UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2007
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from ____________ to ____________
Commission
file number:
000-50154
XETHANOL
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
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84-1169517
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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3348
Peachtree Road NE
Suite
250 Tower Place 200
Atlanta,
Georgia
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30326
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(Address
of principal executive offices)
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(Zip
Code)
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(
404)
814-2500
(Registrant’s
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $.001 per share
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American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Exchange Act.
Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As
of June 29, 2007, the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant was $47,800,232 based on the
closing sale price of $1.68 per share as reported on the American Stock
Exchange.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
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Smaller
reporting company
x
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Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
Class
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Outstanding
at March 24,
2008
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Common
Stock, $.001 par value per share
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28,609,103
shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Document
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Parts
into which incorporated
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None
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TABLE
OF CONTENTS
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PAGE
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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PART
I
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1
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ITEM
1.
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BUSINESS
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1
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ITEM
1A.
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RISK
FACTORS
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26
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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37
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ITEM
2.
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PROPERTIES
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37
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ITEM
3.
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LEGAL
PROCEEDINGS
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38
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ITEM
4
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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39
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PART
II
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40
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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40
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ITEM
6.
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SELECTED
FINANCIAL DATA
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40
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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41
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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48
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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F-1
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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49
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ITEM
9A(T).
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CONTROLS
AND PROCEDURES
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49
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ITEM
9B.
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OTHER
INFORMATION
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50
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PART
III
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51
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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51
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ITEM
11.
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EXECUTIVE
COMPENSATION
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54
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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64
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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68
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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72
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PART
IV
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73
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ITEM
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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73
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements that involve a number of risks and
uncertainties. Although our forward-looking statements reflect the good faith
judgment of our management, these statements can be based only on facts and
factors of which we are currently aware. Consequently, forward-looking
statements are inherently subject to risks and uncertainties. Actual results
and
outcomes may differ materially from results and outcomes discussed in the
forward-looking statements.
Forward-looking
statements can be identified by the use of forward-looking words such as “may,”
“will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,”
“could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative
of these terms or other similar expressions. These statements include, but
are
not limited to, statements in Items 1, 1A and 7 as well as other sections in
this report. You should be aware that the occurrence of any of the events
discussed under these captions and elsewhere in this report could substantially
harm our business, the results of our operations and our financial condition.
You should also be aware that, if any of these events occurs, the trading price
of our common stock could decline, and you could lose all or part of the value
of your shares of our common stock. These events include, but are not limited
to, the following:
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the
availability and adequacy of our cash to meet our liquidity and capital
resources needs;
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economic,
competitive, demographic, business and other conditions in our local
and
regional markets;
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changes
or developments in laws, regulations or taxes in the ethanol, agricultural
or energy industries;
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actions
taken or not taken by third-parties, including our suppliers and
competitors, as well as legislative, regulatory, judicial and other
governmental authorities;
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competition
in the ethanol industry;
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the
loss of any license or permit;
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the
interruption of production at our Blairstown, Iowa plant due to casualty,
weather, mechanical failure or any extended or extraordinary maintenance
or inspection that may be required;
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changes
in our business and growth strategy, capital improvements or development
plans;
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the
availability of additional capital to support capital improvements
and
development; and
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other
factors discussed in Item 1A, Risk Factors, or elsewhere in this
report.
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The
cautionary statements made in this report are intended to be applicable to
all
related forward-looking statements wherever they may appear in this report.
These forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those that are anticipated in the forward-looking statements. See Item 1A,
Risk
Factors, for a description of some of the important factors that may affect
actual outcomes.
We
urge
you not to place undue reliance on these forward-looking statements, which
speak
only as of the date of this report. We undertake no obligation to publicly
update any forward looking-statements, whether as a result of new information,
future events or otherwise.
PART
I
ITEM
1.
BUSINESS.
Company
Overview
We
are a
renewable energy and clean technology company. We have broadened our business
strategy to pursue opportunities in biomass gasification for electricity
production, wind power, solar power, energy storage, energy infrastructure,
energy efficiency, waste recycling and agricultural processes. We are meeting
with investment bankers and other referral sources as we seek attractive
companies to invest in or acquire. We also may decide to invest in profitable
businesses in industries outside renewable energy and clean technology.
We
currently own one operating plant in Blairstown, Iowa that produces ethanol
from
corn. As a result of the continued high prices for corn and natural gas, we
are
considering cutting back our production at this plant to reduce our operating
losses. We have indefinitely deferred construction of a new ethanol plant next
to our Blairstown facility due to the changing ethanol market and our inability
to arrange debt or equity financing for the project. We intend to build a
demonstration plant in Florida for converting citrus peel waste into ethanol,
although we will need to raise additional capital to fund construction. We
are
evaluating our research and development agreements, and we intend to continue
to
fund some of agreements with the aim of commercializing that technology. After
evaluating our agreements to manufacture and sell a diesel biofuel based on
technology that H2Diesel Holdings, Inc. sublicensed to us, we have decided
not
to pursue that business and have begun to sell our shares of H2Diesel common
stock. We also own a former pharmaceutical manufacturing complex in Augusta,
Georgia and a former medium density fiberboard plant in Spring Hope, North
Carolina. We have decided that our Augusta and Spring Hope facilities do not
fit
within our long-term corporate strategy, and on March 20, 2008, our board
authorized management to pursue the sale of each facility.
Our
corporate headquarters are located at 3348 Peachtree Road NE, Suite 250 Tower
Place 200, Atlanta, Georgia 30326, and our telephone number is (404) 814-2500.
Our website is located at www.xethanol.com.
This
Item
1 is divided into two parts. The first part describes our formation,
capitalization, acquisitions, proposed dispositions and impairments. The second
part describes our current business and strategy.
DESCRIPTION
OF FORMATION AND CAPITALIZATION
Historical
Overview
This
section of the report describes our formation, the reverse merger in 2005 by
which we became a public company, and several other transactions in which we
have issued our shares to raise capital or to acquire business, assets or
technology. This section also describes the dispositions or proposed
dispositions of some of those assets, as well as impairments we have
accrued.
Xethanol
Corporation is the successor to a corporation of the same name that was
organized under the laws of Delaware on January 24, 2000. In this report, we
refer to that predecessor corporation as “Old Xethanol.” In 2005, Old Xethanol
structured a series of transactions to gain access to the capital markets.
In
connection with these transactions, which we collectively refer to as the
reverse merger, Zen Pottery Equipment, Inc., a Colorado publicly traded
corporation (“Zen”), organized Zen Acquisition Corp. as a wholly owned Delaware
subsidiary (“Zen Acquisition”). Thereafter, under an agreement of merger and
plan of reorganization dated as of February 2, 2005 among Zen, Zen Acquisition
and Old Xethanol, Zen Acquisition merged with and into Old Xethanol, which
then
became a wholly owned subsidiary of Zen. Following an exchange of shares between
the stockholders of Old Xethanol and Zen, Old Xethanol changed its name to
Xethanol BioEnergy, Inc. Zen then discontinued its previous business activities,
reincorporated as a Delaware corporation, changed its name to Xethanol
Corporation, and succeeded to the business of Old Xethanol as its sole line
of
business.
Under
the
merger agreement, stockholders of Old Xethanol received in the merger
approximately .88 of a share of our common stock for each share of Old Xethanol
common stock they held. As a result, at closing we issued 9,706,781 shares
of
our common stock to the former stockholders of Old Xethanol, representing 74.0%
of our
outstanding
common stock following the merger, in exchange for 100% of the outstanding
capital stock of Old Xethanol. The consideration issued in the merger was
determined as a result of arm’s-length negotiations between the
parties.
All
outstanding warrants issued by Old Xethanol before the merger to purchase shares
of Old Xethanol common stock were amended to become warrants to purchase our
common stock on the same terms and conditions as those warrants issued by Old
Xethanol, except that the number of shares issuable on the exercise of those
warrants was amended to reflect the applicable exchange ratio. Before the
closing of the merger, all outstanding Old Xethanol warrants were exercisable
for 1,465,068 shares of Old Xethanol common stock. At the closing of the merger,
these warrants were amended to become warrants to purchase 1,293,370 shares
of
our common stock. Neither Old Xethanol nor our company had any stock options
outstanding as of the closing of the merger.
In
connection with the merger, we repurchased 8,200,000 shares of our common stock
owned by Zen Zachariah Pool III and Walter C. Nathan for aggregate consideration
of $300,000 and then cancelled those shares at the closing of the merger.
Immediately following the closing, and as part of the consideration for the
repurchase of his shares, we sold to Mr. Pool our pottery kiln operations,
and
Mr. Pool assumed the historical liabilities of those operations. Giving effect
to the cancellation of these stockholders’ shares, there were 1,874,303 shares
of our common stock outstanding before giving effect to the stock issuances
in
the merger and the concurrent private offering of 1,190,116 shares of our common
stock at a purchase price of $3.25 per share, as explained in more detail
below.
In
November 2004, before the merger, Zen Zachariah Pool III, Zen’s Chief Executive
Officer and President and a member of its board of directors, and Walter C.
Nathan, Zen’s Chief Financial Officer and a member of its board of directors,
sold options to purchase a total of 700,000 shares of Zen’s common stock owned
by them at an exercise price of $0.20 per share as follows: (a) 250,000 options
to a company controlled by the brother of Christopher d’Arnaud-Taylor, a
director, officer and significant shareholder of Old Xethanol and our former
director, Chairman, President and Chief Executive Officer; (b) 250,000 options
to the mother-in-law of Jeffrey S. Langberg, a significant shareholder of Old
Xethanol and our former director; and (c) 200,000 options to another significant
shareholder of Old Xethanol. Each purchaser paid $10.00 for that purchaser’s
options. Exercise of the options was conditional upon the closing of the private
offering and reverse merger, and the options were exercisable at any time within
200 days after the closing of the reverse merger. On February 2, 2005, each
of
the company controlled by the brother of Mr. d’Arnaud-Taylor and the
mother-in-law of Mr. Langberg entered into and consummated an agreement with
a
stockholder of Zen to purchase 100,000 shares of Zen’s common stock at a
purchase price of $0.40 per share. Also in connection with the merger,
each
of
Mr. d’Arnaud-Taylor
and Mr.
Langberg agreed to contribute or cause to be contributed 250,000 shares of
our
common stock to us for cancellation. We reflected those contributions to capital
in connection with the reverse merger in the consolidated statements of changes
in stockholder’s equity in the audited consolidated financial statements
included in this report.
We
accounted for the reverse merger as a recapitalization of Old Xethanol, because
the former stockholders of Old Xethanol now own a majority of the outstanding
shares of our common stock as a result of the merger. Old Xethanol was deemed
to
be the acquiror in the reverse merger and, consequently, the assets and
liabilities and the historical operations that are reflected in our financial
statements are those of Old Xethanol and are recorded at the historical cost
basis of Old Xethanol. No arrangements or understandings exist among present
or
former controlling stockholders with respect to the election of members of
our
board of directors and, to our knowledge, no other arrangements exist that
might
result in a change of control of our company. Further, as a result of the
issuance of the 9,706,781 shares of our common stock to the former stockholders
of Old Xethanol, a change in control of our company occurred on the date of
the
consummation of the merger.
Board
of Directors
In
accordance with our by-laws for filling newly-created board vacancies, Zen
Zachariah Pool III and Walter C. Nathan, our existing pre-merger directors,
elected Christopher d’Arnaud-Taylor and Franz A. Skryanz, previous directors of
Old Xethanol, to serve as additional directors of our company effective at
the
closing of the merger. Susan Pool resigned as a director effective at the
closing of the merger. On February 18, 2005, Mark Austin and Jeffrey S. Langberg
were elected as directors effective as of February 28, 2005. Mr. Pool and Mr.
Nathan also resigned as directors following the closing, with their resignations
effective as of February 28, 2005.
On
February 2, 2005, Mr. d’Arnaud-Taylor was named Chairman, President and Chief
Executive Officer and Franz A. Skryanz was named Vice President, Secretary
and
Treasurer. At the same time, Mr. Pool, Mr. Nathan and Ms. Pool resigned as
our
officers. On April 13, 2005, Lawrence S. Bellone was elected to be our Chief
Financial Officer. On May 27, 2005, Mark Austin resigned as a director, but
he
remains on our advisory board. In December 2005, Mr. Austin entered into a
consulting agreement with us to assist us in the development of our technology
portfolio and overall technology strategy, and he is presently assisting us
under a month-to-month consulting arrangement. On June 2, 2005, Louis B.
Bernstein and Richard D. Ditoro were elected to our board of directors. On
July
28, 2005, Richard L. Ritchie was elected to our board of directors. On August
10, 2005, Marc S. Goodman was elected to our board of directors. On June 12,
2006, Jeffrey S. Langberg resigned as a director. Richard D. Ditoro did not
stand for re-election as a director at our 2006 annual meeting of stockholders
in August 2006 but was again elected to our board of directors on September
7,
2006. On August 22, 2006, Mr. d’Arnaud-Taylor’s position as Chairman, President
and Chief Executive Officer was terminated but he remained on our board of
directors. Mr. Ritchie and Mr. Goodman resigned from our board on September
28,
2006. David R. Ames, William P. Behrens and Mark Oppenheimer were elected to
our
board on October 1, 2006.
On
November 9, 2006, Mr. Ames became our Chief Executive Officer and President;
Mr.
Behrens became our non-executive Chairman of the Board; and Mr. Bernstein and
Mr. Oppenheimer resigned from our board. On December 7, 2006, Edwin L. Klett
was
elected to our board of directors. On January 29, 2007, Gary Flicker was elected
as our Chief Financial Officer and Mr. Bellone, formerly our Chief Financial
Officer, was elected our Executive Vice President, Corporate Development. Also
on January 29, 2007, the board elected Gil Boosidan and Robert L. Franklin
to
the company’s board of directors. Mr. Bellone continued to serve as our
principal accounting officer until December 2007, when his employment with
us
terminated.
On
January 16, 2008, Mr. Bellone resigned as a director. At our 2007 annual meeting
of stockholders held in January and February 2008, Mr. Ames, Mr. Behrens, Mr.
Boosidan, Mr. Ditoro, Mr. Franklin and Mr. Klett were elected to our board
for a
one-year term. Mr. d’Arnaud-Taylor did not stand for re-election as a director
at that meeting.
Private
Offering Concurrent with Merger
In
connection with the merger, we closed a private offering of 1,190,116 shares
of
our common stock at a purchase price of $3.25 per share to purchasers that
qualified as accredited investors, as defined in Regulation D promulgated under
the Securities Act of 1933. Gross proceeds from the initial closing of the
private offering were $3,000,028. We received an additional $867,849 upon a
second closing of the private offering on February 15, 2005, for total private
offering proceeds of $3,867,877. Placement agents and advisors received an
aggregate of 665,834 shares of our common stock in connection with the private
offering and reverse merger. After the closing of the reverse merger and the
closing of the private offering, we had outstanding 13,437,033 shares of common
stock and warrants to purchase 1,293,376 shares of common stock.
Permeate
Facility
Old
Xethanol was formed to capitalize on the growing market for ethanol and its
co-products. Old Xethanol commenced ethanol production in August 2003 with
the
acquisition of Iowa-based Permeate Refining, Inc. Permeate had operated for
more
than a decade, principally using non-corn-based feedstocks such as waste candy
sugars sourced from the greater-Chicago candy industry and waste starches
sourced from regional wet millers. Permeate had a nominal production capacity
of
1.6 million gallons of ethanol per year. In April 2005, we ceased operations
at
Permeate and planned to upgrade the site. Given Permeate’s small production size
and location in a residential community, as well as recent acquisitions of
more
attractive sites, we determined that Permeate was no longer a core asset. At
September 30, 2007, we recorded a $522,000 impairment loss on fixed assets
related to our Permeate assets. On October 3, 2007, we agreed to sell the
Permeate facility for $500,000 in cash. On November 9, 2007, we sold the
Permeate facility, at no gain or loss, for $500,000.
Relationship
with UTEK
In
April
2004, we formalized our engagement of UTEK Corporation, a publicly-traded
technology transfer company, to assist us in identifying technologies to enable
us to lower costs throughout the ethanol production cycle
and
create a technology platform for biomass conversion. We entered into a strategic
alliance agreement with UTEK that detailed the research and development
activities to be performed by UTEK on our behalf. The UTEK agreement expired
on
March 31, 2007. Under this arrangement, we acquired a portfolio of diverse
technologies and developed strategic alliances with government-sponsored
research facilities at the National Renewable Energy Laboratory and the U.S.
Department of Agriculture’s Forest Products Labs, as well as research labs at
Queen’s University, Ontario, Canada, Virginia Tech and the University of North
Dakota. Through these strategic alliances, we outsourced our research and
development to specialists in the fields of enzyme, fermentation and
gasification technologies. Under this arrangement, we issued UTEK 1,142,152
shares of our common stock (after adjustment for our reverse merger
transaction): (a) 109,205 shares in consideration of the services performed
by
UTEK under the agreement; and (b) the remaining 1,251,357 shares to acquire
Advanced Bioethanol Technologies, Inc., Ethanol Extraction Technologies, Inc.,
Superior Separation Technologies, Inc., Xylose Technologies, Inc. and Advanced
Biomass Gasification Technologies, Inc.
Blairstown
Facilities
In
October 2004, Old Xethanol purchased its second facility located on 25.5 acres
in Blairstown, Iowa. Our Xethanol BioFuels subsidiary now operates this
facility. When we acquired it, the Blairstown plant was idle and in bankruptcy.
After substantial upgrades and refurbishment, we recommenced production in
July
2005. The facility is currently producing ethanol at a rate of approximately
5.6
million gallons per year, using corn as its feedstock. In addition to ethanol
production, BioFuels also produces distillers wet grains, or DWG, a by-product
of the traditional corn-to-ethanol process. Our sales during 2007 relate
entirely to the BioFuels facility.
In
July
2006, we announced plans to construct a second ethanol facility at the
Blairstown site with an additional production capacity of 35 million gallons
of
ethanol per year. We engaged The Facility Group to provide construction services
and PRAJ Industries to provide engineering and design services. To date, we
have
acquired all necessary permits, purchased an adjacent 55-acre lot and completed
site preparation. The Facility Group has completed the design and engineering
work for the new facility, which includes on-site cogeneration that would allow
the facility to be energy self-sufficient by using waste by-products from the
plant as feedstock. We have indefinitely deferred construction of the second
Blairstown ethanol plant as a result of the changing ethanol market, continued
high prices for corn and our inability to arrange debt or equity financing
for
the project. For these reasons, we have concluded that we should record an
impairment loss to reflect some of the costs related to this project.
At
December 31, 2007, we recorded a $2.6 million impairment loss on costs
previously spent for the second ethanol facility.
Senior
Secured Note Financing
On
January 19, 2005, we completed a transaction with two institutional investors
to
refinance the acquisition bank debt of Xethanol BioFuels, LLC, the subsidiary
that operates our Blairstown, Iowa ethanol facility. At the closing of that
transaction, Xethanol BioFuels issued senior secured royalty income notes in
the
total principal amount of $5,000,000. The proceeds of the financing were used
to:
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satisfy
the $3,000,000 demand note held by an Omaha, Nebraska commercial
bank in
connection with the purchase of the
facility;
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refurbish
and upgrade production capacity at the
facility;
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fund
start-up activities at the facility and related working capital
requirements; and
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pay
legal and other professional fees.
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In
addition, on August 8, 2005, we completed another transaction with the same
two
institutional investors and, at the closing of that transaction, Xethanol
BioFuels issued senior secured royalty income notes in the aggregate principal
amount of $1,600,000. We used the proceeds of the financing to repay funds
we
had advanced to Xethanol BioFuels, and we used those repaid funds for working
capital and general corporate purposes.
The
senior secured royalty income notes provided for interest to be paid
semi-annually at the greater of 10% per year or 5% of gross revenues from sales
of ethanol, wet distillers grain and any other co-products, including xylitol,
at the Blairstown facility, with principal becoming due in January 2012. We
had
the right to require the holders of the notes, from and after January 2008,
to
surrender their notes for an amount equal to 130% of the outstanding
principal,
plus unpaid accrued interest. The holders of the notes had the right to convert
their notes into shares of our common stock at any time at a conversion price
equal to $4.00 per share (equivalent to 1,650,000 shares), which was in excess
of the $3.25 purchase price for shares sold in our February 2005 private
offering.
On
April
21, 2006, the holders of our $5,000,000 senior secured royalty income notes
and
$1,600,000 senior secured royalty income notes exercised their rights to convert
the principal amounts of the notes into shares of our common stock at a price
equal to $4.00 per share. In connection with the conversions, we issued: (a)
1,250,000 shares of common stock and a three-year warrant to purchase 250,000
shares of common stock at a purchase price of $12.50 to the holders of the
$5,000,000 notes; and (b) 400,000 shares and a three-year warrant to purchase
80,000 shares of our common stock at a purchase price of $12.50 to the holders
of the $1,600,000 notes.
Under
a
security agreement, Xethanol BioFuels had pledged its land, buildings and site
improvements, mechanical and process equipment and specific personal property
as
security for the payment of the principal and interest of the notes. Upon the
conversion of the secured notes into our common stock on April 21, 2006, the
security interest in our property was released.
Fusion
Capital Common Stock Purchase Agreement
On
October 18, 2005, we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC, under which
Fusion
Capital
agreed,
under certain conditions, to purchase on each trading day $40,000 of our common
stock up to an aggregate of $20 million over a 25-month period, subject to
earlier termination at our discretion. Under the terms of the Fusion Capital
agreement, we issued 303,556 shares of our common stock to Fusion Capital as
a
commitment fee. We sold a total of 1,894,699 shares to Fusion Capital for net
cash proceeds of $9,611,680. On November 13, 2007, we entered into an agreement
with Fusion Capital to terminate the agreement and a related registration rights
agreement.
April
2006 Investor Purchase Agreement
On
April
3, 2006, we entered into a securities purchase agreement with 100 investors.
Under this agreement, on April 13, 2006, we issued to the
investors:
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6,697,827
shares of our common stock to the investors at a purchase price of
$4.50
per share;
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·
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three-year
Series A warrants to purchase up to 1,339,605 shares of common stock
at an
exercise price of $4.50 per share; and
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three-year
Series B warrants to purchase up to 669,846 shares of common stock
at an
exercise price of $6.85 per share.
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We
received $30,139,951 from the investors for these securities. We may receive
up
to an additional $6,028,222 on exercise of the Series A warrants and up to
an
additional $4,588,445 on exercise of the Series B warrants. If the investors
exercise all of the warrants, the investors will have invested a total of
$40,756,618 in our company.
April
2006 Issuance of Equity Securities to Goldman Sachs &
Co.
Also
on
April 3, 2006, we entered into a securities purchase agreement with Goldman
Sachs. Under this agreement, on April 13, 2006, we issued to Goldman
Sachs:
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·
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888,889
shares of our common stock at a purchase price of $4.50 per
share;
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three-year
Series A warrants to purchase up to 177,778 shares of common stock
at an
exercise price of $4.50 per share; and
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three-year
Series B warrants to purchase up to 88,889 shares of common stock
at an
exercise price of $6.85 per share.
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We
received $4,000,000 from Goldman Sachs for these securities. We may receive
up
to an additional $800,001 if Goldman Sachs exercises the Series A warrants
and
up to an additional $608,889 if Goldman Sachs exercises the
Series
B
warrants. Assuming Goldman Sachs exercises of all of its warrants, its total
investment would be $5,408,890.
Investment
in H2Diesel
On
April
14, 2006, we entered into a sublicense agreement with H2Diesel, Inc., a
development stage company that has not generated any revenues. The sublicense
agreement was amended and restated on June 15, 2006, effective as of April
14,
2006. H2Diesel is the licensee of a proprietary vegetable oil-based diesel
biofuel to be used as a substitute for conventional petroleum diesel and
biodiesel, heating and other fuels, under an exclusive license agreement with
the inventor of the biofuel. Under the amended and restated sublicense agreement
dated June 15, 2006, we were granted (a) an exclusive sublicense to make, use
and sell use and sell products manufactured by using the H2Diesel fuel additive
in Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island,
New
York, Pennsylvania, Delaware, New Jersey, Virginia, West Virginia, North
Carolina, South Carolina, Georgia and Florida, and (b) a non-exclusive license
to sell those products anywhere else within North America, Central America
and
the Caribbean. We do not presently intend to pursue the manufacture and sale
of
a diesel biofuel based on H2Diesel’s technology.
We
hold
5,670,000 shares of H2Diesel common stock and recently sold 180,000 shares
of
H2Diesel common stock for net proceeds of approximately $777,000. H2Diesel
common stock has recently traded at over $5.00 per share on the OTC Bulletin
Board. Because we own more than 30% of the outstanding shares of H2Diesel,
we
relied on SEC Rule 144 in selling those shares. Under that rule, the volume
of
our sales of H2Diesel common stock is limited to 1% of the outstanding shares
of
H2Diesel common stock every 90 days. We may seek to sell a larger block of
our
H2Diesel shares in some other manner at a substantial discount to the market
price, but we can offer no assurances that we will be able to do
so.
The
material terms of the sublicense agreement are described under “Intellectual
Property Rights and Patents - Licensing and Collaborative Agreements - H2Diesel”
below. We entered into the sublicense agreement in connection with (a) an
investment agreement dated as of April 14, 2006 among H2Diesel, two
institutional investors and us; and (b) a management agreement dated as of
April
14, 2006 between H2Diesel and us. (Both the investment agreement and the
management agreement were amended on June 15, 2006, effective as of April 14,
2006, and H2Diesel terminated the management agreement effective as of September
25, 2006.)
Under
the
amended investment agreement, on April 14, 2006: (a) H2Diesel issued to us
a
total of 2,600,000 shares of its common stock and granted us the right to
purchase up to an additional 2,000,000 shares of its common stock at an
aggregate purchase price of $3,600,000 (the “Xethanol Option”); and (b) we
granted the institutional investors the right to require us to purchase the
3,250,000 shares of H2Diesel’s common stock they owned in exchange for 500,000
shares of our common stock (the “Put Right”). H2Diesel had issued the 3,250,000
shares of its common stock to the institutional investors on March 20, 2006,
together with stock options to purchase 2,000,000 shares of its common stock
at
an aggregate exercise price of $5,000,000 (the “Investor Option”). The
institutional investors paid H2Diesel $2,000,000 for the H2Diesel common stock
and options. Of the 2,600,000 shares of H2Diesel common stock issued to us,
1,300,000 shares were issued as an inducement to enter into the Put Right.
The
fair value of these shares was $793,815, based on a price per share of
approximately $0.61, which we credited to additional paid-in capital.
Concurrently, on April 14, 2006, the institutional investors exercised the
Put
Right, and we purchased their 3,250,000 shares of H2Diesel common stock in
exchange for 500,000 shares of our common stock. We have entered in to a
registration rights agreement dated as of April 14, 2006 with the institutional
investors under which they have the right to require us to register the resale
of these shares of our common stock with the SEC under the Securities Act.
Under
the registration rights agreement, subject to its terms and conditions, the
investors are entitled to require us to file up to two registration statements
and to “piggyback” registration rights. The Xethanol Option and the Investor
Option expired unexercised on August 21, 2006. We consider our investment in
H2Diesel as a variable interest in a variable interest entity. Because we are
not the primary beneficiary of the variable interest entity, we have accounted
for our investment in H2Diesel using the equity method of accounting under
APB
Opinion No. 18,
The
Equity Method of Accounting for Investments in Common Stock
,
at the
fair value of the 500,000 shares of our common stock that we issued, or
$5,425,000.
For
the
period from April 14, 2006 through December 31, 2006, we recorded a loss on
our
investment in H2Diesel of $1.6 million. For the year ended December 31, 2007,
we
recorded a loss on our investment in H2Diesel
of
$1.2
million. This loss represents our portion of H2Diesel’s net losses, based on the
equity method of accounting. We have capitalized our amended sublicense
agreement with H2Diesel and have estimated its useful life to be 10 years from
the date on which H2Diesel first notifies us that it can produce and deliver
additive in sufficient quantities to meet our requirements. As of December
31,
2007 (and as the filing date of this report), H2Diesel has not notified us
that
it has met our requirements. Accordingly, we recorded no royalty expense for
the
period ended December 31, 2007. We will amortize the value of the amended
sublicense agreement commencing on the date on which H2Diesel first notifies
us
that it can produce and deliver additive in sufficient quantities to meet our
requirements. We will record expense under our sublicense with H2Diesel based
on
the greater of minimum royalties due or royalties per gallon of product
purchased from H2Diesel. Minimum royalty expense is recognized on a
straight-line basis over each period if guaranteed, as defined, in the license
agreement. Royalties exceeding the defined minimum amounts are recorded as
expense during the period corresponding to product purchases. We will recognize
a loss in the value of the investment in H2Diesel that is other than a temporary
decline in accordance with APB18.
Under
the
H2Diesel management agreement, we agreed to provide administrative, management,
and consulting services to H2Diesel for a period of one year from the date
of
the agreement. H2Diesel issued 1,300,000 shares of H2Diesel common stock under
the investment agreement in consideration of the services we are obligated
to
perform under the management agreement. H2Diesel terminated the management
agreement effective as of September 25, 2006. On June 30, 2006, we loaned
H2Diesel $50,000. The loan bears interest at the prime rate and remains
outstanding.
On
October 16, 2006, we entered into a registration rights agreement with H2Diesel.
On October 20, 2006, H2Diesel consummated a “reverse merger” transaction, as a
result of which H2Diesel became a wholly owned subsidiary of Wireless Holdings,
Inc., a Florida shell corporation without any continuing operations or assets,
and each share of H2Diesel’s common stock outstanding immediately before the
merger automatically converted into one share of Wireless Holdings common stock.
Wireless Holdings, Inc. changed its name to H2Diesel Holdings, Inc. on November
27, 2006. As of March 1, 2008, we owned 5,670,000 shares of H2Diesel Holdings
common stock, which represented approximately 31.2% of the common stock then
outstanding. In connection with the reverse merger, H2Diesel Holdings, Inc.
(then named Wireless Holdings, Inc.) assumed H2Diesel’s obligations under the
registration rights agreement. The agreement requires H2Diesel Holdings, upon
our written request, but not before six months after the date of effectiveness
of the resale registration statement to be filed by H2Diesel Holdings in
connection with the then pending private offering of its securities, to file
a
registration statement with the SEC in form and substance sufficient to
facilitate the distribution to our stockholders of the shares of H2Diesel
Holdings common stock issued to us in the reverse merger, and to use its
commercially reasonable efforts to cause the registration statement to be
declared effective as soon as practicable thereafter.
In
a
Current Report on Form 8-K dated October 5, 2007 and filed with the SEC on
October 10, 2007, we announced that we had entered into a stock purchase and
termination Agreement with H2Diesel Holdings and
H2Diesel
.
Under
the agreement, we agreed to sell to H2Diesel Holdings 5,460,000 shares of the
common stock of H2Diesel Holdings, or approximately 31.6% of H2Diesel Holdings’
outstanding common stock, for the aggregate price of $7.0 million, or
approximately $1.28 per share. In addition, the agreement provided for
termination, at the closing of the agreement, of the agreements described above
to which H2Diesel and we are parties and cancellation of our $50,000 loan to
H2Diesel. On signing the agreement, H2DieselHoldings paid us a $250,000
non-refundable deposit to apply towards the purchase price described above.
The
Current Report on Form 8-K also noted that the closing was conditioned on
H2Diesel Holdings’ obtaining a minimum of $10,000,000 of new financing and that
if the closing did not occur on or before November 9, 2007, or a later date
as
the parties might agree in writing, each party would have an independent right
to terminate the agreement on 10 calendar days’ written notice to the other
party. We had the right to retain the non-refundable deposit of $250,000 if
the
agreement was terminated other than as a result of a breach by us of our
obligations under the agreement. On or about November 13, 2007, the parties
agreed in writing to amend the agreement to extend the closing date referenced
above from November 9, 2007 to November 23, 2007.
The
closing did not occur on or before November 23, 2007. Accordingly, on January
7,
2008, we provided H2Diesel Holdings and H2Diesel with written notice to
terminate the agreement effective January 17, 2008, 10 calendar days from the
date of the notice. The agreement was terminated on January 17, 2008.
Accordingly, we
retained
the non-refundable deposit of $250,000 and the shares of H2Diesel Holdings’
common stock; the other agreements to which H2Diesel and we are parties remain
in effect; and the $50,000 loan from us to H2Diesel remains outstanding.
CoastalXethanol
LLC
In
May
2006, we organized CoastalXethanol LLC to develop plants for the production
of
ethanol in Georgia and parts of South Carolina. CoastalXethanol is a joint
venture with Coastal Energy Development, Inc. (“CED”). We entered into an
organizational agreement with CED under which, among other things, we issued
to
CED a warrant to purchase 200,000 shares of our common stock. We acquired an
80%
membership interest in CoastalXethanol for a capital contribution of $40,000,
and CED acquired a 20% membership interest in CoastalXethanol for a capital
contribution of $10,000. In August 2006, Augusta BioFuels, LLC, a wholly owned
subsidiary of CoastalXethanol, purchased a former pharmaceutical manufacturing
complex located in Augusta, Georgia from Pfizer Inc. for approximately
$8,400,000 in cash. In October 2006, Augusta BioFuels sold surplus equipment
from the Augusta facility for $3,100,000 in cash. On March 5, 2007, we, along
with CoastalXethanol, initiated litigation against CED alleging that it failed
to repay loans and failed to account properly for the funds it spent. On April
3, 2007, CED filed an answer and counterclaim, asserting various claims. On
September 14, 2007, we reached a settlement with CED and agreed to pay CED
$400,000 in exchange for CED’s 20% interest in CoastalXethanol, which owns
(through a wholly owned subsidiary) a former pharmaceutical manufacturing
complex located in Augusta, Georgia. The parties executed releases and replaced
the warrant described above with a warrant to purchase 200,000 shares of our
common stock that is exercisable at an exercise price of $6.85 per share through
May 30, 2009. The payment and purchase of CED’s 20% interest in CoastalXethanol
LLC was completed on September 24, 2007. We dismissed our claims against CED
with prejudice.
We
have
reevaluated our Augusta facility and have decided that it does not fit within
our long-term corporate strategy. On March 20, 2008, our board authorized
management to pursue the sale of the facility. We have interviewed real
estate brokerage firms to assist us in marketing the property for sale, but
we
have not retained such a firm. If we do decide to sell our Augusta facility
and
are successful in selling it, we estimate that we would reduce our annual
overhead by approximately $600,000. We can offer no assurances regarding how
long it would take to sell the facility or the price we might receive. In
connection with the potential sale of the property, we performed a market study
analysis of the amount that we can expect to realize upon the sale of the site
and, based on this analysis, have recorded a $2.1 million impairment loss as
of
December 31, 2007.
NewEnglandXethanol,
LLC
On
June
23, 2006, we entered into an organizational agreement with Global Energy and
Management, LLC (“Global Energy”) under which, among other things, we issued to
Global Energy a warrant to purchase 20,000 shares of our common stock at a
purchase price of $6.85 per share that is first exercisable on the first
anniversary of the date of the organizational agreement and expires on the
fourth anniversary of the date of the organizational agreement.
In
December 2006, the NewEnglandXethanol joint venture effectively ended based
on a
disagreement between Global Energy and us with respect to the actions that
Global Energy and we were required to take pursuant to our joint venture. We
do
not believe that the NewEnglandXethanol joint venture will conduct any further
business.
In
December 2007, Global Energy filed an action in the federal court for the
Southern District of New York against Xethanol and nine of our current or former
officers, directors and employees. The lawsuit alleges fraud by the defendants
in connection with Global Energy’s alleged investment of $250,000 in
NewEnglandXethanol. On March 19, 2008, Global Energy served its second amended
complaint on us. Based on an alleged investment of $250,000, Global Energy
seeks
more than $10,000,000 in damages plus pre-judgment interest and costs.
Management has instructed counsel to vigorously represent and defend our
interests in this litigation.
Spring
Hope Acquisition
In
November 2006, we acquired the assets of Carolina Fiberboard Corporation, LLC,
a
former
medium density fiberboard plant located in Spring Hope, North
Carolina
,
for:
$4,000,000 in cash; 1,197,000 shares of our common stock; and warrants to
purchase an additional 300,000 shares of our common stock at an exercise price
of $4.00 per
share.
We
agreed to file a registration statement registering the resale of the shares
of
common stock issued at closing and the shares of common stock issuable on
exercise of the warrants no later than 20 days after the effective date of
another registration statement that became effective on August 10, 2007. The
warrants are exercisable until the third anniversary of issuance. We have not
filed a registration statement for these shares of common stock and
warrants.
We
have
reevaluated this facility and have determined that it does not fit within our
long-term corporate strategy. On March 20, 2008, our board authorized
management to pursue the sale of the facility. If we do decide to sell the
facility and are successful in selling it, we estimate that we would reduce
our
annual overhead by approximately $250,000. Before we sell the property (or
as a
term of its sale), we will have to resolve certain liens on the property filed
by companies that performed, or have claimed to have performed, environmental
remediation and demolition work on the property. We can offer no assurances
regarding how long it would take to sell the facility or the price we might
receive. We performed an analysis of the fair market value of the property
at
December 31, 2007 and determined that we should record an additional impairment
loss of $4.2 million at December 31, 2007.
Southeast
BioFuels, LLC
In
December 2006, Southeast BioFuels, LLC, a newly formed subsidiary of
CoastalXethanol, purchased assets from Renewable Spirits, LLC for $100,000
in
cash, a $600,000 note payable over 120 months and a 22% membership interest
in
Southeast BioFuels. The purchased assets consisted of equipment and intellectual
property associated with an experimental system for the production of ethanol
and other marketable co-products from waste citrus biomass, including Renewable
Spirits’ rights under a cooperative research and development agreement with the
U.S. Department of Agriculture’s Agricultural Research Service. As described
below, we intend to build, through Southeast BioFuels, LLC, a demonstration
plant in Florida for converting citrus peel waste into ethanol.
Registration
Statement on Form SB-2 Effective August 10, 2007
On
August
10, 2007, our registration statement on Form SB-2 was declared effective by
the
SEC. The registration covers the resale of up to 6,697,827 shares of our common
stock by certain stockholders and the resale of up to 2,009,451 additional
shares of common stock that we may issue on the exercise of Series A Warrants
and Series B Warrants issued to those stockholders. We issued the shares of
common stock, the Series A Warrants and the Series B Warrants to the selling
stockholders in a private placement on April 13, 2006. In connection with that
private placement, we also issued Series A Warrants to placement agents. The
registration also covers the resale of up to 606,938 additional shares of common
stock that we may issue on exercise of the Series A Warrants we issued to those
placement agents.
Investments
in 2008
In
January 2008, we invested $250,000 in Carbon Motors Corporation, a new American
automaker developing a specially-built law enforcement vehicle featuring a
clean
diesel engine that can run on biodiesel fuel. For its investment, we received
a
warrant that is initially exercisable for 30,000 shares of Series B Preferred
Stock at a price of $1.05 per share with a term of 5 years.
Also
in
January 2008, we made a $500,000 investment in Consus Ethanol, LLC of
Pittsburgh, Pennsylvania pursuant to a convertible promissory note. Consus
has a
permitted site in western Pennsylvania, where it plans to build the first of
several ethanol plants. Its business model calls for a cogeneration plant using
waste coal to power the companion ethanol plant - allowing significant energy
cost savings. The note bears interest at the rate of 10% per annum and has
an
initial term of six months. Prior to the maturity date, the note can be extended
for an additional six months or can be converted to equity.
DESCRIPTION
OF BUSINESS
Company
Overview
We
are a
renewable energy and clean technology company. We have broadened our business
strategy to pursue opportunities in biomass gasification for electricity
production, wind power, solar power, energy storage, energy infrastructure,
energy efficiency, waste recycling and agricultural processes. We are meeting
with investment bankers and other referral sources as we seek attractive
companies to invest in or acquire. We also may decide to invest in profitable
businesses in industries outside renewable energy and clean technology.
Current
Business Operations and Investments
Our
business currently includes:
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an
operating plant in Blairstown, Iowa that produces ethanol from
corn;
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a
planned demonstration plant in Florida for converting citrus peel
waste
into ethanol;
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bio-separation
and bio-fermentation technologies, along with strategic relationships
with
government and university research labs to further develop and prove
out
these technologies; and
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minority
investments in other renewable energy or clean tech
businesses.
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We
describe each of these aspects of our business in more detail
below.
As
noted
above, we have decided not to pursue certain business opportunities and have
decided to sell some of our assets. After evaluating our agreements to
manufacture and sell a diesel biofuel based on technology that H2Diesel
Holdings, Inc. sublicensed to us, we have decided not to pursue that business
and have begun to sell our shares of H2Diesel common stock. We also own a former
pharmaceutical manufacturing complex in Augusta, Georgia and a former medium
density fiberboard plant in Spring Hope, North Carolina. We have decided that
our Augusta and Spring Hope facilities do not fit within our long-term corporate
strategy, and on March 20, 2008, our board authorized management to pursue
the sale of each facility.
Blairstown
Facilities
We
currently own one operating plant in Blairstown, Iowa that produces ethanol
from
corn. As a result of the continued high prices for corn and natural gas, we
are
considering cutting back our production at this plant to reduce our operating
losses. The facility is currently producing ethanol at a rate of approximately
5.6 million gallons per year, using corn as its feedstock. In addition to
ethanol production, the Blairstown plant also produces distillers wet grains,
or
DWG, a by-product of the traditional corn-to-ethanol process. Our sales during
2007 relate entirely to the Blairstown facility.
In
July
2006, we announced plans to construct a second ethanol facility at the
Blairstown site with an additional production capacity of 35 million gallons
of
ethanol per year. We engaged The Facility Group to provide construction services
and PRAJ Industries to provide engineering and design services. To date, we
have
acquired all necessary permits, purchased an adjacent 55-acre lot and completed
site preparation. The Facility Group has completed the design and engineering
work for the new facility, which includes on-site cogeneration that would allow
the facility to be energy self-sufficient by using waste by-products from the
plant as feedstock. In light of the changing ethanol market and our inability
to
arrange debt or equity financing for the project, we have indefinitely deferred
construction of a new ethanol plant next to our Blairstown facility
.
Florida
Demonstration Plant for Converting Citrus Waste into Alcohol
On
December 18, 2007, we announced in a press release that Southeast Biofuels
filed
a grant application with the Florida Department of Agriculture and Consumer
Services to expand our work on converting waste to energy, using citrus waste
as
the raw material and converting it into ethanol. On January 22, 2008, the
Florida Department of Agriculture and Consumer Services approved a $500,000
grant to Southeast Biofuels. We intend to build a demonstration plant for
converting citrus peel waste into ethanol and are negotiating an agreement
to
locate the plant at an existing citrus facility in Florida owned by one of
the
largest citrus processors in the state. The planned cost
for
the
two-year build-out of the demonstration plant is approximately $5,900,000.
We
plan to apply for federal government grants and combine private equity with
those grants to supplement the state grant. If we do not receive these federal
grants, we will need to raise additional equity to build this plant as we
intend.
