Imperium Renewables Inc. (IRI)

Form S-1 Registration Statement   

As filed with the Securities and Exchange Commission on May 23, 2007

Overview

We expect to be the largest “pure-play” biodiesel producer in the U.S. in 2007 based on nameplate capacity, according to the NBB. We design, develop, build, own and operate biodiesel production facilities that will be capable of consistently producing industrial scale quantities of biodiesel from multiple feedstocks that exceed industry quality standards. We are building the first facility in the U.S. with a 100 million gallon per year, or MGY, nameplate capacity, and we are developing three additional production facilities that will expand our aggregate nameplate capacity to approximately 405 MGY by the end of 2008. We believe that we will be among the lowest-cost providers, if not the lowest-cost provider, of biodiesel in the U.S. due to the strategic locations of our production facilities, our proprietary process and technological innovations, our ability to utilize multiple feedstocks, and our internal project engineering expertise. Since 2005, we have been selling biodiesel directly and through distributors to a variety of users, including industrial users, fleet and marine operators, utilities, fuel distributors and blenders, and federal, state and local governments. We also have a contractual commitment from a large industrial fuel user to purchase, at a minimum, approximately 18 million gallons of biodiesel annually for approximately five years with an option for a three-year extension. We believe this is the single largest long-term biodiesel sales contract to an end user in the U.S.

Biodiesel is a biodegradable, nontoxic alternative fuel produced from multiple types of vegetable oil and other feedstocks. Biodiesel performs comparably to petroleum diesel, or diesel, in vehicle, marine, power generation and home heating oil applications. Biodiesel can be used as a direct replacement for diesel and can also be blended with diesel. Many industrial biodiesel consumers use B99, which is a blend containing 99% biodiesel and 1% diesel. In comparison to ethanol, which is used primarily as an oxygenate that typically replaces up to 10% of gasoline, biodiesel can be used as a direct replacement for diesel at levels up to 100%, which increases the potential penetration of biodiesel in the diesel market relative to the potential penetration of ethanol in the gasoline market. To use ethanol as a replacement fuel or in blends higher than 10% generally requires significant engine modification. Biodiesel represents less than 0.4% of the overall U.S. diesel market, based on 2006 figures. In the U.S., biodiesel consumption has grown from approximately 500,000 gallons in 1999 to more than an estimated 250 million gallons in 2006.
 
Our competitive strengths include:

Superior logistics. We are locating our production facilities and distribution logistics in and around coastal deep water ports that provide us with multiple operating, cost and business model advantages compared to other industry participants.
 
Feedstock flexibility. Our production facilities are being designed to produce biodiesel simultaneously from multiple feedstocks, including canola, soybean, and palm oil, as well as jatropha, mustard and other feedstocks. This allows us to shift into and out of different feedstocks based on customer demand and market cost dynamics without hindering our production process or substantially increasing our operating costs.
 
Our corporate offices are located at 1418 Third Avenue, Suite 300, Seattle, Washington 98101. We were incorporated in Washington in May 2005. Until May 17, 2005, our business was part of Seattle Biodiesel LLC, at which time we merged  Seattle Biodiesel LLC into a wholly-owned subsidiary, pursuant to which Seattle  Biodiesel LLC became our subsidiary. Our website address is  http://www.imperiumrenewables.com and our telephone number is (206) 254-0203.

The number of shares of common stock that will be outstanding after this offering is based on 33,824,875 shares outstanding at March 31, 2007, which assumes the issuance of 2,385,069 shares of common stock issuable upon exercise of all of our outstanding warrants and an option issued outside of our 2005 Stock Option Plan that terminate immediately prior to the effectiveness of this offering if not exercised, but excludes as of March 31, 2007:

Risks Relating to Our Business

The price of vegetable oil is influenced by various global factors including weather conditions and other factors affecting crop yields, farmer planting decisions, the output and proximity of crush facilities that convert the crops to oil, and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, global and local demand and supply and political and social factors that may cause fewer acres of oilseed crops to be planted, or used for biodiesel production. The significance and relative effect of these factors on the price of vegetable oils is difficult to predict. Any event that tends to negatively affect the supply of vegetable oil, such as adverse weather or crop disease, could increase vegetable oil prices and potentially harm our business. In addition, we may also have difficulty, from time to time, in sourcing vegetable or other oils on economical terms due to supply shortages. A shortage of any particular feedstock may require us to source other types of feedstock at less favorable prices, which may have a material adverse effect on our business and financial condition.

Our financial condition and results of operations are highly dependent on the price of crude oil, diesel and biodiesel, which are subject to significant volatility and uncertainty. Fluctuations in the selling price and production cost of crude oil and diesel may reduce our gross margins.  

We plan to grow our business by building three new 100 MGY nameplate capacity facilities, in addition to our Grays Harbor production facility, over the next 18 months at sites in Hawaii, in Argentina and on the U.S. East Coast. These three new production facilities are in various stages of planning and development. We are also currently evaluating several sites globally, including in Belgium, China and the Philippines, for possible additional production facilities. Development, construction and expansion of biodiesel production facilities is subject to a number of risks, any of which could prevent us from commencing operations at a particular facility as expected or at all, including adverse weather conditions, defects in materials and workmanship, labor and material shortages or delays, zoning delays, opposition from local groups, transportation constraints, construction change orders, site changes, labor issues and other unforeseen difficulties. For example, if the barge we have leased is not delivered on time, we may suffer delays in delivery of feedstock from suppliers and delivery of biodiesel to customers. We must also obtain numerous regulatory approvals and permits to construct and operate new production facilities. These requirements may not be satisfied in a timely manner or at all. In addition, as described below under “—Risks Relating to the Biodiesel Industry—We may be adversely affected by environmental, health and safety laws, regulations and liabilities,” federal and state governmental requirements may substantially increase our costs, which could have a material adverse effect on our results of operations and financial condition. Our expansion plans may also result in other adverse consequences, such as the diversion of management’s attention from our existing operations.

We believe that the net proceeds of this offering will only be sufficient to fund the construction costs of our next three planned production facilities. Total construction costs to complete our Grays Harbor production facility are expected to be approximately $73 million, but construction costs in other regions could be more expensive. For example, construction costs of our planned production facility in Hawaii are expected to be approximately 25% higher than our Grays Harbor construction cost for a production facility with the same capacity.


We will depend on a single customer for a substantial portion of our revenue during 2007 and 2008, and the loss of, or a significant reduction in biodiesel purchased by, this customer could significantly reduce our revenue.

We have entered into a biodiesel purchase agreement with a large industrial fuel user that provides for our delivery of approximately 18 million gallons of biodiesel to this user in 2007, which may increase by up to 10% per year through 2011. The purchase agreement with this user is currently the only major long-term biodiesel customer contract that we have, and we expect this contract to account for a substantial portion of our 2007 and 2008 revenue. This user could terminate this agreement for any reason with six months’ prior written notice, subject to a termination fee, or in the event of our inability to perform our responsibilities, our insolvency, our uncured material breach of the agreements, including our inability to supply biodiesel at required specifications, or if any law, regulation, judgment or order makes our performance of any obligation under the agreement illegal or prohibited. The termination of, or a significant reduction in biodiesel purchased under, the purchase agreement would materially reduce our revenue and would harm our financial condition and results of operations.

 Cold weather can cause biodiesel to gel, which could cause consumers to lose confidence in the reliability of biodiesel. Such loss of confidence could adversely impact our ability to successfully market and sell our biodiesel.

