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As filed with the Securities and Exchange Commission on September 22, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Fulcrum BioEnergy, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2860   33-1173733

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

4900 Hopyard Road, Suite 220

Pleasanton, CA 94588

(925) 730-0150

(Address, including zip code, and telephone number, including area

code, of registrant’s principal executive offices)

E. James Macias

President and Chief Executive Officer

Fulcrum BioEnergy, Inc.

4900 Hopyard Road, Suite 220

Pleasanton, CA 94588

(925) 730-0150

(Name, address including zip code, and telephone number including area code, of agent for service)

 

 

Copies to:

 

Alan Talkington, Esq.   Jeffrey D. Saper, Esq.
Karen Dempsey, Esq.   Allison B. Spinner, Esq.
Orrick, Herrington & Sutcliffe LLP   Wilson Sonsini Goodrich & Rosati, P.C.
405 Howard Street   650 Page Mill Road
San Francisco, CA 94105   Palo Alto, CA 94304
(415) 773-5700   (650) 493-9300

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 12b2 of the Exchange Act.

 

Large accelerated filer  ¨

   Accelerated filer  ¨

Non-accelerated filer  þ (Do not check if a smaller reporting company)

   Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of Securities To Be Registered   Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount Of
Registration Fee

Common Stock, par value $0.001 per share

  $115,000,000.00   $13,351.50

 

 

(1)   Includes shares of Common Stock issuable upon exercise of the Underwriters’ overallotment option.
(2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

 

PRELIMINARY PROSPECTUS   Subject to Completion   September 22, 2011

 

             Shares

LOGO

Common Stock

 

 

This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the              shares of common stock offered by this prospectus. We expect the public offering price to be between $             and $             per share.

We have applied to list our common stock on the              under the symbol “FLCM.”

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 11 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

       

Per Share

    

Total

Public offering price

     $                          $            

Underwriting discounts and commissions

     $                          $            
Proceeds, before expenses, to us      $                          $            

The underwriters may also purchase up to an additional              shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $             and our total proceeds, after underwriting discounts and commissions but before expenses, will be $            .

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                     , 2011.

 

UBS Investment Bank

                    , 2011


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You should rely only on the information contained in this prospectus. We and the underwriters have not authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or such other dates as are stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

TABLE OF CONTENTS

 

 

Prospectus Summary

    1   

Risk Factors

      11   

Special Note Regarding Forward-Looking Statements

    28   

Market and Industry Data

    29   

Use of Proceeds

    30   

Dividend Policy

    30   

Capitalization

    31   

Dilution

    33   

Selected Consolidated Financial Data

    35   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    37   

Industry

    57   

Business

    62   

Collaborations and Strategic Arrangements

    77   

Management

     80   

Executive Compensation

     87   

Certain Relationships and Related Transactions

     102   

Principal Stockholders

     106   

Description of Capital Stock

     108   

Shares Eligible for Future Sale

     112   

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock

     114   

Underwriting

     118   

Legal Matters

     124   

Experts

     124   

Where You Can Find More Information

     124   

Index to Consolidated Financial Statements

     F-1   

 

 

 

 


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Prospectus summary

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus and the information set forth under the headings “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations.”

OUR BUSINESS

We produce advanced biofuel from garbage. Our disruptive business model combines our proprietary process and zero-cost municipal solid waste, or MSW, feedstock to provide us with a significant competitive advantage over companies using alternative feedstocks such as corn, sugarcane and other sources of biomass in the production of renewable fuel, which are subject to commodity and other pricing risks. We have entered into long-term, zero-cost contracts for enough MSW located throughout the United States to produce more than 700 million gallons of ethanol per year. The core element of our technology has been demonstrated at full scale. At our first commercial-scale facility, we expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits. This estimate does not require any improvement in MSW-to-ethanol yields or process efficiencies and is a substantially lower cost per gallon than traditional fuels and other renewable biofuels. Our stable cost structure, based on long-term, zero-cost MSW feedstock arrangements, will allow us to enter into fixed-price offtake contracts or hedges to secure attractive unit economics. We expect our first commercial-scale facility, the Sierra BioFuels Plant, or Sierra, to begin production in the second half of 2013 and to be at full capacity within three years after commencement of ethanol production.

Our proprietary process converts MSW into ethanol. This process, built around numerous commercial systems available today, has been tested, demonstrated and will be deployed on a commercial scale at facilities that we will build, own and operate. We utilize sorted, post-recycled MSW and convert it into ethanol using a two-step process that consists of gasification followed by alcohol synthesis. In the first step, the gasification process converts the MSW into a synthesis gas, or syngas. We have licensed and purchased the gasification system from a third party. In the second step, the syngas is catalytically converted into ethanol using our proprietary alcohol synthesis process. Our alcohol synthesis process demonstration unit has operated at full scale for more than 8,000 hours. We have filed patent applications for the integration of the MSW-to-ethanol process. We believe this may provide us with a significant advantage over competitors looking to replicate our process.

In addition, we will generate electricity to power our plants and reduce our reliance on external electricity sources. By taking this approach to power production, we believe many of our future facilities will qualify for state-level renewable energy credits that may provide additional revenue opportunities. Taking into account the feedstock used for electricity generation, we believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which is sufficient for us to operate profitably in the absence of economic subsidies. Furthermore, an August 2009 independent analysis prepared by Life Cycle Associates, LLC concluded that our process is projected to provide a more than 75% reduction in greenhouse gas, or GHG, emissions compared to traditional gasoline production.

We expect to begin construction of Sierra, located approximately 20 miles east of Reno, in Storey County, Nevada, by the end of 2011. The cost of this facility is estimated at $180 million, which we

 

 

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expect to be financed through existing equity capital and net proceeds from this offering. We are also pursuing a U.S. Department of Energy, or DOE, loan guarantee to fund a portion of the cost and may also seek project financing from other sources. We have acquired approximately 17 acres of vacant property for Sierra and permits are in place to begin construction. We expect to produce approximately 10 million gallons of ethanol per year from Sierra using zero-cost MSW feedstock contractually procured from affiliates of Waste Management, Inc. and Waste Connections, Inc. We have entered into a contract with Tenaska BioFuels, LLC, or Tenaska, to market and sell all ethanol produced at Sierra for three years commencing on the date of the first ethanol delivery. The modular design of our technology will allow us to replicate the design of Sierra and more efficiently construct future facilities with up to six times the production capacity of Sierra. We believe we can lower our unsubsidized cash operating costs, net of the sale of co-products such as renewable energy credits, from less than $1.30 per gallon at Sierra to less than $0.90 per gallon at our full-scale commercial facilities, assuming economies of scale and a 60 million gallon per year facility. These estimates do not require any improvement in MSW-to-ethanol yields or process efficiencies.

Our production facilities will provide numerous social and environmental benefits. By providing a reliable source of domestic renewable transportation fuels, our facilities will help the United States reduce its dependence on foreign oil. In addition, we expect our process will reduce GHG emissions by more than 75% compared to traditional gasoline production. Our process does not compete with recycling programs available today. We use MSW feedstock after it has been processed for recyclables, such as cans, bottles, plastic containers, paper and cardboard, that would otherwise be landfilled. By diverting MSW from landfills, our facilities will help mitigate the need for new landfills and extend the life of existing landfills. Lastly, our MSW feedstock does not have the land-use issues or adverse impact on food prices generally associated with other feedstocks used to produce ethanol, such as corn and sugarcane.

OUR MARKET OPPORTUNITY

According to the National Renewable Energy Laboratory, the global market for transportation fuels was over $4 trillion in 2010. According to the U.S. Energy Information Administration, in 2009 there was a 138 billion gallon market for gasoline and a 52 billion gallon market for diesel in the United States alone.

The most common biofuel used in the global transportation sector is ethanol, which has been blended into gasoline since the 1970s, when it was used primarily to increase fuel performance as an octane booster. Today, its primary use is to accelerate the displacement of petroleum gasoline with a domestic, renewable alternative. Federal law established the Renewable Fuel Standards program, or RFS2, and the Clean Air Act Amendments of 1990, which require that gasoline used in the United States have additives that oxygenate the fuel.

In 2010, approximately 13 billion gallons of ethanol was blended into the gasoline supply of the United States, virtually all of which was produced from corn. Ethanol derived from corn does not satisfy RFS2 advanced biofuel requirements, which include at least a 50% reduction in lifecycle GHG emissions. The RFS2 requirement for the volume of all renewable fuel was 13.95 billion gallons in 2011, increasing to 20.5 billion gallons in 2015 and reaching 36 billion gallons in 2022, 21 billion gallons of which must be advanced biofuel.

Outside of RFS2, state and local programs and incentives have mandated the use of renewable fuels. The most notable state program is the California Low Carbon Fuel Standard, or LCFS, which was enacted in January 2007. The LCFS directive calls for a reduction of at least 10% in the carbon intensity of California’s transportation fuels by 2020, placing a high demand on low-carbon fuels such as ours. This required reduction is applicable across 100% of California’s transportation fuel volume. As a result, the

 

 

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continued use of traditional gasoline for a significant portion of California’s transportation fuel would lead to greater demand for lower carbon intensity blendstock. For example, the 10% ethanol component of E10 would require approximately 100% carbon intensity reduction to allow for LCFS compliance in the event the remaining 90% fuel volume remained unchanged. Thus, blendstocks with significant carbon intensity reductions will be very attractive in meeting these standards.

OUR SOLUTION

Our business strategy is based on securing long-term, zero-cost MSW feedstock and employing our proprietary process to efficiently convert the MSW into an advanced biofuel. We believe our product will be markedly superior to traditional and other advanced biofuels from both an economic and an environmental perspective.

Our competitive strengths

We believe our business model benefits from a number of competitive strengths, including the following:

 

Ø  

Attractive feedstock.    The use of MSW affords us numerous benefits:

 

  ¡    

Contracted at zero cost.    We have executed feedstock contracts with some of the largest waste service companies in the United States that will supply us with sufficient feedstock, at zero cost, to produce more than 700 million gallons of advanced biofuel annually for up to 20 years. Our use of MSW at zero cost removes the largest, and most volatile, component of traditional renewable fuels production cost from our cost structure. We believe this provides us with a significant cost advantage over competitors paying for feedstock or utilizing purpose-grown feedstocks.

 

  ¡    

Transportation advantage.    Significant volumes of MSW are generated near metropolitan areas, providing us with a transportation advantage compared to feedstocks harvested or grown in rural areas that must ultimately transport either the feedstock or the fuel to metropolitan areas.

 

  ¡    

Reliable supply.    The United States generates more than 243 million tons of MSW annually, the majority of which is rich in organic carbon, providing sufficient feedstock for our process to produce approximately 12 billion gallons of biofuel annually.

 

  ¡    

Established infrastructure.    By using MSW, we benefit from existing infrastructure for collection, hauling and handling. No new logistical networks would be required to transport the feedstock to our facilities.

 

  ¡    

No competing use.    We produce advanced biofuel from a true waste product that has no competing use, is not sought after by food producers and has no impact on food prices.

 

Ø  

Clear path to commercialization.    Our first commercial-scale ethanol production facility is expected to begin production in the second half of 2013. We expect to construct additional commercial-scale production facilities across the United States that will be supplied with MSW under our existing contractual arrangements with Waste Connections, Inc. Our modular plant design not only significantly reduces scale-up risk, but will also allow us to construct new facilities and deploy our capital efficiently to capture a meaningful share of the ethanol market in the United States.

 

Ø  

Proprietary process not dependent on yield improvement.    Our process integrates a catalyst that converts syngas into ethanol, and we have demonstrated the success of this process at full scale at our demonstration facility. We believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which we believe is sufficient for us to operate profitably in the absence of economic subsidies.

 

 

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Ø  

Business model built for long-term and sustainable profitability.    We do not rely on government subsidies to make our product commercially viable. While we benefit from policies such as RFS2 and the LCFS, and will access incentives available for the production of our advanced biofuel, we expect our product to be sold on a cost-competitive basis with existing transportation fuels without any reliance on subsidies. We also believe we have greater certainty around our cost structure compared to traditional ethanol producers due to our existing contractual arrangements for zero-cost MSW feedstock. We expect this certainty regarding our cost structure will allow us to enter into financial and/or physical ethanol hedges to lock in a portion of our unit economics.

 

Ø  

Flexible production process.    We have designed our proprietary alcohol synthesis process to give us the flexibility to produce alcohols other than ethanol and take advantage of opportunities in other renewable fuels and chemical markets.

Benefits for our customers

The key benefits we intend to provide to our customers include:

 

Ø  

Zero-cost feedstock; stable cost structure.    With our long-term, zero-cost MSW feedstock, we will be able to sustain strong margins with very little production cost volatility. This enables our customers to have greater certainty relating to their ongoing access to a stable and reliable supply of ethanol.

 

Ø  

Access to domestically-produced advanced biofuel.    We will produce our ethanol domestically, offering customers a pricing advantage over those relying on Brazilian ethanol, which is subject to higher feedstock and transportation costs and tariffs imposed by the U.S. government for RFS2 compliance.

 

Ø  

Large-scale development program.    We have a robust project development pipeline based on the existing MSW under contract across 19 states that will support more than 700 million gallons of annual ethanol production.

Benefits for our suppliers

The key benefits we provide to MSW suppliers that work with us include:

 

Ø  

Cost savings.    We provide a cheaper source of waste diversion than traditional landfill disposal. In addition, our ability to site closer to where waste is collected than landfills allows us to pass on a portion of transportation and disposal cost savings to our suppliers.

 

Ø  

Extend landfill life at existing capacity levels.    Landfills are increasingly expensive and politically contentious assets to permit, expand and maintain. By offering our suppliers the ability to divert large volumes of waste to us, we help them extend the future life of their existing landfills, reduce the need for new landfills and save on the day-to-day costs of managing a landfill.

 

Ø  

Avoidance of methane gas emissions.    We provide an alternative to traditional decomposition of organic materials that creates methane gas, allowing integrated waste service companies the ability to lessen their GHG emissions footprint.

OUR STRATEGY

Our objective is to become a leading producer of renewable transportation fuels in the United States by building, owning and operating commercial production facilities. The principal elements of our strategy include:

 

Ø  

Commence production at Sierra.    We plan to commence construction of our first commercial-scale ethanol production facility by the end of 2011, with ethanol production expected to begin in the

 

 

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second half of 2013. We have entered into agreements with affiliates of Waste Connections, Inc. and Waste Management, Inc. to provide zero-cost MSW feedstock, and we have entered into a three-year contract with Tenaska to market and sell all ethanol produced at Sierra. We have designed Sierra to produce approximately 10 million gallons annually, using a modular design that will be scalable in our subsequent facilities.

 

Ø  

Expand production capacity.    We believe the modular design of our technology will enable us to construct new, larger facilities quickly and efficiently, minimizing scale-up risk and allowing us to expand production capacity to 30- and 60-million gallons per year at future facilities. Such larger facilities would also lower both the capital cost per gallon and the fixed cost component of per gallon production costs, enhancing our economics.

 

Ø  

Execute fixed-price offtake and hedging contracts.    For each facility, we intend to enter into physical and/or financial fixed-price arrangements to lock in sufficient economics to cover a substantial portion of our fixed costs, including debt service.

 

Ø  

Secure additional MSW contracts.    Longer term, we intend to expand our business by entering into additional MSW feedstock agreements to increase the amount of resources we have available to supply our commercial facilities.

 

Ø  

Explore new market opportunities.    We believe significant opportunities for value creation exist outside of our base model to build, own, and operate facilities within the United States. Our process will be attractive to international markets with heavy reliance on oil, poor access to alternative fuels and expensive MSW disposal options. We may license our technology to third parties and/or partner with large strategic players, such as major oil and chemical companies.

RISKS AFFECTING US

Our business is subject to a number of risks and uncertainties including those highlighted in the section entitled “Risk factors” immediately following this prospectus summary. These risks include the following:

 

Ø  

we are a development stage company with a limited operating history and have not yet built a commercial-scale facility or achieved commercial-scale production;

 

Ø  

we have not yet generated any revenue, have incurred losses to date, anticipate continuing to incur losses in the future and may never achieve or sustain profitability;

 

Ø  

our proprietary process has not been demonstrated on a fully-integrated basis, and may perform below expectations when implemented on a commercial scale;

 

Ø  

there are significant risks associated with the construction and completion of Sierra, which may cost more to build, maintain or operate than we have currently budgeted or estimated, or there may be delays in the completion of the facility;

 

Ø  

we will need substantial additional capital in the future in order to finance the construction of our planned future facilities and to expand our business and we may be unable to obtain such capital on terms acceptable to us or at all;

 

Ø  

the growth of our business depends on locating and obtaining control of suitable sites for our additional facilities and the continuing supply of MSW as a feedstock;

 

Ø  

we may be unable to obtain patent or other protection for our proprietary technologies and, even if we obtain such protection, we may be unable to prevent third parties from infringing on any issued patents and other proprietary rights;

 

 

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Ø  

our business model depends on our ability to successfully scale up production capability and develop, own and operate additional production facilities;

 

Ø  

fluctuations in the price of and demand for ethanol and petroleum will impact our results of operations; and

 

Ø  

changes in government regulations, including subsidies and economic incentives, could have a material adverse effect on demand for our ethanol, and negatively impact our results of operations.

CORPORATE INFORMATION

We were incorporated in the State of Delaware on July 19, 2007. Our principal executive offices are located at 4900 Hopyard Road, Suite 220, Pleasanton, California 94588, and our telephone number at this location is (925) 730-0150. Our website address is www.fulcrum-bioenergy.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. Unless the context requires otherwise, the words “Fulcrum,” “we,” “Company,” “us” and “our” refer to Fulcrum BioEnergy, Inc., Fulcrum Sierra BioFuels, LLC and our other wholly-owned subsidiaries and affiliates.

The Fulcrum logo and other trademarks or service marks of Fulcrum appearing in this prospectus are the property of Fulcrum. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of the respective holders.

 

 

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The offering

 

Common stock offered by us

             shares

 

Common stock to be outstanding after this offering

             shares

 

Overallotment option to be offered by us

             shares

 

Use of proceeds

We intend to use a substantial portion of the net proceeds from this offering to fund the construction of our first commercial-scale ethanol production facility, the Sierra BioFuels Plant. We intend to use any remaining net proceeds for general corporate purposes and working capital. See “Use of proceeds” for additional information.

 

Risk factors

See “Risk factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

 

Proposed              symbol

“FLCM”

The number of shares of our common stock to be outstanding after this offering is based on 66,720,526 shares outstanding as of June 30, 2011, and excludes:

 

Ø  

as of June 30, 2011, 1,979,624 shares of common stock issuable upon the exercise of options to purchase our common stock at a weighted average exercise price of $0.24 per share under our 2007 Stock Incentive Plan; and

 

Ø  

             shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective upon the completion of this offering (plus the shares reserved for issuance under our 2007 Stock Incentive Plan that are not issued or subject to outstanding grants at the completion of this offering) and which will also contain provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Stock plans.”

Unless otherwise indicated, this prospectus reflects or assumes the following:

 

Ø  

no exercise of options outstanding at June 30, 2011;

 

Ø  

the conversion of our outstanding Series A, Series B-1 and Series B-2 preferred stock as of June 30, 2011 into an aggregate of 34,192,335 shares of common stock immediately prior to the completion of this offering;

 

Ø  

the conversion of approximately $32.5 million aggregate principal amount and $2.0 million of accrued interest, of our outstanding senior secured convertible notes into 12,924,605 shares of Series C-1 preferred stock, the committed issuance of 16,292,133 shares of Series C-1 preferred stock and the issuance of 1,947,565 shares of common stock in September 2011, as more fully described in “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Series C preferred stock financing,” and the conversion of such preferred stock into an aggregate of 29,216,738 shares of common stock immediately prior to completion of this offering;

 

 

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Ø  

no exercise of the over-allotment option by the underwriters; and

 

Ø  

that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect.

 

 

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Summary consolidated financial data

The following table presents our summary consolidated financial data for the periods indicated. You should read this data together with our consolidated financial statements and related notes, “Selected consolidated financial data,” and “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus.

The consolidated statements of operations data for each of the years ended December 31, 2008, 2009 and 2010, are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for each of the six months ended June 30, 2010 and 2011, and the consolidated balance sheet data as of June 30, 2011, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting of normally recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results for a full fiscal year.

 

     Year ended December 31,     Six months ended
June 30,
 
Consolidated statements of operations data:    2008     2009     2010     2010     2011  
     (in thousands, except per share data)  
          

Operating expenses(1):

          

Research and development expenses

   $ 8,041      $ 8,939      $ 12,015      $ 5,304      $ 8,929   

General and administrative expenses

     4,206        6,327        4,570        2,136        4,221   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,247        15,266        16,585        7,440        13,150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12,247     (15,266     (16,585     (7,440     (13,150

Other income (expense):

          

Interest (expense)

     (288     (1,278     (1,638     (1,123     (958

Interest income

     148        24        8        4        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (140     (1,254     (1,630     (1,119     (956
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (12,387     (16,520     (18,215     (8,559     (14,106

Less net loss attributable to non-controlling interest in subsidiary

     —          2        187        38        299   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (12,387   $ (16,518   $ (18,028   $ (8,521   $ (13,807
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted(2)

   $ (23.04   $ (15.08   $ (14.46   $ (7.01   $ (10.32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in EPS calculation—basic and diluted(2)

     538        1,095        1,247        1,216        1,338   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per share—basic and diluted (unaudited)(2)

       $ (0.43     $ (0.30
      

 

 

     

 

 

 

Pro forma weighted-average shares used in EPS calculation—basic and diluted (unaudited)(2)

         42,409          46,604   
      

 

 

     

 

 

 

 

 

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     As of June 30, 2011  
Consolidated balance sheet data:    Actual    

Pro forma
as

adjusted(3)

     Pro forma
as further
adjusted(4)
 
     (in thousands)  
       

Current assets

   $ 1,007      $ 49,007       $                

Property and equipment, net

     2,901        2,901      

Intangible assets, net

     6,550        6,550      

Deposits

     831        831      

Capitalized offering costs

     436        436      

Current liabilities

     33,299        3,731      

Long-term liabilities

     8        8      

Redeemable convertible preferred stock

     41,902        —        

Total stockholders’ equity (deficit)

     (63,794     55,675      

 

(1)   Includes stock-based compensation expense as follows:

 

     Year ended December 31,      Six months ended
June 30,
 
        2008          2009          2010            2010              2011      
     (in thousands)  

Research and development expenses

   $ —         $ —         $ —         $ —         $ 3   

General and administrative expenses

     57         151         105         53         48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57       $ 151       $ 105       $ 53       $ 51   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
(2)   See Note 2 to our annual consolidated financial statements and Note 1 to our interim condensed consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and the number of shares used in the computation of per share amounts on a historical and pro forma basis.
(3)   Reflects on a pro forma as adjusted basis the (i) conversion of all of our outstanding preferred stock as of June 30, 2011 into an aggregate of 34,192,335 shares of common stock immediately prior to the completion of this offering and (ii) the conversion of approximately $32.5 million aggregate principal amount of our senior secured convertible notes and $2.0 million of accrued interest into 12,924,605 shares of Series C-1 preferred stock the committed issuance of 16,292,133 shares of Series C-1 preferred stock and the issuance of 1,947,565 shares of common stock in September 2011, and the conversion of such Series C-1 preferred stock shares into 29,216,738 shares of our common stock.
(4)   Reflects on a pro forma as further adjusted basis the conversion and issuance described in note (3) above and, on an adjusted basis, the receipt by us of the estimated net proceeds from the sale of              shares of common stock by us in this offering at an assumed initial public offering price of $             per share, which is the mid-point of the price range set forth on the cover of this prospectus, after deducting estimated underwriting discounts, commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed public offering price of $             per share would increase or decrease current assets and total stockholders’ deficit by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. Our business could be harmed by any of these risks. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

We are a development stage company with a limited operating history and have not yet achieved commercial-scale production.

We are a development stage company with a limited operating history, and we have not yet generated any revenue. We currently expect to begin constructing our first commercial ethanol production facility, the Sierra BioFuels Plant, or Sierra, by the end of 2011, and to begin production in the second half of 2013. To date, the components of our process have been demonstrated or used separately, but we have not previously demonstrated the processes on a fully-integrated basis at a single location or on a commercial scale. Certain factors that could, alone, or in combination, delay or prevent us from successfully commercializing our proprietary process, and thus generating revenue or otherwise impact our financial results, include:

 

Ø  

our ability to achieve commercial-scale production of ethanol on a cost-effective basis;

 

Ø  

our ability to successfully integrate our gasification and alcohol synthesis processes;

 

Ø  

our process, including the integrated gasification and alcohol synthesis processes, does not produce sufficient quantities of ethanol on a commercial scale;

 

Ø  

the manufacturer of our gasification system does not deliver the system on a timely basis or at all;

 

Ø  

increased capital costs, including construction costs, of developing Sierra and subsequent facilities;

 

Ø  

construction of Sierra or subsequent facilities takes longer than expected to achieve commercial results;

 

Ø  

our ability to obtain sufficient quantities of high-quality feedstock on a timely and cost-efficient basis;

 

Ø  

ethanol prices and/or demand are lower than expected;

 

Ø  

changes to, or elimination of, federal and/or state subsidies or other programs promoting renewable biofuels or ethanol; and

 

Ø  

actions of direct and indirect competitors that may seek to enter the renewable biofuels market in competition with us.

We have not yet generated any revenue, have incurred losses to date, anticipate continuing to incur losses in the future and may never achieve or sustain profitability.

We have not yet generated any revenue and have incurred substantial net losses since our inception, including net losses attributable to common stockholders of $12.4 million, $16.5 million, and $18.0 million for the years ended December 31, 2008, 2009 and 2010, respectively and $13.8 million for the six months ended June 30, 2011. We expect these losses to continue. As of June 30, 2011, we had a deficit accumulated during development stage of $63.8 million. We expect to incur significant additional costs and expenses related to the development and construction of Sierra, as well as the expansion of our

 

 

 

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business, including the development of additional facilities. There can be no assurance that we will ever generate any revenue or achieve or sustain profitability on a quarterly or annual basis.

Our process has not been demonstrated on a fully-integrated basis, and may perform below our current expectations when implemented on a commercial scale.

Our proprietary process for converting municipal solid waste, or MSW, into ethanol is comprised of two core components, one involving the gasification of the MSW into synthesis gas, or syngas, and the second involving the alcohol synthesis process to convert the syngas into ethanol. To date, the core components have been demonstrated or used separately, but we have not previously demonstrated the process on a fully-integrated basis at a single location or on a commercial scale, and we have not tested the equipment to be used to clean the syngas. Although we conducted extensive testing of the gasification system at a process demonstration unit, or PDU, of a third party, which converted the feedstock into syngas, that PDU is no longer in operation. In addition, we have designed, constructed and have been operating an alcohol synthesis PDU to test our alcohol synthesis process and proprietary catalyst. However, we have not established a fully integrated PDU for the entire process. As a result, we may experience technological problems that neither we nor any of the third-party engineers that have reviewed the project are able to foresee.

