiary in connection with the March 2005
share exchange transaction that occurred following the Private Placement.
RULE 506. Rule 506 of Regulation D of the Act provides in relevant
part, that:
"Offers and sales of securities by an issuer that satisfy the
conditions in paragraph (b) of this [Rule 506] shall be deemed
to be transactions not involving any public offering within
the meaning of Section 4(2) of the Act."
Accordingly, if the Private Placement satisfied the conditions in Rule
506(b), it will have been exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
RULE 506(b)(1). Rule 506(b)(1) provides, as general conditions, that to
qualify for exemption under Rule 506, offers and sales must satisfy all the
terms and conditions of Rules 501 and 502. Rule 501 provides various definitions
and terms used in Regulation D. Rule 502 provides general conditions to be met
under paragraphs (a)-(d) of that Rule.
RULE 502(a). Rule 502(a) essentially provides that an offering
occurring within six months of one or more other offerings will be integrated
for purposes of determining whether an exemption under Regulation D exists, and
that all integrated offerings must collectively meet all of the terms and
conditions of Regulation D for any of the offerings to be exempt from the
registration requirements imposed by Section 5 of the Act.
PEI California engaged in one other offering within six months of the
Private Placement in December 2004. In this offering, PEI California raised,
through a private placement of securities, an aggregate of approximately
$300,000 and issued 103,666 shares of common stock and warrants to purchase an
aggregate of 31,100 shares of common stock. Each of the criteria discussed below
with respect to the Private Placement are also applicable with respect to the
December 2004 private placement, except that no private placement memorandum was
circulated with respect to the December 2004 private placement. More
specifically, each investor in the December 2004 private placement was an
"accredited investor," and the company obtained representations and warranties
to his effect; PEI California did not accomplish the private placement through
any medium of general solicitation or general advertising; PEI California
obtained customary representations and warranties from the investors that they
were acquiring the securities for their own account and not with a view to the
resale or distribution thereof; PEI California made appropriate disclosures to
Jennifer Hardly, Esq.
October 31, 2005
Page 3
the investors regarding the restricted nature of the securities to be purchased
by those investors and included standard restrictive legends on the securities
acquired by the investors; and the number of investors, while less than 35, was
in any event not relevant as each investor was an "accredited investor."
Other than the March 2005 offering, PEI California did not engage in
another offering with six months of December 2004.
RULE 502(b). Rule 502(b) essentially provides for information delivery
requirements to any purchaser that is not an "accredited investor," as defined
in Rule 501(a), if an issuer sells securities under Rules 505 or 506. Rule
502(b) also specifies the type of information to be furnished by the issuer to
the purchasers.
Each of the 63 investors in the Private Placement was an "accredited
investor," as defined in Rule 501(a). The securities purchase agreement executed
by each investor contained customary and appropriate representations and
warranties from each such investor regarding their status as an "accredited
investor." PEI California also circulated and obtained completed investor
questionnaires from each of the 63 investors further attesting to their status
as an "accredited investor." Accordingly, the information requirements of Rule
502(b) were not applicable to the Private Placement. However, in connection with
the Private Placement, PEI California did prepare and circulate to the investors
a private placement memorandum containing the information otherwise required to
be delivered under Rule 502(b).
RULE 502(c). Rule 502(c) essentially provides that the manner of
offering by the issuer or any person acting on its behalf shall not be
accomplished through the offer or sale of securities by any form of general
solicitation or general advertising, including, but not limited to, (1) any
communication published in any newspaper, magazine or similar media or broadcast
over television or radio, and (2) any seminar or meeting whose attendees have
been invited by any general solicitation or general advertising.
PEI California did not accomplish the offer or sale of the securities
sold in the Private Placement through any medium of general solicitation or
general advertising, including the media specifically enumerated in Rule 502(c).
RULE 502(d). Rule 502(d) essentially provides for various limitations
on resales of securities acquired in a Regulation D exempt offering. Rule 502(d)
provides that purchasers of such securities cannot resell the securities without
registration under the Act or an exemption therefrom. In addition, Rule 502(d)
provides that the issuer shall exercise reasonable care to assure that the
purchasers of the securities are not "underwriters" as defined in Section 2(11)
of the Act, and also provides the manner of demonstrating reasonable care by
enumerating three actions that the issuer should undertake and complete.
Jennifer Hardly, Esq.
October 31, 2005
Page 4
PEI California exercised reasonable care to assure that the purchasers
of the securities are not "underwriters" as defined in Section 2(11) of the Act
by, among other things, obtaining customary representations and warranties from
each of the 63 investors in the Private Placement that they were acquiring the
securities for their own account and not with a view to the resale or
distribution thereof. In addition, PEI California disclosed to each such
investor prior to sale that, upon their sale, except as otherwise provided in
the registration rights agreement executed by PEI California and each investor,
such securities would not be registered under the Act and could therefore not be
resold unless they were first registered under the Act or unless an exemption
from registration was available. Finally, PEI California ensured that a legend
on each certificate representing securities and on each warrant to acquire
securities stated that such securities (and warrants) have not been registered
under the Act and further set forth customary and appropriate restrictions on
the transferability and sale of the securities.
RULE 506(b)(2). Rule 506(b)(2) provides, as a specific condition, that
to qualify for exemption under Rule 506, offers and sales must be limited to no
more than 35 purchasers of securities from the issuer in any offering intended
to be exempt under Rule 506 from the registration requirements of Section 5 of
the Act. The number of purchasers is, however, to be calculated in accordance
with Rule 501(e), which provides that "accredited investors" are not included in
the limited number of 35 purchasers. Rule 506(b)(1) also provides, as an
additional specific condition, that to qualify for exemption under Rule 506,
each purchaser who is not an "accredited investor" be capable of evaluating the
merits and risks of the prospective investment, or the issuer reasonably
believes immediately prior to making any sale that such purchaser comes within
such description.
As noted above, each of the 63 investors in the Private Placement was
an "accredited investors," as defined in Rule 501(a). The securities purchase
agreement executed by each investor contained customary and appropriate
representations and warranties from each such investor regarding their status as
an "accredited investor." PEI California also circulated and obtained completed
investor questionnaires from each of the 63 investors further attesting to their
status as an "accredited investor."
Based upon the foregoing, the Company concluded that the Private
Placement was exempt from registration under Section 4(2) of the Act.
Cover
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2. DISCLOSE THE NUMBER OF SHARES THAT UNDERLIE OUTSTANDING WARRANTS.
The Company has included on the cover page the number of shares of
common stock that underlie outstanding warrants and that are being registered
for resale under the Registration Statement.
Jennifer Hardly, Esq.
October 31, 2005
Page 5
Summary, page 1
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3. WE NOTE THAT YOUR OPENING SENTENCE DISCUSSES YOUR OPERATIONS GOAL.
PLEASE CLARIFY UP FRONT WHETHER OR NOT YOU CURRENTLY PRODUCE ETHANOL
AND REVISE THIS SECTION TO DISCUSS YOUR CURRENT OPERATIONS PRIOR TO
YOUR OPERATIONS GOAL. PLEASE REVISE YOUR DISCLOSURE IN MD&A AND
BUSINESS TO COMPLY WITH THIS COMMENT.
The Company has revised its disclosure in the Prospectus Summary
commencing on page 2 of the Registration Statement to clarify that the Company
does not currently produce ethanol and to discuss its current and expected
operations prior to its operations goal. In addition, the Company has revised
its disclosures in the MD&A and Business sections commencing on pages 32 and 48,
respectively, of the Registration Statement, to make conforming changes in these
regards.