The pour point for a fuel is the temperature at which the flow of the fuel substantially stops. A lower pour point means the fuel will flow more readily in cold weather. The pour points for No. 2 diesel and No. 1 diesel, which are used extensively for automotive transportation, are approximately -17ºF and -45ºF, respectively. In contrast, the pour points of canola-based, soybean-based and palm-based pure biodiesel, or B100, are approximately 16ºF, 32ºF and 54ºF, respectively. The pour points for biodiesel vary with the particular feedstock, increasing or decreasing with the level of unsaturated fatty acids. Therefore, for certain uses, we believe we will need to blend the biodiesel we produce with diesel or other additives to provide a biodiesel product that has an acceptable pour point in cold weather. In colder temperatures, lower blends are recommended to avoid fuel system plugging. This may cause the demand for our biodiesel in colder climates to diminish seasonally. This may also require us to use particular feedstocks that customers believe are better suited for their climate, which could require us to purchase more expensive feedstocks and increase our cost of sales. The tendency of biodiesel to gel in colder weather may also result in long-term storage problems. At low temperatures, biodiesel may need to be stored in a heated building or heated storage tanks, which would increase storage costs. Any reduction in the demand for, or increased costs of, our biodiesel will reduce our revenue and have an adverse effect on our financial condition and results of operations.

Problems with product quality or product performance could result in a decrease in customers and revenue, unexpected expenses and loss of market share.

The production of biodiesel that meets stringent quality requirements is complex. Concerns about fuel quality may impact our ability to successfully market our biodiesel. If we are unable to produce biodiesel that meets the industry quality standard, our credibility and the market acceptance and sales of our biodiesel could be negatively affected. In addition, actual or perceived problems with quality control in the industry generally may lead to a lack of consumer confidence in biodiesel and harm our ability to successfully market biodiesel. For example, the State of Minnesota temporarily suspended its 2% biodiesel, or B2, requirement on at least two occasions due to concerns about biodiesel quality. Similar quality control issues in biodiesel that we produce or that is produced by other industry participants could result in a decrease in demand or mandates for biodiesel, with a resulting decrease in our revenue.

 

Our future growth will depend on our ability to establish and maintain strategic relationships with distributors and feedstock suppliers. If we are unable to establish and maintain such relationships our business growth strategy could be significantly limited.

Our future growth generally depends on our ability to establish and maintain relationships with third parties, including alliances with distributors and feedstock suppliers. For example, we currently rely on an agreement with Methanex Methanol Company, or Methanex, to supply methanol to us for our Grays Harbor production facility. However, we will need to enter into additional agreements with Methanex or other third parties to supply us with required quantities of methanol for our planned production facilities in Hawaii, in Argentina and on the U.S. East Coast. Further, we will need to enter into agreements with additional suppliers of vegetable oils. In addition, we will rely to a certain extent on third parties to sell and market our biodiesel. We cannot assure you that we will be able to establish strategic relationships with third parties on terms satisfactory to us or at all, or that any arrangements that we enter into will result in the type of collaborative relationship with the third party that we are seeking. Further, these third parties may not regard their relationship with us as important to their own business and operations and may not perform their obligations as agreed. Any failure to develop and maintain satisfactory relationships with distributors and feedstock suppliers would have a material adverse effect on our business.  (pages 12-13)

 We have a limited operating history and our business may not be as successful as we envision. We began our business in 2004 and commenced commercial operations at our Seattle production facility in 2005, and plan to commence production at our Grays Harbor production facility in July 2007. Accordingly, we have a limited operating history from which you can evaluate our business and prospects. We have generated net losses and negative cash flow from operations since we commenced our operations. For example, for 2006 and the quarter ended March 31, 2007, we incurred net losses of approximately $5.5 million and $2.8 million, respectively, our net cash used in operating activities was approximately $3.8 million and $23.1 million, respectively, and, at March 31, 2007, our accumulated deficit was approximately $9.3 million. We expect to incur increasing net losses and negative cash flow from operations through at least the end of 2007 and possibly in future periods as we build new productions facilities, hire additional employees, apply for regulatory approvals, continue development of our technology, expand our operations and incur the additional costs of operating as a public company.

 A third party owns 7% of Imperium Grays Harbor, LLC, our subsidiary that owns and operates the Grays Harbor production facility. In addition to its economic interest, the third party has the right to appoint a manager to the governing board of managers of Imperium Grays Harbor, LLC. The consent of the third party’s appointed manager is required for a number of matters, including equity and debt financings, payment of cash dividends, and the sale or liquidation of Imperium Grays Harbor, LLC. Because of the third party’s separate business objectives with respect to the operations of this production facility and our obligations under our biodiesel purchase agreement with the third party, there is a risk that the third party may not provide its consent on such matters. On or after September 2009, or earlier if necessary to resolve any dispute, we may be required, pursuant to a put right held by the third party attributable to its interest, to acquire the third party’s interest in Imperium

In an attempt to partially offset the effects of volatility of the spot prices for vegetable oils and biodiesel, we may from time to time purchase vegetable oil in the cash market and hedge the related price risk through futures contracts and options to reduce short-term exposure to price fluctuations on a forward basis and also engage in other hedging transactions involving exchange-traded and off-exchange futures contracts for vegetable oils. The financial statement impact of these activities is dependent on, among other things, the prices involved and our ability to sell sufficient products to use all of the vegetable oils for which we have futures contracts. Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us. There is no assurance that our hedging activities will successfully reduce the risk caused by price fluctuation tha may leave us vulnerable to high vegetable oil prices. Hedging activities can themselves result in losses when a position is purchased in a declining market or a position is sold in a rising market. We also vary the amount of hedging or other risk mitigation strategies we undertake, and we may choose not to engage in hedging transactions at all. As a result, our financial condition may be adversely affected by increases in the prices of vegetable oils or decreases in the price of biodiesel or diesel.

The biodiesel industry is extremely competitive and growing more intense as more production facilities are built and the industry expands globally. We may not be able to compete successfully against current or potential competitors. In the U.S., we primarily compete with three groups of biodiesel producers: large-scale biodiesel production facilities, including companies that have divisions devoted to biodiesel production, such as Archer Daniels Midland Company and Cargill, Inc.; start-up biodiesel refineries that are entering the market; and large petroleum refining companies that are developing large-scale refineries that use natural gas, coal and other non-renewable feedstocks. Many of these competitors have greater financial resources than we do. While the nameplate capacity of our new Grays Harbor production facility will make this facility the largest biodiesel production facility in the U.S., our competitors could develop more efficient biodiesel refining methods that would increase their biodiesel production capacity and place downward pressure on biodiesel pricing. For example, in April 2007, ConocoPhillips and Tyson Foods, Inc. announced a joint project to construct a facility that produces renewable diesel from animal fat, which they estimate will cost approximately $100 million and when fully functioning will produce 175 MGY of renewable diesel.

According to the NBB, as of January 31, 2007, there were 105 biodiesel production facilities in operation in the U.S. with reported aggregate annual production capacity of approximately 864 million gallons and 85 facilities under construction or expansion with expected additional annual production capacity of approximately 1.7 billion gallons. All of these facilities currently, or will in the future, compete with us for feedstocks and customers.

In addition, we will face competition from international biodiesel suppliers outside the U.S. if we attempt to sell into international markets, such as Europe. The European biodiesel market is more mature than the market in the U.S., and there are more competitors with greater production capacity than in the U.S. Any increase in domestic or foreign competition could cause us to reduce our prices and take other steps to compete effectively, which could adversely affect our results of operations and financial condition.

