As
filed with
the Securities and Exchange Commission on November 30,
2007 Registration
No. 333-145939
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
AMENDMENT
NO. 2 TO
FORM
SB-2
REGISTRATION
STATEMENT
Under
The
Securities Act of 1933
____________________
CLEANTECH
BIOFUELS, INC.
(Name
of Small Business Issuer in Its Charter)
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Delaware
(State
or Other Jurisdiction of
Incorporation
or
Organization
)
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2869
(Primary
Standard Industrial
Classification
in Number)
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33-0754902
(IRS
Employer
Identification
No.)
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7320
Forsyth, Unit 102
St.
Louis, Missouri 63105
(314)
727-6253
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(Address
and Telephone Number
of
Principal Executive
Offices)
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___________________
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Edward
P. Hennessey, Jr.
Chief
Executive Officer and President
CleanTech
Biofuels, Inc.
7320
Forsyth, Unit 102
St.
Louis, Missouri 63105
(314)
727-6253
Fax:
(314) 721-3920
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|
(Name,
Address and Telephone Number
of
Agent for Service)
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___________________
Approximate
date of commencement of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If
any of
the securities being registered on this form are being offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box.
ý
If
this
form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration 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
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
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.
¨
___________________
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 or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to
said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with
the
Securities and Exchange Commission is effective. This preliminary prospectus
is
not an offer to sell nor does it seek an offer to buy these securities in
any
jurisdiction where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED NOVEMBER 30, 2007.
Prospectus
18,880,133
Shares
Common
Stock
This
prospectus covers the resale by selling stockholders named on page 47 of up
to
18,880,133 shares of our common stock, $0.001 par value per share, which
include:
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|
·
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11,013,333
shares of common stock underlying our Series A Convertible Debentures
issued in 2007 having a fixed conversion rate of $0.15 per share,
which
includes accrued interest through the stated maturity date of the
Series A
Convertible Debentures.
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|
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·
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7,866,800
shares of common stock issued upon the conversion of certain convertible
promissory notes made in 2003.
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This
offering is not being underwritten. These securities will be offered for sale
by
the selling stockholders identified in this prospectus in accordance with the
methods and terms described in the section of this prospectus entitled "Plan
of
Distribution." We will not receive any of the proceeds from the sale of these
shares. We will pay all expenses incurred in connection with the offering,
except for the brokerage expenses, fees, discounts and commissions, which will
all be paid by the selling stockholders. Our common stock is more fully
described in the section of this prospectus entitled "Description of
Securities."
The
prices at which the selling stockholders may sell the shares of common stock
that are part of this offering will be determined by the prevailing market
price
for the shares at the time the shares are sold, a price related to the
prevailing market price, at negotiated prices or prices determined, from time
to
time by the selling stockholders. See "Plan of Distribution."
Our
common stock is currently listed on the Pink Sheets under the symbol
“CLTH.” We expect the shares of our common stock will be quoted for
trading on the OTCBB. Until our shares are quoted for trading
on the OTCBB, selling stockholders will sell their shares at a fixed price
of
$0.15, and thereafter at prevailing market prices or in privately negotiated
transactions.
As
of November 27, 2007, the last closing price of our common stock was $0.45
per share. Prior to our 100:1 reverse stock split earlier this year,
however, our stock price was approximately $0.01.
AN
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING AT PAGE 4.
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
,
2007.
TABLE
OF CONTENTS
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Page
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You
may rely only on the information contained in this prospectus. We and
the selling stockholders have not authorized anyone to provide information
different from that contained in this prospectus. When you make a
decision about whether to invest in our common stock, you should not rely upon
any information other than the information in this
prospectus. Neither the delivery of this prospectus nor the sale of
common stock means that the information contained in this prospectus is correct
after the date of this prospectus. This prospectus is not an offer to
sell or solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer of solicitation is
unlawful.
This
summary highlights information contained elsewhere in this prospectus. Because
it is a summary, it may not contain all the information that is important to
you
or that you should consider before investing in our common stock. Before making
an investment decision, you should read the entire prospectus carefully,
including the section entitled “Risk Factors” and our financial statements and
the related notes included elsewhere in this prospectus.
All
references to “we,” “us,” “our,” or “our company” in this prospectus refer to
CleanTech Biofuels, Inc. and its consolidated direct and indirect subsidiaries.
All share amounts assume full conversion of our Series A Convertible Debentures
and the conversion of interest through the maturity date of those
debentures.
Our
Company
Overview
We
are a
development stage company engaged in the development of “green” technologies in
anticipation of building, owning and operating facilities to convert municipal
solid waste, which we sometimes refer to as MSW, and other waste into ethanol
and other combustible fuels. We were originally incorporated in 1996
as Long Road Entertainment, Inc. to operate as a holding company for businesses
in the theater, motion picture and entertainment industries. We
ceased conducting business by the end of 2005 and were dormant until the fall
of
2006, at which time our founder and controlling stockholder decided to pursue
the sale of the company. In furtherance of a possible transaction, we
were renamed Alternative Ethanol Technologies, Inc. in January
2007.
On
March
27, 2007, we entered into an Agreement and Plan of Merger and Reorganization
pursuant to which we agreed to acquire SRS Energy, Inc., a Delaware corporation.
The merger agreement contemplated SRS Acquisition Sub, our wholly-owned
subsidiary, merging into SRS Energy, with SRS Energy as the surviving
corporation. We consummated the merger on May 31, 2007, which resulted in
SRS
Energy becoming our wholly-owned subsidiary. In connection with the merger,
the
security holders of SRS Energy surrendered all of the issued and outstanding
capital stock of SRS Energy and received in the aggregate and on a fully-diluted
basis 40,547,275 shares of our common stock, par value $0.001 per share and
Series A Convertible Debentures convertible into up to 11,013,333 shares
of our
common stock. Our security holders immediately prior to the merger retained
in
the aggregate and on a fully-diluted, as if converted basis, 10,119,900 shares
of our common stock. On August 2, 2007, we changed our name to
CleanTech Biofuels, Inc. At this time, we do not anticipate engaging
in any other reverse merger in the next twelve months.
Our
primary non-cash assets are two limited exclusive licenses to technology held
by
SRS Energy that we are developing. Our principal focus is to test the
commercial viability of these technologies, which we believe when put together,
will convert cellulosic feedstocks, including municipal solid waste, into
ethanol and other combustible sources of energy.
One
of
the technologies, which we refer to as the “Eley technology” after its inventor
Dr. Michael Eley, involves the use of a rotating pressure vessel or autoclave,
to combine heat, pressure and agitation to separate municipal solid waste into
its component parts, including cellulosic material. The cellulosic
material is then cleaned in preparation of being used as a feedstock in the
production of ethanol. The other technology, which we refer to as the
“Brelsford technology,” is an acid hydrolysis technology that converts
cellulosic material into fermentable sugars. The sugars are then
fermented and distilled to produce fuel grade ethanol.
Although
not independently tested, the Eley technology has been used by an operator
to
generate cellulosic material on a commercial scale for the production of
paper. The Brelsford process, however, has only been used in small
scale production tests in a unit designed by Brelsford and has not been
independently tested on how the process will perform or operate in large scale
commercial applications. Accordingly, we have engaged Merrick &
Company, an engineering firm located in Denver, Colorado, to evaluate the
commercial viability of the Brelsford technology’s ability to process cellulosic
material generated by the Eley process and other sources such as wood waste,
switch grass, and corn stover into fermentable sugars.
As
part
of that testing process, Merrick will construct a pilot plant test unit, which
is a small-scale replica of a fully operating plant. With Merrick’s
consultation, we expect to use the pilot plant to test the technologies and
demonstrate and prove the Brelsford
process, and gather
data needed to complete the engineering, design, and construction of a
full-scale commercial demonstration plant that implements both the Eley and
Brelsford technologies.
As
a
result of a private placement conducted by SRS Energy in April 2007, we have
obtained $1.4 million of funding consisting of $950,000 in cash and $450,000
aggregate principal amount of promissory notes that are secured by $450,000
of
certificates of deposit. We anticipate these proceeds will fund the testing
and
the construction of the pilot plant test unit, and will provide initial working
capital to fund our organizational activities. If, after Merrick
completes its testing and validation, we conclude that the technology is
commercially viable, we intend to raise additional capital and begin
constructing a full-scale commercial demonstration plant that we believe will
convert waste to ethanol and other fuels.
Although
we expect Merrick’s testing will prove our technology, we have no operating
history and may not be capable of engaging in the commercial production of
ethanol for a significant period of time, if at all. We have not
earned any revenues to date and expect that our current capital and other
existing resources will be sufficient only to fund preliminary testing of our
technology and to provide a limited amount of working capital.
Recent
Developments
On
February 21, 2007, we effected a 100 to 1 reverse stock split, which reduced
our
issued and outstanding common stock at that time from 75,310,000 shares to
753,100 shares.
On
April
16, 2007, SRS Energy completed a private placement of $1.4 million aggregate
principal amount of Series A Convertible Debentures. Interest accrues
on the principal amount of the debentures at the rate of six percent per year
and the debentures mature on April 16, 2010. The debentures are not
secured by any of our assets. We assumed the debentures as part of
our acquisition of SRS Energy and the debentures are now convertible into up
to
11,013,333 shares of our common stock at a fixed conversion rate of $0.15 per
share, subject to customary antidilution provisions. SRS Energy received gross
proceeds of $950,000 in cash and $450,000 aggregate principal amount of
promissory notes secured by certificates of deposit held in escrow in the
aggregate amount of $450,000. After deducting transaction costs, the net
proceeds from this private placement were approximately $1,300,000.
Under
a
registration rights agreement entered into in connection with the issuance
of
the Series A Convertible Debentures, we are required to register the shares
issuable upon conversion of the debentures on or before December 23,
2007. Pursuant to the terms of the debentures, if we do not complete
the registration of the shares by December 23, 2007, the debenture holders
are
entitled to a penalty equal to 1% of the number of shares issuable to them
on
conversion of the debentures for each month that the registration is
delayed.
Pursuant
to the merger agreement with SRS Energy, we are also required to register
7,866,800 shares of common stock issued upon the conversion of two convertible
promissory notes issued in 2003 by our predecessor, Long Road
Entertainment. The notes evidenced loans plus accrued interest in the
aggregate amount of $78,668 to Long Road Entertainment. The notes
were acquired by five accredited investors in April, 2007, and were converted
into common stock in full prior to the merger.
Corporate
Information
We
were
organized as a Delaware corporation in 1996. Our principal executive
offices are currently located at 7320 Forsyth, Unit 102, St. Louis, Missouri
63105, and our telephone number is (314) 727-6253. Our website, which
is currently under construction, is
www.cleantechbiofuels.net. Information contained on, or that can be
accessed through, our website is not a part of this prospectus.
Offering
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Common
stock offered by
selling
stockholders: (1)
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·
common
stockholders
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7,866,800
shares
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·
convertible
debenture holders
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11,013,333
shares
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Common
stock to be outstanding after this
offering:
(1)(2)
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64,204,003
shares
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Common
stock currently outstanding held by
non-affiliates:
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27,441,490
shares
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Use
of
proceeds
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We
will not receive any of the proceeds from sales of common stock
by the
selling stockholders in the offering.
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Risk
factors
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See
“Risk Factors” beginning on page 4 and other information included in this
prospectus for a discussion of factors you should carefully consider
before deciding to invest in our common stock.
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Pink
Sheet
symbol
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“CLTH”
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___________________________________
(1) Assumes
the full conversion of the convertible debentures and includes interest through
the applicable maturity date.
(2) Includes
600,000 shares of restricted stock granted to our directors on August 21, 2007,
and assumes the full exercise of our two immediately exercisable and outstanding
warrants.
The
purchase of our common stock involves investment risks. You should consider
the
following risks carefully before making a decision to invest in our common
stock. These risks may adversely affect our business, financial condition and
operating results. As a result, the trading price of our common stock could
decline, and you could lose part or all of your investment.
Risks
Related to Our Business
We
have no operating experience and may not be able to implement our business
plan.
As
an
early stage company, there is no material operating history upon which to
evaluate our business and prospects. We do not expect to commence any
significant operations until we receive testing information from Merrick &
Company regarding our technologies that we consider favorable. As a result,
we
will sustain losses without corresponding revenues, which will result in the
Company incurring a net operating loss that will increase continuously for
the
foreseeable future. We cannot provide any assurance that we will be profitable
in any given period or at all.
In
addition, we currently have only three full-time employees, our Chief Executive
Officer, General Counsel and Chief Financial Officer, each of whom spend at
least 40 hours a week on our business. Collectively, they have less
experience in operating an alternative energy company compared to many of our
competitors. Moreover, given our newness and the rapid changes in the
industry, we face challenges in planning and forecasting accurately. Our lack
of
expertise and resources may have a negative impact on our ability to implement
our strategic plans, which may result in our inability to commence meaningful
operations, achieve profitable operations or otherwise succeed in other aspects
of our business plan.
We
need to obtain significant additional capital to complete the development of
our
technologies, and the failure to secure additional capital will prevent us
from
commercializing our technology and executing our plan of
operation.
Based
on
our current proposed plans and assumptions, we estimate we have sufficient
cash
to operate for the next nine to 12 months. We estimate that the cost
of completing the testing of our technology, constructing a pilot plant unit
and
performing our other anticipated activities during the testing phase will be
$450,000 to $550,000. Assuming that we deem the test results to be
favorable, we intend to continue our technology development effort and construct
a full-scale commercial demonstration plant. Without the test
results, we are not able to accurately estimate the costs of a full-scale
commercial demonstration plant although our current belief is that the costs
would be at least $55 million and up to $90 million. In any case, the
cost will be significant and well in excess of the amount of cash that we
currently have available to us. Accordingly, in order to fund the development
and construction of a full-scale commercial demonstration plant, we will be
required to:
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·
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obtain
additional debt or equity
financing,
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·
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secure
significant government grants,
and/or
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·
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enter
into a strategic alliance with a larger energy company to provide
funding.
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The amount of funding needed to complete the development of our technology will be very substantial and may be in excess of the amount of capital we are able to raise. In addition, we have not identified the sources for the additional financing that we will require, and we do not have commitments from any third parties to provide this financing. Our ability to obtain additional funding will be subject to a number of factors, including market conditions, the results and quality of the testing being conducted by Merrick & Company and investor sentiment. These factors may make the timing, amount, terms and conditions of additional funding unattractive. For these reasons, sufficient funding, whether on terms acceptable to us or not, may not be available. If we are unable to obtain sufficient financing on a timely basis, the development of our technology, facilities and products could be delayed and we could be forced to limit or terminate our operations altogether. Further, any additional funding that we obtain in the form of equity will reduce the percentage ownership held by our existing security holders.
Our
Eley technology may have design and engineering issues that may increase the
costs of using the technology.
The
Eley
technology involves the use of a rotating pressure vessel, or autoclave, to
combine heat, pressure and agitation to convert MSW into cellulosic material
that can then be cleaned to be used to produce ethanol. Although
technologies that involve the separation and processing of MSW using large-scale
autoclaves, such as our Eley technology, have not been widely adapted in
commercial applications, World Waste Technologies has used the Eley process
to
generate cellulosic material from MSW for the production of
paper. However, World Waste Technologies initially announced design
and engineering issues with its autoclave related to the size of the motors
required to operate the autoclave in commercial conditions. On April
13, 2007, World Waste filed a lawsuit against Bio-Products International, the
licensor of the Eley technology, in the Superior Court of the State of
California alleging, among other things, breach of contract and negligence
with
respect to the construction of the autoclaves it purchased from Bio-Products
International. Subsequent to announcing the initial design problems,
Dr. Eley redesigned the autoclaves being used by World Waste Technologies by
changing the size of the motors that power the process. Based on the
redesign, Dr. Eley and World Waste Technologies have both indicated that they
believe that the initial design issues relating to the separation of cellulosic
material encountered have been resolved. In addition, the lawsuit was
recently dismissed.
Although
we believe the redesigned autoclaves will operate properly on a commercial
scale, we may encounter design and engineering problems similar to those
encountered by World Waste Technologies and other new problems when we try
to
implement this technology on a large-scale for ethanol production. Any design,
engineering or other issue may cause delays, increase production and development
costs and require us to shut down our operation.
Our
Brelsford technology is commercially unproven and may not be viable on a
full-scale basis.
The
Brelsford technology is a two-step process involving acid hydrolysis, which
is
the conversion of cellulose into sugars, and the fermentation of these sugars
into ethanol. Production of ethanol by fermenting sugars and starches
derived from agricultural products such as corn, sugar cane and sugar beets
is a
mature technology that is widely-used in the production of
ethanol. Fermentation, however, can not be used to produce ethanol
from cellulosic material. In order to convert cellulose into ethanol,
the cellulose must first be processed through an acid hydrolysis or enzymatic
action to convert it into fermentable sugars. Neither acid hydrolysis
nor enzymatic processes, however, have been proven to be commercially viable
for
the production of ethanol.
Our
Brelsford technology, which uses an acid hydrolysis process, successfully
generated fermentable sugars on a small-scale with limited feedstock, but it
has
not been demonstrated at commercial scale. In particular, the
Brelsford technology has never been attempted under the conditions or at the
volumes that will be required to be profitable and we cannot predict all of
the
difficulties that may arise. It is possible that the technologies,
when used, may require further research, development, design and testing prior
to larger-scale commercialization. Accordingly, we may experience
delays and increased production or development costs when attempting to
commercialize the technology. We may also determine that the
technology cannot be performed successfully on a commercial basis or will not
be
profitable.
We
may not have sufficient legal protection of our technologies and other
proprietary rights, which could result in the loss of some or all of our rights
or the use of our intellectual properties by our
competitors.
Our
success depends substantially on our ability to use the Eley and Brelsford
technologies and to keep our licenses in full force, and for our technology
licensors to maintain their patents, maintain trade secrecy and not infringe
the
proprietary rights of third parties. We cannot be sure that the
patents of others will not have an adverse effect on our ability to conduct
our
business. We have relied substantially on the patent legal work that
was performed for our licensors with respect to these patents, and have not
independently verified the validity or any other aspect of the patents or patent
applications covering our technology and anticipated products with our own
patent counsel. Further, we cannot be sure that others will not independently
develop similar or superior technologies, duplicate elements of our technologies
or design around them. Even if we are able to obtain or license patent
protection for our process or products, there is no guarantee that the coverage
of these patents will be sufficiently broad to protect us from competitors
or
that we will be able to enforce our patents against potential infringers. Patent
litigation is expensive, and we may not be able to afford the costs. Third
parties could also assert that our process or products infringe patents or
other
proprietary rights held by them.
It
is
possible that we may need to acquire other licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. We
cannot be sure that any license would be made available to us on acceptable
terms, if at all, or that we would prevail in any such contest. In
addition, we could incur substantial costs in defending ourselves in suits
brought against us for alleged infringement of another party’s patents or in
bringing patent infringement suits against other parties based on our licensed
patents.
We
also
rely on trade secrets, proprietary know-how and technology that we will seek
to
protect, in part, by confidentiality agreements with our prospective joint
venture partners, employees and consultants. We cannot be sure that these
agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets and proprietary know-how will not otherwise
become known or be independently discovered by others.
We
could lose our exclusive rights to licensed technology
.
Bio-Products,
Inc. sub-licenses the Eley technology to us pursuant to a license originally
granted to Bio-Products by the University of Alabama Huntsville, which gives
Bio-Products the exclusive right to use and sub-license the Eley
technology. The university’s rights as the owner and original
licensor of the Eley technology under the agreement were acquired by World
Waste
Technologies, which also licenses the Eley technology from Bio-Products for
uses
other than the production of ethanol. As a result, World Waste
Technologies is now the licensor of the Eley technology to
Bio-Products. To maintain exclusivity under its license agreement,
Bio-Products must make certain payments and fulfill certain
obligations. World Waste Technologies has publicly stated its desire
to acquire the rights to use the Eley technology for ethanol
production. Because World Waste Technologies is now the licensor of
the Eley technology to
Bio-Products, any breach of or other default under the
license
agreement by Bio-Products could adversely affect the rights of Bio-Products,
and
our rights indirectly, to the Eley technology.
Pursuant
to our license for the Brelsford technology, we could lose our exclusive rights
if we fail to timely make payments required under the license
agreement.
We
will be dependent on our ability to negotiate favorable feedstock supply and
ethanol off-take agreements.
In
addition to proving and commercializing our technology, the viability of our
business plan will depend on our ability to develop long-term supply
relationships with municipalities, municipal waste haulers or operators of
material recovery facilities, also known as MRFs, and landfills to provide
us
with the necessary waste streams on a long-term basis. We also will
depend on these haulers, operators and facilities to take residual waste streams
from our plants and to deliver or accept these streams for land
filling. We currently have no such relationships or
agreements. If we are unable to create these relationships and
receive supply agreements on terms favorable to us we may not be able to
implement our business plan and achieve profitability.
We
may not be able to attract and retain management and other personnel we need
to
succeed.
We
currently have only three full-time employees, our Chief Executive Officer,
General Counsel and Chief Financial Officer, who each spend at least 40 hours
a
week on our business. As a result, our success depends on our ability
to recruit senior management and other key technology development, construction
and operations employees. We cannot be certain that we will be able to attract,
retain and motivate such employees. The inability to hire and retain one or
more
of these employees could cause delays or prevent us from implementing our
business strategy. The majority of our new hires will be engineers,
project managers and operations personnel. There is intense competition from
other companies and research and academic institutions for qualified personnel
in the areas of our activities. If we cannot attract and retain, on acceptable
terms, the qualified personnel necessary for the development of our business,
we
may not be able to commence operations or grow at an acceptable
pace.
We
will incur increased costs as a result of being a public
company.
As
an
operating public company, we will incur significant legal, accounting and other
expenses we did not incur as a private company and our corporate governance
and
financial reporting activities will become more time-consuming. The
Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the
Securities and Exchange Commission, have required changes in corporate
governance practices of public companies. For example, as a result of becoming
an operating public company, we are required to have independent directors,
create board committees and approve and adopt polices regarding internal
controls and disclosure controls and procedures, including the preparation
of
reports on internal control over financial reporting. In addition, we will
incur
significant additional costs associated with our public company reporting
requirements. We also expect these rules and regulations to make it more
difficult and more expensive for us to obtain director and officer liability
insurance and we may be required to accept reduced policy limits and coverage
or
incur substantially higher costs to obtain the same or similar coverage. As
a
result, it may be more difficult for us to attract and retain qualified persons
to serve on our board of directors or as executive officers.
Our
failure to adequately adhere to the new corporate governance practices or the
failure or circumvention of our controls and procedures could seriously harm
our
business.
Compliance
with the new and evolving corporate governance practices will require a
significant diversion of management time and attention, particularly with regard
to disclosure controls and procedures and internal control over financial
reporting. Although we have reviewed our disclosure and internal controls and
procedures in order to determine whether they are effective, our controls and
procedures may not be able to prevent errors or frauds in the future. Faulty
judgments, simple errors or mistakes, or the failure of our personnel to adhere
to established controls and procedures may make it difficult for us to ensure
that the objectives of the control system are met. A failure of our controls
and
procedures to detect other than inconsequential errors or fraud could seriously
harm our business and results of operations.
Our
senior management’s lack of experience managing a publicly traded company will
divert management’s attention from operations and harm our
business.
Our
management team has limited experience managing a publicly traded company and
complying with federal securities laws, including compliance with recently
adopted disclosure requirements on a timely basis. Our management is required
to
design and implement appropriate programs and policies in response to increased
legal, regulatory compliance and reporting requirements, and any failure to
do
so could lead to the imposition of fines and penalties and harm our
business.
Risks
Related to our Industry
As
a new small company, we will be at a competitive disadvantage to most of our
competitors, which include larger, established companies that have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources than us.
The
alternative energy industry in the United States is highly competitive and
continually evolving as participants strive to distinguish themselves and
compete in the larger transportation fuel industry. Competition is likely to
continue to increase with the emergence and commercialization of new alternative
energy technologies. If we are not successful in constructing systems that
generate competitively-priced ethanol, we will not be able to compete with
other
energy technologies. Moreover, the success of alternative energy
generation technologies may cause larger, conventional energy companies with
substantial financial resources to enter the alternative energy industry. These
companies, due to their greater capital resources and substantial technical
expertise, may be better positioned to develop and exploit new technologies.
Our
inability to respond effectively to our competition could result in our
inability to commence meaningful operations, achieve profitable operations
or
otherwise succeed in other aspects of our business plan.
Our
success is dependent on continued high transportation fuel
prices.
Prices
for fuels, generally, and ethanol, specifically, can vary significantly over
time and decreases in price levels could adversely affect our profitability
and
viability. Most importantly, the price of ethanol is closely related to the
price of petroleum fuels. Any lowering of wholesale gasoline prices will likely
also lead to lower prices for ethanol and will adversely affect our operating
results. We cannot be sure that we will be able to sell ethanol fuels at a
price
that will recover our full costs.