Research
and Development Agreements
We
have
research and development agreements with leading national laboratories and
universities such as the U.S. Department of Agriculture’s Forestry Products
Laboratory (FPL); the U.S. Department of Energy’s National Renewable Energy
Laboratory (NREL); Virginia Tech; and The University of North Dakota’s Energy
& Environmental Research Center (EERC). To date, however, we have been
unable to commercialize any of the technologies identified under these
agreements. We are evaluating our research and development agreements, and
we
intend to continue to fund some of these agreements with the aim of
commercializing that technology. We are also reviewing opportunities to license
our technologies to third parties to create royalty income streams.
Minority
Investments
In
January 2008, we invested $250,000 in Carbon Motors Corporation, a new American
automaker developing a specially-built law enforcement vehicle featuring a
clean
diesel engine that can run on biodiesel fuel. Also in January 2008, we invested
$500,000 in Consus Ethanol, LLC of Pittsburgh, Pennsylvania. Consus has a
permitted site in western Pennsylvania, where it plans to build the first of
several ethanol plants. Its business model calls for a cogeneration plant using
waste coal to power the companion ethanol plant - allowing significant energy
cost savings.
Industry
Overview
The
Ethanol Market
The
growth in ethanol market has been supported by regulatory requirements mandating
the use of renewable fuels, including ethanol. Historically, producers and
blenders had a choice of fuel additives to increase the oxygen content of fuels.
MTBE (methyl tertiary butyl ether), a petroleum-based additive, was the most
popular additive, accounting for up to 75% of the fuel oxygenate market.
Although the federal oxygenate requirement was eliminated in May 2006 as part
of
the Energy Policy Act of 2005, oxygenated gasoline continues to be used to
help
meet separate federal and state air emission standards. Because MTBE is a
suspected carcinogen that may contaminate ground water, the refining industry
has mostly abandoned the use of MTBE, making ethanol the primary clean oxygenate
currently used.
The
Energy Policy Act of 2005 transformed ethanol from a gasoline additive under
the
1990 Clean Air Act to a primary gasoline substitute, which we believe has
strengthened and expanded the role of ethanol in the U.S. fuel economy. The
Energy Policy Act of 2005 created a renewable fuel standard, or RFS, increasing
use of renewable domestic fuels such as ethanol and biodiesel. The RFS mandated
that at least 7.5 billion gallons of ethanol be used annually by 2012. In
addition, the Energy Policy Act established a 30% tax credit up to $30,000
for
the cost of installing clean fuel refueling equipment, such as an E85 ethanol
fuel pump.
On
December 19, 2007, President Bush signed into law the Energy Independence and
Security Act of 2007, which establishes new levels of renewable fuel mandates
for conventional biofuel and advanced biofuel. The Energy Independence and
Security Act increased the mandated minimum use of renewable fuels to 9 billion
gallons per year in 2008 (up from 5.4 billon gallons per year under the previous
RFS), which further increases to 36 billon gallons per year in 2022. The revised
RFS requires the increased use of advanced biofuel, which includes ethanol
derived from cellulose, hemicellulose or other non-corn starch sources. By
2022,
60%, or 22 billion gallons, of the mandated 36 billion gallons of renewable
fuel
must come from advanced biofuels. According to estimates published by the
Renewable Fuels Association in Washington, D.C., the Energy Independence and
Security Act is expected to lead toward the commercialization of cellulosic
ethanol.
Ethanol
is commonly blended in gasoline. Because the ethanol molecule contains oxygen,
it allows an automobile engine to more completely combust fuel, resulting in
fewer emissions and improved performance. Ethanol is produced by the
fermentation of starches and sugars such as those found in grains and other
crops.
Ethanol
contains 35% oxygen by weight and, when combined with gasoline, artificially
introduces oxygen into gasoline and raises oxygen concentration in the
combustion mixture with air. As a result, the gasoline burns more completely
and
releases less unburnt hydrocarbons, carbon monoxide and other harmful exhaust
emissions into the atmosphere. The use of ethanol as an automotive fuel is
commonly viewed as a way to reduce harmful automobile exhaust emissions. Ethanol
can also be blended with regular unleaded gasoline as an octane booster to
provide a mid-grade octane product that is commonly distributed as a premium
unleaded gasoline. Fuel ethanol has an octane value of 113 compared to 87 for
regular unleaded gasoline.
According
to the Renewable Fuels Association, ethanol is blended into more than 50% of
all
U.S. gasoline. Ethanol blends accounted for approximately 4.8%, or approximately
6.8 billion gallons, of the U.S. gasoline supply in 2007. The Energy Information
Administration, a statistical agency of the U.S. Department of Energy, estimates
that U.S. ethanol consumption will exceed 9.2 billion gallons in 2008. The
most
common blend is E10, which contains 10% ethanol and 90% gasoline. There is
also
growing federal government support for E85, which is a blend of 85% ethanol
and
15% gasoline. Increasingly, motor manufacturers are producing flexible fuel
vehicles (particularly sports utility vehicle models) which can run off ethanol
blends of up to 85% (E85) to obtain exemptions from fleet fuel economy quotas.
According to the National Ethanol Vehicle Coalition (NEVC), more than six
million flexible fuel vehicles are now on the road in the United States,
offering further potential for significant growth in ethanol
demand.
During
the last 20 years, ethanol production capacity in the United States has grown
from almost nothing to about 7.9 billon gallons per year as of January 2008.
According to the Renewable Fuels Association, approximately 139 ethanol
production plants were operational in the United States in January 2008, with
an
additional 68 plants under expansion or construction. The ethanol production
industry is fragmented, with two companies, Archer Daniels Midland and Poet,
accounting for nearly 30% of U.S. production and the next largest producer
accounting for less than 7% of the same market. The majority of plants are
in
the 20 million to 60 million gallons per year capacity range, with a number
of
these plants affiliated with local farmer cooperatives. We expect recent
consolidation trends in the ethanol industry to continue.
In
the
United States, ethanol is primarily made from starch crops, principally from
the
starch fraction of corn. Consequently, the production plants are concentrated
in
the grain belt of the Midwest, principally in Illinois, Iowa, Minnesota,
Nebraska and South Dakota. Ethanol producers in the U.S. are sensitive to the
price volatility of corn. After hovering around $2 a bushel for a decade, corn
prices have significantly increased in the recent years. Over the ten-year
period from 1998 through 2007, corn prices (based on the Chicago Board of Trade
daily futures data) have ranged from a low of $1.75 per bushel on August 11,
2000 to a high of $4.55 per bushel on December 31, 2007, with prices averaging
$2.42 per bushel during this period. Beginning in the fourth quarter of 2006,
the biofuels industry experienced significantly higher corn prices.
In
2007,
corn prices ranged from a low of $3.10 per bushel to a high of $4.55 per bushel,
with prices averaging $3.73 per bushel. Corn prices have continued to increase
in 2008, to a high of $5.72 per bushel through March 24, 2008.
According
to 2007 Crop Production Summary published by the U.S. Department of Agriculture,
farmers planted approximately 93.6 million acres, up 19% from 2006 to the
highest level since 1944. Corn production is affected by weather, governmental
policy, disease and other conditions. A significant reduction in the quantity
of
corn harvested due to adverse weather conditions, farmer planting decisions,
domestic and foreign government farm programs and policies, global demand and
supply or other factors could result in increased corn costs that would increase
our cost to produce ethanol. The significance and relative impact of these
factors on the price of corn is difficult to predict.
The
Ethanol Production Process
In
the
United States, ethanol is primarily made from starch crops, principally from
the
starch fraction of corn. It can also be made using industrial food processing
wastes, and extensive research and development is ongoing to improve the
economics of using cellulosic biomass feedstocks - woody and fibrous materials;
agricultural residues including corn cobs, stalks and husks, stalks from sugar
cane and the waste product remaining after refining sugar cane; forestry
residues, yard waste, and restaurant and municipal solid waste Ethanol is
produced by extracting, fermenting and distilling the sugars trapped in these
diverse feedstocks.
Corn
dry
mill ethanol production processing can be divided into five basic
steps:
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·
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milling,
which physically breaks down the corn kernel using mechanical processes
allowing for extraction of the starch
portion;
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·
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liquefaction
and saccharification, which applies heat and enzymes to break down
the
starches into fermentable sugars;
|
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·
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fermentation,
which converts sugar to carbon dioxide and ethanol through yeast
metabolization;
|
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·
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distillation
and dehydration, which separates ethanol from water through the use
of
heat and a molecular sieve dehydrator;
and
|
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·
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by-product
recovery, which employs heat and mechanical processes to process
non-fermentable corn components into saleable feed
products.
|
By-product
recovery is an important contributor to revenues for corn-based plants. The
two
principal by-products are distillers wet grains, or DWG, and distillers dry
grains, or DDG. DWG and DDG are high protein, high fat products for the animal
feed ingredient market. There is a well-established market for DWG and DDG.
The
vast majority of United States ethanol production relies on mature, proven
corn-based technology. Historically and over the longer term, the economics
of
corn ethanol have favored large scale plants, producing more than 60 million
gallons per year, which are located in close proximity to the Corn Belt, and
away from the major consuming markets.
Ethanol
can also be made using industrial food processing wastes such as waste starches
and sugars. Examples of starches and sugars that can be used for ethanol
production include brewing waste, candy waste, spoiled soft drinks and other
diverse food processing residues as well as bakery waste. The principal
advantage of these feedstocks is that they are often available at low cost.
While corn is a commodity that is almost always available at the prevailing
market price, the availability of starch and sugar feedstocks is less
predictable and depends on regional opportunities, plant location and processor
efficiencies. Production from waste starches and sugars is a mature technology
very similar to that from corn, except that the process is simplified in the
case of sugars, which are already in a chemical form suitable for
fermentation.
Biomass
Ethanol Production
In
a
recent report, “Outlook for Biomass Ethanol Production Demand,” the U.S. Energy
Information Administration found that advancements in production technology
of
ethanol from cellulose could reduce costs and result in production increases
of
40% to 160% by 2010. Biomass (cellulosic feedstocks) includes agricultural
waste
(including citrus waste), woody fibrous materials, forestry residues, waste
paper, municipal solid waste and most plant material. Like waste starches and
sugars, they are often available at a relatively low cost. Cellulosic feedstocks
are more abundant than corn, global and renewable in nature. These waste
streams, which would otherwise be abandoned, land-filled or incinerated, exist
in populated metropolitan areas where ethanol prices are higher.
If
we can
develop or license a cost-effective method of producing ethanol from biomass,
it
would have the following advantages over corn-based production, in addition
to
its lower raw material costs:
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·
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biomass
would allow producers to avoid the pressure on margins created by
rises in
corn prices;
|
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·
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biomass
ethanol could be produced locally with a variety of waste products;
and
|
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·
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biomass
ethanol would generate an additional class of valuable co-products,
such
as xylitol, which are not derived from
corn.
|
There
are
three basic steps in converting biomass to ethanol:
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(1)
|
converting
biomass to a fermentation feedstock (some form of fermentable sugar)
-
this can be achieved using a variety of different extraction
technologies;
|
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(2)
|
fermenting
biomass intermediates using biocatalysts (microorganisms including
yeast
and bacteria) to produce ethanol;
and
|
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(3)
|
processing
the fermentation product, which yields fuel-grade ethanol and by-products
such as xylitol.
|
Cellulose
and hemicellulose, which are the two major components of plants and give plants
their structure, are made of sugars that are linked together in long chains.
Advanced bioethanol technology is seeking to break those chains down into their
component sugars and then ferment them to make ethanol or xylitol. This
technology has the potential to turn ordinary low-value plant materials such
as
corn stalks, sawdust or waste paper into fuel ethanol. We have acquired a
portfolio of technologies for biomass-to-ethanol production. For more
information on these technologies, see “Technology Platform” below.
While
the
sale of DWG improves the economics of corn-to-ethanol production, biomass
feedstocks also present opportunities to monetize waste streams beyond revenues
derived from ethanol itself. A valuable co-product derived from
biomass-to-ethanol production is xylitol. Xylitol is a natural sweetener that
the FDA approved in the 1960’s for use in foods and beverages, including chewing
gums, candies, toothpastes and diabetic regimens. Because of its high price and
potential for wider consumer acceptance, we are evaluating whether to seek
to
produce it.
Technology
Platform
Overview
The
major
variable costs associated with the production of ethanol are the feedstock
(traditionally corn) and the natural gas for heat generation at various stages
of the process. We are pursuing a number of technologies to reduce these costs.
We believe that margin improvements can be achieved by substituting lower cost
feedstocks for corn, reducing natural gas intake, increasing the effective
capacity of each plant by accelerating the separation and fermentation
processes, and reducing the amount of water used in the production
cycle.
We
have
acquired a portfolio of diverse technologies and developed strategic alliances
with government-sponsored research facilities at the National Renewable Energy
Laboratory and the U.S. Department of Agriculture’s Forest Products Labs, as
well as research labs at Queen’s University, Ontario, Canada, Virginia Tech and
the University of North Dakota. Through these strategic alliances, we outsourced
our research and development to specialists in the fields of enzyme,
fermentation and gasification technologies.
Advanced
Bioethanol Technologies, Inc.
In
June
2004, we acquired Advanced Bioethanol Technologies, Inc., which holds the
exclusive worldwide license to an innovative biomass extraction and fermentation
process developed by researchers at Virginia Tech. Dr. Foster Aryi Agblevor
is
the developer of the process. The benefits of Advanced Bioethanol’s technology
are that:
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·
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the
process reduces the amount of additives required for healthy
fermentation;
|
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·
|
the
process uses waste paper sludge as an active ingredient and source
of
cellulose; and
|
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·
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the
process requires fewer purification steps before
fermentation.
|
We
acquired this technology to be able to take a mixture of cellulosic biomass
feedstocks and combine them. The material terms of the license are described
under “Intellectual Property Rights and Patents - Licensing and Collaborative
Agreements - Virginia Tech” below.
Recent
research has shown that Advanced Bioethanol’s technology can produce ethanol,
and researchers at Virginia Tech are now seeking to scale up the process to
produce larger quantities of ethanol. We believe this technology offers the
potential to reduce the volume of feedstocks used and costs associated with
their integration into the production process. We are currently unable to
estimate the timetable or costs of completing the commercialization of this
technology.
Superior
Separation Technologies, Inc.
In
January 2005, we acquired Superior Separation Technologies, Inc., which owns
the
worldwide exclusive license to patented technology developed by the National
Renewable Energy Laboratory, the principal research laboratory for the U.S.
Department of Energy’s Office of Energy Efficiency and Renewable Energy, for the
enhanced separation of biomass feedstocks into their constituent fractions
to
facilitate subsequent conversion into ethanol and xylitol. We acquired this
technology to be able to separate the components of cellulosic biomass (lignin,
cellulose and hemicellulose) which would allow access to the fermentable sugars
that can then be turned into ethanol. The material terms of the license are
described under “Intellectual Property Rights and Patents - Licensing and
Collaborative Agreements - National Renewable Energy Laboratory” below. The
potential benefits of Superior Separation’s clean fractionation of biomass
technology are that:
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·
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the
process separates biomass into very pure cellulose, hemicellulose
and
lignin fractions;
|
|
·
|
the
process can be used on a variety of biomass
feedstocks;
|
|
·
|
the
process reduces water requirement in biomass
treatment;
|
|
·
|
the
clean fractions allow easier hydrolysis and fermentation;
and
|
|
·
|
the
solvent is easily recoverable, and
economical.
|
We
are
currently unable to estimate the time or the cost required to complete the
commercialization of this technology.
Xylose
Technologies, Inc.
In
August
2005, we acquired Xylose Technologies, Inc., which holds a license certain
rights to commercialize technology based on research done by the U.S. Department
of Agriculture’s Forest Products Laboratory, which has developed a
genetically-engineered, xylose fermenting yeast strain providing enhanced
ethanol production from xylose, a sugar extracted from wood or straw. We
acquired this technology in an effort to create a yeast that will be more
powerful and robust in the fermentation of hemicellulose sugars present in
wood
and the by-products produced from paper mills, allowing us to use those
materials in our plants. Our extended agreement with the FPL was scheduled
to
expire in March 2007. In January 2007, we negotiated a second cooperative
research and development agreement with FPL. In March 2008, we extended the
term
of this agreement, at no additional cost, until September 2008. The material
terms of the license are described under “Intellectual Property Rights and
Patents - Licensing and Collaborative Agreements - U.S. Department of
Agriculture’s Forest Products Laboratory” below. Because xylose is present in
biomass materials such as agricultural wastes, corn hulls and the like, as
well
as in pulping wastes and fast-growing hardwoods, which are currently
under-exploited, we believe a method to more easily convert xylose to ethanol
and value-added co-products such as xylitol will prove to be valuable. The
potential benefits of Xylose Technologies’ xylose fermenting yeast strain
technology are that:
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·
|
the
process allows more efficient fermentation of biomass
feedstock;
|
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·
|
the
process can allow many forestry products to be used to make ethanol;
and
|
|
·
|
the
process can also be used to make
xylitol.
|
We
are
currently unable to estimate the time or the cost required to complete the
commercialization of this technology.
Advanced
Biomass Gasification Technologies, Inc. (ABGT)
In
June
2006, we acquired Advanced Biomass Gasification Technologies, Inc. (“ABGT”),
which
had no
operations before we purchased it. Until that time, its assets consisted solely
of cash and a license and research agreement.
ABGT
is
the licensee from the University of North Dakota’s Energy & Environmental
Research Center (“EERC”) of certain patents and know-how related to
microgasification and a party to a base research agreement with the EERC. We
acquired this technology in an effort to develop small-scale gasification
technology for the production of syngas. Our development program for the
commercialization of this technology is in its early stages. The material terms
of the license and research agreement are described under “Intellectual Property
Rights and
Patents
-
Licensing and Collaborative Agreements - University of North Dakota” below. The
potential benefits of ABGT’s microgasification technologies are
that:
|
·
|
the
process provides a lower cost alternative to steam boiler power
generation;
|
|
·
|
the
process uses low-cost biomass feedstocks and waste streams, including
lignin, a byproduct of cellulosic ethanol production;
and
|
|
·
|
the
process has applications in numerous industries such as forest products,
wood processing, agricultural processing and secondary
milling.
|
We
are
currently unable to estimate the time or the cost required to complete the
commercialization of this technology.
H2Diesel,
Inc.
On
April
14, 2006, we entered into a sublicense agreement with H2Diesel, Inc., which
was
amended and restated on June 15, 2006, effective as of April 14, 2006. H2Diesel
is the licensee of a proprietary vegetable oil-based diesel biofuel to be used
as a substitute for conventional petroleum diesel and biodiesel, heating and
other fuels, under an exclusive license agreement with the inventor of the
diesel biofuel. Under the amended and restated sublicense agreement, we were
granted (a) an exclusive sublicense to make, use and sell use and sell products
manufactured by using the H2Diesel fuel additive in Maine, Vermont, New
Hampshire, Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania,
Delaware, New Jersey, Virginia, West Virginia, North Carolina, South Carolina,
Georgia and Florida, and (b) a non-exclusive license to sell those products
anywhere else within North America, Central America and the Caribbean. The
other
material terms of the sublicense agreement are described under “Intellectual
Property Rights and Patents - Licensing and Collaborative Agreements - H2Diesel”
below. For more information about our transactions with H2Diesel, see
“Description of Formation and Capitalization - Investment in H2Diesel”
above.
We
do not
presently intend to pursue the manufacture and sale of a diesel biofuel based
on
H2Diesel’s technology.
Intellectual
Property Rights and Patents
We
license U.S. patents and have two pending patent applications in the field
of
biomass conversion. The issued United States patents expire between 2015 and
2020.
Patent
and other proprietary rights are important for the development of our business.
We have sought and intend to continue to seek patent protection for our
inventions and rely upon patents, trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
a
competitive advantage. To protect these rights, know-how and trade secrets,
we
typically require employees, consultants, collaborators and advisors to enter
into confidentiality agreements with us, generally stating that they will not
disclose any confidential information about us to third parties for a certain
period of time, and will otherwise not use confidential information for anyone’s
benefit but ours. We cannot assure you that any of our confidentiality and
non-disclosure agreements will provide meaningful protection of our confidential
or proprietary information in the case of unauthorized use or
disclosure.
The
patent positions of companies like ours involve complex legal and factual
questions and, therefore, their enforceability cannot be predicted with any
certainty. We cannot assure you that any patents will issue on any of our
pending patent applications. The patents licensed to us, and those that may
issue or be licensed to us in the future, may be challenged, invalidated or
circumvented, and the rights granted thereunder may not provide us with
proprietary protection or competitive advantages against competitors with
similar technology. Furthermore, our competitors may independently develop
similar technologies or duplicate any technology developed or licensed by us.
Because of the extensive time required for development and testing of new
technologies, it is possible that, before any of our proprietary technologies
can be commercialized, our relevant patent rights may expire or remain in force
for only a short period following commercialization. Expiration of patents
we
license or own could adversely affect our ability to protect future technologies
and, consequently, our operating results and financial position. In
addition,
we cannot assure you that we will not incur significant costs and expenses,
including the cost of litigation in the future, to defend our rights under
those
patents, licenses and non-disclosure agreements.
Patent
Applications
On
August
4, 2005, we filed an international patent application under the Patent
Cooperation Treaty based on U.S. Provisional Patent Application Serial No.
60/598,880 entitled “Method of Converting a Biomass into a Biobased Product.”
The invention uses an “impact” process for cleanly separating, or fractionating,
the basic fibrous components that are present in a biomass and from which
fermentable sugars are obtained. The fibrous components of the biomass are
then
uniquely processed into a wide range of environmentally advantageous biobased
products such as ethanol, fossil fuel derivatives, biodegradable plastics or
edible protein.
On
December 12, 2005, we filed a provisional U.S. patent application Serial No.
11/301,970 entitled “Method for Producing Bioethanol from Lignocellulosic
Biomass and Recycled Paper Sludge.” We believe the invention will improve the
ethanol yield for lignocelluosics by increasing the amount of sugars available
for fermentation.
Licensing
and Collaborative Agreements
To
date,
we have entered into a number of license and collaborative research and
development agreements with various institutions to obtain intellectual property
rights and patents relating to biomass conversion. Our strategy includes
possible future in-licensing of intellectual property, as well as collaborations
with companies that may use our intellectual property in their products, or
develop, co-develop, market and sell our product candidates in markets outside
of the United States.
Virginia
Tech
In
June
2004, through our acquisition of Advanced Bioethanol Technologies, Inc., we
obtained an exclusive, royalty-bearing license from Virginia Polytechnic
Institute and State University, or Virginia Tech, to any patent rights issuing
from Virginia Tech’s invention relating to bioethanol production from cotton gin
waste and recycled paper sludge. This license is subject to certain research
rights retained by Virginia Tech. Under the license, we agreed to spend at
least
$100,000 annually during the first five years of the agreement to develop
products using the licensed technology and to market and reasonably fill market
demand for licensed products following commencement of marketing. Virginia
Tech
may terminate the license or convert it to an non-exclusive license if we fail
to perform any of these obligations or fail to make any payment under the
license when due, subject to our right to cure that failure within 30 days
of
notice of the failure. We may terminate the license without cause upon 90 days’
written notice. Otherwise, this agreement will terminate upon the later of
the
expiration of the longest-lived patents rights or June 25, 2025. As of the
date
of this report, no patents relating to the invention have been issued.
Under
this license agreement, we paid to Virginia Tech a license issue fee of $25,000.
We are obligated to pay Virginia Tech royalties equal to of 3.0% of our net
sales of equipment using licensed methods and 0.25% of net sales of ethanol
or
other fermentation products, subject to a minimum annual royalty of $7,500
in
the third year of the agreement, $15,000 in the fourth year of the agreement
and
$30,000 thereafter throughout the term of the license. We also agreed to pay
50%
of any fees that are not earned royalties that we may receive in connection
with
the sublicense of the licensed technology and to pay on each sublicense royalty
payment, the higher of (a) 50% of the royalties received or (b) royalties based
on at least 50% of the royalty rate specified in the agreement.
In
connection with this license agreement, in December 2005 we entered into a
research agreement with Virginia Tech. Under this agreement, Virginia Tech
will
own any intellectual property created solely by Virginia Tech researchers in
the
performance of this agreement, and we and Virginia Tech will jointly own any
intellectual property created jointly by our researchers and Virginia Tech
researchers. We have the right, for six months after the termination of the
project, to obtain a non-exclusive, nontransferable, royalty-free license to
any
intellectual property generated by the project or to negotiate a royalty-bearing
exclusive license to any intellectual property generated by the project, subject
to research rights retained by Virginia Tech. We may terminate this
collaboration upon 60 days’ written notice.
Under
these agreements, we have paid Virginia Tech $171,874 through December 31,
2007.
National
Renewable Energy Laboratory
In
January 2005, through our acquisition of Superior Separation Technologies,
Inc.,
we obtained an exclusive, worldwide royalty-bearing license from Midwest
Research Institute, or MRI, as manager and operator of the U.S. Department
of
Energy’s National Renewable Energy Laboratory, or the NREL, for an issued United
States patent with claims directed toward a method of biomass feedstock
separation. Our license is subject to the rights to the licensed patent retained
by the U.S. Government. Under the license agreement, we provided MRI with a
five-year plan for our commercial use of the licensed technologies, including
sales forecasts for products produced by and equipment incorporating the
licensed technologies for the five-year period. We are required to provide
MRI
with annual updates of our commercial use plan throughout the term of the
agreement. MRI has the right to terminate our license if we fail to meet 75%
of
our then current sales forecast or if we fail to make any payment when due
under
the agreement, subject to our right to cure the failure in each case. We have
the right to terminate the license in the event of any material breach by MRI,
subject to their right to cure that breach. The agreement automatically
terminates if we cease to do business or become insolvent or bankrupt or if
we
attempt to assign our license. Otherwise, this license will terminate upon
the
earlier of January 10, 2030 or the extinguishment of all the licensed patent
rights. Currently, the latest to expire of the issued patents under the license
agreement expires in 2015.
Pursuant
this agreement, we paid MRI an up-front royalty fee of $60,000 and also agreed
to pay MRI a continuous royalty of 3.0% on the sale of any equipment that
incorporates the licensed technologies and 0.25% on any ethanol and 5.0% on
any
value added byproducts produced by the licensed technologies, subject to an
annual minimum royalty of $10,000 in 2007, $25,000 in 2008 and between $50,000
and $75,000 (depending on the feedstocks included within the licensed field
of
use) thereafter throughout the term of the license. We also agreed to pay 50%
of
any revenues we receive through the sublicensing of the licensed
technologies.
In
connection with this license agreement, in May 2006 we entered into a
cooperative research and development agreement with MRI as operator of the
NREL.
Under the agreement, we were required to pay $300,000 to the NREL to finance
the
research to be performed under the agreement. We have the right to assert
copyright in works our employees create in performing under the agreement,
and
we have the right to retain ownership of any invention our employees make in
performing under the agreement, exercisable within twelve months of the
disclosure of the invention. We have the right, for six months after the
termination of the project, to negotiate a royalty-bearing exclusive license
to
any invention made by the employees of and retained by the NREL. Our rights
under this agreement are subject to the rights retained by the U.S. Government.
Either party may terminate this agreement upon 30 days’ written
notice.
Under
these agreements, we have paid MRI $60,000 and the NREL $300,000 through
December 31, 2007.
U.S.
Department of Agriculture’s Forestry Products Laboratory
In
August
2005, through our acquisition of Xylose Technologies, Inc., we obtained a
non-exclusive license, limited to the United States, to two issued United States
patents and a patent application relating to xylose-fermenting yeast from the
Wisconsin Alumni Research Foundation, or WARF, the licensee of the U.S.
Department of Agriculture’s Forestry Products Laboratory, or the FPL. Our
license is subject to the rights to the licensed patent retained by the U.S.
Government. Under this license, we had the options, exercisable for six months
from the date of the agreement, to extend the license territory to include
South
America and Africa and to obtain a worldwide, exclusive license to use the
licensed patents in the United States. Our right to exercise the second option
was conditioned on our entering into a cooperative research and development
agreement with the FPL, under which we agreed to provide at least $250,000
to
finance the research that the FPL is to perform under the agreement. WARF has
the right to terminate our license if we breach any of our obligations under
the
agreement, subject to our right to cure within 90 days of notice of the breach
by WARF, or if we become insolvent or bankrupt. We have the right to terminate
the agreement at any time on 90 days’ written notice. Otherwise, this license
will terminate upon the earlier of the date on which no licensed patent remains
enforceable or our payment of royalties, once begun, ceases for more than eight
calendar quarters. Currently, the latest to expire of the issued patents under
the license agreement expires in 2019.
Pursuant
this agreement, we paid WARF a license issue fee of $30,000 and an option fee
of
$50,000. We also agreed to pay WARF a royalty of 0.5% on the sale of any product
that incorporates the licensed technology, subject to an annual minimum royalty
of $15,000 beginning in 2008 and $25,000 thereafter and throughout the term
of
the license.
In
connection with this license, in November 2005 we entered into a cooperative
research and development agreement with the FPL. The agreement provides for
us
to pay the FPL a total of $250,000, payable in four equal installments, to
finance the research to be performed under the agreement. Under this agreement,
we have agreed to confer with the FPL regarding the ownership of any inventions
made in the performance of the agreement. We have the right to negotiate an
exclusive license to any invention retained by the FPL. Our rights under this
agreement are subject to the rights retained by the U.S. Government. In December
2006, this agreement was extended, at no additional cost, until March 2007.
In
January 2007, we negotiated a second cooperative research and development
agreement with FPL with a term that expires on November 30, 2007, which was
subsequently extended to April 30, 2008. In March 2008, we extended the term
of
this agreement, at no additional cost, until September 2008. The new agreement
requires us to pay to FPL a total of $250,000, payable in four equal quarterly
installments beginning January 15, 2007. As of December 31, 2007, under these
agreements, we have paid WARF and the FPL $250,000 under the first agreement
and
$192,500 under the second agreement.
University
of North Dakota
In
June
2006, through our acquisition of Advanced Biomass Gasification Technologies,
Inc. (“ABGT”), we obtained a worldwide royalty-bearing license from the
University of North Dakota’s Energy and Environmental Research Center (the
“EERC”) in Grand Forks for two U.S. provisional patent applications with claims
directed toward a method and apparatus for supply of low-BTU gas to an engine
generator and wet solids removal and separation system from a gasifier and
related know-how. Our license is limited to the field of lignin and biomass
feedstock gasification in Imbert gasifiers of up to 10 megawatt thermal. Our
license is subject to the rights to the licensed patents retained by the EERC
and the U.S. Government. Our license is exclusive with in the specified field
through 2012 and thereafter exclusivity will automatically be renewed for the
following year on a country-by-country basis if the royalty payments from that
country are at least $50,000 on an annual basis. Otherwise, the license becomes
non-exclusive. We have the right to sublicense the licensed technology
throughout the exclusivity period.
Under
the
license, we are obligated to complete long-term testing of the licensed
technologies at the pilot stage by December 31, 2008, to make a first commercial
sale of a licensed product on or before June 30, 2009 and to make minimum annual
net sales of licensed products of $500,000 in 2009, $2,000,000 in 2010 and
$5,000,000 in 2011 and each year thereafter. The EERC has the right to terminate
our license if we fail to perform any of these obligations, subject to our
right
to cure that failure within 60 days after receiving written notice, or if we
fail to pay any amount when due, subject to our right to cure that failure
within 30 days after receiving written notice, or if we cease to do business.
We
may terminate the license upon six months written notice to the EERC, subject
to
our payment of all amounts due under the license. Unless earlier terminated,
this license will terminate upon the later of May 24, 2026 or the end of the
life of the licensed intellectual property.
Under
this agreement, we paid the EERC a license issue fee of $50,000 and agreed
to
pay the EERC an annual license maintenance fee of $10,000 in 2007 and 2008,
$25,000 in 2009, $50,000 in 2010 and $100,000 each year thereafter throughout
the term of the license. Under the license, we are obligated to pay the EERC
a
running royalty of 2.0% on our net sales of equipment incorporating the licensed
technology, 0.25% on net savings of electricity and/or fuel by any of our
customers and 4.0% on any of our service fee income. The running royalties
due
on net sales paid during the previous twelve-month period, if any, may be
credited to the license maintenance fee payable in respect of any year. License
maintenance fees paid in excess of running royalties due in that 12-month period
shall not be creditable to amounts due for future years. We also agreed to
pay
35% of any revenues we receive through the sublicensing of the licensed
technologies.
In
connection with this license agreement, in May 2006 we entered into a base
research agreement with the EERC to develop the licensed technology. The
agreement provides for us to pay the EERC a cost-reimbursable amount of $300,000
in advance to finance the initial project to be performed under the agreement.
Under this agreement, the EERC retains ownership of any invention made in the
performance of the agreement. We have the
exclusive
right to negotiate an exclusive commercial license to any such invention,
exercisable for twelve months after disclosure of the invention. At a minimum,
we will have a non-exclusive, perpetual, royalty-free license to use the
invention in our internal operations, but not for commercial use or in
conjunction with others. Our rights under this agreement are subject to the
rights retained by the U.S. Government. Unless earlier terminated, the agreement
will expire on May 24, 2009. Either party may terminate this agreement upon
30
days’ written notice for any reason.
Under
these agreements, we have paid the EERC approximately $322,000 through December
31, 2007.
H2Diesel,
Inc.
On
April
14, 2006, we entered into management and sublicense agreements with H2Diesel,
Inc., each of which was amended and restated on June 15, 2006, effective as
of
April 14, 2006. H2Diesel cancelled the management agreement on September 25,
2006.
Under
the
amended and restated sublicense agreement, we were granted (a) an exclusive
sublicense to make, use and sell use and sell products manufactured by using
the
H2Diesel fuel additive in Maine, Vermont, New Hampshire, Massachusetts,
Connecticut, Rhode Island, New York, Pennsylvania, Delaware, New Jersey,
Virginia, West Virginia, North Carolina, South Carolina, Georgia and Florida,
and (b) a non-exclusive license to sell those products anywhere else within
North America, Central America and the Caribbean. Additional territories may
be
added by written agreement of the parties.
Under
the
amended and restated sublicense agreement, H2Diesel must sell us additive in
quantities sufficient to meet our requirements for the production of product
at
the lower of its actual cost or the price at which it sells additive to
unrelated third parties, or at such other price as we and H2Diesel may agree.
We
are obligated to pay certain royalties to H2Diesel based on sales of products
by
us or our sublicensees. The royalty that we must pay per gallon of product
that
we or our distributors sell is the lesser of $0.10 per gallon or the lowest
per
gallon royalty that H2Diesel charges to unrelated entities. During the initial
term of the agreement, for each twelve-month period beginning on the date (the
“Trigger Date”) on which H2Diesel first notifies us that it can produce and
deliver additive in sufficient quantities to meet our requirements, is able
to
do so and provides us with the technical and engineering specifications
necessary for a plant to produce the products, we are obligated to pay H2Diesel
a minimum royalty equal to the royalty that would have been paid had a specified
amount been sold during that twelve month period. For the first twelve-month
period, the specified amount is 20,000,000 gallons of product and for each
succeeding twelve-month period the amount increases by 10,000,000 gallons.
If we
do not sell the minimum amount or pay the minimum royalties due with respect
to
the second or third twelve-month periods after the Trigger Date, then H2Diesel
has the option to terminate the sublicense or to convert our exclusive rights
under the sublicense to non-exclusive rights and if H2Diesel elects to convert
our exclusive rights to non-exclusive rights we will still be obligated to
pay
the minimum royalties due with respect to the initial twelve-month period.
If we
do not sell the minimum amount or pay the minimum royalties due with respect
to
the fourth or any subsequent twelve-month period, then our exclusive rights
under the sublicense automatically convert to non-exclusive rights and our
obligation to pay the minimum royalties due with respect to any subsequent
twelve-month period is terminated. In effect, beginning in the fourth
twelve-month period we may terminate our minimum royalty payment obligations
with respect to subsequent twelve-month periods by electing not to cure any
failure to make the minimum royalty payments due with respect to the current
year. If our minimum royalty payment obligations are terminated, throughout
the
term of the agreement we will continue to pay royalties to H2Diesel for any
licensed product actual sold. The initial term of the amended and restated
sublicense agreement is for ten years from the Trigger Date. Thereafter, the
agreement automatically renews for successive one-year periods provided there
is
no existing default at the time of renewal. As of March 1, 2008, the Trigger
Date had not yet occurred and accordingly, we had not recorded any royalty
expense under the sublicense.
The
following table sets forth our minimum royalty payments obligations in each
twelve-month period during the initial term of the agreement assuming that
(a)
the maximum royalty rate of $0.10 per gallon applies throughout the term and
(b)
we do not terminate our minimum payment obligations in the fourth or any
subsequent year on the terms described above:
Twelve-Month
Period
|
Minimum
Royalty
Payment
|
|
|
First
|
$
2,000,000
|
Second
|
3,000,000
|
Third
|
4,000,000
|
Fourth
|
5,000,000
|
Fifth
|
6,000,000
|
Sixth
|
7,000,000
|
Seventh
|
8,000,000
|
Eighth
|
9,000,000
|
Ninth
|
10,000,000
|
Tenth
|
11,000,000
|
Also
on
June 15, 2006, we also entered into a technology access agreement with H2Diesel,
under which H2Diesel agreed to deliver to us the formula for its additive and
all know-how in its possession, under its control or available from its licensor
of the technology that relates to the manufacture of the additive. H2Diesel
is
required to continue to provide us with information regarding modifications
to
that formula or know-how. We have no right to use the formula or the know-how
so
long as H2Diesel is not in default of its obligations under the amended and
restated sublicense agreement. After an event of default, we have the right
to
use the formula and know-how to produce the additive to meet our needs to
exercise our right to sell licensed product under the amended and restated
sublicense agreement. We must pay H2Diesel the royalties we would otherwise
have
paid in connection with sales of licensed product, but may offset the amount
by
which the cost we incur in manufacturing the licensed product ourselves exceeds
the price that we would otherwise have paid H2Diesel. We have retained the
right
to seek damages from H2Diesel for any excess cost of the additive. For more
information about our transactions with H2Diesel, see “Description of Formation
and Capitalization - Investment in H2Diesel” above.
Joint
Venture Agreements
To
date,
we have organized three subsidiaries: CoastalXethanol, NewEnglandXethanol and
Advanced Cellulosic BioTechnologies LLC (formerly named
BlueRidgeXethanol).
CoastalXethanol
LLC
We
formed
CoastalXethanol LLC in May 2006 to develop plants for the production of ethanol
in Georgia and parts of South Carolina. CoastalXethanol is a joint venture
with
Coastal Energy Development, Inc. (“CED”). We acquired an 80% membership interest
in CoastalXethanol for a capital contribution of $40,000 and CED acquired a
20%
membership interest in CoastalXethanol for a capital contribution of $10,000.
For accounting purposes, the operations of CoastalXethanol are consolidated
into
our financial statements.
As
of
March 1, 2008, we had advanced approximately $8.2 million to CoastalXethanol
for
working capital and investment purposes, net of repayments from CoastalXethanol
to us. CoastalXethanol has loaned $630,000 to CED for working capital purposes.
In 2007, subsequent to the settlement of a lawsuit between CED and us, as
described in more detail below, CoastalXethanol recognized the balance of
$630,000 loan to CED as bad debts.
In
August
2006, Augusta BioFuels, LLC, a wholly owned subsidiary of CoastalXethanol,
purchased a former pharmaceutical manufacturing complex located in Augusta,
Georgia from Pfizer Inc. for approximately $8,400,000 in cash. In October 2006,
Augusta BioFuels sold surplus equipment from the Augusta facility for $3,100,000
in cash. The buyer of the surplus equipment also agreed to perform demolition
work at the site.
In
December 2006, Southeast BioFuels, LLC, a newly formed subsidiary of
CoastalXethanol, purchased assets from Renewable Spirits, LLC for $100,000
in
cash, a $600,000 note payable over 120 months and a 22% membership interest
in
Southeast BioFuels. The purchased assets consisted of equipment and intellectual
property associated with an experimental system for the production of ethanol
and other marketable co-products from waste citrus biomass, including Renewable
Spirits’ rights under a cooperative research and development agreement with
the
U.S.
Department of Agriculture’s Agricultural Research Service. Through our indirect
ownership in Southeast Biofuels, we are evaluating the feasibility of producing
ethanol from waste citrus biomass.
On
December 18, 2007, we announced in a press release that Southeast Biofuels
filed
a grant application with the Florida Department of Agriculture and Consumer
Services to expand our work on converting waste to energy, using citrus waste
as
the raw material and converting it into ethanol. On January 22, 2008, the
Florida Department of Agriculture and Consumer Services approved a $500,000
grant to Southeast Biofuels. We intend to build a demonstration plant for
converting citrus peel waste into ethanol and are negotiating an agreement
to
locate the plant at an existing citrus facility in Florida owned by one of
the
largest citrus processors in the state.
On
March
5, 2007, we, along with CoastalXethanol initiated an action against CED in
the
Supreme Court of the State of New York. Our complaint alleges, among other
things, that CED failed to repay to CoastalXethanol loans in the principal
amount of $630,000, plus interest, and that CED has failed to account properly
for the expenditure of certain of our funds and those of CoastalXethanol. In
the
complaint, we and CoastalXethanol seek from CED damages in an amount not less
than $630,000, plus interest, an accounting of funds, and reasonable attorneys'
fees and expenses incurred in connection with the litigation. On April 3, 2007,
CED filed an answer and counterclaim, asserting various claims (breach of
contract, fraud in the inducement, negligent misrepresentation, tortious
interference, alter ego and identical instrumentality liability and conversion)
relating to the relationship between Xethanol and CED. CED sought unspecified
compensatory and punitive damages. On September 14, 2007, we reached a
settlement with CED and agreed to pay CED $400,000 in exchange for CED’s 20%
interest in CoastalXethanol, which owns (through a wholly owned subsidiary)
a
former pharmaceutical manufacturing complex located in Augusta, Georgia. The
parties executed releases and replaced the warrant issued in the organization
of
CoastalXethanol with a warrant to purchase 200,000 shares of our common stock
that is exercisable at an exercise price of $6.85 per share through May 30,
2009. The payment and purchase of CED’s 20% interest in CoastalXethanol LLC was
completed on September 24, 2007. We dismissed our claims against CED with
prejudice.
We
have
reevaluated our Augusta facility and have decided that it does not fit within
our long-term corporate strategy. On March 20, 2008, our board authorized
management to pursue the sale of the facility. We have interviewed real estate
brokerage firms to assist us in marketing the property for sale, but we have
not
retained such a firm. If we do decide to sell our Augusta facility and are
successful in selling it, we estimate that we would reduce our annual overhead
by approximately $600,000. We can offer no assurances regarding how long it
would take to sell the facility or the price we might receive.
NewEnglandXethanol,
LLC
We
formed
NewEnglandXethanol, LLC in June 2006 with a goal of developing plants for the
production of ethanol in the New England states. NewEnglandXethanol was a joint
venture with Global Energy and Management LLC, with both Global Energy and
us
each owning 50% of the membership interests in NewEnglandXethanol. On June
23,
2006, we entered into an operating agreement and an organizational agreement
with Global Energy and NewEnglandXethanol. Under the organization agreement,
Global Energy agreed to contribute capital to NewEnglandXethanol over time
and
based on the achievement of certain milestones. Under the organizational
agreement, we also granted Global Energy a warrant to purchase shares of our
common stock. In December of 2006, our NewEnglandXethanol joint venture
effectively ended based on a disagreement between Global Energy and us with
respect to the actions that Global Energy and we were required to take pursuant
to our joint venture. We do not believe that the NewEnglandXethanol joint
venture will conduct any further business.