The U.S. biodiesel industry is highly dependent on a mix of federal and state legislation and regulation and any changes in legislation or regulation could harm our business and financial condition.

The elimination or a significant reduction in the biodiesel tax credit could have a material adverse effect on the price of biodiesel and on our financial condition and results of operations. Federal tax incentives make the cost of biodiesel production significantly more competitive with the price of diesel. Currently, under the American Jobs Creation Act of 2004 and the Energy Policy Act of 2005, or EPAct, producers of diesel/biodiesel blends can claim up to a $1.00 tax credit per gallon of biodiesel produced from virgin vegetable oils. This credit is currently scheduled to terminate on December 31, 2008, and there can be no assurance that it will be renewed on similar terms, if at all. In addition, this credit and other federal and state programs that benefit biodiesel generally are subject to U.S. government obligations under international trade agreements, including those under the World Trade Organization Agreement on Subsidies and Countervailing Measures, that might in the future be the subject of challenges. The elimination or significant reduction in the biodiesel tax credit or other programs could harm our results of operations and financial condition. See “Industry Background—Government Incentives for Biodiesel Production and Use.”
 
Our revenue will be greatly affected by the price at which we can sell our biodiesel. These prices can be volatile as a result of a number of factors. These factors include the overall supply of and demand for biodiesel, the price of crude oil and diesel, the level of government support, and the availability and price of competing products. U.S. biodiesel prices generally parallel the movement of crude oil and diesel prices. Crude oil and diesel prices are difficult to forecast because the market reflects the global economy, which is subject to political upheaval, natural disasters, and other myriad factors. Even the slightest rumor of political instability can significantly affect the price of crude oil and diesel. Further, exchange rates play a key role in domestic oil pricing. Any lowering of crude oil or diesel prices will likely also lead to lower prices for biodiesel, which may decrease our biodiesel sales and reduce revenue.

 Biodiesel imported from other countries may be a less expensive alternative to our biodiesel, which would cause us to lose market share or adversely affect our efforts to operate internationally.

Biodiesel imported from other countries may be a less expensive alternative to domestically produced biodiesel. Foreign countries may have more abundant supplies of soybean, palm or canola oil, or other feedstocks, less expensive labor, more biodiesel production capacity, more advanced biodiesel infrastructure or technology, more favorable government incentives or other policies, or other economic factors that allow for sales of foreign biodiesel to both U.S. and international customers at prices lower than biodiesel produced in the U.S. The absence of U.S. protective tariffs similar to those imposed on ethanol imports, and any resulting competition in the U.S. from biodiesel imported from other countries, may affect our ability to sell biodiesel profitably.

Growth in the sale and distribution of biodiesel depends on changes to and expansion of related infrastructure, which may not occur on a timely basis, if at all, and our operations could be adversely affected by infrastructure disruptions.

Growth in the biodiesel industry depends on substantial development of infrastructure, such as rail capacity and available barge fleets, to transport raw materials and biodiesel. Areas requiring expansion include:

  •   additional deep-water port access and rail capacity;
  •   additional terminal and storage facilities for biodiesel;
  •   growth in use of pipelines to transport biodiesel, including the ability to transport biodiesel blends above 20%;
  •   increases in truck fleets capable of effectively transporting biodiesel within localized markets; and
  •   growth in the number of service stations equipped to distribute biodiesel.
 
Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand or prices for our products, impede our delivery of biodiesel, impose additional costs on us or otherwise have a material adverse effect on our financial condition. Our business depends on the continuing availability of infrastructure and any infrastructure disruptions could have a material adverse effect on our business.

Adverse public opinions concerning the source of our feedstocks could harm our business. We plan to use significant amounts of palm oil from Southeast Asia, primarily Indonesia and Malaysia, in the production of biodiesel. Palm oil is currently the least expensive vegetable oil feedstock that we use. (page 22)

Environmental and other groups have recently expressed concern that the growing demand for palm oil may result in the clearing of rainforests in Southeast Asia and could threaten animal and plant species in that region. Palm oil growers, processors and environmental groups are working to develop regulations that would attempt to balance the supply of palm oil against these other ecological issues. Public concerns have also been raised concerning the use of soybeans as an alternative fuel feedstock.

Historically soybeans have been used for food production, both domestically and as a significant export. The increased use of soybeans as a biodiesel feedstock contributes to the increasing price of soybeans, and could result in decreased availability of soybeans for food production, and could lead farmers to convert to soybean production from the production of other crops that contribute to domestic or international food production. Unfavorable public opinions concerning the use of palm oil, soybeans and other feedstocks, or negative publicity arising from such use, could reduce the global supply of such feedstocks, increase our production costs and reduce the global demand for biodiesel, any of which could harm our business and adversely affect our financial condition. (page 23)

 
Overview

We expect to be the largest “pure-play” biodiesel producer in the U.S. in 2007 based on nameplate capacity, according to the NBB. We design, develop, build, own and operate biodiesel production facilities that will be capable of consistently producing industrial scale quantities of biodiesel from multiple feedstocks that exceed industry quality standards. We are building the first facility in the U.S. with a 100 million gallon per year, or MGY, nameplate capacity, and we are developing three additional facilities that will expand our aggregate nameplate capacity to approximately 405 MGY by the end of 2008. We believe that we will be among the lowest-cost providers, if not the lowest-cost provider, of biodiesel in the U.S. due to the strategic locations of our production facilities, our proprietary process and technological innovations, our ability to utilize multiple feedstocks, and our internal project engineering expertise. Since 2005, we have been selling biodiesel directly and through distributors to a variety of users, including industrial users, fleet and marine operators, utilities, fuel distributors and blenders, and federal, state and local governments. We also have a contractual commitment from a large industrial fuel user to purchase, at a minimum, approximately 18 million gallons of biodiesel annually for approximately five years with an option for a three-year extension. We believe this is the single largest long-term biodiesel sales contract to an end user in the U.S.

Primary Components of Revenue and Expenses

Product sales. We generate revenue primarily from the sale of biodiesel and to a lesser extent glycerin, which is a co-product of the biodiesel production process. Our primary source of revenue from inception through March 31, 2007 has been from the sale of biodiesel produced at our Seattle production facility. In addition, we sold approximately 138,000 gallons of biodiesel purchased from other biodiesel producers during 2006 to meet increased demand by certain of our customers. Sales related to biodiesel accounted for 99% of our net sales in 2005 and 2006. We expect to purchase approximately 16.5 million gallons of biodiesel from other biodiesel producers in 2007 to satisfy our obligations under our purchase agreement with a large industrial fuel user.

The selling prices we realize for our biodiesel are largely determined by the market demand for biodiesel, which, in turn, is influenced by various factors, including:

The price of crude oil and diesel—the price of biodiesel over the long term has been correlated to the price of diesel, which closely follows the price of crude oil. The prices of both crude oil and diesel tend to increase in the summer, due to the summer driving season, and in winter, due to home heating needs. In addition, the prices of crude oil and diesel fluctuate substantially and are difficult to forecast due to factors such as war, political unrest, worldwide economic conditions, changes in refining capacity, fluctuations in exchange rates and natural disasters;
 
Federal and state renewable fuel standards and tax incentives—federal, state and local governments have sought to encourage biodiesel production and use in the U.S. through numerous regulations that either provide economic incentives for biodiesel producers and users or mandate the use of specified levels of biodiesel. Any change or elimination in such federal and state incentives could adversely impact the demand for biodiesel
 

Industry fundamentals—the biodiesel industry has experienced significant increases in capacity, demand and biodiesel price in recent years. Demand has been driven largely by regulatory changes, such as the U.S. Environmental Protection Agency’s new Ultra-Low Sulfur Diesel, or ULSD, regulation, which went into effect in 2006 and increasing shortages of refining capacity in the U.S. The higher prices of biodiesel may not continue if supply exceeds demand even if crude oil and diesel prices remain high.
 