4. TO AVOID CONFUSION IN THE SECOND PARAGRAPH, CLARIFY WHO "WE" IS SINCE
YOU STATE "WE" ENGAGED IN A TRANSACTION WITH PACIFIC ETHANOL, THE
REGISTRANT. BRIEFLY DISCLOSE WHAT THE BUSINESS OPERATIONS OF ACCESSITY,
YOUR PREDECESSOR, WERE.
The Company has revised its disclosure in the Prospectus Summary
commencing on page 2 of the Registration Statement to clarify that the
transaction engaged in by the Company was a transaction with Pacific Ethanol
California, Inc. In addition, the Company has provided additional disclosure in
the Prospectus Summary on page 3 of the Registration Statement regarding the
business operations of Accessity, the Company's predecessor.
5. PLEASE IDENTIFY AND QUANTIFY ALL OF THE CONSIDERATION GIVEN AND
RECEIVED IN THE MARCH 2005 SHARE EXCHANGE TRANSACTION.
The Company has provided additional disclosure in the Prospectus
Summary on page 3 of the Registration Statement to identify and quantify all of
the consideration given and received in connection with the March 2005 share
exchange transaction.
Risk Factors, page 5
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6. TO THE EXTENT POSSIBLE, AVOID THE GENERIC CONCLUSION YOU MAKE IN
CERTAIN OF YOUR RISK FACTORS THAT THE RISK DISCUSSED WOULD ADVERSELY
AFFECT YOUR BUSINESS AND RESULTS OF OPERATIONS. INSTEAD, PLEASE REPLACE
THIS LANGUAGE WITH SPECIFIC DISCLOSURE OF HOW YOUR BUSINESS AND RESULTS
OF OPERATIONS WOULD BE AFFECTED, I.E., DEMAND, SALES, PROFITS,
REPUTATION, ETC.
The Company has revised its disclosure in the Risk Factors section
commencing on page 9 of the Registration Statement to avoid generic conclusions
regarding, among other things, that certain of the risks discussed would
adversely affect the Company's business and results of operations. These
conclusions have been replaced with more specific disclosure of how the Company
may be affected by such risk factors.
Jennifer Hardly, Esq.
October 31, 2005
Page 6
7. SOME RISK FACTORS INCLUDE LANGUAGE LIKE "WE CANNOT ASSURE" OR "THERE IS
NO ASSURANCE." SINCE THE RISK FACTORS SHOULD SET FORTH THE POTENTIAL
RISK AND NOT YOUR INABILITY TO ASSURE OR GUARANTEE, PLEASE REVISE.
The Company has revised its disclosure in the Risk Factors section
commencing on page 9 of the Registration Statement to exclude language such as
"we cannot assure" or "there can be no assurance" and to include the specific,
potential risk.
8. IT APPEARS THAT SEVERAL OF YOUR RISK FACTORS DISCLOSE GENERIC RISKS
THAT COULD APPLY TO ANY ETHANOL COMPANY. ITEM 503(C) OF REGULATION S-K
PROHIBITS PRESENTING RISKS THAT COULD APPLY TO ANY ISSUER OR ANY
OFFERING. WE CITE THE FOURTH, FIFTH, SIXTH, EIGHTH, NINTH, ELEVENTH AND
TWELFTH RISK FACTORS. PLEASE EITHER CLEARLY EXPLAIN HOW EACH OF THESE
RISK FACTORS APPLIES TO YOUR COMPANY OR DELETE IT.
The Company has revised its disclosure in the Risk Factors section
commencing on page 9 of the Registration Statement to exclude certain generic
risks that could apply to any issuer or any offering, consistent with Item
503(c) of Regulation S-K. However, the Company believes that certain of the
risks specifically cited in your comment letter are significant and particular
enough to the Company to be included in the Registration Statement. Accordingly,
the Company has revised its disclosure in the Risk Factors section commencing on
page ___ of the Registration Statement to more clearly explain how each of the
included risks applies to the Company.
9. PLEASE MOVE THE RISK FACTORS REGARDING KINERGY, PEI AND PBI'S BUSINESS
RISKS TO PRECEDE THE RISKS RELATED TO YOUR COMMON STOCK.
The Company has revised its disclosure in the Risk Factors section
commencing on page 9 of the Registration Statement to move the risk factors
regarding the business risks of Kinergy and PEI California to precede the risks
related to the Company's common stock.
The Market Price of Ethanol is Volatile.... page 13
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10. PLEASE RECONCILE YOUR FIRST STATEMENT WITH STATEMENTS THROUGHOUT THE
PROSPECTUS THAT THE PRICE OF GASOLINE HAS THE LARGEST INFLUENCE ON THE
PRICE OF ETHANOL. PLEASE DISCUSS HOW RECENT EVENTS, INCLUDING THE LARGE
INCREASE IN THE PRICE OF GASOLINE MAY IMPACT YOUR BUSINESS, INCLUDING
DEMAND FOR ETHANOL.
Jennifer Hardly, Esq.
October 31, 2005
Page 7
The Company has revised its disclosure in the Risk Factors section on
page 17 of the Registration Statement to clarify that the price of gasoline is
one of many factors that affect the price of ethanol and to discuss how a
decrease in the price of gasoline may adversely impact the Company's business,
including the demand for ethanol. The Company does not discuss the effects of an
increase in the price of gasoline because the Company believes that those
effects would be entirely or largely positive for the Company and therefore
would constitute mitigation language, the inclusion of which is inappropriate in
the Risk Factors section.
Please note that the Company has, in the Risk Factor entitled
"Governmental regulations or the repeal or modification of various tax
incentives favoring the use of ethanol. . ." on page 11 of the Registration
Statement, more specifically in the context of governmental regulations and tax
incentives, disclosed how certain other factors and recent events, such as the
passage of a national energy bill signed into law by President Bush, may
adversely impact the Company's business, including the demand for ethanol.
In addition, the Company has revised its disclosure throughout the
Registration Statement to clarify that the price of gasoline is one of many
factors that affect the price of ethanol and has excluded the conclusion that
the price of gasoline has the largest influence on the price of ethanol.
MD&A Overview, page 23
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11. REGARDING THE OCTOBER 2005 PBI ACQUISITION, PLEASE DISCLOSE THE TIME
FRAME IN WHICH YOU EXPECT THE ETHANOL PRODUCTION FACILITY TO START
GENERATING REVENUE. DISCLOSE ALSO YOUR CURRENT ESTIMATE OF THE CASH
REQUIRED TO SATISFY THE FIRST YEAR'S EXPECTED DEBT SERVICE REQUIREMENTS
ON THE RELATED DEBT FINANCING. SEE ITEM 3030)(1) OF REGULATION S-K.
Please be advised that, on October 15, 2005, the Membership Interest
Purchase Agreement dated as of August 1, 2005 between the Company and the
holders of the Membership Interests of Phoenix Bio-Industries, LLC terminated
automatically in accordance with its terms. In connection with the termination
of this Agreement, the Company filed a Current Report on Form 8-K on October 20,
2005 reporting such termination under Item 1.02 - Termination of a Material
Definitive Agreement. Accordingly, the Company has removed from the Registration
Statement its disclosure regarding the potential acquisition of Phoenix
Bio-Industries, LLC.
12. WE NOTE THE SUBSTANTIAL DECLINE IN KINERGY'S GROSS MARGIN - FROM 3.9%
IN 2004, TO 1.7% IN THE FIRST QUARTER OF 2005, AND TO .7% IN THE
QUARTER ENDED 6/30/05. ON PAGES 24, 28, AND 38, THIS DECLINE IS
ATTRIBUTED TO (1) INVENTORY GAINS IN PRIOR PERIODS AND (2) HISTORICAL
INCREASES IN ETHANOL PRICES. HOWEVER, GIVEN THAT THE 6/30/05 INVENTORY
BALANCE IS SUBSTANTIALLY HIGHER THAN IN PRIOR PERIODS, AND GIVEN THE
SIGNIFICANT INCREASE IN ETHANOL PRICES DURING THE QUARTER ENDED
6/30/05, THERE IS A CONCERN THAT READERS MAY NOT FULLY UNDERSTAND WHY
THE 6/30/05 GROSS MARGIN IS 59% LOWER THAN THE FIRST QUARTER AND 82%
Jennifer Hardly, Esq.