In
December 2007, Global Energy filed an action in the federal court for the
Southern District of New York against Xethanol and nine of our current or former
officers, directors and employees. The lawsuit alleges fraud by the defendants
in connection with Global Energy’s alleged investment of $250,000 in
NewEnglandXethanol. On March 19, 2008, Global Energy served its second amended
complaint on us. Based on an alleged investment of $250,000, Global Energy
seeks
more than $10,000,000 in damages plus pre-judgment interest and costs.
Management has instructed counsel to vigorously represent and defend our
interests in this litigation.
Research
and Development
In
conjunction with the development of our licensed technologies, we incurred
research and development costs of $601,000 during the year ended December 31,
2007 and $852,000 during the year ended December 31, 2006.
Sales
and Marketing
We
sell
all of the ethanol we produce at our Blairstown plant to Aventine Renewable
Energy Holdings, Inc., the second largest marketer of ethanol, under a
renewable, three-year off-take agreement. Sales are made at monthly prices
determined on a pooled basis and are estimated at the beginning of each month.
Each business day, we deliver ethanol to Aventine’s trucks at our plant, and
Aventine pays us from time to time during the month. Estimates may be revised
during the month based on changing market conditions, and Aventine typically
provides a final true-up adjustment within 10 days after the end of each month,
then pays us the final payment for the month on the first Friday following
the
delivery of the final true-up adjustment. The adjustment is included in the
prior month’s sales revenue. The pool includes ethanol production by Aventine,
other small producers that are members of the Aventine marketing alliance and
us. The pooled price is a combination of forward and spot sales less the cost
of
transportation and marketing overhead. Aventine also receives a sales commission
that is recorded net, in sales. The agreement originally contemplated that
we
would produce and Aventine would purchase all of the 6 million gallons per
year
that we were capable of producing at Blairstown. In July 2006, Aventine agreed
that it would purchase all of the 41 million gallons that might be at Blairstown
if it is ever expanded.
We
sell
the distillers wet grains that we produce as a by-product at Blairstown through
a local merchandising agent.
Raw
Material Supply
Our
Blairstown facility annually purchases approximately 2.1 million bushels of
#2 yellow corn. Due to its location in the Corn Belt, the plant has ample access
to various corn markets and suppliers. The facility’s corn supply has
historically been priced at approximately the price of #2 yellow corn as traded
on the Chicago Board of Trade plus or minus typical regional or local basis.
During 2006 and 2007, the plant purchased corn from one supplier with whom
we
have a contractual arrangement. The seller delivers corn to the facility by
truck. At any given time, we keep on site approximately 8,000 bushels, or
approximately one and a half days supply.
Transportation
and Logistics
Logistics
include truck loading and unloading. The plant site does not have direct access
to a railroad. We believe that the ample local supply of grain and the central
location among three major ethanol terminal markets make rail freight
unnecessary. We deliver to Aventine’s trucks at our plant the ethanol that we
sell to Aventine.
Energy
We
have
purchased all of our electricity for our Blairstown plant from Alliant Energy
at
its standard industrial rate. For the six-month period during which the plant
was operational in 2005, we purchased 4,029 megawatt hours. For the years ended
December 31, 2006 and December 31, 2007, we purchased 8,017 megawatt hours
and
7,725 megawatt hours, respectively.
Throughout
2005 and the first six months of 2006, Alliant Energy supplied natural gas
to
the plant under a supply and transportation contract that expired on June 30,
2006. On July 1, 2006, we entered into contracts with Center Point Energy
Services to provide natural gas and with Alliant Energy to provide related
transport services.
We
currently buy natural gas in the spot market, but have the option to forward
price all or a portion of our needs through our current natural gas supplier,
Center Point Energy. Total energy usage for the six-month period during which
the plant was operational in 2005 and for the year ended December 31, 2006
averaged approximately 42,870 BTUs per denatured gallon produced. Total energy
usage for the year ended December 31, 2007 averaged approximately 41,412 BTUs
per denatured gallon produced.
Regulatory
Approvals and Environmental Laws
We
are
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. These laws,
regulations and permits also can 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 damage, criminal sanctions, permit
revocations and/or facility shutdowns. We do not anticipate a material adverse
effect on our business or financial condition as a result of our efforts to
comply with these requirements. We also do not expect to incur material capital
expenditures for environmental controls in this or the succeeding fiscal
year.
There
is
a risk of liability for the investigation and cleanup of environmental
contamination at each of the properties that we own or operate and at off-site
locations where we arranged 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 damage 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
these properties. Some of these matters may require us to expend significant
amounts for investigation and/or cleanup or other costs. We believe that we
do
not have material environmental liabilities relating to contamination at or
from
our facilities or at off-site locations where we have transported or arranged
for the disposal of hazardous substances.
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. We expect continued government and public
emphasis on environmental issues to require us to increase future investments
for environmental controls at our ongoing operations. Present and future
environmental laws and regulations (and related interpretations) applicable
to
our operations, more vigorous enforcement policies and discovery of currently
unknown conditions may require substantial capital and other expenditures.
Our
air emissions are subject to the federal Clean Air Act, the federal Clean Air
Act Amendments of 1990 and similar state and local laws and associated
regulations. The U.S. EPA has promulgated National Emissions Standards for
Hazardous Air Pollutants, or NESHAP, under the federal Clean Air Act that could
apply to facilities that we own or operate if the emissions of hazardous air
pollutants exceed certain thresholds. If a facility we operate is authorized
to
emit hazardous air pollutants above the threshold level, then we are required
to
comply with the NESHAP related to our manufacturing process and another NESHAP
applicable to boilers and process heaters. New or expanded facilities would
be
required to comply with both standards upon startup if they exceed the hazardous
air pollutant threshold. The emission control systems at our existing Blairstown
facility are designed to meet the current threshold level of emission, and
we
are in compliance with the applicable NESHAP standards. In addition to costs
for
achieving and maintaining compliance with these laws, more stringent standards
may also limit our operating flexibility. Because other domestic ethanol
manufacturers will have similar restrictions, however, we believe that
compliance with more stringent air emission control or other environmental
laws
and regulations is not likely to materially affect our competitive position.
We
have
decided that our Spring Hope facility does not fit within our long-term
corporate strategy, and on March 20, 2008, our board authorized management
to
pursue the sale of the facility. Before we sell the property (or as a term
of
its sale), we will have to resolve certain liens on the property filed by
companies that performed, or have claimed to have performed, environmental
remediation and demolition work on the property. We have accrued $500,000 to
settle claims and $450,000 for environmental clean-up at December 31, 2007.
We
have not completed an environmental study or remediation. These estimates may
require adjustment.
The
hazards and risks associated with producing and transporting our products,
such
as fires, natural disasters, explosions, abnormal pressures, blowouts and
pipeline ruptures also may result in personal injury claims or damage to
property and third parties. As protection against operating hazards, we maintain
insurance coverage against some, but not all, potential losses. Our coverage
includes physical damage to assets, employer’s liability, comprehensive general
liability, automobile liability and workers’ compensation. We believe that our
insurance is adequate and customary for our industry, but losses could occur
for
uninsurable or uninsured risks or in amounts in excess of
existing
insurance coverage. We do not currently have pending material claims for damages
or liability to third parties relating to the hazards or risks of our business.
We
are
also required to obtain a permit issued by the Bureau of Alcohol, Tobacco and
Firearms before any of our ethanol facilities can make ethanol.
Competition
A
number
of our competitors have substantially greater financial and other resources
than
we do. Their larger plants have cost advantages and economies of scale. We
believe that our ability to compete successfully in the ethanol production
industry depends on many competitive factors, including price, quality and
reliability of production processes, the cost of corn and delivery and volume
of
ethanol produced and sold. At our current and projected levels of output, our
production is insignificant relative to the overall size of the U.S. ethanol
market. Most of the ethanol supply in the United States is derived from corn
and
is produced at approximately 139 ethanol production plants, located
predominately in the Corn Belt in the Midwest, with additional 68 plants under
expansion or construction. The ethanol production industry is fragmented, with
two companies, Archer Daniels Midland and Poet, accounting for nearly 30% of
U.S. production and the next largest producer accounting for less than 7% of
the
same market. The majority of plants are in the 20 million to 60 million gallons
per year capacity range, with a number of these plants affiliated with local
farmer cooperatives. We expect recent consolidation trends in the ethanol
industry to continue.
Traditional
corn-based production techniques are mature and well entrenched in the
marketplace, and the industry’s infrastructure is geared toward corn as the
principal feedstock. The technology and infrastructure for commercial
biomass-to-ethanol production is yet to be developed.
Employees
We
had 30
employees as of March 14, 2008, and all of these employees are full time. None
of these employees is covered by a collective bargaining agreement, and our
management believes that our relations with our employees are good.
If
you purchase our common stock, you will be taking on a high degree of financial
risk. In deciding whether to purchase our common stock, you should carefully
read and consider the risks and uncertainties described below and the other
information contained in this report. The occurrence of any of the following
risks could materially impair our business, financial condition and results
of
operation. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of your investment.
Risks
Related to Our Business and Industry
We
have a history of net losses.
We
incurred net losses of $31.3 million for the year ended December 31, 2007;
$20.2
million for the year ended December 31, 2006; $11.4 million for the year ended
December 31, 2005; and $2.6 million for the year ended December 31, 2004. From
our inception on January 24, 2000 through December 31, 2007, we reported an
accumulated deficit of $66.8 million.
We
have
funded our operations primarily through the sale of our securities and expect
to
continue doing so for the foreseeable future. We expect to continue to incur
net
losses for the foreseeable future as we continue to further develop our ethanol
production technologies. Our ability to generate and sustain significant
additional revenues or achieve profitability will depend on the factors
discussed elsewhere in this “Risk Factors” section. We cannot assure you that we
will achieve or sustain profitability or that our operating losses will not
increase in the future. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis
in
the future.
The
market for ethanol produced from corn has continued to
deteriorate.
Corn
is
the principal raw material we use to produce ethanol and ethanol by-products.
Recently, the prices of corn have significantly increased, averaging over $5.25
per bushel in March 2008, while purchases of ethanol by oil refiners to blend
into gasoline have flattened. In general, rising corn prices result in lower
profit margins and may result in negative margins if not accompanied by
increases in ethanol prices. We believe that the increasing ethanol production
capacity has contributed to, and will continue to contribute to, a period of
elevated corn prices compared to historical levels. Under current market
conditions, because ethanol competes with fuels that are not corn-based, we
generally cannot pass along increased corn costs to our customers. At certain
levels, corn prices may make ethanol uneconomical to use in markets and volumes
above the requirements set forth in the renewable fuels standard or for which
ethanol is used as an oxygenate in order to meet federal and state fuel emission
standards.
The
vast
increase in U.S. ethanol capacity under construction could outpace increases
in
corn production, which may further increase corn prices and increase our
operating losses. According to the Renewable Fuels Association, as of December
2007, approximately 5.8 billion gallons per year of production capacity is
currently under construction. Demand for ethanol may not increase as quickly
as
expected or to a level that exceeds supply, or may not increase at all. If
the
ethanol industry has excess capacity resulting from the increases in capacity
coupled with insufficient demand, the market price of ethanol may decline to
a
level that is inadequate to general sufficient cash flow to cover our costs.
The
lower profit margins caused by rising corn prices coupled with the decline
in
the prices of ethanol would have a material adverse effect on our business,
results of operation and financial condition.
Our
Blairstown, Iowa ethanol plant, which is our only operating asset, is not
competitive with newer, larger plants operated by our competitors and continues
to operate at a loss.
The
ethanol production industry is highly competitive with approximately 139 ethanol
production plants currently operational in the U.S., with additional 68 plants
under expansion or construction. A number of our competitors have substantially
greater financial resources and depth of operations than we do. In addition,
there is clearly a consolidation trend in the ethanol industry. As of March
4,
2008, the top five producers accounted for approximately 41% of the ethanol
production capacity in the U.S. according to the Renewable Fuels Association.
The lower profit margins caused by rising corn prices favor the larger ethanol
producers who have economies of scale and cost advantages, which we do not
have.
We have continued to operate at a loss and cannot provide any assurance that
we
will be able to operate profitably in a more competitive environment.
We
will need to raise additional funds to achieve our business
objectives.
As
of
March 14, 2008, we had cash and cash equivalents of approximately $9.5 million,
compared to cash and cash equivalents of $20.8 million as of March 31, 2007.
We
need
additional funds to pursue our revised business strategy. In particular, we
intend to build a demonstration plant in Florida to convert citrus peel waste
into ethanol. The planned cost for the two-year build-out of the demonstration
plant is approximately $5,900,000. On January 22, 2008, the Florida Department
of Agriculture and Consumer Services approved a $500,000 grant that we expect
to
use to defray part of these costs. We plan to apply for federal government
grants and combine private equity with those grants to supplement the state
grant. If we do not receive these federal grants, we will need to raise
additional equity to build this plant as we intend. We will also use cash on
hand to cover corporate overhead and fund our research and development
agreements.
We
currently have no commitments for any additional financing, and there can be
no
assurance that we can obtain additional capital on commercially acceptable
terms
or at all. Our failure to raise capital as needed would significantly restrict
our growth and hinder our ability to compete. We have curtailed our expenses
and
may need to take further steps in that regard. We may also have to reduce
planned investments in technology and research and development and to forgo
other business opportunities. Additional equity financings are likely to be
dilutive to holders of our common stock, and debt financing, if available,
may
require significant payment obligations and covenants that restrict how we
operate our business.
We
do not presently intend to pursue the manufacture and sale of a diesel biofuel
based on H2Diesel’s technology, which previously was one of our key strategies.
In
April
2006, we entered into an exclusive, sublicense agreement with H2Diesel, Inc.
that permits us to manufacture and sell a diesel biofuel based on H2Diesel’s
technology. H2Diesel is the licensee of a proprietary vegetable oil-based diesel
biofuel to be used as a substitute for conventional petroleum diesel and
biodiesel, heating and other fuels. We previously stated that we intended to
collaborate with H2Diesel in the development and testing of the technology
to
accelerate its commercialization. We have decided not to pursue the manufacture
and sale of a diesel biofuel based on H2Diesel’s technology, thus we no longer
have the ability to use that technology to grow our business.
We
may be unable to liquidate our investment in H2Diesel Holdings,
Inc.
As
of
March 1, 2008, we owned 5,670,000 shares of H2Diesel Holdings, Inc. common
stock, which represented approximately 31.2% of the common stock then
outstanding. H2Diesel Holdings’ common stock has recently traded on the OTC
Bulletin Board at approximately $5.00 per share. Because we are an “affiliate”
of H2Diesel Holdings, however, we can sell our H2Diesel Holdings stock
on
the
OTC Bulletin Board
only
in
compliance with SEC Rule 144, which limits the amount of shares we can sell
in
any three month period to 1% of the shares of the class outstanding as shown
by
the most recent report or statement published by H2Diesel Holdings. Due to
this
limitation, the size of our investment, uncertainties in the future business
and
financial performance of H2Diesel Holdings and the fact that the trading prices
of shares of H2Diesel Holdings on the OTC Bulletin Board have varied
considerably over time, we cannot realize the nominal value of those shares
and
may be unable to realize a material portion of it.
Because
we are smaller and have fewer financial and other resources than many ethanol
producers, we may not be able to compete successfully in the very competitive
ethanol industry.
Ethanol
is a commodity, and there is significant competition among existing ethanol
producers. Our business faces competition from a number of producers that can
produce significantly greater volumes of ethanol than we can or expect to
produce, producers that can produce a wider range of products than we can,
and
producers that have the financial and other resources that would enable them
to
expand their production rapidly if they chose to do so. Some of these producers
have achieved substantial economies of scale and scope, thereby substantially
reducing their fixed production costs and their marginal production costs.
We
may be unable to produce ethanol at a cost that allows us to operate profitably.
Even if we are able to operate profitably, these other producers may be
substantially more profitable than we are, which may make it more difficult
for
us to raise any financing necessary for us to achieve our business plan and
may
have a materially adverse effect on the market price of our common
stock.
Competition
from large producers of petroleum-based gasoline additives and other competitive
products may adversely affect our financial
performance.
Our
success depends substantially upon continued demand for ethanol from major
oil
refiners. We believe that other gasoline additives that have octane and
oxygenate values similar to those of ethanol currently cannot be produced at
a
cost that makes them competitive. The major oil refiners have significantly
greater financial, technological and personal resources than we have to reduce
the costs of producing these alternative products or to develop other
alternative products that may be produced at lower cost. The major oil refiners
also have significantly greater resources than we have to influence legislation
and public perception of ethanol. If the major oil refiners are able to produce
ethanol substitutes at a cost that is lower than the cost of ethanol production,
the demand for ethanol may substantially decrease. A substantial decrease in
the
demand for ethanol will reduce the price of ethanol, adversely affect our
profitability and decrease the value of your stock.
Our
financial results are directly affected by corn supply and feedstock prices,
which could adversely affect the value of your
investment.
We
currently produce ethanol only from corn as our feedstock. Corn, as with most
other crops, is affected by weather, governmental policy, disease and other
conditions. A significant reduction in the quantity of corn harvested due to
adverse weather conditions, farmer planting decisions, domestic and foreign
government farm programs and policies, global demand and supply or other factors
could result in increased corn costs which would increase our cost to produce
ethanol. The significance and relative impact of these factors on the price
of
corn is difficult to predict. Corn prices have in fact increased sharply over
the past several months, and those higher prices have made it more costly for
us
to produce ethanol. We believe that growing demand for ethanol has been a key
factor in this increase. Significant variations in actual growing conditions
from normal growing conditions may also adversely affect our ability to procure
corn for our plants. Any events that tend to reduce the supply of corn will
tend
to increase prices and harm our business.
Rising
corn prices have resulted in lower margins for the production of ethanol and,
therefore, represent unfavorable market conditions. This is especially true
when
market conditions do not allow us to pass along increased corn costs to our
customers. The price of corn has fluctuated significantly in the past and may
fluctuate significantly in the future, and the price of corn increased
materially in 2007 and has continued to increase in 2008. Substantial increases
in the price of corn have in the past caused some ethanol plants to temporarily
cease production or lose money. A $1.00 per bushel increase in the price of
corn
at our Blairstown plant increases our costs by approximately $1.8 million per
year. Due in part to the high cost of corn, our Blairstown facility operates
at
a loss. We cannot assure you that we will be able to offset any increase in
the
price of corn by increasing the price of our products. If we cannot offset
increases in the price of corn, our financial performance may be materially
and
adversely affected.
If
ethanol and gasoline prices drop significantly, we will also be forced to reduce
our prices, which potentially may lead to further
losses.
Prices
for ethanol products can vary significantly over time and decreases in price
levels could adversely affect our financial results and viability. The price
of
ethanol has some relation to the price of gasoline. The price of ethanol tends
to increase as the price of gasoline increases, and the price of ethanol tends
to decrease as the price of gasoline decreases. Any lowering of gasoline prices
will likely also lead to lower prices for ethanol and adversely affect our
operating results. We cannot assure you that we will be able to sell our ethanol
profitably, or at all.
Increased
ethanol production in the United States is expected to increase the demand
for
feedstocks and the resulting price of feedstocks, which will adversely affect
our financial performance.
New
ethanol plants are under construction throughout the United States. This
increased ethanol production has increased and is expected to continue to
increase feedstock demand and prices (particularly for corn), resulting in
higher production costs and lower financial performance.
We
currently rely
on a
single
production facility. If there is a natural disaster or other serious disruption
at the facility, we may be unable to produce ethanol.
Since
July 2005, we have relied
on
our
Xethanol BioFuels facility in Blairstown, Iowa for the production of ethanol.
All of our sales in 2006 and 2007 were from our Blairstown facility. Any natural
disaster or other serious disruption at this facility due to fire, tornado,
flood or any other cause could impair our ability to produce ethanol at the
facility. While we maintain business interruption insurance, as well as general
property insurance, the amount of insurance coverage may not be sufficient
to
cover our losses in such an event. Any of these occurrences could impair our
ability to produce ethanol and adversely affect our operating
results.
For
example, production at our Blairstown facility was interrupted for approximately
two weeks in the first quarter of 2007 caused by power outages resulting from
severe weather during the quarter, and we can offer no assurances that similar
or even longer disruptions will not occur in the future.
We
rely on a single customer to purchase all of the ethanol we produce, and if
that
customer fails to purchase our production, we may be unable to sell
ethanol.
We
sell
all of the ethanol produced at our Blairstown facility to Aventine Renewable
Energy, Inc. under an exclusive, renewable three-year off-take agreement. Our
sales are at market prices less the costs of transportation and Aventine’s
marketing commission. Aventine is the second-largest producer and marketer
of
ethanol in the United States. We cannot assure you that if Aventine fails to
purchase our ethanol production for any reason, we would be able to find other
customers to purchase all or any part of it. If this occurs, our operating
results would be materially adversely affected.
Price
increases or interruptions in needed energy supplies could cause loss of
customers and impair our financial performance.
Ethanol
production requires a constant and consistent supply of energy. If there is
any
interruption in our supply of energy for whatever reason, such as availability,
delivery or mechanical problems, we may be required to halt production. If
we
halt production for any extended period, it will have a material, adverse effect
on our business. Natural gas and electricity prices have historically fluctuated
significantly. We purchase significant amounts of these resources as part of
our
ethanol production. Increases in the price of natural gas or electricity would
harm our business and financial results by increasing our energy costs. In
fact,
during the past 18 months, the price of natural gas has varied from a high
of
$8.53 per dekatherm to a low of $4.52, causing a change in production cost
of
$0.17 per gallon of ethanol we produce. During the same period, our purchase
price of corn has also varied from a high of $4.17 per bushel to a low of $2.14,
causing a change in production cost of $0.75 per gallon of ethanol we
produce.
Our
biomass-to-ethanol technologies are unproven on a large-scale commercial basis
and we have been unable to implement them in a commercial production
environment.
While
production of ethanol from corn, sugars and starches is a mature technology,
newer technologies for production of ethanol from biomass are still in a
development stage. The technologies that we are pursuing for ethanol production
from biomass have never been used on a large-scale commercial basis. All of
the
tests that we have conducted to date on our biomass technologies have been
performed on limited quantities of feedstocks, and we cannot assure you that
we
can obtain the same or similar results at competitive costs on a large-scale
commercial basis. We have never used these biomass technologies under the
conditions or in the volumes that will be required to be profitable, and we
cannot predict all of the difficulties that may arise. These technologies will
require further research, development, design and testing before we can
implement them on a larger-scale commercial application. Accordingly, we cannot
assure you that these technologies will perform successfully on a large-scale
commercial basis or that they will be profitable to us.
Any
strategic acquisitions we make could have a dilutive effect on your investment.
Failure to make accretive acquisitions and successfully integrate them could
adversely affect our future financial results.
As
part
of our growth strategy, we will seek to acquire or invest in complementary
businesses, facilities or technologies. We intend, after we make an acquisition,
to integrate the acquired assets into our operations and
reduce
operating expenses. The process of integrating these acquired assets into our
operations may result in unforeseen operating difficulties and expenditures,
and
may absorb significant management attention that would otherwise be available
for the ongoing development of our business. We cannot assure you that we will
in fact realize the anticipated benefits of any acquisitions we make. In
addition, our future acquisitions could result in potentially dilutive issuances
of equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any
of
which could materially and adversely affect our operating results and financial
position. Acquisitions also involve other risks, including entering geographic
markets in which we have no or limited prior experience and the potential loss
of key employees.
As
of
March 1, 2008, we have issued 2,948,357 shares of our common stock in connection
with strategic acquisitions. During the fourth quarter of 2005, we charged
$3,635,416 to expense, representing the unamortized cost of license agreements
obtained as a result of four of our technology acquisitions and to write off
$205,000 of goodwill associated with our now-closed Permeate
facility.
The
success of our business depends, in part, upon proprietary technologies and
information that may be difficult to protect and may infringe on the
intellectual property rights of third parties.
We
believe that the identification, acquisition and development of proprietary
technologies are key drivers of our business. Our success depends, in part,
on
our ability to obtain patents, license the patents of others, maintain the
secrecy of our proprietary technology and information, and operate without
infringing on the proprietary rights of third parties. We currently license
a
number of issued United States patents. We also have patent applications pending
and are in the process of filing additional patent applications in the United
States. We may in the future file foreign patent applications. We cannot assure
you that the patents of others will not have an adverse effect on our ability
to
conduct our business, that the patents that we license will provide us with
competitive advantages or will not be challenged by third parties, that any
of
our pending patent applications will be approved, that we will develop
additional proprietary technology that is patentable or that any patents issued
to us will provide us with competitive advantages or will not be challenged
by
third parties. Further, we cannot assure you that others will not independently
develop similar or superior technologies, duplicate elements of our biomass
technology or design around it.
To
successfully commercialize our proprietary technologies, we may need to acquire
licenses to, or to contest the validity of, issued or pending patents or claims
of third parties. We cannot assure you that any license acquired under those
patents 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 defending the validity or enforceability of our
patents, or in bringing patent infringement suits against other parties based
on
our patents.
In
addition to the protection afforded by patents, we also rely on trade secrets,
proprietary know-how and technology that we seek to protect, in part, by
confidentiality agreements with our prospective joint venture partners,
employees and consultants. We cannot assure you that these agreements will
not
be breached, that we will have adequate remedies for any such breach, or that
our trade secrets and proprietary know-how will not otherwise become known
or be
independently discovered by others.
We
depend upon our officers and key personnel, and the loss of any of these persons
could adversely affect our operations and results.
We
believe that the implementation of our proposed expansion strategy and execution
of our business plan will depend to a significant extent upon the efforts and
abilities of our officers and key personnel. We believe that the personal
contacts of our officers and key personnel within the industry and within the
scientific community engaged in related research are a significant factor in
our
continued success. Our failure to retain our officers or key personnel, or
to
attract and retain additional qualified personnel, could adversely affect our
operations and results. We do not currently carry key-man life insurance on
any
of our officers. See “Management.”
Risks
Related to Government Regulation and Subsidization
The
United States ethanol industry depends heavily on federal and state legislation
and regulation, and any changes in that legislation or regulation could
materially adversely affect our results of operations and financial
condition.
The
elimination or significant reduction in the federal ethanol tax incentive could
have a material adverse effect on our results of
operations.
The
cost
of producing ethanol has historically been significantly higher than the market
price of gasoline. Federal tax incentives make the production of ethanol
significantly more competitive. The federal excise tax incentive program, which
is scheduled to expire on December 31, 2010, allows gasoline distributors
who blend ethanol with gasoline to receive a federal excise tax rate reduction
for each blended gallon they sell regardless of the blend rate. The current
federal excise tax on gasoline is $0.184 per gallon, which is paid at the
terminal by refiners and marketers. If the fuel is blended with ethanol, the
blender may claim a $0.51 per gallon tax credit for each gallon of ethanol
used
in the mixture. The tax credit is scheduled to be reduced to $0.46 per gallon
in
2009. We cannot assure you that the federal ethanol tax incentives will be
renewed in 2010 or if renewed, on what terms they will be renewed. The
elimination or significant reduction in the federal ethanol tax incentive could
have a material adverse effect on our results of operations.
Waivers
or repeal of the minimum levels of renewable fuels included in gasoline mandated
by the Energy Independence and Security Act of 2007 could have a material
adverse affect on our results of operations
.
The
Energy Policy Act of 2005 established a renewable fuel standard of 7.5 billion
gallons of renewable fuels to be included in gasoline annually by 2012. On
December 19, 2007, President Bush signed into law the Energy Independence and
Security Act of 2007, which establishes new levels of renewable fuel mandates
for conventional biofuel and advanced biofuel. The Energy Independence and
Security Act increased the mandated minimum use of renewable fuels to 9 billion
gallons per year in 2008 (up from 5.4 billon gallons per year under the previous
renewable fuel standard), which further increases to 36 billon gallons per
year
in 2022.
Under
the
Energy Policy Act, the Department of Energy, in consultation with the Secretary
of Agriculture and the Secretary of Energy, may waive the renewable fuel
standard mandate with respect to one or more states if the administrator
determines that implementing the requirements would severely harm the economy
or
the environment of a state, a region or the United States, or that there is
inadequate supply to meet the requirement. Shortly after passage of the Energy
Independence and Security Act of 2007 in December 2007, a Congressional
sub-committee held hearings on the potential impact of the new renewable fuel
standard on commodity prices. Although the sub-committee took no action towards
repeal of the new renewable fuel standard, any attempt by Congress to re-visit,
repeal or grant waivers from the new renewable fuel standard could adversely
affect demand for ethanol and could have a material adverse effect on our
results of operations and financial condition.
While
the Energy Policy Act of 2005, as amended by the Energy Independence and
Security Act of 2007, imposes a renewable fuel standard, it does not mandate
the
use of ethanol and eliminates the oxygenate requirement for reformulated
gasoline in the reformulated gasoline program included in the Clean Air
Act.
The
reformulated gasoline program’s oxygenate requirements contained in the Clean
Air Act, which accounted for approximately 1.95 billion gallons of ethanol
use
in 2004, was eliminated on May 5, 2006 by the Energy Policy Act of 2005. While
the Renewable Fuels Association expects that ethanol should account for the
largest share of renewable fuels produced and consumed under the renewable
fuel
standard, that standard is not limited to ethanol and also includes biodiesel
and any other liquid fuel produced from biomass or biogas. We cannot assure
you
that the elimination of the oxygenate requirement for reformulated gasoline
in
the reformulated gasoline program included in the Clean Air Act will not result
in a decline in ethanol consumption, which in turn could have a material adverse
effect on our results of operations and financial condition.
Some
countries can import ethanol into the United States duty free, which may
undermine the ethanol industry in the United States.
Imported
ethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valorem
tax that was designed to offset the $0.51 per gallon ethanol subsidy available
under the federal excise tax incentive program for refineries that blend ethanol
in their fuel. A special exemption from the tariff for ethanol imported from
24
countries in Central America and the Caribbean islands is limited to a total
of
7.0% of United States production per year, with additional exemptions for
ethanol produced from feedstock in the Caribbean region over the 7.0% limit.
Although bills were introduced in both the U.S. House of Representatives and
U.S. Senate in May 2006 to repeal the $0.54 per gallon tariff, the Omnibus
Tax
bill passed by Congress on December 8, 2006 and signed by President Bush
included a provision to extend the secondary tariff offset for ethanol through
January 1, 2009. If total U.S. production increases as many predict, the volume
of ethanol that can be imported duty-free from the Caribbean region will
increase proportionately. In addition, under the North America Free Trade
Agreement, Canada and Mexico are exempt from this tariff. Imports from the
exempted countries have increased in recent years and are expected to increase
further as a result of new plants under development.
Lax
enforcement of environmental and energy policy regulations may adversely affect
the demand for ethanol.
Our
success will depend, in part, on effective enforcement of existing environmental
and energy policy regulations. Many of our potential customers are unlikely
to
switch from conventional fuels unless compliance with applicable regulatory
requirements leads, directly or indirectly, to the use of ethanol. The entities
affected by those requirements are likely to vigorously oppose both the
additional regulation and the enforcement of those regulatory provisions. If
existing emissions-reducing standards are weakened, or if governments are not
active and effective in enforcing those standards, our business and results
of
operations could be adversely affected. Even if the current trend toward more
stringent emissions standards continues, our future prospects will depend on
the
ability of ethanol to satisfy these emissions standards more efficiently than
other alternative technologies. Certain standards imposed by regulatory programs
may limit or preclude the use of our products to comply with environmental
or
energy requirements. Any decrease in the emission standards or the failure
to
enforce existing emission standards and other regulations could result in a
reduced demand for ethanol. A significant decrease in the demand for ethanol
will reduce the price of ethanol, adversely affect our financial performance
and
decrease the value of your stock.
Costs
of compliance with burdensome or changing environmental and operational safety
regulations could divert our focus from our business and cause our results
of
operations to suffer.
Ethanol
production involves the emission of various airborne pollutants, including
particulate matter, carbon monoxide, carbon dioxide, nitrous oxide, volatile
organic compounds and sulfur dioxide. Our plants also will discharge water
into
the environment. As a result, we are subject to complicated environmental
regulations of the U.S. Environmental Protection Agency and regulations and
permitting requirements of the State of Iowa. These regulations are subject
to
change, and those changes may require additional capital expenditures or
increased operating costs. Consequently, considerable resources may be required
to comply with existing or future environmental regulations. In addition, our
ethanol plants could be subject to environmental nuisance or related claims
by
employees, property owners or residents near the ethanol plants arising from
air
or water discharges. Ethanol production can produce an unpleasant odor to which
surrounding residents could object. Environmental and public nuisance claims,
or
tort claims based on emissions, or increased environmental compliance costs
could significantly increase our operating costs.
Our
existing and proposed new ethanol plants will also be subject to federal and
state laws regarding occupational safety. Risks of substantial compliance costs
and liabilities are inherent in ethanol production. We may be subject to costs
and liabilities related to worker safety and job related injuries, some of
which
may be significant. Possible future developments, including stricter safety
laws
for workers and other individuals, regulations and enforcement policies and
claims for personal or property damages resulting from operation of the ethanol
plants could reduce the amount of cash that would otherwise be available to
further enhance our business.
We
may be required to pay material amounts to address environmental issues at
our
Spring Hope facility.
We
are
aware of soil, groundwater or surface contamination involving asbestos at our
Spring Hope facility, a former medium density fiberboard plant we acquired
from
Carolina Fiberboard Corporation, LLC in November 2006. We are also aware that
the facility has asbestos insulation surrounding existing boilers, potential
Polychlorinated Biphenyls (PCBs) contamination of the soil and oil leakage
in
several areas of the plant from past operations. We have not yet completed
our
environmental assessment of the facility and cannot determine the extent of
contamination or remedial actions required.
There
may be other contamination or environmental concerns of which we are currently
unaware.
Under
the
purchase agreement, Carolina Fiberboard is required to pay or reimburse us
for
all reasonable costs and expenses incurred for cleanup or other remedial actions
performed at the Spring Hope facility as needed. Under the purchase agreement,
$128,000 in cash and 1,000,000 shares of our common stock are held in escrow
to
cover these costs and expenses. We cannot assure you, however, that we will
be
able to recover all our costs and expenses from Carolina Fiberboard or at all,
or that the escrowed funds will be sufficient to cover our costs and expenses.
The potential environmental liabilities could have a material adverse effect
on
our results of operations and financial condition.
Risks
Related to an Investment in Our Common Stock
Our
common stock price has fluctuated considerably, and stockholders may not be
able
to resell their shares at or above the price at which they purchased those
shares.
The
market price of our common stock has fluctuated in the past, and may continue
to
fluctuate significantly in response to factors, some of which are beyond our
control. For example, since our reverse merger in February 2005 and through
March 14, 2008, the high and low bid or closing sale price for our common stock
has been $15.19 and $0.30 per share, respectively. Factors that could affect
the
market price of our common stock include the following:
|
·
|
our
inability to manufacture ethanol as efficiently as we expect due
to
factors related to costs and supply of corn, energy or
water;
|
|
·
|
market
factors affecting the demand for ethanol such as price, competition
and
general economic conditions;
|
|
·
|
discontinuation
or limitations on state and federal ethanol
subsidies;
|
|
·
|
negative
public sentiment toward ethanol production and use;
and
|
|
·
|
environmental
restrictions increasing the costs and liabilities of ethanol
production.
|
The
market prices of securities of fuel-related companies have experienced
fluctuations that often have been unrelated or disproportionate to the operating
results of these companies. Continued market fluctuations could result in
extreme volatility in the price of our common stock, which could cause a decline
in the value of our common stock. Price volatility might be intensified under
circumstances where the trading volume of our common stock is low.
We
are unlikely to attract the attention of major brokerage firms for research
and
support, which may adversely affect the market price of our common
stock.
Securities
analysts of major brokerage firms have not published research on our common
stock. The number of securities competing for the attention of those analysts
is
large and growing. Moreover, because we went public through a “reverse merger,”
some major brokerage firms may be reluctant to publish research on us regardless
of our results of operations. Coverage of a security by analysts at major
brokerage firms increases the investing public’s knowledge of and interest in
the issuer, which may stimulate demand for and support the market price of
the
issuer’s securities. The failure of major brokerage firms to cover our common
stock may adversely affect the market price of our common stock.
Future
sales of common stock or other dilutive events may adversely affect prevailing
market prices for our common stock.
We
are
currently authorized to issue up to 100,000,000 shares of common stock, of
which
28,609,103 shares were issued and outstanding and an additional 10,278,764
were
reserved for issuance as of March 1, 2008. Of the
shares
of
common stock we have reserved for issuance, 937,930 shares were reserved for
issuance for options that have not yet been granted under our 2005 Incentive
Compensation Plan. Our board of directors has the authority, without further
action or vote of our stockholders, to issue any or all of the 61,076,821
authorized shares of our common stock that are not reserved for issuance and
to
grant options or other awards under our 2005 Incentive Compensation Plan. The
board may issue shares or grant options or awards relating to shares at a price
that reflects a discount from the then-current market price of our common stock.
The options and warrants referred to above include provisions that require
the
issuance of increased numbers of shares of common stock on exercise or
conversion in the event of stock splits, redemptions, mergers or other
transactions. The occurrence of any such event, the exercise of any of the
options or warrants described above and any other issuance of shares of common
stock will dilute the percentage ownership interests of our current stockholders
and may adversely affect the prevailing market price of our common
stock.
A
significant number of our shares will be eligible for sale, and their sale
could
depress the market price of our common stock.
Sales
of
a significant number of shares of our common stock in the public market could
harm the market price of our common stock. Up to 38,923,179 shares of our common
stock may be offered from time to time in the open market, including the shares
registered on the Registration Statement on Form SB-2 (No.
333-135121
),
which
was originally declared effective on August 10, 2007, and shares reserved for
issuance on the exercise of outstanding options and warrants. These sales may
depress the market for the shares of our common stock. Moreover, additional
shares of our common stock, including shares that have been issued in private
placements, may be sold from time to time in the open market under Rule 144.
Effective February 15, 2008, the SEC amended Rule 144 to shorten the holding
period requirement for “restricted securities” of issuers that are subject to
the reporting requirements of the Securities Exchange Act of 1934 to six months
and substantially reduce the restrictions applicable to the resale of securities
by non-affiliates. Under the new Rule 144, in general, affiliates who have
held
restricted shares of a reporting issuer for a period of six months may, upon
filing with the SEC a notification on Form 144, sell into the market common
stock in an amount equal to the greater of 1% of the outstanding shares or
the
average weekly number of shares sold in the last four weeks before the sale.
Those sales may be repeated at specified intervals. Subject to satisfaction
of a
six-month holding requirement, non-affiliates of an issuer may make sales under
Rule 144, as amended, without regard to the volume limitations, and any of
the
restricted shares may be sold by a non-affiliate after they have been held
one
year. Sales of our common stock by our affiliates are subject to Rule
144.
Failure
to achieve and maintain effective internal controls over financial reporting
in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a
material adverse effect on our business and operating results. In addition,
as a
consequence of that failure, current and potential stockholders could lose
confidence in our financial reporting, which could have an adverse effect on
our
stock price.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. If we cannot provide reliable financial reports
or
prevent fraud, we could be subject to regulatory action or other litigation
and
our operating results could be harmed. Beginning with our 2007 fiscal year,
we
are required to document and test our internal control procedures to satisfy
the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires
our management to annually assess the effectiveness of our internal controls
over financial reporting. Beginning with our 2009 fiscal year (assuming the
one-year extension recently proposed by the SEC becomes effective), our
independent registered public accounting firm will be required to issue an
attestation report on our internal controls over financial reporting.
During
the course of our testing, we may identify deficiencies that we may not be
able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act
for
compliance with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal accounting controls, as those standards
are modified, supplemented or amended from time to time, we may not be able
to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404. Failure to
achieve and maintain an effective internal control environment could cause
us to
face regulatory action and also cause investors to lose confidence in our
reported financial information, either of which could have an adverse effect
on
our stock price.
Xethanol
Corporation and some of our former officers and directors are defendants in
litigation that could have a material adverse effect on our business, results
of
operations and financial condition.
We
and
some of our present and former officers and directors are defendants in two
lawsuits that may result in substantial costs and require significant
involvement of our management and may divert our management’s attention from our
business and operations.
In
October 2006, a shareholder class action complaint was filed in the United
States District Court for the Southern District of New York, purportedly brought
on behalf of all purchasers of Xethanol common stock during the period January
31, 2006 through August 8, 2006. The complaint alleges, among other things,
that
we and some of our former officers and directors made materially false and
misleading statements regarding our operations, management and internal controls
in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934
and Rule 10b-5. The plaintiffs seek, among other things, unspecified
compensatory damages and reasonable costs and expenses, including counsel fees
and expert fees. Six nearly identical class actions complaints were thereafter
filed in the same court, all of which have been consolidated into one action
(the “Class Action”). The plaintiffs filed their amended consolidated complaint
on March 23, 2007. The defendants filed a motion to dismiss the amended
complaint on April 23, 2007. On September 7, 2007, the District Court denied
that motion. On November 28, 2007, the defendants, including Xethanol
Corporation, reached on an agreement in principle with the plaintiffs’ lead
counsel to settle the Class Action. The tentative settlement agreement, which
was reached during a mediation overseen by a retired United States District
Court Judge, calls for the payment of $2.8 million to the plaintiffs, of which
we will pay $400,000 and our insurance carriers will pay $2.4 million. The
agreement remains subject to final negotiated writings executed by the parties
and approval by the United States District Court for the Southern District
of
New York. Although we expect the District Court to approve the settlement
agreement, we can give no assurance that the District Court will approve the
settlement agreement as finalized by the parties or at all.
In
December 2007, Global Energy and Management, LLC filed an action in the federal
court for the Southern District of New York against Xethanol and nine current
or
former officers, directors and employees. The individual defendants include
David Ames, our Chief Executive Officer and a director; and Thomas J. Endres,
our Chief Operating Officer, Executive Vice President, Operations. The lawsuit
alleges fraud by the defendants in connection with Global Energy’s alleged
investment of $250,000 in NewEnglandXethanol, LLC, a joint venture of Xethanol
and Global Energy. On March 19, 2008, Global Energy served its second amended
complaint on us. Based on an alleged investment of $250,000, Global Energy
seeks
more than $10,000,000 in damages plus pre-judgment interest and costs.
Management has instructed counsel to vigorously represent and defend our
interests in this litigation.
Litigation
is subject to inherent uncertainties, and an adverse result in this or other
matters that may arise from time to time could have a material adverse effect
on
our business, results of operations and financial condition. We may incur
material legal and other expenses, and our management may be
distracted.
Investors
should not anticipate receiving cash dividends on our common
stock.
We
have
never declared or paid any cash dividends or distributions on our capital stock.
We currently intend to retain our future earnings to support operations and
to
finance expansion and, therefore, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.
We
may issue shares of preferred stock without stockholder approval that may
adversely affect your rights as a holder of our common
stock.