Spread between biodiesel and vegetable oil prices. Our gross margin depends principally on the spread between biodiesel sales prices and vegetable oil prices. For example, in 2005 and the first half of 2006, the spread between biodiesel and soybean prices was at a historically high level, driven in large part by high crude oil and diesel prices and low soybean oil prices resulting from high soybean oil yields. However, since September 2006, soybean prices have increased substantially, resulting in a lower gross margin for our biodiesel. Any increase or reduction in the spread between biodiesel and vegetable oil prices, whether as a result of a change in vegetable oil prices or biodiesel prices, will have an effect on our financial performance. The following graph sets forth biodiesel and vegetable oil price data for recent periods and illustrates the volatility in market prices for these commodities.

Cost of sales and gross loss. Our gross loss is derived from our total revenue less our cost of sales. Our cost of sales is primarily affected by the cost of vegetable oil, methanol, labor and manufacturing overhead and other expenses. Vegetable oil was our most significant raw material cost for 2006 and the quarter ended March 31, 2007, and is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions, the output and proximity of crush facilities that convert the crops to oil, and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. Methanol represents our second largest cost. We typically purchase vegetable oil and methanol under long-term contracts or at current market prices, depending on market conditions and based on our production obligations under our customer supply agreements. Labor and manufacturing overhead expenses represent the third major component of our cost of sales, and includes salaries and benefits paid to our production facility employees, related payroll taxes, stock-based compensation related to our production facility employees, depreciation and facility rent. Other expenses include the cost of other minor raw materials, such as magnesol, sodium methylate and citric acid, utilities, equipment and supplies used in the production of biodiesel.

Research and development expenses. Research and development expenses consist of salaries and benefits paid to our research and development employees, related stock-based compensation, research activities performed by third parties, materials, supplies and other expenses incurred to sustain our overall research and product development programs primarily related to our biodiesel production process and next generation feedstock development. Internal research and development costs are expensed as incurred.

Product sales. Our product sales consist primarily of sales of biodiesel and, to a lesser extent, our co-product, glycerin, from our Seattle production facility. Product sales increased $993,000, or 244%, to $1.4 million in the first quarter of 2007 from $407,000 in the first quarter of 2006. The increase in net sales was primarily the result of a 243% increase in the total gallons of biodiesel that we sold in the quarter ended March 31, 2007, from 125,000 gallons in the first quarter of 2006 to 429,000 gallons in the first quarter of 2007, in addition to a 0.3% increase in the average selling price of biodiesel from the first quarter of 2007 compared to the first quarter of 2006. In early 2006 biodiesel prices increased due to an increase in demand for biodiesel and an increase in the price of crude oil and diesel. Even though the prices of crude oil and diesel decreased during the first quarter of 2007 compared to first quarter 2006 prices, the average selling price for biodiesel in the first quarter of 2007 was $0.01 per gallon higher than the first quarter of 2006, increasing to $3.24 per gallon in the first quarter of 2007 from $3.23 per gallon in the first quarter of 2006.

Cost of sales and gross loss. Gross loss increased $315,000, or 171%, to $499,000 in the first quarter of 2007 from $184,000 in the first quarter of 2006. The increase was primarily the result of an increase in the aggregate cost of raw materials, including vegetable oil, methanol and magnesol, combined with an increase in the volume of biodiesel produced at our Seattle production facility. We expect our cost of sales to increase substantially when our Grays Harbor production facility is operational in the third quarter of 2007.


Aggregate vegetable oil costs increased $810,000, or 240%, to $1.1 million in the first quarter of 2007 from $337,000 in the first quarter of 2006. The increase was primarily the result of an increase in the volume of production and sales of biodiesel in the first quarter of 2007 compared to the first quarter of 2006. Vegetable oil costs represented 60% of our cost of sales in the first quarter of 2007 compared to 57% of our cost of sales in the first quarter of 2006. Our average cost of vegetable oil decreased $0.03 per gallon, or 1.1%, to $2.67 per gallon in the first quarter of 2007, compared to $2.70 per gallon in the first quarter of 2006. In the first quarter of 2007, the spread between biodiesel and vegetable oil prices was historically narrow, primarily as a result of lower crude oil and diesel prices, which increased pricing pressure on biodiesel, and the higher cost of soybean oil as a result of higher demand for, and lower supply of, soybean oil.

Methanol costs increased $92,000, or 279%, to $125,000 in the first quarter of 2007 from $33,000 in the first quarter of 2006 and accounted for 7% of our cost of sales, and 6% of our cost of sales in the first quarter of 2006. The increase is primarily attributable to the increase in our production of biodiesel and an increase in the cost of methanol. The increase in the cost of methanol as a percentage of our cost of sales was primarily attributable to methanol prices rising beginning in the third quarter of 2006 through the first quarter of 2007 to $0.29 per gallon in the first quarter of 2007 from $0.26 per gallon in the first quarter of 2006.

Labor and manufacturing overhead costs increased $170,000, or 59%, to $459,000 in the first quarter of 2007 from $289,000 in the first quarter of 2006. The increase in aggregate costs was primarily attributable to additional labor associated with increasing the production of biodiesel at our Seattle production facility, as well as ongoing maintenance and increased depreciation expense related to additional capital expenditures at the Seattle production facility. Labor and manufacturing overhead costs represented 24% of our cost of sales in the first quarter of 2007 and 49% in the first quarter of 2006. The decrease in labor and manufacturing overhead costs, as a percentage of costs of sales, was primarily due to increased production of biodiesel at our Seattle production facility.

During the first quarter of 2006 we received compensation from the U.S. Department of Agriculture, or USDA, under a Bioenergy Program for the purpose of expanding industrial consumption of agricultural commodities by promoting their use in the production of bioenergy, including biodiesel. Under the program we were eligible to receive partial compensation for the purchase of commodities used to expand existing production capacity. These amounts are accounted for as a reduction of cost of inventories and cost of sales. Payment from the USDA under this program was based primarily on production levels from period to period, and the amount of claims by other eligible companies. The existing federal incentive income program terminated on June  30, 2006, and as a result we only received compensation for the first six months of 2006. We received $25,000 in the first quarter of 2006 and $0 in the first quarter of 2007.

Research and development expenses. Research and development expenses increased $106,000, to $108,000 in the first quarter of 2007 from $2,000 in the first quarter of 2006. The increase was primarily the result of our investments in enhancing our technologies and focus on increasing the operating efficiency of our existing and planned production facilities.

Product sales. Our product sales in 2006 and 2005 consisted of sales of biodiesel and our co-product, glycerin, from our Seattle production facility. Product sales increased $3.7 million, or 280%, to $5.0 million in 2006 from $1.3 million in 2005. The increase in product sales was primarily the result of a 279% increase in the total gallons of biodiesel that we sold, combined with a 10% increase in the average sales price of biodiesel from 2005 to 2006. In early 2006 biodiesel prices increased due to an increase in demand for biodiesel and an increase in the price of crude oil and diesel. As a result, the average realized selling price for biodiesel in 2006 was $0.30 per gallon higher than in 2005, increasing to $3.19 per gallon in 2006 from $2.89 per gallon in 2005. In addition, we sold approximately 138,000 gallons of biodiesel purchased from other biodiesel producers during 2006 to meet increased demand by certain of our customers. Product sales from biodiesel purchased for resale in 2006 was $453,000, at an average price of $3.28 per gallon.  