October 31, 2005
Page 8
LOWER THAN 2004. PLEASE PROVIDE A DETAILED DISCLOSURE TO CLARIFY THIS
ISSUE. DISCLOSE THE EXTENT TO WHICH MARGINS HAVE BEEN IMPACTED BY
CHANGES IN ETHANOL PRICES AND BY GAINS/LOSSES RESULTING FROM THE
UNMATCHED PURCHASE/SALE COMMITMENTS REFERENCED ON PAGE 10.
The Company has revised its disclosure in the Management's Discussion
and Analysis of Financial Condition and Results of Operations section on pages
35 and 41-42 of the Registration Statement to provide detailed disclosure to
clarify the reasons for the various changes in gross margins during the periods
presented.
The Company believes that, to quantify the extent to which margins have
been impacted by changes in ethanol prices or by gains/losses resulting from the
unmatched purchase/sale commitments (referred to by the Company as its
"inventory sales"), it would have to provide a range of potential margin
effects. The Company would be limited to providing a range because, for its
inventory sales, its base margins may vary from 1-2% (assuming stability in the
price of ethanol). The Company believes that margins above or below this range
likely result from fluctuations in the market price of ethanol. However, because
the Company's margins are so low, the potential percentage variance in margins
is extremely large. For example, if the Company achieved a margin for its
inventory sales of 3% in a given period, the effect on the margin of the
fluctuations in the price of ethanol could range from 1-2%, meaning that, on a
percentage basis, the range of the positive impact on margins would be to
increase them by anywhere from 50% to 200% (i.e., an increase to 3% from a base
margin of 2% is a 50% increase and an increase to 3% from a base margin of 1% is
a 200% increase). Likewise, if the Company achieved a margin for its inventory
sales of 2% in a given quarterly period, the effect on the margin of the
fluctuations in the price of ethanol could range from 0-1% meaning that, on a
percentage basis, the range of the positive impact would be an increase in
margins by anywhere from 0% to 100%. Because these ranges and the corresponding
percentage changes vary so widely, the Company believes that such disclosure
would be of limited use and may be misleading. Accordingly, the Company believes
it is most prudent to limit its disclosure to the matters set forth in its
substantially revised Management's Discussion and Analysis of Financial
Condition and Results of Operations section.
Jennifer Hardly, Esq.
October 31, 2005
Page 9
13. PLEASE TELL US SUPPLEMENTALLY OF THE SOURCE OR BASIS FOR YOUR
STATEMENTS IN THE FOURTH FULL PARAGRAPH ON PAGE 24. PLEASE ALSO TELL US
THE SOURCE OR BASIS FOR YOUR STATEMENT ON PAGE 36 THAT "WE BELIEVE THAT
APPROXIMATELY 4.0 MILLION TONS..." AND FOR YOUR STATEMENTS ON PAGE 39
REGARDING THE DEMOGRAPHICS OF CERTAIN AREAS IN CALIFORNIA.
FOURTH FULL PARAGRAPH, PAGE 24
"ETHANOL REPRESENTS ONLY UP TO 3% OF THE TOTAL ANNUAL GASOLINE SUPPLY
IN THE UNITED STATES..."
This statement is based upon data published by the United States
Department of Energy. Attached hereto as EXHIBIT A are calculations based upon
and references to the relevant publications of the United States Department of
Energy.
"...WE BELIEVE THAT THE ETHANOL INDUSTRY HAS SUBSTANTIAL ROOM TO GROW
TO REACH WHAT WE BELIEVE IS AN ACHIEVABLE LEVEL OF 10% OF THE ANNUAL
GASOLINE SUPPLY IN THE UNITED STATES."
This statement is based upon the blending limits of ethanol of 10% of
gasoline generally accepted in the ethanol industry for environmental reasons
and gasoline oxygenate requirements. In addition, warranty coverage by
automobile manufacturers limits the use of ethanol at 10% of gasoline. There are
over 20 states currently blending ethanol with gasoline, many of which blend at
the full 10% rate. Accordingly, we believe that a 10% blending rate is
achievable throughout the United States.
"IN CALIFORNIA ALONE, AN INCREASE IN THE DEMAND FOR ETHANOL TO 10% OF
THE TOTAL ANNUAL GASOLINE SUPPLY WOULD RESULT IN DEMAND FOR
APPROXIMATELY 650 MILLION ADDITIONAL GALLONS OF ETHANOL, WHICH AMOUNT
REPRESENTS AN INCREASE IN DEMAND OF APPROXIMATELY 16%."
Annual demand for gasoline in California is approximately 15,900
million gallons according to the California State Board of Equalization, Fuel
Taxes Division. This information can be located on the Internet at the following
URL address: HTTP://WWW.BOE.CA.GOV/SPTAXPROG/SPFTRPTS04.HTM [active as of
October 31, 2005]. At a 5.7% blend rate, the total annual demand for ethanol in
California would be at least 900 million gallons. At a 10% blend rate, the total
annual demand for ethanol in California would be at least 1,590 million gallons.
The difference in annual demand for ethanol between these two blend rates is
approximately 700 million gallons. In addition, a 10% blend rate is 75% higher
than a 5.7% blend rate. An additional 700 million gallons of ethanol represents
a 17.5% increase in the annual national demand for ethanol of 3,400 million
gallons, as set forth in Exhibit A attached hereto.
Jennifer Hardly, Esq.
October 31, 2005
Page 10
The Company has revised its disclosure in its Management's Discussion
and Analysis of Financial Condition and Results of Operation section on page
33-34 of the Registration Statement to more accurately include the figures set
forth in the above analysis.
STATEMENT ON PAGE 36
"WE BELIEVE THAT APPROXIMATELY 4.0 MILLION TONS OF DRIED DISTILLERS
GRAINS ARE PRODUCED AND SOLD EVERY YEAR IN NORTH AMERICA."
We believe that this statement is based upon historical estimates for
the year 2002 that were not updated. The Company has included revised disclosure
in the Business Section on page 51 of the Registration Statement to more
accurately reflect the current estimated range of between approximately 5.8 and
6.8 million tons of dried distillers grains produced and sold annually.
The current estimated range of between 5.8 and 6.8 million tons is
based upon estimates published in Ethanol Producer Magazine: Bryan, Tom,
November 2004, DDGS: Keep It Coming, Ethanol Producer Magazine, page 25. A copy
of this magazine is also available on the Internet at the following URL address:
HTTP://WWW.ETHANOLPRODUCER-ONLINE.COM/EPM/200411/ [active as of October 31,
2005].
STATEMENTS ON PAGE 39
"THE GREATER FRESNO AREA IS EXPERIENCING RAPID POPULATION GROWTH."
The Company believes that the greater Fresno area is experiencing
population growth at least twice the national average. The Company believes that
the national average population growth is approximately 1% based on various
published figures it has reviewed in the past. The Company's source for
population growth in the Fresno area is US Census Bureau, JULY 1, 2003
POPULATION ESTIMATES FOR METROPOLITAN, MICROPOLITAN, AND COMBINED STATISTICAL
AREAS, US Census Bureau, ONLINE, July 9, 2004, Available:
HTTP://WWW.CENSUS.GOV/POPULATION/WWW/ESTIMATES/METROPOP/POPTABLE01.XLS (see CBSA
Code 23420 in table) [active as of October 31, 2005].