We cannot assure you that Sierra will be completed at the estimated construction cost or on the schedule that we intend or at all. If the fully-integrated, commercial-scale implementation of our proprietary process is unsuccessful, or does not achieve acceptable yields, we will be unable to generate sufficient revenue and our business will be harmed.

We are currently negotiating with the U.S. Department of Energy for a loan guarantee for the construction of Sierra, and the process for finalizing the terms of such loan guarantee and entering into definitive documentation for loans from the Federal Financing Bank may take longer than expected or may not happen at all.

We are currently in the process of negotiating a term sheet with the U.S. Department of Energy, or DOE, for a loan guarantee to fund a portion of the construction costs associated with Sierra. As a part of the loan guarantee process, the DOE and its independent consultants conduct due diligence on projects which includes a rigorous investigation and analysis of the technical, financial, contractual, market and legal strengths and weaknesses of each project. The DOE’s due diligence of our Sierra project is ongoing and we are negotiating the terms of the loan guarantee with the DOE, and we cannot assure you that the DOE ultimately will issue the loan guarantee on terms that are acceptable to us or at all.

We will need substantial additional capital in order to fund the construction of Sierra and to expand our business in the future.

We will require substantial additional capital to construct Sierra and grow our business, particularly as we build additional facilities following the completion of Sierra. We will need to raise substantial additional funds to construct Sierra, which we currently expect to finance through existing equity capital, net proceeds from this offering and the DOE loan guarantee, if obtained, or additional project financing.

We will also need to raise substantial additional funds to construct, own and operate additional commercial-scale production facilities and to continue the development of our technology and process. The extent of our need for additional capital to grow our business will depend on many factors, including the amount of net proceeds we receive from this offering, whether we obtain additional project financing or loan commitments, whether we succeed in producing ethanol on a commercial scale, our ability to control costs, the progress and scope of our development projects, the effect of any acquisitions

 

 

 

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of other technologies that we may make in the future and the filing, prosecution and enforcement of patent claims. Future financings that involve the issuance of equity securities would cause our existing stockholders to suffer dilution. In addition, debt financing sources may be unavailable to us and any debt financing may subject us to restrictive covenants that limit our ability to conduct our business. If we are unable to raise sufficient funds, our ability to fund our operations, take advantage of strategic opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay the construction of new facilities, delay, scale back or terminate research or development activities, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights or grant licenses on terms that are unfavorable to us. We may be unable to raise sufficient additional funds on acceptable terms or at all. If adequate funds are unavailable, we will be unable to execute successfully our business plan or to continue to grow our business.

There are significant risks associated with the construction and completion of Sierra, which may cause budget overruns or delays in the completion of the facility.

The scheduled completion date for Sierra, and the budgeted costs necessary to construct Sierra, assumes that there are no material unforeseen or unexpected difficulties or delays. Construction, equipment or staffing problems or difficulties in obtaining or maintaining any of the requisite licenses, permits or authorizations from regulatory authorities could delay the commencement or completion of construction or commencement of operations or otherwise affect the design and features of Sierra. Furthermore, given that third-party contractors will be assembling first-of-its kind systems using new technologies and processes, there may be potential construction delays and unforeseen cost overruns. Such delays or other unexpected difficulties could involve additional costs and result in a delay in the commencement of commercial operations at Sierra. Significant delays or cost overruns in completing Sierra will delay our development of additional facilities. Failure to complete Sierra within our estimated construction budget or on schedule may harm our financial condition and results of operations.

We are dependent on third parties to manufacture and deliver the main components of our process. If the delivery of such components for Sierra or future facilities are delayed, if the components do not meet our quality standards or specifications, or if our suppliers are unable to meet our demand for Sierra or future facilities, our business would be harmed.

We are depending on third parties to manufacture and deliver the gasification system we currently intend to use at our facilities, including Sierra, and the catalyst needed for our alcohol synthesis process. We currently have an agreement with a single third party to manufacture the gasification system. If such gasification systems are delayed or do not initially meet our quality specifications or expectations, the completion and commencement of operations at the facility would also be delayed, which would delay our ability to generate revenue and our business would be harmed. Furthermore, if our current manufacturer is delayed or unable to deliver the gasification systems, locating a new manufacturer for the gasification systems would require a significant amount of time, which would result in further delays to the completion and commencement of operations at the facility. In addition, if a third party fails to manufacture and deliver gasification systems to meet our demand and timing for future facilities, we may be unable to grow our business and our financial condition and results of operations may be harmed.

We will rely on contract manufacturers to manufacture substantially all of the catalyst needed for Sierra. The failure of these manufacturers, or any manufacturer we use for future facilities, to manufacture and supply the catalyst on a timely basis or at all, in compliance with our quality specifications or expectations, or in volumes sufficient to meet demand for Sierra or future facilities, would adversely

 

 

 

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affect our ability to produce ethanol and our business would be harmed. If we require additional manufacturing capacity and are unable to obtain it in sufficient quantity, we may not be able to increase our production of ethanol, and we may be forced to contract with other manufacturers on terms that may be less favorable than the terms we currently have. We do not currently have any long-term supply contracts with catalyst manufacturers, but are seeking to enter into such arrangements. However, we cannot guarantee that we will be able to enter into long-term supply contracts on commercially reasonable terms or at all.

If the operating costs of our plants are higher than expected or our plant availability is lower than expected, our results of operations may be harmed.

We have not yet built and operated a commercial-scale facility employing our integrated process, and the operating costs of such facilities may be higher than we currently expect, due to labor costs, labor shortages or delays, costs of equipment, materials and supplies, maintenance costs, weather delays, inflation or other factors, which could be material. Significant unexpected increases in such costs will result in the need to obtain higher selling prices for our ethanol in order to be profitable. If the price of ethanol is below such levels, our results of operations would be harmed.

Other operating and maintenance costs, including fuel costs and downtime, may be significantly higher than we anticipate and plant availability will significantly impact our estimated operating costs per gallon. We currently expect that our process will generate enough electricity to fully supply each facility’s electrical usage requirements. If we are not able to generate sufficient electricity through our process, we will be required to purchase additional natural gas to generate electricity or additional electricity in order to operate our facilities, which could increase our operating costs and harm our results of operations. In addition, our facilities may not operate as efficiently as we expect and may experience unplanned downtime, which may be significant and could adversely affect our business and results of operations.

We are dependent on third parties to deliver MSW feedstock for use in our projects, and if the supply of feedstock is disrupted or delayed or does not meet our quality standards, or we are required to pay for our feedstock, our business may suffer.

In order to produce sufficient yields of ethanol to make our facilities economically viable, we will require large volumes of MSW feedstock. Though we have entered into long-term MSW feedstock supply agreements with waste companies to provide enough feedstock to produce more than 700 million gallons of ethanol annually at zero cost, deliveries by such companies may be disrupted due to weather, transportation or labor issues or other reasons outside of our control. If we do not have sufficient supplies of feedstock on hand, the volume of ethanol we can produce will be decreased. In addition, the MSW we require must meet certain quality standards with respect to the type of materials included in the MSW. If the MSW delivered by the waste companies regularly contains a high portion of unusable materials, we may not have sufficient supplies of usable feedstock on hand and the volume of ethanol we can produce will be decreased. Further, one of our supply agreements for Sierra provides that we are responsible for the transportation costs of delivering the feedstock to the facility, but that the supplier will pay us a tipping fee for the MSW feedstock that we accept. If transportation costs increase faster than the tipping fees and we are not able to obtain zero-cost feedstock from another source, our results of operations may be harmed. In the future, we may also be required to pay for MSW feedstock, transportation fees and related costs. In addition, there can be no assurance that our current zero-cost providers will not breach their agreements with us if they are able to sell the MSW to another party, and we may not be able to find a suitable replacement for a given facility on a timely basis or at all. Our business may suffer as a result of any decreases in the volume of ethanol we can produce due to shortages of feedstock or an increase in the cost of our feedstock.

 

 

 

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The growth of our business depends on locating and obtaining site control of suitable locations for additional facilities.

We seek sites for our facilities based on a number of factors, including the cost to obtain land for the facility, local permitting process, distance to waste processing facilities, distance to oil and gas refinery and blending facilities, access to utilities and existing infrastructure, available work force and local and state development incentives. Once we have identified a suitable site for a facility, purchasing or leasing the land requires us to negotiate with landowners and local government officials. These negotiations can take place over a long period of time, are not always successful and sometimes require economic concessions not in our original plans. In addition, our ability to obtain the site may be subject to competition from other industrial developers. If a competitor or other party obtains the site, or if we are unable to obtain adequate permits for the site, we could incur losses as a result of development costs for sites we do not develop, which we would have to write off. If we are unable to locate sites that meet our criteria, we may have to select sites that are less advantageous to us, and we may be unable to grow our business and our operating results may be harmed.

Our business model depends on our ability to successfully scale up production capability and develop, own and operate additional production facilities.

Our long-term growth and business plan is dependent upon our significantly decreasing the cost of production per gallon of ethanol from what we expect to achieve at Sierra, based on achieving certain economies of scale by increasing the production capability at our future facilities. Sierra is expected to produce approximately 10 million gallons of ethanol per year and we expect that future facilities will be built at three times and eventually six times the scale of Sierra utilizing the modular design of our integrated process. If the modular scale-up of our process and technology is unsuccessful or we are otherwise unable to increase our production capabilities through the build-out of additional facilities, we may not be able to decrease the cost of production per gallon, which will harm our results of operations and growth prospects.

Fluctuations in the price of and demand for ethanol and petroleum will impact our results of operations.

The market price of ethanol is volatile and can fluctuate significantly. The market price of ethanol is dependent upon many factors, including the supply of ethanol and the price of gasoline, which is in turn dependent on the price of petroleum, which is highly volatile and difficult to forecast. In addition, there has been a substantial increase in ethanol production in recent years, and increases in the demand for ethanol may not be commensurate with increases in the supply of ethanol, thus leading to lower ethanol prices. Demand for ethanol could be impaired due to a number of factors, including regulatory developments and reduced U.S. gasoline consumption. Reduced gasoline consumption has occurred in the past and could occur in the future as a result of increased gasoline or oil prices. Fluctuations in the price of ethanol may cause our financial results to fluctuate significantly.

Changes in government regulations, including subsidies and economic incentives, could have a material adverse effect on demand for our ethanol, business and results of operations.

The market for renewable biofuels is heavily influenced by foreign and U.S. federal, state and local government regulations and policies. Changes to existing or adoption of new domestic or foreign federal, state or local legislative initiatives that impact the production, distribution, sale or import and export of renewable biofuels may harm our business.

 

 

 

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For example, the Energy Independence and Security Act of 2007, or EISA, set targets for alternative sourced liquid transportation fuels (approximately 14 billion gallons in 2011, increasing to 36 billion gallons by 2022) as part of the Renewable Fuel Standards program. Of the 2022 target amount, a minimum of 21 billion gallons must be advanced biofuels which, as defined in EISA, is any renewable fuel, other than ethanol derived from cornstarch, having lifecycle greenhouse gas emissions that are at least 50 percent less than baseline greenhouse gas emissions.

 

Ethanol produced from the cellulosic components of separated MSW has been approved by the Environmental Protection Agency or, EPA, as an eligible form of ethanol for meeting the cellulosic biofuel targets under EISA. Cellulosic biofuel is one kind of advanced biofuel, and in 2022, a minimum of 16 billion gallons of the 21 billion gallons of advanced biofuels blended into gasoline or diesel fuel must be cellulosic biofuels.

In addition, we and other companies in the industry are petitioning the EPA for separate and additional confirmation that ethanol produced from any separated MSW (not just the cellulosic components) qualifies as an advanced biofuel for the purpose of meeting the advanced biofuel targets. There is no assurance at this time that we will obtain that confirmation in a timely manner or at all, or that our facilities will be certified, however it is not necessary to be qualified as an advanced biofuel in order for the cellulosic fraction of our ethanol to earn cellulosic biofuel credits. We will need to register and receive producer and facility identification numbers, the receipt of which may be delayed.

We will also apply to the State of California to have our ethanol certified under California’s Low Carbon Fuel Standard, or LCFS, which would make our ethanol eligible for the carbon intensity reduction credits that will be available under this program for reducing the carbon intensity of California’s transportation fuels.

In the United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. The elimination of or any reduction in mandated requirements for alternative fuels and additives to gasoline may cause demand for renewable biofuels to decline. However, there is no assurance that this or any other favorable legislation will remain in place. For example, the biodiesel tax credit expired in December 2009, and its extension was not approved until March 2010 and only through December 31, 2011. The failure of our ethanol to qualify as advanced biofuel or to be certified under LCFS, any reduction in, phasing out or elimination of existing tax credits, subsidies, mandates and other incentives in the United States and foreign markets for renewable fuels, or any inability of our customers to access such credits, subsidies, mandates and incentives, may adversely affect demand for our product, which would adversely affect our business. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations.

Conversely, government programs could increase investment and competition in the market for our ethanol. For example, various governments have recently announced a number of spending programs focused on the development of clean technology, including alternatives to petroleum-based fuels and the reduction of GHG emissions, which could lead to increased funding for our competitors or the rapid increase in the number of competitors within our market.

The price of renewable fuel credits may decline, reducing our revenues.

The Renewable Fuel Standards program, or RFS2, assigns renewable fuel credits to each gallon of qualifying renewable fuel that is produced, including our products. Refiners and importers are required

 

 

 

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to blend into their products an amount of renewable fuel that is specified annually by the EPA, or to purchase RFS2 credits representing such amounts. The value of RFS2 credits depends upon the amount of renewable fuel required by the EPA to be blended into petroleum-based fuels and the availability of renewable fuels (and RFS2 credits). If excess qualifying renewable fuels are produced in a year, then excess RFS2 credits may be created, resulting in a decline in the value of RFS2 credits generally. The trading prices of renewable fuel and advanced biofuel credits are influenced by, among other factors, the transportation costs associated with renewable fuels, the mandated level of renewable fuel use for a specific year, the possibility of waivers of renewable fuel mandates, the ability to use credits from prior years and the expected supply of renewable fuel products. If the price of RFS2 credits declines as a result of oversupply of renewable transportation fuels (and associated RFS2 credits), then the prices at which we are able to sell our renewable transportation fuels (or associated RFS2 credits) will also decline. Our revenues could therefore depend upon market conditions, including the amount of renewable transportation fuels and RFS2 credits supplied by all producers in the market.

Our future success may depend on our ability to produce our renewable transportation fuel without government incentives on a cost-competitive basis with petroleum-based fuels. If current or anticipated government incentives are reduced significantly or eliminated and petroleum-based fuel prices are lower or comparable to the cost of our renewable transportation fuel, demand for our products may decline, which could adversely affect our future results of operations.

Our competitive position may depend on our ability to effectively obtain and enforce patents related to our proprietary processes. If we or our licensors fail to adequately protect this intellectual property, our business may be harmed.

Our success may depend in part on our ability to obtain and maintain patent protection sufficient to prevent others from utilizing our integrated process to convert MSW into ethanol. In order to protect our process from unauthorized use by third parties, we must hold patent rights that cover our technologies and processes. As of June 30, 2011, we had filed three U.S. patent applications and one international application under the Patent Cooperation Treaty.

The patent position of biotechnology and bio-industrial companies can be highly uncertain because obtaining and determining the scope of patent rights involves complex legal and factual questions. The standards applied by the United States Patent and Trademark Office in granting patents are not always applied uniformly or predictably. There is no uniform worldwide policy regarding patentable subject matter, the scope of claims allowable in bio-industrial patents, or the formal requirements to obtain such patents. Consequently, patents may not issue from our pending patent applications. Furthermore, in the process of seeking patent protection or even after a patent is granted, we could become subject to expensive and protracted proceedings, including patent interference, opposition and re-examination proceedings, which could invalidate or narrow the scope of our patent rights. As such, we do not know nor can we predict the scope and/or breadth of patent protection that we might obtain on our proprietary processes.

Changes either in patent laws or in interpretations of patent laws in the United States may diminish the value of our intellectual property rights. Depending on the decisions and actions taken by the U.S. Congress, the federal courts, and the United States Patent and Trademark Office, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we might obtain in the future.

 

 

 

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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of proprietary information and trade secrets.

In addition to patents, we rely on confidentiality agreements to protect our technical know-how and other proprietary information. Confidentiality agreements are used, for example, when we talk to potential development partners, consultants, contractors and vendors. In addition, each of our employees has signed a confidentiality agreement. Nevertheless, there can be no guarantee that an employee or a third party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures.

We also keep as trade secrets certain technical and proprietary information where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific and technical collaborators and other advisors may unintentionally or willfully disclose our trade secrets to competitors. It can be expensive and time-consuming to enforce a claim that a third party illegally obtained and is using our trade secrets. Furthermore, the outcome of such claims is unpredictable. In addition, courts outside the United States may be less willing to or may not protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how without misappropriating or otherwise violating our trade secret rights. Where a third party independently develops equivalent knowledge, methods and know-how without misappropriating or otherwise violating our trade secret rights, they may be able to seek patent protection for such equivalent knowledge, methods and know-how. This could prohibit us from practicing our trade secrets.

Claims that our technologies or processes infringe the patent rights of third parties could result in costly litigation or could require substantial time and money to resolve, whether or not we are successful, and an unfavorable outcome in these proceedings would have a material adverse effect on our business.

Our commercial success depends on our ability to operate without infringing the patents and proprietary rights of other parties and without breaching any agreements we have entered into with regard to our technologies and processes. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to conduct our business. Our industry spans several sectors, including biotechnology and renewable fuels, and is characterized by the existence of a significant number of patents and disputes regarding patent and other intellectual property rights. Because patent applications can take several years to issue, there may currently be pending applications, unknown to us, that may result in issued patents that cover our technologies or processes. The existence of third-party patent applications and patents could limit our ability to obtain meaningful patent protection. If we wish to commercialize the technology or process claimed in issued and unexpired patents owned by others, we will need to obtain a license from the owner, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that the owner asserts that we infringe its patents. If patents containing competitive or conflicting claims are issued to third parties and these claims are ultimately determined to be valid, we may be enjoined from pursuing development or commercialization of our technologies or processes, or be required to obtain licenses to these patents, or to develop or obtain alternative technology.

We may be exposed to future litigation based on claims that one of our technologies or processes infringes on the intellectual property rights of others. There is inevitable uncertainty in any litigation, including patent litigation. Defending against claims of patent infringement is costly and time-consuming,

 

 

 

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regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. Many of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the costs and uncertainty associated with patent litigation could have a material adverse effect on our ability to continue our internal research and development programs, to license needed technology, or enter into strategic partnerships that would help us commercialize our technologies. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business.

If a third party successfully asserts a patent or other intellectual property rights against us, we might be barred from using certain portions of our technologies or processes, whether developed by us or licensed from third parties. Injunctions against using specified processes or components, or prohibitions against commercializing specified products, could be imposed by a court or by a settlement agreement between us and a plaintiff. In addition, we may be required to pay substantial damage awards to the third party, including treble or enhanced damages if we are found to have willfully infringed the third party’s intellectual property rights. We may also be required to obtain a license from the third party in order to continue using the technology or process we were found to infringe. It is possible that the necessary license will not be available to us on commercially acceptable terms or at all. This could limit our ability to competitively commercialize some or all of our products.

We may need to commence litigation to enforce our intellectual property rights, which would divert resources and management’s time and attention and the results of which would be uncertain.

Enforcement of claims that a third party is using our proprietary rights, including any patents issued based on our pending applications, without permission is expensive, time-consuming, uncertain and infringement by third parties of any patents ultimately issued to us may be difficult to determine. Litigation would result in substantial costs, even if the eventual outcome is favorable to us, and would divert management’s attention from our business objectives. In addition, an adverse outcome in litigation could result in a substantial loss of our proprietary rights and we may lose our ability to exclude others from practicing our technologies or processes.

The laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to renewable fuel technologies. This could make it difficult for us to stop the infringement of any patents ultimately granted based on our pending patent applications or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Moreover, our efforts to protect our intellectual property rights in such countries may be inadequate.

We expect to face competition primarily from other renewable fuels companies and, in particular, other ethanol companies.

We believe our primary competitors are companies focused on producing renewable fuels, and specifically companies that produce advanced biofuels, such as sugarcane ethanol and butanol, or from companies that produce other renewable fuels such as corn ethanol. We may also face competition from

 

 

 

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other industry participants, such as our feedstock suppliers or technology providers, seeking to produce renewable biofuels themselves or in partnership with other industry participants. The renewable fuels and advanced biofuels industry is rapidly evolving and highly competitive. If we are unable to compete successfully, our business, financial condition and results of operations could be adversely affected.

We will initially rely on a single distributor for the ethanol produced at Sierra, and we may be unable to successfully negotiate sufficient distribution agreements for our ethanol, which could harm our results of operations and commercial prospects.

We have entered into an agreement with a single distributor to market and sell all ethanol produced at Sierra for three years from commencement of production. If our single distributor is unable to market and sell all of our product at sufficient prices, our results of operations will be harmed. In addition, we may be unable to negotiate additional distribution agreements on favorable terms or at all, to distribute the ethanol produced at Sierra or our future facilities. Final terms of such agreements may include less favorable pricing structures or volume commitments, more expensive delivery or purity requirements, reduced contract durations and other adverse changes. Delays in negotiating such contracts could slow our growth plans and commercial prospects.

We need governmental approvals and permits, including environmental approvals and permits, to construct and operate our projects. Any failure to procure and maintain necessary permits or comply with permit restrictions would adversely affect ongoing development, construction and operation of future projects.

The design, construction and operation of ethanol production facilities require various governmental approvals and permits, including land use and environmental approvals and permits, which vary by jurisdiction, and will impose related restrictions and conditions that could increase our construction and operation costs, require expensive pollution control equipment, or limit the extent of our operations. In some cases, these approvals and permits require periodic renewal. We cannot predict whether all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial of a permit or delay in issuing a permit essential to the construction or operation of a facility or the imposition of impractical or costly conditions in any such permit could impair our ability to develop the facility at that location. In addition, we cannot predict whether the permits will attract significant opposition or whether the permitting process will be lengthened due to complexities and government or public opposition. Delay in the review and permitting process for a project can impair or delay our ability to develop that facility or increase the cost so substantially that the project is no longer attractive to us. If we were to commence construction in anticipation of obtaining the final permits needed to commence commercial operations at that facility, we would be subject to the risk of being unable to complete the project if all the permits were not obtained. If this were to occur, we would likely lose a significant portion of our investment in the project and could incur a loss as a result. Any failure to procure and maintain necessary permits would adversely affect development, construction and operation of our facilities.

Our financial results could vary significantly from quarter to quarter and are difficult to predict.

Our revenue and results of operations could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Factors that could cause our quarterly results of operations to fluctuate include:

 

Ø  

achievement, or failure to achieve, facility development milestones needed to allow us to produce ethanol on a cost effective basis;

 

 

 

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Risk factors

 

 

 

Ø  

delays or greater than anticipated construction costs associated with the completion of new production facilities;

 

Ø  

fluctuations in the price of and demand for ethanol;

 

Ø  

fluctuations in the price and timing of operating costs;

 

Ø  

changes in government regulations, including subsidies and economic incentives;

 

Ø  

departure of key employees;

 

Ø  

ability to manage growth;

 

Ø  

business interruptions, such as earthquakes and other natural disasters; and

 

Ø  

changes in general economic, industry and market conditions.

Due to these factors and others the results of any quarterly or annual period may not meet our expectations or the expectations of our investors and may not be meaningful indications of our future performance.

Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable delays or interruptions.

We are vulnerable to natural disasters and other events that could disrupt our operations, such as riot, civil disturbances, war, terrorist acts, earthquakes or flood, at our facilities or those of our contract manufacturers and other events beyond our control. We do not have a detailed disaster recovery plan, and any such disasters could delay or damage the completion, operation or production capacity of Sierra, or future production facilities. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages or decreases in production capacity we incur could have a material adverse effect on our cash flows and success as an overall business.

Our success depends in part on recruiting and retaining key personnel and, if we fail to do so, it may be more difficult for us to execute our business strategy. We are currently a small organization and will need to hire additional personnel to successfully execute our business strategy.

Our success depends on our continued ability to attract, retain and motivate highly qualified management and engineering personnel. We are highly dependent upon our senior management. If any of such persons left, our business could be harmed. All of our employees are “at-will” employees. The loss of the services of one or more of our key employees could delay or have an impact on the successful commercialization of our products. We do not maintain any key man insurance. In addition, we are currently a small organization with less than 20 employees and will need to hire additional personnel to successfully execute our business strategy. Competition for qualified personnel in the biotechnology and renewable energy fields is intense, particularly in the San Francisco Bay Area. We may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. If we are unsuccessful in our recruitment efforts, we may be unable to successfully execute our strategy.

Growth may place significant demands on our management and our infrastructure.

We expect to expand our business as we begin construction and operations of Sierra and develop additional facilities. At June 30, 2011, we had 17 employees, and we expect to increase our headcount significantly in the future as we commence operations at Sierra and pursue further development plans.

 

 

 

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We expect that in the future we will work simultaneously on the development of multiple facilities. Our growth may place significant demands on our management and our operational and financial infrastructure. In particular, continued growth could strain our ability to:

 

Ø  

develop and improve our operational, financial and management controls;

 

Ø  

enhance our reporting systems and procedures;

 

Ø  

recruit, train and retain highly-skilled personnel;

 

Ø  

develop and maintain our relationships with existing and potential business partners; and

 

Ø  

maintain our quality standards.

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, results of operations and financial condition would be harmed.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2010, we had approximately $14.2 million of federal and $11.6 million of California net operating losses, or NOLs, available to offset future taxable income. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, some of which are beyond our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Furthermore, our ability to utilize NOLs of any companies that we may acquire in the future may be subject to limitations. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.

Our operation will involve the use of hazardous materials, and we must comply with environmental, health and safety laws, which can result in significant costs and may adversely affect our business, operating results and financial condition.

The operation of our ethanol production facilities will involve the use of hazardous materials, including sulfuric acid, caustic, and petroleum hydrocarbons. Accordingly, we are subject to federal, state, and local environmental, health and safety laws and regulations governing the discharge of hazardous materials to air, water, and ground and the use, storage, handling, workplace safety, manufacturing, exposure to, and disposal of these hazardous materials. Our failure to comply with these laws and regulations could result in the imposition of substantial fines and penalties, cleanup costs, property damage and personal injury claims, loss of permits or a cessation of operations, and any of these events could harm our business and financial condition. There can be no assurance that violations of these laws or our environmental permits will not occur in the future as a result of human error, accident, equipment failure, or other causes. Liability under environmental, health and safety laws can be joint and several and without regard to fault or negligence. For example, under certain circumstances, we could be held liable for investigation and cleanup costs at offsite locations at which we disposed of wastes from our operations. We expect that our operations will be affected by other new environmental, health and workplace safety laws, new interpretations of existing laws, increased enforcement of environmental laws or other developments, and although we cannot predict the ultimate impact of any such changes they

 

 

 

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may impose greater compliance costs or result in increased risks or penalties, which could harm our business. Our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, financial condition and results of operations.