Net sales from glycerin increased $23,000, or 288%, to $31,000 in 2006 from $8,000 in 2005. Glycerin production and sales primarily increased due to an increase in the volume of our production of biodiesel.

Cost of sales and gross loss. Gross loss increased $575,000, or 200%, to $863,000 in 2006 from $288,000 in 2005. The increase was primarily the result of an increase in the aggregate cost of raw materials, including vegetable oil and methanol, combined with an increase in the volume of biodiesel produced at our Seattle production facility. Our average cost of vegetable oil decreased $0.04 per gallon, or 1.7%, to $2.31 per gallon in 2006 compared to $2.35 per gallon in 2005.

 Aggregate vegetable oil costs increased $2.3 million, or 239%, to $3.3 million in 2006 from $963,000 in 2005. Vegetable oil costs represented 56% of our cost of sales in 2006 compared to 60% of our cost of sales in 2005. During 2005 and through the second quarter of 2006, vegetable oil prices remained relatively low and the biodiesel market improved following the signing into law of the Energy Policy Act and continued oil refinery shortage concerns, resulting in historically wide spreads between biodiesel and vegetable oil prices. However, during the third quarter of 2006, the spread between biodiesel and vegetable oil prices was reduced to narrow levels, primarily as a result of lower crude oil and diesel prices, which increased pricing pressure on biodiesel, and the higher cost of soybean oil as a result of higher demand and lower supply of soybean oil.

Methanol costs increased $212,000, or 188%, to $325,000 in 2006 and accounted for 6% of our cost of sales in 2006, from $113,000 and 7% of our cost of sales in 2005. The increase is primarily attributable to the increase in our production of biodiesel in 2006, and a $0.05 per gallon decrease in the average cost of methanol, which was approximately $0.23 per gallon in 2006 and $0.28 per gallon in 2005.

Magnesol costs increased $152,000, or 271%, to $208,000 in 2006 from $56,000 in 2005 and accounted for 4% of our cost of sales in 2006 and 2005. The increase is primarily attributable to the increase in our production of biodiesel in 2006. The relatively flat cost of magnesol as a percentage of our cost of sales was primarily attributable to increased efficiency in our production process offset by an increase in the average cost of magnesol of $0.01 per gallon, or 7.1%, to $0.15 per gallon in 2006 from $0.14 per gallon in 2005. As a result of our technological innovations in the

production process, we do not expect to use magnesol in our biodiesel production process at our future production facilities.

Labor and manufacturing overhead costs increased $716,000, or 105%, to $1.4 million in 2006 from $684,000 in 2005. Labor and manufacturing overhead costs represented 24% of our cost of sales in 2006 and 43% in 2005. The increase in costs and decrease in percentage of costs of sales was primarily attributable to additional labor associated with increasing the production of biodiesel at our Seattle production facility, as well as ongoing maintenance and increased depreciation expense related to additional capital expenditures at the Seattle production facility.

Cost of sales and gross loss. Gross loss was $288,000 in 2005. Vegetable oil costs were $963,000 and represented 60% of our cost of sales in 2005. Our average cost of vegetable oil was $2.35 per gallon in 2005. During 2005 vegetable oil prices remained relatively low and the biodiesel market improved following the signing into law of the Energy Policy Act and continued oil refinery shortage concerns, resulting in historically wide spreads between biodiesel and vegetable oil prices.

Methanol costs were $113,000 and accounted for 7% of our cost of sales in 2005. Methanol prices remained relatively constant during 2005, at approximately $0.28 per gallon. Magnesol costs were $56,000 and accounted for 4% of our cost of sales in 2005. Our average cost of magnesol was $0.14 per gallon.

Labor and manufacturing overhead costs were $684,000 in 2005, which were attributable to the labor associated with increasing biodiesel production at our Seattle production facility, as well as ongoing maintenance and increased depreciation expense related to additional capital expenditures at the Seattle production facility. We did not have any labor and manufacturing costs in 2004.

During 2005 we also received $230,000 of compensation from the USDA under their Bioenergy Program. These amounts are accounted for as a reduction of cost of sales. Payments from the USDA under this program are based primarily on production levels from period to period, and the amount of claims by other eligible companies. We did not receive any compensation from the USDA under their bioenergy program in 2004.

Production Capacity Expansion

Overview of Feedstocks and Hedging

Feedstock procurement  construction term loan that we may use to finance the completion of construction of

Construction of Hawaii, Argentina and U.S. East Coast facilities. We intend to use approximately $220 million of the net proceeds from this offering to finance the construction costs of our Hawaii, Argentina and U.S. East Coast production facilities. Subject to obtaining all the necessary permits, we expect to begin construction at the Hawaii and Argentina production facilities in the third quarter of 2007, and the U.S. East Coast production facility in the fourth quarter of 2007. (page 46)
 
Quantitative and Qualitative Disclosures about Market Risk

Our quarterly operating results are influenced by seasonal fluctuations in the price of our primary operating raw materials, including vegetable oil and methanol, and the market price of our primary product, biodiesel, and of the prices of crude oil and diesel. The spot price of vegetable oil tends to rise during the spring planting season in May and June and tends to decrease during the fall harvest in October and November. The price for methanol, however, tends to move opposite that of vegetable oil and tends to be lower in the spring and summer and higher in the fall and winter. In addition, our biodiesel prices are substantially correlated with the prices of crude oil and diesel especially in connection with our indexed, gas-plus sales contracts. The price of diesel tends to rise during each of the summer and winter.

As a result of quarterly and seasonal fluctuations, we believe comparisons of operating measures between consecutive quarters is not as meaningful as comparisons between longer periods and should not be relied on as indicators of our future performance. See “Risk Factors—Risks Relating to Our Business—Our business is subject to seasonal fluctuations, which could adversely affect our financial results.”

Since biodiesel can be used as a direct replacement for diesel, the potential market for biodiesel includes nearly all current diesel users. According to the EIA, the U.S. consumed approximately 64 billion gallons of diesel in 2006. If all U.S. diesel were blended with 2% biodiesel, we believe the U.S. market demand for biodiesel would be approximately 1.3 BGY. This market increases to 13 BGY at a 20% blend ratio, which is typical in Europe and other foreign countries that consume biodiesel. By comparison, in 2006 the U.S. consumed an estimated 250 million gallons of biodiesel, according to the NBB. This represents a 50,000% increase from 1999 consumption levels of 500,000 gallons, a 102% compound annual growth rate from 2002 consumption levels of 15 million gallons, and still only represents approximately 0.4% of the overall U.S. diesel market in 2006.

Biodiesel markets are diverse and we believe biodiesel could be attractive to a large number of current diesel consumers. Today, certain specialty segments are well-positioned for early penetration: (i) the agriculture industry, which has promoted biodiesel use and industry integration; (ii) the marine diesel sector, which is interested in promoting biodiesel utilization due to the fuel’s non-toxic and biodegradable characteristics; (iii) the public service sector segment, driven by federal- and state-mandated fleet vehicle requirements for use in public transit and for agency vehicles as well as the need for lower emissions in certain geographic markets; (iv) the power generation market for the ability to generate renewable energy credits; and (v) the mining industry, which faces diesel particulate matter exposure limits.