The Company cannot, however, locate its source for the national average
population growth and has instead decided to delete the statement that "[t]he
greater Fresno area is experiencing rapid population growth." Accordingly, the
Company has deleted this statement from the Business Section on page 56 of the
Registration Statement.
Jennifer Hardly, Esq.
October 31, 2005
Page 11
"THE FRESNO/CLOVIS METRO AREA POPULATION IS NEARLY 700,000."
The Company's source for this information is: US Census Bureau, JULY 1,
2003 POPULATION ESTIMATES FOR METROPOLITAN, MICROPOLITAN, AND COMBINED
STATISTICAL AREAS, US Census Bureau, ONLINE, July 9, 2004, Available:
http://www.census.gov/population/www/estimates/metropop/PopTable01.xls (see CBSA
Code 23420 in table) [active as of October 31, 2005].
The Company has included revised disclosure in the Business Section on
page 56 of the Registration Statement to more accurately reflect the current
population of 850,000 in the greater Fresno area according to recent census
data.
Results of Operations, page 27
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14. PLEASE QUANTIFY EACH COMPONENT THAT ATTRIBUTED TO CHANGES IN RESULTS OF
OPERATIONS. FOR EXAMPLE, ON PAGE 28, QUANTIFY THE ADDITIONAL HEADCOUNT
AND EACH COMPONENT OF EXPENSES AND ON PAGE 29, QUANTIFY THE DECREASE IN
SALES OF GRAIN INVENTORY. IF MATERIAL, PLEASE DISCLOSE AND QUANTIFY THE
OTHER COMPONENTS OF CHANGES IN RESULTS OF OPERATIONS. FOR EXAMPLE
DISCLOSE AND QUANTIFY THE OTHER COMPONENTS OF THE INCREASE IN SG&A ON
PAGE 28 AND THE DECREASE IN NET SALES ON PAGE 29.
The Company has revised its disclosure in the Results of Operations
section commencing on page 41 of the Registration Statement to quantify each
material component that attributed to changes in results of operations.
Liquidity and Capital Resources, page 30
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15. ON PAGE 31, PLEASE QUANTIFY HOW MUCH IT WILL COST TO COMPLETE THE SITE
PREPARATION, ACQUISITION OF EQUIPMENT AND ENGINEERING SERVICES AT THE
MADERA COUNTY FACILITY. PLEASE DISCLOSE THE ESTIMATED TOTAL COST TO
COMPLETE THIS PRODUCTION FACILITY.
The Company has revised its disclosure in the Liquidity and Capital
Resources section on page 45 of the Registration Statement to quantify the
estimated total cost of completion of its proposed Madera County facility as
well as the components of the total cost of completion. In addition, please note
that the Company has moved this disclosure up toward the beginning of the
Liquidity and Capital Resources section of the Registration Statement.
16. PLEASE IDENTIFY YOUR "CURRENT AND FUTURE AVAILABLE CAPITAL RESOURCES."
The Company has revised its disclosure in the Liquidity and Capital
Resources section on page 44 of the Registration Statement to identify its
current and future available capital resources.
Jennifer Hardly, Esq.
October 31, 2005
Page 12
Business, page 33
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Overview of Ethanol Market, page 34
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17. WE NOTE YOUR CITATION OF THE "RENEWABLE FUELS ASSOCIATION," "BBI
INTERNATIONAL" AND "RINKER & BERGER." PLEASE TELL US WHAT MATERIALS OR
DOCUMENTS FROM THESE ENTITIES ASSOCIATION YOU HAVE RELIED UPON AND
WHETHER THEY ARE THE MOST RECENT MATERIALS ON THE SUBJECT BY THE
AUTHORS. WITH RESPECT TO THESE MATERIALS, PLEASE TELL US WHETHER THEY
HAVE BEEN MADE AVAILABLE TO THE PUBLIC, WITHOUT PAYMENT OF SUBSCRIPTION
OR SIMILAR FEES. HAVE ANY OF THESE MATERIALS BEEN PUBLISHED IN WIDELY
CIRCULATED MEDIA OF GENERAL INTEREST OR AMONG INDUSTRY PARTICIPANTS? IF
SO, PLEASE TELL US WHEN AND WHERE. UNLESS THESE MATERIALS HAVE BEEN
USED IN WIDELY CIRCULATED MEDIA OF GENERAL INTEREST OR AMONG INDUSTRY
PARTICIPANTS, YOU MUST EITHER ADOPT THE STATEMENTS YOU ATTRIBUTE TO
THEM AS YOUR OWN OR FILE SIGNED CONSENTS FOR THEIR USE. WE NOTE THAT
THE BBI INTERNATIONAL STUDY WAS PREPARED FOR REENERGY. TELL US WHETHER
OR NOT THIS STUDY WAS PREPARED FOR A FEE. IF SO, PLEASE FILE A CONSENT
BY BBI INTERNATIONAL FOR THE USE OF ITS STATEMENTS AND FINDINGS IN THE
PROSPECTUS.
The Company has relied upon the following materials or documents from
the following entities:
o Renewable Fuels Association:
o ETHANOL INDUSTRY OUTLOOK 2004. This document was
previously available to the public without charge on
the Internet at HTTP://WWW.ETHANOLRFA.ORG. The
Company does not believe that this document was
published in widely circulated media of general
interest; however, the Company does believe that it
was widely circulated among industry participants at
various conferences. The Company also believes that
the Renewable Fuels Association is recognized by
industry participants as a leading source of
information regarding the ethanol industry. The
authors have published a more recent document on the
subject matter, entitled ETHANOL INDUSTRY OUTLOOK
2005, that is available to the public without charge
on the Internet at
HTTP://WWW.ETHANOLRFA.ORG/OBJECTS/PDF/OUTLOOK2005.PDF
[active as of October 31, 2005]; however, none of the
information relied upon by the Company in the ETHANOL
INDUSTRY OUTLOOK 2004 has been contradicted or
superceded by the ETHANOL INDUSTRY OUTLOOK 2005.
o U.S. FUEL ETHANOL INDUSTRY PLANTS AND PRODUCTION
CAPACITY. This document is available to the public
without charge on the Internet at
HTTP://WWW.ETHANOLRFA.ORG/INDUSTRY/LOCATIONS/ [active
Jennifer Hardly, Esq.
October 31, 2005
Page 13
as of October 31, 2005]. The Company does not believe
that this document was published in widely circulated
media of general interest. The Company believes that
this list is recognized by industry participants as
the most comprehensive and current list of plant
locations and capacity. The Company is not aware of a
more recent document on the subject matter published
by the authors.
o BBI International: ETHANOL FEASIBILITY STUDY PREPARED
FOR REENERGY. This document was not published in
widely circulated media of general interest. This
document is not available to the public. This
document was prepared for a fee paid for by the
Company. The authors have not published a more recent
document on the subject matter.
o Rinker & Berger: OPTIMIZING THE USE OF DISTILLER
GRAIN FOR DAIRY-BEEF PRODUCTION. This document was
not published in widely circulated media of general
interest. This document is available to the public
without charge on the Internet at
HTTP://WWW.DDGS.UMN.EDU/ARTICLES-BEEF/FINAL-UIL12-03.
PDF [active as of October 31, 2005]. The Company does
not believe that the authors have published a more
recent document on the subject matter.
The Company has revised its disclosure in the Business section
commencing on page 50 of the Registration Statement to adopt as its own the
statements previously attributed to the foregoing entities. Please be advised
that the Company has deleted the statements attributable to BBI International.
Kinergy Customers, page 37
- --------------------------
18. PLEASE IDENTIFY ANY CUSTOMERS WHO ACCOUNTED FOR 10% OR MORE OF YOUR
SALES PURSUANT TO ITEM 101(c)(vii) OF REGULATION S-K.