Our
certificate of incorporation authorizes us to issue up to 1,000,000 shares
of
“blank check” preferred stock with such designations, rights and preferences as
may be determined from time to time by our board of directors. Accordingly,
our
board of directors is empowered, without stockholder approval, to issue a series
of preferred stock with rights to receive dividends and distributions upon
liquidation in preference to any dividends or distributions upon liquidation
to
holders of our common stock and with conversion, redemption, voting or other
rights which could dilute the economic interest and voting rights of our common
stockholders. The issuance of preferred stock could also be used as a method
of
discouraging, delaying or preventing a change in control of our company or
making removal of our management more difficult, which may not be in your
interest as holders of common stock.
Provisions
in our certificate of incorporation and bylaws and under Delaware law could
inhibit a takeover at a premium price.
As
noted
above, our certificate of incorporation authorizes us to issue up to 1,000,000
shares of “blank check” preferred stock with such designations, rights and
preferences as our board of directors may determine from time to time. Our
bylaws limit who may call a special meeting of stockholders and establish
advance notice requirements for nominations for election to our board of
directors or for proposing matters that can be acted upon at stockholder
meetings. Each of these provisions may have the effect of discouraging, delaying
or preventing a change in control of our company or making removal of our
management more difficult, which may not be in your interest as holders of
common stock. Delaware law also could make it more difficult for a third party
to acquire us. Specifically, Section 203 of the Delaware General Corporation
Law
may have an anti-takeover effect with respect to transactions not approved
in
advance by our board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by
our stockholders. These provisions could also limit the price that investors
might be willing to pay in the future for shares of our common
stock.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS.
Not
applicable.
ITEM
2.
PROPERTIES.
We
maintain our principal executive and administrative offices in Atlanta, Georgia,
where we lease 6,354 square feet of office space. The lease commenced on June
15, 2007 on a 42-month term, including six months of free rent. The base monthly
rent under the lease is $14,000.
We
also
maintain offices in New York, New York, where we sublease office space under
a
month-to-month sub-lease for a monthly rental rate of approximately $17,000
from
a company of which one of our former directors is the managing member. See
Item
13, “Certain Relationships and Related Transactions - Office Space” for a more
detailed discussion of this arrangement.
In
December 2006, we entered into a lease for a condominium unit located in New
York City to be used by our Chief Executive Officer and other officers and
employees who reside outside the greater New York City area. The term of the
lease is one year beginning on January 1, 2007. The monthly rent under the
lease
is $6,400. In December 2006, we paid the full amount of the rent payable under
the lease in advance through June 2008.
We
own
our Xethanol BioFuels facility located in Blairstown, Iowa that consists of
a
24,728 square foot ethanol plant on 25.5 acres of land and a 20.9-acre vacant
lot adjoining the property; our facility located in Augusta, Georgia that
consists of multiple facilities on 40.8 acres; and our facility located in
Spring Hope, North Carolina that consists of 200,000 square feet of factory
building on 212 acres. Our Blairstown facility also includes warehouse and
distribution facilities, and available space for potential expansion.
We
purchased our Augusta facility in August 2006 for approximately $8,400,000
in
cash. In October 2006, we sold surplus equipment from the Augusta facility
for
$3,100,000 in cash. We have decided that the Augusta facility does not fit
within our long-term corporate strategy, and on March 20, 2008, our board
authorized management to pursue the sale of the facility. We have interviewed
real estate brokerage firms to assist us in marketing the property for sale,
but
we have not retained such a firm. We can offer no assurances regarding how
long
it would take to sell the facility or the price we might receive.
We
have
also reevaluated our Spring Hope facility and have decided that it does not
fit
within our long-term corporate strategy. On March 20, 2008, our board authorized
management to pursue the sale of the facility. Before we sell our Spring Hope
facility, we will have to resolve certain liens on the property filed by
companies that performed, or have claimed to have performed, environmental
remediation and demolition work on the property. We can offer no assurances
regarding how long it would take to sell the facility or the price we might
receive.
We
believe that our Blairstown facility is in good working order.
ITEM
3.
LEGAL
PROCEEDINGS.
We
are a
party to the lawsuits described below. An adverse result in these lawsuits
could
have a material adverse effect on our business, results of operations and
financial condition. In connection with the class action lawsuit described
below
(and a derivative action that has been dismissed), we accrued $200,000 at
December 31, 2006 to cover the deductible amount we are required to pay under
our director and officer liability insurance policy for those claims. Through
December 31, 2007, we have paid $200,000 in legal fees, have accrued a liability
for the approximately $346,000 in additional legal fees and have recorded a
$300,000 receivable from our insurance carriers, which is the amount the
insurance carriers have agreed to pay under the tentative settlement described
below.
Shareholder
Class Action
.
In
October 2006, a shareholder class action complaint was filed in the United
States District Court for the Southern District of New York, purportedly brought
on behalf of all purchasers of Xethanol common stock during the period January
31, 2006 through August 8, 2006. The complaint alleges, among other things,
that
Xethanol and some of its former officers and directors made materially false
and
misleading statements regarding the Xethanol’s operations, management and
internal controls in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5. The individual defendants are Lawrence
S.
Bellone, a former director, Executive Vice President, Corporate Development,
principal accounting officer and Chief Financial Officer; Christopher
d’Arnaud-Taylor, a former director, Chairman, President and Chief Executive
Officer; and Jeffrey S. Langberg, a former director. The plaintiffs seek, among
other things, unspecified compensatory damages and reasonable costs and
expenses, including counsel fees and expert fees. Six nearly identical class
action complaints were thereafter filed in the same court, all of which have
been consolidated into one action, In re Xethanol Corporation Securities
Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.) (the “Class Action”). The plaintiffs
filed their amended consolidated complaint on March 23, 2007. The defendants
filed a motion to dismiss the amended complaint on April 23, 2007. On September
7, 2007, the District Court denied that motion. On November 28, 2007, the
defendants, including Xethanol Corporation, reached an agreement in principle
with plaintiffs’ lead counsel to settle the Class Action. The tentative
settlement agreement, which was reached during a mediation overseen by a retired
United States District Court Judge, calls for the payment of $2.8 million to
the
plaintiffs, of which we will pay $400,000 and our insurance carriers will pay
$2.4 million. In addition, our insurance carriers have agreed to pay up to
an
additional $300,000 in legal costs. The agreement remains subject to final
negotiated writings executed by the parties and approval by the United States
District Court for the Southern District of New York. Although we expect the
District Court to approve the settlement agreement, we can give no assurance
that the District Court will approve the settlement agreement as finalized
by
the parties or at all.
Global
Energy and Management, LLC Lawsuit
.
In
December 2007,
Global
Energy and Management, LLC
(“Global
Energy”) filed an action in the federal court for the Southern District of New
York against Xethanol and nine current or former officers, directors and
employees. The lawsuit is entitled Global Energy and Management v. Xethanol
Corporation, Mr. d’Arnaud-Taylor; Mr. Langberg; Mr. Bellone; Louis B. Bernstein,
a former President, Interim Chief Executive Officer and director; David Ames,
our Chief Executive Officer, President and a director; Thomas J. Endres, our
Chief Operating Officer, Executive Vice President, Operations; Robin Buller,
a
former Executive Vice President - Strategic Development; David Kreitzer, a
former employee; and John Murphy, a former consultant, 07 Civ. 11049 (NRB)
(S.D.N.Y.). The lawsuit alleges fraud by the defendants in connection with
Global Energy’s alleged investment of $250,000 in NewEnglandXethanol, LLC, a
joint venture of Xethanol and Global Energy. On March 19, 2008, Global Energy
served its second amended complaint on us. Based on an alleged investment of
$250,000, Global Energy seeks more than $10,000,000 in damages plus pre-judgment
interest and costs. Management has instructed counsel to vigorously represent
and defend our interests in this litigation.
Litigation
is subject to inherent uncertainties, and an adverse result in this or other
matters that may arise from time to time could have a material adverse effect
on
our business, results of operations and financial condition. We may incur
material legal and other expenses, and our management may be
distracted.
ITEM
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Proposals
Submitted to Stockholders at 2007 Annual Meeting
We
held
our annual meeting of stockholders on January 22, 2008, which was reconvened
on
February 12, 2008 to open and close the polls and announce the results of the
voting on all three proposals. We asked our stockholders to vote on three
proposals, which are described in more detail in the proxy statement dated
December 27, 2007 that we sent to our stockholders and filed with the SEC:
|
1.
|
to
elect six directors to serve until the 2008 annual meeting of stockholders
or until their successors have been duly elected and
qualified;
|
|
2.
|
to
approve an amendment to our 2005 Incentive Compensation Plan, as
amended
on August 10, 2006 (the “Plan”) to increase the number of shares of common
stock available for issuance under the Plan from 4,000,000 to 6,500,000;
and
|
|
3.
|
to
ratify the appointment of Imowitz Koenig & Co., LLP as our independent
registered public accounting firm for the fiscal year ending December
31,
2007.
|
We
solicited proxies for the meeting pursuant to Section 14(a) of the Securities
Exchange Act of 1934, and there was no solicitation in opposition to
management’s solicitations.
Election
of Directors
All
six
of management’s nominees for directors as listed in the proxy statement were
elected with the following votes (there were no abstentions or broker non-votes)
to serve until the 2008 annual meeting of stockholders or until their successors
have been duly elected and qualified:
|
Votes
For
|
|
Votes
Withheld
|
|
|
|
|
David
R. Ames
|
17,240,574
|
|
3,070,844
|
William
P. Behrens
|
17,205,423
|
|
3,105,995
|
Gil
Boosidan
|
17,222,855
|
|
3,088,563
|
Richard
D. Ditoro
|
17,194,516
|
|
3,116,900
|
Robert
L. Franklin
|
17,234,238
|
|
3,077,180
|
Edwin
L. Klett
|
17,195,223
|
|
3,116,195
|
Approval
of an Amendment to the Plan
An
amendment to the Plan to increase the number of shares of common stock available
for issuance under the Plan from 4,000,000 to 6,500,000 was approved with the
following votes:
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
4,137,116
|
|
3,405,366
|
|
97,816
|
|
12,671,121
|
Ratification
of the appointment of Imowitz Koenig & Co., LLP
The
appointment of Imowitz Koenig & Co., LLP as our independent registered
public accounting firm for the fiscal year ending December 31, 2007 was approved
and ratified with the following votes:
Votes
For
|
|
Votes
Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
18,711,628
|
|
1,375,222
|
|
224,066
|
|
0
|
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
.
|
Holders
As
of
March 1, 2008, there were approximately 128 record holders of our common stock
and 28,609,103 shares of our common stock issued and outstanding.
Market
Information
Our
shares of common stock are listed on the American Stock Exchange under the
trading symbol XNL. Before June 20, 2006, our common stock was quoted on the
OTC
Bulletin Board under the trading symbol XTHN.OB.
The
following table sets forth, with respect to the periods between January 1,
2006
and June 19, 2006 (inclusive), the high and low bid prices for our common stock
for the periods indicated as reported by the OTC Bulletin Board and, with
respect to the periods between June 20, 2006 and December 31, 2007 (inclusive),
the high and low sales prices for our common stock for the periods indicated
as
reported by AMEX. These bid prices represent prices quoted by broker-dealers
on
the OTC Bulletin Board. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions.
|
|
High
|
|
Low
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
6.80
|
|
$
|
2.30
|
|
Second
Quarter
|
|
|
16.18
|
|
|
6.85
|
|
Third
Quarter
|
|
|
10.14
|
|
|
2.58
|
|
Fourth
Quarter
|
|
|
4.20
|
|
|
2.18
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
4.14
|
|
$
|
1.95
|
|
Second
Quarter
|
|
|
2.57
|
|
|
1.12
|
|
Third
Quarter
|
|
|
1.93
|
|
|
0.65
|
|
Fourth
Quarter
|
|
|
0.99
|
|
|
0.30
|
|
Dividend
Policy
We
have
not previously declared or paid any dividends on our common stock and do not
anticipate declaring any dividends in the foreseeable future. The payment of
dividends on our common stock is within the discretion of our board of
directors. We intend to retain any earnings for use in our operations and the
expansion of our business. Payment of dividends in the future will depend on
our
future earnings, future capital needs and our operating and financial condition,
among other factors that our board of directors may deem relevant. We are not
under any contractual restriction as to our present or future ability to pay
dividends.
ITEM
6.
SELECTED
FINANCIAL DATA.
Not
required for smaller reporting companies
.
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve future events,
our
future performance and our expected future operations and actions. In some
cases, you can identify forward-looking statements by the use of words such
as
“may,” “will,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,”
“intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or
the negative of these terms or other similar expressions. These forward-looking
statements are only our predictions and involve numerous assumptions, risks
and
uncertainties. Our actual results or actions may differ materially from these
forward-looking statements for many reasons, including the matters discussed
in
this report under the caption “Risk Factors.” We urge you not to place undue
reliance on these forward-looking statements, which speak only as of the date
of
this report. We undertake no obligation to publicly update any forward
looking-statements, whether as a result of new information, future events or
otherwise.
You
should read the following discussion of our financial condition and results
of
operations in conjunction with our financial statements and the related notes
included in this report.
Overview
Our
net
sales were approximately $11.0 million for the year ended December 31, 2007.
Currently, our only source of revenue is from our sales of ethanol and related
products at our corn based Xethanol BioFuels plant in Blairstown, Iowa. We
had
cash and cash equivalents of approximately $12.3 million as of December 31,
2007
and approximately $9.5 million as of March 14, 2008.
In
October 2007, we sold a portion of our property located at our Blairstown site
for $554,000. In November 2007, we sold all of the assets at our Permeate
facility for $500,000 in cash.
For
the
year ended December 31, 2007, we used a total of approximately $3.4 million
in
net cash in connection with investing activities, including a loss on marketable
securities of $1.6 million. During 2007, we invested cash of approximately
$1.3
million related to our formerly planned ethanol facility at our Blairstown
site.
We have deferred construction of the new facility indefinitely as a result
of
the changing ethanol market, continued high prices for corn and our inability
to
arrange debt or equity financing for the project.
We
intend
to build a demonstration plant for converting citrus peel waste into ethanol
and
are negotiating an agreement to locate the plant at an existing citrus facility
in Florida owned by one of the largest citrus processors in the state. The
planned cost for the two-year build-out of the demonstration plant is
approximately $5,900,000. On January 22, 2008, the Florida Department of
Agriculture and Consumer Services approved a $500,000 grant for this purpose.
We
plan to apply for federal government grants and combine private equity with
those grants to supplement the state grant. If we do not receive these federal
grants, we will need to raise additional equity to build this plant as we
intend.
We
anticipate significant capital expenditures and investments over the next 12
months and longer related to our growth program. We have reevaluated our
Augusta, Georgia and Spring Hope, North Carolina facilities and have decided
that they do not fit within our long-term corporate strategy. On March 20,
2008, our board authorized management to pursue the sale of each
facility. We do not presently intend to pursue the manufacture and sale of
a diesel biofuel based on H2Diesel’s technology. We may seek to sell some of our
H2 Diesel stock from time to time to raise capital.
We
plan
to use a portion of our current cash to provide seed equity for potential new
projects while we analyze financing options. We will also use cash on hand
to
fund corporate overhead, and invest in technology and research and development.
We will need substantial additional capital to pursue our plans, and we can
give
no assurance that we will be able to raise the additional capital we need on
commercially acceptable terms or at all.
Please
see the section entitled “Description of Formation and Capitalization” for a
description of our corporate history and material capital-raising transactions.
Results
of Operations
Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net
Loss.
We
incurred a net loss of $31.3 million for the year ended December 31, 2007 versus
a net loss of $20.2 million for the year ended December 31, 2006. Included
in
the net losses for the years ended December 31, 2007 and 2006 were non-cash
charges totaling $18.3 million and $14.4 million or 58.5% and 71.4% of our
net
losses, respectively. Significant 2007 non-cash charges included:
|
·
|
$12.2
million of impairment losses on fixed assets, composed of $7.0 million
in
impairment losses on our Spring Hope facility, a $2.6 million impairment
loss relating to costs previously incurred for a planned second ethanol
facility at Blairstown that we have deferred indefinitely; a $2.1
million
impairment loss at our Augusta site, and a $521,000 impairment loss
on our
Permeate assets that we sold in November
2007;
|
|
·
|
$4.0
million in expenses related to stock options and warrants issued
for
services;
|
|
·
|
$1.2
million in loss on equity of H2Diesel; and
|
|
·
|
$798,000
in depreciation and amortization
expenses.
|
The
increase in net loss of $11.1 million for 2007 as compared to 2006 resulted
primarily from:
|
·
|
a
$11.7 million increase in impairment loss on fixed
assets;
|
|
·
|
a
$2.6 million increase in gross loss on net sales;
and
|
|
·
|
a
$2.2 million increase in general and administrative expenses, including
a
$1.2 million increase in expenses at our Spring Hope
facility
|
offset
by
|
·
|
a
$3.0 million decrease in equity
compensation;
|
|
·
|
a
$2.1 million decrease in other expenses;
and
|
|
·
|
a
$251,000 decrease in research and development
expenses.
|
Our
ability to achieve profitable operations depends in part on increasing gross
margin on our existing facility at Blairstown. Given the uncertainties of
predicting gross margin, we cannot assure you when we will show profitable
results.
Net
Sales.
Net
sales for the year ended December 31, 2007 were $11.0 million compared to the
same amount for the year ended December 31, 2006. Sales during 2007 and 2006
relate entirely to the Blairstown facility. During the year ended December
31,
2007, Blairstown sold 5.4 million gallons of ethanol at monthly prices ranging
between $1.51 and $2.09 per gallon with an average price of $1.87 per gallon
and
generated revenue of $1.0 million from the sales of by-products. Total average
revenue per gallon including by-products was $2.06. During the year ended
December 31, 2006, Blairstown sold 5.2 million gallons of ethanol at monthly
prices ranging between $1.52 and $2.38 per gallon with an average price of
$1.99
per gallon and generated revenue of $664,000 from the sales of by-products.
Total average revenue per gallon including by-products was $2.10.
Cost
of Sales.
Cost of
sales for the year ended December 31, 2007 was $12.7 million compared to $10.1
million for the year ended December 31, 2006. Cost of sales is comprised of
direct materials, direct labor and factory overhead. Included in factory
overhead are energy costs, depreciation, repairs and maintenance. The increase
in cost of sales resulted primarily from an increase in the average monthly
cost
of corn and a small increase in gallons of ethanol produced during the
period.
The
average monthly cost of sales during the year ended December 31, 2007 was
approximately $2.36 per gallon, reflecting the increased costs of grain during
the period from a low of $2.09 per gallon in August to a high of $2.77 per
gallon during February. The average monthly cost of sales during the year ended
December 31, 2006 was approximately $1.91 per gallon, from a low of $0.79 per
gallon in January to a high of $1.26 per gallon during December. The average
monthly cost of corn during the year ended December 31, 2007 was $1.42 per
gallon sold
as
compared to $.87 in 2006. The Blairstown facility is a refurbished plant and,
as
a result, lacks the energy efficiencies of newer plants and requires more
frequent repairs, which may result in temporary production stoppages.
Additionally, because the plant is a smaller production facility, it cannot
benefit from economies of scale available to larger plants, leading to per
gallon expenses higher than those of our competitors’ larger
plants.
Gross
(Loss) Profit.
Gross
loss for the year ended December 31, 2007 was $1.6 million, or 14.9% of net
sales, versus a gross profit of $$938,000, or 8.5% of net sales, for the year
ended December 31, 2006. The increase in gross loss is principally due to a
higher average corn price and a lower average selling price for the year ended
December 31, 2007 compared to the prior year.
General
and Administrative Expenses.
General
and administrative expenses (“G&A”) were $10.1 million for the year ended
December 31, 2007 compared to $7.9 for the year ended December 31, 2006,
reflecting a net increase of $2.2 million, or 27.8%. The primary components
of
2007 G&A expenses were:
|
·
|
$2.5
million for accounting and legal services or 24.8% of
G&A;
|
|
·
|
$1.4
million of employee cash compensation or 13.9% of
G&A;
|
|
·
|
$1.4
million for expenses of the Spring Hope facility or 13.9% of
G&A;
|
|
·
|
$1.3
million for expenses of CoastalXethanol or 12.9% of G&A;
and
|
|
·
|
$994,000
for fees to outside advisors, professionals and other service providers
or
9.8% of G&A
.
|
Other
significant items included in G&A were:
|
·
|
$896,000
in travel and entertainment
expenses;
|
|
·
|
$402,000
in rent expense; and
|
|
·
|
$306,000
for expenses related to our Blairstown
facility.
|
The
increase in G&A in 2007 compared to 2006 was primarily attributable to:
|
·
|
a
$1.5 million increase in accounting and legal fees primarily resulting
from our SEC filings and litigation costs;
|
|
·
|
a
$495,000 increase in travel and entertainment expenses resulting
primarily
from travel related to executive management’s assessment of our
facilities, R&D projects and potential new business opportunities;
and
|
|
·
|
a
$1.2 million increase in expenses related to our Spring Hope site,
which
we acquired during the fourth quarter of
2006.
|
The
increases in G&A costs were partially offset by:
|
·
|
a
$565,000 decrease in consulting costs;
and
|
|
·
|
a
$341,000 decrease in payroll costs.
|
Equity
Compensation.
Equity
compensation for the year ended December 31, 2007 was $4.0 million compared
to
$7.0 million for the year ended December 31, 2006. The significant items in
equity compensation include:
|
·
|
$2.6
million in compensation expense for the year ended December 31, 2007
related to stock options granted to employees and consultants under
the
2005 Incentive Compensation Plan, representing a decrease of $485,000
from
$3.1 million of expenses in the prior
year;
|
|
·
|
$942,000
in compensation expense for the year ended December 31, 2007 related
to
stock options granted to outside directors under the 2005 Incentive
Compensation Plan, representing a decrease of $1.4 million from $2.4
million in the prior year; and
|
|
·
|
$421,000
in compensation expense related to warrants issued in 2006 and expensed
during the year ended December 31, 2007, a decrease of $669,000 from
$1.1
million in the prior year; and
|
|
·
|
no
compensation expense for the year ended December 31, 2007 related
to
shares of common stock issued for services rendered, representing
a
decrease of $448,000 from the prior
year.
|
Depreciation
and Amortization.
Depreciation expense for the year ended December 31, 2007 was $65,000 compared
to $205,000 for the prior year. The $140,000 decrease resulted primarily from
the impairment loss on fixed assets of Permeate at December 31, 2006 and the
subsequent sale of Permeate’s assets in 2007.
Amortization
expense for the year ended December 31, 2007 was $273,000 compared to $136,000
for the prior year. The $137,000 increase was as a result of an entire year
of
amortization in 2007 on our research and development agreements as compared
to
six months in 2006.
Research
and Development.
Research
and development expenses for the year ended December 31, 2007 decreased by
$251,000 to $601,000 as compared to $852,000 for the year ended December 31,
2006. This decrease is primarily due to the expiration of the research agreement
with UTEK in March 2007 and as the result of an extension to the contract with
the National Renewable Energy Laboratory, at no additional cost to us.
Impairment
Loss - Fixed Assets
.
The
impairment loss on fixed assets for the year ended December 31, 2007 was $12.2
million. We recognized impairment losses composed of $7.0 million in impairment
losses on our Spring Hope facility, a $2.6 million impairment loss relating
to
costs previously incurred for a planned second ethanol facility at Blairstown
that we have deferred indefinitely; a $2.1 million impairment loss at our
Augusta site, and a $521,000 impairment loss on our Permeate assets that we
sold
in November 2007. We charged $514,000 to expense to recognize an impairment
loss
on fixed assets at our Permeate facility in 2006. In anticipation of the
probable sale or disposal of these assets, we concluded that the carrying amount
of the remaining assets exceeded their likely disposition value based on an
analysis of current market prices.
Interest
Income.
Interest
income for the year ended December 31, 2007 decreased by $438,000 from $1.2
million for the year ended December 31, 2006 to $746,000 for the year ended
December 31, 2007. This decrease is due directly to the decrease in our cash
and
cash equivalents resulting from our use of cash for operations, financing and
investing activities.
Impairment
Loss - H2Diesel.
At
December 31, 2006, we recorded a loss on our investment in H2Diesel of $2.3
million, after considering H2Diesel’s estimated value at December 31, 2006 and
the illiquidity of our investment.
Loss
on Royalty Note Conversion.
During
the year ended December 31, 2006, in connection with the conversion of our
royalty notes, we issued 330,000 warrants with an exercise price of $12.50
to
the holders of the royalty notes. The value of these warrants at the time of
issuance was $2,170,212. Also in connection with the conversion, the holders
of
the notes waived $203,500 in interest accrued to the date of conversion. The
accrual was reflected in interest expense and as an offset to the cost of the
warrants in 2006.
Loss
on Equity of H2Diesel.
For the
year ended December 31, 2007, we recorded loss on equity of H2Diesel of $1.2
million compared to $1.6 million for the year ended December 31, 2006. This
loss
represents our portion of H2Diesel’s net losses, based on the equity method of
accounting.
Loss
on Marketable Securities.
During
the year ended December 31, 2007, we
recorded
an expense of $1.6 million for a loss on an investment in marketable securities
as described in “Liquidity and Capital Resources” below.
Legal
Settlement Costs.
During
the year ended December 31, 2007, we recorded an expense of $400,000 as the
result of the tentative settlement of a class action lawsuit.
Other
Income.
Other
income for the year ended December 31, 2007 decreased by $314,000 to $178,000
from $492,000 for the corresponding period in 2006. The decrease is primarily
attributable to the decrease in management fees resulting from the termination
of our management agreement with H2Diesel in 2006.
Liquidity
and Capital Resources
We
had
cash and cash equivalents of
approximately
$12.3
million as of December 31, 2007 and approximately $9.5 million
as
of
March 14, 2008
.
Our
working capital as of December 31, 2007 was $10.8 million, representing a
decrease in working capital of $13.6 million compared to $24.4 million at
December 31, 2006. We had outstanding debt instruments totaling $309,000 as
of December 31, 2007 and $305,000 as of March 14, 2008.
During
the year ended December 31, 2007, we used net cash of $9.7 million for operating
activities. We used additional cash of $2.4 million for investing activities.
Included in cash used for investing was:
|
·
|
approximately
$1.3 million used in the preconstruction phase of our Blairstown
expansion
project;
|
|
·
|
approximately
$328,000 for equipment and improvements at our Georgia and Florida
sites;
and
|
|
·
|
a
$1.6 million loss from an investment in marketable securities as
described
below.
|
During
the year ended December 31, 2007, we received cash proceeds of $224,000 from
the
exercise of stockholder warrants. In addition, we received cash proceeds of
$1.1
million from the sale of assets at our Permeate and Blairstown facilities.
In
our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, we disclosed
that we had cash, cash equivalents and marketable securities of approximately
$17.1 million as of August 1, 2007, including a net investment in marketable
securities of $13.3 million. The $13.3 million investment in marketable
securities was comprised of two auction rate securities for which Deutsche
Bank
Securities Inc. served as initial purchaser and broker-dealer. Each auction
rate
security holds a fixed portfolio of corporate bonds. Until August 2007, the
securities were purchased and sold through an auction-type mechanism at a 28-day
interval. Deutsche Bank Securities Inc. also facilitated the purchase and sale
of the securities at par between auction dates. We learned in late August 2007
that the most recent auctions of each of the two securities had failed. We
also
learned that Deutsche Bank Securities Inc. was no longer facilitating the
purchase and sale of the securities at par between auction dates and that the
securities could be sold only at a discount to par.
In
light
of the current credit markets and our inability to sell the securities at par,
our board of directors evaluated the risks of continuing to hold the securities,
which included the risk that the sales price of the securities might decline
even further. Based on this evaluation, the board authorized management to
sell
all of the securities. We did so on September 20, 2007 through Deutsche Bank
Securities Inc. at a discount to par. The sales resulted in a loss of $1.6
million of our $13.3 million total investment in the securities. We reflected
a
$1.6 million loss resulting from the sale of the securities for the year ended
December 31, 2007.
In
December 2006, we formed a joint venture to invest in a research project to
produce ethanol from citrus waste. We agreed to pay $600,000 to our joint
venture partner over the next five years. We intend to build a demonstration
plant for converting citrus peel waste into ethanol and are negotiating an
agreement to locate the plant at an existing citrus facility in Florida owned
by
one of the largest citrus processors in the state. The planned cost for the
two-year build-out of the demonstration plant is approximately $5,900,000.
On
January 22, 2008, the Florida Department of Agriculture and Consumer Services
approved a $500,000 grant for this purpose. We plan to apply for federal
government grants and combine private equity with those grants to supplement
the
state grant. If we do not receive these federal grants, we will need to raise
additional equity to build this plant as we intend.
We
will
need substantial additional capital to pursue the demonstration plant and any
other growth opportunities we pursue. We may seek to raise capital through
additional equity offerings, debt financing, bond financing, asset sales or
a
combination of these methods. Our primary sources of capital are as
follows:
|
·
|
We
have cash and cash equivalents of $9.5 million on hand as of March
14,
2008.
|
|
·
|
We
hold 5,670,000 shares of H2Diesel common stock and recently sold
180,000
shares of H2Diesel common stock for net proceeds of approximately
$665,000. H2Diesel common stock has recently traded at over $5.00
per
share on the OTC Bulletin Board. Because we own more than 30% of
the
outstanding shares of H2Diesel, we relied on SEC Rule 144 in selling
those
shares. Under that rule, the volume of our sales of H2Diesel common
stock
is limited to 1% of the outstanding shares of H2Diesel common stock
every
90 days. We may seek to sell a larger block of our H2Diesel shares
in
|
|
|
some other manner at a substantial discount to the
market
price, but we can offer no assurances that we will be able to do
so.
|
|
·
|
We
have reevaluated our Augusta, Georgia and Spring Hope, North Carolina
facilities and have decided that they do not fit within our long-term
corporate strategy. On March 20, 2008, our board authorized
management to pursue the sale of each facility. We can offer no
assurances regarding the proceeds of the sale of one or both of those
properties or the timing of any such sale or
sales.
|
To
conserve our cash and cash equivalents, we have taken or expect to take several
actions:
|
·
|
We
have downsized our operations by terminating personnel and electing
not to
renew certain consulting agreements. We estimate that these measures
will
save us approximately $800,000 annually.
|
|
·
|
If
we are successful in selling our Augusta facility, we estimate that
we
would reduce our annual overhead by approximately $600,000.
|
|
·
|
If
we are successful in selling our Spring Hope facility, we
estimate that we would reduce our annual overhead by approximately
$250,000.
|
|
·
|
We
have indefinitely deferred construction of a new Blairstown ethanol
plant
as a result of the changing ethanol market, continued high prices
for corn
and our inability to arrange debt or equity financing for the
project.
|
|
·
|
We
have decided to close our New York office and relocate our headquarters
to
Atlanta, Georgia.
|
As
noted
above, we can offer no assurances regarding the proceeds of the sale of one
or
both of our Augusta and Spring Hope properties or the timing of any such sale
or
sales.
Further,
before we can sell the Spring Hope property,
we will
have to resolve certain liens on the property filed by companies that performed,
or have claimed to have performed, environmental remediation and demolition
work
on the property.
We
currently have no commitments for any additional financing, and we can give
no
assurance that we will be able to raise the additional capital we need on
commercially acceptable terms or at all. Our failure to raise capital as needed
would significantly restrict our growth and hinder our ability to compete.
We
will need to curtail expenses further, reduce planned investments in technology
and research and development and forgo business opportunities. Additional equity
financings are likely to be dilutive to holders of our common stock, and debt
financing, if available, may involve significant payment obligations and
covenants that restrict how we operate our business.
Off-Balance
Sheet Arrangements
We
have
not entered into any transactions with unconsolidated entities in which we
have
financial guarantees, subordinated retained interests, derivative instruments
or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in
an
unconsolidated entity that provides us with financing, liquidity, market risk
or
credit risk support.
Critical
Accounting Policies
The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an ongoing basis, including those
related to valuation of intangible assets, investments, property and equipment;
contingencies and litigation; and the valuation of shares issued for services
or
in connection with acquisitions. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The accounting policies that we follow are described
in Note 2 to our audited consolidated financial statements included in this
report.
With
regard to our policies surrounding the valuation of shares issued for services
or in connection with acquisitions, we rely on the fair value of the shares
at
the time they were issued. After considering various trading aspects of our
stock, including volatility, trading volume and public float, we believe that
the price of our stock as
reported
on the American Stock Exchange is the most reliable indicator of fair value.
The
fair value of options and warrants issued for services is determined at the
grant date using a Black-Scholes option pricing model and is expensed over
the
respective vesting periods. A modification of the terms or conditions of an
equity award is treated as an exchange of the original award for a new award
in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R.
We
evaluate impairment of long-lived assets in accordance with SFAS No. 144,
“
Accounting
for the Impairment or Disposal of Long-Lived Assets.”
We
assess the impairment of long-lived assets, including property and equipment
and
purchased intangibles subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The asset impairment review assesses the fair value of the assets
based on the future cash flows the assets are expected to generate. We recognize
an impairment loss when estimated undiscounted future cash flows expected to
result from the use of the asset plus net proceeds expected from the disposition
of the asset (if any) are less than the related asset’s carrying amount.
Impairment losses are measured as the amount by which the carrying amounts
of
the assets exceed their fair values. Estimates of future cash flows are
judgments based on management’s experience and knowledge of our operations and
the industries in which we operate. These estimates can be significantly
affected by future changes in market conditions, the economic environment,
capital spending decisions of our customers and inflation.
At
December 31, 2006, after considering H2Diesel’s estimated value at December 31,
2006 and the illiquidity of our investment in H2Diesel, we recognized a $2.3
million loss in the value of our investment in H2Diesel. We concluded that
this
is other than a temporary decline in our investment in accordance with APB
No.
18,
The
Equity Method of Accounting for Investments in Common Stock
.
As of
December 31, 2007, our carrying value of our investment in H2Diesel was $647,000
in accordance APB No. 18. During the first quarter of 2008, we sold 180,000
shares of H2Diesel’s common stock under SEC Rule 144 for an aggregate sales
price of $782,000. As of March 1, 2008, we own 5,670,000 shares of H2Diesel
Holdings common stock, which represented approximately 31.2% of the common
stock
then outstanding.
Our
remaining $623,000 of intangible assets at December 31, 2007 consisted of
research and license agreements relating to our 2006 acquisition of Advanced
Biomass Gasification Technologies, Inc. (“ABGT”). The research agreement
($390,000, net of amortization) is currently being amortized over its three-year
term. The license agreement ($233,000, net of amortization) is currently being
amortized over its 20-year life.
After
an
assessment of the current state of the relevant business plan surrounding the
development of ABGT gasification technology, including discussions with
scientists, review of milestones and on site visits to demonstration facilities,
we do not believe there are any impairments. We will review the useful life
of
our license agreement at least annually, and we will determine its
recoverability in accordance with SFAS No. 144. Future impairments may occur
if
our remaining technology is not viable.
At
September 30, 2007, we recorded a $522,000 impairment loss on fixed assets
at
our Permeate facility. Because we sold those assets on November 9, 2007 under
a
sales contract executed October 3, 2007, we recorded an impairment loss on
those
assets.
At
June
30, 2007, we recorded a $2.8 million impairment loss on property held for
development. The impairment loss relates to our assets in Spring Hope, North
Carolina, which we had initially purchased in November 2006 for $7.8 million,
of
which $4.0 million was in cash with the balance in common stock and warrants.
Based on discussions with a party potentially interested in acquiring the
assets, we determined that we should record an impairment loss on these assets.
The discussions with the party that was interested in purchasing the property
have not resulted in a purchase agreement. Therefore, we performed an analysis
of the fair market value of the property at December 31, 2007 and determined
that an additional impairment loss of $4.2 million should be recorded.
At
December 31, 2007, we recorded a $2.6 million impairment loss on costs
previously incurred for a planned second ethanol facility at Blairstown.
Currently, we have indefinitely deferred construction of a new Blairstown
ethanol plant as a result of the changing ethanol market, continued high prices
for corn and our inability to arrange debt or equity financing for the project.
For these reasons, we have concluded that we should record an impairment loss
to
reflect some of the costs related to this project.
At
December 31, 2007, we recorded a $2.1 million impairment loss on our Augusta
property. On March 20, 2008, our board authorized management to pursue the
sale
of the property. We have performed a market study analysis of the amount that
we
can expect to realize upon the sale of the site and have recorded an impairment
based on this analysis.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
required for smaller reporting companies.
ITEM
8.
FINANCIAL
STATEMENT
S
AND SUPPLEMENTARY DATA
.
Our
financial statements are filed as part of this annual report on the pages
indicated.
Consolidated
Financial Statements for the years ended December 31, 2007 and 2006
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Balance Sheets
|
|
F-3
|
|
|
|
Consolidated
Statements of Operations
|
|
F-4
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
F-5
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
F-6
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of
Xethanol
Corporation
We
have
audited the accompanying consolidated balance sheets of Xethanol Corporation
(the “Company”) as of December 31, 2007 and 2006 and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Xethanol Corporation as
of
December 31, 2007 and 2006, and the results of its operations and its cash
flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/
Imowitz Koenig & Co., LLP
New
York,
New York
March
24,
2008
Xethanol
Corporation
Consolidated
Balance Sheets
(in
thousands, except share data)
|
|
December
31, 2007
|
|
December
31, 2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,322
|
|
$
|
24,183
|
|
Receivables
|
|
|
564
|
|
|
582
|
|
Inventories
|
|
|
294
|
|
|
291
|
|
Other
current assets
|
|
|
879
|
|
|
846
|
|
Total
current assets
|
|
|
14,059
|
|
|
25,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,316
|
|
|
8,596
|
|
Property
held for development
|
|
|
554
|
|
|
12,553
|
|
Property
previously held for development
|
|
|
5,416
|
|
|
-
|
|
Investment
in and advances to H2Diesel Holdings, Inc.
|
|
|
647
|
|
|
1,963
|
|
Research
and license agreements, net of amortization
|
|
|
|
|
|
|
|
of
$409 and $136 in 2007 and 2006, respectively
|
|
|
623
|
|
|
895
|
|
Other
assets
|
|
|
403
|
|
|
1,537
|
|
TOTAL
ASSETS
|
|
$
|
26,018
|
|
$
|
51,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,221
|
|
$
|
1,229
|
|
Accounts
payable - related parties
|
|
|
-
|
|
|
318
|
|
Total
current liabilities
|
|
|
3,221
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
295
|
|
|
310
|
|
Minority
interest
|
|
|
116
|
|
|
116
|
|
Capitalized
lease obligation
|
|
|
14
|
|
|
22
|
|
Total
liabilities
|
|
|
3,646
|
|
|
1,995
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 1,000,000
|
|
|
|
|
|
|
|
shares
authorized; 0 shares issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares
|
|
|
|
|
|
|
|
authorized;
28,609,103 and 28,497,648 shares issued and
|
|
|
|
|
|
|
|
outstanding
in 2007 and 2006, respectively
|
|
|
29
|
|
|
28
|
|
Additional
paid-in-capital
|
|
|
89,171
|
|
|
84,974
|
|
Accumulated
deficit
|
|
|
(66,828
|
)
|
|
(35,551
|
)
|
Total
stockholders’ equity
|
|
|
22,372
|
|
|
49,451
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
26,018
|
|
$
|
51,446
|
|
See
Notes
to Consolidated Financial Statements
Xethanol
Corporation
Consolidated
Statements of Operations
(in
thousands, except per share data)
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
$
|
11,029
|
|
Cost
of sales, including depreciation of $461 and $451
|
|
|
|
|
|
|
|
for
2007 and 2006, respectively
|
|
|
12,686
|
|
|
10,091
|
|
Gross
(loss) profit
|
|
|
(1,649
|
)
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
10,110
|
|
|
7,932
|
|
Equity
compensation
|
|
|
3,974
|
|
|
7,022
|
|
Depreciation
and amortization
|
|
|
338
|
|
|
341
|
|
Impairment
loss on property
|
|
|
12,249
|
|
|
514
|
|
Research
and development
|
|
|
601
|
|
|
852
|
|
Total
operating expenses
|
|
|
27,272
|
|
|
16,661
|
|
|
|
|
|
|
|
|
|
Loss
from operations before other (expense) income
|
|
|
(28,921
|
)
|
|
(15,723
|
)
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
Interest
income
|
|
|
746
|
|
|
1,184
|
|
Interest
expense
|
|
|
(55
|
)
|
|
(217
|
)
|
Loss
on marketable securities
|
|
|
(1,589
|
)
|
|
-
|
|
Impairment
loss - investment in H2Diesel Holdings, Inc.
|
|
|
-
|
|
|
(2,322
|
)
|
Loss
on equity of H2Diesel Holdings, Inc.
|
|
|
(1,236
|
)
|
|
(1,626
|
)
|
Loss
on royalty note conversion
|
|
|
-
|
|
|
(1,967
|
)
|
Legal
settlement costs
|
|
|
(400
|
)
|
|
-
|
|
Other
income
|
|
|
178
|
|
|
492
|
|
Total
other (expense) income
|
|
|
(2,356
|
)
|
|
(4,456
|
)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(31,277
|
)
|
$
|
(20,179
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(1.09
|
)
|
$
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
28,592,919
|
|
|
21,604,355
|
|
See
Notes
to Consolidated Financial Statements
Xethanol
Corporation
Consolidated
Statements of Stockholders’ Equity
(in
thousands)
|
|
Common
Stock
|
|
Additional
Paid-in-
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balance
at December 31, 2005
|
|
|
15,011
|
|
$
|
15
|
|
$
|
15,586
|
|
$
|
(15,372
|
)
|
$
|
229
|
|
Shares
issued for cash to Fusion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital,
net of placement fees
|
|
|
1,895
|
|
|
2
|
|
|
9,610
|
|
|
-
|
|
|
9,612
|
|
Shares
issued for cash in private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
offerings,
net of placment fees
|
|
|
7,587
|
|
|
8
|
|
|
31,629
|
|
|
-
|
|
|
31,637
|
|
Shares
issued in exchange for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H2Diesel,
Inc. common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
sublicense
|
|
|
500
|
|
|
1
|
|
|
5,425
|
|
|
-
|
|
|
5,425
|
|
Shares
issued to UTEK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
for acquisition
|
|
|
137
|
|
|
-
|
|
|
1,132
|
|
|
-
|
|
|
1,132
|
|
Shares
issued in connection with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Spring Hope, NC
|
|
|
1,197
|
|
|
1
|
|
|
3,518
|
|
|
-
|
|
|
3,519
|
|
Warrants
issued in connection with acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Spring Hope, NC
|
|
|
-
|
|
|
-
|
|
|
277
|
|
|
-
|
|
|
277
|
|
Shares
issued for exchange of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage
note
|
|
|
135
|
|
|
-
|
|
|
432
|
|
|
-
|
|
|
432
|
|
Cancellation
of mortgage note
|
|
|
-
|
|
|
-
|
|
|
450
|
|
|
-
|
|
|
450
|
|
Shares
issued for exercise of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
warrants
|
|
|
311
|
|
|
-
|
|
|
945
|
|
|
-
|
|
|
945
|
|
Shares
issued for conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
secured notes payable
|
|
|
1,650
|
|
|
1
|
|
|
6,598
|
|
|
-
|
|
|
6,600
|
|
Shares
issued for services
|
|
|
75
|
|
|
-
|
|
|
568
|
|
|
-
|
|
|
568
|
|
Options
granted under 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
Compensation Plan
|
|
|
-
|
|
|
-
|
|
|
5,483
|
|
|
-
|
|
|
5,483
|
|
Warrants
issued in royalty note conversion
|
|
|
-
|
|
|
-
|
|
|
2,170
|
|
|
-
|
|
|
2,170
|
|
Warrants
issued for services
|
|
|
-
|
|
|
-
|
|
|
1,152
|
|
|
-
|
|
|
1,152
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20,179
|
)
|
|
(20,179
|
)
|
Balance
at December 31, 2006
|
|
|
28,498
|
|
|
28
|
|
|
84,975
|
|
|
(35,551
|
)
|
|
49,452
|
|
Shares
issued for exercise of warrants
|
|
|
111
|
|
|
1
|
|
|
223
|
|
|
-
|
|
|
224
|
|
Options
granted under 2005 Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Compensation
Plan
|
|
|
-
|
|
|
-
|
|
|
3,552
|
|
|
-
|
|
|
3,552
|
|
Warrants
issued for services
|
|
|
-
|
|
|
-
|
|
|
421
|
|
|
-
|
|
|
421
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(31,277
|
)
|
|
(31,277
|
)
|
Balance
at December 31, 2007
|
|
|
28,609
|
|
$
|
29
|
|
$
|
89,171
|
|
$
|
(66,828
|
)
|
$
|
22,372
|
|
See
Notes
to Consolidated Financial Statements
Xethanol
Corporation
Consolidated
Statements of Cash Flows
(in
thousands)
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(31,277
|
)
|
$
|
(20,179
|
)
|
Adjustments
to reconcile net loss to
|
|
|
|
|
|
|
|
net
cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
798
|
|
|
791
|
|
Amortization
of management fee income
|
|
|
-
|
|
|
(437
|
)
|
Issuance
of common stock, stock options
|
|
|
|
|
|
|
|
and
warrants for services rendered
|
|
|
3,974
|
|
|
7,203
|
|
Issuance
of warrants for debt conversion
|
|
|
-
|
|
|
1,967
|
|
Issuance
of warrants in settlement of interest liability
|
|
|
|
|
|
|
|
on
secured notes
|
|
|
-
|
|
|
204
|
|
Impairment
loss - investments
|
|
|
14
|
|
|
2,390
|
|
Impairment
losses - property
|
|
|
12,249
|
|
|
514
|
|
Loss
on equity of H2Diesel Holdings, Inc.
|
|
|
1,236
|
|
|
1,627
|
|
Loss
on retirement of fixed assets
|
|
|
-
|
|
|
154
|
|
Loss
on marketable securities
|
|
|
1,589
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
18
|
|
|
(17
|
)
|
Inventories
|
|
|
(4
|
)
|
|
(95
|
)
|
Other
assets and liabilities
|
|
|
46
|
|
|
(472
|
)
|
Accounts
payable and accrued expenses
|
|
|
1,993
|
|
|
164
|
|
Accounts
payable-related parties
|
|
|
(318
|
)
|
|
262
|
|
Net
cash used in operating activities
|
|
|
(9,682
|
)
|
|
(5,924
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(1,517
|
)
|
|
(3,237
|
)
|
Purchase
of property held for development
|
|
|
(328
|
)
|
|
(12,551
|
)
|
Investment
in research agreement
|
|
|
-
|
|
|
(300
|
)
|
Investment
in marketable securities
|
|
|
(38,100
|
)
|
|
-
|
|
Redemption
of marketable securities
|
|
|
36,511
|
|
|
-
|
|
Cash
received for sale of fixed assets
|
|
|
1,054
|
|
|
-
|
|
Cash
received from sale of Augusta GA assets
|
|
|
-
|
|
|
3,100
|
|
Advances
to H2Diesel Holdings, Inc.
|
|
|
-
|
|
|
(50
|
)
|
Net
cash used in investing activities
|
|
|
(2,380
|
)
|
|
(13,038
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Cash
received for common stock
|
|
|
224
|
|
|
42,194
|
|
Cash
received from acqusition
|
|
|
-
|
|
|
400
|
|
Payment
of note payable
|
|
|
(15
|
)
|
|
-
|
|
Payment
of mortgage payable
|
|
|
-
|
|
|
(243
|
)
|
Payment
of capitalized lease obligation
|
|
|
(8
|
)
|
|
(8
|
)
|
Net
cash provided by financing activities
|
|
|
201
|
|
|
42,343
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(11,861
|
)
|
|
23,381
|
|
Cash
and cash equivalents - beginning of year
|
|
|
24,183
|
|
|
802
|
|
Cash
and cash equivalents - end of year
|
|
$
|
12,322
|
|
$
|
24,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
55
|
|
$
|
13
|
|
Income
taxes paid
|
|
|
124
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Non-cash
activity
|
|
|
|
|
|
|
|
Issuance
of common stock in partial exchange for
|
|
|
|
|
|
|
|
mortgage
payable
|
|
$
|
-
|
|
$
|
432
|
|
Issuance
of new mortgage payable in partial exchange
|
|
|
|
|
|
|
|
for
mortgage payable
|
|
|
-
|
|
|
243
|
|
Increase
in stockholders' equity as a result of the exchange
|
|
|
|
|
|
|
|
of
mortgage payable with stockholders
|
|
|
-
|
|
|
450
|
|
Research
and license agreements acquired in exchange for
|
|
|
|
|
|
|
|
common
stock
|
|
|
-
|
|
|
732
|
|
Investment
acquired in exchange for common stock
|
|
|
-
|
|
|
5,425
|
|
Investment
acquired in exchange for management services
|
|
|
-
|
|
|
794
|
|
Conversion
of notes payable to common stock
|
|
|
-
|
|
|
6,600
|
|
See
Notes
to Consolidated Financial Statements
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1.