If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 will require us and our independent registered public accounting firm, to evaluate and report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2012. The process of implementing our internal controls and complying with Section 404 will be expensive and time-consuming, and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price.

In connection with the audit of our 2010 consolidated financial statements and preparation of the registration statement of which this prospectus forms a part, our auditors identified a significant deficiency in our system of internal control over financial reporting. The significant deficiency relates to the size our accounting department which is small and lacks the depth and breadth of personnel for appropriate segregation of duties, independent reviews of reconciliations, and timely reviews of contracts and agreements required for a public company, and we currently rely on contractors for some of these functions. With the increasing volume and complexity of our transactions as we construct our first commercial-scale facility, as well as increased financial reporting responsibilities as a public company, a key element of establishing effective internal controls over financial reporting will be having a strong technical accounting group with established financial reporting policies and procedures in place. We plan to take steps to remediate this deficiency by adding additional personnel with financial reporting expertise and generally increase our resources allocated to financial reporting; however there can be no assurance that such steps will be effective in remediating such deficiency or that we will not have additional deficiencies or material weaknesses in the future.

We will have broad discretion in the use of the net proceeds from this offering.

We will have broad discretion in the use of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development and commercialization of our projects and cause the price of our common stock to decline.

 

 

 

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Risk factors

 

 

RISKS RELATING TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK

If our executive officers, directors and largest stockholders choose to act together, they may be able to control our management and operations, acting in their own best interests and not necessarily those of other stockholders.

As of June 30, 2011, our executive officers, directors and beneficial holders of 5% or more of our outstanding stock owned almost all of our outstanding voting stock, and we expect that upon completion of this offering, the same group will continue to hold at least     % of our outstanding voting stock. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

A viable trading market for our common stock may not develop.

Prior to this offering, there has been no public market for shares of our common stock. Although we expect that our common stock will be approved for listing on the             , an active trading market for our shares may never develop or be sustained following this offering. We and the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. This initial public offering price may vary from the market price of our common stock after the offering. In addition, the trading volume of companies such as ours is often very low, and thus your ability to resell your shares may be severely constrained. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price.

The price of our common stock may be volatile.

Stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies, particularly small technology companies, can be very low. Limited trading volume of our stock may contribute to its future volatility. Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including any of the risk factors described in this prospectus.

These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $         in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $         per share (the mid-point of the range set forth on the cover page of this prospectus). The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

 

 

 

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A significant portion of total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. As of June 30, 2011, our directors, executive officers and beneficial holders of 5% or more of our outstanding stock beneficially own, collectively, more than 95% of our currently outstanding capital stock. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline. Based on shares outstanding as of June 30, 2011, upon completion of this offering, we will have              outstanding shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. This includes the shares that we are selling in this offering. As of the date of this prospectus, of the remaining shares, approximately              shares of common stock will be subject to a 180-day contractual lock-up with the underwriters, and an additional approximately              shares of common stock will be subject to a 180-day contractual lock-up with us.

In addition, as of June 30, 2011, there were 1,979,624 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. Moreover, after this offering, holders of an aggregate of              shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all              shares of common stock that we may issue under our 2011 Equity Incentive Plan plus the shares reserved for issuance under our 2007 Stock Incentive Plan that are not issued or subject to outstanding grants at the completion of this offering. Once we register these shares, they can be freely sold in the public market upon issuance and once vested, subject to the 180-day lock-up periods under the lock-up agreements described in the “Underwriting” section of this prospectus.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

Our amended and restated certificate of incorporation and bylaws to be effective upon the completion of this offering will contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents will include the following provisions:

 

Ø  

authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

 

Ø  

limiting the liability of, and providing indemnification to, our directors and officers;

 

Ø  

limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

 

Ø  

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

 

 

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Ø  

establishing a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

 

Ø  

requiring that directors only be removed for cause; and

 

Ø  

limiting the determination to our board of directors then in office with respect to the number of directors on our board and the filling of vacancies or newly created seats on the board.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without the prior approval of our board of directors or the holders of substantially all of our outstanding common stock.

These provisions of our charter documents and Delaware law, alone or together, could delay or deter hostile takeovers and changes in control or changes in our management. Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

Being a public company will increase our expenses and administrative burden.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under applicable securities laws.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, the Dodd-Frank Act and related regulations implemented by the Securities and Exchange Commission and the stock exchanges are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and attract and retain qualified executive officers.

 

 

 

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The increased costs associated with operating as a public company may decrease our net income or increase our net loss, and may cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of such increased costs. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could be volatile and decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock could be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock, which may never occur, would provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

 

 

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements. In this prospectus, the words “believe,” “may,” “will,” “should,” “plan,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “target,” “project,” “potential” and similar expressions, as they relate to our company, our technology and process, our business and our management, are intended to identify forward-looking statements. All statements made in this prospectus relating to our estimated and projected revenue, margins, costs, expenditures, anticipated construction schedule, estimated cash operating costs, cash flows, financial results and prospects are forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

Ø  

our ability to finance, construct and operate our first commercial-scale facility;

 

Ø  

our ability to operate and maintain our facilities in line with our projected costs;

 

Ø  

our ability to raise additional funds to expand our business and construct additional facilities;

 

Ø  

our ability to secure access to adequate supply of MSW feedstock at projected costs;

 

Ø  

changes in federal, state or government regulations, incentives or subsidies affecting our business;

 

Ø  

our ability to protect our intellectual property, including our proprietary process for converting MSW into ethanol;

 

Ø  

costs associated with defending intellectual property infringement and other claims;

 

Ø  

the effects of increased competition in our business;

 

Ø  

our ability to keep pace with changes in technology and our competitors;

 

Ø  

our ability to attract and retain qualified employees and key personnel;

 

Ø  

fluctuations in the price of and demand for ethanol and transportation fuels;

 

Ø  

any business interruption or facilities failure;

 

Ø  

the effects of natural or man-made catastrophic events; and

 

Ø  

other risk factors included under “Risk factors” in this prospectus.

In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

 

 

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Market and industry data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These sources include the U.S. Bureau of Economic Analysis, the U.S. Department of Energy, the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, the California Energy Commission, the California Air Resources Board, the Nevada Governor’s Office, the National Solid Wastes Management Association and the Waste Business Journal. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

 

 

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Use of proceeds

We estimate that we will receive net proceeds of approximately $         million from the sale of the shares of common stock offered in this offering, or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock to cover any over-allotment in full, based on an assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

We intend to use a substantial portion of the net proceeds of this offering to fund the construction of our first commercial-scale ethanol production facility, the Sierra BioFuels Plant. We expect to use the remaining net proceeds, if any, of this offering for the development and construction of additional ethanol production facilities and additional research and development with respect to our proprietary process, working capital and general corporate purposes, including the costs associated with being a public company.

We will have broad discretion in the use of the remaining net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Pending such uses, we intend to invest the net proceeds from the offering in interest-bearing, investment grade securities.

Dividend policy

We have never declared or paid any dividends on our common stock or any other securities. We currently intend to retain our future earnings, if any, for use in the expansion and operation of our business and therefore do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors, based upon our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

 

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011:

 

Ø  

on an actual basis;

 

Ø  

on a pro forma as adjusted basis to reflect the (i) conversion of all of our outstanding preferred stock as of June 30, 2011 into an aggregate of 34,192,335 shares of common stock immediately prior to the completion of this offering and (ii) the conversion of approximately $32.5 million aggregate principal amount of our senior secured convertible notes and $2.0 million of accrued interest into 12,924,605 shares of Series C-1 preferred stock, the committed issuance of 16,292,133 shares of Series C-1 preferred stock and the issuance of 1,947,565 shares of common stock in September 2011, and the conversion of such Series C-1 preferred stock shares into 29,216,738 shares of our common stock; and

 

Ø  

on a pro forma as further adjusted basis to reflect the pro forma adjustments described above and our receipt of the estimated net proceeds from the sale of              shares of common stock offered by us in this offering, assuming the underwriters do not exercise their option to purchase additional shares and based on an assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus) after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    June 30, 2011  
     Actual     Pro forma as
adjusted
    Pro forma as
further
adjusted
 
    (in thousands)  

Cash and cash equivalents

  $ 861      $ 48,861      $                    
 

 

 

   

 

 

   

 

 

 

Senior secured convertible notes and accrued interest

    29,567        —       

Long-term liabilities

    8        8     

Stockholders’ equity (deficit):

     

Preferred stock, $0.001 par value; 34,192,335 shares authorized, 34,192,335 issued and outstanding, actual; 73,146,900 shares authorized, no shares issued and outstanding pro forma as adjusted; no shares authorized, issued or outstanding, pro forma as further adjusted

    41,902        —       

Common stock $0.001 par value; 43,807,665 shares authorized, 1,363,885 issued and outstanding, actual; 76,000,000 shares authorized, 66,720,526 shares issued and outstanding pro forma as adjusted;              shares authorized,              shares issued and outstanding, pro forma as further adjusted

    1        67     

Additional paid-in capital

    —          119,829     

Contributions allocated to non-controlling interest in excess of additional paid in capital

    (15     —       

Deficit accumulated during development stage

    (63,780     (64,221  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (63,794     55,675     
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 7,683      $ 55,683     
 

 

 

   

 

 

   

 

 

 

The number of shares in the table above excludes, as of June 30, 2011:

 

Ø  

1,979,624 shares of common stock issuable upon the exercise of options to purchase our common stock at a weighted average exercise price of $0.24 per share under our 2007 Stock Incentive Plan; and

 

 

 

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Capitalization

 

 

 

Ø  

             shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective upon the completion of this offering (plus the shares reserved for issuance under our 2007 Stock Incentive Plan that are not issued or subject to outstanding grants at the completion of this offering) and which will also contain provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Stock plans.”

 

 

 

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Dilution

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

Our historical net tangible book value (deficit) as of June 30, 2011 was approximately $(70.0) million or $(51.35) per share of common stock. Our historical net tangible book value (deficit) per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and redeemable convertible preferred stock, divided by the total number of shares of our common stock outstanding as of June 30, 2011. Pro forma as adjusted net tangible book value as of June 30, 2011 was approximately $         million, or $         per share of common stock. Pro forma net tangible book value gives effect to (i) the conversion of all of our outstanding preferred stock as of June 30, 2011 into 34,192,335 shares of our common stock, which will occur automatically upon the closing of this offering and (ii) the conversion of approximately $32.5 million aggregate principal amount and $2.0 million of accrued interest of our senior secured convertible notes into 12,924,605 shares of Series C-1 preferred stock, the committed issuance of 16,292,133 shares of Series C-1 preferred stock and the issuance of 1,947,565 shares of common stock in September 2011, and the conversion of such Series C-1 preferred stock shares into 29,216,738 shares of our common stock.

After giving effect to our sale in this offering of              shares of our common stock at an assumed initial public offering price of $         per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us, our pro forma as adjusted net tangible book value as of June 30, 2011 would have been $         million, or $         per share of our common stock. This represents an immediate increase of net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $                

Historical net tangible book value (deficit) per share as of June 30, 2011

   $ (51.35  

Increase per share due to pro forma as adjusted conversion of preferred stock

     52.09     
  

 

 

   

Pro forma as adjusted net tangible book value per share before this offering

     0.74     

Increase per share attributable to this offering

    
  

 

 

   

Pro forma as further adjusted net tangible book value after this offering

    
    

 

 

 

Dilution per share to new investors

     $                
    

 

 

 

Each $1.00 increase or decrease in the assumed public offering price of $         per share would increase or decrease our pro forma as further adjusted net tangible book value by approximately $         million, the pro forma as further adjusted net tangible book value per share after this offering by approximately $         per share and the dilution as adjusted to investors purchasing shares in this offering by approximately $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

If the underwriters exercise their over-allotment option to purchase additional shares in this offering, our as further adjusted net tangible book value at June 30, 2011 would be $         million, or $         per share,

 

 

 

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Dilution

 

 

representing an immediate increase in pro forma as further adjusted net tangible book value to our existing stockholders of $         per share and an immediate dilution to investors participating in this offering of $         per share.

The following table summarizes, as of June 30, 2011, the number of shares of common stock purchased from us, on a pro forma as adjusted basis to give effect to (i) the conversion of all of our outstanding preferred stock into 34,192,335 shares of common stock, which will occur automatically upon the closing of this offering, (ii) the conversion of approximately $32.5 million aggregate principal amount and $2.0 million of accrued interest of our senior secured convertible notes into 12,924,605 shares of Series C-1 preferred stock, the committed issuance of 16,292,133 shares of Series C-1 preferred stock and the issuance of 1,947,565 shares of common stock in September 2011, and the conversion of such Series C-1 preferred stock shares into 29,216,738 shares of our common stock, and (iii) the total consideration and the average price per share paid by existing stockholders and new investors at an initial public offering price of $         per share before deducting underwriting discounts and commissions and estimated offering costs payable by us:

 

     Shares purchased     Total consideration     Average
price

per share
 
        Number          Percent         Amount          Percent      
     (in thousands, except percentages and per share amounts)  

Existing stockholders

     66,721                    $ 120,238                    $ 1.80   

Investors participating in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $           100.0   $     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The table and calculations above are based on 66,720,526 shares of common stock issued and outstanding as of June 30, 2011, and exclude, as of June 30, 2011:

 

Ø  

1,979,624 shares of common stock issuable upon the exercise of options to purchase our common stock at a weighted average exercise price of $0.24 per share under our 2007 Stock Incentive Plan; and

 

Ø  

             shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective upon the completion of this offering (plus the shares reserved for issuance under our 2007 Stock Incentive Plan that are not issued or subject to outstanding grants at the completion of this offering) and which will also contain provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Stock plans”.

To the extent any options to purchase shares of common stock are granted or exercised, there will be further dilution to new investors. In addition, we plan to raise additional capital to fund construction of future production facilities. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

 

 

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Selected consolidated financial data

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes related to those statements, and with “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009 and 2010, are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the period from January 17, 2007 (date of inception) to December 31, 2007 and the consolidated balance sheet data as of December 31, 2007 and 2008, are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for each of the six months ended June 30, 2010 and 2011, and the consolidated balance sheet data as of June 30, 2011, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have included, in our opinion, all adjustments, consisting of normally recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results for a full fiscal year.

 

   

Period from
Jan. 17, 2007
(date of
inception) to
December 31,

2007

    Year ended December 31,     Six months ended
June 30,
 
Consolidated statements of operations data:     2008     2009     2010     2010     2011  
    (in thousands, except per share data)  

Operating expenses:

           

Research and development expenses(1)

  $ 1,192      $ 8,041      $ 8,939      $ 12,015      $ 5,304      $ 8,929   

General and administrative expenses(1)

    1,955        4,206        6,327        4,570        2,136        4,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,147        12,247        15,266        16,585        7,440        13,150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (3,147     (12,247     (15,266     (16,585     (7,440     (13,150
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

           

Interest (expense)

    —          (288     (1,278     (1,638     (1,123     (958

Interest income

    108        148        24        8        4        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    108        (140     (1,254     (1,630     (1,119     (956
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (3,039     (12,387     (16,520     (18,215     (8,559     (14,106

Less net loss attributed to non-controlling interest

    —          —          2        187        38        299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributed to common stockholders

  $ (3,039   $ (12,387   $ (16,518   $ (18,028   $ (8,521   $ (13,807
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share—basic and diluted(2)

  $ N/A      $ (23.04   $ (15.08   $ (14.46   $ (7.01   $ (10.32
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in EPS calculation—basic and diluted(2)

    —          538        1,095        1,247        1,216        1,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma loss per share—basic and diluted (unaudited)(2)

        $ (0.43     $ (0.30
       

 

 

     

 

 

 

Pro forma weighted-average shares used in EPS calculation—basic and diluted (unaudited)(2)

          42,409          46,604   
       

 

 

     

 

 

 

(footnotes on following page)

 

 

 

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Selected consolidated financial data

 

 

 

     As of December 31,     As of
June 30,
 
Consolidated balance sheet data:    2007     2008     2009     2010     2011  
     (in thousands)  

Current assets

   $ 4,246      $ 2,422      $ 2,737      $ 2,310      $ 1,007   

Property and equipment, net

     75        1,896        2,701        2,893        2,901   

Intangible assets, net

     —          6,500        6,590        6,550        6,550   

Deposits

     15        16        18        733        831   

Capitalized offering costs

     —          —          —          —          436   

Total assets

     4,335        10,924        12,136        12,486        11,724   

Current liabilities

     372        11,163        28,485        20,015        33,299   

Long-term liabilities

            8        11        10        8   

Redeemable convertible preferred stock

     7,000        15,000        15,000        41,902        41,902   

Total stockholders’ equity (deficit)

   $ (3,037   $ (15,337   $ (31,662   $ (49,809   $ (63,794

 

(1)   Includes stock-based compensation expense as follows:

 

    

Period from
Jan. 17, 2007
(date of
inception) to
December 31,

2007

     Year ended December 31,      Six months ended
June 30,
 
          2008          2009          2010          2010          2011    
      (in thousands)  

Research and development expenses

   $ —         $ —         $ —         $ —         $ —         $ 3   

General and administrative expenses

     3         57         151         105         53         48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3       $ 57       $ 151       $ 105       $ 53       $ 51   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   See Note 2 to our annual consolidated financial statements and Note 1 to our interim condensed consolidated financial statements appearing elsewhere in this prospectus for an explanation of the method used to calculate basic and diluted net loss per share and the number of shares used in the computation of per share amounts on a historic and pro forma basis.

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk factors” or in other parts of this prospectus.

OVERVIEW

We produce advanced biofuel from garbage. Our disruptive business model combines our proprietary process and zero-cost municipal solid waste, or MSW, feedstock to provide us with a significant competitive advantage over companies using alternative feedstocks such as corn, sugarcane and other sources of biomass in the production of renewable fuel. The core element of our technology has been demonstrated at full scale. At our first commercial-scale facility, we expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits. This estimate does not require any improvement in MSW-to-ethanol yields or process efficiencies and is a substantially lower cost per gallon than traditional fuels and other renewable biofuels. Our stable cost structure, based on long-term, zero-cost MSW feedstock arrangements, will allow us to enter into fixed-price offtake contracts or hedges to secure attractive unit economics. We expect our first commercial-scale facility, the Sierra BioFuels Plant, or Sierra, to begin production in the second half of 2013 and to be at full capacity within three years after commencement of ethanol production.

We were founded in 2007 by James A. C. McDermott, the Managing Partner of USRG Management Company, LLC, to pioneer the development of a reliable and efficient process for transforming MSW into a renewable transportation fuel. Shortly after we were founded, Rustic Canyon Partners became an investor in the company. To date, we have focused our resources on developing and refining our proprietary technology and process of converting MSW to ethanol utilizing novel technologies in an innovative, clean and efficient thermochemical process. We have also been focused on securing long-term, zero-cost MSW feedstock agreements with solid waste companies to provide us with a reliable and abundant stream of MSW not only for Sierra, but also for future projects that we expect to develop in locations throughout the United States. We have secured access to enough zero-cost MSW feedstock in 19 states for up to 20 years to produce more than 700 million gallons of ethanol per year. We expect that our ethanol will constitute an advanced biofuel, which is eligible for certain federal and state programs and related incentives and credits to promote the development and commercialization of renewable fuel technologies.

Key milestones achieved to date include:

 

Ø  

April 2008.    We acquired the development rights to Sierra from InEnTec LLC, or InEnTec. We also entered into a Master Purchase and License Agreement with InEnTec to purchase the gasification system technology that we will deploy at Sierra to convert MSW feedstock to synthesis gas, or syngas.

 

Ø  

May 2008.    We entered into a Development Agreement with Nipawin Biomass Ethanol New Generation Co-operative Ltd. and Saskatchewan Research Council that provides us with access to a catalyst that we have incorporated into our proprietary alcohol synthesis process for converting syngas into ethanol.

 

 

 

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Ø  

September 2008.    We worked with InEnTec to finalize the design and begin testing of a gasification process demonstration unit utilizing the gasification system that will be deployed at Sierra. The results generated from this facility demonstrated that the InEnTec gasification system would produce the required quantities of carbon from the MSW feedstock.

 

Ø  

November 2008.    We entered into a 20-year MSW feedstock agreement with an affiliate of Waste Connections, Inc. for the delivery of MSW feedstock to Sierra. This agreement for zero-cost MSW feedstock will provide approximately one half of Sierra’s MSW feedstock requirements.

 

Ø  

December 2008.    We entered into a Master Project Development Agreement with Waste Connections, Inc. providing us with access to MSW feedstock at various sites across the United States to produce more than 700 million gallons of ethanol per year. This agreement allows us to enter into 20-year, zero-cost MSW feedstock agreements at each of our future project locations.

 

Ø  

April 2009.    We completed construction and began operations of our TurningPoint Ethanol Demonstration Plant to demonstrate our proprietary alcohol synthesis process utilizing a full-scale reactor identical to those that will be used at Sierra. To date, we have successfully operated the demonstration plant for more than 8,000 hours.

 

Ø  

June 2010.    We entered into an engineering, procurement and construction, or EPC, contract with a subsidiary of Fluor Corporation, or Fluor, to provide the EPC services for Sierra.

 

Ø  

September 2010.    We entered into a 15-year MSW feedstock agreement with an affiliate of Waste Management, Inc. for the delivery of MSW feedstock to Sierra and access to additional MSW feedstock for future projects in Northern Nevada. The agreement for zero-cost MSW feedstock will provide the balance of the daily MSW feedstock requirements of Sierra.

 

Ø  

December 2010.    We entered into a Series C preferred stock purchase agreement with affiliates of USRG Management Company, LLC and Rustic Canyon Partners to raise $75.0 million to help fund construction of Sierra, which was amended in April 2011 to increase the amount to be raised to $76.0 million. In September 2011, we entered into an amendment to the purchase agreement and the transaction was closed and funded in part. We expect the remainder of the transaction to close and fund at or prior to completion of this offering.

 

Ø  

February 2011.    We entered into an agreement with Barrick Goldstrike Mines Inc., or Barrick, that provides for a $10.0 million contribution by Barrick to our subsidiary Fulcrum Sierra BioFuels, LLC, or Sierra BioFuels, which entitles Barrick to a portion of the renewable energy credits generated by Sierra. This transaction provides us with additional capital resources for Sierra. We expect this transaction to be completed and the funding to be received upon the earlier of securing project financing for Sierra or completion of this offering.

As of June 30, 2011, we were considered to be a development stage company. Our primary activities since inception have included conducting research and development activities related to our technology, securing long-term MSW feedstock agreements, finalizing the development of Sierra including obtaining property and permits, working with third-party contractors on engineering activities for Sierra, evaluating sites, obtaining property and entering into MSW feedstock agreements for future facilities.

To date, we have not recognized any revenue. As of June 30, 2011, we had a deficit accumulated during development stage of $63.8 million. We experienced net losses attributable to common stockholders of $13.8 million for the six months ended June 30, 2011, $18.0 million for the year ended December 31, 2010, $16.5 million for year ended December 31, 2009 and $12.4 million for the year ended December 31, 2008.

 

 

 

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OUR COMMERCIALIZATION PLANS

Sierra, our first commercial-scale facility, will be owned and operated by our subsidiary, Sierra BioFuels, LLC, or Sierra BioFuels, on property owned by Sierra BioFuels in the Tahoe-Reno Industrial Center located approximately 20 miles east of Reno, Nevada. This plant is designed to produce approximately 10 million gallons of ethanol per year using zero-cost MSW feedstock contractually procured from affiliates of Waste Connections, Inc. and Waste Management, Inc. We have entered into a contract with Tenaska BioFuels, LLC to market and sell all ethanol produced at Sierra for three years commencing on the date of the first ethanol delivery, with unlimited renewal options. Permits necessary for construction have been obtained, construction is expected to commence by the end of 2011 and we expect to begin production in the second half of 2013.

Construction costs for Sierra are estimated to be $180 million, which will be financed primarily through existing equity capital and the net proceeds of this offering. We are also pursuing a loan guarantee from the U.S. Department of Energy, or DOE, to fund a portion of the construction costs, and are currently negotiating a term sheet with the DOE. Our existing equity capital is largely a result of our Series C preferred stock financing transaction, pursuant to which we expect to raise a total of $76.0 million. We also entered into an agreement for a contribution of $10.0 million from Barrick in exchange for a Class B membership interest in Sierra BioFuels entitling Barrick to receive a portion of the annual renewable energy credits generated by Sierra, which we expect to receive upon the earlier of securing project financing for Sierra or completion of this offering.

We own a 90% interest in Sierra BioFuels, which was established in February 2008 for the sole purpose of owning and operating Sierra. We hold a controlling interest in and contribute the equity to Sierra BioFuels for the construction of Sierra. We are entitled to a preferred return which will allow us to receive cash distributions equal to 95.01% of the cash available for distribution at Sierra BioFuels until we have received a return equal to 20% on the cash invested in Sierra BioFuels. We expect these preferred distributions will continue for over 15 years following the commencement of commercial operations of Sierra.

The modular design that we will deploy in our production facilities will allow us to replicate the design of Sierra and more efficiently construct future facilities with up to six times the production capacity of Sierra. We are currently reviewing additional sites for future facilities based on their proximity to MSW feedstock supply, favorable permitting environment and proximity to refineries and blenders. Under our development program, we intend to design, develop, own and operate additional facilities to utilize our existing MSW feedstock supply.

According to an August 2009 independent analysis, our process is projected to provide a more than 75% reduction in greenhouse gas, or GHG, emissions compared to traditional gasoline production. As a result, our ethanol will be eligible for certain federal and state programs and related incentives and credits to promote the development and commercialization of renewable fuel technologies, which we expect will further enhance the margins for our ethanol.

FUNDAMENTALS OF OUR BUSINESS

Our proprietary gasification and alcohol synthesis process converts MSW feedstock into ethanol that can be blended into gasoline at existing refineries to produce a domestic transportation fuel product for use by vehicles on the road today. Although we have not generated any revenue to date, we expect to generate revenue from sales of our advanced biofuels produced at our owned and operated facilities.

 

 

 

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We believe that the following factors will be critical to our future performance:

Access to MSW feedstock

We believe that our zero-cost MSW feedstock provides us with a significant competitive advantage over traditional ethanol producers that use commodity-priced feedstocks, which have high historic pricing volatility and short-dated, illiquid forward markets. We have secured long-term supplies of zero-cost MSW feedstock in sufficient quantities to produce more than 700 million gallons of ethanol annually for up to 20 years. One of our supply agreements for Sierra provides that we are responsible for the transportation costs of delivering the feedstock to the facility, but that the supplier will pay us a tipping fee for the MSW feedstock that we accept. If transportation costs increase faster than the tipping fees, and we are not able to obtain zero-cost feedstock from another source, our results of operations may be harmed. Longer-term, we intend to expand our business by entering into additional MSW agreements to increase the amount of feedstock available for future facilities.