The Company has included additional disclosure under the Kinergy
Customers subsection of the Business section commencing on page 53 of the
Registration Statement to identify its customers who accounted for 10% or more
of the Company's sales pursuant to Item 101(c)(vii) of Regulation S-K.
Competition, page 41
- --------------------
19. PLEASE DISCLOSE THE PRINCIPAL METHODS OF COMPETITION AND DISCUSS THE
NEGATIVE FACTORS PERTAINING TO YOUR COMPETITIVE POSITION PURSUANT TO
ITEM 1.01(c)(x) OF REGULATION S-K.
Jennifer Hardly, Esq.
October 31, 2005
Page 14
The Company has included additional disclosure under the Competition
subsection of the Business section commencing on page 58 of the Registration
Statement to clarify the Company's principal methods of competition and to
discuss the negative factors pertaining to the Company's competitive position
pursuant to Item 1.01(c)(x) of Regulation S-K.
Certain Relationships and Related Transactions, page 57
- -------------------------------------------------------
20. PLEASE SEPARATE THE TRANSACTIONS BETWEEN RELATED PARTIES OF ACCESSITY
AND THE CURRENT SUBSIDIARIES PRIOR TO THE SHARE EXCHANGE FROM THE
RELATED TRANSACTIONS AMONG RELATED PARTIES OF THE SUBSIDIARIES SO THAT
INVESTORS ARE CLEAR AS TO WHAT THE RELATIONSHIP BETWEEN ACCESSITY AND
THE CURRENT SUBSIDIARIES WAS PRIOR TO THE SHARE EXCHANGE AGREEMENT.
The Company has revised its disclosure in the Certain Relationships and
Related Transactions section commencing on page 76 of the Registration Statement
to clarify the categories of the related party transactions specified therein.
Please be advised that, prior to the share exchange transaction, and except for
the share exchange transaction, there were no relationships between Accessity
and the subsidiaries of the Company (i.e., PEI California, Kinergy and ReEnergy)
and such parties were not affiliated with one another. As noted above, the
Company has revised its disclosure in the Certain Relationships and Related
Transactions section to clarify the following categories of related
transactions:
o TRANSACTIONS BETWEEN ACCESSITY AND ITS RELATED PARTIES PRIOR
TO THE SHARE EXCHANGE TRANSACTION--As described, this section
sets forth historical transactions of Accessity, the Company's
predecessor corporation, and its related parties that occurred
prior to the share exchange transaction.
o TRANSACTIONS BETWEEN OUR NOW-WHOLLY-OWNED SUBSIDIARIES AND
THEIR RELATED PARTIES PRIOR TO THE SHARE EXCHANGE
TRANSACTION--As described, this section sets forth historical
transactions of the Company's now-wholly-owned subsidiaries
(which subsidiaries were acquired in connection with the share
exchange transaction) and those subsidiaries' related parties
that occurred prior to the share exchange transaction. These
transactions fall under one of the three following categories,
each of which are included in the Certain Relationships and
Related Transactions section of the Registration Statement:
o TRANSACTIONS BETWEEN PEI CALIFORNIA AND ITS RELATED
PARTIES
o TRANSACTIONS BETWEEN KINERGY AND ITS RELATED PARTIES
o TRANSACTIONS BETWEEN REENERGY AND ITS RELATED PARTIES
Jennifer Hardly, Esq.
October 31, 2005
Page 15
o TRANSACTIONS BETWEEN US AND OUR RELATED PARTIES AT
THE TIME OF OR AFTER THE SHARE EXCHANGE
TRANSACTION--As described, this section sets forth
transactions of the registrant and its related
parties that occurred at the time of or after the
share exchange transaction.
Selling Security Holders, page 66
- ---------------------------------
21. PLEASE DISCLOSE HOW EACH SELLER ACQUIRED THE SECURITIES. FOR EXAMPLE,
DISCLOSE WHETHER SELLERS ACQUIRED THEIR SHARES IN CONNECTION WITH THE
$21 MILLION PRIVATE PLACEMENT, THE SHARE EXCHANGE TRANSACTION,
WARRANTS, COMPENSATION OR OTHER TRANSACTIONS.
The Company has added footnotes to the Selling Security Holder table
commencing on page 90 of the Registration Statement to disclose how each seller
initially acquired the securities offered for resale under the Registration
Statement, including securities acquired from entities that were constituents of
the share exchange transaction.
22. PLEASE IDENTIFY THE NUMBER OF SHARES BEING OFFERED PURSUANT TO THE
DIFFERENT TRANSACTIONS.
The Company has revised its disclosure both in the footnotes to the
Selling Security Holder section commencing on page 90 and in the section
immediately following the Selling Security Holder table commencing on page 96 of
the Registration Statement to identify the number of shares being offered
pursuant to the different transactions.
23. PLEASE NAME ALL NATURAL PERSONS WHO SHARE BENEFICIAL OWNERSHIP WITH
NEUBERGER BERMAN, CHADBOURN SECURITIES, FAIRMONT ANALYTICS, BLAIR
CAPITAL, AND SYCAMORE CAPITAL PARTNERS.
The Company has revised its disclosure in footnotes to the Selling
Security Holder table commencing on page 90 of the Registration Statement to
name all natural persons who share beneficial ownership with Neuberger Berman,
Chadbourn Securities, Fairmont Analytics, Blair Capital and Sycamore Capital
Partners.
24. PLEASE DISCLOSE ANY AFFILIATION BETWEEN THE SELLERS AND OFFICERS AND
DIRECTORS OF THE COMPANY. WE NOTE, FOR EXAMPLE, THAT PAUL KOEHLER, THE
TURNER AND ILLIQUID ASSETS TRUSTS ARE SELLERS. ALSO DISCLOSE IF THERE
ARE ANY MATERIAL RELATIONSHIPS BETWEEN YOU OR YOUR AFFILIATES AND ANY
OF THE PLACEMENT AGENTS. IF ANY OF YOUR OFFICERS OR DIRECTORS WILL
RECEIVE OR SHARE IN PROCEEDS FROM THE OFFERING, PLEASE PROVIDE
APPROPRIATE COVER PAGE DISCLOSURE.
Jennifer Hardly, Esq.
October 31, 2005
Page 16
Please be advised that Paul Koehler is the brother of Neil Koehler, who
is a director and the President and CEO of the Company; however, the Company
believes that Paul Koehler is not an affiliate of either Neil Koehler or the
Company. In addition, Peter Koehler is the brother of Neil Koehler; however, the
Company believes that Peter Koehler is not an affiliate of either Neil Koehler
or the Company. Also, the trustees of the Turner Family Trust are the parents of
Ryan Turner, who is co-beneficiary of the trust, and Rogene Scott Turner is the
grandmother of Ryan Turner; however, none of the foregoing are affiliates of one
another. The Company has revised its disclosure in the footnotes to the Selling
Security Holders table commencing on page 90 of the Registration Statement to
disclose the foregoing relationships. The Company believes that no affiliations
exist between the selling security holders and the officers and directors of the
Company. In addition, the Company does not believe that there are any
undisclosed material relationships between the Company or its affiliates and any
of the selling security holders.
Please be advised that the Company believes that none of its officers
or directors will receive or share in proceeds from the offering, except that
Ryan Turner is a named co-beneficiary of the Turner Trust; accordingly,
appropriate disclosure in this regard has been included in the cover page to the
Prospectus.
25. WE NOTE YOUR DISCLOSURE THAT SOME OF THE SELLERS ARE TRANSFEREES OF
PLACEMENT AGENTS IN CERTAIN PRIVATE PLACEMENT TRANSACTIONS OF PEI
CALIFORNIA THAT OCCURRED PRIOR TO THE CONSUMMATION OF THE SHARE
EXCHANGE TRANSACTION. PLEASE IDENTIFY THESE SELLERS AND TELL US WHAT
EXEMPTION FROM REGISTRATION WAS RELIED ON.