New ethanol plants under construction or decreases in the demand for ethanol may result in excess U.S. production capacity .
According
to the Renewable Fuels Association, domestic ethanol production capacity has
increased from 1.9 billion gallons per year at the start of 2001 to an estimated
5.4 billion gallons per year as of the end of 2006. The Association
estimates that, as of the end of 2006, 109 ethanol refineries were in production
with 57 facilities beginning construction and eight under expansion, totaling
approximately 4.8 billion gallons per year of additional production
capacity. Excess capacity in the ethanol industry would decrease
demand for our products and make it less likely that we will generate sufficient
cash flows or become profitable. We also anticipate excess capacity
could result in the reduction of the market price of ethanol to a level that
is
inadequate for us to generate sufficient cash flow in excess of our
costs.
Waste
processing and energy production is subject to inherent operational accidents
and disasters from which we may not be able to recover, especially if we have
only one or a very small number of facilities.
Our
anticipated operations would be subject to significant interruption if any
of
our proposed facilities experience a major accident or are damaged by severe
weather or other natural disasters. In particular, processing waste and
producing ethanol is subject to various inherent operational hazards, such
as
equipment failures, fires, explosions, abnormal pressures, blowouts,
transportation accidents and natural disasters. Some of these operational
hazards may cause personal injury or loss of life, severe damage to or
destruction of property and equipment or environmental damage, and may result
in
suspension of operations and the imposition of civil or criminal penalties.
Currently we do not have any insurance to cover those risks. We
intend to seek various insurance coverage appropriate for our business before
we
commence significant operations. The insurance that we plan to
obtain, if obtained, may not be adequate to cover fully the potential
operational hazards described above.
Alternative
technologies could make our business obsolete.
Even
if
our technology currently proves to be commercially feasible, there is extensive
research and development being conducted in cellulosic ethanol production and
other alternative energy sources. Technological developments in any
of a large number of competing processes and technologies could make our
technology obsolete and we have little ability to manage that risk.
Risks
Related to Government Regulation and Subsidization
Federal
tax incentives that benefit ethanol producers could expire and other federal
and
state programs designed to assist ethanol producers may
end.
The
cost
of producing ethanol is made significantly more competitive with regular
gasoline by federal tax incentives known as the blenders’ credit, which is
currently $0.51 per gallon and is scheduled to expire in 2010. The blenders’
credits may not be renewed in 2010 or may be renewed on terms that are less
favorable than they are today. In addition, the blenders’ credits, as well as
other federal and state programs benefiting ethanol producers, generally are
subject to U.S. government obligations under international trade agreements,
including those under the World Trade Organization Agreement on Subsidies and
Countervailing Measures, and might be the subject of challenges, in whole or
in
part. The elimination or significant reduction in the blenders’ credit or other
programs would decrease the likelihood that we will become profitable and weaken
our overall financial position.
Tariffs
imposed on imported ethanol could be reduced or eliminated, which would increase
competition from foreign producers.
Most
ethanol imported into the United States is subject to a $0.54 per gallon tariff
that was designed to offset the $0.51 per gallon blender’s credit available
under the federal excise tax incentive program for refineries that blend ethanol
in their fuel. However, a special exemption from the tariff exists for ethanol
imported from 24 countries in Central America and the Caribbean
Islands. Total current ethanol production from these countries is
only 7 percent of U.S. production per year, but, imports from the exempted
countries may increase as a result of new plants that are now under development.
Because production costs for ethanol in these countries are estimated to be
significantly less than they are in the United States, the duty-free import
of
ethanol through the countries exempted from the tariff may reduce the demand
for
domestic ethanol and the price at which we sell our ethanol.
Further,
in May 2006, bills were introduced in both the U.S. House of Representatives
and
U.S. Senate to repeal the $0.54 per gallon tariff, but they did not pass. The
current tariff is scheduled to expire in December 2007. We do not know the
extent to which the volume of imports would increase or the effect on U.S.
prices for ethanol if the tariff is not renewed beyond its current expiration
in
December 2007. Any changes in the tariff or exemption from the tariff would
likely increase competition from foreign producers, which could decrease the
demand for and lower the prices for our products.
Enforcement
of energy policy regulations could change.
Energy
policy in the United States is evolving rapidly. Within the past
three years, the United States Congress has passed two separate major pieces
of
legislation addressing energy policy and related regulations and is currently
considering a third new piece of legislation addressing energy
policy. We anticipate that energy policy will continue to be a very
important legislative priority on a national, state and local
level.
Currently,
the ethanol industry is supported by several important rules, regulations,
and
credits at the federal level. These include the $0.51 blender’s
credit, the $0.54 tariff on imported ethanol, restrictions on the use of MTBE
as
a gasoline additive, and targeted production levels for United States’ ethanol
production. Additionally, many states have adopted separate
restrictions on the use of MTBE as a gasoline additive and adopted independent
incentives to spur development of alternative energy resources.
As
energy
policy continues to evolve, the existing rules and regulations that benefit
the
ethanol industry may change. For example, certain Senators attempted
to amend a provision to the Senate’s Energy bill in 2006 and again in 2007 that
would limit the liability of manufacturers of MTBE for damages caused by using
it as a gasoline additive. Such a change would benefit the producers
of MTBE to the detriment of the ethanol industry.
It
is
difficult, if not impossible, to predict changes in energy policy that could
occur on a federal, state or local level in the future. The
elimination of or a change in any of the current rules, regulations or credits
that support the ethanol industry could create a regulatory environment that
prevents us from developing a commercially viable or profitable
business.
Costs of compliance may increase with changing environmental and operational safety regulations.
As
we
pursue our business plan, we will become subject to various federal, state
and
local environmental laws and regulations, including those relating to the
discharge of materials into the air, water and ground, the generation, storage,
handling, use, transportation and disposal of hazardous materials, and the
health and safety of our employees. In addition, some of these laws and
regulations require our contemplated facilities to operate under permits that
are subject to renewal or modification. These laws, regulations and permits
can
often require expensive pollution control equipment or operational changes
to
limit actual or potential impacts to the environment. A violation of these
laws
and regulations or permit conditions can result in substantial fines, natural
resource damages, criminal sanctions, permit revocations and/or facility
shutdowns.
Furthermore,
upon implementing our plan, we may become liable for the investigation and
cleanup of environmental contamination at any property that we would own or
operate and at off-site locations where we may arrange for the disposal of
hazardous substances. If these substances have been or are disposed of or
released at sites that undergo investigation and/or remediation by regulatory
agencies, we may be responsible under CERCLA, or other environmental laws for
all or part of the costs of investigation and/or remediation, and for damages
to
natural resources. We may also be subject to related claims by private parties
alleging property damage and personal injury due to exposure to hazardous or
other materials at or from those properties. Some of these matters may require
expending significant amounts for investigation, cleanup, or other
costs.
In
addition, new laws, new interpretations of existing laws, increased governmental
enforcement of environmental laws, or other developments could require us to
make additional significant expenditures. Continued government and public
emphasis on environmental issues can be expected to result in increased future
investments for environmental controls at ethanol production facilities. Present
and future environmental laws and regulations applicable to MSW processing
and
ethanol production, more vigorous enforcement policies and discovery of
currently unknown conditions may require substantial expenditures that could
have a material adverse effect on the results of our contemplated operations
and
financial position.
The
hazards and risks associated with processing MSW and producing and transporting
ethanol (such as fires, natural disasters, explosions, and abnormal pressures
and blowouts) may also result in personal injury claims or damage to property
and third parties. As protection against operating hazards, we intend to
maintain insurance coverage against some, but not all, potential losses. We
could, however, sustain losses for uninsurable or uninsured risks, or in amounts
in excess of existing insurance coverage. Events that result in significant
personal injury or damage to our property or third parties or other losses
that
are not fully covered by insurance could have a material adverse effect on
the
results of our contemplated operations and financial position.
Risks
related to our Common Stock and Stock Price Fluctuation
Our
stock is thinly traded, so you may be unable to sell at or near ask prices
or at
all.
The
shares of our common stock are traded on the Pink Sheets. We intend
to have our common stock quoted for trading on the OTCBB. Shares of
our common stock are thinly-traded, meaning that the number of persons
interested in purchasing our common shares at or near ask prices at any given
time may be relatively small or non-existent. This situation is attributable
to
a number of factors, including:
|
·
|
we
only recently re-commenced
operations;
|
|
·
|
we
are a small company that is relatively unknown to stock analysts,
stock
brokers, institutional investors and others in the investment community
that generate or influence sales volume;
and
|
|
·
|
stock
analysts, stock brokers and institutional investors may be risk-averse
and
be reluctant to follow an unproven, early stage company such as ours
or
purchase or recommend the purchase of our shares until such time
as we
became more seasoned and viable.
|
As
a
consequence, our stock price may not reflect an actual or perceived
value. Also, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer that has a large and steady volume of trading activity that
will
generally support continuous sales without an adverse effect on share price.
A
broader or more active public trading market for our common shares may not
develop or if developed, may not be sustained. Due to these conditions, you
may
not be able to sell your shares at or near ask prices or at all if you need
money or otherwise desire to liquidate your shares.
Even
if an active trading market should develop, the price of our common stock is
likely to be highly volatile and subject to wide fluctuations, and stockholders
may be unable to resell at a satisfactory price.
Even
if
an active trading market develops, the market price for our common stock may
be
highly volatile and could be subject to wide fluctuations after this offering.
We believe that newer alternative energy companies and companies that effect
reverse mergers, such as our company, are particularly susceptible to
speculative trading that may not be based on the actual performance of the
company, which increases the risk of price volatility in a common stock. In
addition, the price of the shares of our common stock could decline
significantly if our future operating results fail to meet or exceed the
expectations of market analysts and investors.
Some
of
the factors that could affect the volatility of our share price
include:
|
·
|
significant
sales of our common stock or other securities in the open
market;
|
|
·
|
speculation
in the press or investment
community;
|
|
·
|
actual
or anticipated variations in quarterly operating
results;
|
|
·
|
changes
in earnings estimates;
|
|
·
|
publication
(or lack of publication) of research reports about
us;
|
|
·
|
increases
in market interest rates, which may increase our cost of
capital;
|
|
·
|
changes
in applicable laws or regulations, court rulings, and other legal
actions;
|
|
·
|
changes
in market valuations of similar
companies;
|
|
·
|
additions
or departures of key personnel;
|
|
·
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actions
by our stockholders; and
|
|
·
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general
market and economic conditions.
|
Shares
of ethanol companies that trade in the public markets may be
overvalued.
Recently,
a number of ethanol companies have entered the public markets. As a result
of
the continuing influx of the shares of these companies and the levels at which
they trade in comparison to the current earnings of these companies, the
volatility of the price of our shares may be greater than in other market
segments. Moreover, adverse movement in the market price of shares of other
ethanol producers may adversely affect the value of our shares for reasons
related or unrelated to our contemplated business. The presence of these
competitive share offerings may also make it more difficult for our stockholders
to resell their shares in the public markets.
Trading
in our common stock is subject to special sales practices and may be difficult
to sell.
Our
common stock is subject to the Securities and Exchange Commission’s “penny
stock” rule, which imposes special sales practice requirements upon
broker-dealers who sell such securities to persons other than established
customers or accredited investors. Penny stocks are generally defined to be
an
equity security that has a market price of less than $5.00 per
share. For purposes of the rule, the phrase “accredited investors”
means, in general terms, institutions with assets in excess of $5,000,000,
or
individuals having a net worth in excess of $1,000,000 or having an annual
income that exceeds $200,000 (or that, when combined with a spouse’s income,
exceeds $300,000). For transactions covered by the rule, the broker-dealer
must
make a special suitability determination for the purchaser and receive the
purchaser’s written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell our
securities and also may affect the ability of our shareholders in this offering
to sell their securities in any market that might develop.
Stockholders
should be aware that, according to Securities and Exchange Commission Release
No. 34-29093, the market for penny stocks has suffered from patterns of fraud
and abuse. Such patterns include:
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·
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control
of the market for the security by one or a few broker-dealers that
are
often related to the promoter or
issuer;
|
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·
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manipulation
of prices through prearranged matching of purchases and sales and
false
and misleading press releases;
|
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·
|
“boiler
room” practices involving high-pressure sales tactics and unrealistic
price projections by inexperienced sales
persons;
|
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·
|
excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
|
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·
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the
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with
the
resulting inevitable collapse of those prices and with consequent
investor
losses.
|
Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our common
stock.
Substantial
future sales of shares of our common stock in the public market could cause
our
stock price to fall.
If
our
stockholders sell substantial amounts of our common stock, or the public market
perceives that stockholders might sell substantial amounts of our common stock,
the market price of our common stock could decline significantly. Such sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that our management deems
appropriate. We currently have outstanding 48,743,680 shares of common stock.
We
also have outstanding Series A Convertible Debentures convertible into up to
11,013,333 shares of our common stock (including shares issuable for interest
due under such Debentures) and two outstanding warrants, each immediately
exercisable and representing the right to purchase 1,923,495 shares of our
common stock. An additional 7,000,000 shares of our common stock have
been reserved for issuance pursuant to our 2007 Stock Option Plan.
Potential
issuance of additional common and preferred stock could dilute existing
stockholders.
We
are
authorized to issue up to 240,000,000 shares of common stock. To the extent
of
such authorization, our board of directors has the ability, without seeking
stockholder approval, to issue additional shares of common stock in the future
for such consideration as the board of directors may consider sufficient. We
are
also authorized to issue up to one million shares of preferred stock, the rights
and preferences of which may be designated in series by the board of directors.
Such designation of new series of preferred stock may be made without
stockholder approval, and could create additional securities which would have
dividend and liquidation preferences over the common stock offered hereby.
Preferred stockholders could adversely affect the rights of holders of common
stock by:
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·
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exercising
voting, redemption and conversion rights to the detriment of the
holders
of common stock;
|
|
·
|
receiving
preferences over the holders of common stock regarding or surplus
funds in
the event of our dissolution or
liquidation;
|
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·
|
delaying,
deferring or preventing a change in control of our company;
and
|
|
·
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discouraging
bids for our common stock.
|
Additionally,
our Series A Convertible Debentures and some of our outstanding options and
warrants to purchase common stock have anti-dilution protection. This means
that
if we issue securities for a price less than the price at which these securities
are convertible or exercisable for shares of common stock, the securities will
become eligible to acquire more shares of common stock at a lower price, which
will dilute the ownership of our common stockholders.
Finally,
we are a party to registration rights agreements with some of our stockholders.
The registration rights agreements provide, among other things, that we register
shares of our common stock held by those stockholders within a specified period
of time and that we keep the registration statement associated with those shares
continuously effective. If we are unable to comply with these provisions of
the
registration rights agreements, we may be obligated to pay those stockholders
liquidated damages in the form of warrants to purchase additional common
stock.
In
all
the situations described above, the issuance of additional common stock in
the
future will reduce the proportionate ownership and voting power of our current
stockholders.
This
prospectus contains forward-looking statements. All statements, other than
statements of historical facts, included herein regarding our strategy, future
operations, financial position, future revenues, projected costs, prospects,
plans, objectives and other future events and circumstances are forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as “anticipates,” “believes,” “estimates,” “expects,”
“intends,” “may,” “plans,” “projects,” “would,” “should” and similar expressions
or negative expressions of these terms. Such statements are only predictions
and, accordingly, are subject to substantial risks, uncertainties and
assumptions.
Actual
results or events could differ materially from the plans, intentions and
expectations disclosed in the forward-looking statements we make. We caution
you
that any forward-looking statement reflects only our belief at the time the
statement is made. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee our future
results, levels of activity, performance or achievements. We have included
in
this prospectus important factors that we believe could cause actual results
or
events to differ materially from the forward-looking statements that we make.
These factors include:
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the
commercial viability of our
technologies,
|
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·
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our
ability to maintain and enforce our exclusive rights to our
technologies,
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our
ability to raise additional capital on favorable
terms,
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the
demand for and production costs of
ethanol,
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competition
from other alternative energy technologies,
and
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·
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the
other factors described in the section titled “Risk Factors” in this
prospectus.
|
However,
management cannot predict all factors, or combination of factors, that may
cause
actual results to differ materially from those projected in any forward-looking
statements. In addition, unless required by law, we undertake no obligation
to
publicly update or revise any forward-looking statements to reflect events
or
developments after the date of this prospectus.
Unless
otherwise indicated, information in this prospectus concerning economic
conditions and our industry is based on information from independent industry
analysts and publications as well as our estimates. Our estimates are derived
from publicly available information released by third-party sources, as well
as
data from our internal research, and are based on such data and our knowledge
of
our industry, which we believe to be reasonable. None of the independent
industry publications used in this prospectus were prepared on our or our
affiliates’ behalves, and none of the sources cited in this prospectus has
consented to the inclusion of any data from its reports, nor have we sought
consent from any of them.
We
will
not receive any proceeds from the sale of shares to be offered by the selling
stockholders. The proceeds from the sale of each selling stockholder’s common
stock will belong to that selling stockholder.
AND
RELATED STOCKHOLDER MATTERS
Our
common stock is listed on the Pink Sheets under the symbol
“AETA.” The following table sets forth for the periods indicated the
high and low bid prices per share of our common stock as quoted by the Pink
Sheets:
|
Price
Range of
Common
Stock(1)
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||||||||
|
Fiscal
Year
|
High
|
Low
|
||||||
|
Year
Ended December 31, 2005
|
||||||||
|
First
Quarter
|
$ |
40.00
|
$ |
20.00
|
||||
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Second
Quarter
|
$ |
15.00
|
$ |
10.00
|
||||
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Third
Quarter
|
$ |
39.00
|
$ |
1.20
|
||||
|
Fourth
Quarter
|
$ |
1.80
|
$ |
0.50
|
||||
|
Year
Ended December 31, 2006
|
||||||||
|
First
Quarter
|
$ |
0.80
|
$ |
0.40
|
||||
|
Second
Quarter
|
$ |
2.00
|
$ |
0.70
|
||||
|
Third
Quarter
|
$ |
0.80
|
$ |
0.31
|
||||
|
Fourth
Quarter
|
$ |
0.80
|
$ |
0.30
|
||||
|
Year
Ending December 2007
|
||||||||
|
First
Quarter
|
$ |
2.00
|
$ |
0.65
|
||||
|
Second
Quarter
|
$ |
1.01
|
$ |
0.65
|
||||
|
Third
Quarter
|
$ |
1.00
|
$ |
0.15
|
||||
|
Fourth
Quarter (through November 30)
|
$ | 0.45 | $ | 0.35 | ||||
_______________
|
|
(1)
|
All
periods presented are adjusted for the 100 to 1 reverse stock split
that
occurred on February 21, 2007.
|
As
of November 27, 2007, the last closing price of our common stock, as quoted
by the Pink Sheets, was $0.45 per share. As of November 28, 2007, we had
approximately 124 stockholders of record.
We
had no
equity compensation plans as of the end of the most recently completed fiscal
year. In connection with the merger with SRS Energy, we assumed SRS
Energy’s 2007 Stock Option Plan, which was adopted by the SRS Energy Board of
Directors on April 16, 2007 and approved by the SRS Energy shareholders on
April
16, 2007. We have 7,000,000 shares of our common stock authorized for
issuance under that plan and awarded stock options and restricted stock covering
4,610,000 shares of our common stock to our officers and directors.
We
have
no material operating history and therefore have had no earnings to distribute
to stockholders. Even though we have recommenced operations, we do
not anticipate paying any cash dividends in the foreseeable future. Rather,
we
currently intend to retain our earnings, if any, and reinvest them in the
development of our business. Any future determination to pay cash dividends
will
be at the discretion of our board of directors and will be dependent upon our
financial condition, results of operations, capital
requirements, restrictions under any existing indebtedness
and
other factors the board of directors may deem relevant.
In
connection with our acquisition of SRS Energy, we assumed SRS Energy’s
obligations under an Investor Rights Agreement with the purchasers of Series
A
Debentures. Under our registration rights agreement with these persons, we
agreed to use our reasonable best efforts to file with the SEC a registration
statement covering the resale of the common stock issuable upon conversion
of
the Series A Debentures and the common stock held by certain of our stockholders
who have “piggyback” registration rights. The Investors Rights Agreement also
requires us to use our reasonable best efforts to obtain the effectiveness
of
the registration statement not later than 210 days after the closing of the
purchase of the Series A Debentures, subject to certain exceptions and
limitations. If the filing or effectiveness of the registration statement do
not
occur within the time period specified in the agreement due to our failure
to
satisfy our obligations, we must pay liquidated damages to the holders in the
form of warrants, in lieu of cash, covering the purchase of additional shares
of
common stock in an aggregate amount equal to 1% of the shares of our common
stock issuable upon conversion of the Series A Debentures for each month (pro
rated for partial months) that the registration statement has not been filed
or
declared effective by the SEC until the registration statement is filed or
becomes effective. After the registration statement is declared effective,
we
are obligated to use our reasonable best efforts to maintain the effectiveness
of the registration statement for a period of 24 months at our
expense.
This
prospectus relates to the resale of common stock held by the selling
stockholders. Pursuant to our obligations under the above-described registration
rights agreement between us and these holders, we filed with the SEC a
registration statement on Form SB-2 with respect to the common stock offered
by
this prospectus.
Management’s
discussion and plan of operation
The
following discussion of our Plan of Operation should be read in conjunction
with
the financial statements and related notes to the financial statements included
elsewhere in this registration statement. This discussion contains
forward-looking statements that relate to future events or our future financial
performance. These statements 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 future results, levels
of
activity, performance or achievements expressed or implied by these
forward-looking statements. These risks and other factors include, among others,
those listed under
“
Forward-Looking Statements
” and
“Risk
Factors” and those included elsewhere in this registration
statement.
Plan
of operation
We
only
recently acquired SRS Energy as an operating subsidiary. Our
predecessor-in-interest, Long Road Entertainment, Inc. was formed to be a
holding company for operating companies engaged in the entertainment
industry. Long Road Entertainment raised a small amount of capital
and had limited operations. In 2005 Long Road Entertainment became
dormant and did not engage in any material operating activities until acquiring
SRS Energy through the merger of its wholly-owned subsidiary with SRS Energy.
Prior to the merger, SRS Energy’s activities consisted primarily of
investigating and obtaining licenses to the Eley and Brelsford
technologies.
Our
plan
of operation is focused on the commercialization of our Eley and Brelsford
technologies in three phases: testing, demonstration and
commercialization, and replication and rollout. Over the next 12
months, we expect to complete the testing phase and commence the demonstration
and commercialization phase. Our plan with respect to the testing
phase is to:
Testing
Phase
|
·
|
conduct
testing and evaluation with Merrick & Company of our Brelsford
technology’s ability to process cellulosic material generated by the Eley
process (and other sources) into fermentable
sugars;
|
|
·
|
finalize
contract and arrangements with Colorado State University or another
suitable testing facility for the construction of a pilot
plant;
|
|
·
|
build
and operate a pilot plant using our Eley and Brelsford
technologies;
|
|
·
|
evaluate
the performance of the pilot plant and identify required improvements
to
implement the technologies in a commercial setting;
and
|
|
·
|
begin
design of a small-scale commercial demonstration
plant.
|
We
believe that our anticipated activities during the testing phase will cost
between $450,000 and $550,000 and will be completed in six to nine
months. To date we have paid Merrick & Company approximately
$54,000 for engineering, design and consulting services. We have also
agreed to pay Purdue University $10,000 to test various yeasts available for
fermenting sugar water produced by the Brelsford process into
ethanol. We expect construction costs for the pilot plant, estimated
to be between $300,000 and $400,000, to be the principal cost incurred in the
testing phase.
After
we
complete the testing phase, our plan over the remainder of the next 12 months
is
to commence the following steps of the demonstration and commercialization
phase:
Demonstration
and Commercialization Phase
|
·
|
identify
and evaluate sites with advantageous feedstock supplies and transportation
logistics in areas that facilitate the prompt granting of development
and
environmental permits for first small-scale commercial demonstration
plant;
|
|
·
|
negotiate
co-location rights from the operator of a MRF or landfill for construction
of the small-scale commercial demonstration plant in order to realize
cost
savings from utilizing common infrastructure and operating savings
from
proximity to feedstock, landfill capacity and
transportation;
|
|
·
|
identify
and qualify contractors and subcontractors to construct a small-scale
commercial demonstration plant;
|
|
·
|
negotiate
feedstock supply and product off-take
contracts;
|
|
·
|
secure
funding for the construction of the small-scale demonstration plant;
and
|
|
·
|
begin
permitting and pre-construction activities for a small-scale commercial
demonstration plant.
|
The
principal cost of the demonstration and commercialization phase will be the
construction costs of the commercial demonstration plant. We are
currently developing the design for this plant. Our estimate of the
costs for the commercial demonstration plant is in the range of $55.0 million
to
$90.0 million. When we complete the final design of this plant,
we will have a better understanding of the expected plant costs, but we expect
the cost to be substantially more than our current capital. We do not
expect to begin construction of the commercial demonstration plant within the
next twelve months. We anticipate completing the demonstration and
commercialization phase over the next 24 to 30 months.