Production cost

Maintaining a low production cost will allow us to sell ethanol at greater profit margins than other producers. We believe we can produce advanced biofuel at Sierra, our first commercial-scale facility, at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits. We believe this is a substantially lower cost per gallon than traditional fuels and other renewable biofuels, primarily due to our use of zero-cost MSW feedstock. We believe our production process will also generate sufficient electricity to operate our facilities, contributing to our lower production costs. The modular design of our technology will allow us to more efficiently construct future full-scale facilities with up to six times the production capacity of Sierra. We believe we can lower our unsubsidized cash operating costs, net of the sale of co-products such as renewable energy credits, from less than $1.30 per gallon at Sierra to less than $0.90 per gallon at our full-scale commercial facilities, assuming economies of scale and a 60 million gallon per year facility. These estimates do not require any improvement in MSW-to-ethanol yields or process efficiencies.

Production capacity

As we continue to expand our ethanol production with additional facilities, we believe that our annual production capacity will be a significant factor in our financial results. We believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW after taking into account electricity generation, which is sufficient for us to operate profitably without any economic subsidies. Sierra is expected to begin commercial operations in the second half of 2013 and to be at full capacity within three years after commencement of ethanol production and is designed to produce approximately 10 million gallons of ethanol per year. We expect to construct additional production facilities across the United States with up to six times the production capacity of Sierra.

Capital cost and financing

Our facilities are capital intensive and will require significant amounts of equity and debt capital. We expect the total construction costs of Sierra to be approximately $180 million, which will be financed primarily through existing equity capital and net proceeds of this offering. We are also pursuing a DOE loan guarantee to fund a portion of the cost, and are currently negotiating a term sheet with the DOE. We may also seek project financing from other sources. Although our larger, future facilities will require more capital to construct, we expect to realize economies of scale to lower the construction cost per gallon. We plan to finance these future facilities utilizing cash from operations of existing facilities and project and corporate debt.

 

 

 

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Ethanol and petroleum prices and demand

A significant factor in our operating margins will be the price received for our ethanol, which will be marketed as an alternative to oil. Ethanol is blended with gasoline and sold as a transportation fuel for vehicles on the road today. Because our zero-cost MSW feedstock enables us to have greater certainty about our lower cost structure compared to traditional ethanol producers, we expect to enter into financial and/or physical ethanol hedges to lock in a portion of our unit economics at each facility.

Governmental programs and incentives

Although we expect to generate favorable margins on the production of ethanol as soon as our facilities are operational based on our zero-cost MSW feedstock, we also expect that a significant factor driving growth in our business in the United States will be the federally mandated Renewable Fuel Standard program, or RFS2. We also expect to continue to benefit from the increasing demand for renewable biofuels as a result of favorable low carbon fuel standard legislation being considered or adopted by nearly half of the states, including California’s Low Carbon Fuel Standard. We expect that the additional demand for renewable biofuels from fuel companies in such states will create additional opportunities for us to expand our business. Although we may apply for additional loan guarantees and cash grants for future projects if they remain available, our financing strategy for future projects does not contemplate the use of federal loan guarantees or cash grants.

FINANCIAL OPERATIONS OVERVIEW

Revenue

To date, we have not generated any revenue and do not expect to do so until at least the second half of 2013 when Sierra is expected to commence production. Our revenue will be generated primarily from the sale of ethanol from our production facilities to local refineries or blenders. We will recognize revenue upon the satisfaction of certain criteria that includes the evidence of a sales contract or arrangement with a credit-worthy third party, a determinable price and quantity for our product sold, and the delivery of our ethanol has transferred title and risk of loss to a third party.

Cost of goods sold

When our facilities begin production, our gross profit will be derived from the sale of ethanol less the necessary costs incurred to generate the ethanol product. Cost of goods sold will consist primarily of plant labor, materials, maintenance, catalyst, utilities, other plant-related costs and depreciation. With our existing supply of zero-cost MSW feedstock, cost of goods sold will not be impacted by the use of MSW as feedstock for our process. Variability in cost of goods sold will be mainly driven by varying labor costs in the regions our plants are located and by the impact of inflation on the materials, spare parts, catalyst, utilities and other plant-related costs necessary for the operations of our facilities.

Operating Expenses

Research and development expenses

Historically, our research and development expenses have consisted primarily of labor, materials and third-party engineering, legal and other contractor expenses incurred in connection with evaluating and testing the technology and our proprietary process for converting MSW feedstock into ethanol. In addition, our research and development expenses have included the costs associated with the development of Sierra. We expense all of our research and development expenses as they are incurred. In

 

 

 

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the future, we expect our research and development expenses to primarily include the early development costs associated with future facilities, including evaluating and permitting sites, engineering, legal and other third-party costs. Upon securing the land, necessary permits, adequate funding, and a determination to proceed to advanced development and construction, we will begin capitalizing these project-related costs.

General and administrative expenses

Today, our general and administrative expenses consist primarily of personnel and costs (including non-cash stock-based compensation) related to our management, finance, legal, human resources, information technology, insurance, facilities and administrative functions. These expenses also include costs related to our business development function including third-party professional services. Upon the completion of this offering, we expect general and administrative expenses to increase as we incur additional costs related to operating as a public company and as we enhance our infrastructure to support the anticipated growth of our business. These costs will likely include the hiring of additional personnel, increased costs for insurance, facilities, other overhead as well as third-party legal, accounting and consulting expenses.

Other income (expense)

Interest (expense)

We recognize interest expense as we enter into debt obligations and capital leases. To date, interest expense has consisted primarily of accrued interest on outstanding debt which has consisted of convertible notes from affiliates of USRG Management Company, LLC and Rustic Canyon Partners. The outstanding principal and accrued interest on these notes has been paid through the conversion of the notes and accrued interest into shares of our convertible preferred stock. In the future, we expect interest expense will increase significantly and fluctuate as we incur debt to construct our facilities.

Interest income

Interest income is comprised of interest earned on invested funds and cash on hand. We expect interest income will fluctuate in the future with changes to the balance of funds invested, cash on hand and with market interest rates.

Provision for income taxes

Since inception, we have not generated any revenue and have incurred net losses and have therefore not recorded any U.S. federal and state income tax provisions. Accordingly, we have taken a full valuation allowance against all deferred tax assets until it is more likely than not that they will be realized. However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in liabilities which could be materially different from this estimate. In such an event, we will record additional tax expense or tax benefit in the period in which such resolution occurs.

 

 

 

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RESULTS OF OPERATIONS

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2010 AND 2011

Operating expenses

The following table shows our costs and operating expenses for the periods presented, showing period-over-period changes.

 

     Six months ended June 30,  
      2010      2011      Change  
     (in thousands)  

Operating expenses:

        

Research and development expenses

   $ 5,304       $ 8,929       $ 3,625   

General and administrative expenses

     2,136         4,221         2,085   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 7,440       $ 13,150       $ 5,710   
  

 

 

    

 

 

    

 

 

 

Research and development expenses

Our research and development expenses increased by $3.6 million in the six months ended June 30, 2011, primarily due to increased engineering design costs relating to Sierra of approximately $3.9 million. Other expenses also increased by approximately $89,000. The expense increases were offset by a decrease in 2011 of the operating costs relating to the alcohol synthesis process demonstration unit, or alcohol synthesis PDU, of approximately $284,000, primarily attributable to decreased consulting services, and employee and employee-related costs of $95,000. We plan to continue to make significant investments in research and development expenses for the foreseeable future as we pursue development of additional sites and facilities.

General and administrative expenses

Our general and administrative expenses increased by $2.1 million in the six months ended June 30, 2011, primarily due to increased professional service fees, including legal and engineering services, of approximately $2.0 million and travel expenses of $106,000 relating to project financing activities for the DOE loan guarantee application. We expect that our general and administrative expenses will increase in the near future as we add personnel and incur additional expense as a result of costs related to this offering and becoming a publicly-traded company.

Other income (expense)

The following table shows our other income (expense), net for the periods presented, and showing period-over-period changes.

 

     Six months ended June 30,  
      2010     2011     Change  
     (in thousands)  

Other income (expense):

      

Interest (expense)

   $ (1,123   $ (958   $ 165   

Interest income

     4        2        (2
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (1,119   $ (956   $ 163   
  

 

 

   

 

 

   

 

 

 

 

 

 

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Interest (expense)

Interest expense decreased by $165,000 in the six months ended June 30, 2011, primarily due to lower outstanding convertible note balances during the first half of 2011.

Interest income

Interest income decreased by $2,000 in the six months ended June 30, 2011, primarily due to a slight decrease in unrestricted cash available for transfer to our investment account in the first half of 2011.

COMPARISON OF YEARS ENDED DECEMBER 31, 2009 AND 2010

Operating expenses

The following table shows our costs and operating expenses for the periods presented, showing period-over-period changes.

 

     Year ended December 31,  
      2009      2010      Change  
     (in thousands)  

Operating expenses:

        

Research and development expenses

   $ 8,939       $ 12,015       $ 3,076   

General and administrative expenses

     6,327         4,570         (1,757
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 15,266       $ 16,585       $ 1,319   
  

 

 

    

 

 

    

 

 

 

Research and development expenses

Our research and development expenses increased by $3.1 million in 2010, primarily due to increased engineering design costs relating to Sierra of approximately $1.7 million and expenses related to operating the alcohol synthesis PDU due to increased hours of operation in 2010 of approximately $831,000. Employee and employee-related costs, legal services and other costs also increased by approximately $273,000, $106,000, and $128,000, respectively.

General and administrative expenses

Our general and administrative expenses decreased by $1.8 million in 2010, primarily due to a decrease in compensation expense in 2010 of approximately $1.5 million. Project financing fees also decreased by approximately $613,000 reflecting greater expenses in 2009 when two applications were filed under DOE financing programs. The decreases were offset partially by increases in employee and employee-related costs and other costs of approximately $202,000 and $126,000, respectively.

Other income (expense)

The following table shows our other income (expense), net for the periods presented, and showing period-over-period changes.

 

     Year ended December 31,  
      2009     2010     Change  
     (in thousands)  

Other income (expense):

      

Interest (expense)

   $ (1,278   $ (1,638   $ (360

Interest income

     24        8        (16
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (1,254   $ (1,630   $ (376
  

 

 

   

 

 

   

 

 

 

 

 

 

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Interest (expense)

Interest expense increased by $360,000 in 2010, primarily due to higher convertible notes balances in 2010 than in 2009.

Interest income

Interest income decreased by $16,000 in 2010, primarily due to less time between receiving funding and making major expenditures that depleted cash resources in 2010 than in 2009.

COMPARISON OF YEARS ENDED DECEMBER 31, 2008 AND 2009

Operating expenses

The following table shows our costs and operating expenses for the periods presented, showing period-over-period changes.

 

     Year ended December 31,  
      2008      2009      Change  
     (in thousands)  

Research and development expenses

   $ 8,041       $ 8,939       $ 898   

General and administrative expenses

     4,206         6,327         2,121   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 12,247       $ 15,287       $ 3,019   
  

 

 

    

 

 

    

 

 

 

Research and development expenses

Our research and development expenses increased by approximately $898,000 in 2009, primarily due to increases in expenses of approximately $3.5 million relating to constructing and operating the alcohol synthesis PDU, $555,000 relating to increasing the number of research and development employees in 2009, and $172,000 relating to increased legal services. The increases were partially offset by a decrease of approximately $3.1 million for engineering service expenses relating primarily to the preliminary engineering design for Sierra, which was completed in 2009. Additionally, other project development expenses decreased by approximately $230,000 as fewer project sites were evaluated and other expenses were lower in 2009 by $20,000.

General and administrative expenses

Our general and administrative expenses increased by $2.1 million in 2009, due to an increase in compensation expense of approximately $1.9 million, project financing expenses of approximately $379,000 associated with filing applications under two DOE financing programs and other expenses of $192,000. The increases were partially offset by a decrease in legal fees and corporate communication expense of approximately $227,000 and $169,000 respectively.

 

 

 

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Other income (expense)

The following table shows our other income (expense), net for the periods presented, showing period-over-period changes.

 

     Year ended December 31,  
      2008     2009     Change  
     (in thousands)  

Other income (expense):

      

Interest (expense)

   $ (288   $ (1,278   $ (990

Interest income

     148        24        (124
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

   $ (140   $ (1,254   $ (1,114
  

 

 

   

 

 

   

 

 

 

Interest (expense)

Interest expense increased by $990,000 in 2009 primarily due to higher convertible notes balances in 2009 than in 2008.

Interest income

Interest income decreased by $124,000 in 2009, primarily due to higher cash balances in 2008 compared to 2009, resulting in less interest earned in 2009.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations primarily through convertible debt and equity funded by affiliates of USRG Management Company, LLC and Rustic Canyon Partners. We have never generated any revenue and have generated significant losses. As of June 30, 2011, we had a deficit accumulated during development stage of approximately $63.8 million. We expect to continue to incur significant operating losses through at least the second half of 2013, when Sierra is expected to commence production. Construction and commencement of operations at Sierra will require significant additional capital expenditures.

We anticipate that our material liquidity needs in the near and intermediate term will consist of funding the construction of Sierra and our continuing operating losses. Construction activities for Sierra are expected to begin by the end of 2011 and will cost approximately $180 million. We believe that the combination of our current cash on hand, proceeds from our Series C preferred stock financing, the Barrick contribution and the net proceeds from this offering will be sufficient to fund our current operations for at least the next 12 months and to fund the construction of Sierra.

We are also pursuing a DOE loan guarantee to fund a portion of the construction costs for Sierra. As a part of the loan guarantee process, the DOE and its independent consultants conduct due diligence on projects, which includes a rigorous investigation and analysis of the technical, financial, contractual, market and legal strengths and weaknesses of each project. The DOE’s due diligence of our planned project is ongoing and we are negotiating the terms of the loan guarantee with the DOE. We cannot assure you that the DOE ultimately will issue the loan guarantee on terms that are acceptable to us or at all.

We may also seek project financing from other sources. There can be no guarantee that we will be able to obtain such financing. We will also need substantial additional capital resources to construct future

 

 

 

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production facilities. If we are unable to obtain sufficient additional financing, we will have to delay, scale back or eliminate construction plans for some or all of our future facilities, any of which could harm our business, financial condition and results of operations.

Series C preferred stock financing

In December 2010, we entered into a Series C preferred stock purchase agreement with certain existing and new investors, which was subsequently amended in April 2011 and September 2011, pursuant to which we will raise $76.0 million. Pursuant to the terms of the agreement as amended in September 2011, certain existing investors converted an aggregate principal amount of $32.5 million of our outstanding senior secured convertible notes and $2.0 million of accrued and unpaid interest into shares of our Series C-1 convertible preferred stock, as described below, and committed to purchase up to $17.5 million of additional shares of Series C-1 preferred stock at a purchase price of $2.67 per share from time to time upon 10 days notice by us. In September 2011, we issued draw notices and received approximately $2.5 million for 936,329 shares of Series C-1 preferred stock.

In addition, the new investors agreed to purchase $26.0 million of our Series C-1 preferred stock at a purchase price of $2.67 per share, subject to the completion of one of certain specified funding events, including completion of this offering. If these shares of our Series C-1 preferred stock have not been purchased prior to the closing of this offering, such shares, and any shares not yet purchased by the existing investors pursuant to draw-down notices by us, shall be purchased concurrent with the closing of this offering, at which time all shares of our Series C-1 preferred stock will automatically be converted into shares of our common stock. As consideration for the September 2011 amendment to the purchase agreement, we also issued an aggregate of 1,947,565 shares of our common stock to the new investors, which shares are held in escrow until the new investors complete the purchase of shares of Series C-1 preferred stock.

Barrick agreement

In February 2011, Sierra BioFuels entered into an agreement with Barrick, pursuant to which Barrick agreed to contribute $10.0 million in exchange for 100% of the Class B membership interests in Sierra BioFuels, contingent upon Sierra BioFuels securing all necessary financing to construct Sierra. Upon the earlier of securing project financing for Sierra or the completion of this offering, we expect to receive the contribution of $10.0 million from Barrick and enter into an amended and restated limited liability company agreement, or LLC Agreement, of Sierra BioFuels with Barrick and IMS Nevada LLC, or IMS, a wholly-owned subsidiary of InEnTec. As the holder of the Class B membership interests of Sierra BioFuels, Barrick is entitled to up to 80 million renewable energy credits generated during the first 15 years of Sierra’s operation. If Sierra does not generate sufficient renewable energy credits in any given year, Barrick is entitled to a cash distribution from Sierra BioFuels of the deemed value of the shortfall, in priority to any cash distributions to Fulcrum or IMS. Renewable energy credits can be lower in the first three years when production is ramping up, subject to recovery of those renewable energy credits in later years. If a shortfall remains at the end of the 15-year term, Fulcrum Sierra Holdings LLC may either (i) extend the term for up to an additional two years or (ii) provide Barrick with cash distributions from Sierra BioFuels of the deemed value of the shortfall.

Other preferred stock and convertible note financings

In August 2007, we issued shares of Series A convertible preferred stock for gross proceeds of $1.0 million. Also in August 2007, we issued shares of Series B-1 convertible preferred stock for gross

 

 

 

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proceeds of $6.0 million, and in February 2008 we issued additional shares of Series B-1 convertible preferred stock for gross proceeds of $8.0 million.

In October 2008, we entered into agreements to issue convertible promissory notes to USRG Holdco III, LLC and Rustic Canyon Ventures III, L.P., under which we could borrow up to an aggregate principal amount of $10.0 million. The notes, which were initially scheduled to mature on June 30, 2009, bore interest at 8% on the principal amount outstanding and a 2% commitment fee on the undrawn but available balance. The notes were collateralized by substantially all our assets. The notes were redeemable at the option of the holders for cash or shares of Series C preferred stock, if we had previously issued such securities at the time of redemption. If we had issued Series C preferred stock to a third party, the notes would have been convertible into Series C preferred stock at 75% percent of the purchase price paid by the third-party investors. If we had not issued Series C preferred stock, the notes would be convertible into Series B convertible preferred stock at an undiscounted purchase price. At the time the notes were issued, it was not probable that Series C preferred stock would be issued to a third party and therefore no value was allocated to the beneficial conversion feature.

In March 2009, we amended the notes to increase the amount that could be borrowed to $17.0 million. In October 2009, we further amended the notes to increase the amount that could be borrowed to $24.5 million and extended the maturity date to June 30, 2010. At December 31, 2009, there was $24.5 million aggregate principal amount outstanding under the convertible notes. In June 2010, these notes converted into shares of Series B-2 convertible preferred stock at a conversion price of $2.00 per share.

In March 2010, we issued new notes to the same investors, on substantially the same terms as the prior notes, with an initial maturity date of December 31, 2010, for an aggregate borrowing amount of $4.0 million. In June 2010, we amended the notes to increase the amount that could by borrowed to $8.0 million. In August 2010, we further amended the notes to increase the amount that could be borrowed to $12.0 million. In November 2010, we further amended the notes to increase the amount that could be borrowed to $18.0 million. In February 2011, we further amended the notes to increase the amount that could be borrowed to $26.0 million and extended the maturity date to April 30, 2011. In August 2011, we further amended the notes to extend the maturity date to August 31, 2011 and to increase the amount that could be borrowed under the USRG Holdco III, LLC note to $23.1 million, for a total of $32.5 million under the notes. In September 2011, these notes were converted into shares of Series C-1 convertible preferred stock at a conversion price of $2.67.

At December 31, 2010 and June 30, 2011, an aggregate principal amount of $18.0 million and $28.0 million, respectively, was outstanding pursuant to the convertible notes.

 

 

 

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Cash flows

The following table shows a summary of our cash flows for the periods indicated:

 

     Year ended December 31,     Six months ended
June 30,
 
      2008     2009     2010     2010     2011  
     (in thousands)  

Net cash used in operating activities

   $ (11,544   $ (14,163   $ (17,001   $ (8,054   $ (10,843

Net cash used in investing activities

     (5,845     (2,827     (1,471     (106     (147

Net cash provided by financing activities

     15,530        17,297        18,000        8,000        9,643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (1,859   $ 307      $ (472   $ (160   $ (1,347
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating activities

Our primary uses of cash from operating activities are for professional services and personnel-related expenditures.

Net cash used in operating activities for the six months ended June 30, 2011 was $10.8 million compared to $8.1 million for the six months ended June 30, 2010. The increase was attributed primarily to increased cash payments for preliminary engineering costs relating to Sierra and project financing activities that are being expensed until the requirements for capitalization are met.

Net cash used in operating activities for the year ended December 31, 2010 was $17.0 million compared with $14.2 million for the year ended December 31, 2009 and $11.5 million for the year ended December 31, 2008. The increase in cash used in 2010 compared to 2009 is attributed primarily to increased cash payments for preliminary engineering costs related to Sierra and operation of the alcohol synthesis PDU. The increases were partially offset by a decrease in compensation bonuses paid in 2010 over 2009 levels. The increase in cash used in 2009 compared to 2008 is attributed primarily to increased cash payments relating to the alcohol synthesis PDU and compensation bonuses over 2008 levels. The increase was partially offset by decreases in cash paid for project development which are currently being expensed.

Investing activities

Our investing activities consist primarily of capital expenditures and deposits relating to the purchase of property, plant, and equipment and intangibles.

Net cash used in investing activities for the six months ended June 30, 2011 was $147,000 compared to $106,000 for the six months ended June 30, 2010. The increase is primarily attributable to a deposit relating to a land option agreement that was partially offset by decreased equipment purchases.

Net cash used in investing activities for the year ended December 31, 2010 was $1.5 million compared with $2.8 million for the year ended December 31, 2009 and $5.8 million for the year ended December 31, 2008. The decrease in cash used in 2010 compared to 2009 is attributable to decreased cash paid for license fees relating to technology that will be used in our production process, for water rights and for land purchases. The decreases were partially offset by increased deposits paid for equipment related to future plant construction. The decrease in cash used in 2009 compared to 2008 is attributable to decreased cash paid for license fees relating to technology that will be used in our production process and for land purchases.

 

 

 

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Financing activities

For the six months ended June 30, 2011, cash provided by financing activities was $9.6 million and was attributable to cash receipts of $10.0 million from convertible notes that were partially offset by equity financing costs. For the six months ended June 30, 2010 cash provided by financing activities was $8.0 million and was attributable to cash receipts from convertible notes.

For the year ended December 31, 2010, cash provided by financing activities was $18.0 million and was attributable to cash receipts from convertible notes.

For the year ended December 31, 2009, cash provided by financing activities was $17.3 million and was attributable to cash receipts of $17.0 million from convertible notes and $0.3 million from notes receivable relating to the sale of approximately 1.4 million shares of common stock to members of our management.

For the year ended December 31, 2008, cash provided by financing activities was $15.5 million and was attributable to cash receipts of $8.0 million from the sale of Series B-1 convertible preferred stock and $7.5 million from convertible notes.

Contractual obligations and commitments

The following is a summary of our contractual obligations and commitments as of December 31, 2010:

 

     Payments due by period  
      Total      Less than
1 year
    

1-3

years

    

3-5

years

    

More than

5 years

 
     (in thousands)  

Software license and operating leases

   $ 807       $ 283       $ 446       $ 78       $ —     

Senior secured convertible notes(1)

     18,000         18,000         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,807       $ 18,283       $ 446       $ 78       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   All of the outstanding senior secured convertible notes were converted into shares of our Series C-1 preferred stock as of September 7, 2011.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles accepted in the United States and include all adjustments necessary for fair presentation of our consolidated financial position, results of operations, and cash flows for all periods presented. The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiary, Fulcrum Sierra Holdings, LLC and a majority-owned limited liability company, Sierra BioFuels. The preparation of our consolidated financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and various other factors we believe to be reasonable under the circumstances. Different assumptions and adjustments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions, and judgments on an ongoing basis.

 

 

 

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The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Non-controlling interest

We use the hypothetical liquidation at book value, or HLBV, method to account for non-controlling interests in projects where the allocation of profits, losses and distributions are not consistent with the ownership interest of the members. HLBV uses a balance sheet methodology that considers the non-controlling interest holders’ claim on the net assets of the entity assuming a liquidation event at each reporting period. This method utilizes the specific terms outlined in the entity’s operating agreement or other authoritative documents. These terms may include cash disbursement terms and rights to specific revenue streams. The periodic changes in non-controlling interest in the consolidated balance sheets are recognized by us as a reduction of our stockholders’ equity (deficit).

Under the terms of the LLC Agreement for Sierra BioFuels, current year losses and contributions are allocated to the two members based on the current waterfall calculation of 95.01% and 4.99% for us and IMS, respectively. Our current year investment in Sierra BioFuels resulted in a deduction of additional paid in capital of $253,365 for the year ended December 31, 2010.

We will receive cash distributions equal to 95.01% of the available cash until we have received a preferential return equal to 20% on all cash that we have contributed to Sierra BioFuels for costs incurred to construct Sierra. Upon achieving the stated return, we will then receive 50% of available cash until IMS has received an amount equal to 10% of the cumulative cash distributed since the commencement of commercial operations of Sierra. After IMS has received 10% of the cumulative operating cash distributed from Sierra BioFuels, then all future available cash is distributed 90% to us and 10% to IMS in accordance with each of our respective LLC ownership interests. In the event of a dissolution or liquidation of Sierra BioFuels, distributions are made in the same manner as listed above, after making adequate reserve to settle other outstanding obligations and administrative costs.

Stock-based compensation

We recognize compensation expense related to share-based transactions, including the awarding of employee stock options, based on the estimated fair value of the awards granted. Additionally, we are required to include an estimate of the number of awards that will be forfeited in calculating compensation costs, which are recognized over the requisite service period of the awards on a straight-line basis. We estimate the fair value of our share-based payment awards on the date of grant using an option-pricing model.

We have estimated the fair value of our stock option grants using the Black-Scholes option-pricing model. We calculate the estimated volatility rate based on selected comparable public companies, due to a lack of historical information regarding the volatility of our stock price. We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available. Due to our limited history of grant activity, we calculate the expected life of options granted using the “simplified method” permitted by the Securities and Exchange Commission, or SEC, as the arithmetic average of the total contractual term of the option and its vesting period. The risk-free interest rate assumption was based on the U.S. Treasury yield curve in effect during the year of grant for instruments with a term similar to the expected life of the related option. The expected divided yield was assumed to be zero as we have not paid, and do not expect to pay, cash dividends on our shares of common stock. Forfeitures have been estimated by us based upon our historical and expected forfeiture experience.

 

 

 

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The fair value of the stock options granted was based on the following assumptions:

 

     Year ended December 31,     Six months
ended June 30,
 
      2008     2009     2010     2011(1)  

Expected volatility

     50     80     80     N/A   

Expected dividend yield

     —       —       —       N/A   

Risk-free interest rate

     2.8-3.7     2.6-3.3     3.1-3.2     N/A   

Expected term (years)

     7        7        7        N/A   

 

(1)   No options were granted in the six-month period ended June 30, 2011.