In response to Comment No. 21 above, the Company has revised its
disclosure in the footnotes to the Selling Security Holders table commencing on
page 90 of the Registration Statement to disclose how each seller, including the
sellers who are transferees of placement agents, acquired the securities offered
for resale under the Registration Statement. In addition, please be advised that
the following persons (included at the end of the Selling Security Holders
table) are transferees of placement agents:
Laird Q. Cagan
Fairmont Analytics, Inc.
Demetri Argyropoulos
Kathleen Cole
Patricia Prass
Barbara Hall
Robert A. Bonelli
Stephen J. Perrone
William P. Behrens
Danny Nicholas
David T. R. Tsiang
Jennifer Hardly, Esq.
October 31, 2005
Page 17
Yaudoon Chiang
William T. Behrens
Orrie L. Tawes, III
Stephan H. Kim
James E. McMahan
Ramin Azar
Blair Capital, Inc.
Sycamore Capital Partners, Inc.
The placement agent transferors relied upon the customary Section
4(1-1/2) exemption for private transfers of securities. The securities were
transferred to persons or entities who were "accredited investors" as defined in
Rule 501(a) of Regulation D of the Act. In connection with these transfers, the
Company received written certifications from each of the transferees containing
customary representations and warranties that, among other things, each seller
was an "accredited investor" and was acquiring the securities for their own
account and not with a view to the resale or distribution thereof. The Company
also received written certifications from each placement agent transferor
containing representations and warranties that, among other things, each
transferor did not offer or sell the securities in any form of general
solicitation or general advertising; and that each placement agent transferor
(i) acquired the securities in a private transaction for its own account for
investment, and not with a view to, or for sale in connection with, any
distribution, resale or public offering of such securities or any part thereof
in violation of the Act, (ii) is not directly or indirectly participating in or
underwriting a distribution of the securities, and (iii) did not purchase or
acquire the securities from the Company or from any person directly or
indirectly controlling, controlled by or under common control with the Company
with a view to distribution of the securities.
26. PLEASE CONFIRM THAT NONE OF THE SELLERS CURRENTLY HAVE OPEN POSITIONS
IN THE COMMON STOCK. IF ANY OF THE SELLERS DO HAVE SHORT POSITIONS,
PLEASE INDICATE THE SIZE OF THE SHORT POSITION. SUPPLEMENTALLY CONFIRM
THAT YOU ARE AWARE OF TELEPHONE LNTERP. A.65 (JULY L997) ON THIS
MATTER, WHICH IS PUBLICLY AVAILABLE ON OUR WEBSITE.
The Company circulated selling security holder questionnaires to each
of the selling security holders. The questionnaires contained the Plan of
Distribution section of the Registration Statement and the following
acknowledgements and covenants:
With regard to the attached plan of distribution, I
acknowledge that I am aware of the Commission's Staff's
position that any short sales "against the box" prior to the
effective date of the Registration Statement may not be
covered with shares registered under the Registration
Statement, and that I will comply with that prohibition. I
also acknowledge that I will comply with all selling
restrictions contained in any Registration Rights Agreement or
other agreement to which I am a party.
The Company has received signed questionnaires from each of the selling
security holders. The questionnaires further provide the following
acknowledgements and covenants immediately preceding the signature block:
The answers I have supplied to the questions in this
Questionnaire are true, complete, and correct to the best of
my knowledge after reasonable inquiry. I will promptly notify
counsel to the Company in writing if any event occurs between
now and the termination of the distribution of securities
pursuant to the Registration Statement that causes the answer
to any question to change.
I acknowledge that this obligation includes the obligation to
promptly notify counsel to the Company if any event causes a
change in my beneficial ownership of the Company's securities.
I will specifically reference this Questionnaire when
providing updated information to the Company's counsel.
As of the date of this letter, neither the Company nor its counsel has
received any updated information from any selling security holder with respect
to short sales of the Company's common stock that would qualify or alter the
acknowledgements and covenants above.
Please be advised that the Company is aware of the matters set forth in
Telephone Interpretations Manual A.65 (July 1997).
PRIVATE PLACEMENTS TRANSACTIONS THROUGH WHICH THE SELLING SECURITY HOLDERS
OBTAINED BENEFICIAL OWNERSHIP OF THE OFFERED SHARES, PAGE 74
27. IT APPEARS THAT NOT ALL THE PRIVATE PLACEMENT TRANSACTIONS ARE
DESCRIBED. PLEASE DESCRIBE THESE TRANSACTIONS AND THE REPLACEMENT
WARRANTS. ALSO DESCRIBE IN GREATER DETAIL THE TERMS OF THE WARRANTS.
The Company has revised its disclosure in the section immediately
following the Selling Security Holder table commencing on page 96 of the
Registration Statement to describe each of the transactions in which each seller
initially acquired the securities offered for resale under the Registration
Statement, including securities acquired from entities that were constituents of
the share exchange transaction. In addition, the Company has revised its
disclosure in the section immediately following the Selling Security Holder
table commencing on page 96 of the Registration Statement to describe in greater
detail the terms of the warrants.
Jennifer Hardly, Esq.
October 31, 2005
Page 19
Plan of Distribution, page 75
- -----------------------------
28. PLEASE IDENTIFY THE SELLERS WHO ARE BROKER-DEALERS AS UNDERWRITERS AND
IDENTIFY THESE SELLERS. BROKER DEALERS AND THEIR AFFILIATES WHO
RECEIVED THE SECURITIES AS COMPENSATION FOR UNDERWRITING ACTIVITIES
NEED NOT BE IDENTIFIED AS UNDERWRITERS. ACCORDINGLY, PLEASE REVISE THE
STATEMENT THAT "EACH OF THE SELLING SECURITY HOLDERS HAS REPRESENTED TO
US THAT IT IS NOT ACTING AS AN UNDERWRITER... ."
The Company has revised its disclosure in the Selling Security Holder
section commencing on page 84 of the Registration Statement to identify the
selling security holders who fall within the following two categories: (i)
broker-dealers and their affiliates (including transferees thereof) who received
shares of common stock offered for resale, or warrants whose underlying shares
of common stock are offered for resale, as compensation for transaction-based
investment banking services relating to one or more private placement
transactions of PEI California, and (ii) affiliates of broker-dealers who
received shares of common stock offered for resale, or warrants whose underlying
shares of common stock are offered for resale, in certain private placement
transactions of PEI California. The selling security holders falling within
category (i) have been identified but have not been named as underwriters in the
registration statement. The selling security holders falling within category
(ii) have been identified as persons or entities who may be deemed underwriters
with respect to their respective shares of common stock offered for resale. The
only broker-dealers who are selling security holders are those who received
their securities as compensation for transaction-based investment banking
services and accordingly, the Company has not identified any broker-dealer as an
underwriter.
Financial Statements
- --------------------
Note 2, page F-7
- ----------------
29. PLEASE DISCLOSE HOW PEI ACCOUNTED FOR ITS ACQUISITION OF ACCESSITY.
PLEASE QUANTIFY THE ASSETS AND LIABILITIES ACQUIRED AND DISCLOSE
WHETHER ACCESSITY HAD ANY BUSINESS OPERATIONS ON 3/23/05. DISCLOSE
WHETHER THE TRANSACTION WAS ACCOUNTED FOR AS A RECAPITALIZATION AND
WHETHER ANY FAIR VALUE PURCHASE ACCOUNTING ADJUSTMENTS WERE RECORDED.