We
intend
to commence the replication and rollout phase of our plan of operation if and
when we successfully operate the commercial demonstration
plant. Prior to commencing this third phase of our plan of operation,
we will require a significant amount of capital.
As
a
result of the limited operating history of our company and SRS Energy, prior
years’ financial statements provide little information and virtually no guidance
as to our future performance. Moreover, we do not anticipate
generating any revenue for the foreseeable future. In order to
finance our business beyond the testing phase, we will be required to raise
additional capital. Management plans to secure additional funds
through government grants, project financings and through future sales of the
Company’s common stock, preferred stock or debentures, until such time as the
Company’s revenues are sufficient to meet its cost structure, and ultimately
achieve profitable operations. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. We may not be able to secure financing on favorable
terms, or at all. If we are unable to obtain acceptable financing on
a timely basis, our business will likely fail and our common stock may become
worthless.
Critical
Accounting Estimates
The
following are deemed to be the most significant accounting estimates affecting
us and our results of operations:
Research
and Development Costs
Research
and development expenditures, including payments to collaborative research
partners and research and development costs (which are comprised of costs
incurred in performing research and development activities including wages
and
associated employee benefits, facilities and overhead costs) are expensed as
incurred.
Intellectual
Property
Intellectual
property, consisting of our licensed patents and other proprietary technology,
are stated at cost and amortized on a straight-line basis over their economic
estimated useful life. Costs and expenses incurred in creating intellectual
property are expensed as incurred. The cost of purchased intellectual property
is capitalized.
Results
of Operations
For
accounting purposes, we treated our acquisition of SRS Energy as a
recapitalization of our company. As a result, we treat the historical
financial information of SRS Energy as our historical financial information.
Prior to the merger, SRS Energy did not pay salary to Ed Hennessey or any
other
persons. All of the indebtedness of SRS Energy outstanding at the
time of the merger from its operations was paid from the closing proceeds
of the
sale of the Series A Convertible Debentures.
The
following table sets forth the amounts of expenses and percentages of total
expenses represented by certain items reflected in our consolidated statements
of operations for the nine month period ended September 30, 2007, and for
the
year ended December 31, 2006:
|
Nine
months ended
September
30, 2007
|
Year
Ended
December
31, 2006
|
|||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||
|
General
and administrative
|
$ |
283,959
|
52.2 | % | $ |
16,496
|
21.3 | % | ||||||||
|
Professional
fees
|
218,995
|
40.2 | % |
47,078
|
60.7 | % | ||||||||||
|
Research
and development
|
41,533
|
7.6 | % |
14,000
|
18.0 | % | ||||||||||
|
544,487
|
77,574
|
|||||||||||||||
|
Other
expense (income):
|
||||||||||||||||
|
Interest
|
42,563
|
2,439
|
||||||||||||||
|
Amortization
of technology license
|
16,250
|
-
|
||||||||||||||
|
Deposit
forfeiture
|
-
|
(25,000 | ) | |||||||||||||
|
Interest
income
|
(14,058 | ) |
-
|
|||||||||||||
|
Net
loss applicable to common stockholders
|
$ |
589,242
|
$ |
55,013
|
||||||||||||
Nine
months ended September 30, 2007 compared to the year ended December 31,
2006
Costs
and expenses:
General
and administrative
–
The increase in 2007 is due primarily to
marketing expenses and salary paid to our Chief Executive Officer commencing
in
April 2007.
Professional
fees
– The increase in 2007 is due to increased costs incurred for legal,
consulting and accounting fees related to the private placement of the Series
A
Convertible Debentures, the reverse merger and an increase in general business
activities.
Research
and development
–
The increase in 2007 is due to payments made
to Merrick & Company as commencement of our testing phase began during the
third quarter 2007. The expense in 2006 was paid to Merrick & Company for
costs associated with initial consultation regarding entering into an agreement
to use Merrick & Company to test, evaluate, design and construct a pilot
scale system of our technologies.
Other
expense (income):
Interest
– The increase in interest expense in 2007 is due to the issuance in April
2007 of the Series A Convertible Debentures, which accrue interest at 6.0%
per
annum. Interest on the debentures in 2007 is approximately
$39,000.
Amortization
of technology license
– As the testing phase began during the third quarter
2007, we have begun to amortize the technology license fees previously
capitalized.
Deposit
forfeiture
– The forfeiture was a nonrefundable deposit in the amount of
$25,000 paid to us with respect to our negotiation of a potential
transaction. After the negotiation period lapsed, we retained the
deposit.
Interest
income
–
The income in 2007 is primarily interest on $450,000
of promissory notes issued to us as part of the consideration for the issuance
of the Series A Convertible Debentures.
Liquidity
and Capital Resources
As
a
development-stage company, we have no revenues and will be required to raise
additional capital in order to execute our business plan and commercialize
our
products.
On
April
16, 2007, we completed a $1.4 million private placement of Series A Convertible
Debentures to a group of accredited investors with each debenture being
convertible into shares of our common stock at a conversion ratio of $0.15
per
share. The proceeds from the private placement consisted of $950,000
in cash and $450,000 aggregate principal amount of short-term promissory notes
having a maturity date of April 16, 2008 and bearing interest at a per annum
rate of 6.0%. The promissory notes are secured by $450,000 of
certificates of deposit held in an escrow account for our benefit.
We
expect
the amount of our current cash will be sufficient to fund the first nine to
12
months of our plan of operation, which would include the testing phase that
we
anticipate will last approximately six to nine months, and the first three
to
six months of our demonstration and commercialization
phase. Thereafter, we anticipate requiring additional capital to
complete the demonstration and commercialization phase of our plan of
operation. These costs will be substantially greater than the amount
of funds we currently have available. We currently expect attempting
to obtain additional financing through government grants, the sale of additional
equity and possibly through strategic alliances with larger energy companies.
However, we may not be successful in securing additional capital. Further,
even
assuming that we secure additional funds, we may never achieve profitability
or
positive cash flow. If we are not able to timely and successfully raise
additional capital and/or achieve profitability or positive cash flow, we will
not have sufficient capital resources to implement our business
plan.
Contractual
Obligations and Commitments
Currently
we have the following three contractual obligations that will require us to
make
payments as set forth below over the next 12 months:
Merrick
& Company.
We have entered into an engagement agreement with
Merrick & Company to develop a complete project management plan for the
pilot development plan. To date, we have paid approximately $54,000
for engineering, design and consulting services. After completing the
project management plan, we intend to engage Merrick & Company to construct,
test, and evaluate the pilot development testing vessel. As part of
the testing and evaluation, Merrick & Company will design and then provide
construction observation of the pilot scale system in conjunction with Colorado
State University or another suitable third party testing
facility. The system will employ the Brelsford technology to
demonstrate the efficacy of the process. Our engagement calls for
further payments to Merrick & Company on an as billed basis as they proceed
with the engineering review and testing of our technology. We
anticipate that the total payments to Merrick & Company under the engagement
agreement will be at least $400,000.
Five
Sigma Ltd.
We have paid a $200,000 retainer to Five Sigma Ltd to
assist us in developing appropriate plans and materials for presenting the
Company and our business plan, strategy and personnel to the financial
community, establishing the image of the Company in the financial community
and
creating the foundation for subsequent financial public
relations. This agreement provides for monthly payments by the
Company in the amount of $16,666.66 plus any expenses incurred by Five Sigma
Ltd. Either Five Sigma Ltd. or the Company can cancel this agreement
at any time on three business days’ notice. Upon cancellation Five
Sigma is required to return any unused portion of the retainer to the
Company.
Lease.
We
entered into a lease on October 16, 2007 to rent approximately 1,800 square
feet
of office space located at 7386 Pershing Ave., in St. Louis, Missouri for a
term
of three years. Our monthly rent under the lease is $1,800 plus the
cost of utilities. The landlord for the space is currently completing
the repairs and upgrades before we take possession of the office, which we
expect to be in mid-November.
Off-Balance
Sheet Arrangements
We
have
not entered into any transaction, agreement or other contractual arrangement
with an unconsolidated entity under which we have:
|
·
|
a
retained or contingent interest in assets transferred to the
unconsolidated entity or similar arrangement that serves as
credit;
|
|
·
|
liquidity
or market risk support to such entity for such
assets;
|
|
·
|
an
obligation, including a contingent obligation, under a contract that
would
be accounted for as a derivative instrument;
or
|
|
·
|
an
obligation, including a contingent obligation, arising out of a variable
interest in an unconsolidated entity that is held by, and material
to, us
where such entity provides financing, liquidity, market risk or credit
risk support to, or engages in leasing, hedging, or research and
development services with us.
|
Company
Overview
We
are a
development stage company that intends to:
|
·
|
complete
the research and development of our two licensed technologies, which
we
believe when combined can convert municipal solid waste into ethanol;
and
|
|
·
|
explore,
develop and/or license additional technologies for processing waste
into
energy products as opportunities to do so present
themselves.
|
Our
two
licensed technologies are:
|
·
|
the
“Eley” technology, named after its inventor, Dr. Michael Eley, which was
originally owned by Bio-Products International, Inc. and converts
municipal solid waste, also known as MSW, into cellulosic material
while
simultaneously segregating and eliminating any inorganic materials
in the
solid waste; and
|
|
·
|
the
“Brelsford” technology, developed by Brelsford Engineering, Inc., that
employs an acid hydrolysis process to convert cellulosic material
into
fermentable sugars, which can then be fermented into
ethanol.
|
We
were
originally incorporated in 1996 as Long Road Entertainment, Inc., and were
formed to operate as a holding company for businesses in the theater, motion
picture and entertainment industries. We ceased conducting that business in
2005
and were dormant until the fall of 2006, at which time our founder and then
controlling stockholder decided to pursue the sale of the company. In
anticipation of that sale, we changed our name to Alternative Ethanol
Technologies, Inc.
On
March
27, 2007, we entered into an Agreement and Plan of Merger and Reorganization
in
which we agreed to acquire SRS Energy, Inc., a Delaware corporation that is
the
holder of the Eley and Brelsford technology licenses. Pursuant to the merger
agreement, SRS Acquisition Sub, our wholly-owned subsidiary, merged into SRS
Energy with SRS Energy as the surviving corporation. We consummated the merger
on May 31, 2007 resulting in SRS Energy becoming our wholly-owned subsidiary.
Today, SRS Energy is our principal operating company.
SRS
Energy was formed as a wholly-owned subsidiary of Supercritical Recovery
Systems, Inc., a Delaware corporation, in July 2004. At that time,
Supercritical Recovery Systems was a licensee of various technologies for the
processing of waste materials into usable products. While
investigating different technologies, Supercritical Recovery Systems was
introduced to the Eley and Brelsford technologies and secured licenses to the
technologies in SRS Energy. Prior to our acquisition of SRS Energy,
Supercritical Recovery Systems distributed approximately 80% of its ownership
of
SRS Energy to the stockholders of Supercritical Recovery
Systems. Since our acquisition of SRS Energy, Supercritical Recovery
Systems has ceased its business activities with respect to licensing other
technologies.
The
license to the Eley technology grants SRS Energy limited exclusive rights to
use
the technology to process municipal solid waste and convert the cellulosic
component of that waste to a homogenous feedstock to produce ethanol in the
United States, subject to the right of Bio-Products to request five sites to
construct solid waste to ethanol plants in the United States. SRS
Energy’s license to the Brelsford technology is limited to the production of
fuel grade ethanol in the United States. The license is exclusive
with regard to the conversion of MSW to cellulosis biomass for the production
of
ethanol. We do not
have exclusive rights to the other aspects of the Brelsford
technology. By coupling these technologies, we believe we may have
the ability to extract biomass from curbside solid waste (among other potential
sources of cellulosic material) and convert it into fuel grade
ethanol.
We have no operating history as a producer of ethanol and have not constructed any ethanol plants to date. We have not earned any revenues to date and expect that our current capital and other existing resources will be sufficient only to complete the testing of our technologies and to provide a limited amount of working capital. We will require substantial additional capital to implement our business plan and we may be unable to obtain the capital required to build any commercial plants.
Industry
Overview
General
Ethanol,
today, is produced mostly from sugars or starches, obtained from fruits and
grains. Production in the United States ethanol industry is currently
dominated by corn distillation. According to the Renewable Fuels Association,
domestic ethanol production increased from 1.3 billion gallons per year in
1997
to 5.4 billion gallons per year as of December 2006. The top 12
producers accounted for approximately 47 percent of the industry’s total
estimated production capacity. More than 50 smaller producers and farmer-owned
cooperatives, most with production of 50 million gallons per year or less,
generate the remaining production.
Corn
Ethanol
Although
the ethanol industry continues to explore production technologies employing
various feedstock, corn-based production technologies are the predominant
methods used by ethanol producers today and are likely to remain dominant for
the near future. Consequently, most U.S. ethanol is, and we expect will be
for
the foreseeable future, produced in the Midwest, where corn is
abundant. At the current cost of $3.00 per bushel for corn, raw
material cost represents about 60 percent of the cost of production of ethanol,
which means corn ethanol producers are susceptible to fluctuating corn
costs. In fact, the rapid growth in demand for corn for ethanol
production is creating intensifying competition with the demand for corn as
a
food source, which will likely result in higher future corn prices that in
turn
may increase the cost of ethanol produced from corn.
In
addition, corn ethanol faces distribution issues. More than half of
the total U.S. ethanol production is consumed in the east-coast and west-coast
markets, primarily as a result of the stricter air quality requirements in
large
parts of those markets. The movement of ethanol via pipeline is limited as
a
result of the tendency of ethanol to absorb water and other impurities found
in
the pipelines, logistical limitations of existing pipelines and limited volumes
of ethanol that need to be transported. As a result, the primary means of
transporting ethanol from the Midwest to the coasts is by rail transportation,
at additional cost. Consequently, ethanol today is sold primarily in
the marketplace in which it is produced. Since most corn is grown in
the Midwest, most ethanol plants in the United States are also located in the
Midwest, but many of the largest cities, where energy consumption is the
greatest, are great distances from existing ethanol plants.
Cellulosic
ethanol is obtained from cellulose. Cellulose is plentiful as it is
present in every plant, straw, grass and wood, as well as being abundant
in
solid waste and other waste. Moreover, since cellulose is the main
components of plants, the whole plant, rather than just the fruits and grains,
can be harvested. In fact, a joint study by the United States
Departments of Agriculture and Energy recently concluded that the United
States
land resources could produce a sustainable supply of biomass sufficient to
displace 30 percent of the country’s current gasoline
consumption. Most of these "bio-mass" products are currently
discarded. Since cellulose cannot be digested by humans, the
production of cellulose does not compete with the production of food. The
price
per ton of the raw material is thus much cheaper than fruits or grains and
in
the case of municipal solid waste, processors such as our company may be
paid to
take the material. We believe that because of the size of the
untapped biomass resource, for example, agricultural, forestry and municipal
wastes, the cost of cellulosic material as a feedstock to ethanol producers
will be less than the cost of corn.
In
June
2006, a United States Senate hearing determined that the cost of producing
cellulosic ethanol is $2.25 per gallon. This was primarily due to the current
poor conversion efficiency. The Department of Energy has stated,
however, that it is optimistic that new technologies will improve efficiencies
in the manufacturing of cellulosic ethanol. Based on this optimism,
the Department of Energy has requested a doubling of research funding. The
same
Senate hearing was told that the research target was to reduce the cost of
production to $1.07 per gallon by 2012.
The
ability to take advantage of the potential biomass feedstock resource will
depend, however, on further progress in developing and commercializing
technologies to cost-effectively process cellulosic materials. A
number of cellulosic-based technologies are currently in various stages of
development and commercialization. We believe the most promising
technologies are:
|
·
|
acid
hydrolysis of cellulosic materials followed by fermentation of the
resulting sugars, which is the technology we plan to
employ;
|
|
·
|
Enzymatic
processing of cellulose into fermentable sugars;
and
|
|
·
|
gasification
followed by either catalytic or fermentation transformation of the
synthesis gas into fuel.
|
Acid
Hydrolysis
It
has
been known for over 100 years that acids act as catalyst to convert, or
hydrolyze, cellulose and hemicellulose into simple sugars such as hexose and
pentose sugars. The chemistry for hexose and pentose is C
6
and C
5
,
respectively. Traditional acid hydrolysis occurs in two stages to
accommodate the differences between hemicellulose and cellulose. The first
stage
can be operated under milder conditions, which maximizes yield from more readily
hydrolyzed hemicellulose. The second stage is optimized for hydrolysis of the
more resistant cellulose fraction and traditionally requires high temperatures
and acid concentration to operate efficiently. At each stage, sugar
water is recovered and fermented and distilled to alcohol. Residual cellulose
and lignin left over in the solids from the hydrolysis reactors can serve as
boiler fuel but cannot be used to produce ethanol. Until recently,
however, acid hydrolysis-based technologies were too expensive to compete with
low-cost production methods of petroleum-based products. We believe,
however, that our Breslford technology utilizes an efficient acid hydrolysis
process that will enable us to be cost competitive.
Enzymatic
Conversion
Enzymatic
conversion of cellulose to ethanol faces a number of near-term technical
challenges, but offers considerable longer-term promise as a low-cost
approach. Enzymatic processes break down cellulose chains into
glucose molecules by cellulosic enzymes. This reaction occurs
naturally at body temperature in the stomach of ruminants, such as cows and
sheep, where the enzymes are produced by bacteria. The laboratory processes
being developed use several enzymes at various stages to replicate this biologic
process. Using a similar enzymatic system, cellulosic materials can be
enzymatically hydrolyzed (at a relatively mild temperature and acid level),
thus
enabling effective cellulose breakdown without the formation of byproducts
that
would otherwise inhibit enzyme activity.
Gasification
Gasification
of cellulosic materials is also a technology undergoing rapid improvement and
may present serious near- to mid-term competition to ethanol production that
is
based on acid hydrolysis. The gasification process does not rely on
chemical decomposition of the cellulose chain. Instead of breaking the cellulose
into sugar molecules, the carbon in the raw material is converted into synthesis
gas, using what amounts to partial combustion. The carbon monoxide, carbon
dioxide and hydrogen may then be fed into a special kind of fermenter. Instead
of yeast, which operates on sugar, this process uses microorganisms in the
Clostridium genus. These microorganisms ingest carbon monoxide, carbon dioxide
and hydrogen and produce ethanol and water. The process can thus be broken
into
three steps:
|
·
|
Gasification
— Complex carbon based molecules are broken apart to access the carbon
as
carbon monoxide, carbon dioxide and hydrogen are
produced;
|
|
·
|
Fermentation
— Convert the carbon monoxide, carbon dioxide and hydrogen into ethanol
using the microorganisms; and
|
|
·
|
Distillation
— Ethanol is separated from water.
|
Alternatively,
the synthesis gas from gasification may be fed to a catalytic reactor where
the
synthesis gas is used to produce ethanol and other higher alcohols as
well.
Government
Policies
National,
state, and local governmental policies has, and we believe will continue to
play, a critical role in the development of the ethanol industry.
Clean
Air Oxygen
Standards
The
federal Clean Air Act requires that “ozone non-attainment areas”, which are the
regions of the country with the worst smog, use reformulated gasoline, also
referred to as RFG. Today almost one-third of U.S. gasoline is
RFG. Methyl tertiary butyl ether, referred to as MTBE, and ethanol
have been the two most commonly used substances to add oxygen to gasoline to
meet the RFG requirements.
Phase
out of MTBE
Because
MTBE is a possible human carcinogen, it is being phased out in many
states. If MTBE were to be banned completely, it could create a huge
boost in demand for ethanol, especially if the oxygen standard for reformulated
gasoline remains in place.
Renewable
Fuels
Standard
The
Energy Policy Act of 2005 sets a nationwide renewable fuels standard that
required almost a doubling of the use of ethanol by 2012. This
legislation effectively sets a low floor under the use of ethanol and biodiesel,
because the market is already well above the mandated minimums. In
addition, in order to encourage the use of cellulosic ethanol, the legislation
credits every gallon of cellulose-derived ethanol with the equivalent to 2.5
gallons of other renewable fuel.
Tax
Incentives
Currently,
two types of federal tax incentives apply to biomass-derived ethanol that is
sold as fuel: (1) a partial excise tax exemption, and (2) income tax
credits. Ethanol blends of 10 percent or more qualify for a $0.053
per gallon exemption, with proportionally lower amounts applying to lower
ethanol/gasoline blends. In effect, this exemption structure provides
a $0.53 per gallon of ethanol exemption from excise taxes.
Tariff
Protection
The
government currently levies a tariff of $0.54 per gallon on imported fuel
ethanol. This tariff is justified as a measure to offset the effect
of the excise tax exemption, but its effect is to give significant protection
to
domestic producers from low cost foreign sources such as Brazil. Fuel
ethanol imported from Jamaica, Trinidad, El Salvador, Costa Rica and certain
other Caribbean nations, however, is not subject to tariff and therefore gives
these smaller countries preferential access to the U.S. market.
Our
technologies
We
believe we can convert municipal solid waste into cellulosic material using
our
Eley technology, and then use our Breslford technology to process that
cellulosic material into fermentable sugars using an acid hydrolysis method
and
ferment the sugars into ethanol.
Eley
technology
Municipal
solid waste contains valuable resources if they can be recovered
economically. Waste haulers often bring unsorted waste by truck to
materials recovery facilities, also known as MRFs, for sorting and removal
of
selected materials prior to disposal in sanitary landfills. To date,
however, the amounts of materials recovered are relatively small, typically
on
the order of 20 percent of the total volume of waste.
The
Eley
technology we plan to use was developed by Dr. Michael Eley at the University
of
Alabama, Huntsville. The University of Alabama, Huntsville granted an
exclusive world-wide license to Bio-Products International, Inc., a company
controlled by Dr. Eley. Bio-Products licensed us the exclusive right
to use this technology for the production of ethanol in the United
States. Bio-Products also licensed the technology to World Waste
Technologies for use in the production of paper, but not ethanol.
The
Eley
process separates curbside municipal solid waste into organic and inorganic
materials using a patented and proprietary process, referred to as pressurized
steam classification, which involves a unique combination of steam, pressure
and
agitation. The separation is accomplished by placing waste material
in a rotating pressure vessel, or autoclave. In the autoclave, the
material is heated to several hundred degrees, which sterilizes the
waste material, while the pressure and agitation cause a pulping action. This
combination is designed to result in a large volume reduction, yielding the
following two sterilized resource streams for further manufacturing of new
products:
|
·
|
Cellulosic
biomass, a decontaminated, homogeneous feedstock that we expect will
represent approximately 55 to 60 percent of the MSW and will be suitable
for conversion to ethanol or other
uses.
|
|
·
|
Separated
recyclables (steel cans and other ferrous materials, aluminum cans,
plastics, and glass), which we expect will represent about 25 percent
of
the MSW input and are sorted and can be sold to
recyclers.
|
The
process also creates residual waste (fines, rocks, soil, textiles and non-
recyclable fractions), which we expect will represent the remaining 15 to 20
percent of the MSW input. We will not be able to recover any value in
this residual waste. We will be required to deliver this waste to
landfills, thereby reducing the tipping fees we are paid.
Although
the Eley technology has not been independently tested, World Waste Technologies
has used the Eley process to generate cellulosic material from MSW for the
production of paper. In addition to having been used on a commercial
scale, we believe that the Eley process represents a significant improvement
over other autoclave technologies currently in use because of:
|
·
|
the
relationship between agitation of the waste material, moisture, and
the
temperature and pressure of steam in the
vessel;
|
|
·
|
the
method of introduction of steam into the autoclave vessel, the pressure
range, along with the method of full depressurization, and treatment
of
the steam being vented from the process to prevent air
pollution;
|
|
·
|
the
method of mixing the heat and steam with the waste uniformly throughout
the vessel; and,
|
|
·
|
the
direct and critical correlation between the length and diameter of
the
vessel, internal flighting and the total tonnage of waste to be processed
for proper mixing and product
yield.
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In
2007,
World Waste Technologies purchased the patent for the Eley technology and the
license agreement between the University of Alabama, Huntsville and Bio-Products
from the University of Alabama, Huntsville subject to a preexisting exclusive
license granted by the University to Bio-Products and the sub-license granted
to
us by Bio-Products.
Initially,
World Waste Technologies announced design and engineering issues with the
technology that related to the size of motors required to operate the vessels
in
commercial conditions. We believe, however, that certain redesign
efforts have resolved these issues by increasing the size of motors used to
run
the process.
Under
our
sublicense agreement with Bio-Products, we will be required to begin paying
a
monthly fee for technical services sixty days after we obtain funding to
construct a full-scale plant. We are also required to pay royalties based on
the
tons of waste processed utilizing the technology as well as royalties based
on
the sales price of ethanol produced from the products of the Eley
process.
The license extends until the expiration
date of the last patent issued to the patent owner covering the technology,
which is expected to occur on October 23, 2021.