Common stock valuations

The fair value of the common stock underlying our stock options has historically been determined by our board of directors with input from management and an independent third-party valuation specialist. Option grants were intended to be exercisable at the fair value of our common stock underlying those options on the date of grant based on information known at that time. We determined the fair value of our common stock utilizing methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Aid. In the absence of a public trading market, our board of directors with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

Ø  

the nature and history of our business;

 

Ø  

our historical operating and financial results;

 

Ø  

the market value of biofuels companies;

 

Ø  

the lack of marketability of our common stock;

 

Ø  

the price at which shares of our preferred stock have been sold;

 

Ø  

the liquidation preference and other rights, privileges and preferences associated with our preferred stock;

 

Ø  

our progress in developing our ethanol production technology;

 

Ø  

the risks associated with transferring our ethanol production technology to full commercial scale settings;

 

Ø  

the overall inherent risks associated with our business at the time stock option grants were approved; and

 

Ø  

the overall equity market conditions and general economic trends.

 

 

 

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The estimates of the fair value of our common stock were made based on information from valuations as of the following valuation dates:

 

Valuation date    Fair value
determined
 

November 1, 2007

   $ 0.24   

April 19, 2010

     0.41   

June 27, 2011

     1.53   

The following table summarizes the options granted from January 1, 2010 through the date of this prospectus with their exercise prices, the fair value of the underlying common stock, and the intrinsic value per share, if any:

 

Date of issuance    Number of
options
granted
     Exercise price
per share
     Fair value of
common stock
per share
     Intrinsic value
per share
 

February 15, 2010

     30,000       $ 0.24       $ 0.41       $ 0.17   

March 15, 2010

     10,000         0.24         0.41         0.17   

June 1, 2010

     5,000         0.41         0.41         —     

August 8, 2011

     255,000         1.53         1.53         —     

August 31, 2011

     4,644,467         1.53         1.53         —     

September 6, 2011

     20,000         1.53         1.53         —     
  

 

 

          
     4,964,467            
  

 

 

          

Common stock valuation methodology

For the option grants made in February and March 2010, our board of directors also considered the valuation performed as of November 1, 2007 in determining the grant date fair value of our common stock. Using this valuation, and the other factors described above, our board of directors estimated the fair value of our common stock to be $0.24 per share as of November 1, 2007 and as of the February 15, 2010 and March 15, 2010 grant dates.

The November 2007 valuation was performed using a contingent claims analysis that used option pricing concepts to infer the value of the total invested capital based on the terms of our Series B convertible preferred stock financing in August 2007 following our incorporation in July 2007, which was then allocated to each class of preferred stock and common stock. Under this methodology, each class of stock is modeled as a call option with a unique claim on our assets. In determining the total equity value, we considered two scenarios. The first scenario assumed a 2-year term to a liquidity event, a volatility rate of 50% and a risk-free rate of 4.28%. The second scenario assumed a 3-year term to a liquidity event, a volatility rate of 50% and a risk-free rate of 4.29%. The resulting equity value estimated under each scenario was then equally weighted to determine the fair market value per share.

In May 2010, in anticipation of granting additional options, we undertook a valuation of our common stock as of April 19, 2010. For the option grant made in June 2010, our board of directors considered the April 2010 valuation. The April 2010 valuation was performed by estimating our enterprise value based on the average of the asset approach and the market approach and then allocating the enterprise value to our common stock utilizing the option-pricing method. The market approach used an implied option-pricing model based on an anticipated new round of preferred stock financing, assuming a

 

 

 

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2.5-year term to a liquidity event, a risk-free rate of 1.01% and a volatility rate of 80%. The asset approach is based on the total invested capital in the company. The resulting enterprise value was obtained by averaging the values of the asset approach and the market approach. The enterprise value was then allocated to the various securities that comprised our capital structure at that time, using the option-pricing method and assuming a 3-year term to a liquidity event, a risk-free rate of 1.59% and a volatility rate of 80%. We then applied a discount for lack of marketability to the share value for being a private company, using a discount rate of 35%.

Using this valuation, and the other factors described above, including our continued progress in the development of our gasification process and commercialization efforts, we determined that the fair value of our common stock was $0.41 per share as of April 19, 2010. As a result, for financial reporting purposes, we utilized the fair value of $0.41 per share for options granted on February 15, 2010, March 15, 2010 and June 1, 2010.

For the option grants made in August and September 2011, our board of directors also considered a contemporaneous common stock valuation performed as of June 27, 2011 in determining the grant date fair value of our common stock.

The June 2011 valuation was performed using the probability-weighted expected return method, or PWERM. In March 2011, we began preparations for an initial public offering, and our board of directors determined that it was appropriate to use the PWERM to estimate the fair value of our shares as an initial public offering in the near term became more likely. The PWERM involves analyzing the probability-weighted present value considering various possible future liquidity events, such as an initial public offering, other exit or liquidation. For each of the possible future liquidity events, our board of directors and management estimated a range of future equity values based on the market approach over a range of possible event dates. The estimated values under each scenario were then discounted for lack of marketability, and a probability-weighted value per share of our shares was then determined.

The June 2011 valuation assumed a 60% probability of an initial public offering, a 32% probability of another exit and an 8% probability of a liquidation event. Under the initial public offering scenario, we estimated our enterprise value based on indications of recent initial public offerings of comparable companies in the biofuel and cleantech industry; under the other exit scenario, we estimated our enterprise value based on recent financing negotiations; and under the liquidation scenario we estimated our enterprise value based on the aggregate liquidation preference of our then outstanding preferred stock. The value was then discounted to determine the present value using a discount rate of 25%. A discount for lack of marketability ranging from 15% to 35% across the scenarios was then applied. Using this valuation, and the other factors described above, our board of directors estimated the fair value of our common stock to be $1.53 per share as of June 27, 2011 and as of the subsequent option grant dates of August 8, 2011, August 31, 2011 and September 6, 2011.

Grant date fair value assessments & changes in fair value assessments

As of each stock option grant dates listed in the table above, our board of directors believes it made a thorough evaluation of the relevant factors to determine the fair value of our common stock and accordingly set the exercise price of the options granted equal to the fair value of our common stock.

February, March and June 2010 grants.    Our board of directors determined the fair value of our common stock as of the February 15, 2010 and March 15, 2010 grant dates to be $0.24 per share. As noted above, subsequent to the February and March 2010 grant dates, we undertook a valuation of our

 

 

 

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common stock as of April 19, 2010, and utilized the resulting fair value of $0.41 per share for financial reporting purposes as of the February 15, 2010 and March 15, 2010 option grant dates.

The fair value of our common stock as of the June 1, 2010 option grant date was determined to be $0.41 per share, which is equal to the valuation performed as of April 19, 2010. Our board of directors concluded that there were no significant changes in our business or expectations of future business as of June 1, 2010 since the April 2010 valuation that would have warranted a materially different determination of value of our common stock.

The increase in fair value determination from $0.24 per share as of November 1, 2007 and $0.41 per share as of April 19, 2010, was primarily attributable to our continued progress in the development of our alcohol synthesis process, future project development activities and commercialization efforts.

August and September 2011 grants.    The fair value of our common stock as of the August 8, 2011, August 31, 2011 and September 6, 2011 option grant dates was determined to be $1.53 per share, which is equal to the contemporaneous valuation performed as of June 27, 2011. Our board of directors concluded that there were no significant changes in our business or expectations of future business as of August 8, 2011, as of August 31, 2011 or as of September 6, 2011 since the June 2011 valuation that would have warranted a materially different determination of value of our common stock.

The increase in fair value determination from $0.41 per share as of April 19, 2010 to $1.53 as of June 27, 2011, was primarily attributable to our continued progress in the development of our alcohol synthesis process, future project development activities and commercialization efforts, including securing a portion of the financing needed for the construction of Sierra, as well as the initiation of preparations for an initial public offering.

Income taxes

We account for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, as necessary, to reduce deferred tax assets to their estimated realizable value.

In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income in the future and our ability to utilize net operating losses.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have during the period presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purposes entities, established for the purpose of facilitating financial transactions that are not required to be reflected on our consolidated financial balance sheets.

 

 

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We generally invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of December 31, 2010, our investment portfolio consisted primarily of money market funds. Due to the short-term nature of our investment portfolio, our exposure to interest rate risk is minimal.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board, or FASB, amended its guidance to FASB ASC 810, Consolidation, surrounding a company’s analysis to determine whether any of its variable interest entities constitute controlling financial interests in a variable interest entity, or VIE. This analysis identifies the primary beneficiary of a VIE as an enterprise that has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impacts the entity’s economic performance. The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. The guidance is effective for the first annual reporting period that begins after November 15, 2009. The adoption did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update, or ASU, No. 2010-06, Fair Value Measurements and Disclosures—Improving Disclosures above Fair Value Measurements, which requires entities to make new disclosures about recurring or nonrecurring fair-value measurements and provides clarification of existing disclosure requirements. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption did not have a material impact on our consolidated financial statements.

 

 

 

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Industry

We produce advanced biofuel from garbage. Our proprietary process converts municipal solid waste, or MSW, into ethanol that can be blended with gasoline to provide a clean transportation fuel used by vehicles on the road today. Industries that are important to our business include the traditional transportation fuels industry, the renewable fuels industry and the MSW industry.

THE TRANSPORTATION FUELS AND RENEWABLE FUELS INDUSTRIES

Overview

The transportation sector dominates the demand for liquid fuels, representing 71% of total petroleum consumed in the United States in 2009. Gasoline comprises the majority of transportation fuel volume. According to the U.S. Energy Information Administration, or EIA, in 2009, the United States consumed approximately 138 billion gallons of gasoline and approximately 52 billion gallons of diesel.

The United States is a net importer of transportation fuels, including both crude oil and refined products like gasoline. These imports not only create a dependence upon international sources of production, but also contribute to a significant portion of our country’s current trade deficit. In 2007, 36% of the United States’ $809 billion trade deficit in goods was associated with the cost of net trade in petroleum. Against this backdrop, the U.S. Congress passed the Energy Independence and Security Act of 2007, or EISA, which sought to move the United States toward greater energy independence, to improve national security and to increase the production of clean renewable fuels. EISA sought to update the Renewable Fuel Standards program, or RFS, which was established as the first renewable fuel volume mandate in the United States as part of the Energy Policy Act of 2005. Among other things, EISA updated RFS to (i) increase the total volume of renewable fuel required to be used in transportation fuel, (ii) establish multiple renewable fuel categories and (iii) set separate volume requirements for next-generation renewable fuel categories. We refer to RFS together with the EISA amendments to RFS as RFS2.

 

 

 

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The following diagram illustrates the overlapping relationship of the three major categories of renewable fuel based on RFS2 requirements for the production of renewable fuel in 2022, and sets the renewable fuel market in the context of the broader U.S. transportation fuel market:

LOGO

The three major renewable fuel categories under RFS2 are as follows:

 

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Renewable fuel.     Renewable fuel is produced from renewable biomass that replaces or reduces the quantity of fossil fuel present in transportation fuel, heating oil or jet fuel. A renewable fuel must also reduce lifecycle greenhouse gas, or GHG, emissions by at least 20% compared to a 2005 baseline for the fuel it supplants. The RFS2 requirement for the volume of all renewable fuel was 13.95 billion gallons in 2011, increasing to 20.5 billion gallons in 2015 and reaching 36 billion gallons in 2022.

 

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Advanced biofuel.     Advanced biofuel is a subset of the renewable fuel category that reduces lifecycle GHG emissions by at least 50%. Corn ethanol has been explicitly excluded from the definition of advanced biofuel. Of the total RFS2 requirement for the volume of renewable fuel, at least 1.35 billion gallons of renewable fuel was required to be advanced biofuel in 2011, increasing to 5.5 billion gallons in 2015 and reaching 21 billion gallons in 2022.

 

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Cellulosic biofuel.     Cellulosic biofuel is a subset of the advanced biofuel category that reduces lifecycle GHG emissions by at least 60% and is derived from any cellulose, hemicellulose or lignin. Of the total RFS2 requirement for the volume of renewable fuel, at least 250 million gallons of advanced biofuel was required to be cellulosic biofuel in 2011, increasing to 3 billion gallons in 2015 and reaching 16 billion gallons in 2022. However, RFS2 requires the Environmental Protection Agency, or EPA, to conduct an annual evaluation of the volume of qualifying cellulosic biofuel that can be made available. If the projected available volume of cellulosic biofuel is less than the required volume under RFS2, the EPA must lower the required volume. For 2011, the EPA lowered the cellulosic biofuel

 

 

 

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volume requirement to 6.6 million gallons from 250 million gallons. However, the 243.4 million gallons continue to be required under the advanced biofuel mandate.

Advanced biofuel is a subset of renewable fuel. Producers of advanced biofuel may compete in both the advanced biofuel and the renewable fuel markets, whereas producers of non-advanced renewable fuel cannot compete in the advanced biofuel market. To date, corn ethanol has been used to satisfy most renewable fuel requirements; however, RFS2 requires that advanced biofuel, which explicitly excludes corn ethanol, be used to meet the vast majority of future mandated renewable fuel growth requirements.

Ethanol

The most common biofuel used in the global transportation sector is ethanol, which has been blended into gasoline since the 1970s, when it was used primarily to increase fuel performance as an octane booster. Today, its primary use is to accelerate the displacement of petroleum gasoline with a domestic, renewable alternative. Federal law established RFS2 and the Clean Air Act Amendments of 1990, which require that gasoline used in the United States have additives that oxygenate the fuel. Historically, the most common oxygenate was MTBE, which was banned by many states due to harmful effects on human health. The dominant replacement for MTBE has been ethanol, which refiners and blenders blend into traditional gasoline before distributing the product to retail stations for sale. In 2010, approximately 13 billion gallons of ethanol was blended into the gasoline supply of the United States, virtually all of which was produced from corn.

Ethanol is typically blended with gasoline at 10% ethanol by volume, known as E10. All automakers cover the use of E10 in their warranties and in some cases recommend it since E10 has been recognized as an acceptable fuel for use in today’s vehicle fleet. In 2010, the EPA approved the use of E15 in later-model vehicles. Several government groups including the U.S. Department of Energy, or DOE, are researching the effect of intermediate ethanol blends on the environment and vehicle performance and the results of their research may have an impact on government support for higher blends like E20 and E85. Currently, E85 is used in flex fuel vehicles, which are vehicles capable of operating with gasoline, E85 or a mixture of both. According to the EPA, there are nearly eight million flex fuel vehicles on U.S. roads today. Purchasers of flex fuel vehicles may qualify for alternative fuel vehicle tax credits, which may further increase ethanol demand.

Government regulations, programs and incentives

The renewable fuels industry benefits from government regulations, programs and incentives that seek to promote the development and commercialization of renewable fuel technologies, including RFS2, state and local programs, such as the California Low Carbon Fuel Standard, or LCFS, and tax credits and incentives.

RFS2 and RINs

Under RFS2, any refiner or importer of gasoline or diesel fuel in the U.S. mainland or Hawaii must comply on an annual basis with volume requirements for both renewable fuels as a whole as well as those for each renewable fuel category. Although RFS2 outlines initial volume requirements for each year through 2022, it requires the EPA to perform a market analysis each year to set final standards for the following year. If the expected volume is less than the RFS2 target, the EPA has the authority to lower the standards for all categories of renewable fuel under RFS2. Finally, the EPA takes into account total projected transportation fuel production for the ensuing year to calculate percentage standards, to which each refiner or importer must adhere.

 

 

 

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For 2011, the volume obligations for advanced biofuel and renewable fuel are 1.35 billion gallons and 13.95 billion gallons, respectively. The 1.35 billion gallon figure represents 0.78% of total projected transportation fuel production for 2011. Thus, every refiner and importer was required to ensure 0.78% of its total transportation fuel production consisted of advanced biofuel, which became its respective volume obligations.

The EPA assigns Renewable Identification Numbers, or RINs, to each batch of renewable fuel produced or imported. Each fuel category has a unique set of RINs, which demonstrate compliance with RFS2. Each refiner or importer must obtain its requisite number of RINs for each fuel category based on its volume obligations. If a refiner or importer meets or exceeds its volume obligations, that refiner or importer may either trade its excess RINs to other refiners or retain its excess RINs to satisfy its volume obligations in subsequent years.

California Low Carbon Fuel Standard

Outside of RFS2, state and local programs and incentives have mandated the use of renewable fuels. The most notable state program is the LCFS, which was enacted in January 2007. The LCFS directive calls for a reduction of at least 10% in the carbon intensity of California’s transportation fuels by 2020, placing a high demand on low-carbon fuels such as ours. This required reduction is applicable across 100% of California’s transportation fuel volume. As a result, the continued use of traditional gasoline for a significant portion of California’s transportation fuel would lead to greater demand for lower carbon intensity blendstock. For example, the 10% ethanol component of E10 would require approximately 100% carbon intensity reduction to allow for LCFS compliance in the event the remaining 90% fuel volume remained unchanged. Thus, blendstocks with significant carbon intensity reductions will be very attractive in meeting these standards.

For refiners with significant capacity in California, such as Chevron, BP, Tesoro and ConocoPhillips, LCFS represents a major challenge. The mandate increases quickly and is primarily achievable by blending low-carbon fuel such as advanced biofuel. Under the regulation, refiners are not required to produce lower emissions fuel in California; they can also import the fuel from another location, as long as they meet the annual carbon intensity standards. As a result, biofuel producers located outside California could also benefit from the market created by LCFS. The LCFS may be met through market-based methods because providers exceeding the performance required by the LCFS receive credits that may be applied to future obligations or traded to providers not meeting the LCFS.

THE MSW INDUSTRY

According to the EPA, annual MSW generation in the United States has trended upwards over the past several decades, increasing from 88 million tons in 1960 to 243 million tons in 2009. On average, each person in the United States generates approximately one ton of MSW per year. More than 85% of the MSW generated in 2009 was comprised of carbon- and hydrogen-based organic materials with latent energy content.

Most MSW is disposed in landfills. However, decomposition of MSW in landfills produces harmful GHG emissions, including methane. Accordingly, the MSW industry has undergone a transformation over the past several decades spurred by environmental concerns. The Resource Conservation and Recovery Act, or RCRA, was passed by Congress in 1976 and sets forth a framework for the management of non-hazardous solid wastes. Standards imposed under the RCRA include location restrictions and more comprehensive monitoring requirements that increased costs for landfill operators

 

 

 

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and accelerated the closure of many of the nation’s landfills. As a result, since the 1980s, landfills have moved farther away from densely populated regions, which increased the costs of transporting MSW to landfills.

Waste collectors are charged fees for landfill waste disposal, which are referred to as tipping fees. According to the Waste Business Journal, the national average for tipping fees increased from $28.52 per ton in 1991 to $45.62 per ton in 2011, with considerably higher tipping fees in more densely populated regions. These factors, in conjunction with the rise in fuel prices, have contributed to increasing MSW disposal costs, which reduces operating margins for waste disposal companies and increases costs for municipalities and customers. As a result, the number of landfills in the United States has decreased over time, and the national average for tipping fees has increased, as indicated below:

LOGO

According to the Waste Business Journal, in 2008, the waste sector represented a $55 billion industry comprised of three segments: collection (55%), processing (12%) and disposal (33%). The key players across all three segments were public companies, private companies and municipalities. Since the 1990s, the market share held by municipalities has been contracting while the market share held by public companies has been expanding. In 2008, large publicly-traded companies held approximately 60% market share, with eight public companies comprising approximately 54% of the total market. The top three public companies by market share in 2008, Waste Management, Inc., Republic Services, Inc. and Covanta Energy Corp., comprise 44% of the total industry.

 

 

 

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OVERVIEW

We produce advanced biofuel from garbage. Our disruptive business model combines our proprietary process and zero-cost municipal solid waste, or MSW, feedstock to provide us with a significant competitive advantage over companies using alternative feedstocks such as corn, sugarcane and other sources of biomass in the production of renewable fuel, which are subject to commodity and other pricing risks. We have entered into long-term, zero-cost contracts for enough MSW located throughout the United States to produce more than 700 million gallons of ethanol per year. The core element of our technology has been demonstrated at full scale. At our first commercial-scale facility, we expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits. This estimate does not require any improvement in MSW-to-ethanol yields or process efficiencies and is a substantially lower cost per gallon than traditional fuels and other renewable biofuels. Our stable cost structure, based on long-term, zero-cost MSW feedstock arrangements, will allow us to enter into fixed-price offtake contracts or hedges to secure attractive unit economics. We expect our first commercial-scale facility, the Sierra BioFuels Plant, or Sierra, to begin production in the second half of 2013 and to be at full scale within three years after commencement of ethanol production.

Our proprietary process converts MSW into ethanol. This process, built around numerous commercial systems available today, has been tested, demonstrated and will be deployed on a commercial scale at facilities that we will build, own and operate. We utilize sorted, post-recycled MSW and convert it into ethanol using a two-step process that consists of gasification followed by alcohol synthesis. In the first step, the gasification process converts the MSW into a synthesis gas, or syngas. We have licensed and purchased the gasification system from a third party. In the second step, the syngas is catalytically converted into ethanol using our proprietary alcohol synthesis process. Our alcohol synthesis process demonstration unit, or alcohol synthesis PDU, has operated at full scale for more than 8,000 hours. We have filed patent applications for the integration of the MSW-to-ethanol process. We believe this may provide us with a significant advantage over competitors looking to replicate our process.

In addition, we will generate electricity to power our plants and reduce our reliance on external electricity sources. By taking this approach to power production, we believe many of our future facilities will qualify for state-level renewable energy credits that may provide additional revenue opportunities. Taking into account the feedstock used for electricity generation, we believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which is sufficient for us to operate profitably in the absence of economic subsidies. Furthermore, according to an August 2009 independent analysis, our process is projected to provide a more than 75% reduction in greenhouse gas, or GHG, emissions compared to traditional gasoline production, qualifying our ethanol as an advanced biofuel.

We expect to begin construction of Sierra, located 20 miles east of Reno, in Storey County, Nevada by the end of 2011. The cost of this facility is estimated at $180 million, which we expect to be financed through existing equity capital and net proceeds from this offering. We are also pursuing a U.S. Department of Energy, or DOE, loan guarantee to fund a portion of the cost, and are currently negotiating a term sheet with the DOE. Our subsidiary has acquired approximately 17 acres of vacant property for Sierra and permits are in place to begin construction. We expect to produce approximately 10 million gallons of ethanol per year from the Sierra facility using zero-cost MSW feedstock contractually procured from affiliates of Waste Management, Inc., or Waste Management, and Waste Connections, Inc., or Waste Connections. We have entered into a contract with Tenaska BioFuels, LLC,

 

 

 

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or Tenaska, to market and sell all ethanol produced at Sierra for three years commencing on the date of the first ethanol delivery. The modular design of our technology will allow us to replicate the design of Sierra and more efficiently construct future facilities with up to six times the production capacity of Sierra. We believe we can lower our unsubsidized cash operating costs, net of the sale of co-products such as renewable energy credits, from less than $1.30 per gallon at Sierra to less than $0.90 per gallon at our full-scale commercial facilities, assuming economies of scale and a 60 million gallon per year facility. These estimates do not require any improvement in MSW-to-ethanol yields or process efficiencies.

Our production facilities will provide numerous social and environmental benefits. By providing a reliable source of domestic renewable transportation fuels, our facilities will help the United States reduce its dependence on foreign oil. In addition, we expect our process will reduce GHG emissions by more than 75% compared to traditional gasoline production. Our process does not compete with recycling programs available today. We use MSW feedstock after it has been processed for recyclables, such as cans, bottles, plastic containers, paper and cardboard, that would otherwise be landfilled. By diverting MSW from landfills, our facilities will help mitigate the need for new landfills and extend the life of existing landfills. Lastly, our MSW feedstock does not have the land-use issues or adverse impact on food prices generally associated with other feedstocks used to produce ethanol, such as corn and sugarcane.

OUR MARKET OPPORTUNITY

According to the National Renewable Energy Laboratory, the global market for transportation fuels was over $4 trillion in 2010. According to the U.S. Energy Information Administration, or EIA, in 2009 there was a 138 billion gallon market for gasoline and a 52 billion gallon market for diesel in the United States alone. The ethanol we produce can be blended with gasoline and used by vehicles on the road today. It will not only reduce dependence on foreign oil imports, but also help meet the increasing demand for renewable fuels from current market participants who must meet rising federal and state blending requirements.

Under RFS2, while the total amount of renewable fuel required has been increased, the contribution of ethanol from traditional sources has been capped. The majority of ethanol consumed in the United States today is produced from corn and does not satisfy RFS2 advanced biofuel requirements. Ethanol produced from biomass, including woodchips, agricultural waste and MSW, qualifies as advanced biofuel. Producers of advanced biofuel may compete in both the advanced biofuel and renewable fuel markets, whereas producers of non-advanced renewable fuel may not compete in the advanced biofuel market. Accordingly, the size of the potential mandated market for advanced biofuel in 2022 under RFS2 is 21.0 billion gallons. However, the EPA expects a significant shortfall in production of advanced biofuel. The EIA’s Annual Energy Outlook 2010 forecasts an overall renewable fuel shortfall as well. Total production of renewable fuels is now projected to be 25.7 billion gallons versus 36.0 billion gallons required under the RFS2 mandate in 2022 and the entire 10.3 billion gallon shortfall is a shortfall in advanced biofuel.

 

 

 

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LOGO

Challenges for renewable biofuel companies

Stimulated by environmental and security challenges and assisted by a favorable regulatory environment, many companies have sought to develop technologies for the production of advanced biofuel. These companies have faced a number of challenges that are likely to limit their success, including the following:

 

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Feedstock challenges.    The business models of many renewable fuels competitors rely upon the purchase of feedstocks that present numerous challenges:

 

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Volatile pricing.    Many competing feedstocks have high historic pricing volatility and short-dated, illiquid forward markets. Several of these commodity inputs have markedly increased in price after significant investment had been made, materially eroding investor returns.

 

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Lack of reliable feedstock supply.    Certainty and availability of feedstock supply are ongoing challenges for many competitors who rely on feedstocks that are not currently grown or available in the large quantities required for a commercial facility. Challenges also arise as the infrastructure to harvest feedstock may not be in place, may not remain operational over the long term, and may be subject to a transient labor supply. Such challenges may create significant supply uncertainty.

 

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Dependence on arable land and natural resources.    Many competitors are dependent upon the use of arable land for feedstock supply. For instance, first-generation renewable fuel producers require vast swaths of farm land for corn and sugarcane production. As such, these producers require access to new acreage to increase their production. In addition, other approaches to biofuels such as biomass may require access to natural resources such as timber and forest lands.

 

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Competing uses of feedstock.    Many biofuel companies, including advanced biofuel companies, use feedstock like corn and sugarcane, which can also be used as a component of food supply. As a

 

 

 

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result, the increased use of these feedstocks could adversely impact the market price and availability of certain foods. In addition, wood-based feedstocks can be used for non-food applications such as building products and paper.