The Company has provided additional disclosure in Note 3 of the
financial statements on page F-9 to describe how PEI California accounted for
the acquisition of Accessity, including disclosure indicating that the share
exchange transaction was treated as a capital transaction, whereby PEI
California acquired the net monetary assets of Accessity, accompanied by a
recapitalization of PEI California.
Jennifer Hardly, Esq.
October 31, 2005
Page 20
30. REENERGY'S HISTORICAL FINANCIAL STATEMENTS REFLECT NO MATERIAL ASSETS
OR OPERATING ACTIVITIES. SIMILARLY, ACCORDING TO PAGE 2, REENERGY HAS
NO CURRENT "SIGNIFICANT BUSINESS OPERATIONS OR PLANS." FURTHER, THE
TRANSACTION DOES NOT APPEAR TO CONSTITUTE A BUSINESS COMBINATION AS
OUTLINED IN PARAGRAPH 9 OF SFAS 141. THEREFORE, IT DOES NOT APPEAR
APPROPRIATE TO RECORD GOODWILL IN THE REENERGY ACQUISITION. IF THE
PRIMARY BUSINESS PURPOSE OF THE REENERGY TRANSACTION WAS TO COMPENSATE
REENERGY'S MEMBERS FOR A FEASIBILITY STUDY ON THE VISALIA PROJECT, THEN
PRESUMABLY THE $972,250 PURCHASE PRICE SHOULD BE ACCOUNTED FOR AS A
RESEARCH AND DEVELOPMENT EXPENSE IN PEI'S 6/30/05 STATEMENT OF
OPERATIONS. PLEASE REVISE THE FINANCIAL STATEMENTS PURSUANT TO SFAS 2.
Upon review of the purchase accounting methodology relating to the
ReEnergy acquisition, management of the Company concluded that its selection of
assumptions and factors affecting its purchase accounting methodology for the
acquisition of ReEnergy were not in accordance with generally accepted
accounting principles. As a result, the Company determined that of the $972,250
purchase price for ReEnergy, all of which was previously recorded as goodwill
and was being capitalized, $852,250 should have been recorded as an expense for
services rendered in connection with a feasibility study that was conducted with
respect to real property that was subject to a purchase option held by ReEnergy
and $120,000 should have been recorded as an intangible asset for the fair value
of a favorable option. Based upon this conclusion, the Company has restated its
financial statements as of and for the six months ended June 30, 2005 commencing
on page F-2 to reflect the correction in its purchase accounting methodology.
In addition, on October 20, 2005, the Company filed a Current Report on
Form 8-K under Item 4.02 - Non-Reliance on Previously Issued Financial
Statements or a Related Audit Report or Completed Interim Review to disclose the
foregoing matters and, on October 25, 2005, filed amended Forms 10-QSB for the
quarterly periods ended March 31, 2005 and June 30, 2005 to restate its
financial statements for those periods.
Purchase Agreement, page F-14
- -----------------------------
31. WE NOTE THE $48 MILLION PBI ACQUISITION THAT IS EXPECTED TO CLOSE
OCTOBER 2005. IT APPEARS THAT PBI HISTORICAL FINANCIAL STATEMENTS, AND
PRO FORMA DATA, ARE REQUIRED PURSUANT TO ARTICLE 3-05 OF REGULATION
S-X. SEE ALSO ITEM 11(E) OF THE FORM INSTRUCTIONS.
As note above, be advised that, on October 15, 2005, the Membership
Interest Purchase Agreement dated as of August 1, 2005 between the Company and
the holders of the Membership Interests of Phoenix Bio-Industries, LLC
terminated automatically in accordance with its terms. In connection with the
termination of this Agreement, the Company filed a Current Report on Form 8-K on
Jennifer Hardly, Esq.
October 31, 2005
Page 21
October 20, 2005 reporting such termination under Item 1.02 - Termination of a
Material Definitive Agreement. Accordingly, the Company has removed from the
Registration Statement its disclosure regarding the potential acquisition of
Phoenix Bio-Industries, LLC.
Kinergy Statements of Income, page F-40
- ---------------------------------------
32. PLEASE DISCLOSE RELATED PARTY TRANSACTIONS ON THE FACE OF THE FINANCIAL
STATEMENTS. SEE THE GUIDANCE IN ARTICLE 4-08(K) OF REGULATION S-X.
The Company has revised its disclosure in the face of the financial
statements on pages F-2 and F-42-43 of the Registration Statement to disclose
related party transactions in accordance with Article 4-08(k) of Regulation S-X.
Revenue Recognition, page F-42
- ------------------------------
33. IT IS NOT CLEAR WHETHER KINERGY'S REVENUE RECOGNITION PRACTICES COMPLY
WITH EITF 99-19. IN THIS REGARD, WE NOTE CERTAIN FEATURES IN ITS
ETHANOL MARKETING AGREEMENT (FILED WITH THE 8/31/05 FORM 8-K) THAT MAY
BE INDICATIVE OF NET REVENUE REPORTING. ARTICLE 1.1 DEFINES KINERGY'S
MARKETING (INCENTIVE) FEE AS A FIXED 1% OF THE TRANSACTION AMOUNT.
ARTICLE 2.1(C) SUGGESTS THAT THE SUPPLIER, NOT KINERGY, ASSUMES THE
CREDIT RISK. ARTICLE 2.1(E)(III) APPEARS TO GIVE THE SUPPLIER AUTHORITY
OVER KINERGY'S SELECTION OF CUSTOMERS. ARTICLE 2.1(F) PROHIBITS KINERGY
FROM PURCHASING ETHANOL WITHOUT A MATCHING SALES COMMITMENT. ARTICLE
2.3(C) SUGGESTS THAT THE SUPPLIER IS THE PRIMARY OBLIGOR SINCE THEY ARE
OBLIGATED TO PROVIDE AN ALTERNATIVE SOURCE OF ETHANOL PRODUCT IN THE
EVENT THEY CANNOT PRODUCE THE ETHANOL DUE TO PRODUCTION PROBLEMS. ALSO,
WE NOTE THE DISCLOSURE ON P. 39 THAT "IN THE EVENT THAT OUR SUPPLIERS
SHIP ETHANOL DIRECTLY TO OUR CUSTOMERS, RISK OF LOSS PASSES DIRECTLY
FROM OUR SUPPLIERS TO OUR CUSTOMERS AND WE DO NOT ASSUME ANY RISK OF
LOSS." GIVEN THE VARYING FEATURES OF KINERGY'S MARKETING TRANSACTIONS,
IT IS NOT CLEAR THAT ALL OF THE TRANSACTIONS SHOULD BE REPORTED AS
GROSS REVENUE IN THE HISTORICAL FINANCIAL STATEMENTS. PLEASE PROVIDE US
WITH AN ANALYSIS OF THIS ISSUE AS IT APPLIES TO KINERGY'S ANNUAL
FINANCIAL STATEMENTS AND THE REGISTRANT'S 6/30/05 FINANCIAL STATEMENTS.
ALSO, PLEASE PROVIDE US WITH COPIES OF REPRESENTATIVE SALES CONTRACTS
USED IN TRANSACTIONS WITH THE 2 CUSTOMERS REFERENCED ON PAGE 11 AS
COMPRISING 29% OF 2005 SALES.
The Company does not believe that the Ethanol Marketing Agreement filed
as an exhibit to its Current Report on Form 8-K for August 31, 2005 is
representative of Kinergy's historical sales contracts. In addition, the Company
has not begun recognizing any revenue under this agreement and therefore has not
concluded its analysis of how revenue ought to be recognized for sales under
this agreement. Once the Company begins performing ethanol marketing services
under this agreement, it will review and analyze the relevant accounting
principles to determine whether it should recognize revenue on a gross or net
basis.
Jennifer Hardly, Esq.