DESCRIPTION
OF BUSINESS AND ORGANIZATION
Xethanol
Corporation (the “Company”) is a renewable energy and clean technology company.
The Company’s business currently includes an operating plant in Blairstown, Iowa
that produces ethanol from corn; a planned demonstration plant in Florida for
converting citrus peel waste into ethanol; bio-separation and bio-fermentation
technologies, along with strategic relationships with government and university
research labs to further develop and prove out these technologies; and minority
investments in other renewable energy or clean tech businesses. For 2007, the
Blairstown facility produced ethanol at a rate of approximately 5.4 million
gallons, using corn as its feedstock. The Company’s sales during 2007 relate
entirely to the Blairstown facility.
NOTE
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The
accompanying consolidated financial statements and related footnotes are
presented in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). Certain reclassifications have been made to
previously reported amounts to conform to the current presentation, with no
effect on the Company’s consolidated financial position, results of operations
or cash flows.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Significant estimates include the valuation of shares issued
for services or in connection with acquisitions and the valuation of
investments, fixed assets and intangibles and their estimated useful lives.
The
Company evaluates its estimates on an ongoing basis. Actual results could differ
from those estimates under different assumptions or conditions.
Cash
and Cash Equivalents and Marketable Securities
The
Company invests its excess cash in money market funds and in highly liquid
debt
instruments of the U.S. government and its agencies, and debt instruments
secured by bonds of U.S. corporations. All highly liquid investments with stated
maturities of three months or less from date of purchase are classified as
cash
equivalents; all investments with stated maturities of greater than three months
are classified as marketable securities.
Investments
in marketable securities are accounted for as “available for sale” securities.
“Available for sale” securities are stated at fair value with changes in market
value recorded in shareholders’ equity. The Company determines the appropriate
classification of its investments in marketable debt and equity securities
at
the time of purchase and reevaluates such designation at each balance sheet
date. Marketable debt and equity securities have been classified and accounted
for as available for sale. The Company may or may not hold securities with
stated maturities greater than twelve months until maturity.
Loss
per Common Share
Loss
per
share (“EPS”) is computed based on weighted average number of common shares
outstanding and excludes any potential 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, which would then share in the earnings of the Company.
The shares issuable upon the exercise of stock options and warrants are excluded
from the calculation of net loss per share, as their effect would be
antidilutive.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the periods presented, the Company had securities outstanding that could
potentially dilute basic earnings per share in the future, but were excluded
from the computation of diluted earnings per share, as their effect would have
been anti-dilutive. The anti-dilutive securities are as follows:
|
|
Balance
at December 31,
|
|
|
|
2007
|
|
2006
|
|
Employee
stock options
|
|
|
5,245,000
|
|
|
4,430,000
|
|
Series
A warrants
|
|
|
1,517,383
|
|
|
1,517,383
|
|
Series
B warrants
|
|
|
758,735
|
|
|
758,735
|
|
Placement
agent warrants
|
|
|
606,938
|
|
|
606,938
|
|
Other
warrants
|
|
|
1,248,090
|
|
|
2,314,720
|
|
|
|
|
9,376,146
|
|
|
9,627,776
|
|
Concentration
of Credit Risk
Cash
that
is deposited with major financial institutions or invested in money market
funds
is not insured by the Federal Deposit Insurance Corporation.
Costs
Associated with Issuance of Stock
Investment
banking fees and related costs associated with the sale of stock are charged
to
stockholders’ equity.
Stock
Issued for Non-Cash Consideration
Shares
of
common stock issued for services, and in connection with acquisitions, have
been
valued at the estimated fair value of the shares at the time they were
issued.
Receivables
The
Company records trade accounts receivable at net realizable value. This value
includes an allowance for estimated uncollectible accounts, if necessary, to
reflect any loss anticipated on the trade accounts receivable balance. At
December 31, 2007, the Company has determined that an allowance for estimated
uncollectible accounts is not necessary.
Investments
The
Company accounts for its investments in accordance with FASB Interpretation
46,
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51 (“FIN 46”). A variable interest entity (“VIE”) is a
corporation, partnership, trust, or any other legal structure used for business
purposes that does not have equity investors with voting rights nor has equity
investors that provide sufficient financial resources for the entity to support
its activities. FIN 46 requires a VIE to be consolidated by a company if that
company is the primary beneficiary of the VIE. The primary beneficiary of a
VIE
is an entity that is subject to a majority of the risk of loss from the VIE’s
activities, or entitled to receive a majority of the entity’s residual returns,
or both.
For
investments that are not required to be consolidated, the Company follows the
guidance provided by APB 18 “The Equity Method of Accounting for Investments in
Common Stock.”
Costs
of Start-up Activities
Start-up
activities are defined broadly in Statement of Position 98-5,
Reporting
on the Costs of Start-Up Activities
,
as
those one-time activities related to opening a new facility, introducing a
new
product or service, conducting business in a new territory, conducting business
with a new class of customer or beneficiary, initiating a new process in an
existing facility, commencing some new operation or activities related to
organizing a new entity. The Company’s start-up activities consist primarily of
costs associated with new or potential sites for ethanol production
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
facilities.
All the costs associated with a potential site are expensed, until the site
is
consider viable by management, at which time costs would be considered for
capitalization based on authoritative accounting literature. These costs are
included in selling, general, and administrative expenses in the consolidated
statement of operations.
Inventories
Raw
materials are carried at average cost. Work in process is based on the amount
of
average product costs currently in the production pipeline. Finished goods
are
carried at the lower of cost using the average cost method or market.
Inventories
consist of the following:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Raw
materials
|
|
$
|
85,000
|
|
$
|
81,000
|
|
Work
in process
|
|
|
109,000
|
|
|
94,000
|
|
Finished
goods
|
|
|
100,000
|
|
|
116,000
|
|
|
|
$
|
294,000
|
|
$
|
291,000
|
|
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Major additions are capitalized and
depreciated over their estimated useful lives. Repairs and maintenance costs
are
expensed as incurred. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the assets. The range
of
useful lives for each category of fixed assets is as follows: buildings and
land
improvements - 20 years, process equipment - 10 years, lab equipment - 7 years,
office equipment - 5 years, and computers - 3 years.
Impairment
of Long-Lived Assets
The
Company evaluates impairment of long-lived assets in accordance with SFAS No.
144,
Accounting
for the Impairment or Disposal of Long-Lived Asset.
The Company assesses the impairment of long-lived assets, including property
and
equipment and purchased intangibles subject to amortization, whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. The asset impairment review assesses the fair value of the
assets based on the future cash flows the assets are expected to generate.
An
impairment loss is recognized when estimated undiscounted future cash flows
expected to result from the use of the asset plus net proceeds expected from
the
disposition of the asset (if any) are less than the related asset’s carrying
amount. Impairment losses are measured as the amount by which the carrying
amounts of the assets exceed their fair values. Estimates of future cash flows
are judgments based on management’s experience and knowledge of the Company’s
operations and the industries in which the Company operates. These estimates
can
be significantly affected by future changes in market conditions and the
economic environment.
Goodwill
and License Agreements
Goodwill
represents the excess of cost of an acquired entity over the net of the amounts
assigned to net assets acquired and liabilities assumed. The Company accounts
for goodwill and license agreements with indefinite lives in accordance with
SFAS No. 142,
Goodwill
and Other Intangible Assets
,
which requires an annual review for impairment or more frequently if impairment
indicators arise. At December 31, 2007 and 2006, the Company had no
goodwill.
License
agreements owned by the Company are reviewed for possible impairment whenever
events or circumstances indicate the carrying amount may be impaired. License
agreements are amortized using the straight-line method over the shorter of
the
estimated useful life or legal term of the agreement.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition
The
Company follows a policy of recognizing sales revenue at the time the product
is
shipped to its customers.
Research
and Development
Research
and development costs are expensed as incurred. Research and development costs
were $601,000 and $852,000 for the years ended December 31, 2007 and 2006,
respectively.
Income
Taxes
Deferred
tax assets and liabilities are computed based on the difference between the
book
and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on changes in the assets
and liabilities from period to period. These differences arise primarily from
the Company’s net operating loss. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Fair
Value of Financial Instruments
The
carrying amount of cash and cash equivalents, trade receivables, accounts
payable and accrued expenses approximate fair value because of the short-term
nature of these instruments.
Segment
Reporting
The
Company operates as a single segment.
Recently
Issued Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair Value Measurements (“SFAS 157”), which clarifies that fair value is
the amount that would be exchanged to sell an asset or transfer a liability
in
an orderly transaction between market participants. Further, the standard
establishes a framework for measuring fair value in generally accepted
accounting principles and expands certain disclosures about fair value
investments. SFAS 157 became effective for financial assets and liabilities
on
January 1, 2008. This standard is not expected to materially affect how the
Company determines fair value during 2008, but it may result in certain
additional disclosures. The FASB has deferred the implementation of the
provisions of SFAS 157 relating to certain nonfinancial assets and liabilities
until January 1, 2009. The Company is evaluating whether this standard will
affect the Company’s determination of fair value in 2009.
In
December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
141R”). SFAS 141R broadens the guidance of SFAS 141, extending its applicability
to all transactions and other events in which one entity obtains control over
one or more other businesses. It broadens the fair value measurement and
recognition of assets acquired, liabilities assumed, and interests transferred
as a result of business combinations; and stipulates that acquisition related
costs be expensed rather than included as part of the basis of the acquisition.
SFAS 141R expands required disclosures to improve the ability to evaluate the
nature and financial effects of business combinations. SFAS 141R is effective
for all transactions entered into on or after January 1, 2009. The adoption
of
this standard on January 1, 2009 could materially impact the Company’s future
financial results to the extent that the Company makes significant acquisitions,
as related acquisition costs will be expensed as incurred compared to the
Company’s current practice of capitalizing those costs and amortizing them over
the estimated useful life of the assets acquired.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 will require
noncontrolling interests (previously referred to as minority interests) to
be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. SFAS No. 160 is effective for periods beginning
on
or after December 15, 2008. The adoption of this statement will result
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
in
minority interest currently classified in the “mezzanine” section of the balance
sheet to be reclassified as a component of stockholders’ equity, and minority
interest expense will no longer be recorded in the consolidated statement of
operations.
NOTE
3.
LOSS
ON SALE OF AUCTION RATE SECURITIES
At
December 31, 2007, the Company’s cash equivalents were invested in money market
funds. As of August 1, 2007, the Company had a net investment in marketable
securities of $13.3 million, which was composed of two auction rate securities
for which Deutsche Bank Securities Inc. served as initial purchaser and
broker-dealer. Each auction rate security held a fixed portfolio of corporate
bonds. Until the summer of 2007, the securities were purchased and sold through
an auction-type mechanism at a 28-day interval. Deutsche Bank Securities Inc.
also facilitated the purchase and sale of the securities at par between auction
dates. The Company learned in late August 2007 that the most recent auctions
of
each of the two securities had failed. The Company also learned that Deutsche
Bank Securities Inc. was no longer facilitating the purchase and sale of the
securities at par between auction dates and that the securities could be sold
only at a discount to par.
In
light
of the current credit markets and the inability of the Company to sell the
securities at par, the Company sold all of the securities at a discount to
par.
The sales resulted in a loss of $1.6 million of the Company’s $13.3 million
total investment in the securities. The Company has reflected a $1.6 million
loss resulting from the sale of the securities for the year ended December
31,
2007.
NOTE
4.
ACQUISITIONS
Acquisition
of Advanced Biomass Gasification Technologies, Inc.
Pursuant
to an Agreement and Plan of Acquisition dated June 13, 2006, the Company
purchased all of the outstanding capital stock of Advanced Biomass Gasification
Technologies, Inc. (“ABGT”) from UTEK Corporation in exchange for 136,838 shares
of the Company’s Common Stock at a price of $8.27 for a total consideration of
$1,131,650.
ABGT
is
the licensee from the University of North Dakota’s Energy & Environmental
Research Center (the “EERC”) of certain patents and know-how related to lignin
and biomass gasification in Imbert gasifiers (the “Gasification Technology”). At
the time of the acquisition, ABGT had cash of $400,000. ABGT is also a party
to
a Base Research Agreement with EERC, which has agreed to perform initial
research, development, demonstration, and project implementation work with
respect to the Gasification Technology (the “Project”), to provide the results
of that work to ABGT, to give ABGT a one-year exclusive right of first
negotiation to license inventions, discoveries or computer software developed
as
a result of that project and to grant ABGT a non-exclusive right to use any
such
invention, discovery, computer software or improvement internally to ABGT.
The
Base Research Agreement was scheduled to expire on August 31, 2007. In December
2007, EERC extended the term of the agreement to June 30, 2008. Under the Base
Research Agreement, as of December 31, 2007, ABGT had contributed $300,000
to
the Project that was supplemented with funding from two EERC programs with
the
Department of Energy, which provided an additional $480,000.
The
license that the EERC granted to ABGT is a worldwide license having a term
that
is the longer of 20 years or the life of the licensed Gasification Technology.
Subject to the satisfaction by ABGT of certain royalty obligations, the license
is exclusive in the fields of Lignin and Biomass Feedstock Gasification in
Imbert gasifiers of up to 10 megawatt thermal. ABGT has the right to sublicense
its rights. ABGT is obligated to pay the EERC royalties based upon its sales
of
equipment that use the licensed technology, the fuel and/or electricity savings
of ABGT’s customers, and ABGT’s sublicensing income. If ABGT does not meet
certain minimum royalty thresholds, which apply on a country-by-country basis,
its rights in that country become non-exclusive and extend for the term of
the
license agreement. ABGT also has certain obligations to commercialize the
technology based upon milestones that are set forth in the license agreement.
ABGT had no operations prior to the Company’s acquisition and accordingly,
management viewed this acquisition as a purchase of assets rather than a
business.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
values of the assets acquired at June 13, 2006 were as follows:
Cash
|
|
$
|
400,000
|
|
License
|
|
|
252,000
|
|
Research
Agreement
|
|
|
480,000
|
|
|
|
$
|
1,132,000
|
|
On
June
28, 2006, ABGT contributed $300,000 to the Project, and the Research Agreement
was increased to $780,000.
The
amortized values of the intangible assets of ABGT as of December 31, 2007 are
as
follows:
License
|
|
$
|
233,000
|
|
Research
Agreement
|
|
|
390,000
|
|
|
|
$
|
623,000
|
|
The
value
of the Base Research Agreement is being amortized over its three-year term.
The
Company recorded amortization expense of the AGBT license and research agreement
of $273,000 for the year ended December 31, 2007 and $136,000 for the period
from June 13, 2006 through December 31, 2006. The license agreement is being
amortized over 20 years. The useful life of the license agreement will be
reviewed at least annually. Its recoverability will be determined in accordance
with SFAS 144.
Acquisition
of Site in Augusta, Georgia
On
August
23, 2006, CoastalXethanol LLC (“CoastalXethanol”), an 80% owned subsidiary of
the Company at the time, purchased the assets of a former pharmaceutical
manufacturing complex located in Augusta, Georgia from Pfizer, Inc.
CoastalXethanol was a joint venture with Coastal Energy Development, Inc.
(“CED”). The Company originally acquired an 80% membership interest in
CoastalXethanol for a capital contribution of $40,000, and CED acquired a 20%
membership interest in CoastalXethanol for a capital contribution of $10,000.
The purchased assets included 40 acres of land, buildings, machinery and
equipment. Under the purchase agreement, CoastalXethanol, through its
newly-formed, wholly-owned subsidiary, Augusta BioFuels, LLC, paid approximately
$8.4 million in cash for the facility. The Company provided the cash to acquire
the facility.
On
March
5, 2007, the Company, along with CoastalXethanol initiated an action against
CED
in the Supreme Court of the State of New York. On April 3, 2007, CED filed
an
answer and counterclaim. On September 14, 2007, the Company reached a settlement
with CED and agreed to pay CED $400,000 in exchange for CED’s 20% interest in
CoastalXethanol. The parties executed releases, the payment and purchase of
CED’s 20% interest in CoastalXethanol was completed on September 24, 2007, and
CoastalXethanol became a wholly-owned subsidiary of the Company.
On
October 31, 2006, Augusta BioFuels, LLC entered into a purchase and sale
agreement for the sale of certain surplus equipment at the Augusta site. The
buyer paid $3,100,000 in cash to Augusta BioFuels, LLC and agreed to perform
certain demolition work valued at $1,600,000. The Company initially recorded
the
$4,700,000 value of the consideration received under this agreement as a
reduction in machinery and equipment with a corresponding offset to cash and
a
deferred asset for the value of the demolition work. As of December 31, 2007,
the Company has reduced the deferred asset by $1,600,000 with a corresponding
increase to construction in progress. The demolition work was substantially
completed during the fourth quarter of 2007.
The
Company has determined that the Augusta facility does not fit within its
long-term corporate strategy, and on March 20, 2008, its board authorized
management to pursue the sale of the facility. In connection with the potential
sale of the property, the Company performed a market study analysis of the
amount that it can expect to realize upon the sale of the site and has recorded
an impairment loss of $2.1 million as of December 31, 2007, based on this
analysis.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition
of Site in Spring Hope, North Carolina
On
November 7, 2006, pursuant to an amended and restated asset purchase agreement,
the Company purchased all of the fixed assets of a former fiberboard
manufacturing facility in Spring Hope, North Carolina from Carolina Fiberboard
Corporation LLC. The assets included 212 acres of land, approximately 250,000
square feet of manufacturing and office space and machinery and equipment.
As
consideration for the acquisition, the Company paid $4,000,000 in cash,
1,197,000 shares of the Company’s common stock valued at $2.94, the closing
price of the Company’s common stock on the preceding business day, and warrants
to purchase 300,000 shares of the Company’s common stock at an exercise price of
$4.00 per share. The fair value of the warrants using the Black-Scholes option
pricing model was $277,470. Total consideration paid for the facility including
closing costs of $36,747, amounted to $7,833,397.
At
June
30, 2007, the Company recorded a $2.8 million impairment loss on the Spring
Hope
facility. Based upon discussions with a party potentially interested in
acquiring the assets, the Company determined that it should record an impairment
loss on these assets. The discussions with the party that was interested in
purchasing the property have not resulted in a purchase agreement. Therefore,
the Company performed an analysis of the fair market value of the property
at
December 31, 2007 and determined that an additional impairment loss of $4.2
million should be recorded at December 31, 2007. The Company has determined
that
the Spring Hope facility does not fit within its long-term corporate strategy,
and on March 20, 2008, its board authorized management to pursue the sale of
the
facility.
Acquisition
of Assets in Bartow, Florida
In
December 2006, CoastalXethanol, through a newly formed subsidiary Southeast
BioFuels LLC, purchased assets from Renewable Spirits, LLC for $100,000 in
cash,
a $600,000 non-interest bearing note payable over 120 months and a 22%
membership interest in Southeast BioFuels. On September 14, 2007, Renewable
Spirits’ interest in Southeast Biofuels LLC was reduced to 19.8% in connection
with the settlement of the CED lawsuit described above. As part of the
settlement, the Company acquired CED’s 10% interest in Renewable Spirits. The
purchased assets consisted of equipment and intellectual property including
Renewable Spirits’ rights under a cooperative research and development agreement
with the U.S. Department of Agriculture’s Agricultural Research Service. The
note payable at closing was recorded at its discounted value of $309,914, and
Renewable Spirits’ interest in Southeast Biofuels has been recorded as minority
interest of $115,617.
The
Company plans to use the assets acquired in this transaction to develop a
demonstration plant processing ethanol from citrus waste. The Company has not
obtained financing for this facility.
NOTE
5.
IMPAIRMENTS
Blairstown
2 Site
On
June
30, 2006, the Company entered into an agreement with PRAJ Industries, Ltd.
(“PRAJ”) to supply process license, design, engineering and supervision services
to construct a second ethanol facility at the Blairstown site with an additional
production capacity of 35 million gallons of ethanol per year. The cost of
the
contract was originally $1,845,000 and was payable over seven installments
based
on predetermined deliverables. As of December 31, 2007, total payments of
$810,000 have been made to PRAJ under the contract. During 2007, the Company
elected not to proceed with any remaining phases of the contract and is no
longer obligated under the contract for future payments.
As
of
December 31, 2007, $3.7 million of costs, including the purchase of land, had
been expended on the previously purchased second ethanol facility at Blairstown.
At December 31, 2007, the Company recorded a $2.6 million impairment loss on
costs previously spent for the second ethanol facility. The Company has
indefinitely deferred construction of the second Blairstown ethanol plant as
a
result of the changing ethanol market, continued high prices for corn and its
inability to arrange debt or equity financing for the project. For these
reasons, the Company has concluded that it should record an impairment loss
against some of the costs related to this project.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
remaining costs are included on the Company’s consolidated balance sheet in
property previously held for investment.
Site
in Spring Hope, North Carolina
On
November 7, 2006, the Company purchased all of the fixed assets of a former
fiberboard manufacturing facility in Spring Hope, North Carolina from Carolina
Fiberboard Corporation LLC. The assets included 212 acres of land, manufacturing
and office space, and machinery and equipment. Total consideration paid for
the
facility was $7.9 million. At June 30, 2007, the Company recorded a $2.8 million
impairment loss on this facility. Based upon discussions with a party
potentially interested in acquiring the assets, the Company determined that
it
should record an impairment loss on these assets. The discussions with the
party
that was interested in purchasing the property have not materialized into a
purchase agreement. The Company has determined that the Spring Hope facility
does not fit within its long-term corporate strategy, and on March 20, 2008,
its
board authorized management to pursue the sale of the facility. The Company
performed an analysis of the fair market value of the property at December
31,
2007 and determined that it should record an additional impairment loss of
$4.2
million at December 31, 2007.
Site
in Augusta, Georgia
The
Company owns a former pharmaceutical manufacturing complex located in Augusta,
Georgia for which it paid approximately $8.4 million in cash. Later in 2006,
the
Company sold certain surplus equipment at the Augusta site for $3,100,000 in
cash to a buyer that also agreed to perform certain demolition work valued
at
$1,600,000. The Company initially recorded the $4,700,000 value of the
consideration received under this agreement as a reduction in machinery and
equipment with a corresponding offset to cash and a deferred asset for the
value
of the demolition work. As of December 31, 2007, the Company has reduced the
deferred asset by $1,600,000 with a corresponding increase to construction
in
progress. The demolition work was substantially completed during the fourth
quarter of 2007. The Company has determined that the Augusta facility does
not
fit within its long-term corporate strategy, and on March 20, 2008, its board
authorized management to pursue the sale of the facility. In connection with
the
potential sale of the property, the Company performed a market study analysis
of
the amount that it can expect to realize upon the sale of the site and, based
on
this analysis, has recorded a $2.1 million impairment loss as of December 31,
2007.
Permeate
Facility
During
2006 and 2007, the Company recorded impairment losses of $514,000 and $522,000,
respectively, on fixed assets related to its Permeate assets. On October 3,
2007, the Company agreed to sell the Permeate facility for $500,000 in cash.
On
November 9, 2007, the Company sold the Permeate facility, at no gain or loss,
for $500,000.
NOTE
6.
PROPERTY
AND EQUIPMENT AND PROPERTY HELD FOR DEVELOPMENT
Property
and equipment consists of the following:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Land
|
|
$
|
28,000
|
|
$
|
62,000
|
|
Buildings
|
|
|
732,000
|
|
|
1,166,000
|
|
Machinery
and equipment
|
|
|
3,906,000
|
|
|
5,063,000
|
|
Land
improvements
|
|
|
569,000
|
|
|
569,000
|
|
Furniture
and fixtures
|
|
|
259,000
|
|
|
84,000
|
|
Construction
in progress
|
|
|
-
|
|
|
2,913,000
|
|
|
|
|
5,494,000
|
|
|
9,857,000
|
|
Less
accumulated depreciation and amortization
|
|
|
1,178,000
|
|
|
1,261,000
|
|
|
|
$
|
4,316,000
|
|
$
|
8,596,000
|
|
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Construction
in progress consisted of expenditures related to the Company’s Blairstown
expansion. As of December 31, 2007, these assets were considered impaired,
and
an impairment charge was recorded against these assets. See Note 7.
Property
held for development consists of the following fixed assets:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Land
|
|
$
|
-
|
|
$
|
1,227,000
|
|
Buildings
|
|
|
-
|
|
|
1,589,000
|
|
Machinery
and equipment
|
|
|
554,000
|
|
|
9,257,000
|
|
Construction
in progress
|
|
|
-
|
|
|
480,000
|
|
|
|
$
|
554,000
|
|
$
|
12,553,000
|
|
In
2006,
property held for development consisted of the assets purchased in connection
with the Company’s acquisitions in Augusta, Georgia; Spring Hope, North
Carolina; and Bartow, Florida. (See Note 4.) In 2007, property held for
development consisted of only the machinery and equipment purchased in
connection with the proposed demonstration plant in Bartow, Florida.
Depreciation will not be recorded on these assets until they are placed into
use.
NOTE
7.
PROPERTY
PREVIOUSLY HELD FOR DEVELOPMENT
The
Company has reevaluated its facility in Augusta, Georgia and has decided that
the facility does not fit within its long-term corporate strategy. On March
20,
2008, the Company
’
s
board authorized management to pursue the sale of the facility. The Company
expects to use a real estate brokerage firm to assist in marketing the property
for sale, but the Company has not retained such a firm as of December 31, 2007.
The Company can offer no assurances regarding how long it would take to sell
the
facility or the price the Company might receive. The carrying value of this
property at December 31, 2007, after an impairment charge of $2.1 million,
is
$3.5 million.
The
Company has reevaluated its facility in Spring Hope, North Carolina and has
determined that the facility does not fit within its long-term corporate
strategy. On March 20, 2008, the Company
’
s
board authorized management to pursue the sale of the facility. Before the
Company sells the property (or as a term of its sale), the Company will have
to
resolve certain liens on the property filed by companies that performed, or
have
claimed to have performed, environmental remediation and demolition work on
the
property. The Company has accrued $500,000 to settle claims and $450,000 for
environmental clean-up at December 31, 2007. The Company has not completed
an
environmental study or remediation. These estimates may require adjustment.
The
Company can offer no assurances regarding how long it would take to sell the
facility or the price the Company might receive. The carrying value of this
property at December 31, 2007, after impairment charges of $7.0 million, is
$856,000.
The
Company has determined to defer indefinitely its expansion project at its second
ethanol site at Blairstown and is currently evaluating several alternatives
in
which to dispose of or use the property. The carrying value of this property
at
December 31, 2007, after an impairment charge of $2.6 million, is
$1,060,000.
Property
previously held for development consists of the following fixed
assets:
|
|
December
31,
2007
|
|
Land
|
|
$
|
1,709,000
|
|
Buildings
|
|
|
1,817,000
|
|
Machinery
and equipment
|
|
|
1,890,000
|
|
|
|
$
|
5,416,000
|
|
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8.
INVESTMENT
IN H2DIESEL, INC.
The
Company considers its investment in H2Diesel Holdings, Inc. (“H2Diesel”) as a
variable interest in a Variable Interest Entity (“VIE”). H2Diesel is the
licensee of a proprietary vegetable oil-based diesel biofuel to be used as
a
substitute for conventional petroleum diesel and biodiesel, heating and other
fuels, under an exclusive license agreement with the inventor of the biofuel.
Because the Company is not the primary beneficiary of the VIE, the Company
has
accounted for its investment in H2Diesel utilizing the equity method of
accounting pursuant to APB Opinion No. 18,
The
Equity Method of Accounting for Investments in Common Stock
.
The
Company has recorded a loss of $1,236,000 and $1,626,000 on its investment
in
H2Diesel for the years ended December 31, 2007 and December 31, 2006,
respectively. At December 31, 2007, the Company owned 5,850,000 shares of
H2Diesel common stock, which represented 32.2% of the outstanding common stock
of H2Diesel. H2Diesel is currently a development stage company that has not
yet
generated any revenues. In February 2008, the Company sold 180,000 shares of
H2Diesel common stock for net proceeds of approximately $777,000 and as of
the
date of this filing owns 5,670,000 shares of H2Diesel common stock. The Company
does not presently intend to pursue the manufacture and sale of a diesel biofuel
based on H2Diesel’s technology.
H2Diesel
is a development stage company with no operations. According to its SEC filings,
H2Diesel is obligated to pay $7.0 million in additional payments, including
$1.0
million on March 20, 2008, to the owner of the technology it has licensed and
in
turn has sublicensed to the Company. H2Diesel’s most recent quarterly report on
Form 10-QSB notes that these matters raise substantial doubt about H2Diesel’s
ability to continue as a going concern. If H2Diesel fails to make the license
payments as required, the Company could lose its sublicense of the technology
as
well as its entire investment in H2Diesel.
On
April
14, 2006, the Company entered into a sublicense agreement with H2Diesel, Inc.
The sublicense agreement was amended and restated on June 15, 2006, effective
as
of April 14, 2006. The Company entered into the sublicense agreement in
connection with (a) an investment agreement dated as of April 14, 2006 among
H2Diesel, two institutional investors and the Company; and (b) a management
agreement dated as of April 14, 2006 between H2Diesel and the Company. (Both
the
investment agreement and the management agreement were amended on June 15,
2006,
effective as of April 14, 2006, and H2Diesel terminated the management agreement
effective as of September 25, 2006.)
Under
the
amended investment agreement, on April 14, 2006: (a) H2Diesel issued to the
Company a total of 2,600,000 shares of its common stock and granted the Company
the right to purchase up to an additional 2,000,000 shares of its common stock
at an aggregate purchase price of $3,600,000 (the “Xethanol Option”); and (b)
the Company granted the institutional investors the right to require the Company
to purchase the 3,250,000 shares of H2Diesel’s common stock they owned in
exchange for 500,000 shares of the Company’s common stock (the “Put Right”).
H2Diesel had issued the 3,250,000 shares of its common stock to the
institutional investors on March 20, 2006, together with stock options to
purchase 2,000,000 shares of its common stock at an aggregate exercise price
of
$5,000,000 (the “Investor Option”). The institutional investors paid H2Diesel
$2,000,000 for the H2Diesel common stock and options. Of the 2,600,000 shares
of
H2Diesel common stock issued to the Company, 1,300,000 shares were issued as
an
inducement to enter into the Put Right. The fair value of these shares was
$793,815, based on a price per share of approximately $0.61, which the Company
credited to additional paid-in capital. Concurrently, on April 14, 2006, the
institutional investors exercised the Put Right, and the Company purchased
their
3,250,000 shares of H2Diesel common stock in exchange for 500,000 shares of
the
Company’s common stock. The Company’s 5,850,000 shares of H2Diesel common stock
represented 45.0% of the H2Diesel common stock then outstanding from April
14,
2006 until October 20, 2006.
On
October 20, 2006, H2Diesel completed a reverse merger in which Wireless
Holdings, Inc., a Florida shell corporation without any continuing operation
or
assets, caused its newly-formed, wholly owned subsidiary, Wireless Acquisition
Holdings Corp., a Delaware corporation, to be merged with and into H2Diesel.
The
common stock of H2Diesel is quoted on the OTC Bulletin Board under the symbol
HTWO.OB. Upon the effectiveness of the reverse merger, each share of H2Diesel
common stock outstanding immediately before the merger was converted into one
share of the common stock of Wireless Holdings, which subsequently changed
its
name to H2Diesel Holdings, Inc.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company estimated the fair value of its investment in H2Diesel as of April
14,
2006 as follows:
Net
assets of H2Diesel
|
|
$
|
988,747
|
|
Sublicense
agreement
|
|
|
1,000,000
|
|
Master
license agreement
|
|
|
3,436,253
|
|
Investment
in H2Diesel
|
|
$
|
5,425,000
|
|
The
sublicense agreement and the master license agreement are described
below.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized
financial information of H2Diesel Holdings, Inc. as of December 31, 2007
(estimated) and December 31, 2006 is as follows:
(In
thousands)
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Balance
Sheet:
|
|
(Unaudited)
|
|
|
|
Cash
|
|
$
|
1,644
|
|
$
|
1,032
|
|
Prepaid
expenses
|
|
|
85
|
|
|
70
|
|
Total
current assets
|
|
|
1,729
|
|
|
1,102
|
|
License
agreement
|
|
|
8,061
|
|
|
8,061
|
|
Total
assets
|
|
$
|
9,790
|
|
$
|
9,163
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
635
|
|
$
|
190
|
|
Accrued
dividend on preferred stock
|
|
|
210
|
|
|
-
|
|
Liability
under registration rights agreement
|
|
|
79
|
|
|
-
|
|
Note
payable-Xethanol Corp.
|
|
|
50
|
|
|
50
|
|
License
agreement payable, current portion
|
|
|
922
|
|
|
1,449
|
|
Total
current liabilities
|
|
|
1,896
|
|
|
1,689
|
|
|
|
|
|
|
|
|
|
License
agreement payable
|
|
|
4,006
|
|
|
4,805
|
|
Total
liabilities
|
|
|
5,902
|
|
|
6,494
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
1,625
|
|
|
-
|
|
Common
stock
|
|
|
18
|
|
|
17
|
|
Additional
paid-in capital
|
|
|
18,955
|
|
|
8,044
|
|
Deficit
accumulated during the development stage
|
|
$
|
(16,710
|
)
|
$
|
(5,392
|
)
|
Total
stockholders’ equity
|
|
|
3,888
|
|
|
2,669
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
9,790
|
|
$
|
9,163
|
|
Statement
of Operations:
|
|
For
the Year ended December 31, 2007
|
|
For
the Period from February 28, 2006 (Inception) to December 31,
2006
|
|
Research
and development expenses
|
|
$
|
758
|
|
$
|
84
|
|
General
and administrative expenses
|
|
|
7,510
|
|
|
4,329
|
|
Merger
expenses
|
|
|
-
|
|
|
340
|
|
Net
loss from operations
|
|
|
(8,268
|
)
|
|
(4,753
|
)
|
Other
expense
|
|
|
(250
|
)
|
|
-
|
|
Gain
on fair value adjustment
|
|
|
631
|
|
|
-
|
|
Interest
expense
|
|
|
(774
|
)
|
|
(639
|
)
|
Interest
income
|
|
|
50
|
|
|
-
|
|
Net
loss
|
|
$
|
(8,611
|
)
|
$
|
(5,392
|
)
|
Preferred
dividends
|
|
|
(2,707
|
)
|
|
-
|
|
Net
loss available to common shareholders
|
|
$
|
(11,318
|
)
|
$
|
(5,392
|
)
|
As
noted
above, the Company and H2Diesel entered into a management agreement and
sublicense agreement, each of which is dated April 14, 2006. The sublicense
agreement was amended and restated on June 15, 2006, effective April 14,
2006.
Under the management agreement, the Company was to manage the business of
H2Diesel for a term of one year. The Company received 1,300,000 of the 2,600,000
shares of H2Diesel common stock issued to the Company pursuant to the agreements
as a non-refundable fee for the Company’s services under the management
agreement. These shares had a fair value of $793,815, based on the Company’s
estimate of the fair value of the services to be performed, and were recorded
as
deferred revenue.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
August
25, 2006, H2Diesel notified the Company of its election to exercise its right
to
terminate the management agreement between the parties effective as of September
25, 2006. The Company had no financial obligation to H2Diesel resulting from
the
termination of the management agreement and retained the 1,300,000 shares of
H2Diesel common stock it received pursuant to the management agreement.
Accordingly, during the period from April 14, 2006 through December 31, 2006,
the Company has recorded management fee income of $436,598, net of the Company’s
45% equity portion of the management fee expense as recorded by H2Diesel during
the period, and is included in “Other income” in the Consolidated Statements of
Operations. As a consequence of the investors’ exercise of the Put Right, the
right to exercise the Investor Option was transferred to the Company. The
investors retained the right to purchase up to 500,000 of the shares that are
subject to the Investor Option if the Company exercises the transferred Investor
Option. The Company elected not to exercise the Company Option or the Investor
Option before they expired on August 15, 2006.
The
Company has capitalized its amended sublicense agreement with H2Diesel (as
discussed below) and has estimated its useful life to be ten years from the
Trigger Date (see below). The Company will amortize the value of the amended
sublicense agreement commencing on the Trigger Date. H2Diesel will begin to
amortize its master license agreement over its estimated useful life once
production begins. (As noted above, however, the Company does not presently
intend to pursue the manufacture and sale of a diesel biofuel based on
H2Diesel’s technology.)
At
December 31, 2006, after considering H2Diesel’s estimated value at December 31,
2006 and the illiquidity of the Company’s investment in H2Diesel, the Company
recognized a $2,322,000 loss in value of its investment in H2Diesel. The Company
has concluded that this is an “other than temporary decline” in its investment
and has recognized the loss in “Impairment loss - Investment in H2Diesel
Holdings, Inc.” in the Consolidated Statements of Operations in accordance with
APB18.
The
difference between the estimated value of the Company’s investment in H2Diesel
and the underlying net assets of H2Diesel represents the estimated fair value
of
the Company’s sublicense agreement.
On
October 5, 2007, the Company entered into a Stock Purchase and Termination
Agreement (the “Agreement”) with H2Diesel and its wholly owned subsidiary,
H2Diesel, Inc. (“H2 Sub”). On signing the Agreement, H2Diesel paid the Company a
$250,000 non-refundable deposit that was to apply towards the purchase price
described below. As described below, the Company subsequently terminated the
Agreement in accordance with its terms and retained the $250,000
deposit.