 

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Scale-up issues.    Many advanced biofuel competitors face difficulties commercializing their products due to an inability to access capital to fund projects where the technology has been demonstrated on a very limited scale. Scale-up risk is not only a factor contributing to uncertainty for the first commercial-scale facility but also for subsequent large facilities.

 

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Dependence on yield improvement and future technological advances.    The business models of many renewable fuels competitors are premised upon continued yield improvement to transform feedstock into an end product at a rate that generates sufficient economic returns. The need to achieve future technological success in order to be economically viable introduces a tremendous amount of uncertainty into the business.

 

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Dependence on government subsidies.    The economic viability of some renewable fuels is heavily dependent on the continuation of government subsidies and support available today. On an unlevered, unsubsidized basis, many renewable fuels competitors have low or even negative returns on capital.

OUR SOLUTION

Our business strategy is based on securing long-term, zero-cost MSW feedstock and employing our proprietary process to efficiently convert the MSW into an advanced biofuel. We believe our product will be markedly superior to traditional and other advanced biofuels from both an economic and an environmental perspective.

Our competitive strengths

We believe our business model benefits from a number of competitive strengths, including the following:

 

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Attractive feedstock.    The use of MSW affords us numerous benefits:

 

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Contracted at zero cost.    We have executed feedstock contracts with some of the largest MSW providers in the United States that will supply us with sufficient feedstock, at zero cost, to produce more than 700 million gallons of advanced biofuel annually for up to 20 years. Our use of MSW at zero cost removes the largest, and most volatile, component of traditional renewable fuels production cost from our cost structure. We believe this provides us with a significant cost advantage over competitors paying for feedstock or utilizing purpose-grown feedstocks.

 

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Transportation advantage.    Significant volumes of MSW are generated near metropolitan areas, providing us with a transportation advantage compared to feedstocks harvested or grown in rural areas that must ultimately transport either the feedstock or the fuel to metropolitan areas.

 

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Reliable supply.    The United States generates over 243 million tons of MSW annually, the majority of which is rich in organic carbon, providing sufficient feedstock for our process to produce approximately 12 billion gallons of biofuel annually.

 

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Established infrastructure.    By using MSW, we benefit from existing infrastructure for collection, hauling and handling. No new logistical networks would be required to transport the feedstock to our facilities.

 

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No competing use.    We produce advanced biofuel from a true waste product that has no competing use, is not sought after by food producers and has no impact on food prices.

 

 

 

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Clear path to commercialization.    Our first commercial-scale ethanol production facility is expected to begin production in the second half of 2013. We expect to construct additional commercial-scale production facilities across the United States that will be supplied with MSW under our existing contractual arrangements with Waste Connections. Our modular plant design not only significantly reduces scale-up risk, but will also allow us to construct new facilities and deploy our capital efficiently to capture a meaningful share of the ethanol market in the United States.

 

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Process not dependent on yield improvement.    Our process integrates a catalyst that converts syngas into ethanol, and we have demonstrated the success of this process at full scale at our demonstration facility. We believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which is sufficient for us to operate profitably in the absence of economic subsidies.

 

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Business model built for long-term and sustainable profitability.    We do not rely on government subsidies to make our product commercially viable. While we benefit from policies such as RFS2 and the LCFS, and will access incentives available for the production of our advanced biofuel, we expect our product to be sold on a cost-competitive basis with existing transportation fuels without any reliance on subsidies. We also believe we have greater certainty around our cost structure compared to traditional ethanol producers due to our existing contractual arrangements for zero-cost MSW feedstock. We expect this certainty regarding our cost structure will allow us to enter into financial and/or physical ethanol hedges to lock in a portion of our unit economics.

 

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Flexible production process.    We have designed our proprietary alcohol synthesis process to give us the flexibility to produce alcohols other than ethanol and take advantage of opportunities in other renewable fuels and chemical markets.

Benefits for our customers

The key benefits we intend to provide to our customers include:

 

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Zero-cost feedstock; stable cost structure.    With our long-term, zero-cost MSW feedstock, we will be able to sustain strong margins with very little production cost volatility. This enables our customers to have greater certainty relating to their ongoing access to a stable and reliable supply of ethanol.

 

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Access to domestically-produced advanced biofuel.    We will produce our ethanol domestically, offering customers a pricing advantage over those relying on Brazilian ethanol, which is subject to higher feedstock and transportation costs and tariffs imposed by the U.S. government, for RFS2 compliance.

 

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Large-scale development program.    We have a robust project development pipeline based on the existing MSW under contract across 19 states that will support more than 700 million gallons of annual ethanol production.

Benefits for our suppliers

The key benefits we provide to MSW suppliers that work with us include:

 

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Cost savings.    We provide a cheaper source of waste diversion than traditional landfill disposal. In addition, our ability to site closer to where waste is collected than landfills allows us to pass on a portion of transportation and disposal cost savings to our suppliers.

 

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Extend landfill life at existing capacity levels.    Landfills are increasingly expensive and politically contentious assets to permit, expand and maintain. By offering our suppliers the ability to divert large volumes of waste to us, we help them extend the future life of their existing landfills, reduce the need for new landfills and save on the day-to-day costs of managing a landfill.

 

 

 

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Avoidance of methane gas emissions.    We provide an alternative to traditional decomposition of organic materials that creates methane gas, allowing integrated waste management companies the ability to lessen their GHG emissions footprint.

OUR STRATEGY

Our objective is to become a leading producer of renewable transportation fuels in the United States by building, owning and operating commercial production facilities. The principal elements of our strategy include:

 

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Commence production at Sierra.    We plan to commence construction of our first commercial-scale ethanol production facility by the end of 2011, with ethanol production expected to begin in the second half of 2013. We have entered into agreements with affiliates of Waste Connections and Waste Management to provide zero-cost MSW feedstock, and we have entered into a three-year contract with Tenaska to market and sell all ethanol produced at Sierra. We have designed Sierra to produce approximately 10 million gallons annually, using a modular design that will be scalable in our subsequent facilities.

 

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Expand production capacity.    We believe the modular design of our technology will enable us to construct new, larger facilities quickly and efficiently, minimizing scale-up risk and allowing us to expand production capacity to 30- and 60-million gallons per year at future facilities. Such larger facilities would also lower both the capital cost per gallon and the fixed cost component of per gallon production costs, enhancing our economics.

 

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Execute fixed-price offtake and hedging contracts.    For each facility, we intend to enter into physical and/or financial fixed-price arrangements to lock in sufficient economics to cover a substantial portion of our fixed costs, including debt service.

 

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Secure additional MSW contracts.    Longer term, we intend to expand our business by entering into additional MSW feedstock agreements to increase the amount of resources we have available to supply our commercial facilities.

 

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Explore new market opportunities.    We believe significant opportunities for value creation exist outside of our base model to build, own, and operate facilities within the United States. Our process will be attractive to international markets with heavy reliance on oil, poor access to alternative fuels and expensive MSW disposal options. We may license our technology to third parties and/or partner with large strategic players, such as major oil and chemical companies.

PRODUCT COMMERCIALIZATION ROADMAP

Sierra BioFuels Plant

We expect to begin construction of Sierra by the end of 2011 and to begin commercial production of ethanol in the second half of 2013. Located in the Tahoe-Reno Industrial Center approximately 20 miles east of Reno, Nevada, we expect Sierra to produce approximately 10 million gallons of ethanol per year using zero-cost MSW feedstock contractually procured from affiliates of Waste Management and Waste Connections. The cost of constructing Sierra is estimated at $180 million, which will be financed through existing equity capital and proceeds from this offering. We are also pursuing a DOE loan guarantee to fund a portion of the cost, and are currently negotiating a term sheet with the DOE. We may also seek project financing from other sources.

Our subsidiary Fulcrum Sierra BioFuels, LLC, or Sierra BioFuels, has acquired approximately 17 acres of vacant property for Sierra and permits are in place to begin construction. We have entered into an agreement with Fluor Enterprises, Inc. to provide engineering, procurement and construction services for

 

 

 

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Sierra. We believe we can produce ethanol at this facility at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits. This estimate does not require any improvement in MSW-to-ethanol yields or process efficiencies and is a substantially lower cost per gallon than traditional fuels and other renewable biofuels. We have entered into a contract with Tenaska to market and sell all ethanol produced at Sierra for the first three years of operation. Sierra is well situated to sell ethanol into both Northern Nevada and Northern California, two attractive markets for ethanol.

The State of Nevada currently has a demand for ethanol of more than 50 million gallons per year. Today, there are no ethanol producers in the state of Nevada, nor to our knowledge are there any slated for development other than Sierra. As all of Nevada’s ethanol is currently imported from the Midwest, we believe that Sierra will have a significant location and transportation advantage by providing local blenders with a local supply of ethanol. The State of Nevada also offers various tax incentives to encourage businesses to locate in Nevada though the Nevada Commission on Economic Development, or NCED. We applied for and subsequently entered into an agreement with NCED providing for a number of tax incentives, including sales and use tax abatement, modified business tax abatement, personal property tax abatement and real property tax abatement, so long as we maintain certain levels of investment, employees and wages at the facility.

Northern California also represents a large market for transportation fuels and California’s regulatory environment provides for attractive demand and pricing for advanced biofuel. The State of California currently has a demand for more than 950 million gallons of ethanol per year and imports 80% of its total ethanol supply from Midwest corn-based ethanol producers via rail car and 12% via marine vessel, most of which is sugarcane-based ethanol from Brazil. Our advanced biofuel will be valuable in assisting refiners, blenders, producers and importers of transportation fuels in California to meet the requirements of the LCFS.

Future production facilities

The modular design of our commercial production facilities will enable us to replicate the design of Sierra and more efficiently construct future facilities with the capacity to produce approximately 30 or 60 million gallons of ethanol per year. At the 60 million gallon per year facilities, we believe we can lower our unsubsidized cash operating costs to less than $0.90 per gallon, assuming economies of scale, net of the sale of co-products such as renewable energy credits. This estimate does not require any improvement in MSW-to-ethanol yields or process efficiencies.

We are currently evaluating additional locations across the United States for future facilities at or near the source of the MSW feedstock under contract with Waste Connections. As shown in the map below, we have identified more than 20 potential site locations across the United States for future development, located in the 19 states in which we have contractually secured zero-cost MSW. For each potential site, we plan to leverage existing infrastructure, including MSW processing capabilities, as well as identifying offtake customers. We believe opportunities may exist to co-locate our facilities at sites with significant infrastructure in place, such as refineries, which could lower our per-gallon capital costs.

 

 

 

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LOGO

As we develop future project opportunities, we utilize a disciplined development strategy focused on executing on key project phases.

Early stage development

 

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Feedstock control.    We enter into agreements for long-term feedstock control that secures adequate material to meet the MSW feedstock requirements of each planned facility.

 

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Site and permitting assessment.    In parallel with feedstock negotiations, we identify one or more suitable site locations for each of our facilities, work with our environmental consultants and local and state authorities to understand environmental permitting rules and regulations and assess the impact on schedule and costs to permit a facility. We then prepare a comprehensive development plan for the project.

 

 

 

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Mid-stage development

 

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Site control.    Once there is long-term feedstock control for the project and a defined permitting process, we then identify a suitable site with the necessary infrastructure and secure it through a low-cost site option, lease or outright purchase.

Late stage development

 

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Filing of project permits.    We prepare all required environmental studies and permit applications and file for all permits necessary to begin construction of the facility.

 

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Financing.    With feedstock, site control and permits in place, we secure long-term project financing prior to beginning construction of our facility.

Construction

 

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After we have secured project financing, we begin the construction of the facility which we expect will take approximately 18 months.

OUR TECHNOLOGY

Overview

In collaboration with a leading global engineering, consulting and construction company, we conducted an extensive review of more than 100 technologies and processes for producing large volumes of advanced biofuel and concluded that thermochemical technologies offered the most commercially viable solution. Based on this review, we developed a two-step process that consists of gasification followed by alcohol synthesis to produce ethanol from MSW. For the gasification step, we worked with InEnTec LLC, or InEnTec, to combine two gasification technologies into a single energy-efficient process to produce syngas from MSW. For the second step, we worked with Saskatchewan Research Council, or SRC, and Nipawin Biomass Ethanol New Generation Co-operative Ltd., or Nipawin, to integrate their thermochemical catalyst into our proprietary alcohol synthesis process to convert syngas to ethanol. Additionally, we have designed our facilities to use both syngas created from the MSW and heat recovered from our process to produce electricity for use at the facilities, which not only significantly reduces our reliance on external electricity, but also enables us to receive Renewable Energy Credits for the electricity we produce.

 

 

 

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Fulcrum’s process

Our proprietary thermochemical process converts MSW feedstock into ethanol, using conventional commercial systems and our alcohol synthesis process to provide a sustainable, low-cost and high-yield approach to the production of ethanol. Our process, built around numerous commercial systems, has been demonstrated and will be deployed at our commercial production facilities. In addition, third-party engineering firms have conducted technical reviews that confirm our technology and process. The following diagram depicts our process.

LOGO

Feedstock processing

Our feedstock will consist primarily of the organic material found in MSW, which is currently being landfilled. This MSW feedstock will be delivered to us by waste service companies under the terms of long-term, fixed-price, zero-cost contracts. Our suppliers will sort the waste to remove commercially recyclable material, inorganic waste such as metals, glass, grit, concrete and dirt before delivering the post-sorted MSW to us. We will screen out any remaining inorganic material at our facilities, which will be transported to landfills by the waste services companies at no cost to us. The remaining organic material will be shredded and fed into our gasification system.

Gasification system

We identified InEnTec’s gasification system as a highly efficient and economic approach for the conversion of MSW to syngas due in part to its plasma arc, a Plasma Enhanced Melter, or PEM®. The

 

 

 

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InEnTec technology has its origins in many decades of work in the development of two technologies, plasma arc and glass melter technology. This technology builds upon extensive DOE-sponsored research at the Massachusetts Institute of Technology and Battelle Pacific Northwest National Laboratory.

Our gasification system is comprised of a down-draft partial oxidation gasifier, a PEM® and a thermal residence chamber that we have purchased from InEnTec. Sierra will utilize three trains of this gasification system to convert the organic material in the MSW feedstock to a syngas consisting primarily of carbon monoxide, hydrogen and carbon dioxide.

Steam and oxygen are introduced into the down-draft partial oxidation gasifier to react with the MSW feedstock to produce syngas and solid residue consisting of inorganic and non-gasified organic compounds. The down-draft partial oxidation gasifier converts approximately 80% of our feedstock by weight into syngas. A grate at the bottom of the gasifier allows the non-gasified material to pass into the PEM®, which is located directly below the gasifier.

The PEM® will accomplish the two distinct operations of gasification and vitrification. Any un-reacted organic material and ash from the down-draft partial oxidation gasifier, about 10% of the MSW feedstock by weight, falls into the PEM® where it is exposed to the plasma arc environment. The plasma arc provides the energy needed to gasify the remaining organic material. Steam and oxygen are introduced into the PEM® to react with the gasified organic material and produce syngas, which is then combined with the syngas from the down-draft partial oxidation gasifier prior to entering the thermal residence chamber. Inorganic materials, about 10% of the feedstock by weight, melt and form a molten glass and metal pool at the bottom of the PEM®. The glassified inorganic materials, called vitrate, are removed in a molten state and cooled. The vitrate is stable, non-hazardous and non-leachable and can be put to beneficial use, for example as construction materials, or disposed of in conventional non-hazardous landfills. Incidental and trace metals are drawn off and molded into mixed metal alloy ingots and recycled to the metals industry.

The syngas from both the down-draft partial oxidation gasifier and PEM® are combined and routed to the thermal residence chamber where the gasification reactions are brought to completion. The syngas then leaves the thermal residence chamber and flows into one of three dedicated waste heat steam generators. The waste heat steam generators recover heat from the syngas to create steam that is sent to a steam turbine generator where we produce electricity for use at the plant. We utilize commercial equipment and systems to remove particulates, trace contaminants, sulfur and moisture from the syngas. This purified syngas is then compressed to a higher pressure prior to entering our proprietary alcohol synthesis process.

Alcohol synthesis process

Our alcohol synthesis process incorporates a catalyst that was developed and is owned by Nipawin and SRC. The Nipawin/SRC catalyst is very similar to a hydrotreating catalyst used in almost every refinery in the world. The catalyst contains no precious or rare earth metals and can be recycled by the catalyst manufacturer.

We have designed our alcohol synthesis process at Sierra to include two reactors. Within each reactor, the syngas contacts the Nipawin/SRC catalyst as it flows through tubes containing the catalyst inside each reactor. The reactions that convert the syngas to alcohol compounds are exothermic, resulting in the production of a significant amount of recoverable energy that is converted to electricity to supply the plant. In order to achieve a complete conversion of the syngas to ethanol, we have designed our alcohol synthesis process with the capability to recycle any unconverted syngas, methanol and other alcohols back through the synthesis reactors for conversion to ethanol.

 

 

 

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Although our main product will be ethanol, the catalyst and our alcohol synthesis process provide us with the flexibility to produce other alcohols, such as methanol and propanol, to take advantage of market opportunities.

Technology demonstration

Working closely with InEnTec, we conducted extensive testing of the gasification system combining a down-draft partial oxidation gasifier, PEM® and thermal residence chamber using MSW feedstock. These tests demonstrated the performance of the gasifier and confirmed that the down-draft partial oxidation gasifier converted approximately 80% of the feedstock into syngas. These tests also demonstrated that the combined gasifier and PEM® would produce the required quantity and target ratios of carbon monoxide and hydrogen in the syngas.

We designed, constructed and have been operating an alcohol synthesis PDU to test our alcohol synthesis process and the Nipawin/SRC catalyst. We have operated our alcohol synthesis PDU since the second quarter of 2009. The alcohol synthesis PDU has been operating with a single full-scale tubular reactor packed with the Nipawin/SRC catalyst under the same operating parameters that we will use at our commercial-scale plants. Sierra will utilize many tubular reactors, each one identical to the reactor in the alcohol synthesis PDU. The test results from more than 8,000 hours of operation confirm our expectations that we will be able to economically produce ethanol from syngas. These results have been reviewed and validated by the independent engineers who reviewed our process.

While we have performed extensive testing of both our gasification and alcohol synthesis systems, we have not previously demonstrated or tested the systems on a fully integrated basis at a single location. However, the chemical composition of the syngas produced by our gasification testing facility is consistent with the chemical composition of the syngas used at our alcohol synthesis PDU. In addition, we intentionally varied the chemical composition of the syngas fed into our alcohol synthesis PDU to test the system’s ability to handle unexpected variability in syngas with satisfactory results.

COMPETITION

In the near term, we expect that our ethanol will compete primarily with other renewable biofuels, such as ethanol produced from corn, sugarcane, woodchips and other biomass. We believe the primary competitive factors in the renewable biofuels market are:

 

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price of feedstock and cost of production;

 

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price of the renewable biofuel;

 

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product performance and yields;

 

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compatibility with existing infrastructure;

 

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sustainability; and

 

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dependability of supply.

Many production and technology companies are producing, or working to develop, renewable biofuels, including Amyris, Inc., BlueFire Renewables, Inc., Codexis, Inc., Coskata, Inc., Enerkem, Inc., Gevo, Inc., KiOR, Inc., Mascoma Corporation, Plasco Energy Group Inc., PetroAlgae Inc. and Solazyme, Inc. In addition, we may also face competition from our feedstock suppliers or other industry participants seeking to produce renewable biofuels themselves.

 

 

 

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In the longer term, we believe that our ethanol will also compete with petroleum-based products blended with gasoline in the transportation fuels market. We believe that the primary competitive factors in the transportation fuels market are:

 

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product performance;

 

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price;

 

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ability to produce meaningful volumes; and

 

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dependability of supply.

We believe that the combination of our proprietary process and our supply of zero-cost feedstock provides us with a substantial competitive advantage over producers utilizing alternative feedstocks. In addition, we believe that we will be able to compete favorably because our ethanol is compatible with the existing production, refining and distribution infrastructure in the broader transportation fuels market.

RESEARCH AND DEVELOPMENT

To date our research and development efforts have focused on identifying the technologies and developing the processes to create our integrated process to produce ethanol from MSW. We anticipate that in the future, our research and development efforts will focus on further improvements to our process, including improvements to our gasification and alcohol synthesis systems. For the years ended December 31, 2008, 2009 and 2010, we spent $8.0 million, $8.9 million and $12.0 million, respectively, on research and development activities. Our research and development activities are currently being performed in our corporate headquarters located in Pleasanton, California, as well as at our alcohol synthesis PDU in Durham, North Carolina and at our engineering office in Clemson, South Carolina.

INTELLECTUAL PROPERTY

Our success depends in large part upon our ability to obtain and maintain proprietary protection for our renewable fuel process technologies, and to operate without infringing the proprietary rights of others. Our policy is to protect our proprietary position by, among other methods, filing for patent applications on inventions that are important to the development and conduct of our business with the United States Patent and Trademark Office.

We have filed three U.S. patent applications and one international application under the Patent Cooperation Treaty covering several renewable fuel process inventions, all filed in 2011 based on a priority date of February 8, 2010. The applications relate to technological improvements and discoveries made during the course of designing efficient and cost-effective methods and systems for converting municipal solid waste into ethanol and other renewable fuel products. The international application will allow us, within 30 months of February 8, 2010, to enter a “national phase” within countries of interest, and may lead to patents being issued in countries of strategic interest. We have additional patent applications in process which are expected to be filed later this year. In addition, we will consider filing divisional and continuation applications based on the applications that have already been filed.

Because our patent applications are at a very early stage in the patent examination process, we cannot assess whether or not any or all of these patent applications will be allowed, or the precise time frame in which any patents may ultimately issue. In the United States, patent prosecution generally takes from two to five years from the filing date until the first patent can be issued. During the course of examination, at least some or all of our claims may be rejected, abandoned, or significantly revised. We may not be issued patents for our filed applications, and may not be able to obtain patents regarding other

 

 

 

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inventions we may seek to protect. It is also possible that we may develop products or technologies that will not be patentable or that the patents of others will limit or preclude our ability to develop or commercialize those products or technologies. In addition, any patent issued to us may provide us with little or no competitive advantage, in which case we may abandon such patent or license it to another entity. We may further protect our technology by obtaining patent licenses or purchasing patents from other parties.

We also use other forms of protection (such as trademarks, copyrights, and trade secrets) to protect our intellectual property. In particular, we may choose to protect technology as a trade secret if we do not believe patent protection is appropriate or obtainable, or where a trade secret would provide a strategic advantage. We aim to pursue and protect all of the intellectual property rights that are available to us.

We also protect our proprietary information by requiring our employees, consultants, contractors and other advisers to execute nondisclosure and assignment of invention agreements upon commencement of their respective employment or engagement. Agreements with our employees also prevent them from bringing the proprietary rights of third parties to us. In addition, we require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.

We have also entered into license agreements with InEnTec and Nipawin and SRC with respect to components of our proprietary process, as described in “Collaborations and strategic arrangements.”

ENVIRONMENTAL AND OTHER REGULATORY MATTERS

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of hazardous 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.

A violation of environmental laws, regulations or permit conditions can result in substantial fines, natural resource damage, cleanup costs, criminal sanctions, property damage and personal injury claims, permit revocations and facility shutdowns, and any of these events could harm our business and financial condition. There can be no assurance that violations of these laws or the conditions of our environmental permits will not occur in the future as a result of human error, accident, equipment failure, or other causes. Liability under environmental, health and safety laws can be joint and several and without regard to fault or negligence.

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 dispose of hazardous substances. If these substances are or have been disposed of or released at sites that undergo investigation or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act or other environmental laws for all or part of the costs of investigation and remediation. 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 the properties. Some of these matters may require us to expend significant amounts for investigation and cleanup or other costs.

In addition, new environmental, health and safety laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make significant additional expenditures. Although we cannot predict the ultimate impact of any such changes, continued government and public emphasis on environmental issues can be expected to result in increased future investments in environmental controls at our facilities.

 

 

 

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The design, construction and operation of ethanol production facilities require us to obtain various governmental approvals and permits, including land use and environmental approvals and permits and to comply with numerous restrictions. Delay in the review and permitting process for a project can impair or delay our ability to develop that facility or increase the cost so substantially that the project is no longer attractive or viable. The permits and approvals required for construction and operation of our facilities may not be obtained on a timely basis. The denial of a permit or delay in issuing a permit essential to the construction or operation of a facility or the imposition of impractical or costly conditions could impair our ability to develop the facilities at that location. As a condition to granting the permits necessary for construction or operating our facilities, regulators could make demands that significantly increase our construction and operations costs. Any failure to procure and maintain necessary permits would adversely affect development, construction and operation of our facilities, which could harm our business and financial condition.

FACILITIES

Our corporate headquarters and primary executive offices are located in Pleasanton, California, where we occupy approximately 6,000 square feet of office space under a lease that expires in November 2012. In addition, we have an engineering office located in Clemson, South Carolina where we occupy approximately 2,300 square feet of office space under a lease that expires in December 2013. We believe that these two facilities are sufficient to meet our needs for the immediate future and that additional space is available for any future growth.

Sierra BioFuels owns approximately 17 acres of vacant real property in the Tahoe-Reno Industrial Center located in McCarran, Nevada, approximately 20 miles east of Reno, Nevada. We believe this property is sufficient for us to construct Sierra, our first commercial-scale waste-to-biofuels facility.

EMPLOYEES

As of June 30, 2011, we had 17 full-time employees, including 2 in research and development, 5 in operations, 3 in sales and marketing and 7 in general and administrative activities. None of our employees are represented by a labor union, and we consider our employee relations to be good.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims arising out of operations. We are not currently involved in any material legal proceedings.

 

 

 

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Collaborations and strategic arrangements

The descriptions below contain only a summary of the material terms of the agreements and do not purport to be complete. These descriptions are qualified in their entirety by reference to the respective agreements that are filed as exhibits to the registration statement of which this prospectus is a part.

FEEDSTOCK SUPPLY AGREEMENTS

Sierra BioFuels Plant

Waste Connections

In November 2008, we entered into a Resource Recovery Supply Agreement with Waste Connections of California, Inc., or Waste Connections of California, an affiliate of Waste Connections, Inc., or Waste Connections, to be the primary supplier of municipal solid waste, or MSW, feedstock for the Sierra BioFuels Plant, or Sierra. This agreement, which is effective for 20 years from the facility’s commercial operation date, provides that we are responsible for the transportation costs of delivering the MSW feedstock to the facility, but that Waste Connections of California will pay us a tipping fee for the MSW feedstock that we accept, resulting in no net cost to us for the MSW feedstock delivered to us for the life of the agreement. Waste Connections will deliver up to 1,750 tons of MSW feedstock per week to Sierra. We have the right to reject any MSW feedstock that does not meet our quality standards, and Waste Connections is responsible for removing and disposing of any rejected MSW feedstock at their expense. Under the agreement, we have until November 2011 to begin construction on Sierra, after which Waste Connections of California has the option to terminate the agreement.