Under
its
license, Bio-Products is required to continue to make certain payments to World
Waste Technologies to maintain exclusive rights to the
technology. Our license agreement provides that if for any reason
Bio-Products loses its exclusive rights to the process, we are entitled to
use
the Eley technology at no cost.
Nevertheless,
if Bio-Products loses its exclusive rights, we anticipate that World Waste
Technologies will attempt to use the process to produce ethanol and other fuel
products, thereby becoming one of our competitors. World Waste
Technologies has publicly stated its intention to try to extend its license
with
Bio-Products to include the right to use the Bio-Products process in the
production of ethanol. World Waste Technologies has a substantial
amount of capital that it could use to develop this business. Based
upon their public statements, World Waste Technologies is attempting to develop
a gasification process to produce biofuels, but we do not have enough
information to understand the viability of the technology they are
developing.
World
Waste Technologies filed suit against Bio-Products alleging it breached certain
representations and warranties to World Waste Technologies in its license
agreement for the production of paper granted by Bio-Products. This
suit has subsequently been dismissed and to our knowledge has not been
refiled.
Brelsford
technology
Currently,
the primary feedstocks for the existing ethanol industry are the sugars and
starches found in plants, such as corn. Sugars and starch comprise
only a small part of a plant. Most of the rest of a plant is
cellulose. Moreover, cellulose is widely available and highly
concentrated in waste that we pay to dispose of, such as municipal solid waste,
green waste, saw dust and agricultural waste, which we sometimes refer to
generally as biomass waste. The underutilization of biomass waste has
driven decades of research into ethanol production from
cellulose. Recent increases in the costs of fuels have caused the
research to intensify in the past several years.
Nevertheless,
several obstacles continue to prevent wide-spread commercialization of the
process, including:
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difficulties
accelerating the hydrolysis reaction that breaks down cellulose fibers
without consuming so much energy, which produces heat, that the process
becomes uneconomical;
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·
|
the
high level of the acid concentration needed to hydrolyze cellulose;
and
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the
disposal of the lignin byproduct.
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We
believe that the Brelsford process differs from currently used technology in
a
few key respects. First, the process uses a low pressure, high
temperature oil to provide heat to drive the hydrolysis reaction rather than
the
high temperature steam used in other hydrolysis processes. This
results in lower energy requirements for the Brelsford
process. Second, the Brelsford process recovers heat and acid used in
the first stage of its hydrolysis and reuses them in the second
stage. Recycling heat and acid, further reduces the energy
requirements to run the process and lowers raw material costs.
The
Brelsford technology is comprised of two double-tube heat-exchanger
plug-flow-reactor systems, which are assembled in-series. It
incorporates a three-step process that we believe is a cost-effective acid
hydrolysis process. First, the process separates cellulosic
feedstock, such as the cellulosic material generated by the Eley technology,
into two main components: (1) cellulose and hemicellulose, which can be
converted into sugars, and (2) lignin, which is the glue that holds the
cellulosic building blocks together and is not dissolved in the
process. Second, acid is introduced into the mixture, which breaks
down the chemical bonds in the cellulose and hemicellulose and converts them
primarily into hexose and pentose sugars and glucose, which are then fermented
by yeast. Third, the fermented liquids are purified into ethanol and
other useful end-products, and unhydrolyzed lignin residues, which cannot be
used to make ethanol.
According
to a review of the technology conducted by the National Institute of Science
and
Technology (NIST – Final Technical Evaluation Report No. 457), the “Brelsford
process has a potential for achieving considerable economic savings in: (1)
acid
composition, (2) heat-energy supplied for cellulose hydrolysis and (3)
process-energy for fuel ethanol production. These process and
economic savings are likely to be partially off-set, by no more than one percent
loss in total sugars yield.” We estimate the net effect may lead to a
reduction in total capital and operating costs of roughly 30 percent compared
to
any other acid hydrolysis process of which we are aware.
The
Brelsford technology may be suitable for processing a wide range of cellulosic
materials such as soft and hardwood mill wastes, crop residues such as corn
stover and wheat straw, as well as cellulosic residue from MSW.
Proving
our technologies
We
have
engaged Merrick & Company, an engineering firm located in Denver, Colorado,
to evaluate our Brelsford technology. In particular, Merrick &
Company is evaluating the thermo chemical reaction conditions of the Brelsford
technology that is at the heart of our waste-to-ethanol process, using feedstock
generated by the Eley technology. We will also test whether other
cellulosic materials such as switch grass, corn stover and wood waste may be
used as the feedstock for that process. As part of the testing and
evaluation, Merrick & Company will design and build a pilot plant in
conjunction with Colorado State University (or another suitable facility) that
will utilize the Brelsford technology to demonstrate the operation of the
process. The primary purpose of the pilot plant is to determine
whether the Brelsford technology has the potential to produce ethanol at
commercially viable costs and, if so, to obtain sufficient design basis
information to commence designing a commercial plant using the
technology. Determining whether our technology is commercially viable
for cellulosic ethanol production requires understanding two elements of costs,
the operating costs to process waste to ethanol and the construction costs
to
build an operating plant. We anticipate developing a better
understanding of both of these elements of costs as we work with Merrick &
Company.
Our
present engagement of Merrick does not provide for testing the Eley technology.
We believe, however, that the deployment of the Eley technology on a commercial
basis by World Waste Technologies demonstrates that the Eley technology can
be
commercialized. While World Waste Technologies initially encountered
design problems with its plant, we believe many of the problems relate to the
production of paper using the Eley technology (the purpose for which World
Waste
Technologies licensed the Eley technology) and we believe will not be implicated
in the ethanol production process. Additionally, Dr. Eley
subsequently implemented design changes to his rotating pressure vessel that
he
and World Waste Technologies have indicated resolved the initial problems
encountered with respect to the use of Eley technology to separate cellulosic
material from municipal waste.
In
June
2006, a U.S. Senate hearing was told that the current cost of producing
cellulosic ethanol is $2.25 per gallon based on known technology then in
use. The same Senate hearing was told that the research target was to
reduce the cost of production to $1.07 per gallon by 2012 in order for ethanol
to be competitive with other fuels. Currently, the average cost for
producing ethanol from corn, currently the most prevalent feedstock, is $1.65
per gallon.
Based
on
our current assumptions concerning the future price of fuel ethanol, if our
testing indicates that our cost of producing ethanol from MSW after taking
into
account projected operating costs and construction costs is equal to or less
than $1.65 per gallon, we expect that we will consider our technology to be
commercially viable. If our testing and evaluation indicates that the
cost of producing ethanol using our technologies is in excess of $1.65 per
gallon, we intend to evaluate the results of the testing, current
and expected market conditions in the transportation fuels
industry, and any potential improvements or modifications to our technology
that
may be proposed. If after evaluating these factors, we determine that
the technologies are not usable on a commercial scale, we may elect cease the
development of the technologies at that time or proceed on a basis different
than our current business plan. There can be no assurances that the
price of fuel ethanol will be maintained at levels that make our technology
economically viable, regardless of the costs of production.
Principal Products or Services and their Markets
We
are in
the process of having Merrick & Company test the Brelsford technology using
biomass from the Eley process, among other feedstocks. If we
determine these technologies are mutually reinforcing technologies and are
commercially viable, and we are able to raise a significant amount of additional
capital, we may be in a position to build and operate waste-to-ethanol plants
and enter into long-term contracts with municipalities, solid waste haulers,
and
operators of landfills and materials recovery facilities to process a large
portion of their waste stream into recyclable materials and cellulosic
material. We believe we could then be in a position to convert the
cellulosic component of the MSW into ethanol and sell the ethanol in selected
markets. Although not currently our focus, our technologies may be
able to produce ethanol from other sources of cellulosic material (e.g. wood
waste, corn stover, and switchgrass, among others) if the material can be
acquired on sufficiently favorable terms and the Brelsford technology proves
to
be commercially viable for processing other forms of waste into
ethanol.
Ethanol
We
expect
the primary product we will sell will be fuel-grade ethanol. Ethanol
is ethyl alcohol (200-proof grain alcohol). When it is denatured with
5 percent gasoline, fuel-grade ethanol created that can be used to enhance
gasoline performance and reduce exhaust emissions as well as used directly
as a
gasoline alternative.
The
U.S.
market for ethanol is currently experiencing a surge in demand, having grown
from 4.0 billon gallons in 2005 to 5.3 billon gallons in 2006. We
believe this demand is being driven by a number of factors including using
ethanol as an oxygenate and a replacement for methyl tertiary butyl ether,
or
MTBE, as a clean air additive, as an extender of fuel supplies, and as an
alternative to gasoline. We believe that the ethanol market will
continue to grow as a result of the following factors.
Continuing
High Petroleum
Prices
Demand
for petroleum products has been growing faster than supply, which has been
constrained by declining oil reserves and shortages of refining
capacity. Fundamentally, the wholesale rack price of fuel-grade
ethanol as a fuel alternative is driven by the price of gasoline, and as long
as
gasoline prices remain high, we expect the demand for ethanol will be
strong.
Expanding
Infrastructure to use
Ethanol as a Gasoline Alternative
Ethanol
can be blended with small amounts of gasoline in an 85-15 percent mix, referred
to as E85, and used as an alternative to gasoline. Vehicles must be
specially equipped to use E85 and there must be adequate service stations with
the capacity to dispense E85. Currently about 6 million U.S. vehicles
are so equipped, but less than one thousand service stations offer
E85. Many initiatives are currently being considered to dramatically
increase the number of service stations offering E85 and this may increase
the
usage of E85 as long as it remains price competitive with gasoline.
Government
Regulations
Historically,
producers and blenders had a choice of fuel additives to increase the oxygen
content of fuels. MTBE, a petroleum-based additive, was the most popular
additive, accounting for up to 75% of the fuel oxygenate market. However, in
the
United States, ethanol is replacing MTBE as a common fuel additive. While both
increase octane and reduce air pollution, MTBE is a presumed carcinogen that
contaminates ground water. It has already been banned in California, New York,
Illinois and 16 other states. Major oil companies have voluntarily abandoned
MTBE and it is scheduled to be phased out completely under the Energy Policy
Act. As MTBE is phased out, we expect demand for ethanol as a fuel additive
and
fuel extender to rise. A blend of 5.5% or more of ethanol, which does not
contaminate ground water like MTBE, effectively complies with U.S. Environmental
Protection Agency requirements for reformulated gasoline, which is mandated
in
most urban areas. At this time, we are unaware of any economically feasible
substitutes for MTBE other than ethanol. Regional demand is also
being created by the requirement to use reformulated gasoline in non-attainment
areas under the federal Clean Air Act. In addition, the federal
Energy Policy Act of 2005 sets a minimum use (with certain safeguards) of
ethanol and biodiesel, rising to 7.5 billion gallons per year by
2012.
MSW
Processing Services
We
believe that the opportunity to help communities, haulers and landfill managers
reduce the amount of material transported and deposited in landfills is large
and growing. The Resource Conservation and Recovery Act of 1991,
referred to as RCRA, requires landfills to install expensive liners and other
equipment to control leaching toxics. Due to the increased costs and
expertise required to manage landfills under RCRA, many small, local landfills
have closed during the 1990’s. Larger regional landfills were built
requiring increased transportation costs for the waste haulers. As a
result, landfill space is increasingly scarce and disposal costs have been
increasing.
Currently,
landfill operators charge a tipping fee to deliver municipal solid waste to
a
landfill, waste-to-energy facility, recycling facility, transfer station or
similar facility. Tipping fees vary widely based on geographic
location and the number of available places to dispose of MSW in a given
location.
Because
of the increasing cost pressures on waste haulers and based on current tipping
fee pricing, we believe we will be able to negotiate a payment of part of their
tipping fee from waste haulers who deliver MSW to us for processing that would
range from as low as $10 per ton in some central parts of the country to over
$70 per ton in the Northeast and some parts of the Southeast. The
availability of tipping fees at favorable rates will be a key component of
our
business.
Recyclable
Byproducts
We
anticipate that our process will generate other recyclable byproducts from
the
processing of MSW, such as aluminum and other metals. We believe the
Eley technology will produce scrap aluminum, tin, steel, glass and plastic
(typically amounting 20 to 25 percent of the total waste stream). The
markets for these recovered products are volatile and subject to rapid and
unpredictable changes making it impossible at this time to provide estimated
per
ton cost to revenue information.
Limited
opportunities also exist for selling the insoluble materials, primarily lignin,
left after the sugars are filtered out through the Brelsford technology as
these
materials can be pressed into a cake and further processed into a boiler fuel,
which can be gasified or co-fired with coal. As ethanol production
volumes increase and this type of residual fuel becomes more widely accepted,
a
more robust market for this byproduct may develop, but pricing will depend
heavily on proximity to potential users and prices of other fuels
available.
Basic
business plan
Our
strategy is to build our company in several phases with the ultimate goal of
becoming a leading producer of ethanol and other combustible fuels from
municipal waste and other feedstocks. We are currently focusing on
testing, demonstrating and commercializing our existing licensed technologies.
On an ongoing basis, we intend to continue investigating opportunities to
develop or acquire complementary technologies, especially those that would
allow
us improve our existing processes or to add value to the various byproducts
produced by those processes. In addition, we will look for
opportunities to combine our technologies with other synergistic processes
in
innovative energy parks, where some of our byproducts (e.g., lignin) could
be
used as inputs to other processes (e.g., gasifiers) that could produce inputs
for us (e.g., steam).
We
have
structured our Strategic Plan on the following three phases with respect to
the
development and commercialization of our existing technologies:
Testing
Phase
The
Eley
technology for converting MSW to cellulose has been implemented by World Waste
Technologies on a commercial scale for the production of paper, which we believe
has thin profit margins. Although we are aware World Waste
Technologies has identified design and production issues with the Eley
technology, we anticipate our ethanol will have wider profit margins and will
therefore have greater flexibility to overcome these issues. The
Brelsford process has only been tested at a small pilot scale at Brelsford’s
facilities in Bozeman, Montana. As a result, we intend to construct a
pilot plant at Colorado State University (or another suitable facility) with
the
assistance of Merrick & Company. This pilot plant should be
completed within the next six to 12 months and will provide the basis for
identifying the optimal design criteria and quantifying the expected
engineering, construction costs and economic performance of a commercial
demonstration plant and ultimately a full-scale commercial plant. We
expect we will spend all of our current funds on and during this phase of our
development. There can be no assurance that the pilot plant will be
completed on the schedule we anticipate.
Demonstration
and Commercialization Phase
We
are in
the early stages of identifying and evaluating potential sites for locating
the
first operational plant, which we anticipate will be a relatively small-sized
commercial demonstration facility to further test and refine engineering design
and operating procedures. The preferred property is likely to be
co-located with an existing municipal waste processor in order to share
infrastructure and to facilitate reaching a satisfactory long-term feedstock
supply agreement. One of the options that is currently being
considered is a joint venture with an existing waste hauler, municipal waste
processor or landfill operator in order to realize potential synergies and
reduce the risks. We currently do not have any agreements with regard
to either the location or the feedstock.
Replication
and Rollout Phase
We
intend
to follow a systematic evaluation process in identifying and selecting
additional sites for the construction of full-scale operating plants in order
to
focus on those with the best near-term and long-term potential. If
market conditions are not favorable for the construction of new plants, we
may
consider licensing our technology to third parties with existing waste-to-energy
facilities. To date, we have not identified any sites for a
full-scale facility or commenced any material discussions with any party
regarding building a full-scale operating plant and/or licensing our technology
to a third-party. We have only preliminarily begun to explore these
possibilities.
Our
ability to implement the strategy outlined in our basic business plan will
depend on our ability to raise significant amounts of additional capital and
to
hire appropriate managers and staff. Our success will also depend on
a variety of market forces and other developments beyond our
control.
Distribution
Methods of the Products or Services
We
anticipate utilizing existing distribution channels to sell the ethanol that
we
produce. Depending on plant location, the preferred purchasers may be
blenders, wholesalers or municipal and commercial fleet
operators. When possible and appropriate, we will seek long-term
ethanol purchase agreements in order to reduce price volatility and
risks. This will require extensive and systematic marketing in order
to find fleet operators or other entities willing to enter into these kinds
of
contracts in order to meet environmental or price stability
objectives. Because of these challenges, we may not be able to
execute a significant number of longer-term fuel off-take purchase
agreements.
Competition
We
will
be a very small player in the huge market for transportation fuels and will
compete directly and indirectly with a large number of well-established and
better funded firms. In addition, demand for our product will be
affected by competition with traditional petroleum products, primarily gasoline
and diesel, other alternative energy products such so bio-diesel, and other
ethanol producers. We will also experience significant competition
from ethanol importers.
Petroleum
products
Petroleum
products, because of their dominant market position, largely determine the
market price for transportation fuels. The general expectation is
that declining oil reserves, increasing demand from emerging economies like
China and India, together with political instability in many oil producing
countries are likely to provide continuing upward pressures on future oil
prices. Nonetheless, it is instructive to note that the major oil
companies reportedly use benchmark prices in the range of $30-40 per barrel
in
evaluating investment projects. If prices fall to these levels, even
temporarily, because of global recession or other reasons, conventional
petroleum products will put extreme downward pressure on alternative fuel
producers.
Bio-Diesel
and competing alternative energy products
Within
the alternative energy sector, our cellulosic ethanol will compete with a
variety of other technologies in producing transportation and other
fuels. At a user level, ethanol is facing increasing competition from
biodiesel, which is currently experiencing an advantage because of adverse
publicity about the low net energy balance from corn ethanol. This is
being exacerbated by the impact that the
dramatic growth in corn ethanol has had on corn
prices. As improved technologies permit diesel engines to meet the
new strict U.S. emissions standards, Americans may begin to follow the European
lead in turning to diesel as the preferred transportation fuel.
Ethanol
from sugars and starches
Currently,
worldwide ethanol production uses agricultural products almost exclusively
for
its feedstock. In the United States, ethanol is derived primarily
from corn, while internationally, ethanol is produced primarily from sugar
cane
and sugar beets. As of January 2007, approximately 110 ethanol
production facilities were operating in the United States located predominately
in the cornbelt in the Midwest with a combined annual production capacity of
5.4
billion gallons of ethanol. At June 1, 2007, there were more than 75
additional corn ethanol plants under construction or being expanded that, when
completed, are anticipated to double the current production capacity in the
United States.
Corn
ethanol plants operate in two basic ways, wet and dry milling
processes. Wet milling produces more valuable by-products from the
ethanol production process. However, wet mill plants cost
substantially more to build and have higher operating costs than dry mill
processing plants, and hence, are usually much bigger than dry mill plants
in
order to achieve economies of scale.
Unlike
ethanol production from MSW, traditional ethanol production techniques from
agricultural feedstocks are mature and well entrenched in the
marketplace. In the recent past, well-funded national and
international corporations have built wet mill ethanol plants in the United
States to produce ethanol from corn. Currently,
Archer-Daniels-Midland Company accounts for approximately 20% of all domestic
ethanol production capacity in the United States with more than 1 billion
gallons of production under its control. Its larger plants are wet milling,
as
opposed to dry milling, and each plant has the capacity to produce as much
as
150 to 300 million gallons of ethanol per year. These large plants have cost
advantages and economies of scale that provide significant competitive
advantages over alternative ways of producing ethanol.
Ethanol
production is also expanding internationally. Ethanol produced or processed
in
certain countries in Central America and the Caribbean region is eligible for
tariff reduction or elimination upon importation to the United States under
a
program known as the Caribbean Basin Initiative. Large ethanol producers, such
as Cargill, have expressed interest in building ethanol plants in participating
Caribbean Basin countries, such as El Salvador, which would produce fuel-grade
ethanol for shipment to the United States. Ethanol imported from Caribbean
Basin
countries may be a less expensive alternative to domestically produced ethanol
and may affect our ability to sell our ethanol profitably. For
instance, currently, the cost of producing ethanol in Brazil is about $0.60
per
gallon, more than a dollar per gallon cheaper than the average cost of producing
corn ethanol in the United States.
Cellulosic
Ethanol
Today
there are few companies and no commercial production infrastructure built to
produce ethanol from cellulosic feedstocks, but a large amount of research
and
development is being conducted in these areas. Pilot plants are being
built using alternative technologies and at least one full scale production
plant is under construction.
On
February 20, 2007, the United States Department of Energy announced $385 million
in grant funding to six cellulosic ethanol plants. This grant funding
accounts for 40% of the investment costs. The remaining 60% comes from the
promoters of those facilities. We will likely face especially intense
competition from several pioneers in the cellulosic ethanol
industry who will be gaining from early government support for some large pilot
projects from these grants.
The
grants, ranging from $33 million to $80 million, went to Abengoa Bioenergy,
ALICO, Inc., BlueFire Ethanol, Broin Companies, Iogen Biorefinery Partners,
and
Range Fuels. These companies are pursuing projects ranging from 11
million to 125 million gallons per year in capacity using a variety of
enzymatic, acid hydrolysis and gasification technologies. We do not
believe that these competitive processes have been demonstrated commercially,
but any that are successful will have a substantial “first-mover” advantage over
our company, even though we believe none currently intend to use MSW as
feedstock.
Enzymatic
Conversion
Various
enzyme companies have contributed significant technological breakthroughs in
cellulosic ethanol. Iogen Corporation is a Canadian producer of
enzymes. They promote an enzymatic-hydrolysis process that uses specially
engineered enzymes. Another Canadian company, SunOpta Inc. markets a
patented technology known as "Steam Explosion" to pre-treat cellulosic biomass,
overcoming its recalcitrance and making the cellulose and hemicellulose
accessible to enzymes for conversion into fermenatable sugars. SunOpta designs
and engineers cellulosic ethanol biorefineries and its process technologies
and
equipment are in use in the first three commercial demonstration scale plants
in
the world: Celunol Corporation's facility in Jennings, Louisiana, Abengoa's
facility in Salamanca, Spain, and a facility in China owned by China Resources
Alcohol Corporation (CRAC). The CRAC facility is currently producing cellulosic
ethanol from local corn stover on a 24-hour a day basis utilizing SunOpta's
process and technology. Genencor and Novozymes are two other
companies that have received United States government Department of Energy
funding for research into reducing the cost of cellulase, the key enzyme in
the
production of cellulosic ethanol by enzymatic hydrolysis.
Other
enzyme companies, such as Dyadic International, Inc., are developing genetically
engineered fungi that would produce large volumes of cellulase, xylanase and
hemicellulase enzymes. These enzymes can be utilized to convert
agricultural residues, such as corn stover, distiller grains, wheat straw and
sugar cane bagasse, and energy crops, such as switch grass, into fermentable
sugars, which may be used to produce cellulosic ethanol.
Acid
Hydrolysis
Currently,
there are no operating commercial
plants in the United
States using acid hydrolysis to produce ethanol. Blue Fire Ethanol,
however, recently announced plans to build an operating plant in Sacramento,
California to produce ethanol using their concentrated acid hydrolysis
process.
Blue
Fire
licenses technology from Arkenol, Inc. that enables widely available cellulosic
materials, or more commonly, biomass, to be converted into sugar.
Biomass
feedstocks that can be used in the Arkenol process include:
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agricultural
residues (straws, corn stalks and cobs, bagasse, cotton gin trash,
palm
oil wastes, etc.),
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crops
grown specifically for their biomass (grasses, sweet sorghum, fast
growing
trees, etc.),
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paper
(recycled newspaper, paper mill sludge's, sorted municipal solid
waste,
etc.),
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wood
wastes (prunings, wood chips, sawdust, etc.),
and
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green
wastes (leaves, grass clippings, vegetable and fruit wastes,
etc.).
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Arkenol
has constructed and operated a pilot plant near its Southern California offices
for roughly five years. Since 2003, the technology has been successfully
used by
an unrelated corporation to produce ethanol for the Japanese transportation fuel
market.
The
Arkenol process varies from our processes in two key ways. First,
Arkenol’s technology utilizes a concentrated acid solution to hydrolyze
cellulosic material in a high temperature environment. The Brelsford
process uses a more dilute acid concentration at milder temperatures, which
we
anticipate will make our process less costly and more energy
efficient.
Second,
to use municipal waste as a feedstock, Blue Fire is required to hand separate
the components of the municipal solid waste they receive. In other
words, all the noncellulosic materials are removed by hand. This is a
time-consuming and costly process and it increases the risk of contaminating
the
hydrolysis process and reducing efficiency when municipal solid waste is used
as
feedstock in Blue Fire’s technology. Because our Eley technology
converts municipal solid waste to cellulosic feedstock via thermodynamic and
chemical processes and does not require separation of noncellulosic materials
by
hand, we anticipate that our process will be less expensive and more efficient
than the process used by Blue Fire.
In
addition, a number of other companies are developing and testing a variety
of
innovative technologies and some of these are likely to emerge as serious
competitors.