Under
the
Agreement, the Company agreed to sell to H2Diesel 5,460,000 shares of the common
stock of H2Diesel, or approximately 30.0% of H2Diesel’s outstanding common
stock. The purchase price was to be $7.0 million. In addition, the Company’s
agreements with H2Diesel were to be terminated at the closing, and a $50,000
loan from the Company to H2Diesel was to be deemed satisfied and cancelled.
The
closing was conditioned on the closing of a transaction in which H2Diesel
obtained a minimum of $10,000,000 of new financing and that if the closing
did
not occur on or before November 9, 2007, or a later date as the parties might
agree in writing, each party would have an independent right to terminate the
Agreement on 10 calendar days’ written notice to the other party.
The
Company had the right to retain the non-refundable deposit of $250,000 if the
Agreement was terminated other than as a result of a breach by the Company
of
its obligations under the Agreement. On or about November 13, 2007, the parties
agreed in writing to amend the Agreement to extend the closing date referenced
above from November 9, 2007 to November 23, 2007.
On
January 7, 2008, Xethanol provided H2Diesel and H2Sub with written notice to
terminate the Agreement effective January 17, 2008, as permitted under the
terms
of the Agreement. Upon termination, the Company retained the non-refundable
deposit of $250,000 and all shares of H2Diesel’s common stock that it owned, the
other agreements to which the Company and H2Diesel are parties remained in
effect and the $50,000 loan from Xethanol to H2Diesel remained outstanding.
The
Company recorded the $250,000 non-refundable deposit in other income for the
year ended December 31, 2007.
NOTE
9.
RESTRUCTURING
OF PERMEATE REFINING MORTGAGE NOTE
In
September 2001, the Company issued 1,000,000 shares of common stock to Robert
and Carol Lehman (the “Lehmans”), the owners of Permeate Refining, Inc.
(“Permeate”) as a “good faith” payment, pursuant to a non-
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
binding
letter of intent, in contemplation of the acquisition of Permeate. In July
2003,
the Company completed the transaction and acquired Permeate. The
Company, through its wholly-owned subsidiary, Xethanol One, LLC, also
acquired the real estate and certain production facilities associated with
Permeate’s operations from the Lehmans for a total price of $1,250,000, payable
as follows: (i) a down payment of $125,000, which was made on July 9, 2003,
and
(ii) a promissory note (the “Original Note”) for the balance of $1,125,000,
which bore interest at the simple interest rate of 9% per year with monthly
payments due on the first day of each month commencing August 1, 2003 until
June
1, 2006, at which time the entire balance owing on the promissory note was
to be
paid in full. The Company’s obligations under the Original Note were secured by
a mortgage on the Permeate real estate granted to Master’s Trust (an entity
formed by the Lehmans).
Pursuant
to a memorandum of agreement entered into on October 18, 2005 by the Company,
the Lehmans and Master’s Trust, the Company, the Lehmans and Master’s Trust
entered into a Mutual General Release on January 23, 2006. Under the Mutual
General Release, the Original Note was exchanged for a new promissory note
(the
“New Note”) in the amount of $243,395 issued by the Company to the Lehmans, and
the Company issued 135,000 shares of common stock to Master’s Trust in exchange
for the full release and satisfaction of the mortgage on the Permeate real
estate.
The
New
Note was payable on August 1, 2006 and was repaid in full at that date. Interest
was due monthly on the outstanding principal amount of the New Note at a rate
equal to 0.5% above the prime rate. The Company made monthly payments equal
to
$3,128 allocated between interest and principal based on the then-current prime
rate.
The
Company recorded the 135,000 shares of common stock issued to Master’s Trust at
a value of $432,000 based on the closing price of the common stock on January
23, 2006. At the time of the restructuring, the holders of the Original Note
held a significant percentage of the common stock of the Company then
outstanding. Therefore, the difference between the values of the New Note and
135,000 shares and the Original Note was recorded as an increase in
stockholders’ equity of $449,605.
NOTE
10.
SENIOR
SECURED ROYALTY INCOME NOTES
On
January 19, 2005, the Company completed a transaction with two institutional
investors, primarily to refinance a short-term note issued for the acquisition
of its Blairstown, Iowa facility. At the closing of that transaction, Xethanol
BioFuels issued senior secured royalty income notes in the aggregate principal
amount of $5,000,000 (the “January Notes”). A portion of the proceeds of the
financing was used to satisfy a $3,000,000 demand note held by the First
National Bank of Omaha. The Company used the remaining proceeds to refurbish
and
upgrade capacity at the Blairstown facility, fund start-up activities at the
facility and related working capital requirements, and pay legal and other
professional fees related to the financing. The January Notes provided for
interest to be paid semi-annually at the greater of 10% per year or 5% of
revenues from sales of ethanol, distillers wet grain and any other co-products,
including xylitol, at the Blairstown facility, with the principal becoming
due
in January 2012. The Company had the right to require the holders of the January
Notes, from and after January 2008, to surrender the January Notes for an amount
equal to 130% of the outstanding principal, plus unpaid accrued interest
thereon. The holders of the January Notes had the right to convert the January
Notes into shares of common stock of the Company at any time at a conversion
price equal to $4.00 per share (equivalent to 1,250,000 shares of common
stock).
On
August
8, 2005, the Company completed a second transaction with the institutional
investors. At the closing of this transaction, the Company’s subsidiary that
owns the Blairstown facility issued senior secured royalty notes in the
aggregate principal amount of $1,600,000 (the “August Notes”). The Company used
the proceeds from this financing for working capital and general corporate
purposes. The terms of this financing provided for interest to be paid
semi-annually at the greater of 10% per year or 1.6% of revenues from sales
of
ethanol, distillers wet grain and any other co-products, including xylitol,
at
the Blairstown facility, with the principal becoming due in August 2012. The
Company had the right to require the holders of the August Notes, from and
after
August 2008, to surrender the August Notes for an amount equal to 130% of the
outstanding principal, plus unpaid accrued interest thereon. The holders of
the
August Notes had the right to convert the August Notes into shares of common
stock of the Company at any time at a conversion price equal to $4.00 per share
(equivalent to 400,000 shares of common stock).
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
April
21, 2006, the holders of the January Notes and August Notes” (together, the
“Notes”) exercised their rights to convert the Notes into shares of common stock
of the Company. The principal amounts of the Notes were convertible at a price
equal to $4.00 per share.
In
connection with the conversions, the Company issued 1,250,000 shares of common
and a three-year warrant to purchase 250,000 shares of common stock at a
purchase price of $12.50 to the holders of the January Notes and 400,000 shares
and a three-year warrant to purchase 80,000 shares of common stock at a purchase
price of $12.50 to the holders of the August Notes. The holders of the Notes
also agreed to waive accrued and unpaid interest from January 1, 2006 through
April 12, 2006 totaling $203,500.
A
net
expense of $1,967,000 related to issuance of the warrants and the waiver of
interest is reflected in “Other expense” in the 2006 Consolidated Statements of
Operations as “Loss on Royalty Note Conversion.”
NOTE
11.
FUSION
CAPITAL TRANSACTION
On
October 18, 2005, the Company entered into a common stock purchase agreement
with Fusion Capital Fund II, LLC (“Fusion”), pursuant to which Fusion agreed,
under certain conditions, to purchase up to $20 million of Company common stock
over a 25-month period, subject to earlier termination at the Company’s
discretion. Under the terms of the common stock purchase agreement, the Company
issued 303,556 shares to Fusion as a commitment fee on October 18, 2005.
Pursuant to the terms of a registration rights agreement dated as of October
18,
2005, the Company agreed to file a registration statement with the SEC covering
these 303,556 shares and 5,000,000 shares that could be issued to Fusion under
the purchase agreement. On December 28, 2005, the registration statement was
declared effective and the Company had the right to sell to Fusion up to $40,000
of the Company’s common stock each trading day during the term of the purchase
agreement, subject to certain limitations.
During
the year ended December 31, 2006, the Company sold 1,894,699 shares of common
stock to Fusion for total gross proceeds of $9,846,016. There have been no
sales
of common stock to Fusion since April 20, 2006. The agreement with Fusion
terminated on November 18, 2007.
In
January 2006, the Company issued 75,000 warrants to a group of consultants
as
compensation for introducing, arranging and negotiating the financing with
Fusion. The Company also agreed to pay 2.38% of the gross funds received from
Fusion to these consultants as further compensation. The amounts related to
the
warrants and fees paid to these consultants have been recorded as a reduction
to
additional paid-in-capital.
NOTE
12.
PRIVATE
OFFERINGS
On
April
13, 2006, the Company completed the closing of two separate private offerings
of
the Company’s common stock.
Under
the
first offering, the Company sold a total of 6,697,827 shares of its common
stock
at a purchase price of $4.50 per share to purchasers that qualified as
accredited investors, as defined in Regulation D promulgated under the
Securities Act. Gross proceeds from the offering were $30,139,864. The Company
also issued warrants to purchase 1,339,605 shares of common stock at a purchase
price of $4.50 per share and warrants to purchase 669,846 shares of common
stock
at a purchase price of $6.85 per share. The warrants have an expiration date
of
April 12, 2009. In connection with this offering, the Company agreed to file
a
registration statement with the SEC. Under the terms of this agreement, because
the registration statement was not declared effective by the SEC by April 13,
2007, the holders of the warrants may elect to use a cashless exercise. The
registration statement became effective on August 8, 2007.
Under
the
second offering, the Company sold a total of 888,889 shares of its common stock
at a purchase price of $4.50 per share to a purchaser that qualified as an
accredited investor, as defined in Regulation D promulgated under the Securities
Act. Gross proceeds from the offering were $4,000,000. The Company also issued
warrants to purchase 177,778 shares of common stock at a purchase price of
$4.50
per share and warrants to purchase 88,889
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
shares
of
common stock at a purchase price of $6.85 per share. The warrants have an
expiration date of April 12, 2009.
In
connection with these offerings, the Company incurred cash transaction expenses
of $2,503,143, including placement agent fees. The Company also issued, as
additional compensation to the placement agent, warrants to purchase 606,938
shares of common stock at a purchase price of $4.50 per share.
NOTE
13.
INCENTIVE
COMPENSATION PLAN
On
February 2, 2005, following the completion of the reverse merger, the Company’s
board of directors adopted and approved the 2005 Incentive Compensation Plan
(the “Plan”), which was subsequently approved by the Company’s shareholders on
March 29, 2005.
The
terms
of the Plan provide for grants of stock options, stock appreciation rights
or
SARs, restricted stock, deferred stock, other stock-related awards and
performance awards that may be settled in cash, stock or other property. The
persons eligible to receive awards under the Plan are the officers, directors,
employees and independent contractors of the Company and its subsidiaries.
Until
August 10, 2006, under the Plan, the total number of shares of the Company’s
common stock that were subject to the granting of awards under the Plan was
equal to 2,000,000 shares, plus the number of shares with respect to which
awards previously granted thereunder are forfeited, expire, terminate without
being exercised or are settled with property other than shares, and the number
of shares that are surrendered in payment of any awards or any tax withholding
requirements. On August 10, 2006, at the annual meeting of stockholders, the
stockholders voted to amend the Plan to (i) increase the number of shares of
common stock available for awards under the Plan from 2,000,000 to 4,000,000
and
(ii) eliminate a provision limiting to 250,000 the number of shares with respect
to which each type of award may be granted to any participant during any fiscal
year.
The
total
number of shares of common stock issuable on exercise of options granted on
December 7, 2006, February 1, 2007 and June 19, 2007 exceeded the number of
shares then available under the Plan by 1,652,070 shares (the “excess options”).
The excess options were granted expressly subject to subsequent stockholder
approval of an increase in the 4,000,000 limit in the Plan to cover those
options. Specifically, on December 7, 2006, options to purchase 2,415,000 shares
of the Company’s common stock were granted under the Plan to some of the
Company’s officers, directors, employees and consultants. On that date, before
the options were granted, there were 1,677,930 shares of common stock remaining
available for awards under the Plan. Therefore, the number of shares issuable
upon exercise of those options exceeded the number then available under the
Plan
by 737,070 shares, which represents approximately 30.5% of the shares issuable
upon exercise of those options. Accordingly, the compensation committee of
the
Company’s board of directors has determined that each of those excess options
was subject, on a pro rata basis, to approval by the Company’s stockholders of
an amendment to the Plan to increase the number of shares available for awards
under the Plan to cover those excess options. Subsequently, on February 1,
2007,
options under the Plan to purchase 865,000 shares were granted to the Company’s
new chief financial officer and to two new directors. On June 19, 2007, an
option under the Plan to purchase 50,000 shares was granted to the Company’s new
chief operating officer. The compensation committee determined that each of
those options was subject to approval by the Company’s stockholders of an
amendment to the Plan to increase the number of shares available for awards
under the Plan to cover those excess options. On February 12, 2008, at the
conclusion of the Company’s annual meeting, the Company’s stockholders approved
an amendment to the Plan to increase the number of shares of common stock
available for issuance under the plan from 4,000,000 to 6,500,000, which covered
all of the options granted subject to stockholder approval.
During
the years ended December 31, 2007 and 2006, options to purchase 915,000 and
4,440,000 shares of common stock, respectively, were granted to executive
officers, employees and independent contractors. These options vest up to three
years from the date of grant and are exercisable over periods ranging from
three
to ten years from the date of grant with exercise prices ranging from $1.19
to
$11.04 per share. During the years ended December 31, 2007 and 2006, options
to
purchase 100,000 and 490,000 shares of common stock were forfeited,
respectively, by various directors, employees and independent contractors.
The
fair value of options granted during the years ended December 31, 2007 and
2006,
net of forfeitures, is $1,666,000 and $7,725,000, respectively, and was
determined at
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
their
grant date using a Black-Scholes option pricing model and is being recorded
as
compensation expense over their respective vesting periods. The Company recorded
net compensation expense for outstanding stock options of $3,552,000 and
$5,483,000 for the years ended December 31, 2007 and 2006,
respectively.
As
of
December 31, 2007 and 2006, options to purchase 5,245,000 and 4,430,000 shares
of common stock were outstanding under the 2005 Plan, respectively. At December
31, 2007 and 2006, the weighted average exercise price of outstanding options
is
$3.36 and $3.47, respectively.
A
summary
of stock option activity under the 2005 Plan for the years ended December 31,
2007 and 2006 is as follows:
|
|
2007
|
|
2006
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at beginning of year
|
|
|
4,430,000
|
|
$
|
3.47
|
|
|
480,000
|
|
$
|
3.95
|
|
Options
granted
|
|
|
915,000
|
|
|
2.70
|
|
|
4,440,000
|
|
|
3.75
|
|
Options
exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Options
forfeited
|
|
|
(100,000
|
)
|
|
2.44
|
|
|
(490,000
|
)
|
|
6.46
|
|
Outstanding
at end of year
|
|
|
5,245,000
|
|
$
|
3.36
|
|
|
4,430,000
|
|
$
|
3.47
|
|
Exercisable
at end of year
|
|
|
4,762,500
|
|
$
|
3.43
|
|
|
2,305,000
|
|
$
|
3.75
|
|
A
summary
of outstanding stock options at December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
Options
Exercisable
|
|
Number
Outstanding
|
|
Range
of
Exercise
Price
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Remaining
Life
In
Years
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
4,145,000
|
|
$
|
1.19
- $3.99
|
|
$
|
2.68
|
|
|
5.60
|
|
|
3,662,500
|
|
$
|
2.68
|
|
805,000
|
|
|
4.00
- 5.56
|
|
|
4.82
|
|
|
2.51
|
|
|
805,000
|
|
|
4.82
|
|
295,000
|
|
|
5.57
- 11.04
|
|
|
8.97
|
|
|
2.05
|
|
|
295,000
|
|
|
8.97
|
|
5,245,000
|
|
|
|
|
$
|
3.36
|
|
|
4.93
|
|
|
4,762,500
|
|
$
|
3.43
|
|
The
weighted average fair value of stock options is estimated at the grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
Year
Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
Risk-free
interest rate
|
|
|
4.84
|
%
|
|
4.55
|
%
|
Expected
life of options
|
|
|
9.73
|
|
|
6.20
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Expected
volatility
|
|
|
55.0
|
%
|
|
55.0
|
%
|
NOTE
14.
WARRANTS
During
the year ended December 31, 2007, the Company issued no warrants. During the
year ended December 31, 2006, the Company issued warrants to purchase 4,323,178
shares of the Company’s common stock. At December 31, 2007 and 2006, there were
warrants to purchase 4,131,146 and 5,197,776 shares of common stock, with
weighted average exercise prices of $5.73 and $5.06, respectively.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
fair
value of warrants issued as compensation for services rendered during the years
ended December 31, 2007 and 2006 was estimated at the grant date using the
Black-Scholes option pricing model and recorded as expense over their respective
vesting periods. During the years ended December 31, 2007 and 2006, the Company
recorded compensation expense related to warrants granted for services rendered
of $421,426 and $1,151,714, respectively. During the year ended December 31,
2006, the Company also recorded a loss on royalty note conversion of $1,966,712
and a $203,500 reduction of interest payable related to the issuance of warrants
issued in the debt conversion.
The
weighted average fair value of warrants issued during the years ended December
31, 2007 and 2006 was estimated at the grant date using a Black-Scholes
option-pricing model with the following weighted average
assumptions:
|
|
Year
Ended
December
31,
|
|
|
|
2007
|
|
2006
|
|
Risk-free
interest rate
|
|
|
-
|
|
|
4.79
|
%
|
Expected
life of options
|
|
|
-
|
|
|
3.47
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
0
|
%
|
Expected
volatility
|
|
|
-
|
|
|
55.0
|
%
|
During
the year ended December 31, 2007, warrants to purchase 111,455 shares of common
stock were exercised for total cash proceeds of $224,000. During the year ended
December 31, 2006, warrants to purchase 311,428 shares of common stock were
exercised for total cash proceeds of $945,120.
A
summary
of stock warrant activity is as follows:
|
|
2007
|
|
2006
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding,
beginning of year
|
|
|
5,197,776
|
|
$
|
5.06
|
|
|
1,456,026
|
|
$
|
2.52
|
|
Issued
to investors-Series A and B
|
|
|
-
|
|
|
|
|
|
2,276,118
|
|
|
5.28
|
|
Issued
to placement agents
|
|
|
-
|
|
|
|
|
|
606,938
|
|
|
4.50
|
|
Issued
for facility acquisition
|
|
|
-
|
|
|
|
|
|
300,000
|
|
|
4.00
|
|
Issued
for services rendered
|
|
|
-
|
|
|
|
|
|
810,122
|
|
|
7.01
|
|
Issued
for royalty note conversion
|
|
|
-
|
|
|
|
|
|
330,000
|
|
|
12.50
|
|
Exercised
|
|
|
(111,455
|
)
|
|
2.00
|
|
|
(311,428
|
)
|
|
3.03
|
|
Forfeited
|
|
|
(955,175
|
)
|
|
2.28
|
|
|
(270,000
|
)
|
|
8.21
|
|
Outstanding,
end of year
|
|
|
4,131,146
|
|
$
|
5.78
|
|
|
5,197,776
|
|
$
|
5.06
|
|
Exercisable,
end of year
|
|
|
4,131,146
|
|
$
|
5.78
|
|
|
4,797,776
|
|
$
|
5.03
|
|
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes warrant information as of December 31,
2007:
Number
of
Warrants
|
|
Exercise
Prices
|
|
Expiration
Date
|
|
35,312
|
|
$
|
3.75
|
|
|
2008
|
|
325,000
|
|
$
|
4.00
|
|
|
2008-2009
|
|
2,217,099
|
|
$
|
4.50
|
|
|
2009
|
|
120,000
|
|
$
|
5.25
|
|
|
2010-2011
|
|
20,000
|
|
$
|
5.50
|
|
|
2009
|
|
958,735
|
|
$
|
6.85
|
|
|
2009
|
|
125,000
|
|
$
|
8.32
|
|
|
2011
|
|
330,000
|
|
$
|
12.50
|
|
|
2009
|
|
4,131,146
|
|
$
|
5.78
|
|
|
|
|
NOTE
15.
INCOME
TAXES
As
of
December 31, 2007 and 2006, the Company had unused net operating loss
carryforwards approximating $28.0 million and $15.5 million, respectively,
which
may be applied against future taxable income. The net operating loss
carryforwards expire in the years 2020 through 2026. Portions of these
carryforwards may be subject to annual limitations, including Section 382 of
the
Internal Revenue Code. At December 31, 2007 and December 31, 2006, respectively,
the deferred tax assets (representing the potential future tax savings) related
to the carryforwards were as follows:
|
|
2007
|
|
2006
|
|
Deferred
tax asset
|
|
$
|
11,033,000
|
|
$
|
6,263,000
|
|
Less:
Valuation allowance
|
|
|
11,033,000
|
|
|
6,263,000
|
|
Net
deferred tax asset
|
|
$
|
0
|
|
$
|
0
|
|
As
a
result of the uncertainty that net operating loss carryforwards will be used
in
the foreseeable future, a 100% valuation allowance had been provided. At
December 31, 2007 and 2006, a wholly owned subsidiary had an unused net
operating loss carry forward of approximately $226,000 that may be applied
against future taxable income. The net operating loss carry forward expires
in
2023. A 100% valuation allowance has been provided for against this amount.
NOTE
16.
MAJOR
CUSTOMER
Since
July 1, 2005, all of the Company’s ethanol sales have been to one customer. The
Company has an exclusive marketing agreement with this customer. This customer
represented 91% and 94% of the Company’s net sales for the years ended December
31, 2007 and 2006, respectively.
NOTE
17.
JOINT
VENTURE
Organization
of CoastalXethanol LLC
In
April
2006, the Company entered into a letter of intent with Coastal Energy
Development, Inc., a Georgia corporation (“CED”), to jointly develop plants for
the production of ethanol in the State of Georgia and in the South Carolina
counties in which the cities of Charleston and Georgetown are located. In April
2006, the Company formed a subsidiary, CoastalXethanol LLC (“CoastalXethanol”),
for the purpose of implementing the projects contemplated by that letter of
intent. CoastalXethanol was a joint venture with Coastal Energy Development,
Inc. (“CED”). The Company originally acquired an 80% membership interest in
CoastalXethanol for a capital contribution of $40,000, and CED acquired a 20%
membership interest in CoastalXethanol for a capital contribution of $10,000.
In
connection with the formation of CoastalXethanol, the Company issued to CED
a
warrant to purchase 200,000 shares of the Company’s Common Stock at a purchase
price of $6.85 per share that first became
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
exercisable
on May 30, 2007 and was exercisable until May 30, 2010. The fair value of this
warrant was $1,011,420 and was amortized over its one-year vesting
period.
On
August
23, 2006, CoastalXethanol purchased the assets of a former pharmaceutical
manufacturing complex located in Augusta, Georgia from Pfizer, Inc. The
purchased assets included 40 acres of land, buildings, machinery and equipment.
Under the purchase agreement, CoastalXethanol, through its newly-formed,
wholly-owned subsidiary, Augusta BioFuels, LLC, paid approximately $8.4 million
in cash for the facility. The Company provided the cash to acquire the facility.
The
organizational agreement of CoastalXethanol permitted CoastalXethanol to advance
to CED funds for working capital to the extent necessary for CED to provide
the
services it was required to perform under the agreement. Those advances bore
interest at the prime rate, and were repayable from any distributions by
CoastalXethanol to CED in respect to CED’s membership interest in
CoastalXethanol. As of December 31, 2007 and 2006, Xethanol had advanced
$630,000 and $567,000, respectively, to CoastalXethanol for the purposes of
funding working capital advances to CED. At December 31, 2006, the
CoastalXethanol established a 100% reserve against the $567,000 receivable.
In
2007, CoastalXethanol wrote off 100% of the outstanding loans, and any interest
thereon, in conjunction with the CED settlement. The Company consolidates the
operations of CoastalXethanol.
On
March
5, 2007, the Company, along with CoastalXethanol, initiated an action against
CED in the Supreme Court of the State of New York. On April 3, 2007, CED filed
an answer and counterclaim. On September 14, 2007, the Company reached a
settlement with CED and agreed to pay CED $400,000 in exchange for CED’s 20%
interest in CoastalXethanol.
The
parties executed releases and replaced the warrant described above with a
warrant to purchase 200,000 shares of the Company’s common stock that is
exercisable at an exercise price of $6.85 per share through May 30,
2009.
The
payment and purchase of CED’s 20% interest in CoastalXethanol was completed on
September 24, 2007, and CoastalXethanol became a wholly-owned subsidiary of
the
Company.
NOTE
18.
RELATED
PARTY TRANSACTIONS
In
February 2005, the Company entered into a Consulting Services Agreement with
Jeffrey S. Langberg, then a major stockholder and a member of the Company’s
Board of Directors, pursuant to which Mr. Langberg agreed to provide the Company
general business advisory services. Under this agreement, the Company paid
Mr.
Langberg a monthly consulting fee of $15,000 and Mr. Langberg was eligible
to
receive awards under the Company’s 2005 Incentive Compensation Plan. On June 12,
2006, Mr. Langberg resigned as a director but continued to serve as an advisor
to the Board of Directors of the Company until December 2006. In October 2004,
the Company began sharing office in New York City with other affiliated
companies under a sublease with Xethanol Management Services, LLC, which is
a
single member limited liability company controlled by Mr. Langberg. For the
years ended December 31, 2007 and 2006, total office rent expense plus
reimbursements of other costs of $217,000 and $132,000, respectively, was paid
under this arrangement. As of December 1, 2006, the Company became the sole
occupant of this office space.
On
June
12, 2006, the Company issued to Mr. Langberg an option to purchase 250,000
shares of common stock at an exercise price of $8.32 per share vesting upon
the
date on which NewEnglandXethanol, LLC has approved and commenced its initial
project. For these purposes, the project shall have been approved and commenced
when (a) the project has been approved, (b) financing for construction of the
project has been obtained and closed and (c) the chief executive officer of
the
Company has notified the Board of Directors of the Company or the compensation
committee thereof that conditions (a) and (b) have been met, which notification
shall not be unreasonably withheld or delayed. The fair value of this option
was
$989,050 and was to be charged to operations when vested.
On
September 25, 2006, the Company terminated Mr. Langberg’s consulting agreement
effective immediately. Pursuant to the termination agreement with Mr. Langberg
executed on December 20, 2006, the Company agreed to pay Mr. Langberg $235,000,
with $60,000 payable in 2006 and $175,000 payable in 2007. With regard to this
obligation, the Company recognized $235,000 as compensation expense for the
year
ended December 31, 2006. Pursuant to the termination agreement, the Company
and
Mr. Langberg agreed to cancel the 250,000 warrants granted June 12, 2006, and
issue to Mr. Langberg a fully vested five-year warrant to purchase 125,000
shares of the
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Company’s
common stock at an exercise price of $8.32 and a grant date of December 20,
2006. With regard to this warrant, the Company recognized an expense of $60,000
based on a fair value calculation. During the year ended December 31, 2006,
Mr.
Langberg received additional consulting fees of $135,000 was paid a performance
bonus of $400,000, received health benefits with a value of $27, 000 and
received a payment of $4,000 accrued from prior years. Total compensation
expense recognized by the Company during 2006 with regard to Mr. Langberg was
$858,000 and actual payments made to Mr. Langberg during 2006 were $584,000.
Pursuant to the termination agreement, the Company paid Mr. Langberg consulting
fees of $190,000 during the year ended December 31, 2007, which fees were
recorded in compensation expense during the year ended December 31,
2006.
On
August
25, 2006, the Company and Mr. d’Arnaud-Taylor, the Company’s former Chairman,
President and Chief Executive Officer, entered into a termination agreement
under which the Company and Mr. d’Arnaud-Taylor agreed that Mr.
d’Arnaud-Taylor’s employment by, and his position as an officer of, the Company
was terminated effective as of August 22, 2006 (the “Termination Date”). The
agreement provided that Mr. d’Arnaud-Taylor would continue to serve as a
director of the Company for the remainder of his current term.
Under
the
termination agreement, the Company continued to pay Mr. d’Arnaud-Taylor his
salary and maintain his employment benefits as in effect immediately prior
to
the Termination Date through December 31, 2006, and the Company paid Mr.
d’Arnaud-Taylor $100,000 in severance on the three-month anniversary of the
Termination Date. The agreement provides that, subject to Mr. d’Arnaud-Taylor’s
compliance with the terms of the agreement, the exercise periods of the options
to purchase 250,000 shares of common stock at an exercise price of $5.56 per
share and 450,000 shares of common stock at an exercise price of $8.32 per
share
that were granted to Mr. d’Arnaud-Taylor on February 28, 2006 and June 12, 2006,
respectively, are extended until the third anniversary of the Termination Date
with respect to one half of each option. The options are otherwise terminated.
The agreement also provides that the Company will reimburse Mr. d’Arnaud-Taylor
for any reasonable and appropriately documented business expenses he may have
incurred prior to the Termination Date in the performance of his duties as
an
employee of the company and that Mr. d’Arnaud-Taylor will be entitled to
coverage under the Company’s group medical and dental plans to the extent
provided in and subject to the terms and conditions of the Company’s standard
policy.
Under
the
termination agreement, Mr. d’Arnaud-Taylor agreed to provide such advisory and
consulting services as the Company may reasonably request during the three
months after the Termination Date to permit the orderly transfer of his duties
to other company personnel and not to solicit employees of the company during
the period ending on the first anniversary of the Termination Date. The
agreement also provides for the Company and Mr. d’Arnaud-Taylor to mutually
release each other from all claims arising prior to the date of the agreement,
other than claims based on the released party’s willful acts, gross negligence
or dishonesty and, with respect to Mr. d’Arnaud-Taylor’s release of the Company,
claims vested before the date of the agreement for benefits under the Company’s
employee benefit plans and claims for indemnification for acts as an officer
of
the Company.
On
August
25, 2006, the Company and Mr. d’Arnaud-Taylor entered into a one year consulting
agreement under which Mr. d’Arnaud-Taylor agreed to provide such consulting and
advisory services as the Company may reasonably request from time to time.
During the term of the agreement, the Company was to pay Mr. d’Arnaud-Taylor
$15,000 per month (payable monthly in arrears) and reimburse him for any
reasonable and appropriately documented business expenses he may incur in the
performance of his duties under the agreement. The agreement provided that
Mr.
d’Arnaud-Taylor was not required to dedicate more than eight days in any
calendar month to the performance of services under the agreement and that
if he
did provide services for more than eight days in any calendar month, the Company
would pay him an additional $2,000 for each additional day or part thereof.
The
consulting agreement had a term of one year, subject to earlier termination
by
the Company if Mr. d’Arnaud-Taylor failed to perform his duties under the
agreement. Upon the termination of the agreement, the Company would have had
no
obligation to Mr. d’Arnaud-Taylor other than payment obligations accrued before
the termination date, which would have been paid within 15 days of the
termination date. The agreement included covenants by Mr. d’Arnaud-Taylor
regarding confidentiality, competition and solicitation of the Company’s
customers, suppliers and employees. This agreement was terminated effective
December 1, 2006.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 1, 2006, the Company entered into a consulting agreement with Mr.
d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide strategic
advice to the Company’s Chief Executive Officer. During the term of the
agreement, the Company agreed to pay Mr. d’Arnaud-Taylor $15,000 per month
(payable monthly in advance) and reimburse him for reasonable and appropriately
documented business expenses he incurred in the performance of his duties under
the agreement. The term of the agreement expired on November 25, 2007. The
agreement includes covenants by Mr. d’Arnaud-Taylor regarding
confidentiality.
During
2006, the Company recognized $406,000 in cash compensation expense, and actual
payments made to Mr. d’Arnaud-Taylor during 2006 were $315,000. The Company also
recognized expense of $1,344,000 related to options granted to Mr.
d’Arnaud-Taylor as a result of his employment with Company and $170,000 related
to options granted to Mr. d’Arnaud-Taylor as a result of his membership on the
Company’s board of directors.
During
2007, the Company recognized $165,000 in cash compensation expense, and actual
payments made to Mr. d’Arnaud-Taylor during 2007 were $256,000.
William
P. Behrens, a director of the Company, is the Vice Chairman of Northeast
Securities, Inc., a multi-line financial services firm serving both
institutional and individual clients. Under a placement agent agreement dated
as
of February 22, 2006 between Northeast and the Company, Northeast acted as
the
Company’s placement agent in connection with the private offering of the Company
common stock and warrants to purchase common stock consummated on April 13,
2006. In consideration of Northeast’s services, on April 13, 2006 the Company
paid Northeast $1,928,397 in cash and issued to Northeast and its designees
warrants to purchase 606,938 shares of the Company common stock at an exercise
price $4.50 per share, exercisable at any time until April 12, 2009. The Company
issued warrants to purchase 35,000 shares of common stock to Mr. Behrens as
a
designee of Northeast. The warrants may be exercised on a “cashless” basis at
any time and are otherwise exercisable on the same terms and conditions as,
and
are entitled to registration rights on the same terms as, the warrants issued
to
the investors in the April 2006 private placement.
On
October 1, 2006, the Company entered into an advisory agreement with Northeast
under which Northeast agreed, on a non-exclusive basis, to assist the Company
in
various corporate matters including advice relating to general capital raising,
mergers and acquisition matters, recommendations relating to business operations
and strategic planning. In consideration of these services, the Company agreed
to pay Northeast an advisory fee of $10,000 per month during the term of the
agreement and to reimburse Northeast for all necessary and reasonable
out-of-pocket costs and expenses it incurred in the performance of its
obligations under the agreement. The scheduled term of the agreement was one
year, subject to earlier termination by the Company in the event of a material
breach by Northeast of any of its obligations under the agreement. In May 2007,
the Company informally amended its agreement with Northeast to eliminate the
advisory fee of $10,000 per month, although Northeast continued to perform
advisory services for the Company. On July 25, 2007, the Company formally agreed
with Northeast to terminate the agreement.
Pursuant
to the agreement, during 2007 and 2006, the Company paid and recorded consulting
expense of $40,000 and $30,000, respectively. In addition, Northeast received
a
$5,100 fee in connection with the Company’s purchase of auction rate securities
during 2007.
The
Company has an arrangement with one of its advisory board members to act as
the
Company’s chief technology strategist, and the Company pays him a monthly
consulting fee of $8,000. For the years ended December 31, 2007 and 2006,
$101,000 and $96,000, respectively, had been paid under this arrangement. During
March 2006, the Company also granted this individual warrants to acquire 25,000
shares of common stock at an exercise price of $4.50.
Accounts
payable to all related parties as of December 31, 2007 and 2006 were $0 and
$318,000, respectively.
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
19.
LEGAL
PROCEEDINGS
The
Company is a party to the lawsuits described below. An adverse result in these
lawsuits could have a material adverse effect on the Company’s business, results
of operations and financial condition. In connection with the class action
lawsuit described below (and a derivative action that has been dismissed),
the
Company accrued $200,000 at December 31, 2006 to cover the deductible amount
it
is required to pay under its director and officer insurance policy for those
claims.
Through
December 31, 2007, the Company has paid $200,000 in legal fees, has accrued
a
liability for the approximately $346,000 in additional legal fees and has
recorded a $300,000 receivable from its insurance carriers, which is the amount
the insurance carriers have agreed to pay under the tentative settlement
described below.
Class
Action Lawsuit
.
In October 2006, a shareholder class action complaint was filed in the United
States District Court for the Southern District of New York, purportedly brought
on behalf of all purchasers of Xethanol common stock during the period January
31, 2006 through August 8, 2006. The complaint alleges, among other things,
that
the Company and some of its former officers and directors made materially false
and misleading statements regarding the Company’s operations, management and
internal controls in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5. The individual defendants are Lawrence
S.
Bellone, a former director, Executive Vice President, Corporate Development,
principal accounting officer and Chief Financial Officer; Christopher
d’Arnaud-Taylor, a former director, Chairman, President and Chief Executive
Officer; and Jeffrey S. Langberg, a former director. The plaintiffs seek, among
other things, unspecified compensatory damages and reasonable costs and
expenses, including counsel fees and expert fees. Six nearly identical class
action complaints were thereafter filed in the same court, all of which have
been consolidated into one action, In re Xethanol Corporation Securities
Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.) (the Class Action”). The plaintiffs
filed their amended consolidated complaint on March 23, 2007. The defendants
filed a motion to dismiss the amended complaint on April 23, 2007. On September
7, 2007, the District Court denied that motion.
On
November 28, 2007, the defendants, including the Company, reached an agreement
in principle with plaintiffs’ lead counsel to settle the Class Action. The
tentative settlement agreement, which was reached during a mediation overseen
by
a retired United States District Court Judge, calls for the payment of $2.8
million to the plaintiffs, of which the Company will pay $400,000 and the
Company’s insurance carriers will pay $2.4 million. The agreement remains
subject to final negotiated writings executed by the parties and approval by
the
United States District Court for the Southern District of New York.
Global
Energy and Management, LLC Lawsuit
.
In
December 2007, Global Energy and Management, LLC (“Global Energy”) filed an
action in the federal court for the Southern District of New York against the
Company and nine current or former officers, directors and employees. The
lawsuit is entitled Global Energy and Management v. Xethanol Corporation, Mr.
d’Arnaud-Taylor; Mr. Langberg; Mr. Bellone; Louis B. Bernstein, a former
President, Interim Chief Executive Officer and director; David Ames, our Chief
Executive Officer, President and a director; Thomas J. Endres, our Chief
Operating Officer, Executive Vice President, Operations; Robin Buller, a former
Executive Vice President - Strategic Development; David Kreitzer, a former
employee; and John Murphy, a former consultant, 07 Civ. 11049 (NRB) (S.D.N.Y.).
The lawsuit alleges fraud by the defendants in connection with Global Energy’s
alleged investment of $250,000 in NewEnglandXethanol, LLC, a joint venture
of
the Company and Global Energy. On March 19, 2008, Global Energy served its
second amended complaint on the Company. Based on an alleged investment of
$250,000, Global Energy seeks more than $10,000,000 in damages plus pre-judgment
interest and costs. Management has instructed counsel to vigorously represent
and defend the Company’s interests in this litigation.
The
Company was also a party to two other lawsuits that were settled in 2007 as
described below.
Repurchase
of CED’s Interest in Joint Venture; Settlement of CED Lawsuit.
On March
5, 2007, the Company, along with CoastalXethanol, initiated an action against
CED in the Supreme Court of the State of New York. On April 3, 2007, CED filed
an answer and counterclaim. On September 14, 2007, the Company reached a
settlement with CED and agreed to pay CED $400,000 in exchange for CED’s 20%
interest in CoastalXethanol. The parties
XETHANOL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
executed
releases, the payment and purchase of CED’s 20% interest in CoastalXethanol was
completed on September 24, 2007, and CoastalXethanol became a wholly-owned
subsidiary of the Company.
Settlement
of the Rolls lawsuit.
On July 29, 2005, William C. Roll, as trustee for the Hope C. Roll Trust, and
Hope C. Roll, as trustee for the William C. Roll Trust, commenced an action
against the Company in the Circuit Court of the Ninth Judicial Circuit, in
and
for Orange County, Florida, Case No. 2005-CA-6351. The complaint alleged that
the plaintiffs are beneficial owners of 300,000 shares of common stock of a
corporation of the same name that was organized under the laws of Delaware
on
January 24, 2000 (“Old Xethanol”). In connection with the February 2, 2005
reverse merger, Zen Pottery Equipment, Inc., a publicly traded Colorado
corporation (“Zen”), organized Zen Acquisition Corp. as a wholly owned Delaware
subsidiary (“Zen Acquisition”). The complaint further alleged that the Rolls
were entitled to have issued in their names the number of shares of the
Company’s common stock to which they are entitled under the February 2, 2005
merger agreement among Old Xethanol, Zen and Zen Acquisition. The complaint
sought a declaratory judgment to that effect and the transfer to the plaintiffs
of these shares of common stock, or, in the alternative, damages for breach
of
contract, conversion and breach of fiduciary duty. The complaint also sought
punitive damages against the Company. The Company filed a notice of removal
on
August 29, 2005, and the case was removed to the United States District Court
for the Middle District of Florida, Orlando Division (Case No.
6:05-CV-1263-ORL-28-JGG). On May 2, 2007, the court entered an order finding
the
Company liable to the Rolls on their claim for conversion and breach of
fiduciary duty. The parties entered into a settlement agreement on May 10,
2007
in which the Company agreed to pay $1.0 million to the plaintiffs. The Company’s
directors and officers’ liability insurance carrier has paid the $1.0 million
settlement amount. The Company incurred legal fees of approximately $430,000
in
defending the case.
NOTE
20.
COMMITMENT
On
April
24, 2007, the Company entered into an office space lease for 6,354 square feet
in Atlanta, Georgia. The lease commenced on June 15, 2007 on a 42-month term,
including six months of free rent. The base rent is $14,000 per
month.
NOTE
21.
SUBSEQUENT
EVENTS
In
January 2008, the Company invested $250,000 in Carbon Motors Corporation, a
new
American automaker developing a specially-built law enforcement vehicle
featuring a clean diesel engine that can run on biodiesel fuel. For its
investment, the Company received a warrant that is initially exercisable for
30,000 shares of Series B Preferred Stock at a price of $1.05 per share with
a
term of 5 years.
In
January 2008, the Company made a $500,000 investment in Consus Ethanol, LLC
of
Pittsburgh, Pennsylvania pursuant to a convertible promissory note. Consus
Ethanol has a permitted site in western Pennsylvania, where it plans to build
the first of several ethanol plants. Its business model calls for a cogeneration
plant using waste coal to power the companion ethanol plant - allowing
significant energy cost savings. The note bears interest at the rate of 10%
per
annum and has an initial term of 6 months. Prior to the maturity date, the
note
can be extended for an additional six months or can be converted to equity.
Northeast Securities is a financial advisor to Consus Ethanol.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
ITEM9A(T).
|
CONTROLS
AND PROCEDURES.
|
Disclosure
Controls and Procedures
Based
on
our management’s evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, as of December 31, 2007, the end of the
period covered by this report, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”)) were effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC and is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness
of
internal control over financial reporting. Our internal control over financial
reporting is a process designed, as defined in Rule 13a-15(f) under the Exchange
Act, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting
principles.
Our
internal control over financial reporting is supported by written policies
and
procedures that:
|
1.
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of our assets;
|
|
2.
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations
of our
management and directors; and
|
|
3.
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that
could
have a material effect on the consolidated financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In
connection with the preparation of our annual consolidated financial statements,
our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. Management based this assessment on the
criteria established in “
Internal
Control over Financial Reporting
—
Guidance for Smaller Public Companies
”
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (which
is sometimes referred to as the COSO Framework). Management’s assessment
included an evaluation of the design of our internal control over financial
reporting and testing of the operational effectiveness of our internal control
over financial reporting. Based on this assessment, our management has concluded
that our internal control over financial reporting was effective as of December
31, 2007.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this annual report.
Changes
in Internal Controls
There
was
no change in our internal control over financial reporting that occurred during
the quarter ended December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
The
design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events. There can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
ITEM
9B.
OTHER
INFORMATION.