Waste Management

In September 2010, we entered into a Feedstock Supply Agreement with Waste Management of Nevada, Inc., or Waste Management of Nevada, to secure a second source of MSW feedstock for Sierra. There is no cost to us for the MSW feedstock for the life of the agreement, which is effective for 15 years from the facility’s commercial operation date. The agreement also provides for an option to extend the term for an additional five years subject to certain notice, termination and other provisions. Waste Management of Nevada will deliver up to 2,000 tons of feedstock per week to Sierra at its expense. We have the right to reject any MSW feedstock that does not meet our quality standards, and Waste Management of Nevada is responsible for removing and disposing of any rejected MSW feedstock at their expense. The agreement requires Waste Management of Nevada to dedicate its MSW feedstock to us as a first priority in return for our commitment to use only Waste Management of Nevada’s waste for any future increases in MSW feedstock requirements above and beyond what we obtain from Waste Connections for Sierra and for future projects in Northern Nevada and North Eastern California counties.

National program

Waste Connections

Following our initial agreement with Waste Connections of California for Sierra, in December 2008, we entered into a Master Project Development Agreement with Waste Connections to work together to develop additional waste-to-fuels conversion facilities in various sites throughout the United States over the next ten years. Waste Connections is one of the largest national waste services companies in the United States. Subject to termination provisions, under this agreement we have secured long-term access to pre-sorted MSW feedstock in 15 geographic areas served by Waste Connections, covering approximately 130 municipalities around the United States. We have a right to add additional areas in which Waste Connections establishes a significant presence to the geographic area covered by the master

 

 

 

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agreement. This agreement is subject to certain termination provisions if the progress and pace of our project development fails to meet expectations. Under these termination provisions, either party may terminate if we have not completed three additional projects by December 2016.

For each production facility developed under this master agreement, we will execute a separate agreement with a Waste Connections affiliate and we will have the right to be the exclusive recipient of Waste Connections’ supply of MSW feedstock for 20 years delivered at zero cost to our facility. Where practicable, we will locate our conversion facilities onsite at a Waste Connections landfill, transfer station, or other property. We have agreed to give Waste Connections a first priority right to fill our feedstock requirements. Should Waste Connections’ feedstock supply fall short of our requirements for any given facility, we are permitted to enter into agreements with other suppliers. A material default under the contracts governing any project will give the non-defaulting party termination rights under this agreement.

TECHNOLOGY AGREEMENTS

InEnTec

In April 2008, in connection with our gasification process, we entered into a Master Purchase and Licensing Agreement with InEnTec LLC, or InEnTec, to purchase up to 50 core systems over a period of 10 years, each of which includes an InEnTec down-draft partial oxidation gasifier and Plasma Enhanced Melter (PEM®). Each core system consists of two gasifiers and PEM® systems, which we use to convert MSW feedstock into synthesis gas, or syngas, at our facilities. This agreement establishes the price, license fees and reimbursable costs for the core systems and the payment schedules for the first three core systems and also includes a provision providing for most favored customer pricing through the purchase of the 25th core system. Furthermore, InEnTec has granted or will grant to us upon purchase of each core system a fully paid-up, royalty-free, non-exclusive license to use its technology for waste conversion purposes at such facility as well as a fully paid-up, royalty-free, perpetual, non-exclusive license to use any improvements we make to their technology in the field of bioenergy. Similarly, we have granted InEnTec a reciprocal license to any improvements InEnTec makes to our technology in the field of bioenergy and gasification. The license granted by InEnTec has certain field restrictions and is for use only in the United States and Canada, excluding the state of Montana and Benton, Franklin and Walla Walla Counties in the state of Washington. The agreement contains joint ownership of jointly-developed intellectual property in certain limited circumstances, and mutual assignments to the other party of any improvements to the other party’s technology. The agreement also establishes general licensing provisions to be included in each purchase order, with each license continuing as long as we retain ownership of the PEM® equipment for a given facility or plant, and which can be terminated in limited circumstances. Pursuant to this agreement, we entered into a Purchase Order Contract and License in May 2009, under which InEnTec will provide us with one core system for Sierra. InEnTec’s obligation to sell core systems to us under the agreement ceases on March 31, 2018, and may be terminated earlier in certain limited circumstances, including our failure to purchase a core system within any 24-month period.

Nipawin and SRC

In May 2008, we entered into a Development Agreement with Nipawin Biomass Ethanol New Generation Co-operative Ltd., or Nipawin, and Saskatchewan Research Council, or SRC, to enter into a joint project to test and develop Nipawin and SRC’s proprietary catalyst for converting syngas into ethanol and other alcohols. Under this agreement, we worked with Nipawin and SRC to build our process demonstration unit located in Durham, North Carolina.

 

 

 

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Collaborations and strategic arrangements

 

 

The agreement contains detailed provisions regarding the parties’ rights and obligations in connection with the co-development, ownership and license of the parties’ interdependent technologies, including joint ownership of jointly-developed technology (without the duty to account for or share revenue, but with consent to join or be joined as a necessary party to any action brought by the other party against third-party infringers of the joint intellectual property) in certain limited circumstances. At our request, Nipawin and SRC will execute additional licenses to its catalyst technology for an unlimited number of deployments to us and any affiliated project companies for plants or project facilities in the United States. Upon Nipawin or SRC’s request, we will execute additional licenses, at no cost, to either Nipawin or SRC for an unlimited number of times the right to use our detailed specifications and scientific data underlying the commercial designs for a process that makes use of the Nipawin/SRC catalyst. Neither party is required to offer licenses to third parties until both parties have agreed to license to that third party.

We are not obligated to pay any license fees to Nipawin or SRC from the sale of the first two billion liters, or approximately 528 million gallons, of alcohols after which we have agreed to pay a specified royalty based on the annual gross revenue resulting from the alcohols produced under the licenses in excess of two billion liters, in an amount equal to the lesser of (i) 50% of the lowest amount charged by Nipawin and SRC, collectively, or either of them, at any time during the term of the license to any third party in a substantially similar license, or (ii) a low single-digit royalty based on the applicable facility’s gross revenues.

The agreement has an indefinite term and gives each party the right to terminate after May 2023 for any reason with six months notice, and in other limited circumstances. The individual licenses granted to each project facility continue as long as we continue to operate the facility, and can be terminated in limited circumstances.

ETHANOL SALES AND OFFTAKE AGREEMENT

Tenaska

In April 2010, we entered into an Ethanol Purchase and Sale Agreement with Tenaska BioFuels, LLC, or Tenaska, to sell all of the ATSM grade ethanol produced by Sierra for the first three years of production, with automatic one-year renewals until notice is given by either party. We have also agreed to sell environmental attributes associated with the ethanol under the federal and California renewable fuel standards. All environmental attributes not associated with ethanol will remain our property. Under this agreement, Tenaska will solicit multiple bids for ethanol and present the offers to us. Once we accept a bid, we will supply the required ethanol and Tenaska will be obligated to purchase the ethanol from us. Tenaska will then sell the ethanol to the bidder, retaining a percentage of the gross purchase price as a commission. Tenaska is responsible for arranging receipt and transportation of ethanol from our facility.

The purchase agreement requires us to supply to Tenaska, and Tenaska to purchase from us, all of the ethanol produced by Sierra. However, we have not guaranteed Tenaska any minimum amount of output from the facility. If at any time the ethanol stored at Sierra exceeds 75% of our storage tank capacity, we are entitled to suspend Tenaska’s purchasing exclusivity and can sell the ethanol to third parties until our storage tank is less than 25% full. Tenaska is also allowed to purchase ethanol from third parties to fill bids if we fail to produce the amount required by a bid we accept.

 

 

 

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Management

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth information regarding our executive officers, directors and key employees as of June 30, 2011:

 

Name    Age      Position(s)

Executive officers

     

E. James Macias

     57       President, Chief Executive Officer and Director

Eric N. Pryor

     45       Vice President and Chief Financial Officer

Stephen H. Lucas

     64       Senior Vice President and Chief Technology Officer

Richard D. Barraza

     53       Vice President of Administration

Theodore M. Kniesche

     31       Vice President of Business Development

Directors

     

James A. C. McDermott

     42       Founder and Executive Chairman of the Board

Thomas E. Unterman

     66       Director

Nate Redmond

     37       Director

Timothy L. Newell

     51       Director

Key employees

     

J. Samuel McIntosh

     50       Vice President of Construction

Lewis L. Rich

     60       Vice President of Engineering and Operations

Executive officers

E. James Macias has served as our Chief Executive Officer and President since our founding in July 2007 and a member of our board of directors since August 2007, and served as a consultant to the company from March 2006 until our founding. From May 2000 to March 2006, Mr. Macias served as an Executive Vice President of Calpine Corporation. In December 2005, Calpine Corporation filed a petition for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code and emerged from reorganization under Chapter 11 in January 2008. Before joining Calpine, from May 1978 to May 2000, Mr. Macias was a Senior Vice President and General Manager at PG&E, where he oversaw operations for its power generation fleet and electric and gas transmissions systems. Mr. Macias holds a B.S. in mechanical engineering from California Polytechnic State University, San Luis Obispo. The board of directors believes that Mr. Macias’ extensive experience in the energy industry and his in-depth knowledge of our business as our Chief Executive Officer and President provides critical insight into our business and qualifies him to sit on our board.

Eric N. Pryor has served as our Chief Financial Officer and Vice President since September 2007. Mr. Pryor manages our financial affairs, fundraising efforts, risk management and hedging strategies. From 1995 to August 2007, Mr. Pryor worked for Calpine Corporation, most recently serving as a Senior Vice President and the Deputy Chief Financial Officer. In December 2005, Calpine Corporation filed a petition for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code and emerged from reorganization under Chapter 11 in January 2008. Mr. Pryor holds a B.A. in economics and an M.B.A. with emphasis in accounting and finance from the University of California, Davis. He is also a Certified Public Accountant.

 

 

 

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Stephen H. Lucas has served as our Senior Vice President and Chief Technology Officer since May 2008. Mr. Lucas is responsible for overseeing the design, development and demonstration of our technology and processes for converting MSW to advanced biofuel. From 1992 through May 2008, Mr. Lucas served as President and Chief Executive Officer of S.H. Lucas & Associates, Inc., an engineering consulting firm. Mr. Lucas holds a B.S. in building construction from the Virginia Polytechnic Institute and State University.

Richard D. Barraza has served as our Vice President of Administration since our founding in July 2007. Mr. Barraza is responsible for managing our corporate, communication and administrative activities. From 1986 through May 2007, Mr. Barraza held senior accounting, finance and communications positions at Calpine Corporation, most recently serving as the Senior Vice President for Corporate Communications. Mr. Barraza holds a B.S. in accounting from San Jose State University.

Theodore M. Kniesche has served as our Vice President of Business Development since our founding in July 2007. Mr. Kniesche is responsible for overseeing our business and project development activities and our government and regulatory affairs. From August 2006 to July 2007, Mr. Kniesche served as a finance associate at USRG Management Company, LLC. Before joining USRG Management Company, LLC, from July 2003 to August 2006 Mr. Kniesche served as an analyst in the investment banking group at Bear Stearns & Co. Inc. Mr. Kniesche holds a B.A. in economics from the University of California, Berkeley and a general course certificate from the London School of Economics and Political Science.

Directors

James A. C. McDermott has served as Chairman and a member of our board of directors since founding the company in July 2007. Upon completion of this offering, Mr. McDermott will become Executive Chairman of the Board and will be active in our strategic planning, global growth and national energy policy initiatives. Mr. McDermott has served as Managing Partner and Managing Director of USRG Management Company, LLC and its predecessor US Renewables Group, LLC since 2003, a private equity firm that he co-founded. Before co-founding US Renewables Group, LLC Mr. McDermott worked as a private equities investor for Prudential’s Private Capital Group. As an entrepreneur, Mr. McDermott has launched and run three software startups—Spoke Software, Inc., Archive, and Stamps.com—and invested in numerous others, among them NanoH2O, Inc., Real Practice, Inc., OH Energy Inc. and MagnaDrive. In addition, he has invested in more than 20 start-ups in the energy and internet sectors. He started his career as a public power banker with Credit Suisse’s Municipal Finance Group in New York. Mr. McDermott also previously served as a director of the American Council on Renewable Energy, or ACORE. He holds a B.A. in philosophy from Colorado College and an M.B.A. from the Anderson School at UCLA. The board of directors believes that Mr. McDermott’s significant experience in the energy industry, including his firm’s focus on the renewable energy industry and his participation with ACORE, his experience with development stage companies and his foresight as the founder of the company make him uniquely qualified to serve on our board as Executive Chairman.

Thomas E. Unterman has served as a member of our board of directors since August 2007. Mr. Unterman is the Founding Partner of Rustic Canyon Partners and served as its Managing Partner from 1999 to 2009. From 1992 to 1999, he served in several executive positions at The Times Mirror Company, most recently as an Executive Vice President and the Chief Financial Officer. He also serves as a director of LoopNet, Inc., several private companies and community organizations, and he previously served as a director of 99¢ Only Stores. Mr. Unterman holds a B.A. from Princeton University and a J.D. from the University of Chicago. The board of directors believes that Mr. Unterman’s substantial legal and business expertise, including his previous operating experience as a chief financial officer, his

 

 

 

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experience as a corporate lawyer, his service on the board of directors, including public company boards, of other companies and the extensive knowledge of us he has gained through his four years of service on our board qualify Mr. Unterman to serve on our board.

Nate Redmond has served as a member of our board of directors since August 2007. Mr. Redmond has served as a Partner at Rustic Canyon Partners since September 2003 and became Managing Partner in 2010. Prior to joining Rustic Canyon Partners, Mr. Redmond was a principal investor in start-up technology companies. As an entrepreneur, he founded Clariweb, an Internet software solution for data sharing between applications, and helped launch two other Internet companies. He began his career with the Boston Consulting Group as a consultant to technology firms on new product development and business strategy. Mr. Redmond received his M.B.A. from the Harvard Business School and a B.S.E. and M.S.E. from the University of Michigan College of Engineering, where he was an Entrepreneurial Fellow in the Engineering Global Leadership Honors Program. The board of directors believes that Mr. Redmond’s substantial business expertise, including his previous operating experience as an entrepreneur, his service on the board of directors of other companies and the extensive knowledge of us he has gained through his four years of service on our board qualify Mr. Redmond to serve on our board.

Timothy L. Newell has served as a member of our board of directors since August 2009. Mr. Newell has served as a Senior Advisor to USRG Management Company, LLC, since May 2009. Before joining USRG Management Company, LLC, from May 2008 to May 2009, Mr. Newell served as a Managing Director and Head of the Clean Technology Strategy Group for Merriman Curhan Ford & Co., an investment banking and asset management firm, and from January 2007 to April 2008 as a private investment fund advisor. Prior to that, Mr. Newell served from September 2004 to December 2006 as a founding Managing Director for DFJ Element, a clean technology affiliate fund of Draper Fisher Jurvetson. Previously Mr. Newell was Chief Operating Officer of Olympius Capital, a private equity firm, Managing Director and Head of Investment Banking for E*Offering, a technology investment bank, and Vice President and Principal of Robertson Stephens. In the public sector, Mr. Newell has held a number of positions with the U.S. government, including Deputy Director for Policy in the White House Office of Science and Technology Policy under the Clinton Administration and Washington Staff Director for then-U.S. Representative Norman Mineta. Mr. Newell holds a B.A. in Economics from Brown University. The board of directors believes that Mr. Newell’s significant experience in the energy industry and clean technology, including his investment and government experience in the industry, and the extensive knowledge of us he has gained through his two years of service on our board qualify Mr. Newell to serve on our board.

Key employees

J. Samuel McIntosh has served as our Vice President of Construction since May 2011. Mr. McIntosh is responsible for overseeing the construction of the Sierra BioFuels Plant. From October 2007 to May 2011, Mr. McIntosh worked for Areva, a nuclear and renewable energy firm, most recently serving as Senior Vice President of Plant, Construction and Operations. Before joining Areva, from March 2006 to October 2007, Mr. McIntosh served with Wood Partners, a residential developer and builder, most recently as Design and Construction Manager. From 1996 to 2006, Mr. McIntosh served in project management positions with Calpine Corporation, most recently serving as the Construction Manager/Site Director for a natural gas combined-cycle power plant. Mr. McIntosh holds a B.S. in mechanical engineering technology from California Polytechnic State University and an M.B.A from Pepperdine University—Graziadio School of Business.

 

 

 

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Lewis L. Rich has served as our Vice President of Engineering and Operations since December 2007. Mr. Rich is responsible for managing our plant engineering and operations activities. From November 2006 to November 2007, Mr. Rich worked for Black and Veatch, where he served as Manager of Initial Operations, directing start-up and troubleshooting activities for three liquid natural gas projects. From September 2001 to September 2006, Mr. Rich served as Operations Manager for Kellogg, Brown and Root. In addition, Mr. Rich held various engineering and management positions at Unocal from 1982 to 2001, Brown & Root from 1980 to 1987 and Agrico Chemical Company from 1974 to 1980. Mr. Rich holds a B.Ch.E. from the Georgia Institute of Technology, an M.B.A. from University of Tulsa and an M.A. in Interdisciplinary Studies from University of Houston-Victoria.

BOARD OF DIRECTORS

Our board of directors currently consists of five members, and prior to the closing of this offering, we expect to add additional directors, including              directors who are independent in accordance with the criteria established by              for independent board members. Our board of directors will be divided into three classes effective upon the closing of the offering. The Class I directors,              and             , will serve an initial term until the first annual meeting of stockholders held after the effectiveness of this offering, the Class II directors,             and             , will serve an initial term until the second annual meeting of stockholders held after the effectiveness of this offering, and the Class III director,             , will serve an initial term until the third annual meeting of stockholders held after the effectiveness of this offering. Each class will be elected for three-year terms following its respective initial term.

DIRECTOR INDEPENDENCE

Upon the completion of this offering, our common stock will be listed on             . Under the rules of             , independent directors must comprise a majority of a listed company’s board of directors within a specified period of the completion of this offering. In addition, the rules of              require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the rules of             , a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (i) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (ii) be an affiliated person of the listed company or any of its subsidiaries.

Our board of directors will undertake a review of its composition, the potential composition of its committees and the independence of each director prior to this offering.

COMMITTEES OF THE BOARD OF DIRECTORS

Prior to the completion of this offering, our board of directors will establish an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and responsibilities described below.

 

 

 

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Audit committee

Our audit committee will be comprised of three members, each of whom will be a non-employee member of our board of directors. Our board of directors will confirm that all members of our audit committee satisfy the independence and financial literacy requirements of Rule 10A-3 of the Securities Exchange Act of 1934 as amended and the              listing standards. Our board of directors will adopt a charter for our audit committee which will be posted on our website upon the completion of this offering. Our audit committee will be primarily responsible for overseeing our corporate accounting and financial process. Other potential responsibilities of our audit committee will include:

 

Ø  

evaluating the qualifications, performance and approving the selection of our independent registered public accounting firm;

 

Ø  

reviewing and pre-approving the scope of the annual audit and other non-audit services to be performed by our independent registered public accounting firm;

 

Ø  

monitoring the rotation of the partners of the independent registered public accounting firm on our engagement team as required by law;

 

Ø  

review and discuss with management and our independent registered public accounting firm our annual audit, our management’s discussion and analysis of financial condition and results of operation to be included in our annual and quarterly reports to be filed with the SEC;

 

Ø  

reviewing the adequacy and effectiveness of our internal control policies and procedures over our financial reporting processes;

 

Ø  

overseeing procedures for addressing complaints received by us regarding accounting, financial internal controls or auditing matters; and

 

Ø  

preparing the audit committee report that the SEC requires in our annual proxy statement.

Compensation committee

Our compensation committee will be comprised of three members, each of whom will be a non-employee member of our board of directors. We intend for all of the members of our compensation committee to satisfy the independence requirements of the applicable              listing standards and Section 162(m) of the Internal Revenue Code of 1986. In connection with the establishment of the compensation committee, our board of directors will adopt a charter for our compensation committee that will be posted on our website upon the completion of this offering. Our compensation committee will be primarily responsible for overseeing all compensation matters related to our executive officers. Other potential responsibilities of our compensation committee include:

 

Ø  

overseeing our compensation policies, plans and benefit programs;

 

Ø  

determining the compensation and other terms of employment for our executive officers;

 

Ø  

reviewing and approving the terms of all employment agreements, severance and change of control arrangements, and any other compensation and benefits for our executive officers;

 

Ø  

providing recommendations to our board of directors for the issuance of stock options or other awards under our equity plans; and

 

Ø  

preparing the compensation committee report required by the SEC to be included in our annual proxy statement.

 

 

 

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Nominating and corporate governance committee

Our nominating and corporate governance committee will be comprised of three members, each of whom will be a non-employee member of our board of directors. Our board of directors will adopt a charter for our nominating and corporate governance committee which will be posted on our website upon the completion of this offering. Our nominating and corporate governance committee will be primarily responsible for overseeing all corporate governance matters which include:

 

Ø  

identifying, evaluating and recommending to the board of directors for nomination candidates for membership on the board of directors;

 

Ø  

reviewing, evaluating and considering for recommendation the nomination of incumbent members of our board of directors for re-election to our board of directors;

 

Ø  

monitoring and recommending the size of the board of directors to our board of directors;

 

Ø  

reviewing and reporting on the performance of our board of directors to our board of directors;

 

Ø  

preparing and recommending to our board of directors corporate governance guidelines and policies; and

 

Ø  

identifying, evaluating and recommending to the board of directors the chairmanship and membership of each committee of the board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our board of directors will select members for our compensation committee, each of whom will not have been an officer or employee of ours at any time during the past year. None of our executive officers currently serve, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board or compensation committee.

CODE OF BUSINESS CONDUCT AND ETHICS

Our board of directors will adopt a Code of Business Conduct and Ethics that applies to all of our employees, officers, agents and representatives, including directors and consultants. The full text of our Code of Business Conduct and Ethics will be posted on our website upon the completion of this offering. Effective immediately upon the completion of this offering, we intend to disclose future amendments to provisions of our Code of Business Conduct and Ethics, or waivers of such provisions, that are applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or our directors on our website identified above. The inclusion of our website address in this prospectus does not include or incorporate by reference the information on our website into this prospectus.

NON-EMPLOYEE DIRECTOR COMPENSATION

We do not currently provide any compensation to our non-employee directors for service on our board of directors and none of our non-employee directors received any cash or equity compensation during the year ended December 31, 2010. We do, however, reimburse our directors for their expenses incurred in connection with board-related activities, including expenses associated with attending meetings of our board of directors. Our board of directors has also approved an annual retainer of $250,000 commencing upon completion of this offering for Mr. McDermott for his services as Executive Chairman of the Board, which will be paid to USRG Management Company, LLC, of which Mr. McDermott is a

 

 

 

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Managing Director. Prior to the completion of this offering, our board of directors will adopt a compensation program for all other non-employee directors. We intend for this program to become effective immediately upon completion of this offering and to provide compensation to our non-employee directors which includes, an annual cash retainer for services provided as a member of our board of directors, additional cash payments for participating on the audit, compensation and nominating and corporate governance committees, and additional cash payments for members in the role of chairman of the audit, compensation and nominating and corporate governance committees.

In addition, we will reimburse our non-employee directors for actual travel expenses incurred in attending board and committee meetings and other board related expenses. Effective with the completion of this offering, we intend to grant initial equity awards to all non-employee directors and commencing in 2012, annual equity awards to all non-employee directors. The specifics related to the initial and annual grants are still being developed with the assistance of our outside compensation consultant.

 

 

 

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Executive compensation

COMPENSATION DISCUSSION AND ANALYSIS

The following discussion and analysis of compensation arrangements of our named executive officers for the year ending December 31, 2010 should be read together with the compensation tables and related disclosures set forth below.

Specifically, this section discusses the principles underlying our policies and decisions with respect to the historical compensation of our executive officers who are named in the 2010 Summary Compensation Table and the most important factors relevant to an analysis of these policies and decisions, as well as considerations, expectations and determinations regarding future compensation programs that we may adopt as we transition to a publicly traded company.

The named executive officers, as listed in the Summary Compensation Table after this Compensation Discussion and Analysis, consist of our principal executive officer, our principal financial officer and the three other most highly compensated executive officers. Our named executive officers for 2010 are:

 

Ø  

E. James Macias, President and Chief Executive Officer;

 

Ø  

Eric N. Pryor, Vice President and Chief Financial Officer;

 

Ø  

Stephen H. Lucas, Senior Vice President and Chief Technology Officer;

 

Ø  

Richard D. Barraza, Vice President of Administration; and

 

Ø  

Theodore M. Kniesche, Vice President of Business Development.

Compensation philosophy and objectives

We produce advanced biofuel from garbage. We design, develop, own and will operate facilities that convert sorted, post-recycled municipal solid waste, or MSW, into ethanol. Our disruptive business model combines new, innovative technologies and our proprietary process with zero-cost MSW feedstock to provide us with a significant competitive advantage over other companies in our sector. To help achieve our goals and objectives of becoming one of the leading producers of advanced biofuels in the country, we need to attract, incentivize and retain a highly talented team of senior executives, and senior professionals in the areas of finance, project development, engineering, construction and general and administrative. We expect our team to be well-experienced in these areas and to possess and demonstrate strong leadership and management skills and capabilities.

We have designed our executive compensation and benefits programs to drive employee and corporate performance. Our program was developed to balance short-term and long-term goals utilizing both cash payments and equity awards to help promote the growth and success of our company. Our compensation philosophy is based on the following principles and objectives:

 

Ø  

attract, motivate and retain top-level senior executives with the necessary experience and skill set to promote and manage the growth of the company;

 

Ø  

provide for compensation levels and structures that are both fiscally responsible and competitive within our industry and geography;

 

Ø  

create a meaningful link between compensation and performance;

 

Ø  

maintain transparency, simplicity and ease of administration; and

 

Ø  

align the interests of our management team and shareholders by motivating the executive officers to increase shareholder value and to reward the executive officers when shareholder value increases.

 

 

 

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To help achieve these principles and objectives, our board of directors engaged Radford Consulting, or Radford, in May 2011 to provide benchmarking surveys and assist with the development of our compensation program.

Compensation determination process

Since our inception in 2007, we have been a privately-held, development stage company. Our approach to executive compensation has always focused on the principles and objectives outlined above to help drive long-term value for our shareholders. To date, our board of directors has not established a compensation committee due in part to the size and development stage of our company and has retained the authority to oversee and establish compensation matters for our executive officers. Upon the completion of this offering, the board of directors will establish a compensation committee to be responsible for compensation matters related to our executive officers. Historically, we have not utilized the services of an outside compensation consultant but rather relied on the knowledge of our board to determine the various structures and the appropriate levels of executive compensation that would be sufficient to attract top talent while being prudent and managing the cash and equity available to us as a development company. The board of directors has also considered the recommendations on compensation for our named executive officers from our Chief Executive Officer, except with respect to his own compensation.