Imports
Imports
of fuel ethanol from foreign sources, principally Brazil, do affect overall
supply and pricing. Total foreign imports in 2006 were estimated to amount
to
between 210 and 230 million gallons, or approximately 5 percent of total current
U.S. production. At price levels reached in the second quarter of
2006, prices of imported ethanol, including transportation costs, tariff and
taxes, were competitive with domestically produced ethanol. As a
result, world market forces are likely to provide a restraining influence on
future fuel ethanol price increases.
Sources
and Availability of Raw Materials
The
emergence of technologies to convert municipal waste to energy is opening new
opportunities. What was once perhaps the greatest sanitation and
health challenge for communities may now become an economic and environmental
asset. Instead of adding to landfills already nearing capacity
limits, converting MSW to ethanol can provide one of the building blocks to
a
more sustainable energy future.
American
people produce more than 245 million tons of MSW annually. Only about
20 percent of this waste is currently recovered and recycled. We
estimate that an additional 50 to 60 percent could potentially be recovered,
with roughly two-thirds of that in the form of cellulosic material that could
serve as feedstock for conversion to ethanol. Currently, very little
of this cellulosic material is being recovered from mixed waste
streams. However, as various waste processing and cellulosic ethanol
technologies are refined, competition for this future resource will
intensify. As a result, it will be important for us to attempt to
lock up as much of it as possible through long-term feedstock supply agreements
with operators of materials recovery facilities and landfills.
In
addition to our exclusive license to use the Brelsford technology to produce
ethanol from MSW and other waste, we have a non-exclusive license to produce
ethanol from any other cellulosic materials. We are, therefore, also
potentially interested in pursing projects using other forms of cellulosic
feedstock. The most important potential source of feedstock for us
other than MSW is likely to be agricultural
wastes, especially corn stover and wheat straw, but including
a tremendous variety of other wastes such as grass seed straw, sugar cane
bagasse, seed hulls, trimmings, and the like. There are, however,
serious practical limits on the amounts of these materials that will be
commercially feasible. Part of the problem is that some of the
biomass has to be plowed back into the soil to maintain
fertility. More importantly, it is expensive to collect and transport
these types of relatively low density materials. As just one example,
the Oregon Wheat League estimates the collection cost for straw at between
$25
and $35 per ton. Unless these collection and transportation
cost can be reduced significantly, it is unlikely that agricultural wastes
will
be competitive with MSW as a source of feedstock for our projects except in
very
specific situations.
Over time, it is likely that purpose grown crops, such as switch or miscanthus grass or fast growing trees, such as poplar, will become a preferred source of cellulosic material for ethanol production. Until the technologies are perfected and the plants built for converting them to ethanol we anticipate that farmers will be reluctant to take the risk of shifting their cropping pattern. Similarly, we believe that the economic incentive to build these plants will be limited until there are adequate feedstock supplies.
In
the
interim, it is possible that we could use forestry residues as a feedstock
source. The total forestland in the United States is about 750
million acres, representing roughly one-third of the nation’s total land
area. About 178 million metric tons of woody residue and wood waste
are generated annually from timber harvesting, with 86 million metric tons
being
unused and deemed available for recovery. There is also considerable
latitude for improving the efficiency of the current energy recovery processes
through better combustion and gasification technologies, which might free up
substantial additional amounts of forestry wastes at the plant
site. As a result, there might be opportunities for us to develop
facilities using the Brelsford technology and co-locate them with existing
forest products processing plants as long as we could secure long-term feedstock
supply agreements on favorable terms.
Customers
Because
of the size and commodity nature of the ethanol market, we are unlikely to
become dependent on a few major customers until we enter into specific,
long-term product off-take agreements. At that point, once the
off-take agreements have been finalized, we will be locked into the terms of
those contracts. The advantage of this approach, however, is that it
avoids the likely price fluctuations of the ethanol spot and futures market,
which is driven largely by the overall market for petroleum
products. This market can be highly volatile, so the benefits of
price stability are likely to outweigh the potential advantage of being able
to
realize higher prices on the spot market at various times in the business
cycle. Nonetheless, we will always have the option of selling in the
spot or futures market if it appears advantageous to do so rather than enter
into long-term off-take agreements.
Intellectual
Property License Terms
Eley
Technology
On
August
17, 2005, SRS Energy entered into a U.S. Technology License Agreement with
Bio-Products giving SRS Energy exclusive rights to use the Eley technology
to
process municipal solid waste into a cellulosic biomass product for use as
the
feedstock for conversion into fuel grade ethanol. The technology was
developed by the University of Alabama Huntsville for improved separation,
recovery and recycling of components of waste materials and for chemical and/or
biological conversion of cellulosic materials to fuels and
chemicals.
The
company’s license dated August 17, 2005 with Bio-Products is for a period of
twenty years. Our Bio-Products process royalty is $1.50 for every ton of waste
received and processed at each facility to be constructed and operated under
the
agreement. We will also owe a by-product royalty of 2.5 percent of
the gross sales price in excess of ten dollars per ton obtained from the sale
of
recyclable byproducts, excluding the cellulosic biomass. Bio-Products
will also be paid a monthly fee for Technical Services for each facility to
be
constructed and operated which initially will be $10,000 per month and will
increase to $20,000 per month when vessels for processing waste are ordered
for
the facility. The $20,000 per month fee continues until construction
of the facility is completed.
We
are
required to begin ordering equipment from BioProducts for our pilot plant within
one year after the date that we obtain final construction permits for our pilot
plant or by August 17, 2008, whichever occurs first. We also must
begin permitting, design and site selection of our commercial plant within
two
years from the date the pilot plant begins operating. If we do not
meet these obligations or any of our payment obligations, Bio-Products may
terminate our license on thirty days’ notice.
On
March
8, 2007 we granted a restricted license to a company affiliated with the founder
of Bio-Products for up to five sites and we get a royalty of $0.25 for every
ton
of MSW processed at any of those sites.
Brelsford
Technology
On
April
1, 2005, SRS Energy entered into a U.S. Technology License Agreement with
Brelsford giving SRS exclusive rights to use Brelsford’s technology as it
relates to processing municipal solid waste and green waste to
ethanol. Although this license is exclusive only with respect to the
production of ethanol in the United States, we also have non-exclusive rights
to
use other biomass such as sugar cane bagasse, switch grass and other
fast-growing plants, and forestry products and wastes to produce ethanol, and
a
right of first refusal to extend our license to Canada.
Under
the
terms of the license, we paid an initial fee of $50,000 and pay a minimum annual
fee of $15,000 and a project fee of $30,000 for each annual project that
commences manufacture of a plant. On August 30, 2007, we paid the
first annual project fee in the amount of $30,000 to Breslford and Brelsford
simultaneously acknowledged that we have met all requirements to maintain the
exclusivity in our license. In addition, we will pay a royalty fee
equal to 4 percent of net sales resulting from use of the licensed
product. Brelsford may terminate our license agreement on
sixty days’ notice if we fail to make any payment due under our license
agreement.
Government
Approvals
The
Company is not subject to any government approvals or oversight for its current
operations other than normal corporate governance and taxes. Once we
begin developing our own commercial production facilities, however, we will
be
subject to multiple federal, state, and local environmental laws and
regulations, such as those relating to the discharge of materials into the
air,
water and ground, the generation, storage, handling, use, transportation and
disposal of hazardous materials, and the employee health and
safety. In addition, some of these laws and regulations will require
our facilities to operate under permits that are subject to renewal or
modification. These laws, regulations and permits often require
expensive pollution control equipment of operational changes to limit actual
or
potential impacts to the environment. A violation of these laws and
regulations or permit conditions can result in substantial fines, natural
resource damages, criminal sanctions, permit revocations and/or facility
shutdowns. Additionally, we will be required to
test that the ethanol we produce meets certain quality and consistency standards
for it to be saleable.
Governmental Regulation and Industry Standards for Fuel Grade Ethanol
Gasoline
and gasoline/ethanol blends are subject to a variety of federal and state
regulations. These include Federal Trade Commission octane posting
requirements and Environmental Protection Agency Phase II volatility
regulations. In carbon monoxide non attainment areas, these fuels are
subject to minimum and/or average oxygen content
requirements. Gasoline sold in certain ozone non-attainment areas are
required to be reformulated including, among other things, meeting an average
oxygen content and maintaining stricter controls over volatile organic compounds
and nitrous oxide in gasoline or gasoline blends.
In
addition many states place additional requirements on fuels including such
items
as restrictions on Reid Vapor Pressure, distillation characteristics, and in
some cases a minimum octane requirement for fuels designated as Super or Premium
grades.
Because
of the wide-variety of standards applicable to fuels, the refining industry
has
developed standards set forth in ASTM 4814 published by the American Society
for
Testing and Standards that are designed to ensure that fuels will perform in
as
wide a range of consumers vehicles as possible. The ATSM standards
and specifications are voluntary compliance standards, however, some states
have
adopted all, or a portion of, ASTM 4814 into law, making adherence
mandatory. Compliance with these standards will be necessary in
order for blenders to purchase the ethanol we produce.
The
American Society for Testing and Standards also publishes the industry standards
for fuel grade ethanol in ASTM D 4806. The standard includes the
volume requirements or limitations for various components of ethanol in order
for the ethanol to be considered fuel grade. In addition the federal
government has placed limitations on the amount of sulfur (30 ppm) that can
be
included in denatured ethanol used in gasoline. The State of
California has further restricted the amount of sulfur that can be included
in
denatured ethanol as well as placing additional limitations on other compounds
found in ethanol. As the ethanol industry develops, we anticipate
additional governmental regulations with respect to the composition of fuel
grade ethanol will be adopted.
We
can
not assure that if we ever are able to produce ethanol on a commercial scale
that the ethanol we produce will meet the governmental and industry standards
to
be considered fuel grade ethanol.
Environmental
Laws
The
Company will be subject to extensive air, water and other environmental
regulations and we will have to obtain a number of environmental permits to
construct and operate our plants such as air pollution and construction permits,
pollutant discharge permits, storm water discharge permits, water withdrawal
permits, and alcohol fuel producers permits. In addition, we may have
to complete spill prevention control and countermeasures plans.
The
production facilities that we will build are subject to oversight activities
by
the federal, state, and local regulatory agencies. There is always a
risk that the federal agencies may enforce certain rules and regulations
differently than state and local environmental
administrators. Federal, state, and local rules are subject to
change, and any such changes could result in greater regulator burdens on plant
operations. We could also be subject to environmental or nuisance
claims from adjacent property owners or residents
in the areas arising from possible foul smells or other
air or
water discharges from the plant. We do not know the potential cost of
these requirements or potential claims.
Employees
The
Company currently has only three full-time employees, its Chief Executive
Officer, Edward P. Hennessey, Jr., its General Counsel, Michael Kime, and its
Chief Financial Officer, Thomas Jennewein. Each employee currently
works at least 40 hours a week on Company business.
Property
We
currently lease 1,800 square feet of office space in St. Louis,
Missouri. The lease is for a term of three years and has a monthly
lease payment of $1,800, plus utilities. We expect to take possession
of the leased space in mid-November.
Legal
Proceedings
RAM
Resources, LLC v. Supercritical Recovery Systems, Inc.
On July 11, 2005,
RAM Resources, L.L.C filed suit against Supercritical Recovery Systems (the
former parent company of SRS Energy, Inc.) alleging breach of a Letter Agreement
dated May 11, 2003 as amended between RAM Resources and Supercritical Recovery
Services. We were not named in the suit by RAM, however, RAM alleged
that it had certain rights to be issued additional shares of the common stock
of
SRS Energy, our wholly-owned operating subsidiary.
We
settled all claims of RAM against us and any of our predecessors arising from
the Letter Agreement under a global Settlement and Release Agreement dated
August 29, 2007. Pursuant to that agreement, RAM obtained the right
to acquire an aggregate of 1,923,495 of our common stock at a price of $0.13
per
share. The Warrant is exercisable during a two year term that started
on August 29, 2007 and ends on August 29, 2009. RAM agreed to
terminate the Letter Agreement and release all claims to acquire any shares
of
our stock.
AND
CONTROL PERSONS
Executive
Officers
Edward
P. Hennessey, Jr.
Mr. Hennessey currently is Chief Executive
Officer and President of the Company. He also serves as a Class III
director of our board of directors with a term that expires in
2010. Mr. Hennessey has been the President and CEO of SRS Energy
since 2003 and as President of Supercritical Recovery Systems, Inc., a
non-operating affiliate of SRS Energy, prior to that time since
2002. Mr. Hennessey joined Shearson Lehman Brothers in 1986 and
worked in the securities industry from 1986 until 2000.
Michael
D. Kime.
Mr. Kime has served as General Counsel of the Company
since August 31, 2007. Prior to joining the Company, Mr. Kime was a
partner in the law firm Sauerwein, Simon, Blanchard & Kime, P.C. from 2005
until 2007 and as an associate at that firm from 2002 until 2005. Mr.
Kime has been a practicing attorney since 1994, focusing on securities laws,
finance and mergers & acquisitions. Mr. Kime serves on the Board
of Directors of Missouri Votes Conservation, a bi-partisan lobbying group that
supports pro-conservation legislation in Missouri.
Thomas
Jennewein.
Mr. Jennewein has been Chief Financial Officer of the
Company since August 31, 2007. Prior to joining the Company, Mr.
Jennewein served as the Manager of Financial Reporting for Maverick Tube
Corporation from 2005 until 2006, when Maverick Tube Corporation was acquired
by
Tenaris, S.A. At Maverick Tube Corporation, Mr. Jennewein was
responsible for preparing all of the company’s filings with the Securities and
Exchange Commission. Before joining Maverick Tube Corporation,
Mr. Jennewein held a similar position at Argosy Gaming Company where he served
as Manager of Financial Reporting from 2000 until 2005.
Board
of Directors
We
have
sought to assemble a Board of Directors that is composed of individuals who
have
demonstrated competent leadership abilities and who possess unique expertise
in
areas that are necessary for us to succeed. We believe that our Board
of Directors will provide necessary counsel and advice to management as we
conduct our business.
Our
restated bylaws and restated certificate of incorporation provide for three
classes of directors, each class serving for a three-year term expiring one
year
after expiration of the term of the preceding class, so that the term of one
class will expire each year. The terms of the current Class I, Class II and
Class III directors expire in 2008, 2009 and 2010, respectively. Our Board
of
Directors, in addition to Mr. Hennessey, includes:
Benton
Becker.
Mr. Becker has served as a Class I director of our board
of directors since August 21, 2007. His term expires in
2008. Mr. Becker has been engaged in the private practice of law in
Miami Dade County, Florida since 1984. He also serves on the faculty
of St. Thomas University School of Law in Miami, Florida, teaching
Constitutional Law and previously served on the faculty of the University of
Miami Law School. From 1992 to 2000 he served on the Board of
Directors of Tengasco, Inc., an American Exchange public oil and gas company
located in Knoxville, TN. Mr. Becker is a graduate of the University
of Maryland where he received a B.A. in Psychology and the Washington College
of
Law, American University, where he received a J.D. Prior to moving to
Florida, Mr. Becker worked in Washington D.C., both in private practice and
in
public service. Mr. Becker served as legal counsel to President
Gerald Ford during the time that President Ford assumed the
Presidency. Mr. Becker has
served in a number of distinguished positions inside the
federal government and as legal counsel to government officials throughout
his
career.
Ira
Langethal, Phd.
Dr. Langenthal has served as a Class II director
of our board of directors since August 21, 2007. His term expires in
2009. Dr. Langenthal received his BSEE from City College of New York and M.Eng.
and a Phd. (Statistical Communications/Information Theory) from Yale
University. He also took courses at Stanford and Wharton in Finance
and Accounting at Exeter in Corporate Finance and Strategic Planning and at
the
Levinson Institute in Leadership. Early in his career he was a
consultant to various organizations including General Instruments. In
1967 Dr. Langenthal Co-founded Signal Analysis Industries Corp. (SAJCOR), an
instrument manufacturing company specializing in communications, acoustics
and
vibration and segments of the medical markets. In 1972, SAJCOR was
purchased by Honeywell, Inc. Over the next 19 years Dr. Langenthal
worked at Honeywell in positions of increasing responsibility in virtually
every
phase of business including positions as Director of Engineering, Vice President
of Operations and Vice President and General Manager of Honeywell’s Test
Instruments Division. He retired in 1991. Since his
retirement, Dr. Langenthal has been active in the Colorado Business Incubator
initiative, the Colorado Advanced Technology Institute advising entrepreneurs
and start-up businesses. He served on the Board of Directors of
several companies, including Colorado Med Tech, a NASDAQ listed
corporation.
Larry
McGee.
Mr. McGee has served as a Class II director of our board
of directors since August 14, 2007. His term expires in
2009. Mr. McGee has been a Senior Vice President and Chief
Development Officer with IESI Corporation in Fort Worth, Texas since 1998.
Founded in 1995, IESI is an environmental services company that collects,
transports and disposes of non-hazardous residential, industrial and commercial
waste as well as providing recycling services. IESI was
purchased by BFI Canada in 2005. Prior to joining IESI, Mr. McGee
held a variety of positions with various companies in the waste management
business from 1982 until 1998. Mr. McGee received his B.S. in
Accounting from the University of Tennessee in 1973. From 1974 until
1981 he worked as a Certified Public Accountant.
Paul
Simon.
Mr. Simon has served as a Class I director of our board
of directors since August 21, 2007. His term expires in 2008. He is a
licensed attorney practicing in St. Louis, Missouri and has been a partner
in
the firm, Sauerwein, Simon, Blanchard & Kime., P.C. since
2006. Prior to that time, he was a partner with the firm Halfrey,
Simon and Jones, P.C. from 1994 until 2006. Mr. Simon is a graduate
of the University of Missouri where he received his B.S. in Business
Administration and St. Louis University School of Law where he received his
J.D.
Related
Party Transactions
William
Meyer, a member of the Board of Directors of Supercritical Recovery Systems,
made a series of loans to SRS Energy, Inc. from 2005 to 2007 in the total
amount
of $87,703 that were evidenced by a promissory note bearing interest at the
rate
of 9.5% per year. In addition, the promissory note included an option
to acquire five percent of the outstanding stock of SRS Energy for
$250,000. As part of our acquisition of SRS Energy, Mr. Meyer’s
option was replaced with a warrant to acquire 1,923,495 shares of common
stock
at a price of $0.13 per share. The 1,923,495 shares subject to the
warrant granted to Mr. Meyer represent the number of shares of our common
stock
he would have received if he had exercised his option immediately prior to
the
merger.
Robert
Stinson, the former founder and controlling stockholder of our predecessor,
Long
Road Entertainment, Inc., and Stinson Theatres, Inc., a company controlled
by
Mr. Stinson, loaned $78,668 in the aggregate including accrued interest, to
our
predecessor in 2003 evidenced by two convertible promissory notes.
Independent
Directors
The
Pink
Sheets, which is the quotation system on which our common stock is traded,
does
not have a definition for “independence” with respect to directors and does not
have a requirement that a majority of our board be independent. Accordingly,
we
have chosen to comply with the director independence requirements of the Nasdaq
Stock Market. Under Rule 4200 (a)(15) of the National Association of Securities
Dealers listing standards, a director is independent if he or she is not an
officer or employee of the company and does not have any relationship with
the
company which, in the opinion of the board of directors, would interfere with
the exercise of independent judgment in carrying out the responsibilities of
a
director. Our board has reviewed the independence of its directors under the
Rule 4200 and has determined that Messrs. Becker, McGee and Langenthal are
independent.
Audit
Committee
On
August
29, 2007, we appointed Messrs. Becker, Langenthal and McGee as members of our
audit committee, each of whom are independent directors. In addition, our Board
has determined that Mr. McGee, a member of the Audit Committee, is qualified
as
an audit committee financial expert, as that term is defined in the rules of
the
Securities and Exchange Commission. The Audit Committee will recommend the
engagement of independent auditors, confer with the external auditors regarding
the adequacy of our financial controls and fiscal policy and direct changes
to
financial policies or procedures as appropriate.
Compensation
Committee
Decisions
regarding executive compensation will principally be made by the compensation
committee, which is composed of Messrs. McGee and Simon, in consultation with
the Board of Directors. Mr. McGee serves as the Chairperson of the
Compensation Committee and as such, possesses the authority to determine any
matters for which there is a tied vote of the committee. No member of
the compensation committee during the fiscal year ended December 31, 2006 was
an
officer or employee of the Company or any of its subsidiaries or was formerly
an
officer of the Company or any of its subsidiaries. None of our
executive officers have served as a member of the compensation committee (or
other committee serving an equivalent function) and the Charter of our
Compensation Committee prohibits them from doing so.
Compensation
Committee Report on Executive Compensation
The
compensation committee was formed to review our compensation plan on a regular
basis. The compensation committee periodically retains independent consultants
on an as needed basis to provide current market data with regard to base salary
structure, short-term cash incentives and with the development of long-term
incentive plans. The compensation committee is required to regularly update
its
assessment of various long-term incentive tools including stock options,
restricted stock, performance-based equity, and other alternatives that might
be
available.
Our
primary objective in developing executive compensation policies is to attract,
motivate and retain highly qualified and effective leaders. The compensation
policy includes various components of compensation that are intended to align
management behaviors and priorities directly with our strategic objectives
and
to encourage management to act in the best long-term interest of us and our
shareholders.
Executive
Officers
Compensation
We
did
not pay any compensation to any executive officer for the prior two fiscal
years. Following our acquisition of SRS Energy in 2007, we began
paying Edward P. Hennessey, Jr., our Chief Executive Officer and President,
a
salary of $84,000 per year. Prior to our acquisition of SRS Energy,
Mr. Hennessey had not been paid salary by SRS Energy or Supercritical Recovery
Services. Mr. Hennessey has agreed to maintain his salary at its
current level until such time as we raise additional capital sufficient to
fund
our operations. Michael D. Kime, our General Counsel, and Thomas Jennewein,
our
Chief Financial Officer, have agreed to work for no salary until such time
as we
raise additional capital sufficient to fund our operations.
On
August
31, 2007, we awarded stock options to each of our executive officers as
follows:
|
Executive
Officer
|
Number
of Shares
Underlying
Options
|
|
Edward
P. Hennessey, Jr.
|
2,250,000
|
|
Michael
D. Kime
|
800,000
|
|
Thomas
Jennewein
|
800,000
|
All
of
the stock options awarded to our executives have an exercise price of $0.15
per
share and vest in equal one-third tranches on each of August 31, 2008, 2009,
and
2010.
We
anticipate revisiting the compensation paid to our executives if we are able
to
raise additional capital to fund our operations in the future. While
we have not agreed to any specific amounts to be paid to such executives, we
anticipate paying salaries comparable for similarly situated executives when
we
are capable of doing so.
Employment
Agreements
The
Company has entered into an Employment Agreement with each of Messrs. Hennessey,
Kime and Jennewein. The Agreements provide that Mr. Hennessey shall
be paid a salary of $84,000 per year. Messrs. Kime and Jennewein are not
currently paid salary. All of the executives are entitled to be paid
their then-current salary for one year if they are terminated at any time
without cause. In addition, Mr. Hennessey has been granted options to
acquire 2,250,000 shares of our common stock at $0.15 per share. The
options vest as follows: 750,000 shares on each of August 31, 2008, 2009, and
2010 if Mr. Hennessey is employed with the Company at those
times. Mr. Hennessey will also be entitled to a stock option to
acquire 1,200,000 additional shares if and when we commence the operation of
a
pilot plant. The exercise price of this stock option will be $0.15
and will vest in three equal tranches on August 31, 2009, August 31, 2010,
and
August 31, 2011. If Mr. Hennessey is terminated without cause or the
Company is subject to a change in control, all of his options vest
immediately. Mr. Kime and Mr.
Jennewein
have each been granted an option to acquire
800,000 shares of our common stock at $0.15 per share. These options
vest one-third on August 31, 2008, 2009, and 2010 if they are employed with
the
Company at that time. If Mr. Kime or Mr. Jennewein, respectively, is
terminated without cause one-half of his options vest to the extent not already
vested. If the Company is subject to a change in control, all of Mr.
Kime’s and Mr. Jennewein’s options vest.
Directors
We
did
not pay any compensation to any of our directors for the prior two fiscal
years.
On
August
21, 2007, we awarded stock options to acquire 40,000 shares of our common stock
to each of Benton Becker, Larry McGee, Ira Langenthal and Paul Simon, our four
non-employee directors. All of the stock options awarded to these directors
have
an exercise price of $0.15 per share and vest in 50% increments on August 21,
2008 and August 21, 2009.
Also
on
August 21, 2007, we awarded 150,000 shares of restricted stock to each of
Messrs. Becker, McGee, Langenthal and Simon for $0.15 per share. Each director
issued to the company a promissory note equal to $22,500. The shares are subject
to forfeiture if the director resigns from our board of directors prior to
the
shares vesting. For each director, the shares vest at the rate of 8,333 shares
per month commencing on September 21, 2007 until August 21, 2008 and at the
rate
of 4,167 shares per month thereafter until fully vested.