None.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICER
S
AND CORPORATE GOVERNANCE
|
Directors
and Executive Officers
The
following table provides information regarding the members of our board of
directors and our executive officers. All directors hold office until the next
annual meeting of stockholders and the election and qualification of their
successors. Officers of our company are elected annually by the board of
directors and serve at the discretion of the board. There are no family
relationships among our directors and executive officers.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
David
R. Ames
|
|
59
|
|
Chief
Executive Officer, President and Director
|
Gary
Flicker
|
|
49
|
|
Chief
Financial Officer, Executive Vice President and
Secretary
|
Thomas
J. Endres*
|
|
51
|
|
Chief
Operating Officer, Executive Vice President, Operations
|
William
P. Behrens
|
|
69
|
|
Director
and Non-Executive Chairman of the Board
|
Gil
Boosidan
|
|
35
|
|
Director
|
Richard
D. Ditoro
|
|
70
|
|
Director
|
Robert
L. Franklin
|
|
70
|
|
Director
|
Edwin
L. Klett
|
|
72
|
|
Director
|
________________
*
Mr.
Endres has resigned from our employment, effective April 12, 2008.
The
principal occupations for the past five years (and, in some instances, for
prior
years) of each of our directors and officers are as follows:
David
R. Ames
became
our Chief Executive Officer and President on November 9, 2006 and has served
as
a member of our board of directors since October 1, 2006. Mr. Ames has been
an
active venture capital investor in alternative energy companies, technologies,
processes and services. He is currently a member of the National Ethanol Vehicle
Coalition (NEVC), an association dedicated to bringing together political,
business, industry and scientific leaders to focus on the alternative energy
marketplace. In 2004, Mr. Ames co-founded Alterna Energy to make investments
in
alternative energy companies. From 1994 through 1999, Mr. Ames served as
Chairman, President and Chief Executive Officer of Convergence.com, a provider
of high-speed cable modem broadband internet access and other data services
over
cable systems that was founded by Mr. Ames in 1994 and acquired by C-COR
Incorporated in 1999.
Gary
Flicker
became
our Chief Financial Officer, Executive Vice President and Secretary on January
29, 2007. From May 2002 through January 2007, Mr. Flicker was President and
Chief Executive Officer of Flick Financial, a professional CPA/financial
services firm founded by Mr. Flicker to assist businesses with their financial
and related accounting needs. From March 2004 to November 2006, Flick Financial
had been engaged by HealthSouth Corp. to assist in restating its financial
statements. From 1997 through 2002, Mr. Flicker was the Executive Vice President
and Chief Financial Officer of DVL, Inc., which owns and services commercial
mortgage loans and manages real estate properties and partnerships. Mr. Flicker
has been an independent member of the board of directors of DVL since 2004
and
chairs its audit committee. He is a licensed CPA in New York and Georgia and
is
a Member of the American Institute of Certified Public Accountants.
Thomas
J. Endres
became
our Senior Vice President, Operations on September 7, 2006, our Executive Vice
President, Operations on March 15, 2007 and our Chief Operating Officer on
June
19, 2007. On March 12, 2008, Mr. Endres informed our board of directors of
his
decision not to renew his employment agreement, which expired on March 6, 2008.
He resigned as our Chief Operating Officer and Executive Vice President
effective April 12, 2008. Before joining us, Mr. Endres served in the United
States Army for 26 years, retiring with the rank of Lieutenant Colonel. From
August 1997 until August 2006, he served as Director of Operations/Director
of
Cadet Activities at the United States Military Academy at West Point, from
which
he graduated in 1980. In this position, he was responsible for managing $2
billion in facilities, a $50 million budget and 356 employees. From November
1999
through April 2002, Mr. Endres also served as a member of the board of directors
of the West Point Federal Credit Union, which managed over $55 million in funds.
William
P. Behrens
became
our non-executive Chairman of the Board on November 9, 2006 and has served
as a
member of our board of directors since October 1, 2006. Mr. Behrens serves
as
the Vice Chairman at Northeast Securities, Inc., where he has built a
significant presence in private-client advisory services and institutional
brokerage. He joined Northeast Securities with over 30 years of experience
from
Ernst & Company, most recently as Chairman and CEO of Investec Ernst &
Company (a wholly owned subsidiary of Investec Group, Ltd.). Mr. Behrens
currently serves as an Official for the American Stock Exchange and also served
as a member of the Self-Regulatory Organizations Task Force on Options Reform
and on committees for the FISC, American Stock Exchange, NSCC and NASD. He
is
also a director of Volumetric Fund, Inc.
Gil
Boosidan
became a
member of our board of directors on January 29, 2007. Until February 2007,
Mr.
Boosidan served as Senior Vice President of IDT Corporation, a New York Stock
Exchange listed company, as well as Treasurer of IDT Investments, Inc., a
subsidiary of IDT that managed a substantial portion of IDT’s cash and
investments. In that role, Mr. Boosidan managed its multi-million fixed income
portfolio, and he coordinated IDT’s commercial banking relationships, borrowing,
trading and risk management.
Richard
D. Ditoro
became
a
member of our board of directors on September 7, 2006. Mr. Ditoro previously
served as a member of our board of directors from July 28, 2005 through August
10, 2006, the date of our 2006 annual meeting of stockholders, at which Mr.
Ditoro did not stand for reelection. Mr. Ditoro is currently a principal in
the
consulting firm Merestone Development. In this capacity, Mr. Ditoro provides
due
diligence, financial modeling, market research, acquisition candidate profiling
and strategic partnering advice and assistance to clients in the life sciences
and specialty chemical sectors. Before forming Merestone Development in 1998,
Mr. Ditoro held numerous senior management positions, including Vice President
of Corporate Development, with Lonza Group, an international chemical
conglomerate based in Basle, Switzerland.
Robert
L. Franklin
became a
member of our board of directors on January 29, 2007. Mr. Franklin is a career
investment banker who is currently the chairman of the Angel Investor Network
in
Hilton Head, South Carolina and in Savannah, Georgia. Since 1991, Mr. Franklin
has been president of Prospect Ventures, Inc., advising private investors,
entrepreneurs and private and public emerging growth companies regarding their
capital requirements, business strategy, and the development of their boards
of
directors. He has served on numerous corporate and not-for-profit boards of
directors. In July 2003, Mr. Franklin was appointed by Massachusetts Governor
Romney as a member of the Massachusetts Public Education Nominating Council,
on
which he served until February 2005. In 2003 he was vice chairman, and in 2004
he was chairman of the Council. In November 2004, he joined the Advisory Board
of the Institute for Effective Governance, a Washington, DC service organization
for responsible trustees. From 1998 to 2001, he was a member of the Advisory
Board of Directors of the Association of the United States Army.
Edwin
L. Klett
became a
member of our board of directors on December 7, 2006. Mr. Klett is currently
senior counsel with the law firm of Buchanan Ingersoll & Rooney, in
Pittsburgh, Pennsylvania, where he focuses his practice on corporate litigation.
He was a partner in the law firm of Klett Rooney Lieber & Schorling from its
formation in April 1989 until its merger with Buchanan Ingersoll in July 2006.
He has over 40 years of experience in practicing law. A trial attorney with
a
background in corporate law, banking, securities and business matters, Mr.
Klett
was selected by the Pennsylvania Supreme Court to a four-year term on the
Judicial Conduct Board of Pennsylvania in 2006. Mr. Klett is a fellow of the
International Academy of Trial Lawyers, the American College of Trial Lawyers,
the American Board of Trial Advocates, the American Bar Foundation and the
American Law Institute. He is a member of the American Bar Association and
previously served as a member of the ABA House of Delegates. Mr. Klett is also
a
member of the House of Delegates of the Pennsylvania Bar Association and
previously served as chairman of the Securities and Class Action Committee
of
the Civil Litigation Section of the state association. Mr. Klett is also a
director of Northeast Securities, Inc.
Audit
Committee
Our
board
of directors has established an audit committee composed of Mr. Boosidan, its
chairman, Mr. Franklin, and Mr. Klett. The board has determined that Mr.
Boosidan is an “audit committee financial expert” as
defined
under applicable SEC rules and is “independent” under the listing standards of
the American Stock Exchange, on which the shares of our common stock are
listed.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers and persons who own beneficially more than 10% of our
outstanding common stock to file with the SEC initial reports of ownership
and
reports of changes in their ownership of our common stock. Directors, executive
officers and greater than 10% shareholders are required by SEC regulations
to
furnish us with copies of the forms they file. To our knowledge, based solely
on
a review of the copies of such reports furnished to us, during the fiscal year
ended December 31, 2007, none of our directors, officers, or beneficial owners
of more than 10% of our common stock failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act during the year ended December
31,
2007, except that David R. Ames, our Chief Executive Officer, President and
a
director,
filed
a
late Form 4 to report eight purchase transactions, seven of which were not
reported on a timely basis
;
and Gil
Boosidan, a director, filed a late Form 3 to report his joining our board of
directors
;
Gary
Flicker, our Chief Financial Officer and Executive Vice President, filed a
late
Form 3 to report his becoming an officer; and Robert L. Franklin, a director,
filed a late Form 3 to report his joining our board of directors
.
Code
of Business Conduct and Ethics and Guidelines on Governance
Issues
Our
board
of directors has adopted a code of ethics applicable to all officers, directors
and employees, a copy of which is available on our website at www.xethanol.com.
We will provide a copy of this code to any person, without charge, upon request,
by writing to us at Xethanol Corporation, 3348 Peachtree Road NE, Suite 250
Tower Place 200, Atlanta, Georgia 30326, Attention: Chief Financial Officer.
We
intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of the code of ethics
by
posting such information on our website at the address specified above.
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
The
following Summary Compensation Table sets forth for the years ended December
31,
2007 and December 31, 2006 all plan compensation paid, distributed or accrued
for services, including salary and bonus amounts, rendered in all capacities
by
all individuals who served as our principal executive officer during 2007 and
our two most highly compensated executive officers other than the principal
executive officer who were serving as executive officers at the end of 2007.
These individuals are our “named executive officers.”
Summary
Compensation Table for 2007 and 2006
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards
($)(1)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Ames
President
and Chief Executive Officer (2)
|
|
|
2007
2006
|
|
|
1
1
|
|
|
-
-
|
|
|
1,340,201
743,472
|
(3)
(4)
|
|
-
5,000
|
(5)
|
|
1,340,202
748,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Flicker
Chief
Financial Officer and Executive Vice President (6)
|
|
|
2007
2006
|
|
|
245,296
-
|
|
|
-
-
|
|
|
382,342
-
|
(7)
|
|
-
|
|
|
627,638
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence
Bellone
Former
Executive Vice President - Corporate Development, Former Chief
Financial
Officer
(8)
|
|
|
2007
2006
|
|
|
180,495
180,000
|
|
|
-
50,000
|
|
|
178,324
312,259
|
(9)
(10)
|
|
-
-
|
|
|
358,819
542,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Endres
Chief
Operating Officer and Executive Vice President, Operations
(11)
|
|
|
2007
2006
|
|
|
176,528
47,083
|
|
|
-
|
|
|
133,207
67,598
|
(12)
(13)
|
|
-
-
|
|
|
309,735
114,681
|
|
_____________
|
(1)
|
The
amounts in column (e) reflect the dollar amount of awards under the
Plan
that we recognized for financial statement reporting purposes for
the
fiscal years ended December 31, 2007 and 2006 in accordance with FAS
123(R). Assumptions used in the calculations of these amounts are
included
in Note 12 to our consolidated financial statements in this
report.
|
|
(2)
|
Mr.
Ames has served as our President and Chief Executive Officer since
November 9, 2006.
|
|
(3)
|
This
amount represents the compensation expense we incurred in 2007 for
Mr.
Ames in connection with the December 7, 2006 grant, which is described
in
footnote 4 below.
|
|
(4)
|
On
October 5, 2006, we granted an option to purchase 205,000 shares
of our
common stock to Mr. Ames at an exercise price of $3.00 per share
(the
closing price per share of our common stock on the day before the
date of
grant as reported by the American Stock Exchange) in consideration
of his
service as a director, and 175,000 shares were vested on the date
of grant
and the remainder of the option vests in two installments of 15,000
shares
each on the six-month and one-year anniversaries of the date of grant.
The
option expires on the tenth anniversary of the date of grant. On
November
9, 2006, upon Mr. Ames becoming our President and Chief Executive
Officer,
30,000 shares that were granted as part of the October 5, 2006 grant
were
forfeited as a result of his resigning as a member of the governance
and
compensation committees. On December 7, 2006, we granted an option
to
purchase 1,350,000 shares of our common stock to Mr. Ames at an exercise
price of $2.44 per share (the closing price per share of our common
stock
on the date of grant as reported by the American Stock Exchange)
in
consideration of his service as our President and Chief Executive
Officer,
and 200,000 shares vested on the grant date. The remaining 1,150,000
were
initially scheduled to vest on the first anniversary of the date
of grant.
On February 1, 2007, Xethanol’s compensation committee agreed to revise
the vesting of the option for
|
|
|
those 1,150,000 shares so that they
vest in
equal monthly installments on the seventh day of each month, with the
final installment vesting on December 7, 2007. The option expires on
the
fifth anniversary of the date of grant. The amount in the table includes
(x) $367,368 in compensation expense we incurred in 2006 for Mr. Ames
in
connection with the October 5, 2006 grant; and (y) $376,104 in
compensation expense we incurred in 2006 for Mr. Ames in connection
with
the December 7, 2006 grant.
|
|
(5)
|
This
amount represents a payment made to Mr. Ames for his service as an
independent director from October 1, 2006 until his election by the
board
as President and Chief Executive Officer on November 9,
2006.
|
|
(6)
|
Mr.
Flicker became our Chief Financial Officer, Executive Vice President
and
Secretary on January 29, 2007.
|
|
(7)
|
On
February 1, 2007, we granted an option to purchase 425,000 shares
of our
common stock to Mr. Flicker at an exercise price of $2.79 per share
(the
closing price per share of our common stock on the date of grant
as
reported by the American Stock Exchange) in consideration of his
service
as our Chief Financial Officer, Executive Vice President and Secretary;
212,500 shares were vested on February 1, 2008 and the remainder
of the
option vests in two equal installments of 106,250 shares each on
the
second and third anniversaries of the date of grant. The option expires
on
the fifth anniversary of the date of grant. The amount in the table
represents the compensation expense we incurred in 2007 for Mr. Flicker
in
connection with the February 1, 2007
grant.
|
|
(8)
|
Mr.
Bellone served as our Executive Vice President, Corporate Development
from
January 29, 2007 to December 2007. He served as a member of our board
of
directors from October 5, 2006 until his resignation on January 16,
2008.
Mr. Bellone served as our Chief Financial Officer from April 5, 2005
until
his election as Executive Vice President and provided financial consulting
services to us from March 2005 until his election as Chief Financial
Officer.
|
|
(9)
|
The
amount in the table includes (x) $61,785 in compensation expense
we
incurred in 2007 for Mr. Bellone in connection with the February
28, 2006
grant; and (y) $116,539 in compensation expense we incurred in 2007
for
Mr. Bellone in connection with the December 7, 2006 grant. The option
grants are described in footnote 10
below.
|
|
(10)
|
On
February 28, 2006, we granted an option to purchase 100,000 shares
of our
common stock to Mr. Bellone at an exercise price of $5.56 per share
(the
average closing price per share of our common stock on the five trading
days before the date of grant as reported by the OTC Bulletin Board)
in
consideration of his service as our Chief Financial Officer, and
all
shares vested on the one-year anniversary of the date of grant. The
option
expires on the fifth anniversary of the date of grant. On December
7,
2006, we granted an option to purchase 100,000 shares of our common
stock
to Mr. Bellone at an exercise price of $2.44 per share (the closing
price
per share of our common stock on the date of grant as reported by
the
American Stock Exchange) in consideration of his service as our Chief
Financial Officer, and all shares will vest on the first anniversary
of
the date of grant. The option expires on the fifth anniversary of
the date
of grant. The amount in the table includes (x) $301,665 in compensation
expense we incurred in 2006 for Mr. Bellone in connection with the
February 28, 2006 grant; and (y) $10,594 in compensation expense
we
incurred in 2006 for Mr. Bellone in connection with the December
7, 2006
grant.
|
|
(11)
|
Mr.
Endres became our Senior Vice President, Operations on September
7, 2006,
our Executive Vice President, Operations on March 15, 2007 and our
Chief
Operating Officer on June 19, 2007. On March 12, 2008, Mr. Endres
informed
our board of directors of his decision not to renew his employment
agreement, which expired on March 6, 2008. Mr. Endres resigned as
our
Chief Operating Officer and Executive Vice President effective April
12,
2008.
|
|
(12)
|
On
June 19, 2007, we granted an option to purchase 50,000 shares of
our
common stock to Mr. Endres at an exercise price of $1.19 per share
(the
closing price per share of our common stock on the date of grant
as
reported by the American Stock Exchange) in consideration of his
service
as our Chief Operating Officer, and all shares will vest on the first
anniversary of the date of grant. The option expires on the
|
|
|
fifth anniversary of the date of grant.
The
amount in the table includes (x) $116,539 in compensation expense we
incurred in 2007 for Mr. Endres in connection with the December 7,
2006
grant, which is described in footnote 13 below; and (y) $16,668 in
compensation expense we incurred in 2007 for Mr. Endres in connection
with
the June 19, 2007 grant.
|
|
(13)
|
On
September 7, 2006, we granted an option to purchase 30,000 shares
of our
common stock to Mr. Endres at an exercise price of $3.62 per share
(the
closing price per share of our common stock on the date of grant
as
reported by the American Stock Exchange) in consideration of his
service
as our Senior Vice President, Operations, and all shares vested on
December 31, 2006. On December 7, 2006, we granted an option to purchase
100,000 shares of our common stock to Mr. Endres at an exercise price
of
$2.44 per share (the closing price per share of our common stock
on the
date of grant as reported by the American Stock Exchange) in consideration
of his continued service as our Senior Vice President, Operations,
and all
shares will vest on the first anniversary of the date of grant. Both
options expire on the fifth anniversary of the dates of grant. The
amount
in the table includes (x) $57,003 in compensation expense we incurred
in
2006 for Mr. Endres in connection with the September 7, 2006 grant;
and
(y) $10,594 in compensation expense we incurred in 2006 for Mr. Endres
in
connection with the December 7, 2006 grant.
|
Employment
Agreement with Thomas Endres
In
connection with Mr. Endres’ appointment as Chief Operating Officer, we entered
into an amended and restated employment agreement with him on June 19, 2007.
The
agreement provides for an annual base salary of $200,000 and has a term of
eighteen months commencing on September 7, 2006 and ending on March 6, 2008.
On
March 12, 2008, Mr. Endres informed our board of directors of his decision
not
to renew his employment agreement. He resigned as our Chief Operating Officer
and Executive Vice President effective April 12, 2008. His employment agreement
provides for our previous grants to Mr. Endres of (a) an option to purchase
30,000 shares of our common stock at an exercise price of $3.62 per share (the
closing price per share of our common stock on September 7, 2006, the date
of
grant as reported by the American Stock Exchange), of which all shares vested
on
December 31, 2006, and (b) an option to purchase 100,000 shares of our common
stock at an exercise price of $2.44 per share (the closing price per share
of
our common stock on December 7, 2006, the date of grant as reported by the
American Stock Exchange). The option to purchase 100,000 shares of our common
stock that was granted on December 7, 2006 vested on the first anniversary
of
the date of grant and expires on the fifth anniversary of the date of grant.
Under the agreement, we also granted Mr. Endres on June 19, 2007 an additional
option to purchase 50,000 shares of our common stock at an exercise price of
$1.19 per share (the closing sales price of the common stock on the date of
grant as reported on the American Stock Exchange). Because this option was
not
scheduled to vest until the first anniversary of the date of grant,
it
will
be forfeited when his employment with us ends
.
Under
his
employment agreement, Mr. Endres will receive any earned but unpaid salary
through the date of termination.
Outstanding
Equity Awards for Named Executive Officers at Fiscal Year-End
The
following table sets forth certain information with respect to outstanding
options at December 31, 2007 for each of our executive officers listed in the
Summary Compensation Table above. Unless otherwise noted in the footnotes,
options are fully vested.
As
noted
below, the number of shares issuable upon exercise of the options granted in
December 2006, February 2007 and June 2007, to the extent that such amount
exceeded the number then available under the Plan, was subject to approval
by
our stockholders of an amendment to the Plan to increase the number of shares
available for award under the Plan to cover those excess options. On February
12, 2008, at the conclusion of our annual meeting of stockholders, our
stockholders approved an amendment to the Plan to increase the number of shares
of common stock available for issuance under the Plan from 4,000,000 to
6,500,000.
The
Plan,
as amended, provides that the total number of shares of common stock that may
be
subject to awards granted under the Plan is 6,500,000 shares (plus the number
of
shares with respect to which awards previously granted there under are
forfeited, expire, terminate without being exercised or are settled with
property other than shares, and the number of shares that are surrendered in
payment of any awards or any tax withholding requirements). The table below
reflects the outstanding stock options held on December 31, 2007, giving effect
to the stockholder approval
on
February 12, 2008 of the
increase
in the number of shares issuable under the Plan that covered those excess
options.
Outstanding
Equity Awards at Fiscal Year-End (December 31, 2007)
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
David
R. Ames
|
|
|
175,000
1,350,000
|
(1)
(2)
|
|
-
-
|
|
|
3.00
2.44
|
(3)
(4)
|
|
October 5,
2016
December
7, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Flicker
|
|
|
-
|
|
|
425,000
|
(5)
|
|
2.79
|
(4)
|
|
February 1,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence
Bellone
|
|
|
100,000
100,000
100,000
|
(6)
(6)
|
|
-
-
-
|
|
|
3.75
5.56
2.44
|
(7)
(4)
|
|
April
5, 2008
February
28, 2011
December
7, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Endres
|
|
|
30,000
100,000
-
|
(8)
(8)
|
|
-
-
50,000
|
(9)
|
|
3.62
2.44
1.19
|
(4)
(4)
(4)
|
|
September 7, 2011
December
7, 2011
June
19, 2012
|
|
________________
|
(1)
|
On
October 5, 2006, we granted an option to purchase 205,000 shares
of our
common stock to Mr. Ames in consideration of his service as a director,
and 175,000 shares were vested on the date of grant and the remainder
of
the option vests in two installments of 15,000 shares each on the
six-month and one-year anniversaries of the date of grant. On November
9,
2006, upon Mr. Ames becoming our President and Chief Executive Officer,
30,000 shares that were granted as part of the October 5, 2006 grant
were
forfeited as a result of his resigning as a member of the governance
and
compensation committees.
|
|
(2)
|
On
December 7, 2006, we granted an option to purchase 1,350,000 shares
of our
common stock to Mr. Ames in consideration of his service as our President
and Chief Executive Officer, and 200,000 shares vested on the grant
date.
The 1,150,000 unvested options were initially scheduled to vest on
the
first anniversary of the date of grant. On February 1, 2007, Xethanol’s
compensation committee agreed to revise the vesting of the option
for
those 1,150,000 shares so that they vest in equal monthly installments
on
the seventh day of each month, with the final installment vesting
on
December 7, 2007. 411,750 shares issuable on exercise of the option
granted to Mr. Ames on December 7, 2006 were subject to stockholder
approval of an amendment to the Plan, which was subsequently approved
as
of February 12, 2008.
|
|
(3)
|
Based
on the closing price per share of our common stock on the day before
the
date of grant as reported by the American Stock
Exchange.
|
|
(4)
|
Based
on the closing price per share of our common stock on the date of
grant as
reported by the American Stock
Exchange.
|
|
(5)
|
On
February 1, 2007, we granted an option to purchase 425,000 shares
of our
common stock to Mr. Flicker in consideration of his service as our
Chief
Financial Officer, Executive Vice President and Secretary, and 212,500
shares were vested on February 1, 2008 and the remainder of the option
vests in two equal installments of 106,250 shares each on the second
and
third anniversaries of the date of grant. 425,000 shares issuable
on
exercise of the option granted to Mr. Flicker on February 1, 2007
were
subject to stockholder approval of an amendment to the Plan, which
was
subsequently approved as of February 12, 2008.
|
|
(6)
|
In
consideration of his service as our Chief Financial Officer, on February
28, 2006, we granted an option to purchase 100,000 shares of our
common
stock to Mr. Bellone, and on December 7, 2006, we granted an option
to
purchase 100,000 shares of our common stock. These options vested
on
February 28, 2007 and December 7, 2007, respectively. 30,500 shares
issuable on exercise of the option granted to Mr. Bellone on December
7,
2006 were subject to stockholder approval of an amendment to the
Plan,
which was subsequently approved as of February 12, 2008.
|
|
(7)
|
The
average closing price per share of our common stock on the five trading
days before the date of grant as reported by the OTC Bulletin
Board.
|
|
(8)
|
In
consideration of his service as our Senior Vice President, Operations,
on
September 7, 2006, we granted to Mr. Endres an option to purchase
30,000
shares of our common stock that vested on December 31, 2006. On December
7, 2006, we granted Mr. Endres an option to purchase 100,000 shares
of our
common stock that vested on December 7, 2007. 30,500 shares issuable
on
exercise of the option granted to Mr. Endres on December 7, 2006
were
subject to stockholder approval of an amendment to the Plan, which
was
subsequently approved as of February 12, 2008.
|
|
(9)
|
On
June 19, 2007, we granted an option to purchase 50,000 shares of
our
common stock to Mr. Endres in consideration of his service as our
Chief
Operating Officer, and all shares were scheduled to vest on the first
anniversary of the date of grant and were subject to stockholder
approval
of an amendment to the Plan, which was subsequently approved as of
February 12, 2008. On March 12, 2008, Mr. Endres informed our board
of
directors of his decision not to renew his employment agreement.
He
resigned as our Chief Operating Officer and Executive Vice President
effective April 12, 2008. Accordingly, these options will be forfeited
when Mr. Endres’ employment with us
ends.
|
Compensation
of Directors
The
following table sets forth a summary of the compensation we paid in 2007 to
our
directors. The table includes any person who served during 2007 as a director
(other than named executive officers), even if he is no longer serving as a
director. For information about the compensation we paid to Mr. Ames for serving
as a director, see the notes to the Summary Compensation Table above. Mr.
Bellone, who served as a director from October 5, 2006 until his resignation
on
January 16, 2008, did not receive any compensation related to his service as
a
director in 2007.
Director
Compensation for 2007
Name
|
|
Fees Earned
or Paid
in Cash
($)
|
|
Option
Awards (1)
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
William
P. Behrens (2)
|
|
|
20,000
|
|
|
62,978
(3
|
)
|
|
-
|
|
|
82,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
D. Ditoro (4)
|
|
|
20,000
|
|
|
26,989
(3
|
)
|
|
-
|
|
|
46,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edwin
L. Klett (5)
|
|
|
20,000
|
|
|
107,400
(3
|
)
|
|
-
|
|
|
127,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
d’Arnaud-Taylor (6)
|
|
|
-
|
|
|
-
|
|
|
165,000
(7
|
)
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gil
Boosidan (8)
|
|
|
20,000
|
|
|
372,119
(3
|
)
|
|
-
|
|
|
392,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Franklin (9)
|
|
|
20,000
|
|
|
372,119
(3
|
)
|
|
-
|
|
|
392,119
|
|
________________
|
(1)
|
The
amounts in column (c) reflect the dollar amount of awards under the
Plan
that we recognized for financial statement reporting purposes for
the
fiscal year ended December 31, 2007 in accordance with FAS 123(R).
Assumptions used in the calculation of this amount are included in
Note 12
to our audited consolidated financial statements in this report.
|
|
(2)
|
Mr.
Behrens, who is currently serving as a director, was elected to the
board
on October 1, 2006.
|
|
(3)
|
The
following table below summarizes the outstanding stock options held
on
December 31, 2007 by any person who served during 2007 as a director
(other than named executive officers), even if he is no longer serving
as
a director. The number of shares issuable upon exercise of the options
granted in December 2006 and February 2007, to the extent that such
amount
exceeded the number then available under the Plan, was subject to
approval
by our stockholders of an amendment to the Plan to increase the number
of
shares available for award under the Plan to cover those excess options.
On February 12, 2008, at the conclusion of our annual meeting of
stockholders, our stockholders approved an amendment to the Plan
to
increase the number of shares of common stock available for issuance
under
the Plan from 4,000,000 to 6,500,000.
The
table below reflects the outstanding stock options held on December
31,
2007, giving effect to the stockholder approval on February 12, 2008
of
the
increase
in the number of shares issuable under the Plan that covered those
excess
options.
|
Name
|
|
Grant
Date
|
|
Number
of
Options Granted
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Option
Exercise
Price
($)
(a)
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
P. Behrens (b)
|
|
|
Oct.
5, 2006
|
|
|
215,000
|
|
|
215,000
|
|
|
-
|
|
|
3.00
|
|
|
Oct.
5, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
D. Ditoro (c)
|
|
|
July
28, 2005
Sept.
7, 2006
Oct.
5, 2006
Dec.
7, 2006
Feb.
1, 2007
|
|
|
80,000
55,000
5,000
125,000
15,000
|
|
|
80,000
55,000
5,000
125,000
7,500
|
|
|
-
-
-
7,500
|
|
|
4.00
3.62
3.00
2.44
2.79
|
(d)
|
|
July
28, 2010
Sept.
7, 2011
Oct.
5, 2016
Dec.
7, 2016
Feb.
1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edwin
L. Klett (e)
|
|
|
Dec.
7, 2006
Dec.
7, 2006
Feb.
1, 2007
|
|
|
40,000
175,000
25,000
|
|
|
40,000
175,000
12,500
|
|
|
-
-
12,500
|
|
|
2.44
2.44
2.79
|
|
|
Dec.
7, 2016
Dec.
7, 2016
Feb.
1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
d’Arnaud-
Taylor
(f)
|
|
|
Feb.
28, 2006
June
12, 2006
Dec.
7, 2006
|
|
|
125,000
225,000
100,000
|
|
|
125,000
225,000
100,000
|
|
|
-
-
-
|
|
|
5.56
8.32
2.44
|
|
|
Aug.
22, 2009
Aug.
22, 2009
Dec.
7, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gil
Boosidan (g)
|
|
|
Feb.
1, 2007
|
|
|
200,000
|
|
|
100,000
|
|
|
100,000
|
|
|
2.79
|
|
|
Feb.
1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Franklin (h)
|
|
|
Feb.
1, 2007
|
|
|
200,000
|
|
|
100,000
|
|
|
100,000
|
|
|
2.79
|
|
|
Feb.
1, 2017
|
|
_______________
|
(a)
|
Except
as noted otherwise, the exercise price of each option in this column
is
equal to the closing price per share of our common stock on the date
of
grant as reported by the American Stock
Exchange.
|
|
(b)
|
We
granted an option to purchase 215,000 shares of our common stock
to Mr.
Behrens in consideration of his service as a director, and 175,000
of the
shares vested on the date of grant and the remainder of the option
vested
in two installments of 20,000 shares each on the six-month and one-year
anniversaries of the date of grant. The amount in the table includes
$62,978 in compensation expense we incurred in 2007 for Mr. Behrens
in
connection with this grant.
|
|
(c)
|
We
granted options to purchase shares of our common stock to Mr. Ditoro
in
consideration of his service as a director. The amount in the table
includes $26,989 in compensation expense we incurred in 2007 for
Mr.
Ditoro in connection with the February 1, 2007
grant.
|
|
(d)
|
As
reported by the OTC Bulletin Board, the high and closing prices per
share
of our common stock on the date of grant were $4.20 and the low price
was
$3.51.
|
|
(e)
|
We
granted options to purchase shares of our common stock to Mr. Klett
in
consideration of his service as a director. The amount in the table
includes (x) $62,419 in compensation expense we incurred in 2007
for Mr.
Klett in connection with the Dec. 7, 2006 grant and (y) $44,981 in
compensation expense we incurred in 2007 for Mr. Klett in connection
with
the February 1, 2007 grant.
|
|
(f)
|
On
February 28, 2006, we granted an option to purchase 250,000 shares
of our
common stock to Mr. d’Arnaud-Taylor in consideration of his service as our
President and Chief Executive Officer, and all shares (as adjusted
as
described below) vested on the first anniversary of the grant date.
On
June 12, 2006, we granted an option to purchase 450,000 shares of
our
common stock to Mr. d’Arnaud-Taylor in consideration of his service as our
President and Chief Executive Officer, with all shares to vest upon
Mr.
d’Arnaud-Taylor entering a new employment agreement. On August 25,
2006,
we entered into a termination agreement with Mr. d’Arnaud-Taylor under
which we agreed with Mr. d’Arnaud-
|
|
|
Taylor that his employment by, and
his
position as an officer of, the company was terminated effective as
of
August 22, 2006. The agreement provided that Mr. d’Arnaud-Taylor would
continue to serve as a director of the company for the remainder of
his
current term. The agreement further provided, with respect to the
foregoing options, and subject to Mr. d'Arnaud-Taylor’s compliance with
the terms of the agreement, that (a) the exercise period was extended
until August 22, 2009 with respect to one half of each option; and
(b) the
remaining one-half of each option was terminated. On December 7, 2006,
we
granted an option to purchase 100,000 shares of our common stock to
Mr.
d’Arnaud-Taylor in consideration of his service as a director, and all
shares vested on the date of grant. The option expires on the tenth
anniversary of the date of grant.
|
|
(g)
|
We
granted options to purchase shares of our common stock to Mr. Boosidan
in
consideration of his service as a director. The amount in the table
includes $372,119 in compensation expense we incurred in 2007 for
Mr.
Boosidan in connection with this grant.
|
|
(h)
|
We
granted options to purchase shares of our common stock to Mr. Franklin
in
consideration of his service as a director. The amount in the table
includes $372,119 in compensation expense we incurred in 2007 for
Mr.
Franklin in connection with this grant.
|
|
(4)
|
Mr.
Ditoro, who is currently serving as a director, served as a director
from
July 28, 2005 through August 10, 2006 and again became a director
on
September 7, 2006.
|
|
(5)
|
Mr.
Klett, who is currently serving as a director, was elected a director
on
December 7, 2006.
|
|
(6)
|
Mr.
d’Arnaud-Taylor, served as a director from February 2, 2005 until his
term
expired on February 12, 2008.
|
|
(7)
|
On
December 1, 2006, we entered into a consulting agreement with Mr.
d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide
strategic advice to our Chief Executive Officer. This amount represents
compensation expense we incurred in 2007 for Mr. d’Arnaud-Taylor under the
December 1, 2006 consulting agreement, which expired on November
25, 2007.
For more information about our payments to Mr. d’Arnaud-Taylor, please see
Item 12 below, “Certain Relationships and Related Transactions, and
Director Independence - Termination and Consulting Agreements with
Christopher d’Arnaud-Taylor.” Mr. d’Arnaud-Taylor did not receive any
compensation related to his service as a director in
2007.
|
|
(8)
|
Mr.
Boosidan, who is currently serving as a director, was elected as
a
director on January 29, 2007.
|
|
(9)
|
Mr.
Franklin, who is currently serving as a director, was elected as
a
director on January 29, 2007.
|
We
compensate non-employee members of the board through a mixture of cash and
equity-based compensation. Commencing October 1, 2006, we adopted a policy
of
paying each independent, non-employee director a quarterly retainer of $5,000
for his services as a director. On March 20, 2008, we revised this policy to
increase this quarterly retainer to $7,500.
On
the
date each independent, non-employee director is elected to the board of
directors for his or her first time, our current policy is to grant to the
director an option to purchase shares of our common stock at a price equal
to
the fair market value of our common stock on the date of grant. Directors also
receive stock option grants for serving on the audit, governance, compensation
and science committees. The number of shares underlying each annual option
grant
is: 25,000 shares for chairing the compensation, governance or science
committees; 50,000 shares for chairing the audit committee; 15,000 shares for
being a member of the governance, compensation or science committees; and 25,000
shares for being a member of the audit committee. Annual grants to reelected
directors are at the discretion of the board.
On
March
20, 2008, as detailed in the following table and in accordance with the policy
described in the previous paragraph, we granted to our non-employee directors
options to purchase a total of 275,000 shares at a purchase price per share
equal to the closing price of the common stock on the American Stock Exchange
on
the
date
of
grant (which was $0.42 per share). The options granted to each director vest
one
half six months after the date of grant, and the remaining one half vests on
the
first anniversary of the date of grant. The options have a term of 10 years.
Name
|
|
Position
|
|
Number
of
Options
|
|
|
|
|
|
Bill
Behrens
|
|
Chairman
of the Board
|
|
25,000
|
|
|
Member
of Compensation Committee
|
|
15,000
|
|
|
Member
of Governance Committee
|
|
15,000
|
|
|
|
|
|
Gil
Boosidan
|
|
Chair
of Audit Committee
|
|
50,000
|
|
|
|
|
|
Richard
Ditoro
|
|
Chair
of Compensation Committee
|
|
25,000
|
|
|
Member
of Governance Committee
|
|
15,000
|
|
|
Member
of Science & Technology Committee
|
|
15,000
|
|
|
|
|
|
Robert
Franklin
|
|
Chair
of Science & Technology Committee
|
|
25,000
|
|
|
Member
of Audit Committee
|
|
25,000
|
|
|
|
|
|
Edwin
Klett
|
|
Chair
of Governance Committee
|
|
25,000
|
|
|
Member
of Compensation Committee
|
|
15,000
|
|
|
Member
of Audit Committee
|
|
25,000
|
TOTAL
|
|
|
|
275,000
|
Directors
who are also our employees do not receive cash or equity compensation for
service on the board in addition to compensation payable for their service
as
our employees.
Directors
who are also our employees do not receive cash or equity compensation for
service on the board in addition to compensation payable for their service
as
our employees.
Change-in-Control
Arrangements
The
Plan
provides that if and only to the extent provided in the award agreement, or
to
the extent otherwise determined by the compensation committee, subject to
certain limitations, on the occurrence of a “Change-in-Control”, (a) any option
or stock appreciation right that was not previously vested and exercisable
as of
the time of the Change-in-Control, shall become immediately vested and
exercisable, (b) any restrictions, deferral of settlement, and forfeiture
conditions applicable to a restricted stock award, deferred stock award or
an
other stock-based award subject only to future service requirements granted
under the Plan shall lapse and such awards shall be deemed fully vested as
of
the time of the Change-in-Control, and (c) with respect to any outstanding
award
subject to achievement of performance goals and conditions under the Plan,
the
compensation committee may, in its discretion, deem such performance goals
and
conditions as having been met as of the date of the
Change-in-Control.
For
this
purpose, a “Change-in-Control” includes:
|
·
|
consummation
of a reorganization, merger, statutory share exchange or consolidation
or
similar corporate transaction involving Xethanol or any of its
subsidiaries, a sale or other disposition of all or substantially
all of
the assets of Xethanol, or the acquisition of assets or stock of
another
entity by Xethanol or any of its subsidiaries (each a “Business
Combination”), in each case, unless, following such Business Combination,
(A) all or substantially all of the individuals and entities who
were the
beneficial owners, respectively, of the outstanding voting securities
of
Xethanol immediately prior to such Business Combination beneficially
own,
directly or indirectly, more than 50% of the then outstanding shares
of
common stock and the combined voting power of the then outstanding
voting
securities entitled to vote generally in the election of directors,
as the
case may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of
such
transaction owns Xethanol or all or substantially all of our assets
either
directly or through one or more subsidiaries) in substantially the
same
proportions as their ownership, immediately prior to such Business
Combination, of the voting securities of Xethanol, (B) no person
|
|
|
(excluding any employee benefit plan
(or
related trust) of Xethanol or such corporation resulting from such
Business Combination or any person that as of the effective date of
the
Plan owns beneficial ownership of a controlling interest) beneficially
owns, directly or indirectly, fifty percent (50%) or more of the then
outstanding shares of common stock of the corporation resulting from
such
Business Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (C) at least
a
majority of the members of the Board of Directors of the corporation
resulting from such Business Combination were members of our incumbent
board at the time of the execution of the initial agreement, or of
the
action of the Board, providing for such Business
Combination;
|
|
·
|
during
any consecutive two-year period, individuals who at the beginning
of that
two-year period constituted the Board of Directors (together with
any new
directors whose election to the Board of Directors, or whose nomination
for election by the stockholders of Xethanol, was approved by a vote
of a
majority of the directors then still in office who were either directors
at the beginning of such period or whose elections or nominations
for
election were previously so approved) cease for any reason to constitute
a
majority of the Board of Directors then in office;
or
|
|
·
|
approval
by our stockholders of a complete liquidation or dissolution of
Xethanol.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
The
following table sets forth information regarding the number of shares of our
common stock beneficially owned as of March 1, 2008:
|
·
|
each
person who is known by us to beneficially own 5% or more of our common
stock;
|
|
·
|
each
of our directors and named executive officers (other than Mr. Bellone,
who
is no longer an officer or a director, and Mr. d’Arnaud-Taylor, who is no
longer a director); and
|
|
·
|
all
of our directors and executive officers, as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Shares of our
common stock that may be acquired on exercise of stock options or warrants
that
are currently exercisable or that become exercisable within 60 days after the
date indicated in the table are deemed beneficially owned by the option holders.
Subject to any applicable community property laws, the persons or entities
named
in the table above have sole voting and investment power with respect to all
shares indicated as beneficially owned by them.
Except
as
otherwise provided below, the address of each of the persons listed below is
c/o
Xethanol Corporation, 3348 Peachtree NE, Suite 250 Tower Place 200, Atlanta,
Georgia 30326.
Name
and Address of Beneficial Owner
|
|
Number
of
Shares
Beneficially
Owned
(1)
|
|
Percentage
of
Shares
Beneficially
Owned
(2)
|
|
|
|
|
|
|
|
David
R. Ames
|
|
|
1,625,010
|
(3)
|
|
5.4
|
%
|
|
Gary
Flicker
|
|
|
212,500
|
(4)
|
|
*
|
|
|
Thomas
J. Endres
|
|
|
133,300
|
(5)
|
|
*
|
|
|
William
P. Behrens
|
|
|
328,591
|
(6)
|
|
1.1
|
%
|
|
Gil
Boosidan
|
|
|
228,891
|
(7)
|
|
*
|
|
|
Richard
D. Ditoro
|
|
|
288,828
|
(8)
|
|
1.0
|
%
|
|
Robert
L. Franklin
|
|
|
200,000
|
(9)
|
|
*
|
|
|
Edwin
L. Klett
|
|
|
240,0000
|
(10)
|
|
*
|
|
|
Directors
and executive officers as a group
|
|
|
3,257,420
|
(11)
|
|
10.3
|
%
|
|
*
Less
than 1% of outstanding shares.