In May 2011, as part of the transition to a publicly-held company, our board of directors retained Radford as its outside compensation consultant to assist in developing our approach to executive compensation. As part of this engagement, Radford assisted in the development of an appropriate peer group and provided benchmark compensation data to help establish a competitive compensation program for our executive officers. Based on this information, discussions between Radford and the board of directors, and together with the compensation knowledge and experience of various members of our board, we are finalizing and implementing a revised executive compensation program designed to achieve the principles and objectives of our compensation philosophy outlined above.

Compensation consultant

In May 2011, our board of directors retained Radford to conduct a review and competitive assessment of our current compensation program for our named executive officers. As part of this process, and upon the recommendation of Radford, the board of directors approved of a peer group that includes primarily early and growth stage alternative energy companies. The approved peer group consists of the following companies:

 

A123 Systems

   Gevo, Inc.

Amyris, Inc.

   KiOR, Inc.

BrightSource Energy, Inc.

   Metabolix, Inc.

Ceres, Inc.

   Myriant Corporation

Clean Energy Fuels Corp.

   Ormat Technologies, Inc.

Codexis, Inc.

   Solazyme, Inc.

EnerNOC, Inc.

   Tesla Motors, Inc.

FuelCell Energy, Inc.

  

These peers were identified and selected based on their status as alternative energy companies with revenues generally of no more than $200 million in the preceding four quarters and with market values of generally no more than $2 billion that were either publicly traded, or had filed to become publicly traded.

 

 

 

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Key components of our compensation program

Base salaries

We provide our executive officers and all of our employees with a base salary to compensate them for services provided throughout the year. The level of the base salary is intended to acknowledge the experience, knowledge, skill set and responsibilities of executive officers and employees and provide them with a fixed level of compensation. Historically, the board of directors has established base salaries for our executive officers based on the board’s experience and knowledge of what constitutes competitive base salaries within our industry relative to companies of similar size and stage of development, and together with recommendations from our Chief Executive Officer based on his experience and knowledge.

Historically, the board of directors has reviewed the base salaries of our executive officers annually or on a more frequent basis if warranted under certain circumstances and has made adjustments to recognize achievements and overall performance. Following the completion of this offering, we anticipate that the compensation committee will be responsible for reviewing and adjusting base salaries for our executive officers.

In August 2011, the board of directors completed a review of the base salaries of our executive officers which included a review of market compensation data provided by Radford and an evaluation of the roles and responsibilities of each executive officer. Following this review, and with the board of directors’ desire to remain competitive with the company’s peer group, it was determined that the market compensation data for the 50th and 75th percentiles of our peer group would be used as a guide for establishing base salaries for the executive officers. At this time, the board of directors also approved base salary increases for Messrs. Pryor, Barraza and Kniesche effective as of September 1, 2011. As adjusted, Mr. Pryor’s base salary is between the the 50th and 75th percentiles, while Messrs. Barraza’s and Kniesche’s base salaries are slightly below the 50th percentile, in each case, with respect to our peer group. The board determined that the base salaries for Messrs. Macias and Lucas were market-competitive based on all the relevant data and, therefore, determined that an adjustment was not necessary at this time. The following table sets forth the information regarding base salaries for fiscal year 2010 and the new base salaries that will become effective on September 1, 2011:

 

Name of executive officer    2010 annual
base salary
     New annual base
salary effective
September 1, 2011
 

E. James Macias

   $ 500,000       $ 500,000   

Eric N. Pryor

     262,500         310,000   

Stephen H. Lucas

     450,000         450,000   

Richard D. Barraza

     210,000         260,000   

Theodore M. Kniesche

     210,000         270,000   

Annual cash bonuses

We have utilized a short-term cash incentive bonus program to motivate and reward our employees, including our executive officers, for their accomplishments and contributions toward the success of the company. As an early stage development company, cash bonus payments made to date have been infrequent and purely discretionary. Historically, the board of directors has targeted the amount of an executive officer’s potential cash bonus based upon a fixed percentage of the executive officer’s annual base salary. However, we have not established specific individual or corporate goals, but rather at the

 

 

 

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end of each year employ a subjective analysis of the executive officer’s individual performance and contributions to the company and the overall success of the company during the year to determine an executive officer’s annual cash bonus, if any.

The cash bonus targets are established at the date of hire and are based upon the executive officer’s position within the company, their experience, knowledge and skill set, level of responsibility and a subjective analysis of the executive officer’s expected contributions to the company. In 2010, partial cash bonus payments for 2009 were made to our executive officers for achievements made in 2009 in the areas of technology development, project development and engineering work on the Sierra BioFuels Plant, or Sierra. The balance of the cash bonus for 2009 may be paid upon the successful completion of certain project financing milestones associated with Sierra. Through the date of this filing, no cash bonus payments have been made in 2011 for 2010 performance. The following table sets forth the cash bonus targets and cash bonus payments in 2010 for our executive officers that relate to performance during 2009:

 

Name of executive officer    2010 cash bonus
target
    2010 cash bonus
payment
 

E. James Macias

     100   $ 50,000   

Eric N. Pryor

     40        50,000   

Stephen H. Lucas

     40        50,000   

Richard D. Barraza

     40        50,000   

Theodore M. Kniesche

     40        50,000   

Prior to the completion of this offering, we expect that our board of directors may adopt a more formal short-term incentive plan to reward our employees and our executive officers for their performance and contributions toward achieving more established and formal performance metrics. Cash bonuses, if any, for 2011 will continue to be completely discretionary and determined under the subjective method described above and based on similar bonus target percentages.

Based on the compensation data from Radford, and the board of directors’ general desire to provide annual target bonuses between the 50th and 75th percentile of our peer group, we expect to increase the target percentage for Messrs. Pryor, Lucas, Barraza and Kniesche to 50% each starting with fiscal year 2012, which will generally place each executive officer’s annual target bonus between the 50th and 75th percentile of our peer group for short-term cash incentives.

Commencing with our 2012 fiscal year, we expect the compensation committee to establish cash bonus targets and corporate performance metrics for a specific performance period or fiscal year. It is the intent that starting in 2012, the compensation committee will establish corporate performance metrics that are both aggressive and obtainable and that the executive officers’ performance at expected levels will provide the opportunity to achieve a meaningful number of the corporate goals and objectives. Following the end of the performance period, the compensation committee will approve the achievement of the corporate performance metrics and authorize the funding of the cash bonuses for that period.

Until Sierra achieves commercial operations in the second half of 2013, we do not expect to produce any product or generate any revenue. As such, certain traditional corporate performance metrics such as revenue and EBITDA would be irrelevant. Until then, we would expect that any bonuses paid will be more focused on the achievement of certain project development and construction targets to advance the growth and shareholder value of the company. It is our intent that the compensation committee establishes appropriate performance objectives to properly incentivize executive officers that are tied to the success of the Company.

 

 

 

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Long-term equity incentives

Stock options are our primary vehicle for offering long-term equity incentives to our executive officers. We believe the use of long-term equity incentives drives the long-term performance and investment in our common stock by our executive officers, aligning the interest of our shareholders with our executive officers. The potential for significant future value in the option awards provides a competitive tool to attract, motivate and retain executive officers. Through the use of our 2007 Stock Incentive Plan, described below, all of our employees participate and hold options to purchase our common stock which we believe contributes to the retention of our employees and executive officers and provides for a positive employee ownership culture which encourages long-term performance. Options issued under this program consist of both time-based options vesting over a four-year period as well as options subject to performance-based vesting conditions as described below. Stock options are granted at 100% of fair market value on the date of grant as determined by the board of directors with the assistance of an independent third-party valuation firm engaged by the company to perform periodic 409A valuations of the company’s common stock, applying valuation techniques and methods that rely on recommendations by the American Institute of Certified Public Accountants, or AICPA, in its Audit and Accounting Practice Aid and conform to generally accepted valuation practices.

Each of the executive officers has received only one equity grant at the time of adoption of the 2007 Stock Incentive Plan. As a result of their length of service, no unvested options will be held by the executive officers upon the completion of this offering. Further, based on review of the relevant data provided by Radford, the board of directors determined that the executive officers’ current equity holdings are significantly below market. Thus, to properly incentivize the executive officers, provide a retentive element for executive officers that align their interests with that of our shareholders and as a market adjustment, the board of directors decided to grant additional options to the executive officers in August 2011, as follows:

 

Ø  

Two grants to Mr. Macias totaling an additional 1,726,372 stock options subject to the vesting requirements discussed below.

 

Ø  

Two grants to Mr. Pryor totaling an additional 275,009 stock options subject to the vesting requirements discussed below.

 

Ø  

Two grants to Mr. Lucas totaling an additional 815,932 stock options subject to the vesting requirements discussed below.

 

Ø  

Two grants to Mr. Barraza totaling an additional 259,706 stock options subject to the vesting requirements discussed below.

 

Ø  

Two grants to Mr. Kniesche totaling an additional 244,448 stock options subject to the vesting requirements discussed below.

Subject to an executive officer’s continued employment through each vesting date, 50% of the total additional options granted to each of the executive officers in August 2011, as described above, vest in accordance with the standard four-year vesting schedule (25% on the one year anniversary of the vesting commencement date and pro rata thereafter over the next 36 months).

 

 

 

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Subject to an executive officer’s continued employment through each vesting date, the remaining 50% of the total additional options described above, or the Performance-Based Shares, vest contingent upon the achievement of established performance objectives. Specifically, the Performance-Based Shares vest as follows:

 

Ø  

Vesting as to 1/3 of the Performance-Based Shares shall occur based upon, and effective as of, the date of mechanical completion of Sierra. If the date occurs on or before December 31, 2013, the executive officers shall vest as to 100% of such shares. Each month thereafter, the percentage of shares vesting upon mechanical completion, declines as to 10% per month such that if the date of mechanical completion occurs on or after October 1, 2014, the executive officers shall not vest in any portion of such shares. The unvested portion of such shares shall be immediately forfeited and the executive officer shall have no further rights with respect to such shares.

 

Ø  

Vesting as to 1/3 of the Performance-Based Shares shall occur effective as of the last date of the measurement period following mechanical completion of Sierra based upon the calculation of the number of millions of gallons per year resulting from the fuel and chemical production test for Sierra during such measurement period. The applicable vesting percentages for these Performance-Based Shares relative to the millions of gallons per year results are as follows: 8 million gallons or more (100%); 7 to 8 million gallons (80%); 6 to 7 million gallons (50%); 5 to 6 million gallons (25%); and less than 5 million gallons (0%). The unvested portion of such shares shall be immediately forfeited and the executive officer shall have no further rights with respect to such shares.

 

Ø  

Vesting as to 1/3 of the Performance-Based Shares shall occur based upon, and effective as of, the date the Company receives all of the permits necessary to commence construction on two new facilities other than the Sierra. If the date occurs on or before August 31, 2014, the executive officers shall vest as to 100% of such shares. The vesting percentage declines to 75% if the date is between September 1, 2014 and November 30, 2014 and to 50% if the date is between December 1, 2014 and February 28, 2015. If the date occurs on or after March 1, 2015, the executive officers shall not vest in any portion of such shares. The unvested portion of such shares shall be immediately forfeited and the executive officer shall have no further rights with respect to such shares.

As an early stage development company, we have not established criteria for issuing stock options except to new hires based on guidelines approved by the board of directors and provided to our principal executive officer. Going forward following the completion of this offering, as part of our compensation philosophy of targeting total annual compensation between the 50th and 75th percentiles of our peer group, our general intent is to provide annual refresh grants to executive officers based upon performance, retention need, and prevalent market compensation practices.

The company does not currently have formal stock ownership guidelines for our executive officers because we believe our current incentive compensation arrangements provide the appropriate alignment between executive officers and our shareholders. We will continue to review best practices and evaluate our position with respect to stock ownership guidelines. Following the effectiveness of this prospectus, the executive officers will be eligible to receive long-term incentive awards under the 2011 Equity Incentive Plan.

Other employee benefits

We provide the following benefits to our named executive officers on the same basis as all of our eligible employees:

 

Ø  

health, dental and vision insurance;

 

 

 

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Ø  

contributions to employees’ health savings accounts;

 

Ø  

paid time off for vacation, sick and personal days;

 

Ø  

a 401(k) plan;

 

Ø  

life insurance; and

 

Ø  

short- and long-term disability and accidental death and dismemberment insurance.

We believe these benefits are generally consistent with the benefits provided by other similar companies with which we compete, allowing us to attract and retain employees and executive officers.

Severance and change of control benefits

The board of directors has evaluated and generally approved a plan to provide severance and change of control benefits to the executive officers. Prior to the completion of this offering, we intend to finalize the specific terms and conditions of these severance and change of control benefits for each executive officer. However, to date, the company has not entered into any formal arrangements with any executive officer setting forth the specific benefits for each executive officer. We will provide additional details once we finalize the formal arrangements with the executive officers.

Tax and accounting considerations

Section 162(m) of the Internal Revenue Code of 1986, generally limits a public company’s ability to take a federal income tax deduction for compensation paid to our Chief Executive Officer and to certain other executive officers only if the compensation is less than $1 million per person during any fiscal year or is performance-based as defined under Code Section 162(m). Our board of directors has not established a policy for determining which forms of incentive compensation provided to our named executive officers will qualify as performance-based compensation. In addition, the board of directors may from time to time authorize the payment of incentive compensation that does not qualify under Section 162(m) in order to retain or attract executive officers.

Risk review of compensation plans

Generally, the company and the board of directors do not believe that any of our compensation plans encourage executives or employees to engage in unnecessary or excessive risks that would have a material adverse effect on the value of the company. As part of our overall evaluation of compensation programs that we will perform as part of our evolution toward becoming a publicly traded company, the board of directors, and following the effectiveness of this prospectus, the compensation committee, will more formally review the company’s compensation plans and the associated potential risks. Specifically, we will review:

 

Ø  

the compensation plans and programs available to our executive officers to reaffirm and ensure that such plans and programs do not encourage our executive officers to take unnecessary and excessive risks that threaten the value of the company and to appropriately mitigate any potential risks;

 

Ø  

employee compensation plans in light of the risks posed to the company by these plans and how such risks are limited; and

 

Ø  

our executive and employee compensation plans to reaffirm and ensure that these plans do not encourage the manipulation of the reported earnings of the company to enhance the compensation of any of the company’s employees.

 

 

 

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2010 SUMMARY COMPENSATION TABLE

The following table sets forth information regarding the compensation awarded to, earned by, or paid to each of our named executive officers during the year ended December 31, 2010. Throughout this prospectus, these five officers are referred to as our named executive officers.

 

Name and principal position  

Salary

($)

    Stock
awards
($)
    Option
awards
($)
   

Non-equity
incentive plan
compensation(1)

($)

   

Change in
pension

value and
nonqualified
deferred
compensation
earnings

($)

    All other
compensation
($)
   

Total

($)

 

E. James Macias

    500,000                      50,000               25,116 (2)      575,116   

Chief Executive Officer and President

             

Eric N. Pryor

    262,500                      50,000               31,955 (3)      344,455   

Chief Financial Officer and Vice President

             

Stephen H. Lucas

    450,000                      50,000               36,567 (4)      536,567   

Senior Vice President and Chief Technology Officer

             

Richard D. Barraza

    210,000                      50,000               32,196 (5)      292,196   

Vice President of Administration

             

Theodore M. Kniesche

    210,000                      50,000               31,302 (6)      291,302   

Vice President of Business Development

             

 

(1)   The amounts reported in this column represent discretionary bonuses for 2009 but paid in 2010, as determined by the board of directors.
(2)   Includes $14,700 for company match on 401(k) plan and $10,416 in health insurance premiums paid on behalf of Mr. Macias.
(3)   Includes $14,700 for company match on 401(k) plan and $17,255 in health insurance premiums paid on behalf of Mr. Pryor.
(4)   Includes $14,700 for company match on 401(k) plan and $21,867 in health insurance premiums paid on behalf of Mr. Lucas.
(5)   Includes $14,700 for company match on 401(k) plan and $17,496 in health insurance premiums paid on behalf of Mr. Barraza.
(6)   Includes $14,700 for company match on 401(k) plan and $16,602 in health insurance premiums paid on behalf of Mr. Kniesche.

 

 

 

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GRANTS OF PLAN-BASED AWARDS

As reflected in the following table, there were no grants of plan-based awards to any of our named executive officers during the year ended December 31, 2010.

 

Name   Grant
date
    Estimated future payouts
under non-equity
incentive plan awards
    Estimated future payouts
under equity incentive
plan awards
   

All other
stock
awards:
number of
shares or
stock or
units

(#)

   

All other
option
awards:
number of
securities
underlying
options

(#)

    Exercise
or base
price of
option
awards
($/Sh)
    Grant
date
fair
value
of
stock
and
option
awards
 
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
         

E. James Macias

    —          —          —          —          —          —          —          —          —          —          —     

Eric N. Pryor

    —          —          —          —          —          —          —          —          —          —          —     

Stephen H. Lucas

    —          —          —          —          —          —          —          —          —          —          —     

Richard D. Barraza

    —          —          —          —          —          —          —          —          —          —          —     

Theodore M. Kniesche

    —          —          —          —          —          —          —          —          —          —          —     

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table shows all outstanding equity awards held by each of our named executive officers at December 31, 2010.

 

    Option awards     Stock awards  
Name  

Number of
securities
underlying
unexercised
options

(#)(1)
exercisable

   

Number of
securities
underlying
unexercised
options

(#)(1)

unexercisable

   

Equity
incentive
plan
awards:
number of
securities
underlying
unexercised
unearned
options

(#)

   

Option
exercise
price

($)

    Option
expiration
date
   

Number of
shares or
units of
stock that
have not
vested

(#)(1)(2)

    Market
value of
shares or
units of
stock
that
have not
vested
($)(3)
   

Equity
incentive
plan
awards:
number of
unearned
shares,
units or
other
rights that
have not
vested

(#)

    Equity
incentive
plan
awards:
market
or
payout
value of
unearned
shares,
units or
other
rights
that have
not
vested
($)
 

E. James Macias

    1,030,457        61,124        —          0.24        3/15/2017        —          —          —          —     

Eric N. Pryor

    361,069        122,222        —          0.24        9/1/2017        —          —          —          —     

Stephen H. Lucas

    —          —          —          —          —          20,373        20,780        —          —     

Richard D. Barraza

    —          —          —          —          —          30,558        31,169        —          —     

Theodore M. Kniesche

    133,190        44,562        —          0.24        6/1/2017        —          —          —          —     

 

(1)   25% of the total number of shares subject to the option vest on the first anniversary of the vesting commencement date and 2.0833% of the remaining shares subject to the option vest monthly thereafter until all shares are vested. Vesting is accelerated in certain situations. See the section titled “Potential Payments Upon Termination or Change in Control.” All options are immediately exercisable. The shares issued upon exercise of such options remain subject to a right of repurchase by the Company to the extent the shares are unvested.
(2)   Reflects the portion of shares issued pursuant to the early exercise of options that remain subject to a right of repurchase by the company.
(3)   The market value of the shares is based on an estimated fair market value of $1.02 on December 31, 2010, which was determined based on a linear interpolation between the valuations of our common stock performed as of April 19, 2010 and June 27, 2011.

 

 

 

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OPTION EXERCISES AND STOCK VESTED

The following table shows information regarding option exercises by our named executive during the year ended December 31, 2010.

 

     Option awards      Stock awards  
Name   

Number of
shares
acquired on
exercise

(#)

    

Value
realized on
exercise

($)

    

Number of
shares
acquired
on vesting

(#)(1)

    

Value
realized on
vesting

($)(2)

 

E. James Macias

     —           —           —           —     

Eric N. Pryor

     —           —           —           —     

Stephen H. Lucas

     —           —           61,110         37,787   

Richard D. Barraza

     —           —           61,110         37,787   

Theodore M. Kniesche

     —           —           —           —     

 

(1)   Reflects the portion of shares issued pursuant to the early exercise of stock options on which the right of repurchase by the company lapsed.
(2)   The value realized on vesting of the shares is based on a weighted average estimated fair market value of $0.62 across monthly vesting dates during the year ended December 31, 2010.

PENSION BENEFITS

None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us.

NONQUALIFIED DEFERRED COMPENSATION

We did not maintain any nonqualified defined contribution or deferred compensation plans or arrangements for the named executive officers.

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

Each of our named executive officers and all of our employees have entered into non-competition, non-solicitation and proprietary information and inventions assignment agreements. Under these agreements, each named executive officer has agreed (i) not to solicit our employees or customers during his employment and for a period of 12 months after the termination of his employment, (ii) not to compete with us or assist any other person to compete with us during the officer’s employment with us and (iii) to protect our confidential and proprietary information and to assign to us intellectual property developed during the course of his employment. As a condition of employment with the company, all employees are required to enter into this agreement.

We entered into a service agreement with Mr. Macias dated March 31, 2007, which provided for Mr. Macias to serve as a temporary consultant to us and set forth certain conditions to the engagement of Mr. Macias as a full-time employee of the Company. On August 31, 2007, we terminated the services agreement and entered into an employment agreement with Mr. Macias providing for his employment as a full-time employee. Pursuant to this agreement, Mr. Macias is entitled to an annual base salary of $500,000 per year, and a cash bonus targeted at 100% of his base salary based on the achievement of certain corporate performance metrics established by our board of directors. In connection with the commencement of his employment, Mr. Macias received a one-time grant of options to purchase 1,466,581 shares of our common stock. In June 2008, Mr. Macias received an amended and restated

 

 

 

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stock option notice which provided him the ability to exercise the option, at which time he purchased 375,000 shares of common stock for a total cost of $90,000. On August 31, 2011, Mr. Macias received option grant notices to purchase an aggregate of 1,726,372 shares of our common stock with an exercise price of $1.53 per share. As a condition to his employment, Mr. Macias agreed not to solicit our employees during his employment and for a period of 18 months after the termination of his employment and to protect our confidential information. Mr. Macias’s employment agreement also provides for certain payments and benefits in the event of certain terminations of employment. For a summary of the material terms and conditions of these benefits, as well as an estimate of the potential payments and benefits payable to Mr. Macias and our other named executive officers, see “—Potential Payments Upon Termination or Change in Control” below.

Each of our executive named officers, in addition to Mr. Macias, received an offer letter in connection with the commencement of his employment with the company. Prior to the completion of this offering, we expect our board of directors to execute formal employment agreements with all of our named executive officers.

Eric N. Pryor.     In September 2007, we provided Mr. Pryor with an offer letter to begin employment with us as Vice President and Chief Financial Officer. The offer letter provided for a starting annual base salary of $250,000 and a cash bonus target of 40%. On August 1, 2009, Mr. Pryor received a merit adjustment increasing his annual base salary to $262,500 and on September 1, 2011, his annual base salary was increased to $310,000 as discussed above in “Key Components of Our Compensation Program.” In connection with his employment, Mr. Pryor also received an option grant notice to purchase 733,291 shares of our common stock with an exercise price of $0.24 per share. In June 2008, Mr. Pryor received an amended and restated stock option notice which provided him the ability to exercise the option, at which time he purchased 250,000 shares of common stock for a total cost of $60,000. On August 31, 2011, Mr. Pryor received option grant notices to purchase an aggregate of 275,009 shares of our common stock with an exercise price of $1.53 per share. Prior to the completion of this offering, we expect to enter into an employment agreement with Mr. Pryor.

Stephen H. Lucas.    In December 2007, we entered into a Consulting Agreement with Mr. Lucas for his services in assisting the company with the technical and commercial development of our waste-to-fuels projects. Under the Consulting Agreement, Mr. Lucas was paid $1,600 for each day worked. In May 2008, we provided Mr. Lucas with an offer letter to begin employment with us as Senior Vice President and Chief Technology Officer. The offer letter provided for a starting annual base salary of $450,000 and a cash bonus target of 40%. In connection with his Consulting Agreement, Mr. Lucas received an option grant notice to purchase 244,444 shares of our common stock with an exercise price of $0.24 per share. In June 2008, Mr. Lucas received an amended and restated stock option notice which provided him the ability to exercise the option, at which time he purchased 244,444 shares of common stock for a total cost of $58,666.56. On August 31, 2011, Mr. Lucas received option grant notices to purchase an aggregate of 815,932 shares of our common stock with an exercise price of $1.53 per share. Prior to the completion of this offering, we expect to enter into an employment agreement with Mr. Lucas.

Richard D. Barraza.    In May 2007, Mr. Barraza began employment with us as Vice President of Administration, with a starting annual base salary of $200,000 and a cash bonus target of 40%. On August 1, 2009, Mr. Barraza received a merit adjustment increasing his annual base salary to $210,000 and on September 1, 2011 his annual base salary was increased to $260,000 as discussed above in “Key Components of Our Compensation Program.” In connection with his employment, Mr. Barraza also received an option grant notice to purchase 244,444 shares of our common stock with an exercise price of $0.24 per share. In June 2008, Mr. Barraza received an amended and restated stock option notice which provided him the ability to exercise the option, at which time he purchased 244,444 shares of

 

 

 

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common stock for a total cost of $58,666.56. On August 31, 2011, Mr. Barraza received option grant notices to purchase an aggregate of 259,706 shares of our common stock with an exercise price of $1.53 per share. Prior to the completion of this offering, we expect to enter into an employment agreement with Mr. Barraza.

Theodore M. Kniesche.    In July 2007, we provided Mr. Kniesche with an offer letter to begin employment with us as Vice President of Business Development. The offer letter provided for a starting annual base salary of $170,000 and a cash bonus target of 40%. On January 1, 2009, as a result of Mr. Kniesche gaining additional responsibilities in the area of government and regulatory affairs, he received an adjustment increasing his annual base salary to $200,000 and on August 1, 2009, he received a merit adjustment increasing his annual base salary to $210,000 and on September 1, 2011 his annual base salary was increased to $270,000 as discussed above in “Key Components of Our Compensation Program.” In connection with his employment, Mr. Kniesche also received an option grant notice to purchase 427,752 shares of our common stock with an exercise price of $0.24 per share. In June 2008, Mr. Kniesche received an amended and restated stock option notice which provided him the ability to exercise the option, at which time he purchased 250,000 shares of common stock for a total cost of $60,000. On August 31, 2011, Mr. Kniesche received option grant notices to purchase an aggregate of 244,448 shares of our common stock with an exercise price of $1.53 per share. Prior to the completion of this offering, we expect to enter into an employment agreement with Mr. Kniesche.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The following table discloses potential payments and benefits under our compensation and benefit plans and other employment arrangements to which certain of our executive officers would be entitled upon a termination of their employment or change of control, assuming the termination of employment or change in control occurred on December 31, 2010.

 

                       Following change in control  
Name    By
company
without
cause(1)
    By
executive
for good
reason(1)
    Disability or
death(1)
    By
company
without
cause(1)
    By
executive
for good
reason(1)
    Disability or
death(1)
 

E. James Macias

            

Cash payments

   $ 1,010,416 (2)    $ 1,010,416 (2)    $ 500,000 (3)    $ 1,010,416 (2)    $ 1,010,416 (2)    $ 500,000 (3) 

Accelerated equity awards

     47,677 (4)        —          47,677 (4)      —          —     

Eric N. Pryor

            

Cash payments

     —