The
following table sets forth certain information regarding beneficial ownership
of
our common stock as of November 28, 2007 (a) by each person known by us to
own
beneficially 5% or more of any class of our common stock, (b) by each of
our
Named Executive Officers and our directors and (c) by all executive officers
and
directors of this company as a group. As of November 28, 2007, there were
49,343,680 shares of our common stock issued and outstanding. In
addition, 9,333,333 shares are issuable upon conversion of the Series A
Debentures of the Company (plus shares issuable for accrued interest
thereunder), 6,400,000 shares of our common stock are reserved for issuance
under our 2007 Stock Option Plan, and 3,846,990 shares of our common stock
are
reserved for issuance pursuant to two outstanding warrants. Unless otherwise
noted, we believe that all persons named in the table have sole voting and
investment power with respect to all the shares beneficially owned by them.
Except as otherwise indicated, the address of each stockholder is c/o the
company at 7320 Forsyth Blvd, Unit 102, St. Louis, Missouri
63105.
|
Shares
of Common Stock Beneficially
Owned
|
||||||||
|
Beneficial
Owner
|
Number
|
Percentage
|
||||||
|
Edward
P. Hennessey, Jr.
|
7,847,860 | (1)(2) | 16.1 | % | ||||
|
Michael
D. Kime
|
- | (2) | * | % | ||||
|
Thomas
Jennewein
|
- | (2) | * | % | ||||
|
Benton
Becker
|
49,998 | (2)(3) | * | % | ||||
|
Larry
McGee
|
49,998 | (2)(3) | * | % | ||||
|
Ira
Langenthal
|
49,998 | (2)(3) | * | % | ||||
|
Paul
Simon
|
49,998 | (2)(3) | * | % | ||||
|
SRS
Legacy Trust
(4)
|
8,580,645
|
17.6 | % | |||||
|
RAM
Resources, L.L.C.
(5)
|
6,630,520 | (6) | 13.1 | % | ||||
|
William
Meyer
|
3,997,512 | (6) | 7.9 | % | ||||
|
Total
owned by All Officers and Directors
|
16,528,501
|
25.31 | % | |||||
_____________________________
* less
than 1%.
|
(1)
|
Amount
represents shares owned by Supercritical Recovery Systems, Inc.,
of which
Mr. Hennessey serves as President and a Member of the Board of
Directors.
|
|
(2)
|
Each
executive officer and director were awarded equity grants described
in
“Executive And Director Compensation” that do not vest within 60 days from
the date hereof.
|
|
(3)
|
Amount
represents the vested portion, and the portion that will vest within
60
days hereof, of shares of restricted stock owned by such
director.
|
|
(4)
|
SRS
Legacy Trust is an irrevocable trust of which Edward P. Hennessey,
Jr. is
a beneficiary. Michael Hennessey, Mr. Hennessey’s brother, has
sole voting power, and Paul Simon, one of our directors, has sole
dispositive power with respect to these
shares.
|
|
(5)
|
Based
on information available to us, we believe Rod Thomas is the manager
and
principal owner of RAM Resources, L.L.C. and therefore has sole voting
and
dispositive power over the shares held by RAM. RAM’s address is
13397 Lakefront Drive, Earth City,
Missouri 63045.
|
|
(6)
|
Amount
includes 1,923,495 shares issuable upon exercise of a warrant to
purchase
such shares at a price of $0.13 per
share.
|
The
shares to be offered by the selling stockholders are “restricted” securities
under applicable federal and state securities laws and are being registered
under the Securities Act of 1933, as amended, or the Securities Act, to give
the
selling stockholders the opportunity to publicly sell or otherwise dispose
of
those shares. The registration of these shares does not require that any of
the
shares be offered or sold by the selling stockholders. The shares included
in
this prospectus may be disposed of by the selling stockholders or their
transferees on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These dispositions may be at
fixed
prices, at prevailing market prices at the time of sale, at prices related
to
the prevailing market price, at varying prices determined at the time of sale,
or at negotiated prices. We will not control or determine the price at which
a
selling stockholder decides to dispose of its shares.
No
estimate can be given as to the amount or percentage of our common stock that
will be held by the selling stockholders after any sales or other dispositions
made pursuant to this prospectus because the selling stockholders are not
required to sell any of the shares being registered under this prospectus.
The
following table assumes that the selling stockholders will sell all of the
shares listed in this prospectus.
None
of
the selling stockholders has, or within the past three years has had, any
material relationship with us, our predecessors or any of our
affiliates. We have not, and are not required, to make any payments
to any selling stockholder, affiliate of any selling stockholder or any person
who has a contractual relationship with a selling stockholder except for
interest due or any interest or penalties that may accrue under the debentures
in the future as disclosed in the table below. No selling stockholder
is a broker-dealer or an affiliate of a broker-dealer.
The
following table sets forth the beneficial ownership of the selling
stockholders:
____________________
*
less
than 1%.
|
(1)
|
Yirlania
Rivas Marin, who serves as the Director of Brite Star Associates,
Inc.,
has sole voting and dispositive power over the shares owned by Brite
Star. Brite Star acquired its shares by converting convertible
notes issued in 2003 by Long Road Entertainment, our predecessor,
into
common stock prior to the merger between SRS Energy and
us.
|
|
(2)
|
Anthony
D. Cupini, who serves as the President and sole shareholder of Two
Shamrocks, Inc., has sole voting and dispositive power over the shares
owned by Two Shamrocks, Inc. Two Shamrocks acquired its shares
by converting convertible notes issued in 2003 by Long Road Entertainment
into common stock prior to the merger between SRS Energy and
us.
|
|
(3)
|
M
eyvis
Sanchez, who serves
as the President and Director of Fountain Consulting, Inc., has sole
voting and dispositive power over the shares owned by
Fountain. Fountain acquired its shares by converting
convertible notes issued in 2003 by Long Road Entertainment into
common
stock prior to the merger between SRS Energy and
us.
|
|
(4)
|
Hector
Montes, who serves as the Treasurer and Director of St. Ives Consulting,
has sole voting and dispositive power over the shares owned by St.
Ives. St. Ives acquired its shares by converting convertible
notes issued in 2003 by Long Road Entertainment into common stock
prior to
the merger between SRS Energy and
us.
|
|
(5)
|
Anthony
D. Cupini, who serves as the President and sole shareholder of STL
Capital
Holdings, Inc., has sole voting and dispositive power over the shares
owned by STL Capital. STL Capital acquired its shares by
converting convertible notes issued in 2003 by Long Road Entertainment
into common stock prior to the merger between SRS Energy and
us.
|
|
(6)
|
Richard
Sauget, who serves as the President and Director of IS Investments,
has
sole voting and dispositive power over the shares owned by IS
Investments.
|
|
(7)
|
Keith
Burant, who serves as the
Director of Leggwear International, Ltd., has sole voting and dispositive
power over the shares owned by
Leggwear.
|
|
(8)
|
Maritza
Sanabria, who is the 100% owner and serves as the Manager of Trinity
Enterprises, LLC, has sole voting and dispositive power over the
shares
owned by Trinity.
|
|
(9)
|
Marissa
Simmons, who is the 100% owner and serves as the President of Padstow
Estates, Inc., has sole voting and dispositive power over the shares
owned
by Padstow.
|
|
(10)
|
Yuriy
Memenov, who is the 100% owner and serves as the President of Anahuac
Management, Inc., has sole voting and dispositive power over the
shares
owned by Anahuac.
|
|
(11)
|
Eugene
P. Slay, who is the 100% owner and serves as the President of Agest,
Inc.,
has sole voting and dispositive power over the shares owned by
Agest.
|
|
(12)
|
The
listed shares are issuable upon conversion of Series A Convertible
Debentures issued by SRS Energy on April 16, 2007. As set forth
in our registration rights agreement, we may be required to grant
warrants
to the holder covering the purchase of additional shares of our common
stock in an aggregate amount equal to 1% of the shares of our common
stock
issuable upon conversion of the Series A Convertible Debentures for
each
month (pro rated for partial periods) that the registration statement
is
not declared effective after December 23,
2007.
|
The
selling stockholders will sell their shares of common stock at a fixed price
of
$0.15 until our shares of common stock are quoted for trading on the
OTCBB. Thereafter, the selling stockholders may, from time to time,
sell, transfer or otherwise dispose of any or all of their shares of common
stock or interests in shares of common stock on any stock exchange, market
or
trading facility on which the shares are traded or in private transactions.
These dispositions may be at fixed prices, at prevailing market prices at the
time of sale, at prices related to the prevailing market price, at varying
prices determined at the time of sale, or at negotiated prices.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
·
|
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;
|
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions;
|
|
|
·
|
short
sales effected after the date the registration statement of which
this
prospectus is a part is declared effective by the
SEC;
|
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
|
·
|
a
combination of any such methods of sale;
and
|
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
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
aggregate proceeds to the selling stockholders from the sale of the common
stock
offered by them will be the purchase price of the common stock less discounts
or
commissions, if any. Each of the selling stockholders reserves the right to
accept and, together with their agents from time to time, to reject, in whole
or
in part, any proposed purchase of common stock to be made directly or through
agents.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are “underwriters” within the meaning of Section 2(11)
of the Securities Act will be subject to the prospectus delivery requirements
of
the Securities Act.
To
the
extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions
or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be
sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We
have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to
the
activities of the selling stockholders and their affiliates. In addition, we
will make copies of this prospectus (as it may be supplemented or amended from
time to time) available to the selling stockholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We
have
agreed to indemnify the selling stockholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to
the
registration of the shares offered by this prospectus.
We
have
agreed with the selling stockholders to keep the registration statement of
which
this prospectus constitutes a part effective until the earlier of (1) such
time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
Paul
Simon, Jr., one of our directors, is a partner of Sauerwein, Simon, Blanchard
& Kime, PC. Our subsidiary, SRS Energy, has historically retained
Mr. Simon’s firm and we paid approximately $35,000 in legal fees in
2006. After our acquisition of SRS Energy, we retained Mr. Simon’s
firm to represent us generally and expect to incur a material amount of legal
fees going forward.
We
are
presently authorized to issue 240,000,000 shares of $0.001 par value common
stock and 10,000,000 shares of $0.001 par value preferred stock. As of November
28, 2007, we had 49,343,680
shares of common stock issued
and outstanding and no preferred stock issued and
outstanding.
Common
Stock
The
holders of our common stock are entitled to equal dividends and distributions
per share with respect to the common stock when, as and if declared by the
board
of directors from funds legally available therefor. No holder of any shares
of
common stock has a preemptive right to subscribe for any of our securities,
nor
are any common shares subject to redemption or convertible into other
securities. Upon liquidation, dissolution or winding-up of our company, and
after payment of creditors and preferred stockholders, if any, the assets will
be divided pro rata on a share-for-share basis among the holders of the shares
of common stock. All shares of common stock now outstanding are fully paid,
validly issued and non-assessable. Each share of our common stock is entitled
to
one vote with respect to the election of any director or any other matter upon
which stockholders are required or permitted to vote. We have not paid any
dividends on our common stock to date and do not anticipate that we will be
paying dividends in the foreseeable future. Any payment of cash dividends on
our
common stock in the future will be dependent upon the amount of funds legally
available, our earnings, if any, our financial condition, our anticipated
capital requirements and other factors that the board of directors may think
are
relevant. However, we currently intend for the foreseeable future to follow
a
policy of retaining all of our earnings, if any, to finance the development
and
expansion of our business and, therefore, do not expect to pay any dividends
on
our common stock in the foreseeable future.
Preferred
Stock
Under
our
restated certificate of incorporation, the board of directors has the power,
without further action by the holders of the common stock, to designate the
relative rights and preferences of the preferred stock, and to issue the
preferred stock in one or more series as designated by the board of directors.
The designation of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or
other
preferences, any of which may be dilutive of the interest of the holders of
the
common stock or the preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control of the company without further stockholder action and may adversely
affect the rights and powers, including voting rights, of the holders of the
common stock.
Registration
Rights
In
connection with the private placement of the Series A Convertible Debentures,
we
entered into a registration rights agreement with the investors. In that
registration rights agreement, we agreed to file a registration statement,
at
our expense, to register the resale of the common stock issuable upon conversion
of the Series A Convertible Debentures. In the event that the resale
registration statement has not been declared effective within certain time
periods or if sales cannot be made pursuant to the registration statement
following its effectiveness, each as described in the registration rights
agreement, we will be obligated to pay to each investor liquidated damages,
subject to certain limitations set forth in the registration rights agreement.
This prospectus includes the 11,013,333 shares of common stock that we are
obligated to register under the registration rights agreement.
In
the
merger agreement pursuant to which we acquired SRS Energy, we granted the holder
of certain convertible notes “piggyback registration” rights. Under the
piggyback registration provisions, we are required, subject to certain limited
exceptions, to register all of the common stock issuable upon conversion of
such
notes in any registration statement that we file. This prospectus includes
the
7,866,800 shares of common stock that we are obligated to register under the
registration rights provision of the merger agreement.
Delaware
Law and Certain Charter and By-law Provisions
The
provisions of Delaware law and of our restated certificate of incorporation
and
restated by-laws discussed below could discourage or make it more difficult
to
accomplish a proxy contest or other change in our management or the acquisition
of control by a holder of a substantial amount of our voting stock. It is
possible that these provisions could make it more difficult to accomplish,
or
could deter, transactions that stockholders may otherwise consider to be in
their best interests or our best interests.
Classified
Board of Directors
.
Delaware
law permits any Delaware corporation to classify its board of directors into
as
many as three classes as equally as possible with staggered terms of office.
After initial implementation of a classified board, one class will be elected
at
each annual meeting of the stockholders to serve for a term of three years
(depending upon the number of classes into which directors are classified)
or
until their successors are elected and take office. Our restated certificate
of
incorporation provides for a classified board of directors divided into three
classes, with no class having more than one director more than any other class
and each class serving for a term of three years or until their successors
are
elected and qualified. Under Delaware law, stockholders of a corporation with
a
classified board of directors may only remove a director “for cause” unless the
restated certificate of incorporation provides otherwise. Our restated
certificate of incorporation does not so provide and, accordingly, stockholders
may
only remove a director “for cause.”
The
likely effect of the classification of the board of directors and the
limitations on the removal of directors is an increase in the time required
for
the stockholders to change the composition of the board of directors. For
example, because only approximately one-third of the directors may be replaced
by stockholder vote at each annual meeting of stockholders, stockholders seeking
to replace a majority of the members of the board of directors will need at
least two annual meetings of stockholders to effect this change.
Business
Combinations
.
We
are
subject to the provisions of Section 203 of the General Corporation Law of
the
State of Delaware. Section 203 prohibits a publicly-held Delaware corporation
from engaging in a “business combination” with an “interested stockholder” for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in
a prescribed manner. A “business combination” includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to specified exceptions, an “interested stockholder” is a
person who, together with affiliates and associates, owns, or within three
years
did own, 15% or more of the corporation’s voting stock.
Limitation
of Liability; Indemnification
.
Our
charter contains provisions permitted under the General Corporation Law of
the
State of Delaware relating to the liability of directors. The provisions
eliminate a director’s liability for monetary damages for a breach of fiduciary
duty as a director, except in circumstances involving wrongful acts, such as
the
breach of a director’s duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. The limitation of
liability described above does not alter the liability of our directors and
officers under federal securities laws. Furthermore, our restated certificate
of
incorporation and restated by-laws contain provisions to indemnify our directors
and officers to the fullest extent permitted by the General Corporation Law
of
the State of Delaware. These provisions do not limit or
eliminate our right or the right of any stockholder of
ours to
seek non-monetary relief, such as an injunction or rescission in the event
of a
breach by a director or an officer of his duty of care to us. We believe that
these provisions will assist us in attracting and retaining qualified
individuals to serve as directors.
Special Meeting of Stockholders .
Our
restated by-laws provide that special meetings of our stockholders may be called
only by our chairman of the board, chief executive officer or by our board
of
directors.
Advance
Notice Requirements for Stockholder Proposals and Director
Nominations
.
Our
restated by-laws provide that stockholders seeking to bring business before
an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual or special meeting of stockholders, must meet specified
procedural requirements. These provisions may preclude stockholders from
bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual or special meeting of
stockholders.
Preferred
Stock Issuances
.
Our
restated certificate of incorporation provides that, without stockholder
approval, we can issue up to 10,000,000 shares of preferred stock with rights
and preferences determined by our board of directors.
Shares
Eligible for Future Sale
As
of the
date of this prospectus, we had 49,343,680
shares of
common stock outstanding. That number does not include (i) the 6,400,000 shares
that are reserved for issuance under outstanding options and that may be issued
if and when the options are exercised, (ii) 9,333,333 (plus shares issuable
for
accrued interest) shares that may be issued upon the conversion of the Series
A
Convertible Debentures owned by the selling stockholders listed in this
prospectus, or (iii) 3,846,990 shares that may be issued upon the exercise
of
outstanding Warrants.
Freely
Tradeable Shares After Offering
.
As
of the
date of this prospectus, excluding the shares that are covered by this
prospectus, we believe 2,253,100
shares of our
49,343,680
currently outstanding shares can be publicly
resold without restriction under the Securities Act. Upon the re-sale of the
currently outstanding shares covered by this prospectus, approximately
21,133,233 shares will also be freely tradable without restriction or limitation
under the Securities Act.
Rule
144
.
In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities for
at
least one year, including persons who may be deemed our “affiliates,” as that
term is defined under the Securities Act, would be entitled to sell within
any
three month period a number of shares that does not exceed the greater of 1%
of
the then outstanding shares (approximately 636,040
shares
on a fully diluted, as if converted basis) or the average weekly trading volume
of shares during the four calendar weeks preceding such sale. Sales under Rule
144 are subject to certain manner-of-sale provisions, notice requirements and
the availability of current public information about the company. A person
who
has not been our affiliate at any time during the three months
preceding a sale, and who has beneficially owned his shares
for at least two years, would be entitled under Rule 144(k) to sell such shares
without regard to any volume limitations under Rule 144. Subject to certain
volume limitations and other conditions, all of the currently outstanding
unregistered shares are eligible for public resale under Rule 144. The
availability of Rule 144 to our holders of restricted securities is, however,
conditioned on various factors, including the availability of certain public
information concerning the Company.
Transfer Agent
Our
transfer agent currently is:
Signature
Stock Transfer, Inc.
2301
Ohio
Drive - Suite 100
Plano,
Texas 75093
Telephone
Number (972) 612 4120
Facsimile
Number (972) 612 4122
We
have
adopted provisions in our restated certificate of incorporation and restated
by-laws that limit the liability of our directors and provide for
indemnification of our directors and officers to the full extent permitted
under
the Delaware General Corporation Law. Under our restated certificate of
incorporation, and as permitted under the Delaware General Corporation Law,
directors are not liable to us or our stockholders for monetary damages arising
from a breach of their fiduciary duty of care as directors. Such provisions
do
not, however, relieve liability for breach of a director’s duty of loyalty to us
or our stockholders, liability for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, liability for
transactions in which the director derived as improper personal benefit or
liability for the payment of a dividend in violation of Delaware law. Further,
the provisions do not relieve a director’s liability for violation of, or
otherwise relieve us or our directors from the necessity of complying with
federal or state securities laws or affect the availability of equitable
remedies such as injunctive relief or rescission.
At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification by any director or
officer.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by our company of expenses incurred or paid by any of our directors,
officers or controlling persons 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, we will, unless in the opinion
of our 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.
The
financial statements for the years ended December 31, 2006 and 2005 included
in
this prospectus have been audited by Larry O’Donnell, C.P.A., P.C. to the extent
and for the periods indicated in their report thereon. Such financial statements
have been included in this prospectus and registration statement in reliance
upon the report of Larry O’Donnell, C.P.A., P.C. and upon the authority of such
firm as experts in auditing and accounting.
The
validity of the common stock offered hereby will be passed upon for us by
Sauerwein, Simon & Blanchard, P.C. Paul Simon, Jr., a shareholder
of Sauerwein, Simon & Blanchard, P.C., is one of our directors and
beneficially owns 49,998 shares of our common stock.
We
filed
with the SEC a registration statement on Form SB-2 under the Securities Act
for
the common stock to be sold in this offering. This prospectus does not contain
all of the information in the registration statement and the exhibits and
schedules that were filed with the registration statement. For further
information with respect to the common stock and us, we refer you to the
registration statement and the exhibits and schedules that were filed with
the
registration statement. Statements made in this prospectus regarding the
contents of any contract, agreement or other document that is filed as an
exhibit to the registration statement are not necessarily complete, and we
refer
you to the full text of the contract or other document filed as an exhibit
to
the registration statement. A copy of the registration statement and the
exhibits and schedules that were filed with the registration statement may
be
inspected without charge at the public reference facilities maintained by the
SEC, 100 F Street, Washington, DC 20549. Copies of all or any part of the
registration statement may be obtained from the SEC upon payment of the
prescribed fee. Information regarding the operation of the public reference
rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains
a
web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is
http://www.sec.gov
.
What
follows are the financial statements detailed below of CleanTech Biofuels,
Inc.
Prior to August 1, 2007, our name was Alternative Ethanol Technologies,
Inc.
|
Page
|
|
|
Audited
Financial Statements
|
|
|
Unaudited
Financial Statements
|
|
Larry
O'Donnell, CPA, P.C.
|
Telephone
(303) 745-4545
|
2228
South Fraser Street
Unit
I
Aurora,
Colorado 80014
|
Board
of
Directors
Alternative
Ethanol Technologies, Inc.
(Formerly
SRS Energy, Inc.)
I
have
audited the accompanying balance sheet of Alternative Ethanol Technologies,
Inc.
(formerly SRS Energy, Inc.) as of December 31, 2006, and the related
statements of operations, changes in stockholders’ deficit and cash flows for
each of the years in the two-year period ended and for the period July 14,
2004
(inception) to December 31, 2006. These financial statements are the
responsibility of the Company’s management. My responsibility is to
express an opinion on these financial statements based on my
audits.
I
conducted my audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that I 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. I believe that my audits provide a reasonable basis for
my opinion.
In
my
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Alternative Ethanol Technologies,
Inc. (formerly SRS Energy, Inc.) as of December 31, 2006, and the
results of its operations and its cash flows for the years then ended and for
the period from July 14, 2004 (inception) to December 31, 2006, in conformity
with generally accepted accounting principles in the United States of
America.
Larry
O'Donnell, CPA, P.C.
June
29,
2007
ALTERNATIVE
ETHANOL TECHNOLOGIES, INC.
(Formerly
SRS Energy, Inc.)
(A
Development Stage Company)
December
31, 2006
See
notes
to financial statements.
ALTERNATIVE
ETHANOL TECHNOLOGIES, INC.
(Formerly
SRS Energy, Inc.)
(A
Development Stage Company)
|
Year
ended December 31,
|
July
14, 2004
(inception)
to
December
31,
|
||||||||||
|
2006
|
2005
|
2006
|
|||||||||
|
Costs
and expenses:
|
|||||||||||
|
General
and administrative
|
$ |
16,496
|
$ |
6,104
|
$ |
22,700
|
|||||
|
Professional
fees
|
47,078
|
1,750
|
48,828
|
||||||||
|
Research
and development
|
14,000
|
14,000
|
|||||||||
|
Other
expense (income):
|
|||||||||||
|
Interest
|
2,439
|
299
|
2,738
|
||||||||
|
Deposit
forfeiture
|
(25,000 | ) | (25,000 | ) | |||||||
|
Net
loss applicable to common shareholders
|
$ | (55,013 | ) | $ | (8,153 | ) | $ | (63,266 | ) | ||
|
Basic
and diluted net loss per common share
|
$ | ** | $ | ** | |||||||
|
Weighted
average number of common
shares
outstanding
|
38,567,100
|
38,493,300
|
|||||||||
**
less
than $(.01) per share
See
notes
to financial statements.
ALTERNATIVE
ETHANOL TECHNOLOGIES, INC.
(Formerly
SRS Energy, Inc.)
(A
Development Stage Company)
|
Common
Stock
|
Additional
Paid-in
|
Deficit
Accumulated
From
|
||||||||||||||
|
Shares
|
Amount
|
Capital
|
Inception
|
|||||||||||||
|
Balances,
July 14, 2004 (inception)
|
--
|
$ |
--
|
$ |
--
|
$ |
--
|
|||||||||
|
Common
stock issued in July 2004,
valued
at $100 for organizational costs
|
38,470,900
|
38,471
|
(38,371 | ) | ||||||||||||
|
Net
loss
|
(100 | ) | ||||||||||||||
|
Balances,
January 1, 2005
|
38,470,900
|
38,471
|
(38,371 | ) | (100 | ) | ||||||||||
|
Common
stock sold for cash in
May
2005 at $.26 per share
|
38,471
|
38
|
9,962
|
|||||||||||||
|
Net
loss
|
(8,153 | ) | ||||||||||||||
|
Balances,
December 31, 2005
|
38,509,371
|
38,509
|
(28,409 | ) | (8,253 | ) | ||||||||||
|
Common
stock sold for cash in
January
2006 at $.13 per share
|
115,413
|
116
|
14,884
|
|||||||||||||
|
Net
loss
|
(55,013 | ) | ||||||||||||||
|
Balances,
December 31, 2006
|
38,624,784
|
$ |
38,625
|
$ |
13,525
|
$ | (63,266 | ) | ||||||||
See
notes
to financial statements.