Biodiesel is produced primarily by small production facilities, with approximately 63% of the 105 commercial biodiesel production facilities reporting nameplate capacity of less than 10 MGY as of January 31, 2007.

Biodiesel can be shipped directly to end users, such as large fleets or military customers, or distributed using existing diesel terminal and storage facilities and rail, marine and truck infrastructure.

International Market Opportunity for Biodiesel

Although the U.S biodiesel industry has grown rapidly in recent years, it still lags behind the European market. According to the International Energy Agency, Europe consumed 95 billion gallons of diesel in 2006. The European Union has implemented a target of 5.75% renewable fuel usage by 2010, which we expect could create demand for approximately 5.5 billion gallons of biodiesel per year, assuming the target is met entirely with biodiesel. This creates a potential for a nearly 6.8 billion gallon market in the U.S. and Europe alone, based on 2006 consumption levels. Countries such as China, India, Indonesia, Japan, Malaysia and South Korea have also expressed interest in increasing renewable fuel usage within their borders both for environmental benefits and energy security.

Energy Policy Act of 1992. This act establishes a goal of 30% alternative fuel usage in government fleets by 2010. Biodiesel is an alternative fuel and credits can be earned for blends of 20% or greater. The act also requires the federal government, alternative fuel providers, state and local governments, and private fleets to purchase vehicles that employ alternative fuels. Since 2000, 75% of all light-duty vehicles acquired by covered fleets of federal agencies have been required to have alternative fuel capabilities.
 
Energy Conservation and Re-Authorization Act of 1998. This act allows vehicle fleets that are required to purchase alternative fuel vehicles, or AFVs, to generate credits toward fulfilling this requirement by purchasing and using biodiesel in conventional-fuel vehicles. Since there are few cost-effective options for purchasing heavy-duty AFVs, federal and state fleet providers can meet up to 50% of the heavy-duty AFV purchase requirements by generating biodiesel fuel use credits.

American Jobs Creation Act of 2004. This act creates an excise tax credit for biodiesel of $0.01 per percentage point of biodiesel blended with diesel, up to $1.00 per gallon. A credit is available for each gallon of biodiesel that is used by the taxpayer in producing a qualified mixture of biodiesel and diesel fuel.

Energy Policy Act of 2005. This act extends through December 2008 the income and excise tax credits for biodiesel promulgated under the Jobs Creation Act of 2004. The Energy Policy Act of 2005, or EPAct, also mandates procuring AFVs and using alternative fuels, including biodiesel, in federal, state and utility fleets. The EPAct establishes minimum nationwide levels of renewable fuels, including biodiesel, ethanol and liquid fuel produced from biomass or biogas, to be blended into the domestic fuel supply. By 2012, these renewable fuel standards, or RFS, require that the national volume of renewable fuels equal or exceed 7.5 billion gallons. The U.S. Environmental Protection Agency, or EPA, is required, in consultation with the Secretary of Agriculture and the Secretary of Energy, to promulgate regulations for blenders to earn and trade renewable fuel credits for biodiesel blending. The EPA has established a credit trading program that defines who can generate credits and under what conditions, how credits may be transferred, and the appropriate value of credits. Under this program, blending biodiesel into fuel will earn 50% more credits than blending ethanol.

Other legislative and regulatory market drivers. We believe that renewable portfolio standards, or RPS, and other laws and programs that create a market for trading carbon credits, are additional demand drivers for biodiesel. As of March 31, 2007, approximately 23 of the 50 states have established an RPS, which are guidelines or rules regarding the amount of renewable power generation of electricity delivered to customers. For example, the State of California’s RPS requires that, by 2010, 20% of electricity sold in the state must be generated by renewable power, such as biodiesel. The power generation market relies in part on diesel generators to produce electricity. Biodiesel offers electricity utilities the opportunity to satisfy RPS requirements by switching from diesel to biodiesel in the electricity production process, rather than incurring capital expenditures to build wind, solar, geothermal or other facilities to satisfy RPS requirements. We are currently negotiating a biodiesel supply agreement with a major U.S. electricity generator that we believe is motivated in part by RPS requirements. We believe that Hawaii RPS requirements, which require that 10% of energy sold in the state must be from renewable sources by 2010, increasing to 20% by 2020, will help drive demand for biodiesel from our planned Hawaii production facility. In Hawaii, more than 75% of electricity is generated utilizing petroleum products. We estimate the current diesel fuel market in Hawaii to be approximately 332 MGY, or up to 729 MGY if residual fuel oil is included, for which biodiesel can also be substituted.

 In addition to RPS requirements, we believe that the emerging market for trading carbon credits, driven in part by the Kyoto Protocol to reduce greenhouse gas emissions, will drive biodiesel consumption. According to the EPA, the use of biodiesel, compared to diesel, results in a 78% reduction in carbon dioxide emissions. The Kyoto Protocol, which is an international treaty to reduce greenhouse gas emissions associated with global warming, and other similar regulations, have created an international market for trading of emissions credits in Europe, in Asia and through United Nations exchange programs. Trading in credits allows companies and governments to match their greenhouse gas emissions with equal volumes of emission allowances.

Several states that collectively account for approximately 20% of U.S. carbon dioxide emissions have launched initiatives to reduce greenhouse emissions using cap-and-trade regimes. The Regional Greenhouse Gas Initiative, or RGGI, is a market-based effort by Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, and Vermont to reduce carbon dioxide emissions from power plants. The initiative would set up the nation’s first mandatory cap-and-trade program for carbon dioxide. Starting in January 2009, RGGI states have agreed to implement a cap of 121 million short tons on carbon dioxide emissions from power plants, which would be further reduced by 10% by 2018. Under the RGGI cap-and-trade system, regulators

 
Since biodiesel can be used in diesel power plants and reduces carbon dioxide emissions by up to 78%, carbon cap-and-trade programs represent a meaningful market opportunity for biodiesel.
 
Build industrial-scale facilities. We plan to build industrial-scale production facilities with a nameplate capacity of at least 100 MGY at each facility. While much of the domestic biodiesel production capacity consists of facilities having a nameplate capacity of 10 MGY or less, we plan to utilize our in-house project management and engineering expertise to build high-volume production facilities at lower capital costs by utilizing a smaller physical plant design than our competitors. We believe our large production capacity will enable us to enter long-term contracts with large-volume customers.
 
Manage feedstock costs. Feedstocks are the most expensive component of biodiesel and are subject to substantial price fluctuations. In addition to our internal research and development efforts to develop more efficient and less expensive feedstock sources, we are implementing three other strategies to minimize our feedstock costs. First, we will continue to use advanced hedging principles to reduce the   cost of our feedstocks to maintain the lowest possible supply and conversion costs available. Second, we plan to reduce our feedstock costs over the next 18 to 36 months by seeking to license rights to proprietary oil seeds that we believe have the potential to produce more than 140 gallons of feedstock oil per acre, compared to 30 to 40 gallons per acre for soybeans. We plan to work with licensors to develop seeds and, if successful, plan to grow and harvest seeds ourselves, thereby reducing our feedstock acquisition cost. Third, we intend to reduce our feedstock costs over the long-term by seeking to acquire rights to, or investing in companies that are developing, algae, which we believe has the potential to produce more than 1,500 gallons of feedstock oil per acre.
 