October 31, 2005
Page 22
Please find enclosed as Exhibit B copies of representative sales
contracts used in transactions with the two customers referenced on page 15 as
comprising 29% of 2005 sales. The Company believes that these contracts are
representative of Kinergy's historical direct sales contracts. The Company's
analysis of EITF 99-19 in the context of its historical direct sales contracts
follows:
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent" sets forth the following indicators of reporting revenues gross:
INDICATOR 1 - If the company is responsible for fulfillment of the
product or services ordered or purchased by the customer, this fact is a strong
indicator that the company has risks and rewards of a principal in the
transaction and that it should record revenue gross based on the amount billed
to the company.
INDICATOR 2 - General inventory risk exists if a company takes title to
a product before that product is ordered by a customer and is a strong indicator
that the company has risks and rewards of a principal in the transaction and
that it should record revenue gross based on the amount billed to the company.
INDICATOR 3 - If the company is able to establish the exchange price
with the customer for the product or service that fact may indicate that the
company has risks and rewards of a principal in the transaction and that it
should record revenue gross based on the amount billed to the customer.
INDICATOR 4 - If a company physically changes the product (beyond its
packaging) or performs part of the service ordered by a customer, that fact may
indicate that the company is primarily responsible for fulfillment and that it
should record revenue gross based on the amount billed to the customer.
INDICATOR 5 - If a company has multiple suppliers for a product or
service ordered by a customer and discretion to select the supplier that will
provide the products or services ordered by the customer, that fact may indicate
that the company is primarily responsible for fulfillment and that it should
record revenue gross based on the amount billed to the customer.
INDICATOR 6 - If the company must determine the nature, type,
characteristics, or specifications of the products or services ordered by the
customer, that fact may indicate that the company is primarily responsible for
fulfillment and that it should record revenue gross based on the amount billed
to the customer.
Jennifer Hardly, Esq.
October 31, 2005
Page 23
INDICATOR 7 - Physical loss inventory risk exists if title to the
product is transferred to the company at the shipping point and is transferred
from the company to the customer upon delivery. This indicator may provide some
evidence, albeit less persuasive than general inventory risk, that the company
should record revenue gross based on the amount billed to the customer.
INDICATOR 8 - If a company assumes credit risk for the amount billed to
the customer, that fact may provide weak evidence that the company has risks and
rewards as a principal in the transaction and, therefore, that it should record
revenue gross for that amount. Credit risk exists if the company is responsible
for collecting the sales price from the customer but must pay the amount owed to
the supplier after the supplier performs, regardless of whether the sales price
is fully collected.
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent" sets forth the following indicators of reporting revenues net:
INDICATOR 1 - If the supplier is responsible for fulfillment that fact
may indicate that the company does not have risks and rewards as principal in
the transaction and that it should record revenue net based on the amount
retained.
INDICATOR 2 - If the company earns a fixed dollar amount per customer
transaction regardless of the amount billed to the customer, or a stated
percentage of the amount billed to the customer, that fact may indicate that the
company is an agent of the supplier and should record revenue net based on the
amount retained.
INDICTOR 3 - If credit risk exists (the sales price has not been fully
collected prior to delivering the product or service) but that credit risk is
assumed by the supplier, that fact may indicate that the company is an agent of
the supplier and, therefore, the company should record revenue net based on the
amount retained.
Kinergy, and subsequent to the share exchange transaction that occurred
on March 23, 2005, the Company (collectively, hereafter, the "Company"), always
took title to the ethanol that was shipped via rail and picked up by the
customer at the terminal. However, because of the nature of these direct rail
transactions, the Company typically did not have general inventory risk or
physical loss of inventory risk. The Company guaranteed that the ethanol it
delivered to its customers met certain specifications, and to this extent, the
Company determined the nature, type, characteristics, or specifications of the
products or services ordered by the customer; however, the Company did not
generally change the product, but it would have been required to do so to the
extent that the product had non-conforming specifications.
Jennifer Hardly, Esq.
October 31, 2005
Page 24
The Company did enter into fixed sales agreements with its customers
that stated that the customer will purchase and that the Company will supply to
the customer certain specified gallons per month for a six-month period at a
stated price. In addition, the Company and the customer negotiated the price in
their agreements. These agreements indicated that the Company, rather than the
supplier, is responsible for fulfillment of the product purchased by the
customer, which is a strong indicator for reporting revenues gross. In addition,
the contracts support that the Company has the ability to negotiate the price,
which would also indicate that revenues should be recorded gross.
Additionally, the Company was responsible for amounts due to its
suppliers whether or not the customer pays. This is further supported by letters
of credit that the Company had with two of its vendors that accounted for
significant amounts of the Company's purchases in 2002, 2003 and 2004,
specifically, 63% of the Company's purchases for 2002, 71% of the Company's
purchases for 2003 and 50% of the Company's purchases for 2004. These facts
indicate that the Company, rather than the supplier, assumes credit risk for the
amount billed to the customer, which is an indicator for reporting revenues
gross.
The Company used several suppliers for its sales to customers, and the
purchases from these suppliers are not always matched to the sale to a customer.
Often the ethanol is shipped from the supplier for several customers and is
commingled on a rail car. The fact that the Company used several suppliers and
can select the supplier that will provide the ethanol ordered by the customer is
an indicator for recording revenues gross.
Based on the above discussion and analysis, the indicators for
accounting for the revenues from the sales transactions net are not present
through the period ended June 30, 2005. Certain of the indicators for accounting
for the revenues gross are present while others are not. Although the Company
did not take title and thus did not have general inventory risk or physical loss
inventory risk, the Company was responsible for fulfillment of the ethanol
purchased by the customer, establishing the sales price, having multiple
suppliers and bearing credit risk.
The presence of the combination of these factors indicates that the
Company had the risks and rewards of a principal in the transaction and
therefore should record revenue gross for periods ending on or before June 30,
2005.
The Company believes that for periods ending after June 30, 2005, some
of the ethanol distribution contracts entered into by the Company are and will
sometimes be the same or very similar to those discussed above and will
therefore be of the type that support reporting revenue at gross based on an
application of the principles of EITF 99-19. Other contracts will have elements
and characteristics similar to the ethanol marketing agreement filed as an
exhibit to the Company's Current Report on Form 8-K for August 31, 2005. In the
case of each contract under which ethanol is sold and delivered by the Company
in periods ending after June 30, 2005, an analysis based on EITF 99-19 will be
made and a determination made as to which amounts of ethanol sold and delivered
should be recorded as revenue at gross or at net.
Jennifer Hardly, Esq.
October 31, 2005
Page 25
Certain Matters
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Please be advised that the company has included an additional 275,000
shares in the Registration Statement. Of these shares, 250,000 shares are issued
and outstanding and 25,000 shares underlie outstanding warrants to purchase
common stock of the Company. Both the issued and outstanding shares and the
warrants were outstanding prior to the time of the initial filing of the
Registration Statement on August 19, 2005. The Company has included appropriate
disclosure in the Registration Statement with respect to these shares and the
named selling security holders of these shares. An additional registration fee
has been paid in connection with the filing of the Registration Statement to
cover the registration of these additional shares.
Please be advised that we have included our form of legal opinion as
Exhibit 5.1 to the Registration Statement.
We trust that the foregoing is responsive to your comments in your
letter of comments dated September 20, 2005. If you have any questions, please
call me at (714) 641-3450 or my associate John T. Bradley, Esq. at (714)
662-4659.
Sincerely yours,
RUTAN & TUCKER, LLP
/s/ LARRY A. CERUTTI
Larry A. Cerutti
LAC:jtb
cc: Brigitte Lippmann, Esq. (w/encl.)
Neil M. Koehler (w/encl.)
Ryan W. Turner (w/encl.)
William G. Langley (w/encl.)