ALTERNATIVE
ETHANOL TECHNOLOGIES, INC.
(Formerly
SRS Energy, Inc.)
(A
Development Stage Company)
|
Year
ended December 31,
|
July
14, 2004
(inception)
to
December
31,
|
|||||||||||
|
2006
|
2005
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
loss
|
$ | (55,013 | ) | $ | (8,153 | ) | $ | (63,266 | ) | |||
|
Adjustments
to reconcile net loss to
|
||||||||||||
|
net
cash used in operating activities:
|
||||||||||||
|
Common
stock issued for organizational costs
|
100
|
|||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Technology
license
|
(75,000 | ) | (42,500 | ) | (117,500 | ) | ||||||
|
Accrued
interest
|
2,439
|
2,439
|
||||||||||
|
Accrued
professional fees
|
42,103
|
42,103
|
||||||||||
|
Net
cash used in operating activities
|
(85,471 | ) | (50,653 | ) | (136,124 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Net
cash used in investing activities
|
--
|
--
|
--
|
|||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Advances
- related parties
|
69,914
|
41,230
|
111,144
|
|||||||||
|
Sale
of common stock
|
15,000
|
10,000
|
25,000
|
|||||||||
|
Net
cash provided by financing activities
|
84,914
|
51,230
|
136,144
|
|||||||||
|
Net
(decrease) increase in cash
|
(557 | ) |
577
|
20
|
||||||||
|
Cash
at beginning of year
|
577
|
|||||||||||
|
Cash
at end of year
|
$ |
20
|
$ |
577
|
$ |
20
|
||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ |
--
|
$ |
--
|
$ |
--
|
||||||
|
Supplemental
disclosure of noncash investing and
financing
activities:
|
||||||||||||
|
Common
stock issued for organizational costs
|
$ |
100
|
||||||||||
See
notes
to financial statements.
Alternative
Ethanol Technologies, Inc. (formerly SRS Energy, Inc.) (“SRS Energy” or
“Company”), a wholly-owned subsidiary of Supercritical Recovery Systems, Inc.,
was incorporated in Delaware on July 14, 2004.
The
Company is a development stage company that has been engaged in technology
development and pre-operational activities since its formation. Its
business strategy is to develop, own and operate renewable energy facilities
with a primary focus on the conversion of cellulose feedstocks to fuel ethanol
and other combustible fuels. The Company has limited exclusive
licenses to technology designed to convert cellulosic feed stocks, including
municipal garbage, into ethanol and other combustible sources of
energy. The Company has no operating history as a producer of ethanol
and has not constructed any ethanol plants to date. It has no
revenues to date and expects that its current capital and other existing
resources will be sufficient only to provide a limited amount of working
capital. The Company will require substantial additional capital
to implement our business plan and it may be unable to obtain the capital
required to do so.
Note
2 - Summary of Significant Accounting Policies
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 reporting amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the periods. Management makes these estimates using the best
information available at the time the estimates are made; however, actual
results could differ materially from these estimates.
Impairment
of Long-Lived Assets
The
Company records impairment losses on long-lived assets used in operations and
finite lived intangible assets when events and circumstances indicate the assets
might be impaired and the undiscounted cash flows estimated to be generated
by
those assets are less than their carrying amounts. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount.
Fair
Value of Financial Instruments
The
fair
value of the advances to officers/directors is not practicable to estimate,
based upon the related party nature of the underlying transactions.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with SFAS No. 123(R)
Share-Based Payment.
Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at
the
grant date based on the fair value of the award and is recognized as expense
on
a straight-line basis over the requisite service period, which is the vesting
period. We elected the modified-prospective method, under which prior
periods are not revised for comparative purposes. The valuation
provisions of SFAS 123R apply to new grants and to grants that were outstanding
as of the effective date and subsequently modified.
During
the years ended December 31, 2006 and 2005, there were no stock options granted
or outstanding.
Comprehensive
Income
SFAS
No.
130,
Reporting Comprehensive Income
, establishes requirements for
disclosure of comprehensive income (loss). During the years ended
December 31, 2006 and 2005, the Company did not have any components of
comprehensive income (loss) to report.
Net
Loss Per Share
SFAS
No.
128,
Earnings per Share
, requires dual presentation of basic and
diluted earnings or loss per share (“EPS”) for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution; diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity.
Basic
loss per share is computed by dividing net loss applicable to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share reflects the potential dilution
that could occur if dilutive securities and other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company, unless the
effect is to reduce a loss or increase earnings per share. The
Company had no potential common stock instruments which would result in a
diluted loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share.
Recently
Issued Accounting Pronouncements
In
June
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109,
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109,
Accounting for Income Taxes
. FIN 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return that results in a tax benefit. Additionally,
FIN 48 provides guidance on de-recognition, income statement classification
of
interest and penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company does not expect the
application of FIN 48 to have a material affect on its financial
statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements
. This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or permit fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect the application
of SFAS No. 157 to have a material affect on its financial
statements.
Note
3 - Technology Licenses
On
April 1, 2005, the Company
entered into an exclusive license with Brelsford Engineering, Inc. (“Brelsford”)
to use their technology (Patent No. 5,411,594) to convert cellulosic biomass
into fuel grade ethanol in the United States. This agreement was amended
in November 2005 to extend the initial evaluation period for the
technology.
Under
the
terms of the license with Brelsford, the Company paid an initial fee of $50,000
and pays a minimum annual fee of $15,000 and a project fee of $30,000 for
each
annual project that commences manufacture of a plant. On August 30,
2007, the Company paid the first annual project fee in the amount of $30,000
to
Breslford and Brelsford simultaneously acknowledged that the Company has
met all
requirements to maintain the exclusivity of its license. In addition,
we will pay a royalty fee equal to 4 percent of net sales resulting from
use of
the licensed product. Brelsford may terminate the license agreement
on sixty days’ notice if we fail to make any payment due under our license
agreement.
On
August 17, 2005, the
Company entered into an exclusive license agreement with Bio-Products
International, Inc. (“Bio-Products”) giving it limited exclusive rights to use
Bio-Products technology (Patent No. 6,306,248) to process municipal solid waste
and convert the cellulosic component of that waste to a homogenous feedstock
to
produce ethanol in the United States, subject to the right of Bio-Products
to
request five sites to construct garbage to ethanol plants in the United
States.
The
Company’s license with Bio-Products is for a period of twenty years. Under the
license, Bio-Products is paid a process royalty of $1.50 for every ton of waste
received and processed at each facility to be constructed and operated under
the
agreement. The Company also is required to pay a by-product royalty
of 2.5 percent of the gross sales price in excess of ten dollars per ton
obtained from the sale of recyclable byproducts, excluding the cellulosic
biomass. Bio-Products will also be paid a monthly fee for Technical
Services for each facility to be constructed and operated which initially will
be $10,000 per month and will increase to $20,000 per month when vessels for
processing waste are ordered for the facility. The $20,000 per month
fee continues until construction of the facility is completed.
Intangible
assets are reviewed for impairment whenever events or other changes in
circumstances indicate that the carrying amount may not be
recoverable. An impairment charge is recognized if an intangible
assets carrying amount exceeds its implied fair value.
Note
4 - Stockholders' Deficit
In
July
2004, the Company issued 38,470,900 shares of common stock to Supercritical
Recovery Systems, Inc., our parent, for organizational costs. These
shares were valued at $100.
In
May
2005, the Company sold 38,471 shares of common stock for $10,000 ($.26 per
share). In January 2006, the Company sold 115,413 shares of common
stock for $15,000 ($.13 per share).
Dividends
may be paid on outstanding shares as declared by the Board of
Directors. Each share of common stock is entitled to one
vote.
Note
5 - Income Taxes
The
Company recognizes deferred income tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the differences between the financial statement
carrying amounts and the tax basis of assets and liabilities using enacted
tax
rates in effect in the years in which the differences are expected to
reverse.
The
Company incurred no income taxes for the years ended December 31, 2006 and
2005. The expected income tax benefit for the years ended December
31, 2006 and 2005 is approximately $11,000 and $1,600,
respectively. The difference between the expected income tax benefit
and non-recognition of an income tax benefit in each period is the result of
a
valuation allowance applied to deferred tax assets.
Net
operating loss carryforwards of approximately $63,300 at December 31, 2006
are
available to offset future taxable income, if any, and expire in
2026. This results in a net deferred tax asset of approximately
$12,600 at December 31, 2006. A valuation allowance in the same
amount has been provided to reduce the deferred tax asset, as realization of
the
asset is not assured.
The
net
operating loss carryforwards may be limited under the Change of Control
provisions of the Internal Revenue Code section 382.
Note
6 - Related Party Transactions
During
2006 and 2005, the Company incurred corporate and administrative fees of
approximately $7,300 and $33,700 for expenses paid by its president on behalf
of
the Company. The Company has advances from its president of $39,041
at December 31, 2006. At the present time, the Company does not
require any office space and the Company uses the office of its president for
corporate and administrative purposes.
The
Company had a $72,103 advance from one of its board of director members at
December 31, 2006 evidenced by a promissory note that accrued interest at 9.5%
per annum. The promissory note also contained an option to acquire 5%
of the outstanding capital stock of SRS Energy, Inc. In April 2007,
the indebtedness under the promissory note was repaid in full, and the Company
issued a warrant exercisable until August 31, 2009 to purchase 1,923,495 shares
of its common stock at $.13 per share to replace the option included in the
promissory note, which shares were allocated from the merger consideration
paid
to stockholders of SRS Energy, Inc.
Note
7 - Subsequent Events
Recapitalization
of Company
On
March
27, 2007, Alternative Ethanol Technologies, Inc. (“AETA”) entered into an
Agreement and Plan of Merger and Reorganization with its wholly-owned subsidiary
SRS Acquisition Sub, a Delaware corporation (“SRS Acquisition”) and SRS Energy,
Inc. (“SRS Energy”) pursuant to which SRS Acquisition merged with and into SRS
Energy. The merger was consummated on May 31, 2007 and resulted in
SRS Energy becoming a wholly-owned subsidiary of AETA. As a result of
the merger, the shareholders of SRS Energy surrendered all of its issued and
outstanding common stock and received shares of AETA’s $.001 par value common
stock. The former parent of SRS Energy, Supercritical Recovery
Systems, Inc. immediately prior to the merger, distributed 78.8% of its 96%
ownership in SRS Energy to their shareholders on a pro rate basis.
For
accounting purposes, because AETA had been a public shell company prior to
the
merger, the merger was treated as an acquisition of AETA and a recapitalization
of SRS Energy. As such, the historical financial information prior to
the merger is that of SRS Energy. Historical share amounts have been
restated to reflect the effect of the merger.
Series
A Convertible Debentures
In
April
2007, the Company sold $1,400,000 of Series A Convertible Debentures
(“Debentures”) that convert into shares of the Company’s common stock at $.15
per share. The Debentures have Demand Registration Rights and accrue
interest at 6% per annum. The interest is payable in cash or shares
of the Company’s common stock at the Company’s option. The Company
received cash of $950,000 and Promissory Notes Receivable (“Notes”) of $450,000
that accrues interest at 6.0%. The Notes are due on the earlier of
April 16, 2008 or the effectiveness of the Company’s SB-2 Registration
Statement.
2007
Stock Option Plan
In
March
2007, the Company adopted the 2007 Stock Option Plan (“Stock Plan”) for its
employees, officers, directors and consultants. The Company has
reserved a maximum of 7,000,000 shares of common stock to be issued for the
exercise of options or shares awarded under the Stock Plan.
Commitment
The
Company has engaged Merrick & Company (“Merrick”), an engineering firm
located in Denver to test the commercial viability of the technologies that
we
have licensed and to construct a proto-type unit to demonstrate the various
processes used to convert waste to ethanol. Merrick is also
investigating other potential feed stocks such as wood waste, smith grass,
and
corn stover that can be used with our licensed technology to produce
ethanol. If the technology proves commercially viable after Merrick
completes its testing and validation, we intend to begin constructing operating
plants using this technology. The Company estimates the cost of this
testing and pilot plant construction at $400,000.
CLEANTECH
BIOFUELS, INC.
(Formerly
Alternative Ethanol Technologies, Inc.)
(A
Development Stage Company)
CLEANTECH
BIOFUELS, INC.
(Formerly
Alternative Ethanol Technologies, Inc.)
(A
Development Stage Company)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
July
14, 2004
(inception)
to
September
30,
|
||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
||||||||||||||||
|
Costs
and expenses:
|
||||||||||||||||||||
|
General
and administrative
|
$ |
50,608
|
$ |
1,813
|
$ |
283,959
|
$ |
14,071
|
$ |
306,659
|
||||||||||
|
Professional
fees
|
62,152
|
-
|
218,995
|
4,976
|
267,824
|
|||||||||||||||
|
Research
and development
|
41,533
|
10,000
|
41,533
|
14,000
|
55,533
|
|||||||||||||||
|
154,293
|
11,813
|
544,487
|
33,047
|
630,016
|
||||||||||||||||
|
Other
expense (income):
|
||||||||||||||||||||
|
Interest
|
21,466
|
-
|
42,563
|
-
|
45,300
|
|||||||||||||||
|
Amortization
of technology license
|
16,250
|
-
|
16,250
|
-
|
16,250
|
|||||||||||||||
|
Deposit
forfeiture
|
-
|
-
|
-
|
(25,000 | ) | (25,000 | ) | |||||||||||||
|
Interest
income
|
(9,038 | ) |
-
|
(14,058 | ) |
-
|
(14,058 | ) | ||||||||||||
|
28,678
|
-
|
44,755
|
(25,000 | ) |
22,492
|
|||||||||||||||
|
Net
loss applicable to common stockholders
|
$ |
182,971
|
$ |
11,813
|
$ |
589,242
|
$ |
8,047
|
$ |
652,508
|
||||||||||
|
Basic
and diluted net loss per common share
|
**
|
**
|
$ | (0.01 | ) |
**
|
$ | (0.02 | ) | |||||||||||
|
Weighted
average common shares outstanding
|
49,043,680
|
38,624,784
|
43,784,232
|
38,618,372
|
39,766,937
|
|||||||||||||||
|
**
- less than $.01 per share
|
||||||||||||||||||||
|
See
accompanying notes to financial statements.
|
||||||||||||||||||||
CLEANTECH
BIOFUELS, INC.
(Formerly
Alternative Ethanol Technologies, Inc.)
(A
Development Stage Company)
|
Common
Stock
|
Additional
Paid-in
|
July
14, 2004
(inception)
to
September
30,
|
||||||||||||||
|
Shares
|
Amount
|
Capital
|
2007
|
|||||||||||||
|
Balances
at July 14, 2004 (inception)
|
-
|
$ |
-
|
$ |
-
|
$ |
-
|
|||||||||
|
Common
stock issued in July 2004, valued at $100,
|
||||||||||||||||
|
for
organizational costs
|
38,470,900
|
38,471
|
(38,371 | ) | ||||||||||||
|
Net
loss
|
(100 | ) | ||||||||||||||
|
Balances
at January 1, 2005
|
38,470,900
|
38,471
|
(38,371 | ) | (100 | ) | ||||||||||
|
Common
stock sold for cash in May 2005 at $.26 per share
|
38,471
|
38
|
9,962
|
|||||||||||||
|
Net
loss
|
(8,153 | ) | ||||||||||||||
|
Balances
at December 31, 2005
|
38,509,371
|
38,509
|
(28,409 | ) | (8,253 | ) | ||||||||||
|
Common
stock sold for cash in January 2006 at $.13 per share
|
115,413
|
116
|
14,884
|
|||||||||||||
|
Net
loss
|
(55,013 | ) | ||||||||||||||
|
Balances
at December 31, 2006
|
38,624,784
|
38,625
|
(13,525 | ) | (63,266 | ) | ||||||||||
|
Shares
effectively issued to former AETA stockholders in
|
||||||||||||||||
|
Recapitalization
in May 2007
|
752,096
|
752
|
(134,348 | ) | ||||||||||||
|
Conversion
of promissory notes in May 2007 at $.014 per share
|
9,366,800
|
9,367
|
124,229
|
|||||||||||||
|
Issuance
of restricted shares to Directors in August 2007
|
||||||||||||||||
|
at
$.15 per share
|
600,000
|
600
|
89,400
|
|||||||||||||
|
Stock-based
compensation
|
11,413
|
|||||||||||||||
|
Net
loss
|
(589,242 | ) | ||||||||||||||
|
Balances
at September 30, 2007
|
49,343,680
|
$ |
49,344
|
$ |
77,169
|
$ | (652,508 | ) | ||||||||
|
See
accompanying notes to financial statements.
|
||||||||||||||||
CLEANTECH
BIOFUELS, INC.
(Formerly
Alternative Ethanol Technologies, Inc.)
(A
Development Stage Company)
|
Nine
months ended
September
30,
|
July
14, 2004
(inception)
to
September
30,
|
|||||||||||
|
OPERATING
ACTIVITIES
|
2007
|
2006
|
2007
|
|||||||||
|
Net
loss applicable to common stockholders
|
$ | (589,242 | ) | $ | (8,047 | ) | $ | (652,508 | ) | |||
|
Adjustments
to reconcile net loss applicable to common
|
||||||||||||
|
stockholders
to net cash used by operating activities:
|
||||||||||||
|
Common
stock issued for organizational costs
|
-
|
-
|
100
|
|||||||||
|
Amortization
|
16,250
|
-
|
16,250
|
|||||||||
|
Share-based
compensation expense
|
11,413
|
-
|
11,413
|
|||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Interest
receivable
|
(12,525 | ) |
-
|
(12,525 | ) | |||||||
|
Prepaids
and other current assets
|
(55,913 | ) |
-
|
(55,913 | ) | |||||||
|
Technology
license
|
(15,000 | ) | (75,000 | ) | (132,500 | ) | ||||||
|
Accounts
payable
|
50,899
|
-
|
50,899
|
|||||||||
|
Accrued
interest
|
36,528
|
-
|
38,967
|
|||||||||
|
Accrued
liabilities
|
(30,132 | ) |
-
|
11,971
|
||||||||
|
Cash
used by operating activities
|
(587,722 | ) | (83,047 | ) | (723,846 | ) | ||||||
|
INVESTING
ACTIVITIES
|
||||||||||||
|
Cash
used by investing activities
|
-
|
-
|
-
|
|||||||||
|
FINANCING
ACTIVITIES
|
||||||||||||
|
Advances
- related parties
|
(111,165 | ) |
67,735
|
(21 | ) | |||||||
|
Series
A Convertible Debentures
|
950,000
|
-
|
950,000
|
|||||||||
|
Sale
of common stock
|
-
|
15,000
|
25,000
|
|||||||||
|
Loans
- related parties
|
-
|
(200 | ) |
-
|
||||||||
|
Cash
provided by financing activities
|
838,835
|
82,535
|
974,979
|
|||||||||
|
Increase
(decrease) in cash and cash equivalents
|
251,113
|
(512 | ) |
251,133
|
||||||||
|
Cash
and cash equivalents at beginning of period
|
20
|
577
|
-
|
|||||||||
|
Cash
and cash equivalents at end of period
|
$ |
251,133
|
$ |
65
|
$ |
251,133
|
||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ |
6,334
|
$ |
-
|
$ |
6,334
|
||||||
|
Supplemental
disclosure of noncash investing and
|
||||||||||||
|
financing
activities:
|
||||||||||||
|
Promissory
notes receivable
|
$ |
450,000
|
$ |
-
|
$ |
450,000
|
||||||
|
Series
A Convertible Debentures
|
$ |
450,000
|
$ |
-
|
$ |
450,000
|
||||||
|
Restricted
common stock issued to Directors
|
$ |
90,000
|
$ |
-
|
$ |
90,000
|
||||||
|
Common
stock issued for organizational costs
|
$ |
-
|
$ |
-
|
$ |
100
|
||||||
|
Common
stock issued for promissory notes
|
$ |
133,596
|
$ |
-
|
$ |
133,596
|
||||||
|
See
accompanying notes to condensed consolidated financial
statements.
|
||||||||||||
The
accompanying unaudited financial statements have been prepared in accordance
with the accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB and Item 310 of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for annual financial
statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals considered necessary for a fair presentation,
have
been included. Operating results for the three and nine months ended September
30, 2007 are not necessarily indicative of the results that may be expected
for
the year ending December 31, 2007. These interim financial statements
should be read in conjunction with the Company’s audited financial statements
for the year ended December 31, 2006.
Note
2 – Organization and Business
Alternative
Ethanol Technologies, Inc. (formerly SRS Energy, Inc.) (“Company”), was
incorporated in Delaware on December 20, 1996. Effective August 2, 2007,
Alternative Ethanol Technologies, Inc. changed its name to CleanTech Biofuels,
Inc.
On
March
27, 2007, Alternative Ethanol Technologies, Inc. (“AETA”) entered into an
Agreement and Plan of Merger and Reorganization with its wholly-owned subsidiary
SRS Acquisition Sub, a Delaware corporation (“SRS Acquisition”) and SRS Energy,
Inc. (“SRS Energy”) pursuant to which SRS Acquisition merged with and into SRS
Energy. The merger was consummated on May 31, 2007 and resulted in
SRS Energy becoming a wholly-owned subsidiary of AETA. As a result of
the merger, the shareholders of SRS Energy surrendered all of its issued and
outstanding common stock and received shares of AETA’s $.001 par value common
stock. The former parent of SRS Energy, Supercritical Recovery
Systems, Inc. immediately prior to the merger, distributed 78.8% of its 96%
ownership in SRS Energy to their shareholders on a pro rate basis.
For
accounting purposes, because AETA had been a public shell company prior to
the
merger, the merger was treated as an acquisition of AETA and a recapitalization
of SRS Energy. As such, the historical financial information prior to
the merger is that of SRS Energy. Historical share amounts have been
restated to reflect the effect of the merger.
The
Company is a development stage company that has been engaged in technology
development and pre-operational activities since its formation. Its
business strategy is to develop, own and operate renewable energy facilities
with a primary focus on the conversion of cellulose feedstocks to fuel ethanol
and other combustible fuels. The Company has limited exclusive
licenses to technology designed to convert cellulosic feed stocks, including
municipal garbage, into ethanol and other combustible sources of
energy. The Company has no operating history as a producer of ethanol
and has not constructed any ethanol plants to date. It has no
revenues to date and expects that its current capital and other existing
resources will be sufficient only to provide a limited amount of working
capital. The Company will require substantial additional capital
to implement our business plan and it may be unable to obtain the capital
required to do so.
Note
3 - Technology Licenses
On
April 1, 2005, the Company
entered into an exclusive license with Brelsford Engineering, Inc. (“Brelsford”)
to use their technology (Patent No. 5,411,594) to convert cellulosic biomass
into fuel grade ethanol in the United States. This agreement was amended
in November 2005 to extend the initial evaluation period for the
technology.
Under
the
terms of the license with Brelsford, the Company paid an initial fee of $50,000
and monthly fees for the trial option premium totaling $67,500. The Company
also
pays a minimum annual fee of $15,000 and a project fee of $30,000 for each
project that commences for the manufacture of a plant. On August 30,
2007, the Company paid the first project fee in the amount of $30,000 to
Breslford with the respect to the commencement of the design of our pilot
plant
and Brelsford simultaneously acknowledged that the Company has met all
requirements to maintain the exclusivity of its license. In addition,
the Company will pay a royalty fee equal to 4 percent of sales resulting
from use of the licensed product less any applicable taxes. Brelsford
may terminate the license agreement on sixty days’ notice if the Company fails
to make any payment due under our license agreement. Commencing with the
first
project payment, the Company began amortizing costs previously capitalized
over
the remaining term of the license. The license, issued to Brelsford, terminates
simultaneously with the expiration of the patent, in May
2015.
On
August 17, 2005, the
Company entered into an exclusive license agreement with Bio-Products
International, Inc. (“Bio-Products”) giving it limited exclusive rights to use
Bio-Products technology (Patent No. 6,306,248) to process municipal solid waste
and convert the cellulosic component of that waste to a homogenous feedstock
to
produce ethanol in the United States, subject to the right of Bio-Products
to
request five sites to construct garbage to ethanol plants in the United
States.
The
Company’s license with Bio-Products is for a period of twenty years. Under the
license, Bio-Products is paid a process royalty of $1.50 for every ton of
waste
received and processed at each facility to be constructed and operated under
the
agreement. The Company also is required to pay a by-product royalty
of 2.5 percent of the gross sales price in excess of ten dollars per ton
obtained from the sale of recyclable byproducts, excluding the cellulosic
biomass. Bio-Products will also be paid a monthly fee for technical
services to be provided by Bio-Products for each facility to be constructed
and
operated which initially will be $10,000 per month and will increase to $20,000
per month when vessels for processing waste are ordered for the
facility. The $20,000 per month fee continues until construction of
the facility is completed.