Our Biodiesel Production Process
We have optimized our biodiesel production process to incorporate new, internally-developed proprietary technology. Biodiesel is produced in a relatively simple process know as transesterfication. Vegetable oil or animal fat feedstock is reacted with methanol, in the presence of a catalyst, such as lye, sodium or potassium hydroxide, and this chemical reaction produces biodiesel and crude glycerin, which can easily be separated. The glycerin can be used in a variety of products ranging from soap, cosmetics and pharmaceuticals to manufactured fireplace logs. We intend to sell our crude glycerin to glycerin refiners and users and are developing the ability to sell or further process our glycerin for higher value products.

 The multi-feedstock technology that we employ in our biodiesel production process enables us to reduce our costs by simultaneously shifting into and out of different feedstocks based on available supply and price. While approximately 63% of the 250 million gallons of biodiesel produced in the U.S. in 2006 was produced at facilities that are only capable of using soybean oil as the primary feedstock, our Seattle production facility and Grays Harbor production facility are designed, and additional planned production facilities will be designed, as multi-feedstock facilities that produce biodiesel from many kinds of vegetable oils simultaneously.

 Reaction Process. Our process for producing biodiesel begins with selecting a feedstock oil, adding an alcohol, usually methanol, and a catalyst to react with the feedstock oil. Our reactor design is a multi-stage, continuous, pressurized, high-throughput process that facilitates the movement of the reacted mixture. Many smaller-scale biodiesel reactors use a batch process and require longer residence times to complete the reaction process. Once the reacted mixture stops catalyzing, it is decanted to separate biodiesel reaction product from byproducts, including glycerin and excess alcohol. We have developed a proprietary method for this separation process and for recovering the excess alcohol by flash evaporation.

Polishing Process. We have developed a proprietary process for polishing the biodiesel that does not utilize water or produce a toxic waste stream. After the  biodiesel reaction and separation process, there are remaining amounts of catalyst, methanol, glycerin and other contaminants in the biodiesel. We believe that many  production facilities use water to wash out the impurities. The added water must then be removed again to complete the production process, and the now-toxic waste water must be properly disposed of at additional cost. To complete the production process, we have designed and deployed two waterless “polishing” technologies. Our primary method employs a distillation column to separate biodiesel into grades and to isolate impurities. Our alternative method employs an adsorbent and filtering process to strip the impurities from the biodiesel. The result of our production process is biodiesel that exceeds the ASTM standard for water and glycerin content. Our proprietary process leads to a longer shelf life, improved overall product quality, and the ability to transport our biodiesel over longer distances than biodiesel produced with a water wash.

We plan to grow our biodiesel production capacity significantly over the next several years. We are currently developing sites for new production facilities in Hawaii, in Argentina and on the U.S. East Coast. We expect to finance the construction costs of these sites with the net proceeds we receive from this offering. We intend to replicate the construction and production processes we are employing at our Grays Harbor production facility at these additional production facilities.
 
Hawaii production facility

Overview. We have signed a letter of intent to enter into a 35-year lease on an 11-acre site on the island of Oahu, Hawaii, where we have also entered into escrow to acquire a second 21-acre site. We are in the process of securing all required permits for the leased site and are continuing our investigation of the site in escrow. Assuming successful permitting and investigation, we intend to begin construction of a 100 MGY nameplate capacity biodiesel production facility at the leased site by the third quarter of 2007. We expect construction of this production facility to be completed in the third quarter of 2008. We currently plan to use the second site for future expansion of our Hawaii production capacity.

 

Market opportunity. Our Hawaii production facility will provide us direct access to the Hawaiian diesel market. In Hawaii, more than 75% of electricity is generated utilizing petroleum products. We estimate the current diesel fuel market in Hawaii to be approximately 332 MGY, or up to 729 MGY if residual fuel oil is included, for which biodiesel can also be substituted. Hawaii also has recently enacted legislation that will require that 10% of all on-road fuel to come from alternative sources by 2010, 15% by 2015, and 20% by 2020. In addition, 10% of energy sold in the state must be from renewable sources by 2010 and 15% by 2015. We believe that we will be able to sell 100% of the annual production from our Hawaiian production facility in the local market to meet expected demand. Our Hawaii location will give us a cost advantage over competitors who must incur transportation costs to ship biodiesel to Hawaii to serve that market. This location also gives us faster, less expensive access to palm oil from Indonesia and Malaysia, which is well suited for the warmer Hawaiian climate. This location also gives us less expensive access to growing Asian diesel markets.

Argentina production facility

Overview. We have entered into a letter of intent to purchase approximately 25 acres of land adjacent to a major soybean crushing facility in Ramallo, Argentina. We intend to begin construction of a 100 MGY nameplate capacity facility at the site in the second half of 2007. We are in the process of securing all permits required for construction and expect to complete construction of this facility in the third quarter of 2008. We plan to develop and construct this production facility with a local strategic partner with whom we expect to renew a letter of intent. We anticipate the production facility will receive up to 100% of the feedstock required from an adjacent soybean crushing plant via pipeline. We plan to export biodiesel we produce at the production facility to Europe from an existing port at the site.

Market opportunity. We have identified Argentina as a strategic location for a production facility because of the ability to ship to Europe efficiently and the wide availability of feedstock, particularly low-cost soybeans. When operational, we will most likely target sales from our Argentina production facility to the European diesel market, which we estimate to be approximately 95 BGY. The production facility would also be positioned to supply biodiesel directly to the Argentinean market with low cost, locally grown soybeans. As the world’s largest exporter of soybean oil, Argentina provides less expensive feedstock through existing crushing facilities and existing port infrastructure.

Overview of Feedstocks and Hedging


Feedstock procurement
 
Feedstock supply arrangements

  •   Palm Oil. We have entered into a three-year contract with Cargill International Trading Pte Ltd. for delivery of palm oil to our production facilities, which we believe will be sufficient to provide up to 100% of our palm oil feedstock requirements through 2010. The purchase price for the palm oil under this agreement varies according to applicable market rates.
 
  •   Canola Oil. We have entered into a one-year purchase agreement, with successive one-year renewal options, with Natural Selection Farms, Inc. for the purchase of canola seed vegetable oil. The purchase price for the canola oil under this agreement varies according to applicable market rates. In addition, we have entered into spot and basis contracts for canola oil with Archer Daniels Midland Company, Bunge Canada, Cargill Ltd. and others.
 
  •   Methanol. We have entered into a three-year methanol purchase agreement with Methanex Methanol Company to supply methanol to us. We believe this agreement will supply us with 95% of our methanol needs for our Grays Harbor production facility through 2010, after taking into account the methanol we recover through our proprietary process. The purchase price for the methanol varies under this agreement according to the market index price per gallon that Methanex determines each month, plus fixed costs for freight, shipping and a geographic price adjustment.
 
All of our planned biodiesel production facilities expect to have deep water port access, which will enable us to transport by barge large volumes of biodiesel directly to independent petroleum distributors and other customers, and to other storage facilities. We currently lease one barge and are under contract to purchase another barge, with an aggregate capacity of more than 6.1 million gallons.
 
As of May 7, 2007, we had 69 full-time employees, 19 in operations, 13 in engineering, and 37 who are responsible for companywide management, marketing, project management, logistics and administration. All of our employees are located in the U.S., except for one employee located in Argentina. None of our employees are covered by collective bargaining agreements. We have had no labor-related work stoppages, and we believe we have positive relations with our employees.