(1)
|
Unless
otherwise indicated, includes shares owned by a spouse, minor children and
relatives sharing the same home, as well as entities owned or controlled
by the named person. Also includes shares if the named person has
the
right to acquire those shares within 60 days after March 1, 2008
by the
exercise of any warrant, stock option or other right. Unless otherwise
noted, shares are owned of record and beneficially by the named
person.
|
(2)
|
Based
upon 28,609,103 shares of common stock outstanding on March 1,
2008.
|
(3)
|
Includes
1,525,000 shares of common stock issuable to Mr. Ames on the exercise
of
stock options.
|
(4)
|
These
shares of common stock are issuable to Mr. Flicker on the exercise
of
stock options.
|
(5)
|
These
shares of common stock are issuable to Mr. Endres on the exercise
of stock
options.
|
(6)
|
Includes
215,000 shares of common stock issuable to Mr. Behrens on the exercise
of
stock options, 41,668 shares of common stock issuable on exercise
of
warrants held by Mr. Behrens and 50,000 shares of common stock issuable
on
exercise of warrants held by Northeast Securities, Inc. Mr. Behrens
is
Vice Chairman of
|
|
Northeast Securities and disclaims beneficial ownership
of the portion of the shares held by Northeast Securities in which
he has
no pecuniary interest.
|
(7)
|
Includes
200,000 shares of common stock issuable upon the exercise of stock
options, 22,223 shares of common stock and 6,668 shares of common
stock
issuable on exercise of warrants held by GBAF Capital, LLC, an entity
controlled by Mr. Boosidan. Mr. Boosidan disclaims beneficial ownership
of
the portion of the shares held by GBAF Capital, LLC in which he has
no
pecuniary interest.
|
(8)
|
Includes
280,000 shares of common stock issuable to Mr. Ditoro on the exercise
of
stock options.
|
(9)
|
These
shares of common stock are issuable to Mr. Franklin on the exercise
of
stock options.
|
(10)
|
These
shares of common stock are issuable to Mr. Klett on the exercise
of stock
options.
|
(11)
|
Includes
3,100,836 shares of common stock issuable on the exercise of warrants
and
stock options.
|
Equity
Compensation Plan Information
At
the
time of the reverse merger described in Item 1, neither we nor Old Xethanol
had
any outstanding stock options. On February 2, 2005, following the completion
of
the reverse merger, our board of directors adopted the Xethanol Corporation
2005
Incentive Compensation Plan (the “Plan”), which our stockholders subsequently
approved. The Plan is the only equity compensation plan approved by our
stockholders.
The
terms
of the Plan provide for grants of stock options, stock appreciation rights
or
SARs, restricted stock, deferred stock, other stock-related awards and
performance awards that may be settled in cash, stock or other property. The
persons eligible to receive awards under the Plan are the officers, directors,
employees and independent contractors of our company and our subsidiaries.
Until
August 10, 2006, under the Plan, the total number of shares of our common stock
that were subject to the granting of awards under the Plan was equal to
2,000,000 shares, plus the number of shares with respect to which awards
previously granted thereunder are forfeited, expire, terminate without being
exercised or are settled with property other than shares, and the number of
shares that are surrendered in payment of any awards or any tax withholding
requirements. On August 10, 2006, at the annual meeting of stockholders, the
stockholders voted to amend the Plan (a) to increase the number of shares of
common stock available for awards under the Plan from 2,000,000 to 4,000,000
and
(b) to eliminate a provision limiting to 250,000 the number of shares with
respect to which each type of award may be granted to any participant during
any
fiscal year.
The
total
number of shares of common stock issuable on exercise of options granted on
December 7, 2006, February 1, 2007 and June 19, 2007 exceeded the number of
shares then available under the Plan by 1,652,070 shares (the “excess options”).
The excess options were granted expressly subject to subsequent stockholder
approval of an increase in the 4,000,000 limit in the Plan to cover those
options. On February 12, 2008, at the conclusion of our annual meeting of
stockholders, our stockholders approved an amendment to the Plan to increase
the
number of shares of common stock available for issuance under the plan from
4,000,000 to 6,500,000, which covered all of the options granted subject to
stockholder approval.
The
following table provides information regarding the status of our existing equity
compensation plans at December 31, 2007, giving effect to the stockholder
approval on February 12, 2008 of the
increase
in the number of shares issuable under the Plan that covered those excess
options. As described above,
on
March
20, 2008, we granted to our non-employee directors options to purchase a total
of 275,000 shares.
Equity
Compensation Plan Information
Plan
category
|
|
Number of
securities
to
be issued
upon
exercise of
outstanding
options,
warrants
and
rights
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
|
|
Number
of securities
remaining
available for future
issuances
under equity
compensation
plans (excluding
securities
reflected in column (a)
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans
approved by
security
holders
|
|
|
5,245,000
|
|
$
|
3.36
|
|
|
937,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans
not approved
by
security holders (1)
|
|
|
543,090
|
|
$
|
6.27
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,788,090
|
|
$
|
3.63
|
|
|
937,930
|
|
(1)
|
We
have issued warrants to purchase shares of our common stock in
exchange
for consideration in the form of goods or services as described
in
Statement of Financial Accounting Standards No. 123, Accounting
for
Stock-Based Compensation. These warrants are described
below:
|
|
(a)
|
On
December 20, 2006, we agreed with Mr. Jeffrey S. Langberg, a former
director, to cancel the warrants we granted to him on June 12, 2006,
and
to issue to him a fully vested five-year warrant to purchase 125,000
shares of our common stock at an exercise price of $8.32 per share.
For
more information about those warrants, please see Item 12, Certain
Relationships and Related Transactions - Consulting Agreements with
Jeffrey S. Langberg.
|
|
(b)
|
On
June 29, 2006, we issued to an entity a fully vested warrant to purchase
25,000 shares of our common stock at an exercise price of $5.25 per
share.
The warrant expires on November 6, 2010. We issued this warrant for
investor relations services.
|
|
(c)
|
On
April 13, 2006, we issued to an entity a fully vested three-year
warrant
to purchase 17,778 shares of our common stock at an exercise price
of
$4.50 per share. We issued this warrant for private placement advisory
services.
|
|
(d)
|
On
March 31, 2006, we granted to three members of our advisory board
warrants
to purchase a total of 95,000 shares of our common stock. The warrants
have a three-year term, are fully vested and have a weighted average
exercise price of $4.71 per share. On February 1, 2005, we granted
to two
members of our advisory board warrants to purchase an aggregate of
35,312
shares of our common stock. The warrants have a three-year term,
are fully
vested and have an average exercise price of $3.75 per share.
|
|
(e)
|
On
December 1, 2005, we issued to an entity a fully vested three-year
warrant
to purchase 25,000 shares of our common stock at an exercise price
of
$4.00 per share. We issued this warrant for private placement advisory
services.
|
|
(f)
|
On
September 1, 2005, we issued to a member of our advisory board a
warrant
to purchase 20,000 shares of our common stock at an exercise price
of
$5.25 per share. We issued this warrant for business development
services.
|
|
(g)
|
As
more fully described in Note 17 to our audited consolidated financial
statements in this report, we issued to Coastal Energy Development,
Inc.
(“CED”) a warrant to purchase 200,000 shares of our common stock at an
exercise price of $6.85 per share to replace the warrant previously
issued
on May 30, 2006, which was first exercisable on May 30, 2007 and
was
exercisable until May 30, 2010. We issued this warrant as part of
a
settlement agreement with CED. The new warrant is exercisable through
May
30, 2009.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Acquisition
of Permeate Refining
In
September 2001, Old Xethanol issued 1,000,000 shares of common stock to Robert
and Carol Lehman, of Permeate Refining, Inc. as a “good faith” payment, under a
non-binding letter of intent, in contemplation of the acquisition of Permeate.
In July 2003, Old Xethanol completed the transaction and acquired Permeate.
Old
Xethanol, through its wholly owned subsidiary, Xethanol One, LLC, also acquired
the real estate and some of the production facilities associated with Permeate’s
operations from the Lehmans for a total price of $1,250,000, payable as follows:
(a) a down payment of $125,000, which we made on July 9, 2003, and (b) a
promissory note for the balance of $1,125,000, which bore interest at the simple
interest rate of 9% per year with monthly payments due on the first day of
each
month commencing August 1, 2003 until June 1, 2006, the maturity date. Our
obligations under the promissory note were secured by a mortgage on the Permeate
real estate granted to Master’s Trust (an entity formed by the
Lehmans).
Under
an
October 18, 2005 memorandum of agreement among the Lehmans, Master’s Trust and
us, we entered into a mutual general release on January 23, 2006. Under release,
we issued to the Lehmans a new $243,395 promissory note in exchange for the
$1,125,000 promissory note and we issued 135,000 shares of our common stock
to
Master’s Trust in exchange for the full release and satisfaction of the mortgage
on the Permeate real estate.
We
repaid
the new note in full on August 1, 2006, its maturity date. Interest was due
monthly on the outstanding principal amount of the new note at a rate equal
to
0.5% above the prime rate. We made monthly payments equal to $3,128 allocated
between interest and principal based on the then-current prime
rate.
Termination
and Consulting Agreements with Christopher d’Arnaud-Taylor
Termination
Agreement
.
On
August 25, 2006, we entered into a termination agreement with Christopher
d’Arnaud-Taylor, our former director, Chairman, President and Chief Executive
Officer, under which his employment by us and his position as an officer of
our
company was terminated effective as of August 22, 2006 (the “Termination Date”).
The agreement provided that Mr. d’Arnaud-Taylor would continue to serve as a
member of our board of directors for the remainder of his current term. Under
the termination agreement, we continued to pay Mr. d’Arnaud-Taylor his salary
and maintain his employment benefits in effect immediately before the
Termination Date through September 30, 2006, and we paid Mr. d’Arnaud-Taylor
$100,000 in severance on the three-month anniversary of the Termination Date.
The agreement provides that, subject to Mr. d’Arnaud-Taylor’s compliance with
the terms of the agreement, the exercise periods of the options to purchase
250,000 shares of common stock at an exercise price of $5.56 per share and
450,000 shares of common stock at an exercise price of $8.32 per share that
were
granted to Mr. d’Arnaud-Taylor on February 28, 2006 and June 12, 2006,
respectively, are extended until the third anniversary of the Termination Date
with respect to one half of each option. The options are otherwise terminated.
The agreement also provides that we will reimburse Mr. d’Arnaud-Taylor for any
reasonable and appropriately documented business expenses he may have incurred
before the Termination Date in the performance of his duties as an employee
and
that Mr. d’Arnaud-Taylor will be entitled to continue his coverage under our
group medical and dental plans to the extent provided in and subject to the
terms and conditions of our standard policy.
Under
the
termination agreement, Mr. d’Arnaud-Taylor agreed to provide the advisory and
consulting services as we may reasonably request during the three months after
the Termination Date to permit the order transfer of his duties to other
personnel and not to solicit our employees during the period ending on the
first
anniversary of the Termination Date. The agreement also provides for mutual
releases from all claims arising before the date of the agreement, other than
claims based on the released party’s willful acts, gross negligence or
dishonesty and, with respect to Mr. d’Arnaud-Taylor’s release of us, claims
vested before the date of the agreement for benefits under our employee benefit
plans and claims for indemnification for acts as an officer of our
company.
Initial
Consulting Agreement
.
On
August 25, 2006, we also entered into a consulting agreement with Mr.
d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide the
consulting and advisory services as we may reasonably request from time to
time.
During the term of the agreement, we agreed to pay Mr. d’Arnaud-Taylor $15,000
per month (payable monthly in arrears) and reimburse him for any reasonable
and
appropriately
documented
business expenses he may incur in the performance of his duties under the
agreement. The agreement provided that Mr. d’Arnaud-Taylor was not required
to dedicate more than eight days in any calendar month to the performance of
services under the agreement and that if he did provide services for more than
eight days in any calendar month, we would pay him an additional $2,000 for
each
additional day or part of a day.
The
consulting agreement had a term of one year, subject to earlier termination
by
us if Mr. d’Arnaud-Taylor failed to perform his duties under the agreement. Upon
the termination of the agreement, we would have had no obligation to Mr.
d’Arnaud-Taylor other than payment obligations accrued before the termination
date, which would have been paid within 15 days of the termination date. The
agreement included covenants by Mr. d’Arnaud-Taylor regarding
confidentiality, competition and solicitation of our customers, suppliers and
employees. This agreement was terminated effective December 1,
2006.
New
Consulting Agreement
.
On
December 1, 2006, we entered into a consulting agreement with Mr.
d’Arnaud-Taylor under which Mr. d’Arnaud-Taylor agreed to provide strategic
advice to our Chief Executive Officer. During the term of the agreement, we
paid
Mr. d’Arnaud-Taylor $15,000 per month (payable monthly in advance) and
reimbursed him for any reasonable and appropriately documented business expenses
he incurred in the performance of his duties under the agreement. The term
of
the agreement expired on November 25, 2007.
During
2006, we paid Mr. d’Arnaud-Taylor $315,000 and recognized $406,000 in cash
compensation expense. We also recognized expense of $1,344,000 related to
options granted to Mr. d’Arnaud-Taylor as a result of his employment and
$170,000 related to options granted to him as a result of his membership on
our
board of directors. During 2007, we paid Mr. d’Arnaud-Taylor $256,000 and
recognized $165,000 in cash compensation expense.
Consulting
Agreements with Jeffrey S. Langberg
In
February 2005, we entered into a consulting services agreement with Jeffrey
S.
Langberg, then one of our directors, under which Mr. Langberg agreed to provide
general business advisory services. Under this agreement, we agreed to pay
Mr.
Langberg a monthly consulting fee of $15,000 per month and a sign-on bonus
of
$225,000. Under the consulting agreement, Mr. Langberg was also eligible to
receive performances bonuses at the discretion of the board of directors as
well
as equity-based awards under the Plan. Mr. Langberg agreed to waive any
compensation otherwise payable to him while he was a director of our company.
During 2005, Mr. Langberg earned $180,000 in consulting fees and $275,000 in
bonuses. Including $194,147 he earned in 2004 that we paid him in 2005, we
paid
Mr. Langberg a total of $649,147 in 2005, and we provided him with health
insurance coverage at a cost of $14,014 to us. (We also paid rent paid to an
entity controlled by Mr. Langberg as described below under “Office Space.”) Mr.
Langberg did not receive any compensation otherwise payable to him as a director
in 2005.
On
June
12, 2006, Mr. Langberg resigned from our board of directors. On that date,
we
issued to Mr. Langberg warrants to purchases 250,000 shares of common stock
at
an exercise price of $8.32 per share that were originally scheduled to vest
upon
the date on which NewEnglandXethanol, LLC has approved and commenced its initial
project. For these purposes, the project was to be deemed to have been approved
and commenced when (a) the project has been approved, (b) financing for
construction of the project has been obtained and closed and (c) our chief
executive officer has notified our board of directors or our compensation
committee that conditions (a) and (b) have been met. Due to the contingent
nature of these warrants, we did not reflect an expense for them in our
financial statements. In September 2006, we entered into an agreement with
Mr.
Langberg that terminated our consulting agreement with him. Mr. Langberg
continued to provide consulting services directly to our board of directors
under the terms of the terminated agreement until December 20, 2006, when we
entered into another agreement with Mr. Langberg that terminated the September
2006 agreement. In the December 20, 2006 agreement with Mr. Langberg, we agreed
as follows:
|
·
|
to
pay Mr. Langberg $15,000 on December 20, 2006 and $100,000 on January
2,
2007;
|
|
·
|
to
pay him six monthly payments of $15,000 each, beginning on December
25,
2006 and continuing on the 25
th
day of each month thereafter through May 25, 2007 (in addition to
payments
in that amount previously made on September 25, 2006 and October
25,
2006), although we are longer using Mr. Langberg’s services as a
consultant;
|
|
·
|
to
cancel the warrants we granted to him on June 12, 2006, and to issue
to
him a fully vested five-year warrant to purchase 125,000 shares of
our
common stock at an exercise price of $8.32;
|
|
·
|
to
continue paying or reimbursing him for health insurance through May
25,
2007; and
|
|
·
|
to
amend the sublease arrangement with a company controlled by Mr. Langberg
to reflect the terms described in “Office Space”
below.
|
During
2006, we paid Mr. Langberg a $400,000 performance bonus, consulting fees of
$139,353 (including $4,353 in consulting fees he earned in 2005) and termination
fees of $45,000. We also paid $27,496 in health insurance and benefits on his
behalf. In connection with the warrant we agreed to issue to Mr. Langberg on
December 20, 2006, we recognized a $60,439 compensation expense for financial
statement reporting purposes for the fiscal year ended December 31, 2006 in
accordance with FAS 123(R). (On an accrual basis, our audited financial
statements reflect a $400,000 performance bonus, $135,000 in consulting fees,
$235,000 in termination fees, a $60,439 compensation expense for the warrant,
and $27,496 in health insurance and benefits.) Mr. Langberg received no
compensation as a member of the board of directors in 2006. (We also paid rent
paid to an entity controlled by Mr. Langberg as described below under “Office
Space.”)
Office
Space
In
October 2004, Old Xethanol began sharing office space in New York City with
other affiliated companies under a sublease with Xethanol Management Services,
LLC, a single member limited liability company controlled by Jeffrey S.
Langberg. Under this arrangement as amended pursuant to the December 20, 2006
agreement with Mr. Langberg described above, we are currently paying
approximately $17,000 per month, plus reimbursements of other costs, in sublease
payments on a month-to-month basis. Total payments under the sublease were
$216,964 for the year ended December 31, 2007 and $132,043 for the year ended
December 31, 2006.
Agreements
with Northeast Securities, Inc.
William
P. Behrens, a director, is the Vice Chairman of Northeast Securities, Inc.,
a
multi-line financial services firm serving both institutional and individual
clients. Under a placement agent agreement dated as of February 22, 2006 between
Northeast and us, Northeast acted as our placement agent in connection with
the
private offering of our common stock and warrants to purchase common stock
consummated on April 13, 2006. In consideration of Northeast’s services, on
April 13, 2006 we paid Northeast $1,928,397 in cash and issued to Northeast
and
its designees warrants to purchase 606,938 shares of our common stock at an
exercise price $4.50 per share, exercisable at any time until April 12, 2009.
We
issued warrants to purchase 35,000 shares of common stock to Mr. Behrens as
a
designee of Northeast. The warrants may be exercised on a “cashless” basis at
any time and are otherwise exercisable on the same terms and conditions as,
and
are entitled to registration rights on the same terms as, the warrants issued
to
the investors in the April 2006 private placement. (Mr. Behrens also acquired
in
the private offering 22,223 shares of common stock, 4,445 Series A warrants
and
2,223 Series B warrants on the same terms as the other investors in the private
offering.)
On
October 1, 2006, we entered into an advisory agreement with Northeast under
which Northeast agreed, on a non-exclusive basis, to assist us in various
corporate matters including advice relating to general capital raising, mergers
and acquisition matters, recommendations relating to business operations and
strategic planning. In consideration of these services, we agreed to pay
Northeast an advisory fee of $10,000 per month during the term of the agreement
and to reimburse Northeast for all necessary and reasonable out-of-pocket costs
and expenses it incurred in the performance of its obligations under the
agreement. The scheduled term of the agreement was one year, subject to earlier
termination by us in the event of a material breach by Northeast of any of
its
obligations under the agreement. The agreement provided that if, within twelve
months after the termination of the agreement, we either (a) consummate a
financing transaction with any investor that Northeast introduced to us before
the termination or (b) enter into a definitive agreement to consummate a
financing transaction with any such investor and the financing transaction
is
consummated within six months thereafter, then we are obligated to pay Northeast
a cash fee in line with industry standard rates (the “tail provision”). In the
agreement, we also agreed to indemnify Northeast against any losses, claims,
damages and liabilities it may incur as a result of its engagement as an advisor
under the agreement, other than losses, claims, damages and liabilities
resulting solely from Northeast’s gross negligence or willful misconduct. In May
2007, we informally amended our agreement with Northeast to eliminate the
advisory fee of $10,000 per month, although Northeast continued to perform
advisory services for us. On July 25, 2007, we formally agreed with Northeast
to
terminate the agreement, including the tail provision.
Determination
of Independent Directors
Our
board
of directors has determined that each of Mr. Behrens, Mr. Boosidan, Mr. Ditoro,
Mr. Franklin and Mr. Klett is an “independent” director within the meaning of
Rule 10A-3(b)(1)(ii) under the Exchange Act and Section 121A of the AMEX Company
Guide. In evaluating Mr. Behrens’ independence, our board considered that Mr.
Behrens is the Vice Chairman of Northeast Securities, Inc., the placement agent
for our April 2006 private placement. There were no transactions, relationships,
or arrangements not disclosed in this Item 13 pursuant to Item 404(a) of
Regulation S-K that our board considered in making the determinations of
independence described in this paragraph.
ITEM
14.
Principal
Accounting Fees and Services.
Independent
Registered Public Accounting Firm’s Fees
The
following table shows the fees accrued for audit and other services provided
by
Imowitz Koenig & Co., LLP, our independent registered public accounting
firm, for the years ended December 31, 2007 and 2006.
Year
|
|
Audit
Fees (1)
|
|
Audit-Related
Fees
(2)
|
|
Tax
Fees (3)
|
|
All Other Fees
|
|
Total
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
225,000
|
|
$
|
89,057
|
|
$
|
92,394
|
|
|
-
|
|
$
|
406,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
338,246
|
|
$
|
81,690
|
|
$
|
64,175
|
|
|
-
|
|
$
|
484,111
|
|
______________________________
(1)
|
“Audit
Fees” consist of fees for professional services provided in connection
with the audit of our financial statements and review of our quarterly
financial statements and audit services provided in connection with
other
statutory or regulatory filings. The amount shown for 2007 is an
estimate
and is subject to adjustment.
|
(2)
|
“Audit
Related Fees” consist of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review
of
our financial statements and are not reported under “Audit Fees.” During
2007 and 2006, these fees primarily related to accounting research
in
connection with our registration statements on Form SB-2 and our
current
reports on Form 8-K that we filed with the SEC.
|
(3)
|
“Tax
Fees” consist of fees associated with tax compliance, including tax return
preparation.
|
Pre-Approval
Policies and Procedures
Applicable
SEC rules require the audit committee of our board of directors to pre-approve
audit and non-audit services provided by Imowitz Koenig, our independent
registered public accounting firm. On November 28, 2005, our audit committee
began pre-approving all services by Imowitz Koenig and has pre-approved all
new
services since that time. The audit committee does not delegate its
responsibilities under the Exchange Act to our management. The audit committee
has determined that the rendering of the services other than audit services
by
Imowitz Koenig is compatible with maintaining Imowitz Koenig’s independence.
PART
IV
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES.
|
Exhibit
No.
|
|
Description
of Exhibit
|
|
|
|
3.1
|
|
Certificate
of Incorporation of Xethanol Corporation. [Incorporated by reference
to
Exhibit 2 in our Definitive Information Statement on Schedule 14C
filed
with the SEC on March 9, 2005.]
|
|
|
|
3.2
|
|
By-Laws
of Xethanol Corporation. [Incorporated by reference to Exhibit 3
in our
Definitive Information Statement on Schedule 14C filed with the SEC
on
March 9, 2005.]
|
|
|
|
3.3
|
|
Amended
and Restated Bylaws of Xethanol Corporation. [Incorporated by reference
to
Exhibit 3.1 in our current report on Form 8-K dated November 12,
2007.]
|
|
|
|
4.1
|
|
Form
of Senior Secured Royalty Income Notes issued by XethanolBioFuels,
LLC.
[Incorporated by reference to Exhibit 4.1 in our current report on
Form
8-K dated February 2, 2005.]
|
|
|
|
4.2
|
|
Specimen
Common Stock Certificate. [Incorporated by reference to Exhibit 4.3
in our
annual report on Form 10-KSB for the year ended December 31, 2005.]
|
|
|
|
4.3
|
|
Form
of Series A Warrant issued by Xethanol Corporation to the Investors
and to
Goldman Sachs & Co. [Incorporated by reference to Exhibit 4.3 in
Amendment No. 3 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on March 26, 2007.]
|
|
|
|
4.4
|
|
Form
of Series B Warrant issued by Xethanol Corporation to the Investors
and to
Goldman Sachs & Co. [Incorporated by reference to Exhibit 4.4 in
Amendment No. 3 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on March 26, 2007.]
|
|
|
|
|
|
Miscellaneous
Corporate Agreements
|
|
|
|
10.1
|
|
Agreement
of Merger and Plan of Reorganization dated February 2, 2005 by and
among
Zen Pottery Equipment, Inc., Zen Acquisition Corp. and Xethanol
Corporation. [Incorporated by reference to Exhibit 2.1 in our current
report on Form 8-K dated February 2, 2005.]
|
|
|
|
10.2
|
|
Form
of Agreement and Plan of Merger by and between Zen Pottery Equipment,
Inc.
and Xethanol Corporation. [Incorporated by reference to Exhibit 1
in our
Definitive Information Statement on Schedule 14C filed with the SEC
on
March 9, 2005.]
|
|
|
|
10.3
|
|
Form
of Security Agreement by and among Xethanol BioFuels, LLC and Lucas
Energy
Total Return Offshore, Ltd. and Lucas Energy Total Return Partners,
LLC.
[Incorporated by reference to Exhibit 10.1 in our current report
on Form
8-K dated February 2, 2005.]
|
|
|
|
10.4
|
|
Ethanol
Marketing Agreement dated May 20, 2005 by and between Xethanol BioFuels,
LLC and Aventine Renewable Energy, Inc. [Incorporated by reference
to
Exhibit 10.41 in our Amendment No. 1 to Registration Statement on
Form
SB-2 (File No. 333-135121) filed with the SEC on September 15,
2006.]
|
|
|
|
10.5
|
|
Amendment
dated July 2006 to Ethanol Marketing Agreement dated May 20, 2005
by and
between Xethanol BioFuels, LLC and Aventine Renewable Energy, Inc.
[Incorporated by reference to Exhibit 10.44 in our Amendment No.
2 to
Registration Statement on Form SB-2 (File No. 333-135121) filed with
the
SEC on November 28, 2006.]
|
Exhibit
No.
|
|
Description
of Exhibit
|
|
|
|
|
|
Agreements
with or Related to Related Parties
|
|
|
|
10.6
|
|
Xethanol
Corporation 2005 Incentive Compensation Plan, as amended on August
10,
2006, including Form of Non-Qualified Stock Option Agreement.
[Incorporated by reference to Exhibit 10.8 in Amendment No. 3 to
Registration Statement on Form SB-2 (File No. 333-135121) filed with
the
SEC on March 26, 2007.]
|
|
|
|
10.7
|
|
Form
of Non-Qualified Stock Option Agreement (for options granted on December
7, 2006). [Incorporated by reference to Exhibit 10.9 in our registration
statement on Form SB−2, Amendment No. 6, filed with the SEC on August 8,
2007.]
|
|
|
|
10.8
|
|
Form
of Non-Qualified Stock Option Agreement (for options granted during
2007).[Incorporated by reference to Exhibit 10.10 in our registration
statement on Form SB−2, Amendment No. 6, filed with the SEC on August 8,
2007.]
|
|
|
|
10.9
|
|
Termination
Agreement dated August 25, 2006 by and between Xethanol Corporation
and
Christopher d’Arnaud-Taylor. [Incorporated by reference to Exhibit 10.9 in
Amendment No. 3 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on March 26, 2007.]
|
|
|
|
10.10
|
|
Consulting
Agreement dated August 25, 2006 by and between Xethanol Corporation
and
Christopher d’Arnaud-Taylor (terminated on December 1, 2006).
[Incorporated by reference to Exhibit 10.10 in Amendment No. 3 to
Registration Statement on Form SB-2 (File No. 333-135121) filed with
the
SEC on March 26, 2007.]
|
|
|
|
10.11
|
|
Employment
Agreement dated September 7, 2006 by and between Xethanol Corporation
and
Thomas J. Endres. [Incorporated by reference to Exhibit 10.11 in
Amendment
No. 3 to Registration Statement on Form SB-2 (File No. 333-135121)
filed
with the SEC on March 26, 2007.]
|
|
|
|
10.12
|
|
Indemnification
Agreement dated October 1, 2006 by and between Xethanol Corporation
and
William P. Behrens. [Incorporated by reference to Exhibit 10.45 in
Amendment No. 2 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on November 28, 2006.] (The identical
form
of Indemnification Agreement was subsequently executed by Xethanol
Corporation and each of the following directors: Lawrence S. Bellone,
David R. Ames, Edwin L. Klett, Gill Boosidan and Robert L. Franklin.)
|
|
|
|
10.13
|
|
Consulting
Agreement dated December 1, 2006 by and between Xethanol Corporation
and
Christopher d’Arnaud-Taylor. [Incorporated by reference to Exhibit 10.13
in Amendment No. 3 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on March 26, 2007.]
|
|
|
|
10.14
|
|
Amended
and Restated Employment Agreement dated June 19, 2007 by and between
Xethanol Corporation and Thomas J. Endres. [Incorporated by reference
to
Exhibit 10.16 in our registration statement on Form SB−2, Amendment No. 6,
filed with the SEC on August 8, 2007.]
|
|
|
|
|
|
Financing
Documents
|
|
|
|
10.15
|
|
Form
of Private Placement Subscription Agreement. [Incorporated by reference
to
Exhibit 10.4 in our current report on Form 8-K dated February 2,
2005.]
|
|
|
|
10.16
|
|
Common
Stock Purchase Agreement dated October 18, 2005 by and between the
Fusion
Capital Fund II, LLC and Xethanol Corporation. [Incorporated by reference
to Exhibit 10.1 in our current report on Form 8-K dated October 18,
2005.]
|
Exhibit
No.
|
|
Description
of Exhibit
|
|
|
|
10.17
|
|
Registration
Rights Agreement dated October 18, 2005 by and between the Fusion
Capital
Fund II, LLC and Xethanol Corporation. [Incorporated by reference
to
Exhibit 10.2 in our current report on Form 8-K dated October 18,
2005.]
|
|
|
|
10.18
|
|
Form
of Warrant. [Incorporated by reference to Exhibit 4.2 in our Amendment
No.
1 to Registration Statement on Form SB-2 (File No. 333- 129191) filed
with
the SEC on December 6, 2005.]
|
|
|
|
10.19
|
|
Purchase
Agreement dated April 3, 2006 by and among Xethanol Corporation and
the
Investors. [Incorporated by reference to Exhibit 1.1 in our current
report
on Form 8-K dated April 3, 2006.]
|
|
|
|
10.20
|
|
Registration
Rights Agreement dated April 3, 2006 by and among Xethanol Corporation
and
the Investors. [Incorporated by reference to Exhibit 1.2 in our current
report on Form 8-K dated April 3, 2006.]
|
|
|
|
10.21
|
|
Purchase
Agreement dated April 3, 2006 by and among Xethanol Corporation and
Goldman Sachs & Co. [Incorporated by reference to Exhibit 1.6 in our
current report on Form 8-K dated April 3, 2006.]
|
|
|
|
10.22
|
|
Fund
Warrant dated April 21, 2006 issued to Lucas Energy Total Return
Master
Fund, Ltd. by Xethanol Corporation. [Incorporated by reference to
Exhibit
3.1 in our current report on Form 8-K dated April 7,
2006.]
|
|
|
|
10.23
|
|
Partners
Warrant dated April 21, 2006 issued to Lucas Energy Total Return
Partners,
Ltd. by Xethanol Corporation. [Incorporated by reference to Exhibit
3.2 in
our current report on Form 8-K dated April 7, 2006.]
|
|
|
|
10.24
|
|
Mutual
Termination Agreement by and between Xethanol Corporation and Fusion
Capital Fund II, LLC dated November 13, 2007. [Incorporated by reference
to Exhibit 10.1 in our current report on Form 8-K dated November
12,
2007.]
|
|
|
|
|
|
Documents
Related to Joint Ventures
|
|
|
|
10.25
|
|
Organizational
Agreement dated May 30, 2006 by and among Xethanol Corporation, Coastal
Energy Development, Inc. and CoastalXethanol LLC. [Incorporated by
reference to Exhibit 1.1 in our current report on Form 8-K dated
May 30,
2006.]
|
|
|
|
10.26
|
|
Operating
Agreement dated May 30, 2006 by and among Xethanol Corporation, Coastal
Energy Development, Inc. and CoastalXethanol LLC. [Incorporated by
reference to Exhibit 1.2 in our current report on Form 8-K dated
May 30,
2006.]
|
|
|
|
10.27
|
|
Form
of Warrant dated May 30, 2006 issued to Coastal Energy Development,
Inc.
by Xethanol Corporation. [Incorporated by reference to Exhibit 3.2
in our
current report on Form 8-K dated April 7, 2006.]
|
|
|
|
10.28
|
|
Organizational
Agreement dated June 23, 2006 by and among Xethanol Corporation,
Global
Energy and Management, LLC and NewEnglandXethanol, LLC. [Incorporated
by
reference to Exhibit 1.1 in our current report on Form 8-K dated
June 23,
2006.]
|
|
|
|
10.29
|
|
Operating
Agreement dated June 23, 2006 by and among Xethanol Corporation,
Global
Energy and Management, LLC and NewEnglandXethanol, LLC. [Incorporated
by
reference to Exhibit 1.2 in our current report on Form 8-K dated
June 23,
2006.]
|
|
|
|
10.30
|
|
Warrant
dated June 23, 2006 issued to Global Energy and Management LLC by
Xethanol
Corporation. [Incorporated by reference to Exhibit 3.1 in our current
report on Form 8-K dated June 23,
2006.]
|
Exhibit
No.
|
|
Description
of Exhibit
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10.31
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First
Amendment to Organizational Agreement and Operation Agreement dated
August
22, 2006 by and among Xethanol Corporation, Coastal Energy Development,
Inc. and CoastalXethanol LLC. [Incorporated by reference to Exhibit
10.32
in Amendment No. 6 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on August 8, 2007.]
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Agreements
Related to Acquisitions of Facilities
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10.32
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Purchase
and Sale Agreement dated August 4, 2006 by and among Augusta BioFuels,
LLC, an indirect subsidiary of Xethanol Corporation, Pfizer Inc.,
G.D.
Searle LLC and CoastalXethanol LLC. [Incorporated by reference to
Exhibit
10.29 in Amendment No. 3 to Registration Statement on Form SB-2 (File
No.
333-135121) filed with the SEC on March 26, 2007.]
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10.33
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Asset
Purchase Agreement dated August 7, 2006 by and among Xethanol Corporation,
Carolina Fiberboard Corporation LLC and Victor Kramer. [Incorporated
by
reference to Exhibit 10.30 in Amendment No. 3 to Registration Statement
on
Form SB-2 (File No. 333-135121) filed with the SEC on March 26,
2007.]
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10.34
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Amended
and Restated Asset Purchase Agreement dated November 7, 2006 by and
among
Xethanol Corporation, Carolina Fiberboard Corporation, LLC and Victor
Kramer. [Incorporated by reference to Exhibit 10.47 in our Amendment
No. 2
to Registration Statement on Form SB-2 (File No. 333-135121) filed
with
the SEC on November 28, 2006.]
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10.35
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Escrow
Agreement dated November 7, 2006 by and between Xethanol Corporation
and
Carolina Fiberboard Corporation. [Incorporated by reference to Exhibit
10.32 in Amendment No. 3 to Registration Statement on Form SB-2 (File
No.
333-135121) filed with the SEC on March 26, 2007.]
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Technology-Related
Agreements
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(for
Agreements Related to H2Diesel, see below)
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10.36
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Strategic
Alliance Agreement dated April 1, 2004 by and between UTEK Corporation
and
Xethanol Corporation. [Incorporated by reference to Exhibit 10.31
in our
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on September 15, 2006.]
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10.37
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Letter
Agreement dated March 17, 2005 by and between UTEK Corporation and
Xethanol Corporation. [Incorporated by reference to Exhibit 10.32
in our
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on September 15, 2006.]
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10.38
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Letter
Agreement dated April 12, 2006 by and between UTEK Corporation and
Xethanol Corporation. [Incorporated by reference to Exhibit 10.33
in our
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on September 15, 2006.]
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10.39
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Agreement
and Plan of Acquisition dated June 13, 2006 by and among Advanced
Biomass
Gasification Technologies, Inc., UTEK Corporation and Xethanol
Corporation. [Incorporated by reference to Exhibit 10.4 in our current
report on Form 8-K dated June 12, 2006.]
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10.40
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License Agreement
dated June 24, 2005 by and between Virginia Tech Intellectual Properties,
Inc. and Advanced Bioethanol Technologies, Inc., a wholly owned subsidiary
of UTEK Corporation. [Incorporated by reference to Exhibit 10.34
in our
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
333-135121) filed with the SEC on September 15, 2006.]
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Exhibit
No.
|
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Description
of Exhibit
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10.41
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Research
Agreement dated December 6, 2005 between Virginia Polytechnic Institute
and State University and Xethanol. [Incorporated by reference to
Exhibit
10.35 in our Amendment No. 1 to Registration Statement on Form SB-2
(File
No. 333-135121) filed with the SEC on September 15, 2006.]
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10.42
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Exclusive
Patent License by and between Midwest Research Institute, Management
and
Operating Contractor for the National Renewable Energy Laboratory
and
Superior Separation Technologies, Inc. [Incorporated by reference
to
Exhibit 10.37 in our Amendment No. 1 to Registration Statement on
Form
SB-2 (File No. 333-135121) filed with the SEC on September 15, 2006.]
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10.43
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Cooperative
Research and Development Agreement dated May 1, 2006 by and between
Midwest Research Institute, Management and Operating Contractor for
the
National Renewable Energy Laboratory and Superior Separation Technologies,
Inc. [Incorporated by reference to Exhibit 10.38 in our Amendment
No. 1 to
Registration Statement on Form SB-2 (File No. 333-135121) filed with
the
SEC on September 15, 2006.]
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10.44
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Non-Exclusive
License Agreement dated June 30, 2005 by and between Wisconsin Alumni
Research Foundation and Xylose Technologies, Inc. [Incorporated by
reference to Exhibit 10.39 in our Amendment No. 1 to Registration
Statement on Form SB-2 (File No. 333-135121) filed with the SEC on
September 15, 2006.]
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10.45
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Marketing
and License Agreement dated October 19, 2005 by and between Xethanol
Corporation and DDS Technologies USA, Inc. [Incorporated by reference
to
Exhibit 10.42 in our Amendment No. 1 to Registration Statement on
Form
SB-2 (File No. 333-135121) filed with the SEC on September 15,
2006.]
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10.46
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Cooperative
Research and Development Agreement dated November 30, 2005 between
USDA,
Forest Service Forest Products Laboratory and Xylose Technologies,
Inc.
[Incorporated by reference to Exhibit 10.40 in our Amendment No.
1 to
Registration Statement on Form SB-2 (File No. 333-135121) filed with
the
SEC on September 15, 2006.]
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10.47
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Base
Research Agreement dated May 24, 2006 by and between the University
of
North Dakota Energy and Environmental Research Center and Advanced
Biomass
Gasification Technologies, Inc. [Incorporated by reference to Exhibit
10.5
in our current report on Form 8-K dated June 12, 2006.]
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10.48
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Exclusive
Patent and Know-How Final License Agreement dated May 24, 2006 by
and
between the Energy and Environmental Research Center Foundation and
Advanced Biomass Gasification Technologies, Inc. [Incorporated by
reference to Exhibit 10.6 in our current report on Form 8-K dated
June 12,
2006.]
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Agreements
Related to H2Diesel
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10.49
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Management
Agreement dated April 14, 2006 by and between Xethanol Corporation
and
H2Diesel, Inc. [Incorporated by reference to Exhibit 1.3 in our current
report on Form 8-K dated April 14, 2006.]
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10.50
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Sublicense
Agreement dated April 14, 2006 by and between Xethanol Corporation
and
H2Diesel, Inc. [Incorporated by reference to Exhibit 1.4 in our current
report on Form 8-K dated April 14, 2006.]
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10.51
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Investment
Agreement dated April 14, 2006 by and among Xethanol Corporation
and
H2Diesel, Inc., and the Investors. [Incorporated by reference to
Exhibit
1.1 in our current report on Form 8-K dated April 14,
2006.]
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Exhibit
No.
|
|
Description
of Exhibit
|
|
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10.52
|
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Registration
Rights Agreement dated April 14, 2006 by and among Xethanol Corporation
and the Investors. [Incorporated by reference to Exhibit 1.2 in our
current report on Form 8-K dated April 14, 2006.].
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10.53
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Registration
Rights Agreement dated April 14, 2006 by and among Xethanol Corporation,
Crestview Capital Master, LLC and TOIBB Investment, LLC. [Incorporated
by
reference to Exhibit 10.43 in our Amendment No. 1 to Registration
Statement on Form SB-2 (File No. 333-135121) filed with the SEC on
September 15, 2006.]
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10.54
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First
Amendment to Investment Agreement dated June 15, 2006 by and among
Xethanol Corporation, H2Diesel, Inc., and the Investors. [Incorporated
by
reference to Exhibit 10.1 in our current report on Form 8-K dated
June 12,
2006.]
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10.55
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Amended
and Restated Sublicense Agreement dated June 15, 2006 by and between
Xethanol Corporation and H2Diesel, Inc. [Incorporated by reference
to
Exhibit 10.2 in our current report on Form 8-K dated June 12,
2006.]
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10.56
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Technology
Access Agreement dated June 15, 2006 by and between Xethanol Corporation
and H2Diesel, Inc. [Incorporated by reference to Exhibit 10.3 in
our
current report on Form 8-K dated June 12, 2006.]
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21
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Subsidiaries
of Xethanol Corporation.
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24
|
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Power
of Attorney (contained on the signature page hereof).
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31
|
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Certifications
of David R. Ames and Gary Flicker pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32
|
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Certifications
of David R. Ames and Gary Flicker pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. This exhibit is not “filed” for purposes of
Section 18 of the Securities Exchange Act of 1934 but is instead
furnished
as provided by applicable rules of the Securities and Exchange
Commission.
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
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XETHANOL
CORPORATION
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Date:
March 31, 2008
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By:
|
/s/
David R. Ames
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David
R. Ames
Chief
Executive Officer and President
(principal
executive officer)
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Date:
March 31, 2008
|
By:
|
/s/
Gary Flicker
|
|
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Gary
Flicker
Chief
Financial Officer and Executive Vice President
(principal
financial officer)
|
POWER
OF ATTORNEY
KNOW
ALL
MEN BY THESE PRESENTS, that each director and officer whose signature appears
below constitutes and appoints each of David R. Ames and Gary Flicker, either
of
them signing individually, as his true and lawful attorney-in-fact and agent,
with full powers of substitution and resubstitution, for him and in his name,
place and stead, to sign in any and all capacities any and all amendments to
this annual report on Form 10-K and to file the same, with all exhibits thereto
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing
requisite and necessary to be done, as fully to all intents and purposes as
he
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant
to the requirements of Securities Exchange Act of 1934, as amended, this report
has been signed by the following persons in the capacities and on the date
indicated.
Signature
|
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Title
|
|
Date
|
|
|
|
|
|
/s/
David R. Ames
|
|
Director, Chief
Executive Officer
|
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March
31, 2008
|
David
R. Ames
|
|
and
President
|
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*
|
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Chief
Financial Officer
|
|
March
31, 2008
|
Gary
Flicker
|
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and
Executive Vice President
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*
|
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Chairman
of the Board of Directors
|
|
March
31, 2008
|
William
P. Behrens
|
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*
|
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Director
|
|
March
31, 2008
|
Gil
Boosidan
|
|
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*
|
|
Director
|
|
March
31, 2008
|
Richard
D. Ditoro
|
|
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|
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*
|
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Director
|
|
March
31, 2008
|
Robert
L. Franklin
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*
|
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Director
|
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March
31, 2008
|
Edwin
L. Klett
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*By:
|
/s/ David
R. Ames
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|
|
Attorney-in-fact
David R. Ames
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|
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