Intangible
assets are reviewed for impairment whenever events or other changes in
circumstances indicate that the carrying amount may not be
recoverable. An impairment charge is recognized if an intangible
assets carrying amount exceeds its implied fair value.
Note
4 - Series A Convertible Debentures
In
April
2007, the Company sold $1,400,000 of Series A Convertible Debentures
(“Debentures”) that convert into shares of the Company’s common stock at $.15
per share. The Debentures have Demand Registration Rights and accrue interest
at
6% per annum. The interest is payable in cash or shares of the Company’s common
stock at the Company’s option. The Company received cash of $950,000 and
Promissory Notes (“Notes”) of $450,000 that accrues interest at
6.0%. The Notes are due on the earlier of April 16, 2008 or the
effectiveness of the Company’s SB-2 Registration Statement.
Note
5 - Stockholders' Deficit
Common
Stock
In
July
2004, the Company issued 38,470,900 shares of common stock to Supercritical
Recovery Systems, Inc., our parent, for organizational costs. These
shares were valued at $100.
In
May
2005, the Company sold 38,471 shares of common stock for $10,000 ($.26 per
share). In January 2006, the Company sold 115,413 shares of common
stock for $15,000 ($.13 per share).
In
May
2007, SRS Energy completed its reverse merger with AETA with the issuance of
38,624,784 shares of AETA’s common stock and the issuance of a warrant
exercisable until August 31, 2009 to purchase 1,923,495 shares of common stock
at $.13 per share in exchange for cancellation of all of the outstanding capital
stock of SRS Energy and cancellation of an option to acquire 5% of the
outstanding capital stock of SRS Energy that had previously been
issued. AETA in January 2007 had reversed split its common stock 100
to 1. For accounting purposes, because AETA had been a public shell
company prior to the merger, the merger was treated as an acquisition of AETA
and a recapitalization of SRS Energy. As such, the historical
financial information prior to the merger is that of SRS
Energy. Historical share amounts have been restated to reflect the
effect of the merger.
In
May
2007, AETA issued 9,366,800 shares of common stock ($.014 per share) for three
promissory notes totaling $114,681 and accrued interest of $18,915.
Note
6 - Related Party Transactions
During
the three and nine-month periods ended September 30, 2007, the Company incurred
corporate and administrative fees of approximately $200 and $4,200, respectively
($300 and $3,200 for the three and nine-month periods ended September 30,
2006)
for expenses paid by its president on behalf of the Company. The Company
has
advances to its president of $21 at September 30, 2007. The Company
has been using the office of its president for corporate and administrative
purposes. We have entered into a lease for office space which we expect to
occupy in early December 2007 (See Note 9 for new office lease
information).
The
Company had a $72,103 advance from one of its board of director members at
December 31, 2006 evidenced by a promissory note that accrued interest at
9.5%
per annum. The promissory note also contained an option to acquire 5%
of the outstanding capital stock of SRS Energy at a price of
$250,000. In April 2007, the indebtedness under the promissory note
was repaid and the promissory note was cancelled. Under its terms,
the right to exercise the option to purchase shares survived after the repayment
of the indebtedness under the note. As part of the merger consideration,
the
Company issued a warrant exercisable until August 31, 2009 to purchase 1,923,495
shares of its common stock at $.13 per share to replace the option included
in
the promissory note on substantially similar terms as the
option.
In
August
2007, the Company entered into stock purchase agreements with certain members
of
the Board of Directors. The directors issued notes to the Company in exchange
for their stock purchases. See Note 7 for further discussion. These notes
are
recorded as long-term notes receivable on the Balance Sheet.
Note
7 – Share-based Payments
The
Company accounts for stock options and restricted stock issued to employees
and
directors under SFAS No. 123(R), "Share-Based Payment". Under SFAS No. 123(R),
share-based compensation cost to employees and directors is measured at the
grant date, based on the estimated fair value of the award, and is recognized
as
expense over the requisite service period. The Company has no awards with
market
or performance conditions.
In
March
2007, the Company adopted the 2007 Stock Option Plan (“Stock Plan”) for its
employees, officers, directors and consultants. The Company has
reserved a maximum of 7,000,000 shares of common stock to be issued for the
exercise of options or shares awarded under the Stock Plan. We also have
an
equity compensation plan for non-employee directors pursuant to which stock
options and shares of restricted stock may be granted.
In
August
2007, the Company granted options to purchase an aggregate 3,850,000 shares
of
common stock to various employees that vest ratably over three years and
options
to purchase an aggregate 160,000 shares of common stock to directors that
vest
ratably over two years. All options have an exercise price of $0.15. No options
were cancelled, expired or exercisable as of September 30,
2007.
Additionally,
upon commissioning of the pilot plant, an option to purchase 1,200,000 shares
of
common stock will be issued to our Chief Executive Officer. This option has
not
yet been granted, but if and when granted, will vest ratably over three years
beginning on August 31, 2009.
The
estimated fair value of stock option grants is computed using the binomial
option-pricing model. Generally, expected volatility is based on historical
periods commensurate with contractual term of options. However, since we
have no
history of stock price volatility as a public company at the time of the
grants,
we calculated volatility by considering historical volatilities of public
companies in our industry. Due to the short history of our industry, the
historical period used in our calculations is shorter than the contractual
term
of the options. The fair value for options granted was estimated at the date
of
grant to be $0.097 per share assuming a contract term of 7 years, a risk-free
interest rate of 4.38%, expected volatility of 61.5% and no expected dividends.
Stock option expense is recognized in the statements of operations ratably
over
the vesting period based on the number of options that are expected to
ultimately vest. We currently use a forfeiture rate of zero percent for all
existing share-based compensation awards since we have no historical forfeiture
experience under our share-based payment plans. Our options have characteristics
significantly different from those of traded options and changes in the
assumptions can materially affect the fair value estimates.
During
the three and nine months ended September 30, 2007, the Company recorded,
as
general and administrative expenses, stock based compensation of $10,543
for
employee stock options and $870 for director stock options. Related to these
grants, the Company will record future compensation expense for stock options
of
approximately $33,000 and $132,000 during the year ending December 31, 2007
and
December 31, 2008, respectively.
The
potential tax benefit realizable for the anticipated tax deductions of the
exercise of share-based payment arrangements totaled $4,708 for both the
three
and nine month periods ended September 30, 2007. However, due to the uncertainty
that the tax benefits will be realized, these potential benefits were not
recognized currently.
As
of
September 30, 2007, there was approximately $378,000 of unrecognized
compensation cost related to 4,010,000 nonvested stock options that we expect
to
ultimately vest. These options have a weighted average exercise price of
$0.15.
The unrecognized compensation cost is expected to be recognized over a
weighted-average period of 2.96 years.
In
August
2007, the Company entered into stock purchase agreements with certain members
of
the Board of Directors. Under the agreements, each director agreed to purchase
150,000 shares of common stock of the Company at a cost of $.15 per share.
The
directors issued notes to the Company in exchange for their stock purchases.
The
shares issued under the agreements are restricted shares subject to a right,
but
not obligation, of repurchase by the Company. The Company may
exercise its repurchase right only during
the 60 day period following a director’s termination of
service on the Board of Directors. The Company’s repurchase rights lapse at the
rate of 8,333 shares per month, commencing on September 21, 2007, of continuous
service on the Board of Directors performed by each director for the first
year
of service. Following the first year of service, the Company’s
repurchase rights lapse on 4,167 shares per month, commencing on September
21,
2008, of continuous board service until the repurchase rights have lapsed
on all
restricted shares. At September 30, 2007, 566,668 shares were subject
to a right of repurchase.
Pursuant to a settlement agreement, RAM Resources, L.L.C. obtained the right to acquire an aggregate of 1,923,495 shares of our common stock at a price of $0.13 per share. This warrant is exercisable during a two year term that started on August 29, 2007 and ends on August 29, 2009. RAM Resources, L.L.C. agreed to terminate the Letter Agreement and release all claims to acquire any shares of our stock.
Note
8 - Recent Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair Value
Measurements
”. The objective of SFAS No. 157 is to increase consistency and
comparability in fair value measurements and to expand disclosures about
fair
value measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. The
provisions of SFAS No. 157 are effective for fair value measurements made
in
fiscal years beginning after November 15, 2007. The adoption of this statement
is not expected to have a material effect on the Company's future reported
financial position or results of operations.
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No.
159, “
The Fair Value Option for Financial Assets and Financial Liabilities
–
Including an Amendment of FASB Statement No. 115
”. This
statement permits entities to choose to measure many financial instruments
and
certain other items at fair value. Most of the provisions of SFAS No. 159
apply
only to entities that elect the fair value option. However, the amendment
to
SFAS No. 115 “
Accounting for Certain Investments in Debt and Equity
Securities
” applies to all entities with available-for-sale and trading
securities. SFAS No. 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Early adoption is permitted
as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provision of SFAS No. 157,
“
Fair Value Measurements”.
The adoption of this statement is not
expected to have a material effect on the Company's financial
statements.
Note
9 - Commitments
Project
management
- The Company has engaged Merrick & Company (“Merrick”), an
engineering firm located in Denver, to test the commercial viability of the
technologies that we have licensed and to construct a proto-type unit to
demonstrate the various processes used to convert waste to
ethanol. Merrick is also investigating other potential feedstocks
such as wood waste, switch grass, and corn stover that can be used with our
licensed technology to produce ethanol. If the technology proves
commercially viable after Merrick completes its testing and validation, the
Company intends to begin constructing operating plants using this
technology. The Company estimates the cost of this testing and pilot
plant construction at $400,000.
Lease
-
We entered into a lease on October 16, 2007 (expecting to occupy in
early December) to rent approximately 1,800 square feet of office space for
use as our corporate office, located at 7386 Pershing Ave., in St. Louis,
Missouri for a term of three years. Our monthly rent under the lease
is $1,800 plus the cost of utilities.
PART
II – INFORMATION NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification Of Directors And Officers
Section
145 of the Delaware General Corporation Law (“DGCL”) makes provision for the
indemnification of officers and directors of corporations in terms sufficiently
broad to indemnify our officers and directors under certain circumstances from
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act.
As
permitted by the DGCL, our restated certificate of incorporation provides that,
to the fullest extent permitted by the DGCL, no director shall be personally
liable to us or to our stockholders for monetary damages for breach of his
fiduciary duty as a director. Delaware law does not permit the elimination
of
liability (i) for any breach of the director’s duty of loyalty to us or our
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases or (iv)
for any transaction from which the director derives an improper personal
benefit. The effect of this provision in the restated certificate of
incorporation is to eliminate the rights of this corporation and its
stockholders (through stockholders’ derivative suits on behalf of this
corporation) to recover monetary damages against a director for breach of
fiduciary duty as a director thereof (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
in
clauses (i)-(iv), inclusive, above. These provisions will not alter the
liability of directors under federal securities laws.
Our
restated certificate of incorporation provides that we have the power to
indemnify, and our restated by-laws state that we shall indemnify, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in our right) by
reason of the fact that he is or was a director, officer, employee or agent
of
this corporation or is or was serving at our request as a director, officer,
employee or agent of another corporation or enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person’s conduct was unlawful. Our restated by-laws further provide that we
may purchase and maintain insurance on our own behalf and on behalf of any
person who is or was a director, officer, employee, fiduciary or agent of this
corporation or was serving at our request as a director, officer, employee
or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred by
him
or her in any such capacity, whether or not we would have the power to indemnify
such person against such liability under our restated by-laws.
Item
25. Other Expenses Of Issuance And Distribution
We
estimate that expenses in connection with the distribution described in this
registration statement (other than brokerage commissions, discounts or other
expenses relating to the sale of the shares by the selling stockholders) will
be
as set forth below. We will pay all of the expenses with respect to the
distribution, and such amounts, with the exception of the Securities and
Exchange Commission registration fee, are estimates.
|
Amount
to be Paid
|
||||
|
Securities
and Exchange Commission registration fee
|
$ |
1,000
|
||
|
Legal
fees and expenses
|
75,000
|
|||
|
Accounting
fees and expenses
|
25,000
|
|||
|
Transfer
agent and registrar fees
|
6,000
|
|||
|
Total
|
$ |
107,000
|
||
Item
26. Recent Sales of Unregistered Securities
Our
predecessor, Long Road Entertainment, Inc., issued the following shares of
common stock (adjusted for our 100:1 reverse split in 2007):
|
Amount
of Shares
|
Date
|
Issued
To
|
Price/Consideration
|
|
78,900
|
10/18/04
|
Seaside
Investments, LLC
|
Services
rendered
|
|
3,945
|
10/21/04
|
Hunter
Wise Securities, LLC
|
Services
rendered
|
|
1,119
|
3/21/05
|
King’s
Point Capital
|
$5,952
|
|
16,500
|
4/6/05
|
Crescent
Fund, LLC
|
$82,500
|
|
15,000
|
7/13/05
|
Crescent
Fund, LLC
|
$75,000
|
|
1,500
|
8/17/05
|
Hayde
Family Revocable Trust
|
$7,500
|
|
1,500
|
8/17/05
|
Sweeney
Family Revocable Trust
|
$7,500
|
Each
issuance set forth above was exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 506
of Regulation D promulgated under the Securities Act and Section 4(2) of the
Securities Act.
On
April
16, 2007, SRS Energy, Inc., currently our wholly-owned subsidiary, completed
a
$1,400,000 private placement of Series A Convertible Debentures to a group
of
accredited investors with each debenture being convertible into shares of common
stock at an initial conversion ratio of $0.15 per share. The private placement
was exempt from the registration requirements of the Securities Act, pursuant
to
Rule 506 of Regulation D promulgated under the Securities Act and Section 4(2)
of the Securities Act.
On
May
24, 2007, holders of certain convertible notes originally issued in 2003 and
2004 by Long Road Entertainment, our predecessor, converted their notes at
$0.01
per share of common stock pursuant to the terms of the notes. As a
result, we issued 9,366,800 shares of our common stock in the aggregate to
the
following holders of the convertible notes:
The
noteholders acquired the notes in April 2007 from Robert Stinson, the former
founder and controlling stockholder of our company, a company affiliated with
Mr. Stinson, and a consulting company that acted as an advisor to our company
in
2004, but was not an affiliate of our company. The issuance was
exempt from the registration requirements of the Securities Act, pursuant to
Rule 506 of Regulation D promulgated under the Securities Act and Section 4(2)
of the Securities Act.
On
May
31, 2007, we consummated our acquisition of SRS Energy, Inc. through the merger
of SRS AcquisitionSub, our wholly-owned subsidiary, with and into SRS
Energy. In connection therewith, we issued a total of 38,623,780
shares of our common stock to the former shareholders of SRS Energy, a warrant
to William Meyer to acquire 1,923,495 shares of our common stock at a price
of
$0.13 per share and assumed the Series A Convertible Debentures previously
issued by SRS Energy, as consideration for the acquisition for all of the
outstanding shares of SRS Energy. The warrant is exercisable at any
time up until August 31, 2009, when it expires. The issuances were
exempt from the registration requirements of the Securities Act, pursuant to
Rule 506 of Regulation D promulgated under the Securities Act and Section 4(2)
of the Securities Act.
On
August
21, 2007 and August 31, 2007, we awarded stock options to our (i) executive
officers representing the right to acquire in the aggregate 3,850,000 shares
of
our common stock, and (ii) directors, other than Mr. Hennessey, representing
the
right to acquire in the aggregate 160,000 shares of our common
stock. All of these stock options have an exercise price of $0.15 per
share. On August 21, 2007, we also issued to our directors, other
than Mr. Hennessey, 600,000 restricted shares of our common stock in the
aggregate at a price of $0.15 per share. The award of stock options
and the issuance of restricted stock to our executive officers and directors
were exempt from the registration requirements of the Securities Act pursuant
to
Rule 701 promulgated under the Securities Act.
We
will
account for the grants of stock options and restricted stock in accordance
with
FASB 123R.
On
August
30, 2007, we issued a warrant to RAM Resources, L.L.C. to purchase 1,923,495
shares of our common stock at a price of $0.13 per share. The warrant
is exercisable at any time in the two years since its issuance. The
warrant was issued as consideration for the full and unconditional release
of
the Company from any and all claims of RAM Resources, L.L.C, relating to rights
to acquire shares of our common stock. The issuance was exempt from
the registration requirements of the Securities Act, pursuant to Rule 506 of
Regulation D promulgated under the Securities Act and Section 4(2) of the
Securities Act.
The
warrant issued to RAM Resources will be accounted for in accordance with SFAS
133 (paragraphs 6-9) and EITF 00-19 as appropriate.
Item
27. Exhibits
The
following exhibits are filed as part of this report:
|
Exhibit
Number
|
Description
|
|
3.1
*
|
Restated
Certificate of Incorporation.
|
|
3.2
*
|
Restated
By-Laws.
|
|
4.1
*
|
Form
of Series A Convertible Debenture.
|
|
4.2
*
|
Investors’
Rights Agreement dated as of April 16, 2007 by and among SRS Energy,
Inc.
and certain Investors.
|
|
4.3
*
|
Series
A Debenture Purchase Agreement dated as of April 16, 2007 by and
among SRS
Energy, Inc. and certain Investors.
|
|
4.4
*
|
Warrant
dated August 31, 2007 by CleanTech Biofuels, Inc. in favor of RAM
Resources, L.L.C.
|
|
5.1
*
|
Opinion
of Sauerwein, Simon & Blanchard, P.C.
|
|
10.1
*
|
Exclusive
License Agreement between Brelsford Engineering, Inc. and SRS Energy,
Inc.
dated as of April 1, 2005.
|
|
10.2
*
|
Amendment
to Exclusive License Agreement between Brelsford Engineering, Inc.
and SRS
Energy, Inc. dated as of January 11, 2006.
|
|
10.3
*
|
Technology
License Agreement between Bio-Products International, Inc. and
SRS Energy,
Inc. dated as of August 17, 2005.
|
|
10.4
*
|
Technology
License Agreement between Bio Products International, Inc. and
SRS Energy,
Inc. dated as of March 8, 2007.
|
|
10.5
*
|
Engagement
Agreement between Alternative Ethanol Technologies, Inc. k/n/a
CleanTech
Biofuels, Inc. and Merrick & Company.
|
|
10.6
*
|
Consulting
Fee Agreement between Alternative Ethanol Technologies k/n/a CleanTech
Biofuels, Inc. and Five Sigma Ltd. dated as of April 17,
2007.
|
|
10.7
*
|
2007
Stock Option Plan.
|
|
10.8
*
|
Form
of Director Stock Option Agreement.
|
|
10.9
*
|
Director
Stock Purchase Agreement.
|
|
10.10
*
|
Employment
Agreement – Edward P. Hennessey, Jr.
|
|
10.11
*
|
Form
of Employee Agreement – Michael Kime and Tom Jennewein.
|
|
10.12
*
|
Form
of Employee Stock Option Agreement – Edward P. Hennessey, Jr., Michael
Kime and Tom Jennewein.
|
|
10.13
|
Commercial
Lease with Pershing Properties, LLC dated October 12,
2007.
|
|
21.1
*
|
List
of Subsidiaries.
|
|
23.1
*
|
Consent
of Sauerwein, Simon & Blanchard, P.C. (contained in Exhibit
5.1).
|
|
23.2
|
Consent
of Larry O’Donnell, CPA, P.C.
|
|
24
*
|
Power
of Attorney.
|
_________________________
|
*
|
Previously
filed with Amendment No. 1 to the Registration Statement on Form
SB-2
(Sec. No. 333-145939) on October 24,
2007.
|
Item
28. Undertakings
A.
Rule
415 Offering
We
hereby
undertake:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth 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 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
(iii)
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that 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 which remain unsold at the termination of the
offering.
(4)
For
determining liability of the Company under the Securities Act of 1933 to any
purchaser in the initial distribution of the securities, the Company undertakes
that in a primary offering of securities of the Company pursuant to this
registration statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the Company will
be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the Company relating to the offering
required to be filed pursuant to Rule 424;
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
Company or used or referred to by the Company;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the Company or its securities provided by or on
behalf of the Company; and
(iv)
Any
other communication that is an offer in the offering made by the Company to
the
purchaser.
B.
Request for Acceleration of Effective Date
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
Company pursuant to the foregoing provisions, or otherwise, the Company 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.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the Company of expenses incurred or paid by a director, officer
or
controlling person of the Company 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 Company 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 Act and
will
be governed by the final adjudication of such issue.
C.
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness.
Provided
,
however
, that no statement
made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to
such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made
in
any such document immediately prior to such date of first use.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements of filing on Form SB-2 and authorized this Pre-Effective Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in St. Louis, Missouri, on November 30, 2007.
|
CleanTech
Biofuels, Inc.
|
||
|
By:
|
/s/
Edward P. Hennessey, Jr.
|
|
|
Edward
P. Hennessey, Jr.
|
||
|
President
and
Chief
Executive Officer
|
||
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/
Edward P. Hennessey, Jr.
|
Chief
Executive Officer, President, Chairman of the Board, and Director
(Principal Executive Officer and Principal Financial and Accounting
Officer)
|
November
30, 2007
|
||
|
Edward
P. Hennessey, Jr.
|
|
|
||
|
/s/
Michael D. Kime
|
General
Counsel and Secretary
|
November
30, 2007
|
||
|
Michael
D. Kime
|
|
|
||
|
/s/
Benton Becker*
|
Director
|
November
30, 2007
|
||
|
Benton
Becker
|
|
|
||
|
/s/
Ira Langenthal, Phd.*
|
Director
|
November
30, 2007
|
||
|
Ira
Langenthal, Phd.
|
|
|||
|
/s/
Paul Simon, Jr.*
|
Director
|
November
30, 2007
|
||
|
Paul
Simon, Jr.
|
|
|||
|
/s/
Larry McGee*
|
Director
|
November
30, 2007
|
||
|
Larry
McGee
|
|
|
||
|
*
|
/s/
Edward P. Hennessey, Jr.
|
|
|
Edward
P. Hennessey, Jr., as attorney-in-fact
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
|
3.1
*
|
Restated
Certificate of Incorporation.
|
|
3.2
*
|
Restated
By-Laws.
|
|
4.1
*
|
Form
of Series A Convertible Debenture.
|
|
4.2
*
|
Investors’
Rights Agreement dated as of April 16, 2007 by and among SRS Energy,
Inc.
and certain Investors.
|
|
4.3
*
|
Series
A Debenture Purchase Agreement dated as of April 16, 2007 by and
among SRS
Energy, Inc. and certain Investors.
|
|
4.4
*
|
Warrant
dated August 31, 2007 by CleanTech Biofuels, Inc. in favor of RAM
Resources, L.L.C.
|
|
5.1
*
|
Opinion
of Sauerwein, Simon & Blanchard, P.C.
|
|
10.1
*
|
Exclusive
License Agreement between Brelsford Engineering, Inc. and SRS Energy,
Inc.
dated as of April 1, 2005.
|
|
10.2
*
|
Amendment
to Exclusive License Agreement between Brelsford Engineering, Inc.
and SRS
Energy, Inc. dated as of January 11, 2006.
|
|
10.3
*
|
Technology
License Agreement between Bio-Products International, Inc. and
SRS Energy,
Inc. dated as of August 17, 2005.
|
|
10.4
*
|
Technology
License Agreement between Bio Products International, Inc. and
SRS Energy,
Inc. dated as of March 8, 2007.
|
|
10.5
*
|
Engagement
Agreement between Alternative Ethanol Technologies, Inc. k/n/a
CleanTech
Biofuels, Inc. and Merrick & Company.
|
|
10.6
*
|
Consulting
Fee Agreement between Alternative Ethanol Technologies k/n/a CleanTech
Biofuels, Inc. and Five Sigma Ltd. dated as of April 17,
2007.
|
|
10.7
*
|
2007
Stock Option Plan.
|
|
10.8
*
|
Form
of Director Stock Option Agreement.
|
|
10.9
*
|
Director
Stock Purchase Agreement.
|
|
10.10
*
|
Employment
Agreement – Edward P. Hennessey,
Jr.
|
|
10.11
*
|
Form
of Employee Agreement – Michael Kime and Tom Jennewein.
|
|
10.12
*
|
Form
of Employee Stock Option Agreement – Edward P. Hennessey, Jr., Michael
Kime and Tom Jennewein.
|
|
10.13
|
Commercial
Lease with Pershing Properties, LLC dated October 12,
2007.
|
|
21.1
*
|
List
of Subsidiaries.
|
|
23.1
*
|
Consent
of Sauerwein, Simon & Blanchard, P.C. (contained in Exhibit
5.1).
|
|
23.2
|
Consent
of Larry O’Donnell, CPA, P.C.
|
|
24
*
|
Power
of Attorney.
|
_________________________
|
*
|
Previously
filed with Amendment No. 1 to the Registration Statement on Form
SB-2
(Sec. No. 333-145939) on October 24,
2007.
|