Executive Officers         
Martin G. Tobias  43    Chief Executive Officer, Chairman of the Board and Director
John P. Plaza 41    President and Director
Marc D. Stolzman 40    Chief Financial Officer
Arthur D. Ayrault IV 45    Vice President of International
Jerold J. Goade 43    Vice President of Finance and Administration
James Graham Noyes 42    Vice President of Sales and Business Development
Jane A. Orenstein 51    Vice President, General Counsel and Secretary
Mark E. Warner 44    Vice President of Engineering
   
Non-Employee Directors         
Ira M. Ehrenpreis 38    Director
Nancy C. Floyd( 52    Director


Martin G. Tobias. Mr. Tobias has been our Chief Executive Officer, Chairman of the Board and a director since May 2005. Mr. Tobias has been a Venture Partner at Ignition Venture Partners since March 2002, and has invested in over two dozen start-up companies including Cloudmark, Inc., a messaging security company, for which he is a board member. From 1997 to 2001, Mr. Tobias was the Founder, Chief Executive Officer and Chairman of Loudeye Technologies, Inc., a digital media production company now part of Nokia Corporation. Prior to Loudeye, Mr. Tobias was with Microsoft Corporation from 1991 to 1997 in various operational management roles and was with Andersen Consulting, now known as Accenture, from 1987 to 1991. Mr. Tobias received his bachelor’s degree in Marketing and Computer Science from Oregon State University.

John P. Plaza. Mr. Plaza has been our President and a director since founding Seattle Biodiesel LLC, the predecessor to our company, in March 2004. From March 2004 to May 2007, Mr. Plaza also served as our Secretary. From 1996 to March 2005, Mr. Plaza was a commercial airline pilot with Northwest Airlines Corporation, and he has over 20 years of commercial piloting experience. Mr. Plaza attended AAR Western Skyways and received an Airline Transport Pilot License, which is the highest level of aircraft pilot certification. Mr. Plaza is a member of the National Biodiesel Board.

Marc D. Stolzman. Mr. Stolzman has been our Chief Financial Officer since March 2007. From 1994 to January 2007, Mr. Stolzman served in a number of finance and management capacities with Starbucks Corporation, including Senior Vice President of Finance and Business Development of Starbucks Coffee International from July 2003 to January 2007, Chief Financial Officer of Starbucks Coffee Japan from 2001 to July 2003, as Vice President of Finance of North America from 1997 to 2001, and Director of Corporate Business Planning and Analysis Director of Corporate Business Planning and Analysis from 1996 to 1997. Mr. Stolzman received his bachelor’s degree in Business Administration from Washington State University.

Arthur D. Ayrault IV. Mr. Ayrault has been our Vice President of International since July 2006, prior to which he served as a consultant to us from March 2006. Mr. Ayrault is responsible for development of joint ventures and production facility sites for all international locations and Hawaii. From August 2002 to February 2006 he was Chief Executive Officer of Mobility Inc., doing business as Flexcar, a vehicle sharing company, for which he is Vice Chairman of the Board. Prior to Flexcar, Mr. Ayrault served as Vice President, International for AEI Music Network Inc. from 1998 to April 2002. He served as General Manager with Simpson Latin America, Ltd. from 1990 to 1993, and then Vice President, International of Simpson Paper Company from 1994 to 1998. Mr. Ayrault received his bachelor’s degree in History from Harvard University and his Masters in Business Administration from the University of Washington.

Jerold J. Goade. Mr. Goade has served as our Vice President of Finance and Administration since April 2006. Mr. Goade has over 15 years of experience in finance and accounting roles with start-up companies, technology, retail and broadcasting companies, as well as public accounting experience. From December 2004 to March 2006, Mr. Goade was the Vice President of Finance at Clearwire Corporation, an international wireless high-speed Internet and Internet phone service company. Prior to Clearwire, Mr. Goade served as Sr. Vice President of Finance and
interim Chief Financial Officer of Loudeye from 1999 to December 2004. Mr. Goade  is among several former officers and directors of Loudeye named in a private securities class action suit filed just prior to Loudeye’s acquisition by Nokia and which is still pending. Mr. Goade is a Certified Public Accountant (CPA inactive) in the State of Washington and received his bachelor’s degree in Business Administration from Seattle University.

James Graham Noyes. Mr. Noyes has been our Vice President of Sales and Business Development since February 2007. From 2000 to December 2007, Mr. Noyes was Vice President of Sales at World Energy Alternatives, LLC, a leading distributor generally recognized as the biodiesel industry’s first company to market biodiesel. Prior to World Energy Alternatives, Mr. Noyes practiced law at the Law Offices of Graham Noyes in San Francisco, California from 1995 to 2000. Mr. Noyes received his bachelor’s degree in Political and Social Thought from the University of Virginia, Charlottesville and a Juris Doctorate from the University of California, Davis School of Law, where he served as a staff editor for the law review.

Jane A. Orenstein. Ms. Orenstein has been our General Counsel since August 2006 and our Vice President and Secretary since May 2007. From 1999 to August 2006, Ms. Orenstein served as Vice President and General Counsel for Shurgard Storage Centers, Inc., a self-storage company that merged with Public Storage, Inc. in August 2006, where she also served as Assistant General Counsel. Prior to Shurgard, Ms. Orenstein served for four years as Assistant General Counsel for Smart & Final Stores Corporation, a grocery wholesale and retail chain. Ms. Orenstein has over 20 years of experience as a government and corporate attorney. Ms. Orenstein received her bachelor’s degree in History from the University of California, Los Angeles and a Juris Doctorate from the University of Southern California Law Center.

Mark E. Warner. Mr. Warner has been our Vice President of Engineering since May 2007, prior to which he served as our Managing Director of Project Engineering from May 2006 to April 2007. From April 2001 to May 2006, he was Vice President of Pacific Operations at Weston Solutions, Inc., an engineering consulting company. Mr. Warner received his bachelor’s degree in Chemical Engineering from Washington State University.

Ira M. Ehrenpreis. Mr. Ehrenpreis has been a director since December 2005. Mr. Ehrenpreis is also a General Partner at Technology Partners, a venture capital firm. Mr. Ehrenpreis joined Technology Partners in 1996, where he leads the firm’s cleantech investment practice. Mr. Ehrenpreis currently serves on the board of the National Venture Capital Association and the Western Association of Venture Capitalists. Mr. Ehrenpreis has also served as Chairman of the Cleantech Venture Network Advisory Board, Chairman of the Clean-Tech Investors Summit and Chairman of the Energy Investors Forum. Mr. Ehrenpreis received his bachelor’s degree from the University of California, Los Angeles (Phi Beta Kappa, summa cum laude) and a Masters in Business Administration and Juris Doctorate from the Stanford Graduate School of Business and Stanford Law School, where he was an Associate Editor of Stanford Law Review.

Nancy C. Floyd. Ms. Floyd has been a director since July 2005. Ms. Floyd is Founder and Managing Director of Nth Power, a venture capital firm. Ms. Floyd has led Nth Power’s investments in various entities, various company boards, Ms. Floyd sits on the boards of the Cleantech Venture Network, Center for Resource Solutions and American Council on Renewable Energy. Prior to founding Nth Power in 1997, Ms. Floyd built, managed and negotiated the sale of two high-growth energy and telecommunications companies. Ms. Floyd received her bachelor’s degree in Political Science from Franklin and Marshall College, where she currently serves as a Trustee, and her Masters degree in Political Science from Rutgers University.
 
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